Authors: Anita Raghavan
Tags: #Finance, #Business & Economics
On meeting the New York prosecutors, Jeffrey Bornstein, Lee’s lawyer, didn’t mince words. He wanted to know the evidence prosecutors had against his client. Klein and Michaelson played him recordings of some of the most incriminating calls featuring Lee. Without a cooperating witness offering context, tapes—even powerful ones like the recordings the government had involving Lee—can seem unimpressive. To a layperson listening—a potential juror, for instance—it would be hard to figure out what was going on.
At first, Bornstein, the lawyer from California, appeared unfazed.
“Are these even coming in?” he asked the New York prosecutors. It was unclear if Bornstein knew that the recordings had been obtained through court-authorized wiretaps—the prosecutors certainly didn’t tell him the origin of the tapes—so it was difficult to tell if he was querying whether the wiretaps would be deemed admissible or he was simply asking if the prosecutors planned to use them.
“They’re going to come in,” Klein answered firmly.
Then he played more tapes; with each one, Bornstein grew more apprehensive. He was in a tricky spot. He had little information to go on but had to advise Lee, his client, on the most important decision he probably had faced in his life: should he sign up with the government or roll the dice and decide to fight?
“This is your one chance to cooperate,” said Klein, the prosecutor, looking Lee squarely in the eyes. “If you don’t cooperate, we will prosecute you, we will convict you and you will go to jail.”
Klein’s manner left no doubt that the New York prosecutors meant business. Within weeks, Lee agreed to cooperate with the government. He started making consensual recorded telephone calls to one of his former bosses, the granddaddy of the hedge fund world, SAC’s Steven Cohen. On the pretext of seeking to get a job again at SAC, Lee telephoned Cohen a number of times. In the course of conversation, he rattled off about twenty stocks, many technology company shares, in which he could obtain confidential, nonpublic information. Cohen did not respond to Lee’s overture; he remained silent. On one call, he suggested he and Lee meet. It was a tantalizing overture, but it would ultimately not lead to charges. By the summer of 2009, Wall Street was rife with rumors of an insider trading probe and the word was that Lee and Far were cooperating. All of a sudden, Cohen stopped taking Lee’s calls.
At the time, though, by managing to “flip” both Far and Lee without the world knowing, prosecutors had forestalled having to take public their covert operation. Little did they know that the cover was coming off the government’s probe. Shortly after they met with prosecutors in the US attorney’s office in Manhattan, Far and Lee suddenly shut down their hedge fund. They had no choice. Once they were approached by the FBI, they would have had a fiduciary obligation to their investors to disclose that they were targets of criminal investigations if they kept managing money. To keep their cooperation with the government under wraps, the only option they had was to close down Spherix. Naturally, shuttering their fund triggered questions. Nobody throws in the towel on Wall Street when they are making money.
During the first week of October 2009, Rajaratnam and Kumar and their wives, Asha and Malvika, headed to Trinidad to attend the wedding of a woman who had once worked for both men. On their return, they stopped in Miami to chill out at Rajaratnam’s luxury condominium in the Setai hotel, an oceanfront resort in the heart of South Beach.
On the afternoon of October 7, as the two were lounging in deck chairs, reading books and chatting, Rajaratnam got a call. He looked at his phone and then excused himself, walking down the beach to have a private conversation. When he returned, he seemed excited. He told Kumar that he had gotten a call from a Cisco Systems executive who said Cisco was buying a company called Starent.
Then Rajaratnam confided that something was bothering him. “You know Anil, I am really disappointed,” he said. “There is another gentleman who used to work for me and I’m told is now wearing a wiretap. I have to be really careful…I can’t believe he is betraying me.” Rajaratnam said he suspected the former employee who was wearing a wire was someone called Ali Far. He suggested that Kumar buy prepaid phones to call him in the future so that no one could trace the calls.
Later that afternoon, when Kumar returned to his room, he flipped open his laptop and logged into his Charles Schwab account. Then he bought 300 shares of Starent stock at about $27.97 a share, or over $8,300. “I thought let me just buy a few shares of Starent to see if this thing ever happens.”
It did. The following week, on October 13, Cisco unveiled an agreement to buy Starent Networks for $2.9 billion, or $35 a share. Kumar made a quick buck, netting a profit of a little more than $2,000 in six days.
On Thursday, October 15, 2009, Raj Rajaratnam was sitting at his curved desk in his glass-walled corner office on the thirty-fourth floor of the IBM Building, basking in his own success. By 2009, Galleon Group, the hedge fund company he had built from scratch, managed about $6 billion in assets and employed nearly 130 investment professionals—among them analysts and portfolio managers. Rajaratnam had every reason to feel pleased; his sprawling investment empire now stretched from Menlo Park to Mumbai and he was pouring money into markets as far afield as Sri Lanka. He had only to look outside his office to feel satisfied. There sat rows and rows of traders and analysts, all jockeying to make money for him and, along the way, themselves. Whenever he had a hot tip, all he had to do was slide one of the glass panels and shout to the traders on the desk. Invariably, they jumped; they knew a tip from their boss was as good as gold.
It was hard to believe, but friends of his—icons like Art Samberg of Pequot Capital—were no longer in the investing game. They had been felled by regulatory probes or the recession. Somehow—most probably because of Rajaratnam’s tenaciousness and drive—Galleon had survived. It had weathered the most brutal financial crisis since the Great Depression, coming out on top even as some of the brokerage firms it did business with, such as Lehman Brothers and Merrill Lynch, had failed or disappeared as independent, stand-alone firms. Of the three largest technology funds at the start of the decade, Rajaratnam’s Galleon was the only one still in business. The other two, the Bowman Technology fund, run by former Fidelity manager Lawrence A. Bowman, and Andor Capital Management, spearheaded by former Goldman Sachs technology analyst Daniel Benton, had shuttered. Bowman was a casualty of the 2001 tech bust, and Benton had thrown in the towel in 2008, one of nearly fifteen hundred to close its doors amid the market meltdown.
Rajaratnam escaped by the skin of his teeth, even though his funds suffered blistering losses and large outflows too. Amid it all, he had never violated the one shibboleth held sacred in the hedge fund world: he was proud that he had not imposed “gates” on investors, prohibiting them from withdrawing their money from Galleon. “It is our investors’ money and they have the right to do whatever they want with it even if it means withdrawing all the funds from Galleon and destroying our firm,” Rajaratnam had told employees the previous year.
For stock investors like him, 2008 had been a roller-coaster ride, but in the end, he was happy he had hung on. By 2009, the markets had snapped back and his Galleon group of funds was on track to earn 20 percent in performance fees, the lucrative payments that had propelled him to the billionaires’ club in the first place. Some big investors—so-called funds of funds—which allocate money to hedge funds, were close to pouring their money back in after pulling their cash in 2008. Galleon was on a list of about ten different funds that large asset allocators were considering funnelling cash to, Rajaratnam had learned. After a horrific 2008, it looked like 2009 was going to be just fine.
Rajaratnam was finally feeling relaxed and good about the world. He and his wife, Asha, were set to leave for London the next day for the premiere of
Today’s Special
, an independent film he helped finance. It was a comedy about a New York chef and it had a cast of South Asian luminaries that featured Aasif Mandvi, a correspondent on Jon Stewart’s
The Daily Show
, and cookbook writer Madhur Jaffrey.
Rajaratnam was excited about the trip. In the last few years, he had been forging into areas beyond investing. Filmmaking was one new passion. Another was philanthropy. He wanted to build a legacy that outlasted his investment empire. His efforts to help Sri Lankans rebuild destroyed homes and livelihoods after the tsunami in December 2004 had been noticed. When the Sri Lankan leader Chandrika Bandaranaike Kumaratunga spoke at the Asia Society in 2005, Rajaratnam posed a question.
“Is this
the
Raj Rajaratnam?” Kumaratunga asked when she heard his name. She then singled him out as someone who had been a special friend to Sri Lanka.
That Thursday afternoon in October, when an old associate stopped by to see him, Rajaratnam was upbeat. He was in the midst of hatching a grand plan to expand Galleon, making it one of the biggest hedge fund companies around.
“I am the last man standing,” he told the visitor, gently stroking his belly as he reclined comfortably in his leather chair. “I want to raise $5 billion. I want to double in size over the next five years.” He had no clue how much evidence the government had amassed on him during the financial meltdown of 2008.
* * *
On that very same October 15, in the wee hours of the morning, B. J. Kang, the FBI special agent working the Galleon case, was talking with a member of the Office of Customs and Border Protection. FBI agents like Kang stay in close touch with the border police because they are in a position to alert the FBI if the target of an arrest is preparing to flee. Kang learned something interesting. Rajaratnam had bought a plane ticket on Wednesday, October 14, to fly to London, Heathrow. He was set to leave two days later. Kang also found out that Rajaratnam had made a call to his daughter around 3 a.m. Thursday. The wiretaps were no longer in place, but in anticipation of imminent arrests, the FBI had sought authorization from the court some time back for what is known as “pen register data”—essentially a running ticker of calls in and out of a potential defendant’s phone in an effort to keep tabs on his comings and goings. The pen register data had picked up Rajaratnam’s call to his daughter. Its odd timing, coming in the dead of night, only raised alarms.
Originally, the arrests of Rajaratnam and his ring had been planned for the end of the month. Among law enforcement officers, the anticipated takedowns came to be known as the Halloween Day arrests. Typically the FBI likes to arrest people on Tuesdays, Wednesdays, and Thursdays. It tries to avoid Mondays because it is harder to rejigger plans over a weekend, and it also eschews Fridays because if bail issues aren’t resolved, a defendant stands the risk of spending the weekend in jail.
Jonathan R. Streeter, a nine-year veteran of the US attorney’s office in Manhattan, had been juggling the Galleon case all year along with a few others. When Streeter secured a guilty plea in May from Marc Dreier, a once prominent New York lawyer who bilked hedge funds and other investors out of $700 million, colleagues expected Streeter to parlay the victory into a lucrative private sector job—one that involved defending deep-pocketed white-collar criminals. He had actually stayed in public sector service longer than most. Few knew it, but he had an important legacy to protect. His uncle, Michael Armstrong, had been the chief of the securities fraud division at the US attorney’s office in Manhattan between 1965 and 1967 and was the chief counsel to the Knapp Commission, created to investigate public allegations of corruption in the New York Police Department made by officer Frank Serpico. When Streeter was in eighth grade, he was reading
Serpico
for a book report, and he saw his uncle’s name mentioned all over the last hundred pages. Inspired, he ultimately decided to become a lawyer.
Late in the morning of October 15, the boyish-looking Streeter was coming out of a job interview when he glanced at his BlackBerry. There was an email from the office informing him that the Galleon takedowns were set for the next day. All year, Streeter had been through several false alarms for arrests in the Galleon case, but there was no way of knowing if this was another fire drill or the real thing. He rushed back to the office. When he returned, his colleagues, Klein and Michaelson, were deep in discussions about the nitty-gritty: Would the FBI arrest half a dozen people or many more? Would all the arrests take place simultaneously or be staggered? What was the office’s position on bail? Streeter jumped into the fray; there were less than eighteen hours to go before the arrests and a ton of logistical details to finalize.
At 11:27 a.m., Sanjay Wadhwa at the SEC sent an email to David Rosenfeld, the SEC’s associate regional director of the New York area. “Breaking News,” Wadhwa wrote. “The FBI just learned that Raj may be leaving the country so there is a chance they may arrest Raj tomorrow morning with Goel and Kumar.” He was referring to Rajiv Goel, the Intel executive, and Anil Kumar, the McKinsey partner, whom Wadhwa suspected were part of Rajaratnam’s insider trading ring. A few minutes earlier, Wadhwa had gotten a call from FBI agent Kang briefing him on developments overnight. Lacking access to the wiretaps, Wadhwa and his team at the SEC had been building their case with old-fashioned circumstantial evidence. For months, they had been itching to bring a civil action against Rajaratnam and some of his moles. They had developed solid circumstantial insider trading cases against Rajaratnam and key members of his ring in a handful of stocks such as Google, Polycom, Intel, and Hilton. But the authorities at the US attorney’s office in Manhattan were not ready to pull the trigger on a criminal complaint.
“Trust me, we are developing good evidence,” Klein told Wadhwa. Knowing that the only two things the US attorney’s office could not share with the SEC were Title III wiretaps and grand jury material, Wadhwa suspected it was the wiretaps that had been yielding important evidence for prosecutors. In less than twenty-four hours, he would learn for the first time exactly what some of that evidence was.
Under the plan finalized by the US attorney’s office in Manhattan Thursday afternoon, three teams of FBI agents would fan out across Manhattan early Friday morning. One team would head to Sutton Place, where Rajaratnam lived, another to an address nearby where Chiesi lived; a third would head to the Time Warner Center, where Kumar lived. Two other teams were on standby to make additional arrests depending on the outcomes of the Chiesi takedown, and when the West Coast woke up, a sixth FBI arrest team would take Goel into custody.
The day before, the Manhattan US attorney’s office filed two complaints under seal. One complaint named only Raj Rajaratnam, Rajiv Goel, and Anil Kumar, and in it there was a reference to a “CC-1,” which stood for “coconspirator 1.” In the other complaint, there was no reference to a CC-1. She was named as Danielle Chiesi along with two other defendants, Bob Moffat and Mark Kurland. These two new names were curious: Moffat was a longtime senior vice president at IBM; Kurland was the cofounder of a billion-dollar hedge fund. Prosecutors had drafted two complaints in the event that if Chiesi cooperated when FBI agents came to arrest her, the US attorney’s office would unseal only one complaint, where she was referred to as “CC-1.” It would hold off on the arrests of the IBM executive, Moffat, with whom Chiesi was having an affair and who was supplying her with inside tips, and Kurland, her longtime lover and boss, who traded on the tips she got from Moffat. Law enforcers knew Chiesi would have only a short window in which she could be helpful to the government.
Investigators wanted her to make a recorded call to one of the prominent executives she was heard talking with on the wiretap and to place calls to various hedge fund managers she knew whom investigators suspected were trading on inside information. It wouldn’t be long after Rajaratnam’s arrest before Chiesi became toxic. In the hedge fund community, where news travels fast, traders would soon figure out the identity of CC-1.
At about 6 a.m. on Friday, October 16, 2009, FBI agent Kathleen Queally, dressed in a business suit but armed with a gun, and four other agents went to 418 East Fifty-Ninth Street, a modern high-rise building overlooking the Queensboro Bridge. They approached the doorman and told him they were there to see Chiesi but asked him not to call up to her as he normally would to alert her to a visitor. One of the FBI agents stayed with the doorman to make sure he didn’t phone Chiesi. When they arrived at her apartment on the thirty-fifth floor, Queally and another agent stationed themselves on either side of her door as Agent Diane Wehner knocked. She rapped on the door several times, repeatedly announcing “FBI” and “Police,” but there was no response, so she phoned the apartment, hoping to rouse Chiesi. She failed to stir her, and one of the other FBI agents phoned her colleague downstairs to get the doorman to call up.
When Chiesi first heard people outside her apartment yelling “FBI, FBI,” she thought it was a joke. Halloween was just around the corner. Perhaps the early morning visitors were pranksters. When she finally realized it was the police, she opened the door. She looked like she had just rolled out of bed. Her blond hair, usually perfectly coiffed, was uncombed. Without makeup, she looked nothing like the seductress who made a living teasing inside information out of some of America’s most powerful executives.
“Is my mom okay?” she asked when she saw the agents. “Is my family fine?”
The officers told her that they had a warrant for her arrest. She asked if they could speak in the hallway because her apartment was a mess. She was actually worried that there could be a joint lying around from a party the night before. The agents insisted on entering the apartment; they swept the rooms, checking to see that there were no weapons and that no one else was in it. All they found was Chiesi’s pet cat, Amadea, and her fish. Meanwhile, Agents Queally and Wehner sat down with Chiesi in her den. They said they were there to discuss an insider trading matter and told her that she had a special opportunity to help herself. If she took them up on their offer and cooperated, she might not be arrested that day, though she would be taken into custody at some point. When Chiesi asked if she would be able to work in the business ever again, the agents told her that she would probably have to find something else to do.
At about the same time as Chiesi was approached, another FBI team headed to Rajaratnam’s building in nearby Sutton Place, where he lived in a duplex with his wife and kids and his parents. Police blocked off a strip of the street; cruisers and unmarked sedans parked in front of his building. Following the same procedure, another team of FBI agents, led by Kang, went up to Rajaratnam’s apartment unannounced and rang his doorbell. Rajaratnam was on his exercise bike looking out onto the East River and thinking about the number of shirts he would have to pack for his trip to London later that day. Unlike with Chiesi, there was no doubt that the FBI was going to arrest Rajaratnam, the man they considered the mastermind of the insider trading ring, that morning. With his wife and kids watching, the agents quickly searched the apartment and then whisked Rajaratnam out. They led him into a car waiting outside to take him to Twenty-Six Federal Plaza, where the FBI has its headquarters, for processing. A diabetic, Rajaratnam didn’t get a chance to grab breakfast before leaving.