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A rare look at how insider trading works

Bill Whitaker speaks with a former stock analyst who -- after getting caught -- became an informant in one of the biggest insider trading busts in U.S. history

The following script is from "Inside Edge" which aired on May 22, 2016. Bill Whitaker is the correspondent. Deirdre Cohen and Sarah Koch, producers.

Insider trading is one of the hardest crimes to detect, it happens in whispers and phone calls, behind closed doors. But we've been given a rare look at how it actually works, through the experiences of one woman, a former stock analyst named Roomy Khan. She made a fortune in illegal profits -- with inside information, that she and her colleagues called the edge: the inside edge -- using company secrets to make winning investments in the market. But she got caught and became a government informant in one of the biggest insider trading busts in American history.

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Roomy Khan

CBS News

Roomy Khan helped the government bring down one of the world's largest hedge funds - the Galleon Group - and send its billionaire cofounder, Raj Rajaratnam, to prison.

Roomy Khan's story reveals how she got involved in insider trading, and how easy it was to do.

Roomy Khan: You are pushed and pushed to get this information. You know, you get the high fives after the trade. I was sent flowers after one of the trades. Big thank you, a huge bouquet. Thank you.

Bill Whitaker: It sounds like you guys are in a bubble, trading all this information while we sit and look at it and say, 'Well, that's breaking the law."

"It is like if you are taking an exam tomorrow and somebody hands you what's going to be on the test, it's easy to get an A-plus."

Roomy Khan: Absolutely, that we were breaking the law.

Breaking the law by obtaining confidential information from friends in Silicon Valley - connected to Google and Polycom and other tech companies. In two years, Roomy Khan made $1.5 million from illegal trades alone; her friends and associates made an additional $25 million off her tips, investigators found. It was easy money.

Roomy Khan: It is like if you are taking an exam tomorrow and somebody hands you what's going to be on the test, it's easy to get an A-plus.

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Raj Rajaratnam

AP

Roomy Khan shared her tips with self-made billionaire, Raj Rajaratnam, who built one of the biggest hedge funds in the world, the $7 billion Galleon Group. Federal authorities said Rajaratnam made more than $72 million from illegal tips from Roomy Khan and other sources.

The two met back in the 1990s when she was working at Intel as a product marketer and had access to proprietary company information. Rajaratnam tapped her for the inside information, so he could trade on it.

Roomy Khan: And he started asking me about 'How's business?' and I used to have access to Intel's top customer microprocessor bookings. I started giving him this information--

Bill Whitaker: So you started feeding him--

Roomy Khan: So I started feeding--

Bill Whitaker: --inside information from Intel?

Roomy Khan: Absolutely. Absolutely.

Roomy Khan was so brazen, she used Intel's fax machine to send him confidential data about product demand. She says Rajaratnam referred to inside information as "the edge." She was such a good inside source, she said he offered her money to stay at Intel.

Roomy Khan: He said, 'Listen, I'll off - I'll give you, you know 100K just to stay there,' I don't remember the number he offered me. But he did offer me money to just stay there and "Keep giving me information."

Bill Whitaker: And-- and keep--

Roomy Khan: Yes. And I said, 'No, there's no way,'

Bill Whitaker: --feeding him this inside information.

Roomy Khan came to the United States from Delhi, India, on a scholarship at age 23. She earned three graduate degrees before joining Intel. But she longed for the action of Wall Street and set out to build her own fortune. At the height of her success, she says she was worth $50 million.

Khan moved into this $10 million gated estate in the heart of Silicon Valley. She was living the life she wanted where money was no object.

Roomy Khan: Jewelry, painting. I mean, anything that you can think of, you know?

Bill Whitaker: You had it all?

Roomy Khan: We had it all, yes.

Bill Whitaker: The high life?

Roomy Khan: Absolutely.

Bill Whitaker: Sort of life we see in the movies with the hedge fund investors.

Roomy Khan: Probably. Probably.

One purchase from that time still makes her light up.

Roomy Khan: The 17-carat famous diamond ring--

Bill Whitaker: The famous diamond ring.

Roomy Khan: Yeah.

Bill Whitaker: Cost how much?

Roomy Khan: I think it's $1.7 million.

She explained to us just how the biggest money could be made: when the predictions of Wall Street were at odds with the inside information.

Roomy Khan: The most money you make is when your analysis is totally in an opposite to what your edge is telling you.

Bill Whitaker: ...the inside information?

Roomy Khan: Absolutely. If you have a really great source.

Roomy Khan had a really good source who knew what was going on inside Google...a friend who worked for a firm that prepared Google's press releases and who told her the company's quarterly income would be lower than expected.

Roomy Khan: And she told me they were going to miss the quarter.

Bill Whitaker: And you made money off of it.

Roomy Khan: I did. I made half a million dollars.

She shared the information with Galleon chief, Raj Rajaratnam, who made $8 million betting against Google just before the price dropped.

Bill Whitaker: And you're making good money, but he's making far more. What's your motivation?

Roomy Khan: Well, I had access to Raj so I had that access to the billionaire biggest hedge fund on Wall Street. And that was worth a lot to me.

Her relationship with the hedge fund titan would be worth a lot to the government too. Roomy Khan didn't know the Securities and Exchange Commission -- the SEC -- had launched an investigation into Rajaratnam. Former SEC attorney Andrew Michaelson was tracking his texts and trades.

Andrew Michaelson: We did see in Mr. Rajaratnam's instant messages communications where he would say, "AMD's revenues are going to be X," before AMD itself announced them. And they were accurate. Mr. Rajaratnam's predictions were accurate.

Michaelson joined the SEC in 2006 and this was one of his first cases. He remembers combing through stacks and stacks of Galleon's trading and phone records, instant messages and emails.

Bill Whitaker: How many documents are we talking about?

Andrew Michaelson: Hundreds of thousands.

Bill Whitaker: Hundreds of thousands.

Andrew Michaelson: Sometimes you'd have to sit there with a ruler to make sure that you're getting exactly who is talking, what phone number is calling which phone number at what time.

Bill Whitaker: So you're connecting the dots.

Michaelson: We're connecting the dots. And then the next dot to connect is, "Well, where's Raj Rajaratnam getting this information?"

Finally, after six months of searching, they found the needle in the haystack in a single, careless instant message from Roomy Khan.

Roomy Khan: I texted him. And I said, "Don't buy Polycom."

Bill Whitaker: And in writing?

Roomy Khan: And then-- in-- it was a text message.

Bill Whitaker: In electronic writing?

Roomy Khan: Yes. And then--and it said, "Til I check the--the guidance.

Bill Whitaker: You're saying, "Don't, don't do anything until I--"

Roomy Khan: Yeah, till I get my information.

Bill Whitaker: Call my inside guy and get this inside information.

Roomy Khan: Yes. Yes. Right.

It was the piece of evidence FBI special agent BJ Kang thought he could use to turn Roomy Khan into an informant against Rajaratnam.

BJ Kang: She was an insider. She knew all the players. She worked for Galleon. She knew Raj.

He paid her a visit in November 2007.

Roomy Khan: Two people knocked on my door and they flashed their badge and my heart sank because I just was like, "Oh my God.''

BJ Kang: She knew we were dead serious. She knew why we were there. And she knew this wasn't gonna go away.

Kang showed her the Polycom message she'd sent to Rajaratnam.

Roomy Khan: And when they showed me this text message I knew this was over because it was very easy for them to connect me to the executive at Polycom.

She knew she had to cooperate. Starting in late 2007, she began to educate the Feds on the hidden world of some of Wall Street's biggest players.

BJ Kang: We didn't have a very good understanding of what the hedge funds were doing, right? Um--

Bill Whitaker: So you didn't understand--

Kang: No.

Bill Whitaker: --completely what you had.

BJ Kang: Absolutely not. She kinda drew the-- drew out the roadmap for us to say, "This is what they're doing. This is how they're doing it. This is the language that they use. And-- and here you go."

As part of her cooperation, she also reluctantly agreed to secretly record her phone conversations with her colleagues.

Bill Whitaker: And turned out to be a good liar.

Jonathan Streeter: And turned out to be a good liar. There are some people who can't do that very well, who can't get on the phone and lie to their former colleague on the phone and you know, that's - she was good at that.

But Jonathan Streeter, a former assistant U.S. Attorney, who was the trial counsel on the case, said Roomy Khan also lied to federal investigators.

Jonathan Streeter: Roomy had multiple instances, one after another where she had withheld information while she was cooperating or she had her gardener get a cell phone so that she could have secret phone calls with people.

Bill Whitaker: Why would you--

Roomy Khan: I-- I-- I don't--

Bill Whitaker: --do this?

Roomy Khan: --know. I was just so-- I just couldn't-- I just couldn't tell on all these people.

Jonathan Streeter: I told her that if she didn't tell us the truth about this, I was gonna make it my mission in life that she would spend a long time in jail.

Ultimately, Roomy Khan gave prosecutors what they wanted - enough evidence of insider trading that a judge allowed the government to tap Rajaratnam's cell phone. The investigation was the first time wiretaps were used in a significant way in an insider trading case.

Jonathan Streeter: Without Roomy-- you don't have a wiretap, and without a wiretap, you don't have a whole lot of other evidence. What you have is some circumstantial evidence that Rajaratnam made some well-timed trades and that he spoke to some people before he made those trades, but you don't have him on the phone, talking about inside information.

In one wiretap, Rajaratnam bragged to a colleague about getting valuable inside information from a Goldman Sachs board member, just two minutes before the market closed.

Rajaratnam (wire): I got a call at 3:58, right?

Colleague (wire): Yeah.

Rajaratnam (wire): Saying something good might happen to Goldman.

That "something good" was a $5 billion investment in Goldman by Warren Buffett that hadn't yet been announced to the public. Rajaratnam's hedge fund purchased more than 200,000 shares in those last minutes and made $840,000.

In another wiretap, he told a different colleague that he'd gotten inside information Goldman's earnings would be below market expectations.

Rajaratnam (wire): I heard yesterday from somebody who's on the Board of Goldman Sachs, that they are gonna lose $2 per share. The Street has them making $2.50.

Jonathan Streeter: That was quite possibly my favorite of the wiretap calls. So he's admitting he has a piece of inside information from a board member that's clearly different from what the rest of the world thinks. Right there, ticking off the elements of insider trading, he's given us a bunch of 'em.

And in October 2009, U.S. Attorney Preet Bharara announced the arrests of Raj Rajaratnam and his colleagues.

Bharara (presser): They may have been privy to a lot of confidential information but there was one secret they did not know and that is that we were listening.

Thirty-two people were charged criminally or civilly in the case including members of Raj's inner circle - many were members of the business elite of South Asian descent, including Anil Kumar and Rajat Gupta, the former head of the McKinsey Consulting Group. The courts imposed more than $250 million in fines and penalties. In 2011, Rajaratnam was convicted of insider trading crimes and sentenced to 11 years in prison.

Anita Raghavan: One of the astonishing things is that Raj was not caught earlier. He would boast about how he got inside information from corporate sources.

Anita Raghavan, is a journalist who introduced us to Roomy Khan. She wrote a book, about the Galleon hedge fund, "The Billionaire's Apprentice" that tracked the downfall of Roomy Khan and her colleagues.

Bill Whitaker: What did the fall do to Roomy?

Anita Raghavan: Everyone in the trading community distanced themselves from Roomy. They didn't want to have anything to do with her. She was the rat, she was the cooperator.

Bill Whitaker: She was a pariah.

Anita Raghavan: She was a pariah.

Though she cooperated, Roomy Khan was sentenced to a year in prison for insider trading and for obstruction of justice, because of her lies.

Released in 2014, she now lives in Florida where she is struggling to rebuild her life. She's been unable to find a job. For all her early success, her advanced degrees, her multimillion dollar fortune - Roomy Khan says she allowed her ambition to get the better of her.

Roomy Khan: As I look back, you know, I'm aghast at the choices I made. I had all the right the breaks. I was so fortunate. I landed in the United States. I was very fortunate and then I threw it all away.