Circle of Friends (23 page)

It wouldn't end there. Wall Street might be sleazy, but it's a heavily regulated industry, thus hardly impenetrable. Rajaratnam's lawyers would try to show that the government hadn't exhausted other investigative tools. As proof, Roomy Khan was still helping them with the Rajaratnam case, with a recording device on her telephone that didn't need a court order since she was already cooperating.

Even so, the courts have been slowly warming to an expansion of wiretapping into the white-collar realm. In fact, former prosecutors say they used wiretaps of telephones to crack down on penny-stock fraud during the 1990s, which included insider trading. As financial fraud grew during the 1990s stock market boom, the legal system adapted and judges increasingly showed less distinction between the typical gangster from Mulberry Street versus the one on Wall Street.

That was at least part of the case Kang and Goldberg made to Judge Gerald Lynch to tape Raj Rajaratnam's cell phone in March of 2008. The other stuff involved establishing probable cause through the information Roomy Khan was dishing about Rajaratnam's activities, which involved everything from his Hilton trades to Rajaratnam's ramblings about his market exploits, including how the guys at tech company Xilinx were giving him a lot of guidance.

With the wiretap on Rajaratnam's phone, the unprecedented phase of the crackdown was about to unfold, though if Judge Gerald Lynch thought he was making history or something close to it when he reviewed and granted the wiretap request, he didn't show it.

It was a pretty perfunctory affair. The application stated that the government believed it couldn't obtain the information to make its case any other way, though it left out a key detail: that Rajaratnam had been a focus of the SEC's investigations for years and had turned over millions of documents to government officials.

It was a mistake, and later, Rajaratnam's attorneys would add it to their list of complaints and argue it was a deliberate attempt to mislead the courts into granting the request and hiding the fact that the government failed to meet its very high bar to obtain the wiretap, namely that it had exhausted every other means before resorting to the ultimate invasion of privacy.

But for now it didn't matter. On March 7, 2008—the same day it was submitted—Judge Lynch granted the application and the taping of Rajaratnam's phone began.

S
laine, meanwhile, was well into his FBI-sanctioned espionage work by this point, having met with Drimal several times and recorded their conversations. At least initially, Slaine didn't think recording people was part of the deal he had cut with Makol and his other handler, assistant U.S. Attorney Andrew Fish, people who know him say. Maybe so, but it would soon loom large in his new life as a cooperating witness.

Documents show that some of the first evidence Slaine gave the FBI involved Drimal's trading in the stock of ATI Technologies. That trade had also caught the attention of Slaine's new bosses at the FBI because it appeared that Slaine had made it right before a market-moving corporate event. But Slaine said it wasn't his. It was one of the trades Drimal had placed in his account to repay the money Drimal had borrowed.

That was just the beginning, Slaine pointed out. Even though the relationship between the two men cooled, Drimal remained in awe of Slaine, and, some mutual friends say, Drimal still wanted to impress his mentor, reminding him that the guy who used to be a doorman at a nightclub now had his own trading relationships.

That would be Drimal's fatal mistake. Slaine pointed to those relationships immediately, explaining how his old weight-lifting partner now had a pretty sophisticated circle of friends and used them to make dirty trades.

According to people who know Slaine, the feds were clearly interested in Drimal as a starting point to unravel what they believed was a well-orchestrated scheme to trade on confidential information. They wanted to know everything about him, from his work life to his private life. Drimal's work as nightclub doorman in the 1980s helped him make connections with Wall Street traders looking to get into some of the city's hottest clubs.

By 2007, Galleon was one of the hedge-fund world's biggest players, putting it firmly on Wall Street's radar screen—and the phones were ringing constantly, with Wall Street trading desks begging for Galleon business, and the commissions they produced for completing trades.

Drimal was in the middle of what one former trader there described as “the wild west of the hedge fund business.” Unlike competitors such as SAC Capital, there were few rules, and no overarching investment strategies at Galleon. Fiefdoms developed between Rajaratnam's people—namely the firm's analysts—and the traders who reported to Rosenbach. Some of Rosenbach's traders would place huge bets against the same stocks Rajaratnam was touting as a buying opportunity and vice versa.

Galleon traded so much that it produced around $250 million in yearly commissions for Wall Street's brokers. One of its stars, Todd Deutsch, earned the name “Rain Man” both for his awkward temperament and his remarkable ability to keep track of hundreds of different trades at the same time. Galleon was also a hub of information, with Rajaratnam bragging about his sources in the technology community who gave him guidance about the direction of stocks, and the Wall Street brokers handing market intelligence to the firm's traders.

Drimal was no Todd Deutsch, who once earned approximately $25 million in a year. In fact, he was never officially hired by the firm, but over the years he managed to understand the value of information and find his niche at Galleon, where he was known to all by the oddly effeminate nickname: “Ruby.”

“It was a name of an old girlfriend, or something,” was how one person who knew Drimal described his trading-floor moniker.

But he was now married—ironically to a former prosecutor in the Manhattan District attorney's office and living in the New York City suburb of Weston, Connecticut, a far cry from his early days. Inside Galleon, Drimal thrived for another reason: He had a penchant for skirting the law, Slaine told his handlers, which fit the FBI's working knowledge of his activities in the hedge fund business.

Makol and Fish weren't the lead investigators on the Galleon investigation, which was headed by Kang and Lauren Goldberg, but Slaine was such a treasure-trove of industry knowledge they also began to probe what he knew about Rajaratnam. Slaine had left Galleon many years earlier so his information was a bit stale. But what he knew fit what the government had begun to uncover as well: Galleon was a place where trading on inside information wasn't uncommon. In fact, Slaine claimed at Galleon there was significant pressure to crank out big returns even if that meant crossing the line into illegality.

But Slaine's knowledge of Galleon was considered a secondary matter; Makol and Fish were most interested in building a case against Drimal and uncovering one of the most convoluted circles of friends FBI agents had ever witnessed—a probe that would ultimately snare numerous traders and lawyers and expose the seedy world of expert networks, including a wannabe hedge fund star who was known by his cohorts as “Octopussy,” because he had so many friends radiating out from his particular node in the circle.

H
ey, how's it going?” Slaine asked Richard Dickey, his old friend from his days at Morgan Stanley, as they casually crossed paths outside the swanky Delano Hotel in South Beach Miami where Dickey had been vacationing with his family. The two hadn't seen each other for years, though Dickey, like most people who knew David Slaine, also knew the legend: a street-smart brawler who made it big in the hedge fund world. In fact, Dickey was one of the Morgan executives who broke up the alleged French fry fight at Morgan Stanley, and he could attest to both Slaine's strength and his good-guy status on Wall Street.

What Dickey didn't know when they crossed paths was that Slaine was not merely a hedge fund trader; he was in fact a key government cooperator going underground to snare friends and their circle of friends. “He just said hello and said he was doing some trading and we agreed to get a drink and that was the last I heard of him,” Dickey recalls.

That's because Slaine had bigger things on his mind than getting a drink with an old pal. The months following his cooperation agreement with the government were a difficult time for Slaine. Whereas lying to Rajaratnam seemed to investigators almost second nature for Roomy Khan, Slaine's betrayal of past friends and associates caused him great emotional pain. People who know him describe it as an excruciating experience, particularly during the first two years of his undercover work where his efforts were most intense.

The biggest emotional hurdle for Slaine was wearing a wire and secretly recording other targets, including, most prominently, Drimal. Being a rat was “humiliating for David,” is how one friend described Slaine's life working undercover. At several points Slaine asked Makol if he could stop because of the emotional stress of spending much of his days as an imposter. Slaine's wife even threatened to personally alert Drimal that he was being recorded as she witnessed the emotional toll wearing a wire took on her husband.

Slaine reported the threat to his FBI handlers, who confronted Elyse Slaine on the matter. It's unclear exactly what the FBI said to prevent Elyse Slaine from following through, but people who know her say she made it clear to Makol that she believed her husband had done enough, and that the punishment, in her view, didn't fit the crime.

“How much more do I have to do!” Slaine screamed during one particularly tense meeting with Makol. As Slaine's friends recount it, Makol reminded him bluntly of the threat he made when they first met, that if he didn't cooperate, “You'll never see your daughter again.”

The threat was incentive enough to keep moving until his new masters were satisfied and Slaine knew that slapping them in the face wasn't going to work. What would work was agreeing to help them fully uncover what the government believed was a formidable circle of friends.

It started with Drimal, whom he began recording in September 2007. But within a year Slaine had led the FBI to many more possible targets, helping establish enough probable cause for Chaves and Makol to get court orders to start their own wiretapping of other targets' telephone calls.

Slaine and Drimal appeared to re-establish many of the personal bonds they'd had in the past. Slaine was a notorious Wall Street tough guy, but he was also smart as he lured Drimal into the FBI's web. Drimal, meanwhile, dealt with concerns that Galleon people would notice him hanging out again with the guy who once slapped Rosenbach by meeting Slaine outside the hedge fund's offices. It was worth the chance, given Slaine's own reputation as a proficient trader and as someone Drimal could use to advance his own career.

During the Boesky-Siegel era, meetings at the Harvard Club in Midtown were par for the course. But the new breed of insider traders had no problem passing lucrative tips at more lowbrow establishments, such as Burger Heaven, a cafeteria-style burger joint on Forty-Ninth Street and Madison Avenue.

It was here as well as cafés like Pret A Manger, just around the corner from Burger Heaven, that Slaine helped the FBI nail Craig Drimal by unlocking his extensive network of insider trading accomplices, both in the Wall Street trading community and at law firms. Slaine's first recorded conversation with Drimal didn't disappoint. Makol took pains to make sure Slaine knew what questions to ask—and how to ask them—he put a recording device on Slaine's telephone and one on his suit. And it worked. Drimal began sharing insider tips with Slaine immediately, according to federal investigators with firsthand knowledge of the matter. Drimal at times appeared nervous; he often balked at talking over the telephone because he said the feds could be listening, but thanks to his trust in Slaine he agreed to meet once again and personally share something with him.

In preparation for Slaine's face-to-face meeting with Drimal, Makol had placed what's known as a “body wire” directly on Slaine, one so small it couldn't be detected. By now federal agents had gotten creative in their use of listening devices, placing them on candles in restaurants, on watches worn by informants, and even creating microphones that look like hotel key cards.

When they met, Drimal revealed that a big deal was at hand: Bain Capital was going to take electronics manufacturer 3Com private. The deal would be announced at the end of September. How did he know this? Drimal said he had a source named Zvi Goffer—the trader who would later be described as Octopussy—who had a source at a law firm named Ropes & Gray, which was representing Bain on the deal.

Slaine had seen many guys like Zvi Goffer during his twenty-five-year career; a relative kid in his early thirties with a vaunting ambition to make money. The scheme Drimal offered was indeed an easy way to make money even if Drimal added ominously, that he wasn't sure why the lawyer was risking jail by passing on what was so obviously illegal inside information. But Goffer was paying the lawyer for the information, which has always been enough incentive to commit a crime.

The old David Slaine would have made a crude remark or a joke, but now with the FBI listening and the threats of jail time in his head he just let his old friend dig himself into a deeper and deeper hole.

The insider tips didn't end there. Like Rajaratnam, these guys also traded on inside information involving Hilton Hotel's takeover, Drimal said. Meanwhile, Drimal's initial statements were enough for Chaves and Makol to obtain a court order to wiretap Drimal's telephone and eventually many others in the scheme.

Zvi “Octopussy” Goffer certainly lived up to his name; Slaine told Makol that while Drimal was well-connected inside Wall Street's seedy underworld, Goffer's connections were even better; he appeared to have sources of information everywhere.

Drimal didn't know who it was at Ropes & Gray who had provided the 3Com leak. In fact, the cat-and-mouse game would last most of the next two years, with Drimal providing insider tips to Slaine and then Slaine infiltrating the circle of friends directly, attending meetings with Drimal, Goffer, and others and piling up the evidence to bury them all.