Circle of Friends (18 page)

What Friedman found was that Rajaratnam was so plugged in that he frequently communicated with an executive at Intel, one of the handful of tech stocks Galleon liked to trade. The executive, Rajiv Goel, had been a classmate of Rajaratnam at Wharton, so it made sense that they had some contact. But Friedman discovered that Goel had a Charles Schwab brokerage account that was accessed from an IP address located in Galleon's office, suggesting it was used to funnel payoffs to Goel for inside information he supplied Rajaratnam. A little more digging and the SEC discovered that Rajaratnam had dealings with Wharton alum Anil Kumar, who worked at the prestigious consulting firm McKinsey & Co.

Access to a McKinsey partner was a key get for anyone interested in insider trading, since the big consulting firm does business with just about every major corporation, advising them on activities that have a direct impact on share price, such as mergers and acquisitions. Even better, as investigators discovered, Rajaratnam had forged ties to a former McKinsey chief executive, Rajat Gupta, now in retirement but still a presence in corporate America.

Many of Rajaratnam's circle of friends shared common ethnic bounds, college ties, and most astonishing of all, an absolute desire to make money by cheating the system. When Wadhwa heard the news about Kumar, for example, he could barely contain himself. “Why don't we just charge the entire fucking Wharton class of 1983,” he snapped.

That was the case Wadhwa was making once again to the Justice Department lawyers at their headquarters in lower Manhattan. They should join in the fight, he argued, and take the case to the next level. Wadhwa had given them more evidence to build their case: He had Raj's confirmation under oath that he had a “source” inside AMD and that he regularly chatted with Roomy Khan about the markets. Wadhwa believed Khan was paid by Rajaratnam to supply him with inside tips. He couldn't find the direct money trail, at least not yet, but he had found lots of indirect payments made by Rajaratnam to Khan in the form of information.

Even better was what Wadhwa and his team found out
after
Rajaratnam's deposition. In July, just weeks after being grilled by the SEC, investigators found evidence that Rajaratnam traded on inside information concerning the pending takeover of Hilton Hotels by private equity firm Blackstone Group—a $26 billion leveraged buyout that shocked the markets, but apparently did not come as a surprise to Rajaratnam's circle of friends.

Trading records showed that both Rajaratnam brothers and Khan snapped up shares just before the deal was announced, earning millions of dollars, particularly in the case of Raj Rajaratnam (who bought 400,000 shares of Hilton). Most fascinating was how they bought the stock on July 3, during an abbreviated market session just before the Fourth of July holiday. They crammed all their trades in the last half hour that the market was open, which set off massive alarm bells on the SEC's stock-trading surveillance system.

What wouldn't be known, at least for a while, was precisely why the Rajaratnams had bought the shares with such gusto, and why Rajaratnam kept in such close contact with Khan. As investigators later learned, Khan had passed the Hilton tip to Rajaratnam through a source at the ratings agency, Moody's Investors Service, which was analyzing the deal.

It didn't end there. Trading records showed that two weeks later Galleon had suddenly bought 25,000 shares of Google just before it announced strong quarterly earnings. Another smallish fund, Whitman Capital, also bought shares of Google before the announcement, as did Khan. The reason was discovered as the investigation progressed: Khan had a source inside Google's investor relations department who had provided her with the numbers before they were made public. Khan, in turn, gave them to Rajaratnam, and a Silicon Valley money manager, Doug Whitman, who was also on her friends list.

The Justice Department assembled what it considered its insider trading A-team for the meeting at which Wadhwa made his case: Assistant U.S. Attorneys Lauren Goldberg and Joshua Klein, widely regarded as experts in the prosecution of white-collar crime, and the FBI's B. J. Kang, now one of two go-to agents (Makol being the other) in the prosecution of insider trading.

The feds listened to Wadhwa's presentation and made a few admissions of their own. Roomy Khan wasn't quite the mystery woman that she had appeared to be. She worked for Rajaratnam in the 1990s as a trader and she had long been suspected of providing insider information to Rajaratnam when she was an employee of Intel, the big chipmaker, in 1998.

There had been lots of suspicious trading just before key events such as earnings announcements. Intel set up an internal sting operation, placing a camera near a fax machine. Khan was caught in the surveillance video dialing Rajaratnam's telephone and sending him an early copy of a press release about earnings. By 2001, the FBI had assembled enough evidence to offer her a deal: Plead guilty to securities fraud for supplying Rajaratnam with insider trading, and avoid jail by cooperating with them to build a case against Rajaratnam.

It was a lucky break for Khan for several reasons. Khan avoided serious jail time, and before long, the Justice Department's investigation into Rajaratnam would be dropped. Some people inside the government say the case became a low priority as the FBI began diverting its resources to investigating terrorism following the 9/11 attacks. Others say those FBI agents still assigned to the matter couldn't develop any of Khan's leads.

In any event, her activities as a government snitch and a felon would remain under seal, and her friendship with Rajaratnam would continue as if nothing had ever happened.

Goldberg and her colleagues then discussed the suspicions they had about Rajaratnam's involvement with the Tamil Tigers—they appeared to receive money from the Galleon chief, albeit indirectly.

But it was the Justice Department's past investigation of Rajaratnam and Khan for conspiring to trade on insider information that had Wadhwa's head spinning. Wadhwa knew Galleon had appeared on the insider trading watch list in the past. Still, details of the Justice Department's earlier probe were remarkable. The FBI had wanted to put Rajaratnam in jail six years earlier, using Khan as its primary witness. She had agreed to cooperate, under one condition: complete and total immunity. In exchange, she would disclose “how Rajaratnam did it and who he gets his information from” and stay clean herself.

The feds lived up to their end of the bargain, but Khan didn't live up to hers.

Still, that was yesterday's news. Today's story was how to finally nab Rajaratnam, given the new evidence that Wadhwa brought to the table, and was it worth doing a second dance with Roomy Khan. Just about everyone in the room that afternoon knew that Roomy Khan by herself was largely damaged goods. She was already a crook with a sealed case that would nonetheless be opened for the entire world to see. Rajaratnam's lawyer would have a field day with her credibility—or lack of it. On top of her rap sheet, she had led the FBI down so many dead ends when she was a witness in the early Rajaratnam probe that no jury would convict Rajaratnam on her word alone.

Yet they also came to the conclusion that Khan, not Rengan with his blood loyalty to his other brother, was their best hope to break the Rajaratnam circle. Kang could try to flip other members of Rajaratnam's circle of friends whom Wadhwa had come across, but based on the nature of the conversations, Khan appeared to be Rajaratnam's best source of dirty information and, more than that, someone Rajaratnam obviously believed he could trust, given the pair's long relationship. When Kang discussed all of this with his supervisor, Rich Jacobs, in a small conference room in the FBI's lower Manhattan headquarters, they quickly came to the same conclusion: In order to make a case against Rajaratnam they needed more than trading records and some IMs. They needed Roomy Khan—and probably something else.

After long hours reviewing Raj's IMs, trading records, and other documents Wadhwa had provided them, Kang and his supervisors had developed what they thought was a pretty good character study of the Galleon chief. He would be an amazingly valuable witness himself because he had assembled a large circle of friends—employees at technology companies, other traders, and of course Roomy Khan, as part of his conspiracy to cheat the markets.

But he had gotten away with insider trading for far too long, which only stoked his massive ego. In Rajaratnam's mind he was smarter than the teams of government investigators who had been searching his trash for so long. And even if they did actually catch him, the betting among the government investigators was that a guy who could lie through his teeth for eight hours during an SEC deposition would also believe he could beat the rap, and beat any Roomy Khan–like witness they threw at him.

And he probably would unless they could get him on tape.

It's unclear exactly how the decision was made to give the FBI that perfect hedge in nailing one of the market's biggest players using telephone wiretaps. But based on conversations with various people in law enforcement, the decision began with a request from Kang's supervisors in the FBI.

They brought their plan to Reed Brodsky, the assistant U.S. attorney who had been specializing in insider trading cases. Brodsky understood the sensitivity of the matter (the federal wiretapping law was supposed to focus on terrorists and mobsters) but also how difficult it is to win insider trading cases, unless they have the culprits in their own words committing the crime. Brodsky made that case to his immediate boss, Michael Garcia, the Manhattan U.S. Attorney, who ultimately agreed.

And there was no better target to use wiretaps on than Raj Rajaratnam. Federal prosecutors, like their counterparts at the SEC, had come to the conclusion that Rajaratnam symbolized all that was wrong with the markets. He had created a trading firm based primarily on breaking the law as it applied to the use of material nonpublic information.

Moreover, they believed they were on to something big in the history of the government's crackdown on insider trading. Galleon traded so frequently and so widely that Rajaratnam's connections stretched all across Wall Street.

A top Merrill Lynch broker, investigators discovered, had accompanied Rajaratnam on a vacation to Jamaica. Another Rajaratnam associate on Wall Street was Lloyd Blankfein, CEO of Goldman Sachs, one of the firms that served as Galleon's prime brokers. Galleon traders were among the hedge-fund world's best paid and best connected, with friends all across Wall Street and at major hedge funds, including SAC.

In other words, by breaking Galleon and Rajaratnam, the government believed they could finally crack into a much larger circle of friends.

Investigators weighed whether they could get the needed corroborating evidence against Rajaratnam to convict him
without
a wiretap.Roomy Khan in and of herself was a terrible witness, and even if she didn't come with baggage, it would be a challenging case. There were so few major criminal insider trading convictions in the past because the quality of the evidence was often circumstantial or weak. He-said-she-said trials are risky. Targets often claim they didn't know they were trading on illegal information, and intent is a key ingredient of any fraud case.

That's why getting Rajaratnam on tape was crucial, and not just the taping that occurs when a witness like Khan decides to flip, and she records their conversations either with a wire or with a recording device on
her
telephone.

Officials in the Justice Department were now weighing was a wiretap on Rajaratnam's
own
cell phone, which would completely unlock his circle of friends.

To get wiretapping permission, investigators would need to convince a federal judge that they had probable cause to believe Rajaratnam committed securities fraud. They would also have to prove that they couldn't get the necessary evidence to convict Rajaratnam in any other way. Government officials determined neither would be difficult to meet given all the resources now being assembled against Galleon and its founder, which produced lots of good evidence with more to come particularly if they could convince Roomy Khan to go undercover.

For all her baggage, Roomy Khan was exactly the type of mole they were looking for: She had the trust of Rajaratnam, and she knew Wall Street and Silicon Valley, so she could snare others who were part of the bigger ring they believed existed.

And she would have no choice but to cooperate once Kang had his patented chat with her and laid out choices: Either help put her benefactor and good friend in prison, or be prepared to serve a long term behind bars herself.

C
onvincing a target, even one as guilty as Roomy Khan, to cooperate with the government is never an easy task. It is a cat-and-mouse game. As an agent you can't give up too much information because you need to keep the target guessing. It's the fear of the unknown that causes many of these targets to start crying the moment the FBI explains their dire situation.

And you usually only have one shot to make an impression, which is why agents like Kang and Makol are so valuable. The Galleon investigation had now become a top priority not just at the SEC but also at the Justice Department, and its intensity and focus were largely a secret outside of the circle of law enforcement officials toiling twelve to eighteen hours to develop evidence. The risk in trying to flip someone like Khan is her loyalty to her circle of friends, whom she might alert and thus damage the case.

Kang's skill was in breaking that loyalty. Kang spent days preparing how to make his approach, or as one colleague put it “B. J. made night and day into one.” He had seen all the reactions from white-collar criminals. Some just sit there and sweat as the reality of being caught sets in. Some faint; others lose control over their bowels and beg for mercy (in that order, FBI agents tell me), while still others calmly assess their options. One thing
most
of them have in common is an absolute willingness to do anything necessary to keep themselves out of jail.