A DIRTY BUSINESS by icestar

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									A DIRTY BUSINESS
New York City’s top prosecutor takes on Wall Street crime.
by George PackerJUNE 27, 2011




In the Galleon case, both the prosecutor, Preet Bharara, and the defendant, Raj Rajaratnam, were immigrants from the subcontinent.

In the fall of 2003, Anil Kumar, a senior executive with the consulting firm McKinsey, and Raj Rajaratnam, the
head of a multibillion-dollar hedge fund called Galleon, attended a charity event in Manhattan. They had known
each other since the early eighties, when, as recent immigrants, they were classmates at the Wharton School of
Business, in Philadelphia. Their friendship, intermittent over the years, was based on self-interest rather than on
intimacy. Kumar, born in Chennai, formerly Madras, India, was fastidious and morose, travelling at least thirty
thousand miles a month for work, and seldom socializing. Rajaratnam, a Tamil from Colombo, Sri Lanka, was
fleshy and dark-skinned, with a charming gap-toothed smile and a sports fan’s appetite for competition and
conquest. Kumar was not among the group whom Rajaratnam took on his private plane to the Super Bowl every
year for a weekend of partying. “I’m a consultant at heart,” Kumar liked to say. “I’m a rogue,” Rajaratnam once
said. Kumar had the more precise diction and was better educated, but Rajaratnam was one of the world’s new
billionaires and therefore a luminary among businessmen from the subcontinent. In an earlier generation of
immigrant financiers, Kumar would have been the German Jew, Rajaratnam the Russian. Kumar might have felt
some disdain for Rajaratnam, but Rajaratnam’s fortune made him irresistible.

McKinsey executives, in an attempt to cash in on the explosive growth of hedge funds, had recently sent Rajaratnam
several e-mails proposing that Galleon hire the company to provide expert advice. Rajaratnam had ignored them.
Leaving the charity event, Kumar expressed annoyance about the unanswered e-mails, he later recalled. Rajaratnam
pulled him aside. “I’d much rather have you as a consultant than McKinsey,” he explained. “And I am willing to pay
you half a million dollars a year.” Kumar replied that McKinsey forbade outside consulting, but Rajaratnam
persisted, appealing to Kumar’s pride: “You work very, very hard, you travel a lot, you are underpaid. People have
made fortunes while you were away in India, and you deserve more.” He noted that Kumar, who provided strategic
advice to Silicon Valley technology companies—one of Rajaratnam’s investing specialties—possessed knowledge
that was worth a lot of money. Kumar had only to keep a list of “ideas,” and to call him once a month or so. “I know
you will do that if you get money from me,” Rajaratnam said. “And I know you will not remember to keep a list if
you don’t get money from me.”

Kumar agreed to be paid a quarterly sum of a hundred and twenty thousand dollars. To evade the scrutiny of
McKinsey and of the government, he followed Rajaratnam’s instructions and set up a Swiss bank account for a shell
company in Geneva called Pecos Trading, which transferred the quarterly payments, through offshore banks, to a
Galleon account under the name Manju Das. This was Kumar’s housekeeper in Saratoga, California, who also cared
for his ill son. “Lots of people set up offshore companies,” Rajaratnam said, trying to alleviate Kumar’s
squeamishness.

Pulling off the subterfuge required a false mailing address, signatures obtained under false pretenses, backdated
investment documents, and phony doctor’s bills. Yet Kumar initially believed that he was going to pass information
to Rajaratnam legally. He soon realized that Rajaratnam wanted tips that he could convert into profitable stock
trades. Once the flow of money created an obligation, Rajaratnam began asking for financial details about
companies that Kumar advised. Soon, Kumar was breaking both McKinsey’s confidentiality rules and the securities
laws that forbid such exchanges.

His offerings were never good enough for Rajaratnam, who kept pressing for more. As an incentive, Rajaratnam
offered to pay Kumar a percentage of the profits from trades made on his tips. Kumar recoiled: the paper trail
documenting such trades would put him at risk of exposure, and receiving Galleon trading profits would bring him
too close to Rajaratnam’s illegal business. He didn’t want to know what Rajaratnam did with his secrets. As long as
he was paid as a consultant, Kumar felt sufficiently sheltered from the truth. So he secured a different arrangement:
at the end of each year, Rajaratnam would give him whatever he thought his information had been worth, a common
practice at McKinsey. In 2006, it was worth a lot.

Early that year, the microprocessor-maker Advanced Micro Devices decided to acquire a graphics-chip company
called A.T.I. Hardly anybody on Wall Street anticipated the deal except Rajaratnam, who knew exactly what was
going to happen because Kumar was A.M.D.’s consultant at McKinsey, guiding its strategic decisions. His tips
allowed Rajaratnam to time a trade perfectly, and Galleon—betting long on A.T.I.—cleared twenty-three million
dollars. After the deal was announced, in July, 2006, Rajaratnam called Kumar at home from Galleon’s offices and
said, “Thank you. We’re all cheering you. You’re a hero.” At the end of the year, he called Kumar again: “I’ve had a
fabulous year. I’m handing out huge bonuses.” Kumar’s was a million dollars. “Tell me where to send it,”
Rajaratnam said.

In the language of hedge funds, Galleon’s strategy was to “arbitrage reality” with the consensus on the Street—to
find information about a given company that diverged from Wall Street’s view, allowing Galleon to cash in when
the company’s stock price rose or fell. At Galleon, this was known as “getting an edge.” The analyst or portfolio
manager with the best read on a company was called the “axe” on that stock. The surest way to become the axe was
to have a source who passed on information about a company’s earnings, upcoming deals, and other confidential
matters. The ultimate edge was insider trading—the acquisition of nonpublic information about a company—and
Rajaratnam was the king axe. At Galleon’s daily 8:30 A.M. meeting, he always had more information than his
employees and didn’t hesitate to let them know it. By the mid-aughts, hedge funds accounted for nearly half of all
stock trades, and there was ferocious competition for wealthy investors and the business of investment banks.
Lightly regulated and nearly opaque, hedge funds played a central role in the creation of credit-default swaps and
other financial exotica that led to the economic collapse of 2008.
Rajaratnam’s goal was to be running a ten-billion-dollar fund by the end of 2009. In seducing Kumar, he made a
valuable addition to the network that he had built up over the years. Some of Rajaratnam’s informants were his
subordinates at Galleon, such as Adam Smith, a graduate of Harvard and of Harvard Business School, whom
Rajaratnam hired in 2002. Clean-cut and calculating, Smith was the sort of ambitious financier who worked hard,
did his homework, and cheated, too. In 2004, in the class notes for his ten-year college reunion, he wrote about
working at Galleon: “It’s the first job I’ve truly loved, and I find the challenge of the stock market exhilarating.” By
then, Smith had become a reliable conduit of illegal tips to Rajaratnam. Some of the biggest ones came from Kamal
Ahmed, at Morgan Stanley in Menlo Park, California, where Smith had worked. To throw off potential
investigators, Smith used code names and adopted one of his boss’s favorite techniques, creating false e-mail trails.
(The merger of two companies whose names began with “I” became “the two eyes.”) Rajaratnam soon promoted
Smith from analyst to portfolio manager.

At the heart of Rajaratnam’s informant network was a group consisting largely of Indian-born businessmen. They
included Krish Panu, a board member of the outsourcing company PeopleSupport; Kris Chellam, an executive at
Xilinx, a Silicon Valley semiconductor company; and Rajiv Goel, a manager at Intel, who was, in a comically
assertive and bumbling fashion, one of Rajaratnam’s close friends. The most illustrious was Rajat Gupta, the former
worldwide head of McKinsey; the onetime chair of the Global Fund to Fight AIDS, Tuberculosis, and Malaria; and a
board member of several prominent business schools and companies, including Goldman Sachs. All these men had
investments that were tied to Galleon, and therefore benefitted from the trades that they helped Rajaratnam make.
Rajaratnam tried to keep each source unaware of the others so that their trails of information led only to him.

Rajaratnam’s sources revered him, except Kumar, who viewed him with condescension, and Gupta, who was on
friendly terms with heads of state and didn’t need Rajaratnam’s approval—only his money. In August, 2008, when
Gupta was considering a position with the private-equity firm Kohlberg Kravis Roberts, Rajaratnam and Kumar
exchanged gibes on the phone about Gupta’s greed. Rajaratnam said, “Here he sees an opportunity to make a
hundred million dollars over the next five years, or ten years, without doing a lot of work.” Two weeks earlier,
Rajaratnam had disparaged Kumar to Gupta, saying that he was trying to be “a mini-Rajat” without “bringing
anything new to the party.” He added, “I’m giving him a million dollars a year for doing literally nothing.” Worse,
Kumar had never thanked him. “I’ve never seen him laugh and be really happy, you know? He is constantly . . . not
scheming—it’s not the right word—but constantly trying to figure out what other people’s angles are.”

One of Rajaratnam’s most enthusiastic informants was Danielle Chiesi, a former teen beauty queen from upstate
New York. She worked at a hedge fund called New Castle, which was owned by Bear Stearns. A bottle blonde in
her early forties, Chiesi lived alone in midtown and slept with men who gave her stock tips. She said that when she
profited from such tips she felt “mentally fabulous.” By 2008, Chiesi had entered a relationship with Hector Ruiz,
the chief executive of A.M.D. (Ruiz has denied that it was intimate.) Rajaratnam, hearing of Chiesi’s highly placed
source, told Kumar that he had established a new inroad at the company, noting, “Your value to me is a bit
diminished.”

In October, 2008, Kieran Taylor, an executive with Akamai, an Internet-services company, told Chiesi over the
phone, “Danielle, I have a major present for you.”

“Drugs?” she asked. “I hope not.”

“Information, information.”

“I love you for that. When am I going to see you?”
After another phone conversation with Taylor, Chiesi told Rajaratnam, “I played him like a finely tuned piano.” She
was eager to impress Rajaratnam, flirting with him as if by reflex, and passing him secrets without expecting much
in return. Rajaratnam kept his distance, and declined to tell her when her information confirmed tips from other
sources. After receiving one tip, he warned, “We got to keep this radio silence.”

“That is my pleasure,” Chiesi said.

“Not even to your little boyfriends, you know?”

“Believe me, I don’t have any friends.”

Rajaratnam’s view of human nature was not so different from that of Willie Stark, in “All the King’s Men”: “Man is
conceived in sin and born in corruption and he passeth from the stink of the didie to the stench of the shroud.” If
there are examples of people whom Rajaratnam unsuccessfully tried to corrupt, they have not surfaced in the
voluminous public record on Galleon. Once, his brash younger brother, Rengan, put out a feeler for inside
information to a friend from Stanford’s business school who had become Kumar’s protégé at McKinsey. Rengan
gleefully relayed to his brother that the young associate was “a little dirty.” When Rajaratnam shared this assessment
with Kumar, Kumar asked him to lay off the associate, not wanting his protégé to be sucked into Galleon’s
corruption. Later, Rajaratnam laughed with his brother over the episode. “I just wanted to show how your friend is—
”

“Scumbag!” Rengan said. “Everybody is a scumbag!”

In October, 2009, Rajaratnam and Kumar flew to Trinidad with their wives to attend a wedding. On their way home,
they stopped in Miami to spend two days at Rajaratnam’s beachfront condominium. On the evening of October 6th,
the men went out in Rajaratnam’s boat, then returned to shore and took a swim. They were lounging on deck chairs,
reading and chatting, when Rajaratnam’s phone rang. Excusing himself, he walked down the beach to talk. Five
minutes later, he came back, excited. “That was a Cisco executive,” he said. “Cisco is buying Starent”—an
information-technology company. Kumar had never heard of Starent, and he wondered which Cisco executive was
calling Rajaratnam.

Rajaratnam then gave Kumar a warning: a man named Ali Far, who had worked at Galleon, was rumored to be
wearing a wire. “I have to be really careful,” Rajaratnam said. “I can’t believe he’s doing that and betraying me.” He
instructed Kumar to start using unregistered prepaid cell phones for their calls. When they returned to the
condominium, Kumar opened his laptop, went into his Charles Schwab brokerage account, and bought three
hundred shares of Starent, worth about eight thousand dollars. The deal was announced a week later. It was
Rajaratnam’s last known inside trade.

Early on the morning of October 16th, F.B.I. agents converged on Rajaratnam’s town house, on Sutton Place, on
Manhattan’s East Side, where he lived with his wife, Asha, his two younger children, and his parents. The agents
arrested him on charges of conspiracy and securities fraud, and released him on a hundred-million-dollar bond.
Within hours, Adam Smith and Rengan Rajaratnam had removed evidence from the Galleon offices. At six that
same morning, Danielle Chiesi was roused from bed in her apartment on East Fifty-ninth Street by the knocks of
four agents wearing bulletproof vests. The agents spent an hour showing Chiesi a file of evidence before concluding
that she wouldn’t coöperate. She refused to place a monitored call to someone on the West Coast—probably Hector
Ruiz.
At the same hour, agents appeared at Anil Kumar’s Manhattan apartment, at the Time Warner Center. When they
put him in handcuffs, Kumar’s long struggle to separate himself from what he had become ended. He fainted, hitting
his head against a wall. He had to be treated at a local hospital before he could be brought in for booking.

Two of Chiesi’s co-conspirators and Rajaratnam’s friend Rajiv Goel were also arrested. Later that day, Asha
Rajaratnam sent a text message to Kumar’s wife, Malvika. It said, “I’m sorry.”

Three years earlier, in October, 2006, a thirty-one-year-old lawyer from Weston, Connecticut, named Andrew
Michaelson started working at the New York office of the Securities and Exchange Commission, at 3 World
Financial Center, just west of Ground Zero. Michaelson, a graduate of Harvard Law School, had wanted to work in
government in order to help fight corporate fraud and abuse. When the S.E.C. lifted a hiring freeze, he jumped at the
chance.

In the seventies and eighties, the S.E.C. had been a powerful regulator, led by ambitious attorneys; it handled
important cases like the insider trading of Ivan Boesky and Michael Milken. But by the mid-aughts the commission
was languishing. Its chairman, a former California congressman named Christopher Cox, exuded blithe faith that the
financial markets would regulate themselves. The S.E.C. ignored warnings when Wall Street inflated the credit
bubble with dubious “synthetic” securities known as collateralized debt obligations. After the Enron scandal, in
2001, the S.E.C. began attracting promising lawyers like Michaelson, but it was still a largely impotent institution.
Wall Street regarded it with disdain, and when companies under investigation were called to give testimony their
executives may have felt little reluctance to lie, which carried far less risk than admitting to a crime under oath in a
civil action.

Michaelson’s first assignment was a month-old case involving a small hedge fund called Sedna Capital, which was
run by Rengan Rajaratnam. A tip from a source in the banking world had alerted the S.E.C. to a pattern of “cherry
picking” at Sedna—reserving the biggest profits for a fund in which all the investors were family members and
friends. In its first month of operation, the favored fund executed ten trades, all winners, and doubled its capital.
Some of the trades seemed to involve inside information, including on A.M.D. The S.E.C. soon shifted its focus to
Galleon, the much bigger firm of Raj Rajaratnam, where most of the trades were duplicated.

In March, 2007, the S.E.C. briefed the F.B.I. and the United States Attorney’s Office for the Southern District of
New York, which opened a criminal case. That same month, an anonymous letter arrived at the S.E.C.’s offices,
postmarked Queens, March 13, 2007. “It is hedge funds like Galleon Group that create wealth for their shareholders
and themselves at the expense of innocent investors,” the letter began. “Insider trading word in this fund should be
changed to insider partnership and prostitution. . . . Prostitution is rampant for executives visiting Galleon. You will
find that the Super Bowl parties for the executives, paid for by Galleon Group, include prostitutes and other forms of
illegal entertainment. In return, the executives provide Galleon the unfair edge that the fund leverages so well.” The
letter was signed “Seeking integrity in business.” The writer sounded knowledgeable about Galleon and the industry,
but it was impossible to track him down.

In 2006, Galleon had registered with the government as a “regulated investment adviser.” In order to obtain this title,
which conveys to potential clients the impression that a business is soundly run, Galleon had to agree to preserve its
electronic correspondence. Rajaratnam, aware of this requirement, instructed his subordinates to move key dealings
off the Internet and onto the phone. Nevertheless, a few electronic records gave hints of widespread insider trading
at Galleon. In February, 2007, an S.E.C. examination team began going through the company’s electronic
correspondence, and after several months of meticulous work they found enough suspicious fragments to issue
Rajaratnam a subpoena. On June 7, 2007, Rajaratnam arrived at 3 World Financial Center for an all-day session of
giving testimony. That morning, a member of the exam team told Michaelson’s supervisor—a New Delhi-born
former corporate tax lawyer named Sanjay Wadhwa—that there was “definitely some interesting chatter” in a batch
of cryptic I.M.s from a person using the handle roomy81. Wadhwa and Michaelson hastily formulated a way to ask
Rajaratnam about roomy81 without raising his suspicion.

The session took place in Testimony Room 416, which had scuffed yellow walls, a stained beige carpet, and
windows overlooking the World Financial Center’s Winter Garden. The session lasted seven hours, and Rajaratnam,
relaxed and fluent, spent a good part of it telling lies. After Rajaratnam’s lawyer, Jerry Isenberg, requested a
midafternoon break, Michaelson looked up from his papers on the conference table, as if he had just remembered
something.

“A couple quick questions before break,” he said. “Are you familiar with a roomy81 instant-message address?”

“Yes.”

“Who is that?”

“She worked at Galleon and then she left Galleon to start her own fund. I think she primarily manages her own
money.”

“What is her name?”

“Roomy Khan,” Rajaratnam said, spelling out the surname.

“Do you know where she works now?”

“From home.”

Michaelson asked, “Did you ever talk with Roomy about A.M.D.?”

“She may have given me information, but I can’t recall.”

“We can take a break.”

Five days after Rajaratnam’s deposition, the investigators turned up an I.M. exchange, dated January 9, 2006,
between rajatgalleon and roomy81:
IM Administrator: The Galleon Group archives and reviews incoming and outgoing instant messages.
rajatgalleon: hey
rajatgalleon: u back
roomy81: i am here
roomy81: did not go any where
rajatgalleon: call me..just got back today
roomy81: please let me know on JNPR
roomy81: donot buy plcm till i het guidance
roomy81: want to make sure guidance OK


PLCM was the ticker symbol for Polycom, a manufacturer of voice and video equipment. JNPR was Juniper, a
company that made switching routers. But what jumped off the screen was “till I [get] guidance . . . want to make
sure guidance OK.” The term “guidance” refers to the direction of a company’s quarterly earnings, up or down.
Roomy Khan seemed to have an inside track on Polycom’s financial information. Without this I.M., the case would
probably have died.
In the months after Rajaratnam testified, the S.E.C. investigators stayed away from Galleon, wanting to make him
think that they had moved on. In fact, Michaelson went back and scoured all of Rajaratnam’s I.M. correspondence
from 2006—thousands of pages. The S.E.C. issued subpoenas to phone companies, and when the records finally
came in, a new member of the team, Jason Friedman, combed through the call histories of Rajaratnam and Khan. By
comparing I.M.s, phone calls, and trading records, the investigators determined that Rajaratnam and Khan, in the
days after their January 9, 2006, I.M. exchange, had called each other frequently and begun trading heavily in
Polycom stock. At the end of January, 2006, when Polycom announced record quarterly earnings, Khan made three
hundred thousand dollars, and Galleon cleared at least twice that. One of Khan’s phone contacts was a Polycom
vice-president named Sunil Bhalla, who lived near Khan in Silicon Valley and, like Khan, was Punjabi. The
investigators guessed that he was Khan’s source.

In July, 2007, another S.E.C. lawyer noticed that there had just been several large purchases of stock options in
Hilton Hotels immediately preceding an announcement of the chain’s takeover by the Blackstone Group. One of the
prescient traders was Rajaratnam; another was Khan. The lawyer went to Michaelson and asked, “Isn’t this the
woman you were talking about?”

The S.E.C. gave Khan’s name to B. J. Kang, the F.B.I. special agent assigned to the case. On July 10th, a
background check revealed that Khan had a criminal history, and that it involved Rajaratnam.

Khan was married to a wealthy Indian entrepreneur and lived in Atherton, California, in a mansion with a tennis
court. In 1998, she had been caught on a security camera faxing to Galleon confidential documents from the offices
of Intel, where she worked at the time. Khan pleaded guilty and received three years’ probation, but the case against
Rajaratnam was too hard to make—the volume and the complexity of hedge-fund trading makes pinpointing the
source of just one trade almost impossible. The Rajaratnam file was sealed in 2002.

The investigators believed that the evidence on the Polycom trade was also too circumstantial to bring a criminal
charge against Rajaratnam. To break the case open, they needed a source in Rajaratnam’s inner circle to flip and
give direct evidence of providing Rajaratnam inside information. Anil Kumar, the McKinsey consultant, and Rajiv
Goel, the Intel executive, came up frequently in Rajaratnam’s phone records. But there was no sign that Kumar was
making trades on inside information. Then investigators discovered that Galleon had been given the password to
Goel’s Schwab account, which it was using to make profitable trades on his behalf. Goel’s account was like a road
map to insider trading—but Goel was considered too close a friend of Rajaratnam’s to be approached without
irrefutable evidence. The F.B.I. would have only one chance to flip someone; if it failed, Rajaratnam would know
that he was the target of a criminal investigation and take precautionary measures. The best shot was Roomy Khan,
who had already pleaded guilty once, and who had said a little too much in an I.M. before Rajaratnam could nudge
her onto the phone.

On November 28, 2007, Kang and another agent rang the bell at the gate of Khan’s house. Khan, a dishevelled,
overweight woman of forty-nine, allowed the F.B.I. inside. She was in distress, having recently lost a lot of money
on trades. She had sold her jewelry through Sotheby’s; her house was on the market for eighteen million dollars; and
her marriage was in trouble. Khan told Kang that she was in contact with Rajaratnam only because she was hoping
to get a job with Galleon, and that he talked to her only to be nice. She said that she knew Sunil Bhalla, of Polycom,
because he had dated one of her friends. For more than an hour, she blizzarded the agents with lies. Then Kang
brought out a file with the roomy81 I.M.s and other incriminating evidence. Khan retreated to one of her seven
bathrooms, cried, and emerged with a new understanding of her situation. “If I don’t coöperate this time,” she told
Kang, “I’ll go to jail.”
After meeting with Kang, Michaelson, and prosecutors in New York, Khan agreed to coöperate with the
investigation. She gave up a new source: Shammara Hussain, a young employee of an investor-relations firm in San
Francisco, who, in mid-2007, had tipped Khan about Google’s poor quarterly earnings. Khan had passed the news to
Rajaratnam, who made eighteen million dollars by shorting Google stock. But for months Khan continued to lie
about the Hilton trades. Finally, in April, 2008, she revealed that her source was Deep Shah, a young analyst at
Moody’s, the rating agency, who had been assigned to Hilton and who called Khan the day before the acquisition
was announced. (Shah, whom Khan paid ten thousand dollars for the information, is now a fugitive in India.) Khan
had met Shah through a relative, and she had lied about the Hilton trades because she hadn’t wanted to implicate a
family member. This was Roomy Khan’s notion of honor.

As part of her coöperation, Khan began recording her calls with Rajaratnam. She caught him on enough “dirty” calls
that, in March, 2008, Judge Gerard E. Lynch, of the Southern District, approved the government’s application for a
thirty-day wiretap on Rajaratnam’s cell phone. The order was renewed through the rest of the year. The Rajaratnam
recordings led to taps on other phones, including Chiesi’s, and identified other conspirators, harvesting a huge crop
of direct evidence. By the time of the October, 2009, arrests, the government had taped thousands of calls. The
S.E.C. had issued more than two hundred and thirty subpoenas for phone numbers and reviewed at least eight
thousand call records. Over the course of the investigation, the agency gathered nearly ten million documents.

By law, the S.E.C.’s lawyers were kept in the dark about the wiretaps. In late 2008, the financial crisis and the
Bernard Madoff scandal exposed the S.E.C. to unprecedented criticism, and higher-ups at the agency pressured the
New York office to bring the Galleon case early and score a quick victory. But New York refused to jump the gun.
By that time, it had become clear that the criminal authorities were building the biggest insider-trading case in
history.

Preet Bharara, the United States Attorney for the Southern District of New York, is, like so many others in the
Galleon story, a Punjabi. He was born in 1968, in Firozpur, India. When Bharara was still a toddler, his father, a
pediatrician, moved the family to Monmouth County, New Jersey, and Preet grew up in the suburbs, a thoroughly
Americanized striver. His parents drove him pretty hard—“The Tiger Mom actually made my dad look good,” he
joked to me—and he was the kind of schoolboy who bought how-to books on getting an A-plus in math. After
graduating as his high-school valedictorian, in 1986, he attended Harvard, then Columbia Law. Bharara is the son of
a Sikh father and a Hindu mother who moved from Pakistan to India after partition; he is married to the daughter of
a Muslim father who moved from India to Pakistan after partition and a Jewish mother who was born in Israel. The
Bhararas have three young children, religious affiliation unknown.

After law school, Bharara worked at private firms; in 2000, he was hired as an assistant U.S. Attorney, in the
Southern District. He wasn’t a star prosecutor, but his intelligence, wit, and skill at navigating the politics of a large
and competitive institution caught the attention of Senator Charles Schumer, of New York, who, in 2005, named
Bharara his chief counsel. The next year, Bharara helped lead the investigation into the Bush Administration’s firing
of eight U.S. Attorneys for political reasons, and stood out as a sharp, nonpartisan interrogator of witnesses who
were to testify before the Judiciary Committee. After President Barack Obama took office, Schumer put Bharara’s
name forward to lead the premier U.S. Attorney’s office in the country.

The prominent curve of Bharara’s nose and his striking pale-green eyes give him an unsettling falconine gaze. As a
Democrat from New Jersey in his forties, Bharara inevitably loves Bruce Springsteen and watches “The Daily
Show.” When Bharara was interviewed at the White House for the U.S. Attorney’s job, he was asked if he had been
born in India. Yes, Bharara replied. But was he a citizen of the United States? “Damn,” Bharara said. “You’ve got to
be a citizen for this job?”

He started in the position in August, 2009, and his short tenure has been crowded with aggressive prosecutions of
terrorism, Medicare fraud, illegal tax shelters, and public corruption. But the arrest of Rajaratnam, on October 16,
2009, gave Bharara his highest-profile case. From the start, Bharara made it clear that he would go after Wall Street
crime. “Greed, sometimes, is not good,” he said in announcing the arrests.

A month after Rajaratnam’s arrest, Bharara gave an unusually dark speech at N.Y.U.’s law school, speaking of “epic
frauds surfacing with increasing frequency.” He noted, “There is a lack of faith in the economic system; a lack of
belief in the markets; and a lack of trust that the playing field is level.” He made no apologies for ferreting out
insider trading by using wiretaps, a practice that was unpopular on Wall Street. “When sophisticated business people
begin to adopt the methods of common criminals, we have no choice but to treat them as such,” he said.

Bharara spends a surprising amount of time speaking off the record at business schools, companies, and financial
institutions. It’s like a D.A. who visits schools where crime and drug use are widespread and explains to the
students, “Look, this is why this is happening to you.” A key purpose of the insider-trading prosecutions is
deterrence. As Daniel Richman, a Columbia law professor and a former Southern District prosecutor, told me, “The
average hedge-fund guy who’s lawyered up and a serious reader of the relevant publications is going to be more
deterred by prosecution than the average dope dealer.”

In May, Bharara met with me in his office, on the eighth floor of 1 St. Andrew’s Plaza, a brutalist concrete structure
near the federal courthouse in lower Manhattan. His windows face south, and through the murky light of a damp late
afternoon the towers of Wall Street were barely visible. “There are often two categories of reasons to do the right
thing,” he said. Category 1 is a sense of right and wrong. “But if that doesn’t work for you—and it doesn’t for a lot
of people—then there’s the Category 2 reason: you’re going to get caught, your business is going to go down the
tubes, you’re going to go to jail. For a lot of these people, maybe Category 1 doesn’t work but Category 2 should.
But maybe there was not enough enforcement, such that they thought, What’s the big deal?” Insider trading, Bharara
observed, was unlike other federal crimes—it wasn’t committed by people with a violent outlook or a bad
upbringing, or by serial lawbreakers who knew no other life. “These folks seem not to have been of that type,” he
said.

The insider-trading type was someone like Adam Smith, the Galleon portfolio manager from Harvard. After the
public announcement of a deal on which he’d given Rajaratnam inside information, Smith had a sinking feeling, a
flush of worry. But no one spoke to him about the deal, so he moved on. Smith was a Category 2 guy. So,
apparently, were a lot of traders. Bharara referred me to a 2007 poll in which twenty-five hundred Wall Street
professionals were asked if they would use inside information to make ten million dollars if the chances of getting
caught were fifty per cent. Seven per cent said yes. But, if there was zero chance of getting caught, fifty-eight per
cent said that they would break the law.

Some Wall Street observers have called the Galleon case a sideshow. When Charles Ferguson, the filmmaker, won
an Oscar, earlier this year, for “Inside Job,” a scathing documentary account of the Wall Street meltdown, he began
his acceptance speech by saying, “Three years after a horrific financial crisis caused by massive fraud, not a single
financial executive has gone to jail, and that’s wrong.” Ferguson told me that Bharara’s focus on an insider-trading
scandal was misplaced, given that the financial crisis was caused primarily by shoddy mortgages and the cynical
trading of those irresponsible loans. Last month, the Times columnist Joe Nocera accused Bharara of displaying
phony toughness while sending a message to Wall Street’s élites that “crime pays.” Matt Taibbi, of Rolling Stone,
has taken the even harsher view that prosecutors have given bankers a pass because they covet lucrative jobs in the
private sector.

At the other extreme is the argument that the crisis was caused simply by greed and stupidity, which remain legal
under federal law. In February, this was Nocera’s stance: he published a column on why there had been no
prosecution of Angelo Mozilo, the disgraced head of Countrywide Financial, which was at the center of the
mortgage crisis. “Delusion is an iron-clad defense,” Nocera wrote.

Eliot Spitzer, who brought dozens of suits against financial institutions between 1999 and 2006, when he was New
York’s Attorney General, told me that it wouldn’t be easy to build prosecutions directly tied to the financial crisis.
Top bank executives, with the assistance of lawyers and accountants, took care to insulate themselves from the
fraudulent activities of mortgage lenders and other low-level players. But, he added, “I’ve always believed you start
at the bottom, the credit department of the bank—that’s where the guys with green eyeshades, who don’t get the
bonuses, write down what is honest and truthful about their critiques of the loans being made.” As in the Galleon
investigation, prosecutors could amass a document trail allowing them to flip someone down below; they could then
work their way to the top. Spitzer referred me to a set of documents produced by Clayton Holdings, a company hired
by investment banks to evaluate the loans that they were securitizing and selling to investors. In some cases, thirty
per cent of the loans were found to be bad, if not fraudulent, yet the banks packaged and traded them anyway. “Just
track this,” Spitzer said, “and you’ll be able to make the case that people were willfully blind.”

Fraud abetted the financial crisis, from the marketing of deceitful financial products to the banks’ concealment of
losses after the housing market collapsed. Then why are no executives in jail? One reason is that criminal law often
founders in what prosecutors call a “dead-body case.” During the mortgage bubble, the possible crimes were
committed before any investigations had begun. By the time the government could have gathered enough evidence
to obtain wiretaps, any incriminating conversations would have long since taken place.

The Department of Justice also played a role in inhibiting vigorous prosecutions. In 2008, the department, under
President George W. Bush’s Attorney General, Michael Mukasey, distributed the major new investigations across
different offices. Countrywide went to the U.S. Attorney’s office in Los Angeles; Washington Mutual was claimed
by Seattle; A.I.G. was pursued out of Washington, D.C., with the coöperation of New York’s Eastern District, in
Brooklyn. Lehman Brothers was split among New Jersey and the Eastern and Southern Districts of New York. The
Southern District, with its superior experience and expertise in accounting fraud, was largely cut out. Neil Barofsky,
a former Southern District prosecutor who left the office in December, 2008, to become the first inspector general of
the Troubled Asset Relief Program, considers this a mistake. “The Department of Justice made a decision that
decreased the probability that those cases are going to get made,” he said. He suggested that the attorneys in the
Southern District weren’t happy about missing the chance. “Getting the C.E.O. of a major bank is not a career
killer,” he said. “It’s a career maker.”

At the time, the Southern District was between leaders, and the attorneys in its securities unit had their hands full
with other cases, including Galleon. Bharara insists that the lack of charges stemming from the meltdown can’t be
blamed on insufficient resources. He told me, “If the well is dry, a thousand more people aren’t going to get you
water in that well.” But, given the targets in question—huge banks, well-insulated executives, intricately structured
financial products, tens of millions of knotty documents—it’s unlikely that a federal prosecutor’s office, staffed by
generalists and operating under standard procedure, which is to wait for cases to come in, could have made serious
headway. Several financial-fraud experts told me that a task force, made up of assistant attorneys adept at financial
investigations, should have been created in key districts, especially in New York’s Southern District, and given two
or three years to investigate a single bank. These teams could have functioned almost like special prosecutors, with
an open-ended mandate, and worked in tandem with agencies like the S.E.C. and the F.B.I., as in the Galleon case.
These prosecutors might have had the time and the expertise to recognize a subtly incriminating e-mail or
spreadsheet. Such a major initiative needed to come from Washington, but investigating Wall Street’s big banks
seems not to have been a top priority. In November, 2009, the Obama Administration announced the creation of an
interagency Financial Fraud Enforcement Task Force. Its principal accomplishments to date have been press releases
claiming credit for cases that often predated the financial crisis and involve low-level Ponzi and mortgage-fraud
schemes.

In the spring of 2009, Congress authorized a hundred and sixty-five million dollars to be spent on more vigilant
fraud enforcement. According to a recent article in the Times, only thirty million or so was spent. In December,
2009, Senator Ted Kaufman, of Delaware, as a member of the Judicial Committee, held an oversight hearing on
financial-fraud prosecutions. A Brooklyn jury had just acquitted two Bear Stearns hedge-fund managers of fraud and
conspiracy, in the only criminal case related to the major players in the financial crisis. At the hearing, Kaufman
urged Justice Department officials not to be deterred by the unwelcome verdict. “It is just very hard for me to
understand why there haven’t been more indictments,” Kaufman, whose Senate term ended last November, told me.
“I am incredibly disappointed.”

Kaufman’s chief of staff at the time, Jeff Connaughton, was even more scathing toward the Obama Administration.
Attorney General Eric Holder, he noted, “said in his swearing-in that he would make it a priority. We thought we
were making sure that they were doing the right thing, and they said all the right things in hearings, and nothing
happened. I feel gamed by it.”

In the spring of 2010, a respected prosecutor from the Southern District named Raymond Lohier, who had been
running Bharara’s securities-fraud unit, was nominated for the position of an appeals-court judge on the Second
Circuit. As part of the confirmation process, he met members of the Senate Judiciary Committee, and, according to
Connaughton, Kaufman asked Lohier about his priorities at the Southern District, hoping to hear about financial-
fraud cases. To Kaufman’s dismay, Lohier said that his top priority was cyber-security. Lohier also expressed
satisfaction that the Southern District had passed on the Bear Stearns case that had ended in acquittals. (Bharara later
told Kaufman’s staff that these were not the views of his office.)

Until now, Bharara has not spoken at length about the lack of financial-crisis prosecutions. When I asked him about
it, his even manner gave way to pent-up annoyance at “ideologues.” He said, “It bothers me a little bit when people
suggest, without knowing anything, that we’re not even bothering to look. We have grand-jury secrecy—I don’t go
out and announce my investigations. But I got to tell you something: where there’s smoke, we take a look. Do you
have any idea how much people want to bring the case if it exists? So what could be the reason we haven’t?
Sometimes people say, ‘It’s because you’re beholden to these guys,’ which doesn’t make any sense. Do we look like
we’re afraid to prosecute anyone?”

Bharara walked me through the decisions of a prosecutor, using the example of a taxpayer filing false returns. “The
question then becomes, did you have criminal intent that can be proven beyond a reasonable doubt? Two things, two
hurdles, right?” If a taxpayer’s accountant wires up and his client is caught saying on tape that he intends to cheat
the Internal Revenue Service, “that’s an example of where you have the actual criminal intent and you have the
evidence.” At the other extreme, “you’re not going to have the evidence because you don’t actually have the
criminal intent, and it may look like the person was simply negligent.” In between, there are other scenarios—for
example, an accountant involved in a conspiracy won’t flip. “So now we know, if we’re omniscient, that a crime
was committed, that the accountant was involved, that the taxpayer was involved. Maybe there’s a lot of smoke—
now comes the proof. This guy’s going to testify, ‘My accountant’s a smart guy—I just relied on my accountant.’
The accountant’s going to say, ‘I just relied on what he gave me,’ and everyone has plausible deniability. That’s a
simple example of a way in which people can get away with even criminal activity when they’re making false
certifications to the government.”

I asked Bharara about the Clayton Holdings documents, and the various reports by commissions and congressional
committees suggesting that laws were broken during the mortgage bubble. While he refused to comment specifically
on the findings of any report, he answered generally that the damning evidence of an investigation can look very
different upon closer inspection and when it comes up against the counter-evidence produced by a skilled defense in
a criminal trial.

Bharara seemed equally frustrated by his inability to clear the high bars set up by criminal law and by his critics’
inability to understand why they exist. At times, he got caught in a defensive flurry: “People who did bad things,
whether it’s criminal or otherwise, should get punished, there should be some comeuppance, right?” he said. “In any
arc in a movie, when someone treated his or her spouse badly, you want to see that person pay for that later. Doesn’t
mean it’s a criminal act. There are lots of bad people out there who I can’t charge criminally.”

Perhaps indictments couldn’t be brought against top bank executives, but Bharara could take down Rajaratnam, and
he went out of his way to give the case a high profile. It was his best chance to deter the pervasive corruption of
Wall Street. One former prosecutor compared the financial crisis to international narcotics trafficking, and insider
trading to street-level drug dealing. Maybe a federal prosecutor couldn’t nail Scarface, but he could always go after
Stringer Bell.

The trial of Raj Rajaratnam began on March 8, 2011, in the federal courthouse at 500 Pearl Street, in lower
Manhattan. Prosecutors accused him of having made $63.8 million, in profits and averted losses, from insider
trading. Forty-seven conspirators, in overlapping networks of insider trading, had already been charged, and twenty-
three of them had pleaded guilty. One of the last to do so was Danielle Chiesi. By then, she was on the anti-anxiety
drug Cymbalta and seeing a psychiatrist. She sobbed, and told the court, “I ruined a twenty-year career in my field
that I truly love and I have been extremely devoted to. I brought disrepute to what is an honorable profession.” And
yet, in her way, Chiesi had been more honorable than the others: to the end, she refused to turn anyone else in.

Within days of the arrests, Galleon had been shut down. Adam Smith, who had initially avoided arrest, started his
own operation, managing the money of a Galleon investor. Perhaps because Smith could no longer achieve the
expected results without the help of his performance-enhancing drug, he continued to use his “edge,” fully aware of
the government’s extensive wiretapping efforts. In December, 2010, Smith was caught in the dragnet. F.B.I. agents
told him that unless he coöperated he wouldn’t see his young sons until they were grown. Frightened, and still
calculating his best position, Smith agreed to record his calls and lure a former Galleon colleague into admitting
knowledge of the Cisco-Starent tip. On the phone, the colleague, a trader named Ian Horowitz, wouldn’t bite. “I feel
like that you’re—the questions you are asking me are, like, you are tapping me on the phone trying to get me to say
some things.”

“Are you serious? Dude, come on,” Smith said. “I’m telling you, one hundred per cent, that’s not the case.”

Having failed at entrapment, Smith proceeded to testify against Rajaratnam—the boss whose approval he had
worked so assiduously to win.
After his arrest, Anil Kumar, who had been paid $2.1 million by Rajaratnam, confessed everything to his lawyer. He
pleaded guilty on January 7, 2010, becoming the government’s lead witness.

Rajaratnam retained the defense attorney John Dowd, from the Washington law firm Akin Gump. The choice was
surprising. Dowd, who had represented Senator John McCain in the Keating Five case and led Major League
Baseball’s investigation of Pete Rose’s gambling, wasn’t a New York criminal defender, and, at seventy years old,
he would be appearing at his last big trial. But Dowd was known for fighting rather than bargaining, and Rajaratnam
liked that. In spite of the overwhelming evidence against him and the prospect of a twenty-five-year sentence, he
never seemed to consider pleading guilty. Observers attributed this decision to the limited deal he could hope to
make with prosecutors, but in fact Rajaratnam could have offered them someone who was, perhaps, even bigger
than he was: Rajat Gupta, the former McKinsey head. Instead, the competitor’s code that had brought Rajaratnam to
the height of his industry drove him to fight the case. “I’m a warrior,” he once told Chiesi. “They can’t kill me.”

The prosecution was led by Jonathan Streeter, a ten-year veteran of the Southern District. Streeter, a Cleveland
native, was unassuming, but, in an office of cautious colleagues, the fact that he spoke his mind and owned a
speedboat made him a bit of a character. His colleague Reed Brodsky, from Long Island, had slick black hair and an
open face; he was ebullient and aggressive—one former colleague called him “a trial animal.” The third lawyer at
the prosecution table was Andrew Michaelson, who had come over from the S.E.C. just after the wiretaps went up,
in March, 2008, because he knew more about the Galleon case than anyone else. This was his first trial, but the case
had already consumed almost five of his thirty-five years.

On the first day of testimony, in the courtroom of Judge Richard J. Holwell, Anil Kumar, the McKinsey consultant,
walked to the witness stand, where he stood for a moment, in a dark suit and tie, and bowed his head, his hands
clasped before him. He looked like a prisoner waiting to be sentenced. Rajaratnam sat not with his lawyers but,
rather, on a bench behind the defense table, the shiny wave of his hair almost touching his hunched shoulders. He
was not as bulky as he looked in photographs. His lower lip jutted slightly, and he stared through rimless glasses
with undisguised contempt at his former friend.

As Streeter led Kumar through the story of his descent into crime, Kumar’s sombre penitence lifted and gave way to
the didactic precision of a consultant. His memory was astounding, and his explanations to the jurors, whom he
often addressed directly, were so smooth that they came across as almost smug. He gave crisp lectures on the
difference between private-equity and hedge funds, and on the purpose of a board of directors. Kumar could not help
contrasting, with a slight smile, his own interest in the long-term condition of American companies with
Rajaratnam’s focus on short-term payoffs. Then a question about a breach of trust, or a lie, brought Kumar back to
why he was in the courtroom, and his face sagged.

Dowd, Rajaratnam’s attorney, tried his best to undo the damage. Bald and imposing, with a phlegmy voice, he
bullied Kumar, accusing him of peddling a “monstrous lie.” At one point, taking Kumar through the forgeries that
had been required to set up the Manju Das account, Dowd said, “Your wife didn’t know how adept you were at
faking paperwork, did she?”

Kumar was clearly offended. “Do you want an answer to that, sir?”

“I sure do.”

“Yes, my wife did not know how adept I was.” For that moment, the criminal enjoyed moral superiority.
In case the cross-examination had unsettled the jury, Streeter, in his redirect, took Kumar through the crucial events
one more time. “At the very beginning,” Streeter said, “you thought he was asking for legitimate information?”

“Yes, sir.”

“And, once he started paying you, he was asking you for confidential information?”

“That’s correct, sir.”

“And, once he was paying you, you started giving it to him?”

“Yes, that is correct, sir. To my eternal regret.”

With that, Anil Kumar was excused by Judge Holwell. A verdict would not come for another eight weeks, but in a
sense the trial was already over.

Rajaratnam’s defense, which cost him as much as forty million dollars, according to the Wall Street Journal, was
based on the argument that there was too much information available in the marketplace for anything to be
considered a secret. Moreover, Rajaratnam had too much information at his disposal for any single item to account
for a given trade. Insider trading is defined as the transmission of “material, nonpublic information” in breach of a
duty and for some benefit. The defense came close to arguing that, in the age of hedge funds and electronic
communications, everything is public and nothing can be proved material—that insider trading cannot exist. This
view was most cogently expressed by Professor Gregg Jarrell, a professional expert witness and an economist at the
University of Rochester, who came out of the University of Chicago’s free-market school of thought. As the
S.E.C.’s chief economist in the mid-eighties, he had argued against stronger regulation of that era’s leveraged
buyouts. Rajaratnam’s spokesman, Jim McCarthy, of CounterPoint Strategies, who appeared in court every day with
a carefully pressed pocket square that matched his tie, was a libertarian. For McCarthy, the wiretapping of
Rajaratnam violated the Fourth Amendment’s prohibition against unreasonable search and seizure, and Preet
Bharara’s crusade against Galleon posed a threat to the legitimate activities of all hedge funds.

Throughout the trial, John Dowd seemed like a great aging elephant, slow and ponderous but still capable of
inflicting damage. He took extreme dislikes: to Kumar, whom he accused of being the biggest liar in the history of
the Southern District federal courthouse; to Reed Brodsky, the prosecutor, whom he mocked as a crybaby; and to the
reporters covering the trial. After a Wall Street Journal article suggested that the defense had been caught off guard
by Brodsky’s cross-examination of one of its witnesses, Dowd shot off an e-mail to the reporter, Chad Bray:
This is the worst piece of whoring journalism I have read in a long time. How long are you going to suck Preet’s teat?
All to hurt a decent, honest witness, Brodsky could not lay a glove on.
It did not work. The jury was not impressed by the worst cross examination ever delivered.
So in the style of Preet, try to smear him by working the sycophants in the back of the Courtroom. He learned from Schumer in the
Senate. . . .
Preet is scared shitless he is going to lose this case so he feeds his whores at the WSJ.
What a disgrace for an otherwise great paper.


Rajaratnam never took the stand, allowing Kumar and other witnesses to narrate the story of Galleon’s fall. He sat
silent and imperturbable on the bench behind the defense table for weeks while his voice echoed in the courtroom
day after day, through the static of the wiretaps. (The government played forty-six tapes.) Alongside the shallow
cockiness of Rengan Rajaratnam, the pathetic insecurities of Danielle Chiesi, and the sour knowingness of Anil
Kumar, Raj Rajaratnam—who never raised his voice and never let his own vanity or his interlocutors’ neuroses
distract him from the business of the day—seemed like the only sound character in the bunch. Yet his every word
incriminated him.

One day, in the eighth-floor cafeteria, I noticed Rajaratnam standing alone by a refrigerator case, contemplating the
beverage choices. By unspoken agreement, reporters had refrained from approaching him, but it was a chance that
seemed unlikely to come again. In court that day, he had been carrying a small paperback. I walked over and asked
what he was reading.

Rajaratnam recoiled. “Why?”

“I saw you had a book. I just wondered what it was.”

He smiled in a shy way that seemed self-protective. “No, it was just some papers.”

In a mere ten seconds, Rajaratnam had managed to lie. I didn’t blame him. I was sorry that I’d broken the invisible
barrier. He was facing the end of his freedom, and it was a kind of cruelty to make him engage.

During jury selection, Judge Holwell had passed out fifty-two questions for members of the jury pool. One question
mentioned the financial crisis and went on, “This case does not have anything to do with the recession or who is to
blame for the financial problems we face. . . . Does the fact that the case involves the financial industry, Wall Street
executives, hedge funds, mutual funds and the like, make it difficult for anyone to render a fair verdict?”

In spite of the Judge’s caveat, the catastrophic events of 2008 haunted the proceedings. All the wiretaps had been
made that year, and so the jurors heard tapes of a hedge-fund manager running his business as one investment bank
after another fell. In early October, with the government scrambling to rescue the banking system, Kumar called
Rajaratnam:
“Ah Raj, eBay is gonna do massive layoffs on Monday.”
“They’re gonna do what?”
“Layoffs on Monday.”
“O.K.”
“Now the problem again, as usual, is will that mean everyone will say, shit, this company is in trouble . . . or will it be good news, right?”
“Right.”
“But the only thing I do know is, I, I tried to get the percentage, I couldn’t.”


While the ocean liner was sinking, these leaders of finance and industry were focussed on keeping their chips from
sliding off the lower deck’s poker table. The wiretaps, which breached the normally soundproof walls of hedge
funds, told a breathtaking tale of selfish, short-term thinking.

According to the government, two of Rajaratnam’s most important conversations in 2008 occurred on his office
phone, which wasn’t tapped. On the afternoon of September 23rd, Rajat Gupta, the former head of McKinsey,
joined members of the Goldman Sachs board on a conference call. They discussed Warren Buffett’s proposed
investment of five billion dollars in the investment bank, which had been imperilled by the crash. The conference
call ended at 3:54 P.M. Sixteen seconds later, Gupta called Rajaratnam’s office. At 3:58, just two minutes before the
markets closed, Rajaratnam gave an order to buy three hundred and fifty thousand shares of Goldman stock, worth
forty-three million dollars. That night, the world learned of the Buffett investment. At the peak of the crisis, Gupta
the Goldman board member’s first thought was to make sure that his investment partner Raj Rajaratnam could
exploit the deal. A month later, the drill was repeated: as Goldman prepared to announce an unexpected quarterly
loss, Gupta called Rajaratnam, and Rajaratnam sold all his Goldman stock before the announcement. Two cell-
phone wiretaps caught Rajaratnam telling colleagues about his Goldman tips.
A few days before the trial started, Gupta was charged with insider trading, in an S.E.C. civil suit. Prosecutors in
New York weren’t pleased—they had not yet filed criminal charges against Gupta, and civil suits complicate
criminal cases. The failure to charge Gupta is a much discussed mystery, but the answer might be simple: the
prosecutors, consumed with other cases and with preparation for the Rajaratnam trial, might not have realized what
they had on Gupta until shortly before the proceedings began. Gupta, through a spokesman, denied any wrongdoing.

In order to introduce evidence about Rajaratnam’s Goldman trades, the government subpoenaed Lloyd Blankfein,
Goldman’s chairman and chief executive, who has come to represent the face of investment banking in an age of
dubious and destructive practices. In turn, the defense subpoenaed records of government investigations of Goldman
Sachs, intending to argue that Blankfein might be rewarded with softer treatment if he testified against Rajaratnam.
Streeter informed Dowd that there was no current investigation of the company or of Blankfein. The government
formally moved to preclude Blankfein from being cross-examined on “whether Goldman Sachs bears responsibility
for the 2008 financial crisis.” On the morning of Blankfein’s testimony, Dowd said in court, “It’s not something I
intend to pursue.”

Neither the government nor Blankfein need have worried. His appearance in court on March 23rd was pure celebrity
spectacle, and he entered the room smiling broadly. Preet Bharara, who had regularly attended the trial, was in court
that day with four of his top deputies. Andrew Ross Sorkin, the Times reporter and the author of “Too Big to Fail,”
showed up. Dowd’s cross-examination was marked by uncharacteristically gentle questioning and occasional banter;
even the jurors seemed charmed. Under Michaelson’s direct examination, Blankfein subtly rewrote the history of the
financial crisis—a phrase he never uttered. Instead, Blankfein spoke vaguely of “riskiness” and “uncertainty.” Asked
what the collapse of Lehman Brothers meant for Goldman Sachs, Blankfein hedged: “Some people out—people
might have drawn—some might not have, but some might have drawn the conclusion that their business was similar
to our business.” As for Buffett’s five-billion-dollar investment in Goldman, Blankfein suggested that it had made
an already attractive company even more so. According to “Too Big to Fail,” in September, 2008, Timothy
Geithner, then the head of the New York Federal Reserve, wasn’t sure that Goldman would survive, and its stock
price was plummeting so fast that Blankfein was in a state of panic. But at the Galleon trial the prosecutors’ only
goal was to get Blankfein to say that Rajat Gupta had violated the company’s confidentiality rules. After a pause,
Blankfein did.

During the government’s closing argument, Reed Brodsky finally spoke to what the jurors might have been feeling
about all the Wall Street characters in the trial. “You don’t get on the board of Goldman Sachs without having
accomplished a lot in your life and having a great reputation,” Brodsky said, his voice rising as he paced before the
jury box. “But having a great reputation doesn’t give you a free pass to violate the law. Nobody is above the law, no
matter how good their reputation is.” Later, Brodsky said, “The ordinary, average investor doesn’t have access to
Mr. Gupta,” and added, “The laws against insider trading are designed to protect the investing public against
cheating. The stock market is supposed to be an even playing field.”

The jury deliberations lasted twelve days—longer than almost anyone expected. But on the morning of May 11th the
jurors pronounced Rajaratnam guilty on all fourteen counts of securities fraud and conspiracy to commit securities
fraud. The room fell silent. Trials are excruciatingly slow, but when the end comes, it comes with devastating speed.
“Nothing is as dramatic and sombre as when the foreperson of a jury of twelve Americans stands up and pronounces
a verdict,” Bharara later told me. “It’s a really stunning thing.” Rajaratnam, seated for the first time with his lawyers
at the defense table, kept his head steady. His stoicism was impressive. But when he turned to leave the courtroom
his eyes were filmy. Sentencing was scheduled for July 29th. The defense team vowed to appeal.
“Everybody is a scumbag,” Rengan Rajaratnam had said. The files of the Galleon case are littered with the names of
people implicated in insider trading—Rengan Rajaratnam and Kamal Ahmed among them—who have not been
charged and perhaps never will be charged, in some cases simply because the government lacks the resources to try
them. “It’s everywhere you look,” Bharara said. One obscure document from the case is the F.B.I.’s writeup of an
interview, on April 16, 2009, with a government informant named Richard Choo-Beng Lee, who had once worked
for Rajaratnam and then at S.A.C. Capital, one of the largest hedge funds. Lee told the agents that S.A.C. covered up
insider trading by having different portfolio managers buy and sell a certain stock. “Entities like the Securities and
Exchange Commission cannot detect trading irregularities at S.A.C. because S.A.C. trades around a position,” the
F.B.I.’s writeup said. “This is what Lee meant when Lee told Danielle Chiesi to trade around Chiesi’s A.M.D.
position. Lee was attempting to tell Chiesi that S.A.C. trades around a position to make it harder for the S.E.C. to
detect insider trading by S.A.C.” Several former S.A.C. employees have pleaded guilty to charges of insider trading,
but its founder, Steven A. Cohen, has not been charged with any crime. (A spokesman for S.A.C. said that Lee’s
assertion “is completely false and reflects a deep misunderstanding of S.A.C.’s multi-portfolio-manager model.”)

In a recent speech in New York, Bharara surveyed the extensive rot of illegal activity on Wall Street and concluded,
“The bigger and better question may not be whether insider trading is rampant but whether corporate corruption in
general is rampant; whether ethical bankruptcy is on the rise; whether corrupt business models are becoming more
common.” The Galleon case helps to answer these broader questions about the culture of the financial world: it
illustrates how, over the past decade, cheating and self-dealing became the principal ways to succeed on Wall Street.
Bharara’s campaign of deterrence has had a particularly strong effect at hedge funds. Several New York attorneys
told me that clients have called in a panic. “There are a lot of nervous people out in the Hamptons,” one criminal
lawyer said. Stanley Sporkin, a retired judge who was regarded as one of the S.E.C.’s most aggressive enforcement
chiefs when he served, in the nineteen-seventies, told me, “People on Wall Street are going to be coming to work
with brown pants on. It’s going to change the way they work for a long time.”

And yet, nearly three years after the financial crisis, Wall Street still relies on reckless practices to create wealth. An
investment banker recently described the meltdown, with some chagrin, as “a speed bump.” The S.E.C. remains so
starved of resources that its budget this year falls short of Raj Rajaratnam’s net worth at the time of his arrest. The
agency lacks the technology to keep track of the enormous volume and lightning speed of algorithmic trades, like
the ones that caused last May’s “flash crash” of the stock market. The market has become more of an exclusive
gambling club for the very rich than a level playing field open to the ordinary investor.

As for the larger financial system, in Washington, D.C., implementation of the Dodd-Frank regulatory reform law
has been slowed, if not yet sabotaged, by lobbying on the part of the big banks and a general ebbing of will among
politicians. Neil Barofsky, the former inspector general of TARP, said, “Is Tim Geithner going to have the political
will to take on the size and interconnectivity of the largest banks? Nothing in his previous career suggests he
would.” Barofsky went on, “It is a remarkable failure of our system that we’ve not addressed the fundamental
problems that brought us into the financial crisis. And it is cynical or naïve to imagine it won’t happen again.”

Two weeks after Rajaratnam was found guilty, an annual conference of hedge funds, which doubled as a fundraiser
for pediatric cancer, was held in midtown Manhattan. Investors paid up to four thousand dollars to hear the views of
some of the country’s most famous fund managers. The outlook was upbeat; no one mentioned the recent events
downtown at the federal courthouse. The speakers took turns touting their favorite stocks: Zhongpin, the Chinese
pork processor; the Home Shopping Network; Tiffany’s. A well-known fund manager, Michael Price, spoke up for
financial stocks. “We like the big banks,” Price said. “Goldman Sachs, if you have the stomach. The risk/rewards
today in financials in particular are very attractive.” Goldman stock, he said, is undervalued by at least a hundred
dollars. “These are tremendous businesses, honest people,” he said. “These are not people who are trying to rip
people off. . . . They have a long track record of doing extremely well for their clients as well as themselves.” He
went on, “In 2008, all of a sudden they didn’t turn into criminals. There were some in the business who are no
longer in the business, but it’s not Goldman Sachs.” ♦



Read more http://www.newyorker.com/reporting/2011/06/27/110627fa_fact_packer#ixzz1eiCSkxsp

								
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