Preet Bharara, the US Attorney for the Southern District of New York, photographed on Sunday, January 29, 2012.
Martin Schoeller for TIME
Monday, Feb. 13, 2012
On wall street and in financial firms across America, the conference call is a standard workday tool. Traders, analysts and executives hop on to discuss trades, news and rumors that might move the market. Such was the case at the hedge fund Level Global Investors on Nov. 4, 2009, when one of its analysts joined a call organized by a second firm, Primary Global Research. PGR connects hedge funds, brokerages and other market players with executives of corporations--a Wall Street matchmaker of sorts--and on that day, PGR had some hot information for the hedgies at Level Global.
Too hot.
Unknown to the participants, Preet Bharara, U.S. Attorney for the Southern District of New York, was recording the conversation, and he wasn't looking for stock tips. A confidential informant had told his office that the party line was being used illegally to trade inside information. Bharara, who has launched a war on Wall Street crime, wanted proof. So he obtained a secret court order to join the conference call--something of a first for a U.S. Attorney. "Significant officials at publicly traded companies are casually and cavalierly engaged in insider trading," Bharara said on Jan. 24, sitting in his corner office behind Manhattan's city hall. "Because insider trading has as one of its elements communication, it doesn't take rocket science to realize it's nice to have the communication on tape."
Now Bharara is targeting an even more infamous Wall Street excess. On Feb. 1 he charged three former high-ranking Credit Suisse executives with fraud for inflating the value of mortgage bonds they held in 2008 in order to protect their bonuses as the housing market collapsed around them. Kareem Serageldin, head of the bank's structured-credit group, managing director David Higgs and Salmaan Siddiqui, a vice president in the investment-banking division, allegedly "papered over" more than $500 million in losses, according to the indictment, contributing to an eventual $2.65 billion write-down for Credit Suisse. Higgs and Siddiqui have pleaded guilty and are cooperating with the government. These are some of the first prosecutions of crimes involving residential-mortgage-backed securities, instruments that helped underwrite the housing bubble that led to the financial collapse.
In postmeltdown America, Main Street has been baying for some high-paid Wall Street heads to roll, and the 43-year-old Bharara is supplying them. His tactics are not always conventional. Prosecutors normally unravel criminal conspiracies one crook at a time, working their way slowly up the chain of command, and Bharara is doing some of that. But in an unusual and still controversial feat of prosecutorial moxie during his investigations of insider trading, Bharara and his team got a warrant to tap multiple people on the PGR conference call, beginning in early October 2009. The tap, which would cover 104 PGR employees and clients, gave Bharara a big net. The evidence that he and his staff would accumulate through that and other classic Mob-busting techniques like flipping lower-lever defendants into informants has led to the arrests of 63 people on insider-trading and other stock-fraud-related charges. Through pleas and at trial he's won 56 convictions--seven cases are pending--and he's had no losses.
Those traders may not have caused the meltdown, but since he arrived on the job in August 2009, Bharara has been targeting what he calls Wall Street's culture of greed. "There was a creeping culture of corruption in our politics and also in Wall Street and in business generally," he says. Bharara is aiming high, making arrests so far up Wall Street's food chain that hedge-fund bosses may be wondering about picking up the phone.
One of those arrested was Anthony Chiasson, high-flying co-founder of Level Global, whose trades, say the feds, made $72.6 million in profits for the firm over more than two years. Another is Raj Rajaratnam, the former boss of the $7 billion hedge fund Galleon Group, who is in jail for securities fraud and conspiracy while he appeals his 11-year sentence, which was delivered last October after a lengthy trial. Bharara has also charged former McKinsey & Co. CEO Rajat Gupta--like him a first-generation immigrant from India who made it in the U.S.--with securities fraud. And having arrested John Horvath, who worked at Sigma Capital, a unit of SAC Capital Advisors, Bharara has now alleged illegal activity inside the $14 billion hedge fund of Wall Street biggie Steven Cohen. Neither Cohen nor his firm has been accused of any wrongdoing. "He's bringing a lot of very high-profile cases," says his predecessor in the job, former New York City mayor Rudolph Giuliani, who says Bharara's done a "great job."
To his critics, Bharara's prosecutorial reach is perilous to innocent bystanders. The definition of insider trading has never been clear. And the mere appearance of Bharara has been enough to send investors fleeing (with their cash) from hedge funds once they become his target. Level Global is finished; FrontPoint Partners, once a $7 billion firm, was reduced to a shell after one of its analysts was busted. At the same time, political pressure for more arrests is mounting. An election-year posse is being formed in Washington to try to round up the perpetrators of the Great Recession. President Barack Obama unveiled during his State of the Union address in January a new task force to investigate mortgage fraud by big banks.
To hear him tell it, Bharara is after something bigger than just arrests. In his insider-trading cases, Bharara says he is not targeting hedge funds but rather leveling the playing field for all investors at a time when fairness is vitally important. "Insider trading tells everybody at precisely the wrong time that everything is rigged," he says, "and only people who have a billion dollars and have access to and are best friends with people who are on boards of directors of major companies--they're the only ones who can make a true buck." Ultimately, though, justice comes in court, after the perp walks and the press conferences are long forgotten, and it is there that Bharara's choice of cases--and his tactics--will be judged.
The Third Wave
Bharara is the top cop on the beat at a time when Wall Street is experiencing its third major prosecution wave since the late 1980s. Giuliani made enough successful big-time busts during the first wave to launch a political career that culminated in a presidential run. His was the junk-bond era--marked by the crash of '87--when corporate takeovers fueled by "high yield" debt were frequent and inside information was a valued currency. He nailed Drexel Burnham Lambert's superstar banker Mike Milken and arbitrageur Ivan Boesky on charges related to insider trading. And he made drama a tool of his trade: the sight of Robert Freeman, the highly respected head of arbitrage at Goldman Sachs, being led away in handcuffs from the firm's trading floor was one of the most stunning scenes of the era.
New York Attorney General Eliot Spitzer was the star of the second wave, during the dotcom-bust days in the 2000s. Leveraging New York State's nominal jurisdiction over what usually are considered federal cases, he zeroed in on Wall Street's all-too-cozy relationships among investment bankers, analysts and firms' best customers in dispensing hot tech-stock IPOs. Spitzer also targeted the Street's research analysts' penchant for placing "buy" recommendations on every other piece of dotcom garbage their firms were taking public. During the same period, U.S. Attorneys in Houston took advantage of a relatively new law that made it a crime for corporate executives to deprive shareholders of "honest services." Down went Enron CEO Jeff Skilling and Hollinger's Conrad Black on honest-services fraud and other charges. Other big fish like WorldCom's Bernie Ebbers and Tyco's Dennis Kozlowski were also jailed.
There's a link between the Spitzer era and Bharara's current cases. Spitzer's spotlight helped prompt new regulations that forced the large financial firms to divest themselves of some in-house research capabilities to prevent collusion between research-chasing analysts and their stock-peddling colleagues. The idea was to strip the big brokerage firms of their access to inside info and give equal access to all investors. Instead, the activity was essentially outsourced to people who left the firms to set up their own research organizations--what would become known as expert networks--which then sold the information back to the Wall Street firms. Expert networks like PGR got good at penetrating corporations and connecting traders on the outside with corporate operatives on the inside who had useful information to sell.
What Bharara was listening for on the conference call in November 2009 was very specific: nonpublic information that could move stock prices. It is a violation of federal securities law to conspire to make money on "material nonpublic information," and in an FBI affidavit filed to U.S. District Judge Kevin Duffy, the feds claimed probable cause against at least eight of the potential 104 people who used the PGR line. Duffy granted the wiretap in early October 2009.
Over the months that followed, Bharara's team would mine the resulting wiretap warrant for all it was worth. On the Nov. 4, 2009, call, for example, Dan DeVore, a global supply manager for computer maker Dell who was paid in total more than $145,000 by PGR, told Spyridon "Sam" Adondakis of Level Global that computer sales had jumped from 60,000 units a day to as high as 200,000 units a day, thanks in part to the introduction of the new Windows 7 operating system. DeVore also gave Adondakis details on future pricing of Dell's computers. And he slipped Adondakis forecasts for the company's growth in coming months. All of this gave Adondakis a leg up on the market. DeVore briefed at least nine other analysts about Dell's prospects on the conference line over the next six months. When Bharara finally arrested him in December 2010, DeVore pleaded guilty to wire fraud and conspiracy and began cooperating with the government. It is a sign of how useful he is--and how much further Bharara plans to take this strand of his investigation--that DeVore's sentencing is not even scheduled until December 2013.
Giuliani says Bharara has chosen his cases wisely and well. "He's bringing responsible cases," Giuliani tells TIME. "When you make these high-profile prosecutions, you're deterring a lot of crimes."
Born to Prosecute
Bharara got to the Southern District from the ground up. He was born in the Punjab city of Ferozepur, where his father, a doctor, was struggling to raise a family. When Bharara was 2, his father brought the family to New Jersey via England, and Bharara remembers him drawing a contrast between how things worked in India and how they did in their new country. "I remember him talking about seeing bribes being passed, even among doctors [in India], which he thought was not the way it should work," Bharara says.
Bharara developed a first-generation immigrant's passion for the American way of government. In his first week at Harvard, he engaged in a now famous all-night argument with another newcomer, Viet Dinh, who later became a powerful lawyer in the George W. Bush Administration and an author of the Patriot Act. Dinh argued that the framers of the Constitution believed men's souls were evil, while Bharara insisted they thought they were good. By the time they went to breakfast the following morning, they were best friends. Back then, it was already clear to Dinh where Bharara was headed. "His unwavering focus has always been to become a prosecutor," Dinh says.
Seven years after Columbia Law School, Bharara got his chance, joining the Southern District, one of the largest, most powerful and most respected federal attorney's offices in the U.S. Assigned to the organized-crime unit, he teamed up with the agents busting figures from the Colombo and Gambino families. It was there, says his friend Bill Burck, a former deputy White House counsel for Bush who served with him as a prosecutor, that Bharara developed his signature mix of Ivy League training and wisecracking, blue collar casemaking.
It was also in that job that Bharara learned the value of a wiretap. "When you're trying to make a racketeering case that involves charges of extortion, which by definition include threats of violence, and you have a guy saying, like you might see on The Sopranos, 'I'm going to staple your eyeball,' that's pretty good evidence. And you get that all the time," Bharara says.
In 2005 he showed he had political smarts, getting himself a job as a judiciary-committee aide to New York's senior Senator, Chuck Schumer. Bharara arrived in Washington a known quantity, thanks to his friendships with Republicans like Burck and Dinh, both of whom were already in the Bush Administration. That made him a trusted interlocutor between the Administration and the Democrats in Congress when accusations of political influence over prosecutors arose under then Attorney General Alberto Gonzales in 2006. Bharara became the lead investigator, uncovering political motivations behind the firing of nine U.S. Attorneys by top Gonzales aides. The investigation started the ball rolling that would eventually topple Gonzales and result in subpoenas against top White House officials, including Karl Rove and White House counsel Harriet Miers, and make Bharara's boss, Schumer, look good. In early 2009, Schumer encouraged newly elected President Obama to make Bharara the new U.S. Attorney in Manhattan.
Will His Perps Walk?
The Jury is still out on whether Bharara's war on this third wave of Wall Street crime will produce longer-lasting results than his predecessors' efforts did. Much depends on whether his convictions are upheld on appeal--and the defendants in these cases have the means to make the challenges that sometimes lead to reversals. The 1968 federal law on wiretaps explicitly limits the government's right to listen in on calls where there is no probable cause that a crime will be committed. And the definition of exactly what constitutes insider trading remains a hurdle. "Neither the SEC nor Congress has ever defined inside information, nor has either succeeded in specifying the level of significance the information must have to be the subject of a criminal violation," says Henry G. Manne, a dean emeritus of the George Mason University School of Law.
No prosecutor wins every case. While most of those overheard on the conference call who were charged with insider trading have pleaded guilty to securities fraud and conspiracy, at least one, PGR's James Fleishman, has not. "It should be tremendously scary for anyone who works in a large organization" that government prosecutors can tap conference-call lines that are used by multiple innocent people, says Ethan Balogh, the lawyer for Fleishman. Courts have been generous in judging whether a wiretap is reasonable, and Judge Jed Rakoff of New York's Southern District denied Balogh's motion to suppress the conference-call wiretap evidence and sentenced Fleishman to 30 months in prison. Fleishman is appealing to the U.S. Second Circuit Court of Appeals; the case could go all the way to the Supreme Court, thanks to the government's admission in its request for the tap that it didn't have probable cause against 93 of the 104 people it planned to eavesdrop on.
History shows a mixed record for forward-leaning prosecutors. Giuliani's highest-profile Wall Street target, Robert Freeman, served just four months in prison and paid a $1 million fine--for mail fraud. Appeals courts rolled back some of the honest-services-fraud convictions related to Enron and Conrad Black, and in 2005, the Supreme Court unanimously nullified the government's victory against Enron's accounting firm Arthur Andersen, a bitter end for the more than 25,000 employees who lost their jobs when the company folded in the wake of the lower court's 2002 conviction. Spitzer's civil suit to force New York Stock Exchange CEO Dick Grasso to return part of his multimillion-dollar pay package was drop-kicked by the appeals courts, as were other high-profile cases he brought on his way to the governor's mansion. Brendan Sullivan, the defense lawyer who successfully defended Alaska Senator Ted Stevens after his indictment on charges based on prosecutorial witness rigging, says we are at a historical extreme of prosecutorial power. "The pendulum has swung fully toward prosecutors," he says. "So it's all the more important that you have prosecutors with a keen sense of justice."
Sullivan is right, of course, and that's why warrants have to be okayed by judges. But it is also true that politics can sometimes drive prosecutions at every level of government, and there is a danger in wanting to criminalize the recession. The Obama Justice Department has launched a new wave of investigations of people behind the mortgage-lending free-for-all that nearly destroyed the economy when the housing bubble burst in 2007. Three years of prior investigations haven't yielded much criminal prosecution. Greed by itself isn't a crime. In trying to make Wall Street fairer to all investors, Bharara is in some respects acting as a regulator. Given the dithering in Congress over consumer financial protection, state and federal prosecutors get the job by default.
Bharara, who is not part of the new task force but says it is a "welcome addition," echoes Sullivan's call for prosecutorial standards. "In this office, we talk every day about doing what is right by the law and by our conscience and try to use the most aggressive technique that is appropriate to the task at hand, within limits of the law," he says.
That kind of talk explains why some friends say Bharara has the potential to become the first Indian American in a top spot at the Justice Department or in the courts. For now, though, Bharara says more insider-trading arrests are on the way, a statement he knows has its own power to deter potential criminals. "Securities fraud generally and insider trading in particular should be eminently deterrable crimes," he says. With Bharara on the beat, they are. But eventually Wall Street's appetite for making money will once again test the skills, and tactics, of America's prosecutors.
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