You should always assume someone is watching
Investigators focused on a golden rule for years: Follow the money.
It’s a line popularized in the 1976 film All the President’s Men, which tells the story of the Watergate scandal. The catchphrase simply meant that if you were trying to break a case, your best lead was to track the cash – that’s how you’d catch the criminal.
There’s a new rule today on Wall Street…
One thread ties together nearly all of Wall Street’s past decade of scandals, schemes, and misdeeds. From insider-trading convictions, high-profile divorce proceedings, Ponzi schemes, sexual harassment cases, pay-to-play ethics violations, misleading stock recommendations based on banking relationships, mortgage fraud, and rate-rigging scams… follow the electronic communication.
In each of these exposed improprieties, e-mails, instant messages, and text messages played an integral part in the investigations. They helped open cases, filled gaps, or were themselves the damning evidence that ultimately resulted in proving guilt.
Wall Street has learned this lesson the hard way. And as the world watched the 2016 campaigns, the election, and ongoing political investigations, it’s left many in the financial industry shaking their heads. How could they be so stupid to write it in an e-mail?
The idea that the rest of the world hadn’t gotten the metaphorical memo – Write It Like Ya Mama’s Gonna Read It – was shocking to most. The rule is: Never put anything in print.
Some on the Street take this to an extreme, never using any form of electronic communication. But for most it’s simply a mental precaution taken every time their fingers hit the keyboard. While typing an e-mail, assume it can end up on the front page of the New York Times.
And yet, that caution didn’t happen overnight.
After most of corporate America put e-mail onto its employees’ desks in the mid-’90s, it took a few years to realize it could be weaponized against you. But once those dots started to connect, the concept of avoiding self-incrimination began to catch on. Perhaps Wall Street is the older brother paving the way for everyone else in corporate America and Washington, D.C. – whatever you do, don’t incriminate yourself unnecessarily.
The people I know working in finance today assume somebody is always watching.
It’s a lesson I learned early on in my career. In the early 2000s, I got a phone call from a friend who worked at Credit Suisse First Boston. He told me he needed to talk to me outside of work. That typically meant one thing – he didn’t want to share what he needed to say on a recorded line.
That night, we met at happy hour. I pulled up the barstool next to his at Mexican Radio, a divey dark restaurant and we ordered a couple of tequilas on the rocks.
“Bro,” he said. “E-mail is forever.”
He explained that he had recently gone down to Washington to give testimony. He sat there across from the authorities struggling to give straight answers… that is, until they pulled out paper copies of his e-mails he thought had long been deleted.
“It’s much harder to lie when they know the truth,” he said.
His firm was at the center of an investigation on charges related to giving kickbacks in the allocation of initial public offerings (IPOs). At the time, it was common for IPOs to skyrocket on the first day of trading. It was cash cow for big banks. And since Wall Street was a backscratching industry – I help you, you help me – and there didn’t seem to be anything wrong with a little quid pro quo.
It’s how business was done during the Internet boom. There didn’t seem to be anything wrong with it – unless you admitted to it in print. In my friend’s case, the feds had proof that side deals were made – a very large allocation – in return for a promise of the client to buy more shares in the immediate aftermarket. The reason was to boost the share price, which would create the impression that the stock was hotter than it was. That would allow insiders to profit when they sold their shares.
“We’re probably going to get a slap on the wrist,” my friend said. “$100 million fine. But remember… E-mail is forever, bro.”
I never forgot those words.
Of course, sometimes not only do you not want a paper trail; sometimes you want a fake paper trail.
Around the same time my friend warned me about e-mail, my former boss Raj Rajaratnam received inside information that had the potential to take down the entire market when it became public. If you’re into inside information, this is the best kind. Rajaratnam was the founder of the Galleon Group, and is currently serving an 11-year sentence for insider trading.
After Raj analyzed the illegal information, our hedge fund was furiously liquidating every stock we owned, even though it was a raging bull market. I wasn’t sure why we were selling and then shorting everything. Then Raj stepped out of his office, cupped his left hand on the side of his mouth as if he’s about to whisper something, and yelled over to an analyst: “Send me an e-mail with some fundamental reasons to sell Nortel,” he said. “And make sure you put something in it about them canceling from the Robertson Stephens conference.”
We sold every single stock we owned in a matter of hours. And then we went short those same stocks. Our portfolio went from 100% long to 100% short in the same trading day. At the time, I called it the billion-dollar flip.
Two minutes after the closing bell that day, Nortel Networks reported a terrible earnings number. And its future earnings guidance was even worse. At the height of the dot-com tech bubble, the company grew faster than its expertise. The headlines coming across the tape were so bad that regulators halted the stock. This was not only bad for Nortel, but catastrophic for the entire market… The bubble was about to burst and we were going to make a boatload of money the next few days.
Over the next few weeks, the atmosphere in the office was tense and suspicious. A couple of my fellow traders talked about lawyering up. An investigator with the U.S. Securities and Exchange Commission (SEC) called Raj and wanted to know why he had sold all of his tech stocks. Raj told them he did it because Nortel was pulling out of the Robertson Stephens conference, then listed a couple of generic fundamental reasons that were in the e-mail he had sent himself. Raj had created a paper trail to support his alibi. And it worked. Raj’s excuse was good enough for the SEC.
It would take another eight years for electronic communication to catch up with Raj. By 2006, he became one of the FBI’s main focuses. They spent years collecting evidence by reviewing Rajaratnam’s instant messages. And then the feds built their case with wire taps.
In court, they used his own voice against him. Raj was accused of making more than $72 million on non-public information (sounded light to me) and then convicted after a trial including more than 2,400 recorded phone calls. In many of those conversations he received information that was considered inside (illegal). And they would compare his trading records to his phone conversations.
But wiretaps on Wall Street aren’t only useful for providing direct evidence; they’re also used as a recruiting tool to find cooperating witnesses. Many people are far more willing to talk after hearing their own voices on wiretaps. When FBI agents have evidence against you, it becomes a much easier decision to work with them. And by the end of 2012, there were 75 people charged in a three-year span, primarily by using tools such as wiretaps, informants and cooperators.
The people I know working in finance today assume somebody is always watching.
Today, almost everyone left on the Street who used to play fast and loose now operates in a totally different manner. Everyone is a liar until proven otherwise. But this isn’t a blueprint on how to get away with improprieties.
The best way to avoid getting caught doing something illegal – don’t do something illegal.
Turney Duff is a former trader at one of the biggest hedge funds in the world, the Galleon Group, where its founder and several Galleon employees were found guilty of insider trading. Turney rose through the ranks and then fell prey to the trappings of Wall Street: money, sex, drugs, alcohol, and power. Turney chronicles his spectacular rise and fall in his bestselling book, The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess.