The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (17 page)

As it happened, Israel Friedman sat in an office next to Michaelson. The two were friends and would often chat about their cases. Reminded of the hours of meticulous phone logging Jason Friedman and Michaelson put in investigating Sedna, Galleon, and the Rajaratnam brothers, Israel Friedman drilled into the “blue sheets” (trading records) on Hilton stock. (In the analog days they were actually printed on blue paper.) Among the hundreds and hundreds of buyers and sellers of Hilton shares that day, there was Galleon. It placed an astonishingly large trade to buy Hilton stock just seven minutes into the trading cycle. It yielded a profit of $4 million, a huge gain on a single stock—not bad for half a day’s work.

Rajaratnam either had contempt for the intelligence of Wadhwa and Michaelson, or he was so intoxicated by the prospect of a quick score that not only was he trading on inside information while he was the subject of an ongoing SEC investigation, but also he was now no longer limiting his trades to technology stocks, where he could arguably make the case that his investments were driven by his superior analysis of the industry. He was forging aggressively into sectors, for example, hospitality, where he had no special expertise and where a large trade by a technology fund would raise red flags.

Sanjay Wadhwa was taken aback by Rajaratnam’s nerve—apparently, the higher the risk of breaking the law and getting away with it, the less the worry of being caught.

“Wow, he was just here a month ago,” he remarked to colleagues.

One day not long after the Blackstone takeover of Hilton in July 2007, Israel Friedman walked over to the desk of his SEC colleague Andrew Michaelson.

“Isn’t this the woman you were talking about?” asked Friedman, pointing to a name, Roomy Khan, that was buried in a stack of trading records in Hilton stock.

Michaelson flipped through the sheaf of papers and noticed another name he’d come across months earlier. Rajiv Goel was one of the contacts in Rajaratnam’s voluminous Rolodex. Now it looked like Goel was also someone who happened to trade in Hilton stock before the Blackstone takeover. Hoping that these eerily prescient trades could be the key to unlocking the investigation into Galleon, Michaelson decided to scour the Hilton blue sheets for other names that cropped up in Rajaratnam’s electronic address book or emerged in the Galleon phone records that the SEC had subpoenaed. One individual with whom Rajaratnam seemed to be in frequent contact but to whom investigators could not tie any information about any stock was a McKinsey consultant named Anil Kumar.

If Kumar was indeed an informant of Rajaratnam’s, he might well have traded in Hilton stock, Michaelson ventured. But when he ran Kumar’s name through the blue-sheet data, he came up empty. It diminished his suspicions of Kumar’s involvement in the ring. With no shady instant messages between Rajaratnam and Kumar and no incriminating trading activity, Michaelson moved on, not revisiting evidence that was sitting in a corner of his office.

Months before, Michaelson’s colleagues in Texas were investigating the rally in ATI Technologies stock before its takeover by AMD in July 2006. In the course of that investigation, they forwarded Michaelson three boxes of documents, made up of deal histories listing bankers, lawyers, and consultants privy to the deals before they were announced. Buried in one of the boxes among some nine hundred names and hundreds of pages was Anil Kumar’s name. He was listed as a consultant to AMD. Knowing that might have helped Michaelson make the link between Rajaratnam and Kumar.

Struck by the overlapping players in the Galleon and the Hilton cases, Sanjay Wadhwa and Markowitz pulled in Israel Friedman, who was working on the Hilton team, to join the Galleon effort. At first, the lawyers suspected that Blackstone, the New York private equity fund run by Stephen Schwarzman, might have been the source of the Hilton information. Blackstone invested $20 million in April 2007 in Galleon’s Captain’s fund, run by portfolio manager Todd Deutsch.

“Blackstone may have tipped Galleon,” wrote B. J. Kang, the special agent for an FBI squad that focuses on economic crimes and securities fraud. The SEC lawyers chased down some inconclusive Blackstone leads, but Israel Friedman’s discovery of Khan’s trading in Hilton quickly sent them on a new, more promising trail.

Ever since Rajaratnam had given testimony in early June, Michaelson had been honing in on Khan, the former Intel employee who went by the instant-message handle “roomy81.” Five days after Rajaratnam’s visit, investigators uncovered an IM exchange dated January 9, 2006, between rajatgalleon and roomy81:

PLCM was the ticker symbol for Polycom, and JNPR was Juniper Networks, a Sunnyvale, California–based company that made switching routers. Amid the cryptic exchange, one line grabbed investigators: “till I [get] guidance…want to make sure guidance OK.” Judging by the IMs, it looked like Khan had an informant at Polycom who was giving her the early read on its profit reports and its future earnings prospects. The exchange was too vague to build an insider trading case, but after more than a year and a half of investigating, the SEC was heartened.
Surely the IM must be the smoking gun
, thought the SEC lawyers. With evidence of both Khan and Rajaratnam making large purchases of Hilton shares on the same day, there was even more ammunition to support their suspicions that the two were more than casual friends. Indeed, it was increasingly looking like they were partners in crime.

The SEC lawyers poured their energies into learning more about Khan and her world of corporate insiders. Jason Friedman was assigned the task of diving deep into Khan’s phone records to uncover her universe of contacts. It turned out to be far more time-consuming and painful than he first imagined. Khan was a phone junkie. She had nearly half a dozen landlines and at least three cell phones—all of which she used all the time. At one point, Friedman was so familiar with Khan’s phone numbers that he could recite them all off the top of his head. For each of Khan’s phone lines, Jason Friedman printed out the records for the relevant time period and tried to link Khan to a possible source of information. Trolling through the dense data in small print left him bleary-eyed.

One muggy day in August 2007, after weeks of combing through phone records, Jason Friedman came across a call between Khan and a number at Polycom’s headquarters. A little later in the day, he found another call between one of Khan’s other phones and the home number of a Polycom executive. Friedman identified the number, by simply Googling it, as belonging to a Sunil Bhalla. He did an Internet search and learned that Bhalla was a high-level Polycom executive. Excited, he ran across the hall into Wadhwa’s office to report on his find.

After almost a year of investigating, the SEC for the first time had the circumstantial evidence to link Rajaratnam’s trading in a stock to a source inside the company whose stock he was trading. The SEC had no evidence to suggest that Rajaratnam knew Bhalla, but it already had heaps of IMs between Khan and Rajaratnam and phone records that showed them speaking around the same time as the calls between Khan and Bhalla. Khan, it seemed, was the connective tissue between the Galleon chief and the Polycom executive.

It was an important breakthrough, and Wadhwa was eager to build on it quickly. When Friedman found Polycom dragging its feet in complying with his request for call logs, Wadhwa and his boss, Markowitz, a seasoned lawyer, lobbed calls to the company’s outside lawyers, demanding they step up their efforts to produce the call histories. Worried that Polycom might alert Bhalla, a senior executive, to the SEC’s inquiry, Friedman requested phone logs for several Polycom executives rather than asking for Bhalla’s alone. Sandwiched among the list of names was Bhalla’s.

As Friedman made progress on Polycom, Rajaratnam partied hard. In early August, he headed off to the Maasai Mara, one of Kenya’s most acclaimed game reserves. Rajaratnam knew how to throw a fabulous party, and Kenya was a five-day extravaganza for the “Raj tribe,” his seventy closest friends and family members. Before the bash even started, Rajaratnam, true to style, seduced the guests he flew out on a chartered plane with a hard-to-resist invitation. “Are you ready to leave the urban jungle and walk on the wild side?” the party invitation read. On August 5, after a brief stop in Nairobi, the group flew to the Mara. As they walked off the plane, they were greeted by a dozen Maasai natives dressed in bright red cloth and holding sharp spears; the natives were in the throes of a spell-binding dance.

To get his friends in the right mood, Rajaratnam supplied party favors: black T-shirts. One guest, a serious-looking individual with glasses, looked uncomfortable in his green pants, light blue windbreaker, and a black T-shirt, which read “The Riotous, Rowdy, Rebellious Raj Tribe.” Few knew it, but it was none other than Anil Kumar, a core member of the tribe. When the guests returned home, Rajaratnam sent them all a book with photos memorializing the trip. Inscribed at the front was his life motto: “Remember never grow up—and nothing is more serious than the pursuit of fun!!!”

By the end of the summer, it was clear to the SEC team working the Galleon case that nothing was more important than getting a Rajaratnam informant to flip. Two stocks, Polycom and Hilton, offered the most glaring examples of trading on inside information, but all the evidence that Michaelson and the two Friedmans—Jason and Israel—had developed was still circumstantial.

With an individual who is an occasional trader of stocks, that would not have mattered, but hedge funds like Galleon dive in and out of stocks all day, so it would be hard to tie the trades Galleon made to any one piece of information without the help of an insider. Wadhwa, Markowitz, and Michaelson felt that the criminal authorities needed to flip someone in Rajaratnam’s inner circle, someone who could provide direct evidence of inside information being exchanged. Chances were that they would have only one shot at convincing a suspected member of the ring to cooperate with the government. If they failed, they risked blowing the entire investigation. The odds were high that the individual would inform Rajaratnam and he would stop his criminal activity.

Coincidentally, an unexpected discovery on another front helped convince the SEC lawyers that Khan was their best bet. Soon after the large trades in Hilton, the SEC turned over Khan’s name to FBI special agent B. J. Kang. Agent Kang, known as B.J., looks like the archetypal FBI agent. He has a crew cut that he often wears slicked back, and a penetrating gaze. Kang did a quick background check and discovered that Khan had a criminal past. In fact, in 1999 she confessed to procuring inside information for none other than Raj Rajaratnam. Instead of paying her for the Intel information she purloined, Rajaratnam did favors for her, such as arranging job interviews. “Intel and the FBI agree that the primary culprit, and continuing threat is Rajaratnam,” wrote Russell Atkinson, an FBI agent in the San Francisco bureau, in an April 29, 1998, email to agents in New York. “He is expected to continue his activity after Khan leaves, and is probably obtaining insider information from other companies currently.” Atkinson suggested that someone in New York get in touch so the FBI could coordinate its efforts on both coasts. But after years of investigating, neither the SEC nor the FBI could show that any Galleon trade resulted from the information Khan stole for Rajaratnam from Intel. So in August 2002, the probe into Rajaratnam was closed. This time it would be different.

Khan had every incentive to cooperate. She had been in trouble with criminal authorities before. She got off easy the first time, but the courts were unlikely to be as lenient with a repeat offender. Encouraged by the knowledge of Khan’s criminal past and equipped with evidence that she was back to breaking the law, the SEC lawyers started pushing prosecutors to get Khan on “Team USA”—a phrase Markowitz liked to use for flipping Khan and getting her to cooperate. In late September 2007, Wadhwa, Markowitz, Michaelson, and Jason Friedman met with Lauren Goldberg, the assistant US attorney in the Southern District working the case. Since telling prosecutors of the investigation in March, the SEC had been working hard to get lawyers in the Manhattan US attorney’s office excited about the Galleon probe. (The US attorney’s office has a crush of cases to handle, so it can take time before prosecutors focus on another agency’s white-collar case.) Ahead of the meeting, Michaelson prepared an agenda. Near the top of it was Roomy Khan.

On November 28, 2007, Kang and another FBI agent appeared unannounced at Khan’s lavish and heavily mortgaged California home. The imposing property at 168 Isabella Avenue was fittingly protected by high security gates, and the agents were let into the house by Khan’s mother. There they found Khan, an overweight and voluble woman around fifty years old, in a state of panic.

Her marriage was in trouble and the Atherton house was on the market for $18 million. She had raised about $2 million by auctioning some diamonds through Sotheby’s, disposing of pieces of art, and jettisoning a car. But she still had not made up the losses she had racked up in the account of her old friend Bhalla. For a while the two were out of touch. Khan stopped calling him because she was embarrassed by the trading mishap and overwhelmed by her own woes. She missed the friendship; a couple of times, when the situation on the home front had become unbearable, she and her mother had stopped by the Bhallas to unburden themselves and cry. But as much as she wanted to pay back Bhalla, she couldn’t at first because her own finances were in a perilous state. “I personally have been going through very tough times,” she emailed him in the spring, reaching out after a long hiatus. “I know I still need to recoup the deficit I created for you.” He was remarkably sanguine—“Yes, personally losing all the money hurt a lot…however, I am not complaining and know that you are doing the best you can.” Still she couldn’t get it out of her mind. “I will make up your loss!!” she replied. “I do promise.”

For an hour, the FBI agents asked questions and then let Khan talk, which she did freely but not always truthfully. Lying to the FBI agents who appeared on her doorstep in 1999 had not hurt her; she figured dissembling again wouldn’t be a problem. She said that she got back in touch with Rajaratnam because she hoped he would hire her. When they asked about Bhalla, the Polycom executive, she admitted knowing him but denied speaking to him about the company.

She was insistent that she did not instant-message or email Rajaratnam about Polycom. In fact, she claimed that she no longer discussed companies with people. She’d learned her lesson after a little legal tangle she had with the FBI several years before. At that point, Kang confronted her with the Polycom instant messages and other incriminating material. Khan fled to the bathroom and returned a short while later, puffy-faced, evidently from crying. She adjusted quickly to her new reality and was ready to tell the truth—some of it, not all, for now. “If I don’t cooperate this time,” she told Kang, “I’ll go to jail.”

With Khan now ready to play for Team USA, investigators worked to tie up other loose ends. Israel Friedman, who had originally been sniffing around the suspicious trading in shares of Hilton before joining the Galleon probe, sent letters to Charles Schwab & Co. asking for account statements for Rajiv Goel and his wife, Alka (Goel was both a Wharton pal of Rajaratnam’s and an Intel executive). As was his custom, Friedman also requested the IP addresses that would show who logged into the Goels’ account to trade. When the documents arrived, the SEC lawyers discovered a guidebook to some of Galleon’s more questionable trades. On the morning of July 3, 2007, before Blackstone unveiled its deal for Hilton, somebody at Galleon logged into Goel’s account at Schwab and bought $264,284.95 of Hilton stock. He made about $78,000 on the trade. In twelve other instances that year, an individual at Galleon logged into the Goels’ Schwab account and bought stocks. Some of the stocks were the same ones now under scrutiny by the SEC.