Circle of Friends (39 page)

It wasn't the first such rant Kinnucan had rifled off in the year or so since he became a hero of sorts among Bharara's insider trading targets (and even more so, their attorneys). In that email, Kinnucan explained how the FBI came to his home, offered to play tapes of him discussing stuff the agents said was evidence he had passed illegal insider trading tips to his clients, and offered him a deal.

Kinnucan refused to be a rat—and began to brag about it in multiple television appearances and newspaper accounts, and more recently through dozens of racist threatening emails to his accusers in government.

It was a long year for Kinnucan, as the FBI started approaching his old clients to ask what they knew about his business, and making it nearly impossible for him to earn money. With that, Kinnucan became more and more deranged. He drank late into the night while firing off racist and anti-Semitic emails to reporters, FBI agents, and some of the same prosecutors who were building a case against him.

Kinnucan was not the first white-collar target of the government to become unhinged to the point of near insanity. The legendary arbitrageur John Mulheren, armed with automatic weapons, set out to kill Ivan Boesky, after Boesky implicated Mulheren in the insider trading scheme that rocked 1980s Wall Street and ultimately led to Mulheren's conviction.

But Mulheren, who suffered from bipolar disorder, was apprehended before firing a shot, and later his conviction was overturned. He returned to Wall Street as one of its top traders before dying unexpectedly of a heart attack in 2003.

John Kinnucan didn't try to kill anyone, but his rants raised lots of eyebrows with prosecutors. Most targets of federal probes lie low hoping not to antagonize prosecutors and tip the scales against them. Several attorneys advised Kinnucan to do just that. Some people thought he was crazy, or had gone mad—a notion seemingly confirmed by the more than occasional racist email blast.

But between the lunacy, Kinnucan was also making some sense. Wall Street runs on information and much of that information is in the realm of informed speculation—rumor mixed with a few facts that people like him have the connections dig up. Kinnucan could understand how Rajaratnam might have crossed the line, paying for tips on company earnings or getting a telephone tip from a friend who was privy to nonpublic information about how Goldman was about to be rescued by Warren Buffett during the financial crisis. But how was asking a source at Intel about how many computer parts it was shipping a comparable offense? Kinnucan said. Only by taking the broadest definition of what constitutes dirty information.

“Is it illegal for me to ask the counter girl at Starbucks how much coffee she's selling so I can figure out Starbucks' earnings?” Kinnucan asked. But “that's exactly what the government thinks is insider trading.”

And he was at least partially right. In interviews with Justice Department officials and SEC investigators an expanded definition of insider trading seemed to emerge. Information that at one time was considered fair game to construct a mosaic was now considered at minimum suspicious, if it was nonpublic.

The problem for Kinnucan, and many of the other people snared in Perfect Hedge, is how he took his deceit to a new level. He didn't just hit up sources for confidential tidbits that he could use to project company earnings and by extension stock prices. The FBI now had evidence from the wiretaps that he was paying people to hand him inside tips.

It's impossible to know whether Kinnucan himself understood he was breaking the law but his actions suggested he did. At first, the publicity may have made Kinnucan feel good—that he could actually fight back against a government that considered him a criminal for doing what he knew was done all across Wall Street.

But insider trading also cost him, both professionally, as most of his clients ran for cover, and emotionally. The question that haunted him was whether it was all worth it. If he didn't play dirty, he might have made half as much, but he would have kept his career and his life.

With the FBI visit, Kinnucan's business and life imploded. “It's over,” Kinnucan said.

And it was over in more ways than one. Kinnucan tried to manage money but he couldn't find clients.

After all, who was going to give money to someone with an FBI bull's-eye on his forehead?

That's what Kinnucan was coming to terms with each night as he sat in front of his computer and lashed out at his perceived enemies, whether it was Bharara, the FBI agents David Makol and Edmund Rom who showed up to his home, or Katherine Goldstein, the assistant U.S. Attorney who was assigned specifically to his case.

“Mr. Kinnucan I am going to hang up now!” Goldstein snapped after Kinnucan dialed her number one afternoon, announced who he was, and then proceeded to spew an ever-escalating racist tirade against the federal agents and prosecutors he believed were unfairly targeting him in their insider trading witch hunt.

“As you know, the FBI faggots David Makol and Edmund Rom came to my home in Portland over one year ago, and threatened to arrest me multiple times,” he wrote one night, adding that he recently called up Goldstein and demanded an answer to a simple question: “Why have you still not arrested me?”

In that email, he said he hadn't heard back about his arrest. That would soon change. Chaves alerted people as the FBI began drawing up papers to arrest and indict Kinnucan for insider trading and passing illegal information to his clients.

Chaves and his team would contrast Kinnucan with Slaine: It was a tale of two cooperators. Both faced the same choice—jail for their crimes or entrapping friends and former colleagues—and each took a different path.

The Justice Department was now praising Slaine as possibly the most successful cooperating witness of all time. His efforts didn't just bust up his “Octopussy” circle of friends (Zvi Goffer, Craig Drimal, et al.) but his leads helped put others in jail. Slaine also aided in the Rajaratnam conviction with a lead that indicated how Drimal funneled an inside tip on shares of 3Com through Goffer to the Galleon boss. At Slaine's sentencing hearing in early 2012, the once-tough jock and trading-desk brawler didn't look like the alpha male associates had described him as. Slaine had been outed by the
Wall Street Journal
's Susan Pulliam about two years earlier as the mole who brought down Drimal, Octopussy Zvi Goffer, and that circle of friends. The story was headlined “Wired on Wall Street: Trader Betrays a Friend.” Slaine never saw the article coming, and during a brief telephone call with Pulliam, he did what his attorney told him to do if his role in the probe somehow leaked: Say nothing. In fact Slaine told Pulliam, “You got the wrong guy.”

But she had the right one, and what a betrayal it was. Until then, Slaine was relatively unknown outside his small circle of friends on Wall Street and in government. Now he was known to the larger world. Slaine isn't a common name, so he prepared his wife and daughter for the obvious public repercussions of being associated with a criminal, albeit one who was working for the government.

Drimal, meanwhile, was devastated by the news. People who know him say he opened up to Slaine during all those incriminating conversations precisely because he thought he was talking to a friend, rather than a man who was trying to put him behind bars. Slaine and Drimal haven't spoken since Drimal's arrest, though one mutual friend is said to have passed a message to Slaine more recently. Drimal, this person said, wanted Slaine to know that with the passage of time he “understood” why Slaine did what he did.

One of the hardest parts for Slaine was that he had to wait an extended period of time before he could start a new life, since the cases that he helped make had yet to filter through the legal system. That new life was set to begin as he entered the court hunched over in a dark overcoat and cap. Slaine's government handlers certainly described his efforts as “truly exceptional” in his sentencing memorandum and demanded the leniency Chaves, Makol, and Fish had promised from the start of his cooperation.

But Slaine stood stoically, almost ashamed, as the judge read his sentence: three hundred hours of community service, fines, and forfeitures of more than $1 million (on top of the roughly $300,000 he paid the SEC), and no jail time. Just three years of probation.

Slaine got what he always really wanted. He could see his family again, and not just through a glass partition in federal prison. But it came at a tremendous price. Living a life as a rat had taken its toll. Friends say he still suffers mental anguish for destroying people's lives, such as Drimal's, who was sentenced to five and a half years in jail even after pleading guilty to his crimes. “I understand I've committed a crime and I deserve to pay the price,” Drimal remarked as he was sentenced to one of the stiffer jail sentences handed out during Perfect Hedge.

But Drimal, unlike Slaine, had decided to work against the government. Judge Holwell increased Rajaratnam's sentence because he said he didn't trade on inside information during the 2007 SEC deposition. Drimal suffered a similar fate. His sentence was enhanced in part because he had alerted Goffer that the feds were investigating their circle of friends.

John Kinnucan, meanwhile, was not cooperating, and suffered his own hell. He had no money as his business dried up, and his old circle of friends ran for cover amid his increasing dementia.

His sister-in-law was on his email list as well. At one point she urged him to stop the email rants—blaming his rage on “booze,” as she worried that he had gone completely mad (or in her words “sinking with the already wrecked ship”) and would no longer be able to care for his family, which included two young children.

But it seemed like rage was the only thing Kinnucan had left as he braced for the final indignity. In addition to losing his business, his home, and his $1 million a year salary, he was about to be arrested.

M
uch had changed on Wall Street since Kinnucan sent that now-famous email about the FBI. Raj Rajaratnam, the infamous Galleon Group founder, had completed a year of his eleven year sentence. One of his most influential tippers, Rajat Gupta, the former CEO of McKinsey & Co., Goldman Sachs board member, and one of the most respected businessmen in the world, was convicted as well, and sentenced to a two-year jail term.

The judge in the Gupta trial, Jed S. Rakoff, was no insider-trading novice. In addition to hearing many white-collar cases, he was once a prominent white-collar defense attorney. In fact, Marty Siegel, one of the key figures in the insider trading scandals of the 1980s, had been his client.

Rakoff apparently was swayed by the kind words for Gupta from friends in high places who urged leniency and he sentenced Gupta to two years in jail.

Meanwhile, dozens of low-level and midlevel technology company executives—working for expert networking firms—were either charged with criminal insider trading, pled guilty and cooperated, or went to jail in the burgeoning inquiry.

The various cooperators kept churning out new leads. Wesley Wang, the former SAC analyst, led government investigators to nearly two dozen other insider trading suspects. Jon Horvath, the SAC analyst involved in the suspicious Dell trade, led agents to other members of the SAC insider trading club, while other cooperators would point to people including Anthony Chiasson, the Level Global partner who worked for SAC Capital, as well as Todd Newman, a portfolio manager of another hedge fund named Diamondback Capital.

Chiasson and Newman would eventually be charged and convicted—a case labeled by Bharara as a “corrupt circle of friends,” the term he would use more and more as the arrests piled up. The feds would follow the leads provided by Horvath to one of SAC's top portfolio managers, Michael Steinberg, soon to be named an “unindicted co-conspirator.”

After the move, SAC placed Steinberg on a leave of absence from the firm, but that was the least of his problems. Being an unindicted co-conspirator is usually a warning shot by the Justice Department that at the very least they think you're guilty of something pretty bad, and it's time to cooperate or possibly face jail time. Steinberg was one of Steve Cohen's top advisers inside SAC—he had been there more than a decade and was well paid for his investing acumen, particularly on technology stocks. The feds now believed his success was the product of insider dealings.

And here's why Kinnucan, for all his racist lunacy, was at least initially important in the government's pursuit of Cohen and SAC: Steinberg turned out to be one of the people the FBI wanted Kinnucan to secretly tape on wiretaps if he agreed to cooperate.

This account was initially denied by Kinnucan, who said the agents were more interested in someone at Citadel Investment Group, another large hedge fund client. Kinnucan made that accusation when he was looking to collect money from Citadel and his finances were increasingly tight.

But the SAC connection is key. Kinnucan said his direct contact at SAC was in fact Noah Freeman, the same Noah Freeman who since 2010 was cooperating with the government and telling investigators all he knew about Steve Cohen.

CHAPTER 15

HARPOONING THE WHALE

T
hank you for not showing up at three o'clock in the morning,” Catherine Kinnucan remarked as FBI agent Matthew Thoresen appeared on her doorstep on a crisp February afternoon in 2012 to take her husband into custody.

The FBI agents were local guys—they seemed “less harsh” than Makol, she said, based on her recollection of her husband's account of that initial meeting. There were no threats of jail, nor of not seeing his children again. With a simple “uh huh,” Thoresen handcuffed John Kinnucan, explained the charges against him, and put him under arrest.

By now, the FBI had conducted dozens of arrests, many in predawn raids with sirens blaring and guns drawn, as they had with Craig Drimal. Their intent was always to use the element of surprise to daze their targets, possibly into cooperating, or at least to give up without a fight.