Bloodmoney (37 page)

“I like it here. I was inside at ten, but now I’m outside. Let’s forget about the seating chart and do our business. I have to get up early tomorrow to help the president open a wind farm in Okla-fuckinghoma. So what’s this ‘trouble’ that you needed to see me about? It better be important.”

Gertz was on his back foot. He had gotten off to a bad start. He needed to frighten the chief of staff enough to take action, but not so much that he panicked him into doing something that would make the situation worse.

“We have hit an iceberg, Mr. Yazdi. We are taking on water. I want permission from you and the president to close down the operation.”

“Close down Operation Pax? The friendship payments, the whole thing? The president loves that stuff.”

“I’m sorry. I know you were excited about those special activities. But they have become too risky.”

“Risky for who? Not the president. And what’s this iceberg you’re talking about? I don’t see any freaking iceberg. It sounds to me like you’re covering something up. You’d better explain what’s going on. Take it slower this time.”

“You know about out security problem. I’ve briefed you on it before. You know that we have lost four officers. We nearly lost a fifth one the other day in Islamabad. It has gotten too dangerous out there. More people are going to get killed and the whole thing is going to blow.”

“Whose fault is that? Not mine. Why is all this bad shit happening?”

“People have gotten hold of our address book, Mr. Yazdi. They know where we are. They’re coming after us.”

“But I thought you had that contained. We put out your total-denial, piss-off statement about Tawhid, and it worked, right? That’s what you told me. So what’s the squawk now? I never thought of you as the ‘cold feet’ type, but maybe I was wrong.”

Gertz’s soft sell wasn’t working. Yazdi was too cranked up. He would have to try a different approach.

“Look, Mr. Yazdi, it’s not just the attacks on our officers. That’s part of the problem. But people are going to find the money trail if we don’t shut things down quickly.”

“What money trail? I thought you said there wouldn’t be any trail. That was the pitch. This would be self-funding and self-liquidating. I don’t know how many times I heard that from you. Was that bullshit?”

“That was the truth. We were self-funding, but now it’s time to liquidate. That’s what I’m telling you, Mr. Yazdi. We need to shut the operation down, bring everyone home. Turn off the money machine. In the process, we need to build a cover story to explain why billions of dollars have been bouncing around the world like Ping-Pong balls. And why people have been making fortunes trading on inside information.”

“Too much detail. Just liquidate it. This is your problem, not mine.”

“Just a heads-up, Mr. Yazdi: Our hub is in London. The British will take it down. It will look like a fraud investigation. We will keep it far away from you and the president, I promise you.”

“What the hell is that supposed to mean? ‘Far away from you and the president.’ We don’t have anything to do with this. What the fuck are you talking about? This is your mess. That’s the deal.”

Yazdi almost shouted these last words. Gertz put his finger to his lips, to get him to shush. He had him now.

“The president authorized these programs, Mr. Yazdi. There’s a trail of authorities and permissions. Even where there were no formal presidential orders, there were subsequent memoranda for the file, and legal opinions. We don’t do things on our own, Mr. Yazdi, as you well know. What’s important is that this documentation should never, ever become public.”

Yazdi stood up angrily, walked a few paces toward the house and then paused, weighing his options. He returned to his chair in the garden and wagged his finger at the intelligence officer.

“You are a cocksucker, Gertz. Don’t ever threaten me or the president, ever. It won’t work. Stop this bullshit right now and tell me how you’re going to solve this.”

Gertz’s manner sweetened, now that he had his man locked up.

“I promise you there won’t be any connection, if we do this right. No fingerprints. Clean as a whistle. But I need a free hand to close this down, quickly and efficiently, and do what I think is necessary. Do I have your authority? And I don’t just mean now, but a year from now, if it takes that long. It will be complicated if you say no, because I’ve already started.”

The chief of staff looked tired and deflated, a balloon that had lost its air and gone soft and rubbery around the edges. Gertz had scared him, and he was a man who made his living giving other people heartburn.

“Sure,” said Yazdi. “What the fuck? Just make it go away.”

LONDON

Thomas Perkins referred to
the fraud investigation as “the witch hunt.” From the first morning when the Metropolitan Police arrived in Mayfair Place with warrants and summonses, the campaign was conducted as much by insinuation and whisper as by hard evidence that could be put before the prosecutors and magistrates. Across Mayfair, people seemed to know that Perkins’s firm was in trouble before they had any inkling why. A small crowd formed in Stratton Street behind the yellow tape in the first minutes after the fraud squad ascended the elevators. Where had they come from? How did they know?

When Perkins’s employees asked him what was wrong that first day, he answered that he didn’t understand what had triggered the raid. But that was not entirely honest. He had a good idea where this tangle began, but he could not speak about it to anyone who didn’t already know.

The police set up a desk that morning in the entrance lobby of the building on Mayfair Place, before you even got to the elevator. On the top floor, where Alphabet Capital had its offices, the investigators took over a suite to coordinate their work. There were representatives from the Serious Fraud Office, the Financial Services Authority and, for good measure, a Foreign Office representative who was, in fact, an officer from MI6. The police cordon had the useful effect of providing security, though Alphabet’s staff did not understand just how providential that was.

Perkins had been frantic the first day. He tried to contact the man he knew as Anthony Cronin. He called the cell phone number that Cronin had given him, and then another number to be used in emergencies only. On the cellular number, he received a message saying that the account was no longer in service. The emergency number rang and rang, but nobody ever answered. Perkins also sent emails to the account that Cronin had used, but they bounced back with an error message saying that it was a nonexistent address.

Sophie Marx’s call from Islamabad, a few hours after the police had raided the office, had only confused Perkins. He called her back twice the next day, but each time it rolled over to voicemail, and he didn’t leave a message. He didn’t want to make a nuisance of himself, so he waited through the first twenty-four hours trying to make sense of what was happening.

On the second day of the securities dragnet, Perkins decided to contact Felix Stern, the representative at Fédération des Banques Suisses who handled his private, numbered accounts. These accounts had been created more than a year ago as “special-purpose vehicles” at the insistence of Mr. Cronin. They received a portion of the funds generated by Alphabet Capital from trades based on “the system,” as Cronin liked to call it, of intelligence tips that generated arbitrage opportunities. Under the agreed formula, 20 percent of the firm’s monthly capital gains would be skimmed into the Swiss special-purpose vehicle accounts, where they would be divvied up between Perkins and Cronin’s team.

Felix Stern had handled all the details. The profits had been split into two accounts: The first was controlled by Perkins and was his money, to do with as he liked. The second was to be used by Cronin and his operatives, such as Howard Egan. The split was 25 percent to Perkins’s account and 75 percent for Cronin and his network. That was an unequal division, but the flow of money was so substantial that until very recently Perkins had been entirely happy with the arrangement. His share of the proceeds was now approaching two billion dollars. Rather than manage it actively, the way he did with Alphabet’s proprietary accounts, he simply let it sit in fixed-income securities, accumulating interest. Even at the low prevailing rate of about 3 percent, the fund was spinning off nearly sixty million dollars of additional cash a year.

Perkins had made a practice over the past year of checking with Stern once a week. The FBS officer held the documentation for the account himself, in his drawer, as it were. Perkins had always assumed the banker was Cronin’s man, under some mysterious arrangement he did not need to know, and Stern had kept track of the sums well enough.

So Perkins, not sure now where else to turn, tried to contact this same Stern, the financial manager he had shared with the now-vanished Anthony Cronin. Rather than using one of his own phones, he borrowed a cell phone from his housekeeper at the townhouse on Ennismore Gardens. He dialed Stern’s number at the FBS office on Quai Gustave Ador in Geneva.

A secretary answered. She said that Mr. Stern was unavailable, but that his accounts were being handled by a colleague, Mr. Traub, and Perkins asked to be connected.

“This is Herr Traub,” said a very proper German-Swiss voice. Perkins identified himself and said he wanted to inquire about the status of his accounts with FBS. He read off the number of the principal account he had created, with Cronin’s help, and gave other identifying details.

“Is this Mr. Thomas Perkins?” asked the banker, wanting to make sure that he had it right.

“Yes, I just told you that, for Christ’s sake. Come on, Traub. I want to know the status of my account.”

“I must advise you that I am recording this call, Mr. Perkins.”

“I know, for ‘quality assurance purposes.’ Fine, very Swiss. Thank you.”

“Your account has been frozen by order of the Swiss Financial Market Supervisory Authority. I am sorry. The order was executed this morning. I am happy to tell you about the account, but you cannot touch the money, I am afraid.”

Perkins felt a chill. He put down the handset for a moment, then put it back to his ear.

“Why has my account been frozen? And how does anyone even know about it in the first place? This is a numbered private account. What the hell is going on?”

“That I cannot say, Mr. Perkins. You must ask the Swiss police or the FMSA. Maybe they can tell you, maybe not.”

“Where’s Mr. Stern? I want to talk with him. Felix Stern. He handles my account. Where is he?”

“I am sorry, but Felix Stern is no longer with the firm. I believe he has left the country. I have been instructed to handle all his business.”

“Left the country? What about the other Alphabet Capital account that Mr. Stern was handling? It was much larger than mine. It was opened last year by an American named Anthony Cronin. I was a cosignatory. What about that account? Is that frozen, too?”

“I am very sorry, Mr. Perkins, but I cannot help you there, either. Any other accounts handled by Mr. Stern must have been closed or liquidated. I do not have any record of them. Let me look here on the computer to make sure…No, I am sorry, there is no record of any other account. Just yours.”

“You mean the other money is gone?”

“Excuse me, please. I am not following you.”

“Holy shit,” said Perkins. “It’s all gone.”

“Could you repeat, sir? I did not understand.”

Perkins ended the call. He was frightened, and he did not know where to turn or what to do.

Perkins remained in his office overlooking Mayfair, as representatives of the various investigative agencies came to him with their requests for documents. Keeping him company was his lawyer from Washington, Vincent Tarullo, plus a British solicitor named Jacob Gormley, who knew UK securities law. After the first two days of the inquiry, they discovered that there was very little they could do to prevent the pillaging of their files. The authorities had warrants and orders for every piece of information they sought, and they seemed to know what they were looking for.

A pressing problem for Perkins was dealing with his lenders and investors. By now everyone in Mayfair knew that Alphabet Capital was in trouble. Within minutes after the first police raid and sequestration of records, Perkins’s own traders had been on the phone to their friends at other hedge funds and investment banks, asking if they knew what was going on. The rumors had spread in a viral chain. By the end of the first day, Alphabet Capital’s swap arrangements at other firms had been suspended, and the next morning its credit lines were frozen by the firm’s major lenders.

The credit squeeze wouldn’t have been a problem by itself. Perkins’s firm was well capitalized, thanks to its extraordinary profitability. But as word of its trouble spread, investors in the fund got nervous. There were calls all that second day from investors requesting redemptions, which was a polite term for pulling out their money. Alphabet Capital had a standard forty-five-day notification requirement, and many of its investors had signed one-year lockup agreements, which prevented them from withdrawing their money without severe penalties.

But the lockups and other precautions proved to be of little use. Late on the second day of the witch hunt, the Serious Fraud Office made a formal public announcement that it was conducting a criminal investigation of Alphabet Capital’s trading activities. Lawyers for several of Perkins’s largest investors were on the phone within minutes, saying that the lockup and notification agreements were nullified in the event of fraud. They wanted their money out.

Perkins instructed his managers to honor any valid redemption requests, and the firm massively sold off assets that second day, both fixed-income and equities. But it’s in the nature of things in the financial world that bad news breeds more of the same, and the firm’s distressed selling compounded its losses severely. By the third day, it had gone from the jewel of Mayfair to a firm that was perceived to be in a death spiral. No other major firm was prepared to act as a counter-party without a hefty risk premium, which accelerated the downward momentum.