I sat down to wait and read the Wall Street Journal. For the last twelve years, I had devoured this paper, consuming it whole every morning on the train as the starting point for my day’s worth of research. Now, scanning the headlines, my only thought was that the content was totally meaningless to me now. All of it. There wasn’t a single thing in here that impacted my life anymore. Not one iota. It was all entertainment. Business porn from a faraway world. My life was now simply down to the case before me—no more, no less. And the outcome would dictate whether my family would have enough money to live on, and whether my children would have a real father. It would decide if I would go to prison, and if so, for how long.
The Journal and its contents were irrelevant now.
Outside of the realm of my family and my lawyers, virtually nothing else mattered.
I tossed the Journal aside and gazed at the wall until my lawyer Michael Sommer came bounding up the stairs from the thirty-ninth floor to shake my hand. I wasn’t sure what the appropriate expression was to wear, and no longer cared. His was the perfect mix of subdued confidence and deep concern. A solid, attractive man with a receding hairline and a high-end Italian suit, Michael knew this business cold. He had been a prosecutor in the Southern District of New York (SDNY). They had been the All Stars of the prosecution world for years. With its purview encompassing New York City, the Southern District drew a greater share of high-profile cases than any other district in the nation. The World Trade Center bombing, the Milken-Boesky insider trading cases, the Giuliani mob prosecutions—these cases and others like them had turned a few SDNY prosecutors into superstars and household names. If you were a talented and serious prosecutor, it was where you wanted to be. Since crossing over to the defense side, Michael had allegedly never lost a case, including the high-profile win in the Symbol accounting fraud case several years ago.
He escorted me to the aptly named Conference Room F, as in “Fucked,” and sat down across an impressive dark wood table from me.
“Michael, let’s take this from the top,” he said. “I want to review the complaint with you and then we can discuss your options—that is, how best to proceed. I want to start by saying that I know this is the hardest thing you’ve ever gone through. I know it can feel terrifying and impossible to handle. But I want to tell you, while the hardest part may not be over, the scariest part probably is. I was on the other side of this as a prosecutor for a lot of years. I know the system, how it works. I know most if not all of the players. The shock, fear, and shame—that’s bad, but it’s over now, okay? The project now is to figure out whether there’s anything we can do to get them to drop the case or at least defer prosecution. I’ll be very frank. It’s an uphill battle for something this well publicized. It’s a lot easier to get the government to do the right thing when they haven’t splashed your picture all over the news. For them to drop the charges now would require them to admit, in a very public fashion, that they were wrong. But I’m not saying it’s impossible. Now if you were Zvi? Zero chance. That would be a career killer for them. But out of this group of nine that were arrested, your name is at the bottom. Prosecutors usually do these lists in order of culpability. Worst on top, least on bottom. I’d say you and David Plate, the ones at the bottom, are who the government aim to squeeze the most. Peripheral guys they expect to help them with the case, either through information or your testimony.”
I heard Sommer’s words loud and clear, but I couldn’t really process them. After three days of the purest stress imaginable, Ambien-induced nightmare naps and an anti-anxiety trance had left me a zombie, a shell of my former self. Squeeze the most? Me?
“To be frank,” Sommer continued, “I think it’ll be impossible to get them to drop the case entirely. The next best thing is a deferred prosecution. A deferred prosecution, or DP, is when the government agrees not to move forward with the case and comes to an agreement with the defendant that if he can stay out of trouble for a set period of time—two years, three years, whatever—then they’ll agree not to bring it to trial. That’s a home run in this game. When you get back to your house later, Google a case I was hired on last year. Ramesh Chakrapani. He was a banker at Blackstone. I got the government to agree to defer his prosecution by illustrating that their view of the case, their view of his actions, was wrong. That it wasn’t consistent with the evidence and that they would be making a mistake taking him to trial and trying to convict.”
Here Sommer paused and leaned forward—possibly for dramatic effect, possibly just savoring the recollection of his previous victory.
“I hope to do the same in your case, Michael. You have to understand that this is a long shot, it’ll be difficult, but it’s not impossible, especially if there are key parts of the complaint or the government’s theory that are wrong.”
I exhaled a deep breath and offered a bland, “Okay.”
I understood what he was saying, but at the same time I couldn’t put any odds on it. As a trader, I’d always needed to know the chances of hitting worst-case scenario so I could mentally prepare myself. Here, though, the odds felt impossible to know.
Sommer was still speaking, leaning forward on his arms, and I didn’t want to interrupt him. I was sure there would be plenty of time for questions later.
“You see,” he went on, “the complaint is essentially the government’s roadmap of the case. In an abbreviated trial, this is what they would attempt to present and prove. But understand that this is baseline. Cases don’t get weaker over time, they get stronger. Defendants become informants, additional witnesses come forward, an investigation turns up new evidence. So don’t get your hopes up that this is it.”
He held up the complaint and gestured with it.
“There will be more.”
I nodded, trying to take it all in. I was hearing every sentence but each part brought up so many other thoughts and questions that Sommer was always three sentences past by the time my attention clicked back. I was scribbling notes ferociously.
“I’m telling you now,” I warned, “I’m going to ask you to repeat things again and again. Whether it’s stress or lack of sleep, I can’t seem to remember things like I used to.”
“Understood,” my lawyer said, as if I were not to first client to have this problem. “Now let’s look at the people. Give me a brief description or tell me about your background relationship with the people listed—Zvi and Nu and so forth. Start with the lawyer, Arthur Cutillo.”
“Never heard of him. Never met him before the arrest.”
“Never?”
“No. Never.”
“What about Jason Jenkins?”
“Same. Never.”
“Ok. What about David Plate?”
“Met him a handful of times. I think twice at this bar a lot of traders go to for happy hour. Then maybe one more time. I knew him really only as the guy who sat next to Zvi at Schottenfeld. He’s a smart technology analyst that used to work for Mario Gabelli. But I don’t really know him.”
“Gautham Shankar.”
“I think I spoke to him twice. Maybe three times. Barely know him. Same bar, same happy hour, small-talk chitchat and some macro market talk. I also vaguely remember interviewing him for a job. At some point he considered coming over to Incremental.”
“Drimal.”
“Less than a handful of times. He was an early passive investor in Incremental. He works at Galleon and is good friends with Zvi.”
“So then it seems like out of the nine people listed in the complaint, the only ones you really know are Zvi and Nu?”
“Yes.”
Sommer made a brief notation on his legal pad and then looked back up at me.
“Okay, let’s look at the complaint now. They allege two counts. One is a ‘substantive’ count of insider trading, meaning you actually made a trade they deem illegal, and the other is ‘conspiracy,’ a catch-all prosecutors use to try to entangle someone. It’s a very liberal, wide-net charge that covers an agreement be
tween two or more people to potentially do something wrong. You don’t need to actually commit the crime. You can be thinking about it or planning it. As long as you take a step toward committing the crime, you can be found guilty of conspiracy. You didn’t have to make the trade or be successful. Just having an agreement to commit insider trading would be enough.”
You can be convicted for your thoughts, I thought to myself. This was beginning to sound like a bad Orwellian dream, or a nightmarish science fiction from William Gibson or Philip K. Dick.
“That seems … ridiculous,” I stammered. I was still in shock over the idea that I might be going to prison for insider trading, without any actual trading.
“It may. But conspiracy is very broad and an effective tool for prosecutors. It’s how more than half the people in prison right now were convicted.”
“So again, because I’m not sure I heard you right, I can be convicted of conspiracy to commit insider trading without actually making any trades?”
“Yes. I know it’s hard to believe, but yes. You’re hearing me right.”
Stress, fear, shame, vodka—my brain cried out for and against each one. I thought, If the government is Sauron, conspiracy is the One Ring. The thing they can use to do whatever they want.
That was my first introduction to the concept of conspiracy. I would spend the next eighteen months debating my lawyers (and everyone else), trying to determine what it really meant and what it actually covered. When dozens of highly paid lawyers, defendants, prosecutors, and judges can’t give you a firm and final answer, you realize it’s nothing more than a magic hammer for prosecutors to smash defendants, suspects, and persons of interest into submission.
Insider trading without a trade. WTF?!
That overwhelming, almost suffocating feeling of dread that Moe had successfully dispelled over burgers with the kids was lunging back with an impressive counteroffensive.
“Now let’s go back to the complaint again,” Sommer continued. “The government alleges that on August 7th you, Zvi, Emanuel, Drimal, Shankar, and Plate all bought shares of 3Com while knowingly in possession of inside information. With regard to you, the complaint says you bought 10,000 shares while in possession of nonpublic information that was knowingly acquired from someone in breach of their fiduciary duty on that date. Do you remember buying shares that day?”
“Not really,” I said. “But it’s highly unlikely that I did.”
“Why?”
“Because I was in DC, at the Federal Reserve, having lunch with my father-in-law.”
“Was anyone else at lunch with you?”
“Yes. My wife … and Alan Greenspan and Ben Bernanke.”
Sommer looked at me for several seconds without saying a word.
“Are you serious?” he finally managed to ask, even though his gut instinct was probably to shout: “Stop fucking around here. Your life is on the line and this isn’t the time for jokes.”
But I wasn’t kidding.
I told Sommer that my father-in-law, formerly the president of the Chicago Federal Reserve, had his retirement luncheon in DC on that date.
“My wife and I sat at a table with Greenspan, Bernanke, my father-in-law, and a few other Fed Heads. Greenspan and my wife discussed which vegetables gave him gas pains, and Bernanke and my eight-year-old nephew had engaged in that timeless debate—Red Sox or Yankees.”
Sommer was still staring straight at me. I’m sure he had a question or two, but with a new client the best approach is caution, until you find out what makes them tick.
“Oh … kay,” he said. “I assume you have some sort of documentation to verify this?”
“Yup, I do. I checked before I came here and have credit card receipts of my hotel stay, flight itinerary … all the stuff like that.”
“And you didn’t have a laptop or anything with you, or have someone execute trades for you while you were there?”
“No,” I said. “We were at the Fed and they were meeting on interest rates. There’s a limit on what technology you can bring in when that’s going on. They had a strict ‘no laptops or cell phones’ policy until after the decision was released. And, I mean, it’s not like I knew the decision, but I do remember thinking if I could backdoor Bernanke into revealing it and find a carrier pigeon, I could make a lot of money. The Fed makes its decision around noon and then they embargo it until 2:15 p.m., when they disseminate it publicly to the markets.”
“And you are absolutely positive that was August 7, 2007?” Sommer asked again. It seemed that he still did not fully believe what I was saying.
“Yes,” I insisted.
“Well … I’ll have to see that documentation,” Sommer said, seeming to relent somewhat. “It’s hard to believe the government would get that date wrong. That’s the most essential part of this complaint. If that’s wrong, it’s a serious fuck-up. Very sloppy.”
Sommer shook his head. He consulted the page before him. Then he began again.
“Do you remember trading 3Com ever around this time period?”
“Yes,” I said. “I don’t have my records from Quad Capital, where I was working at the time. But in my PA, my personal account, it shows that I traded 3Com on August 10th.”
“August 10th,” Sommer said with a smile “Three days later? Okay, that’s good. Let’s not get too excited here, because it may not be a big deal, but I like it. It breaks up their narrative that everyone traded on the same day. If they’re wrong about something as simple as a date, they can be wrong about other things. But what about the quote in the complaint? The one where Zvi tells you, ‘PF Chang’s, print it all out’?”
“I don’t remember that,” I said. “I know I traded Chang’s. I know I lost money in it. If we were trading it, and it was more of an intermediate than a day trade, I’d probably have had a research file on it.”
“OK. What about when you said, ‘There’s always a reason to be paranoid’? What about that quote?”
They had obviously tapped phone lines or bugged us to get these quotes in the complaints. But at that moment, I didn’t know which phone had been tapped, or which of my coworkers had been wired. If I had, it might have been easier to recall these conversations.
“Always a reason to be paranoid …” I slowly repeated, searching my brain for anything that felt familiar. “No idea. I don’t know when I said that, or what it was regarding. That’s my personality in business, though. I’m a paranoid guy. Or maybe that’s not even totally the right word. I’m always nervously trying to divine what’s next or where my weaknesses are. This is one of the riskiest, most regulated industries out there. You need to be skeptical and paranoid. Andy Grove, the CEO of Intel, even wrote a book called Only the Paranoid Survive. I’m not sure how paranoia is proof of a criminal mindset.”
“And what about; ‘Joked about it coming from a guy fixing a pothole’?”
“I kind of remember that one,” I said. “Vaguely. I can recall Zvi, in a pitch meeting once, saying something about how he occasionally gets information from a construction worker. There was a guy outside our window, drilling a pothole for Con Ed. I made a joke about how that was the guy Zvi gets his information from. You had to be there, but it was a good joke. I think the whole room cracked up.”
“Hmm, all right,” said Sommer neutrally. “So here’s the next step. I have a conversation with the government team prosecutors and the FBI lead case agent. I find out what they’re thinking and then I come back to you. They may want you to do a proffer.”
“What’s that?”
“That’s where we sit down in the same room with the Assistant US Attorneys, and maybe the FBI case agent, and they interrogate you.”
“Sounds lovely,” I said.
“My position on proffers is very simple,” Sommer said. “I don’t do them. They almost never help a defendant. More times than not, they get seriously hurt. It’s irrelevant whether or not you’re innocent. In a proffer, they can ask you vague questions and later say you didn
’t answer them fully. They can be sneaky and confusing about the dates, and then claim you answered incorrectly. Proffers are a way to cement a case if you’re a prosecutor, because the prosecutor can almost always hit the defendant with a perjury or obstruction of justice charge afterwards. It’s not just a ‘material misstatement’ they can get you for. Remember that. It’s a ‘material misstatement or omission.’ So they can say that while you answered truthfully, you failed to mention X, and that was an omission. Welcome to obstruction of justice and perjury. I take it you’ve heard the phrase: It’s not the crime, it’s the cover-up.”
“Watergate.”
I was well-versed in Nixonian lore.
“Proffers are designed to work that angle,” Sommer told me. “There are a lot of people in jail who aren’t there for any substantive crime, just perjury or obstruction. Look at Martha Stewart. It’s the same reason you never answer questions or speak to an FBI agent when they arrest or approach you. They use your answers as the basis to bring additional charges. It’s your word against theirs, and theirs always wins.”
“I’m starting to agree it makes sense to turn down a proffer,” I told him.
“Now …” Sommer said with a deep sigh. “We reach the part that I don’t like talking about and I’m sure you won’t either … money.”
“Lay it out for me,” I said, tightening my sphincter to prevent myself from flinching (or perhaps from actually soiling myself). I was praying the guy’s fee would be in my ballpark. I really liked Sommer and wanted him to represent me for this.
“Well, there are two phases here,” Sommer said, gently easing me into it. “We’re going to try to get this dismissed or resolved pre-indictment. For the pre-indictment phase, I can get by with a retainer of only $100,000. That’s just a retainer. If we use less, and the case gets dismissed or wraps up before then, you receive the balance of what hasn’t been used. That is, you get some of your money back.”
Confessions of a Wall Street Insider Page 5