Circle of Friends (31 page)

Being in the right place at the right time has served Bharara well. The Southern District, as it is known in law enforcement circles, is a prosecutorial destination like no other. It is considered the most important of all the federal prosecutorial offices, primarily because its jurisdiction includes Manhattan—just about every trade, every financial transaction, has
some
link to a firm located in Manhattan. Consequently, a scam in Shanghai might be investigated by the Southern District because it had some roots in one or more of the big New York banks.

Over the years, the office has made good use of its power. One of its high-water marks came back in the 1980s, when another prosecutor from the Southern District, Rudy Giuliani, launched what was at that time the largest crackdown ever on white-collar crime.

That crackdown crippled that era's big players, such as investment banker Marty Siegel, arbitrageur Ivan Boesky, and ultimately junk-bond king Michael Milken. It also led to Giuliani's political career as mayor of New York and his subsequent highly lucrative career in the private sector, specifically the corporate security industry.

Bharara had to know what those cases had done for Giuliani and perhaps he was looking to create the same magic for himself. There were of course key differences. Giuliani actually led the office as it was making the white-collar crime cases of the 1980s; thus he was responsible for its successes and more than occasional failures (several of his high-profile indictments floundered in court).

By contrast, Bharara had inherited much of his good fortune from predecessors in the Bush administration, though you wouldn't know that from some of the rhetoric coming from the Southern District press office. To be fair, Bharara had little choice but to go public in a major way given the very nature of his job, which is to show the general public that law enforcement is addressing white collar crime, particularly following the excesses that led to the financial crisis. Moreover, a closer look at Bharara's remarks shows he often gave credit to the career prosecutors and agents who had developed the cases before he took the job.

That said, his press department wasted little time touting various arrests that came as a result of the crackdown on insider trading. Bharara clearly understood what he had stumbled upon. As an assistant U.S. attorney he brought cases against Mobsters. But when he joined Schumer's office he got a taste of how the Wall Street Mob worked. He was at the Senate Judiciary Committee when it championed Gary Aguirre's cause against insider trading.

With that the Southern District press machine went into overdrive. One story in the Wall Street Journal promised a wave of insider trading arrests that would surpass the size and scope of Giuliani's crackdown. The government had mountains of targets, and the press frenzy that followed sent the hedge fund business into disarray. Suddenly a guy, whose last name reporters had had a tough time spelling, was known across Wall Street.

Meanwhile, the takeaway from his now-famous speech heard all around the hedge fund world was unambiguous: Mass arrests in the insider trading probe were imminent. Or as one white-collar defense attorney with clients caught up in the expanding probe put it: “Preet believes it's gonna be like shooting fish in a barrel.”

CHAPTER 12

NEVER LET A GOOD SCANDAL GO TO WASTE

W
e did all the work,” muttered a senior FBI official when he digested the
New York Post
story about Bharara's speech. By now senior FBI officials were convinced the speech was part of a broader campaign by Bharara's press office to take credit for the bureau's hard work.

The FBI is an office inside the Justice Department, but it's in many ways an independent agency. Its director is appointed by the president, not by the attorney general. FBI agents need U.S. attorneys to bring cases, but U.S. attorneys need the FBI to help them make those cases.

Now a battle over which part of the Justice Department deserved credit for the fruits of the crackdown threatened that relationship at a time when so much work was yet to be done. The expert networks and their role in funneling dirty information to the hedge fund business were now on the front burner at all the major law enforcement agencies involved in the insider trading probe. New informants were being brought forward, and wiretap authority sought. The pursuit of new targets was still an objective for all the government agencies.

Most of all, senior officials in the FBI worried about the agency's place in history. The FBI's early days include the secretive J. Edgar Hoover, but the modern version of “the Bureau” is one where image and PR count. Press releases touting arrests are routinely sent to reporters to make certain the public knows that all the money spent on investigations produces results. In fact the agency assigns at least one agent to protect its image in Hollywood, since criminals often develop their first impression of the bureau from seeing it in the movies.

Combating Bharara's PR blitz, though, would be a dicey matter. He was, of course, the U.S. attorney, and with that he had a bully pulpit not available to any FBI agent, or even to Janice Fedarcyk, the newly appointed head of the New York office of the FBI.

Eventually the FBI would get into the act, tipping off selected reporters to show up for high-profile arrests. But FBI officials complained that the Southern District had a big lead. A November 20 story in the
Wall Street Journal
added color and depth to the
New York Post
scoop about Bharara's speech. Citing people familiar with the matter, the
Journal
reported that “federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation,” as well as the shadowy world of the “expert network business,” where inside tips were passed from company executives moonlighting as researchers to big hedge funds.

The story sent shock waves across Wall Street. Seated at his usual luncheon perch, the San Pietro restaurant in Manhattan, John Mack, having just retired from Morgan Stanley, predicted that his old nemesis Gary Aguirre was behind the insider trading assault. Others at the exclusive Manhattan eatery believed it was an overambitious Obama Justice Department following the class-warfare message of their supreme leader.

Still others said the ultimate target was Cohen, whom the feds had been eager to grab for years. “But I bet they never get him,” said one executive as he chowed down on his plate of thirty-dollar pasta. Hedge fund executives and their legal staffs read the story for detail and nuance to predict the feds' next move.

Cohen, meanwhile, wasn't specifically mentioned in the account, but no story about insider trading allegations would be complete without a mention of SAC Capital. In this case the mention stemmed from an FBI person of interest, John Kinnucan, the independent research analyst whom the FBI had come across as someone who used expert networks and other sources of insider information and passed them along to his clients, which included major hedge funds and mutual funds.

Kinnucan had done something unusual a few weeks earlier. It was after Special Agents David Makol and Edmund Rom paid a visit to his home in Portland, Oregon, and he sent a blast email to his clients, firms like SAC, Citadel, and other big hedge funds, alerting them that “two fresh faced eager beaver” FBI agents had showed up to his home, offered to play some tapes they had of him passing along and trading on inside information, and told him he could make the case go away if he wore a wire to snare some of his clients.

The way Kinnucan described his FBI encounter in a subsequent interview was more dramatic; he said Makol and Rom announced who they were, surrounded him, and after offering to play a recording of some of his illegal doings, began shouting threats about how long he would spend in jail because of his illegal activities. At one point they brought up someone else who had been found on the wiretaps—a sales representative from a technology firm that Kinnucan used as a source of information. The sales rep's son just died in a biking accident. “It's a shame if we put him in jail,” Makol said, referring to the sales rep. “But we don't feel sorry for you.”

Kinnucan held to his story, saying he had done nothing wrong—the information he received from the sales rep or anyone else “can be downloaded off the Internet.”

Makol was unimpressed. “Come on, John,” he shot back. “You know something is happening before it happens.”

Kinnucan said it all went down as he was sitting in his kitchen, worrying about being arrested in front of his wife and children, who weren't home at the time.

Kinnucan declined the FBI's request to cooperate, and a few hours later he became among the more bizarre footnotes in the insider trading drama. His blast email was leaked to the
Wall Street Journal
and soon went viral, picked up by other media outlets, both print and television.

As any defense attorney will tell you, targets shouldn't antagonize the feds. The government, being the government, can always find something to charge you with, and they will do so if you rub their noses in it.

But that's exactly what Kinnucan did. He appeared on both Fox Business and CNBC to tell his story, not of a fat cat guilty of cheating the system, but about an average citizen unfairly targeted by the all-powerful federal government, waging a political vendetta.

Kinnucan described himself as a mere researcher, pushing information to his clients like everyone else does on Wall Street and in the hedge fund business. He penned a column in the Dealbook section of the
New York Times
titled “Why I Declined to Wear a Wire,” and in it he wrote: “My personal belief is that much of this enforcement activity is politically motivated and will ultimately only serve to delay the return of confidence in our country, on the part of Main Street and Wall Street alike.”

The question is, why? At the FBI, the guess was that he was desperate and that Kinnucan thought he could keep them at bay by having the media portray him as a victim. Others at the FBI simply believed Kinnucan was crazy, which appeared increasingly the case as his criticism of the government turned more bizarre.

Still, there was nothing strange or crazy about why the FBI believed Kinnucan could be an important witness. The
Journal
originally reported that the agents wanted him to focus on SAC. Kinnucan has said they were interested in another client, the Chicago-based hedge fund Citadel.

Either way, both were major clients, as were about a dozen other large hedge funds and a smattering of mutual funds.

K
innucan's email, and its description in the press, had the practical effect of further putting the hedge fund business on red alert. The feds were ready to move and they were willing to do anything within the confines of the law to snare the biggest players in the business, including playing hardball with a witness and threatening to confront him in front of his wife and kids.

Most hedge funds just hunkered down, hiring press agents to manage the fallout when the subpoena arrived and its name was leaked. Such leaks often cause investor panic, and as the tally of hedge funds under scrutiny became known, investors reacted in kind. Suspects reacted in their own way. Some tried to keep a low profile. Former SAC trader Donald Longueuil was recorded describing how, after reading a story about pending arrests, he destroyed hard drives on his computer that contained trading data.

Longueuil was eventually snared the same way Drimal was caught: thanks to the cooperation of a friend. The best man at his wedding, Noah Freeman, a former SAC portfolio manager, wore the wire that led to Longueuil's arrest. Both were fired from SAC in 2010 for poor performance, which was hardly surprising to investigators given the sink-or-swim mentality that operated at SAC and how, they believed, it caused some traders to push the limits of acceptable conduct.

Freeman's odyssey from criminal to informant began when he was out of the hedge fund business for a few months, teaching at an all-girls school in Boston—that's when he was approached by B. J. Kang, who gave him the same choice he gave everyone else who came onto his radar: Cooperate or go to jail.

Freeman chose to cooperate, helping the FBI develop evidence against his best friend, and telling all he knew about SAC. Freeman's SAC experience was important to FBI investigators. He confirmed much of what they knew about the inner workings of the giant hedge fund, and how Cohen himself operated, namely by culling the best trading ideas from his money managers.

None of which is illegal, of course. Although Freeman said he had minimal direct contact with Cohen (he worked in Boston as opposed to Stamford), he also shed more light on how he believed illegality took place at SAC. A report in
Bloomberg News
citing an FBI memo said Freeman told Kang at one point that the pressure to give Cohen profitable trading strategies was immense, and that pressure led traders like himself to cross the line into trading on insider information.

Freeman conceded that he took steps to evade the firm's compliance rules. These included policies designed to curtail the passing of inside information by forbidding SAC employees from talking directly to executives of public companies through expert networks. Freeman also admitted he communicated by the video-calling service known as Skype rather than through emails on his computer because he said it wasn't checked by SAC's compliance team.

But Freeman also described a compliance system that was fairly easily evaded, and “willfully blind” to illegal activities, according to one person with direct knowledge of what Freeman told the feds. He pointed to his use of one Primary Global expert named Winifred Jiau, an American citizen who was born in Taiwan. Primary Global had been raising red flags at SAC where the compliance department was putting an end to its use. Freeman found a way around the ban simply by paying Jiau through trading commissions, rather than directly as a consultant, which would have brought on greater scrutiny.