Black Edge

  Copyright © 2017 by Sheelah Kolhatkar

  All rights reserved.

  Published in the United States by Random House, an imprint and division of Penguin Random House LLC, New York.

  RANDOM HOUSE and the HOUSE colophon are registered trademarks of Penguin Random House LLC.

  Hardback ISBN 9780812995800

  Ebook ISBN 9780812995817

  randomhousebooks.com

  Book design by Caroline Cunningham, adapted for ebook

  Cover design and photograph: Pete Garceau

  v4.1_r1

  ep

  Contents

  Cover

  Title Page

  Copyright

  Prologue: The Flip

  Part One

  Chapter 1: Money, Money, Money

  Chapter 2: What Stevie Wants, Stevie Gets

  Chapter 3: Murderers’ Row

  Part Two

  Chapter 4: It’s Like Gambling at Rick’s

  Chapter 5: Edgy, Proprietary Information

  Chapter 6: Conflict of Interest

  Chapter 7: Stuff That Legends Are Made Of

  Part Three

  Chapter 8: The Informant

  Chapter 9: The Death of Kings

  Chapter 10: Occam’s Razor

  Chapter 11: Undefeatable

  Chapter 12: The Whale

  Chapter 13: Karma

  Chapter 14: The Life Raft

  Part Four

  Chapter 15: Justice

  Chapter 16: Judgment

  Epilogue

  Dedication

  Cast of Characters

  Acknowledgments

  Notes and Sources

  About the Author

  PROLOGUE

  THE FLIP

  One evening in July 2008, FBI Special Agent B. J. Kang sat hunched over a desk with headphones on, listening to a phone call. It was dark outside, and he hadn’t eaten dinner. His stomach growled.

  “Raj, you better listen to me,” a woman said in a soft, breathy voice. “Please don’t fuck me on this.”

  “Yeah,” a male voice said.

  “They’re gonna guide down,” the woman said. Guide down, Kang knew, was a common Wall Street term that meant the company was planning to announce that its earnings were going to be lower than expected—definitely bad news; the “they” was an $800 million Internet company based in Cambridge, Massachusetts, called Akamai Technologies. “I just got a call from my guy. I played him like a finely tuned piano.”

  “I’m short it, you know that, right?” the man said.

  “I want you to be on top,” the woman purred. “We need to be a team.” She wasn’t talking about sex, at least not this time. This was about money. “Let’s just play this thing. Just keep shorting, every day.”

  Who was this woman? Kang thought to himself. She sounded cartoonishly conspiratorial. Kang listened and took notes. He was in the FBI’s “wire room,” a windowless den housing fourteen vintage Dell computers and an assortment of mismatched office furniture on the twenty-fourth floor of 26 Federal Plaza in lower Manhattan, home of the Bureau’s New York field office. Along one wall was a metal shelf loaded with granola bars, Goldfish crackers, and Kit Kats—sustenance for the agents who spent hours there each day, monitoring live phone calls.

  Listening to the wires was generally considered a crappy job, but Kang didn’t see it that way. He understood it as a matter of patience; if you put in the work, it eventually paid off. A few months earlier, on March 7, a federal judge had handed Kang a gift, approving a wiretap application on the cellphone of a Wall Street titan named Raj Rajaratnam. Kang had been practically living in the wire room ever since, gathering evidence for a massive insider trading case. He wasn’t in securities crime just to bust the seedy, small-time frauds he’d been working on for the previous two years. He wanted to take down someone big—someone like Raj—a significant player in the financial world.

  The fifty-year-old co-founder of the Galleon Group, a $7 billion hedge fund, Rajaratnam was one of the more high-profile traders on Wall Street. Partly this was due to his size. Raj was obese and flamboyant, a man of outsize appetites. He liked to eat, and he liked to spend money, flying seventy of his friends to Kenya for a birthday safari and paying $250,000 for a Super Bowl party on Star Island in Biscayne Bay. Raj cut a stark contrast to Kang, the disciplined child of Korean immigrants, who was built like a block of concrete with black buzz-cut hair. Where Rajaratnam lived to schmooze and trade and brag about his exceptional skill at every opportunity, Kang was a quiet, tireless worker who spoke only when absolutely necessary. Even his closest colleagues at the Bureau hardly knew anything about him.

  Six days after that phone call, Kang watched as Akamai announced to the world that its next earnings release was going to be a disappointment. Its stock dropped from $31.25 to $23.34 overnight. Raj, who was short 875,000 shares, made over $5 million in a week. The woman who gave him the tip, a trader named Danielle Chiesi, made $2.5 million. Kang wanted to know where she had gotten such valuable intelligence about what Akamai was going to do, so he subpoenaed her phone records. He could see, looking over her call logs, that she had spoken to a senior executive at Akamai just before she passed the information on to Raj.

  “You did it in such a classy way,” Rajaratnam told Chiesi afterward, when he called to thank her for the tip. “The way you worked the relationship.”

  Chiesi sighed. “It’s a conquest.”

  Rajaratnam had been caught on tape doing something that was clearly illegal: getting confidential, inside information about Akamai, trading on it, and making a profit. There was no code or innuendo. All the pieces were laid out perfectly, ready to go into a criminal complaint: The call came on the night of July 24; Raj shorted 138,550 shares the next day, betting that the stock was going to go down, and he kept shorting more until the news came out on July 30. Based on that evidence alone, one of the most successful traders on Wall Street was probably going to jail. Kang could feel himself growing excited. If Raj and Chiesi were trading on inside information so casually and openly, there had to be others doing it, too.

  Rajaratnam’s phone line was usually busiest in the morning, right around the time the market opened, and Kang made a point to get in early and listen. Raj would call his friends and acquaintances, casting around for dirt. Some of the people he exchanged information with were former classmates from Wharton who were now out in the world running technology companies or hedge funds. Many of them were on his payroll. Kang watched as Raj collected information about upcoming earnings announcements and takeover offers that hadn’t yet been disclosed and used it to make millions of dollars trading stocks. Within a few months, Kang had wires going on Rajaratnam’s friends, too.

  He and the other FBI agents on wire detail were shocked by what they were hearing. Was this normal behavior on Wall Street? Was inside information that easy to get? They had become accustomed to finding corruption in the financial industry, but these interactions were so blatant, so obviously illegal, and seemed to extend in every direction. Each time they discovered one insider trading circle, it would overlap with another, and they’d have a whole new list of suspects to go after. The problem was bigger than Raj. It was a large, complicated network.

  As the agents listened and studied phone records and interview notes, one hedge fund kept coming up: SAC Capital Advisors. Kang decided to look into it.

  —

  The sign for the Embassy Suites in South San Francisco loomed overhead as B. J. Kang steered the midsize rental car out of the parking lot and drove south, toward Cupertino, pulling up about forty minutes later in front of a three-bedroom house on a quiet street. He and his partner, who was sitting silently next to him, had spent a good part of the previous night rehearsing the diff
erent scenarios that might take place once they arrived at their destination and knocked on the door. What if the person they were looking for wasn’t home? What if he told them to go screw themselves? What if he had a gun? It was unlikely, but they had to be ready for every possibility.

  It was April 1, 2009, and the sun was setting. Kang and the other agent—Tom Zukauskas, whom Kang referred to as his “wingman”—exited the car and strode up the front walk. They knocked on the door. A dark-haired man appeared.

  “Ali Far?” Kang said. The man nodded, confused. Kang reached into his jacket and produced a badge, which he held up in front of the man’s face. “My name is B. J. Kang. I’m with the FBI. We’re here to talk about insider trading.”

  He paused for a moment or two to let that sink in.

  Kang explained that Far was in a difficult position because of some of the things he had done, but there might be a solution. Kang and Far could help each other. Far’s wife, two daughters, mother, and mother-in-law cowered in the background, watching with alarm. “We know you used to work for Raj Rajaratnam at Galleon and that you’ve been trading on inside information,” Kang said. “We have you on tape.”

  Tape?

  Kang then played an audio recording in which Far could be heard giving inside information about a semiconductor company to Rajaratnam. As the recording played, Far was speechless.

  Far had left Galleon in 2008 to start his own hedge fund with his friend Richard Choo-Beng Lee, who was known as “C.B.” by virtually everyone. Lee was a technology analyst who had previously worked at SAC Capital. Kang hoped that Far and Lee would lead him closer to SAC, which was one of the biggest hedge funds in the world. Kang had been learning more and more about the fund and its mysterious founder, Steven Cohen, hearing from other traders on Wall Street that Cohen was “always on the right side” of every trade—something that seemed, at least on the surface, to be impossible. No one in the industry understood how Cohen made so much money so consistently; his competitors were envious—and suspicious. Taking skills they’d developed at Galleon and SAC, Far and Lee had marketed their own fund, called Spherix Capital, to potential investors partly by advertising the access they had to executives at technology companies and the valuable information they could get as a result of those relationships. Kang knew all of this. He liked to say that he understood the difference between “the dirty, important hedge funds,” the “dirty hedge funds you didn’t need to waste time on,” and the “not-important hedge funds.” He had argued to his FBI colleagues that they should push their investigation beyond Raj Rajaratnam and Galleon to bigger and more powerful targets like Cohen. Kang thought that Far and Lee, who were well connected and seemed to be getting inside information directly from company employees, were from the first group, worth going after on their own. But to Kang, they were also a path to something bigger. All Kang had to do was convince them to flip.

  Kang believed that Far, in particular, fit the profile of a potential FBI cooperator very well. He seemed like a nice person who would want to do what was best for his family.

  “Do you really want to put your kids through this?” Kang asked.

  He told Far to think carefully about his offer, as it was the best one he was going to get—definitely more appealing than going to jail. If he didn’t do the right thing, the next time FBI agents showed up at his house, it would be to arrest him. “Don’t tell anyone about this,” Kang added, before saying goodbye. “We’ll be watching, and we’ll find out if you do.” The agents walked back to their car.

  That night, Far was in distress. He couldn’t sleep. Despite Kang’s warning, Far placed a call to his partner, C. B. Lee. The voicemail answered. “The FBI just showed up at my house,” Far said, then abruptly hung up.

  It was critical to the FBI that word of the investigation and the wiretaps not leak into the hedge fund community. Kang had to talk to C. B. Lee as soon as possible in order to try to contain the disclosure. Lee lived with his mother just twenty minutes from Far, and two days later Kang went to see him. As soon as Lee answered the door, Kang told him that he knew he had been insider trading at Spherix.

  At first, Lee refused to answer any of the FBI’s questions. But by the end of their conversation, Kang felt confident that he would cooperate.

  “We are going to help each other,” Kang told him. “You’re doing the right thing.”

  —

  The telephone rang inside Steven Cohen’s offices at SAC Capital. It was C. B. Lee on the line. He and Cohen hadn’t spoken in a while.

  “Hey, Steve, we had to shut our fund down,” Lee told Cohen, trying to sound calm. He explained that he and Ali Far weren’t getting along because they couldn’t agree on how to share their profits. “I’d love to work with you again,” Lee said. He tried to bring up memories of all the money they had made together years ago when Lee worked for Cohen. Lee suggested an arrangement whereby he would come back as a consultant to Cohen and they would split the profits if Lee provided good information. He listed several technology companies and bragged about his ability to get the secret internal numbers at all of them.

  “I know people,” Lee said. “I have people in sales and finance at Nvidia who keep me up on quarterly earnings, and I have a contact at Taiwan Semiconductor who gives me wafer data.”

  Cohen was intrigued. Lee had been one of his highest-performing analysts, someone who could be relied on to bring in moneymaking trading ideas, until he left SAC in 2004. Lee’s research was so good that Cohen and one of his portfolio managers used to fight over it. But Cohen wasn’t naïve. He wanted to be careful.

  “I don’t want to get into it on the phone,” he said.

  He was interested enough, though, that he had his head of recruiting call Lee back and talk to him about the logistics of returning to work at SAC. The two men spoke several times.

  A couple of weeks later, Cohen mentioned to one of his research traders that he was thinking of rehiring C. B. Lee. The trader shuddered, but he didn’t say anything. He had just heard some gossip about Lee from a friend who worked at Galleon, Rajaratnam’s fund. The rumor was that federal agents had recently visited Lee and Far’s hedge fund. “I don’t know what’s going on there,” the Galleon trader had said when he mentioned it during a group dinner in Manhattan three days earlier. “It’s weird.”

  The next morning, the research trader leaned over to Cohen and summoned up all his courage. He had no idea how his volatile boss might react to what he was about to say. “This might be totally off base,” he said, “but there’s a rumor that the Feds were in C.B.’s office. You might want to take a closer look at it.”

  “You mean the SEC?” Cohen said.

  “No,” the trader answered. “The FBI.”

  Cohen grabbed the phone and dialed the number of a friend of his, a former SAC portfolio manager who was close to Lee. “I heard C.B. might be cooperating with the Feds,” Cohen told him. “We heard he’s wearing a wire.” It sounded like there might be a federal investigation of the hedge fund industry going on. Who knew where it might lead?

  “Be careful.”

  —

  It would be an investigation unlike any other in the history of Wall Street, a decadelong, multiagency government crackdown on insider trading focused almost entirely on hedge funds. It began with Raj Rajaratnam and the Galleon Group and quickly expanded to ensnare corporate executives, lawyers, scientists, traders, and analysts across dozens of companies. Its ultimate target was Steven Cohen, the billionaire founder of SAC Capital Advisors, possibly the most powerful hedge fund firm the industry had ever seen.

  In 1992, the year Cohen started SAC, the average person had only the faintest idea of what a hedge fund was. Most funds like his began as tiny, informal operations founded by eccentric traders whose financial ambition couldn’t be satisfied by even the mightiest investment banks on Wall Street. They had little patience for corporate culture and no interest in negotiating over their bonuses each year. Many of them wore jeans and fli
p-flops to work. Their aversion to the big banks and brokerage firms was a source of pride.

  Hedge funds were conceived as a small, almost boutique service, as vehicles for wealthy people to diversify their investments and produce steady, moderate returns that were insulated from swings in the stock market. The idea behind them was simple: A fund manager would identify the best companies and buy their shares while selling short the stock of ones that weren’t likely to do well. Shorting is a bet against a stock on the expectation that it will go down, and the practice opened up new opportunities to sophisticated investors. The process involves borrowing a stock (for a fee), selling it in the market, and then, if all goes well, buying the shares back at a lower price and using them to repay the loan. In a good market, when most stocks are going up, the gains on the longs eclipse the losses from the shorts; in a bad market, the shorts make money to help offset the losses on the longs. Being long some stocks and short others meant that you were “hedged.” This strategy could be applied to other financial instruments in addition to stocks, such as bonds and options and futures, in any market in the world.

  The losses on a short position are potentially limitless if a security keeps rising, so it’s considered a high-risk activity. That, combined with the fact that many hedge funds employed leverage, or borrowed money, to trade with as they pursued different strategies in different markets around the globe, led regulators to decree that only the most sophisticated investors should be investing in them. Hedge funds would be allowed to try to make money almost any way they wanted, and charge whatever fees they liked, as long as they limited their investors to the wealthy, who, in theory at least, could afford to lose whatever money they put in.