Confessions of a Wall Street Insider

by Michael Kimelman

  JAMS seemed to relish being in a tight trading until a week later, when Nu was in Hawaii for his honeymoon. Nu had already lived and died for almost two months with this piece of garbage, and the stock seemed to enjoy Nu’s absence as a chance to engage in a little opportunistic volatility. On Monday, it broke its range on the downside and started to bleed … $1.30 … $1.20. By Tuesday we were looking at $1.10. On Thursday morning, Nu’s assistant Eric was fielding an angry, panicked call from Hawaii. Eric had to check twice to make sure that he had heard Nu correctly: “You want me to blow out of the entire position right now?”

  I typed it up on my trading screen and readied myself for fireworks. As the first large prints began to come through and the stock started ticking violently downward for no apparent reason, I whispered “foot in the aisle” to the guys in my row and starting putting in my buy orders lower. JAMS was a relatively thin trading stock, and Nu’s 200,000-share “out-in-a-hurry” market sale smashed it. When the $1 level broke, additional stop losses were triggered and the stock traded down to 90 cents in a heartbeat. As soon as $1 broke, I was bidding and bidding, scooping Nu’s puke and then buying back up to $1 when it started bouncing. I unloaded the entire position at $1.30 a week later, to break even overall in the trade. It was nice to be on the receiving end of a panic trade for a change.

  I felt slightly bad for Nu, certain that the JAMS implosion and call to Eric would remain the primary memory of his honeymoon. I had seen this movie before. In fact, I had starred in the original*. But my sympathy was tempered when I waited, and waited, and waited even more for a follow-up call from Zvi, Nu, or Eric to say that these guys had hit the eject button and I was flying solo. It eventually came days later, but too late to be of any use whatsoever. As I would slowly but surely learn, after a few weeks in a stock, Zvi would typically become disillusioned and snap if you asked him a follow-up question. Ostensibly, this type of reaction was a manifestation of his frustration and hypersensitivity with the underperformance of the position.

  A cliché in the trading business is that there’s always another train leaving the station. The challenge, however, was always to find the one that was going to reach its intended destination before it derailed. I was learning that, in Zvi’s mind, such an action was an admission of defeat. I thought that was nuts. There were no “sure things” in this game (at least not for people at our level). Everyone that’s been in the industry for more than a few years knows that the timeless admonition of caveat emptor reigns supreme. We’re all adults. You swim at your own risk. Zvi was learning by trial and error. Mostly error, but he was on the right path and just had a little growing up to do—all part of the learning curve.

  I privately decided that if he could ever learn or be taught to distinguish between a nugget of gold from a nugget of fool’s gold, he had the potential to be the real thing. And with this little bit of maturing and molding on my part, we would get there together.

  Fast forward to our next softball season. I’d been working at Remsenberg for several months. We were back at Blondie’s on the Upper West Side after a game. It was after my seventh shot and seventh beer, following a big victory against a team from Price Waterhouse, when Zvi leaned in and started telling me how he would soon be running a billion-dollar hedge fund. I listened politely—drunk and under the impression I was being bullshitted—with one eye on the Yankee game in the background. Zvi wanted to raise his own fund. He complained that his current boss was taking every one of his ideas and passing them off to their clients as his own. To listen to Zvi, it sounded like David Winters and Bob Jaffe were putting up impressive numbers solely because some unknown broker’s assistant’s assistant was feeding them his brilliant ideas. Yet it wasn’t entirely implausible. It had happened before.

  I got bored and said: “I’m going to lighten on ATYT.”

  “Why?” Zvi asked. He appeared not to mind having his tale derailed, but also suddenly seemed worried. This was because Zvi had been the genesis of the “get long on ATYT” idea a month before, a call buttressed by JD and his contacts at hedge fund SAC.

  “Garrett is concerned how one-sided our firm is in it,” I said invoking Remsenberg’s risk manager. “I’m also hesitant because the rumors are so pronounced and the stock price hasn’t ticked up at all.”

  For weeks, ATYT had been the subject of wide-eyed tales of takeover.

  “Don’t you think if someone was kicking the tires, the stock price would be climbing higher?” I added dismissively. “This thing is on its ass still.”

  “Don’t sell a share,” Zvi said, and took a long sip of his beer.

  When all I did was raise an eyebrow, he began to fill the silence.

  “What I’m about to tell you can’t go to anyone else,” he said softly.

  “If you tell me not to tell anyone else, I don’t tell anyone else,” I assured him, and thank God I didn’t. JAMS, BGO, TWX, HD, KGC, ALEX, BMHC … the list of stocks where he told me to “load the boat” went on and on—a long shortlist. Indeed, if I had told anyone else about these “high conviction calls” from Zvi there’d be a lynch mob out after me, with torches and pitchforks. I almost laughed at the dichotomy between the caliber he ascribed to himself and his information and the objective reality of his actual performance.

  “So last week, one of my Galleon guys calls me,” Zvi said, still sotto voce. “Long story short, this is the guy who originally told me about ATYT, and he knew about it because he sits near Raj’s execution trader. During lunch, he overheard Raj’s trader on the phone say, ‘He wants 500 thousand more ATYT?’ in a really surprised voice. My guy asked him what was up, and the guy told my guy he didn’t know anything except that that Raj was buying ATYT for size again. It’s now one of Galleon’s biggest positions.”

  Zvi took another long sip from his Amstel. It seemed as though the oracle had spoken.

  “Um, okay. Cool. Thanks, man,” I managed, trying to flag down the waitress for another round.

  “Idiot, that’s not the story.”

  “Oh? Then what is?”

  “Later, my guy is taking a piss next to Raj in the men’s room … And Raj asks him what he’s doing today. My guy says to Raj, ‘Please don’t ever talk to me when I’ve got my dick in my hand!’ which Raj thinks is hysterical and practically pisses all over himself. Then my buddy says he’s only kidding and asks Raj if he saw the article in Light Reading on ATYT.”

  Light Reading was an industry rag focusing on networking.

  “Raj said he hadn’t, and asked him to send it over to Ian, his trader,” Zvi continued. “My guy then says ‘What do you think of the name here?’ to which Raj replies with a devilish smile, ‘Buy it. This one is for your kids’ IRA.’ Your KIDS’ IRA! FOR YOUR KIDS’ IRA!”

  Zvi was shouting and people at the bar were looking over.

  “Do you know what that means?” he continued, wide-eyed.

  I actually didn’t, and not just because the number of beers I’d consumed was nearing double digits. I had no fucking clue what it meant. The phrasing was familiar, though. I had heard people describe high conviction ideas as “Buy it for your retirement fund,” or “Buy it in your IRA.” Retirement funds are supposed to be the safest, most conservative investments, so the connection was that if you were buying it in your IRA it was a safe, high conviction play. “Buy it for your kid’s college fund” was another one, meaning essentially the same thing. But buy it for your kids’ IRA? Was this an investment Minotaur, some mythological, rare, ultimate hybrid of safety and return, or just some Sri Lankan mogul with piss on his hands confusing the investment lexicon?

  “Are kids even allowed to have IRAs?” I asked with a wiseass smile. “I’ve never heard of that.”

  Zvi looked at me like I’d suddenly grown a second nose one my face.

  “Are you fucking retarded? Who cares if kids are allowed to have IRAs? This is the King saying he was buying it for his kids’ IRA.”

  “Wait, wait, wait,” I said drunkenly. “You told
me he told your friend to buy it for his kids’ IRA, not that Raj was buying it for his kids’ IRA.”

  “WHAT FUCKING DIFFERENCE DOES THAT MAKE?” Zvi exploded, slamming his beer bottle onto the table and sending foam billowing.

  “I’m just trying to get the story straight,” I said trying not to smile. He stared at me like he was deciding whether to put me in a headlock, smash his beer over my head, or maybe—just maybe—keep talking.

  “You’re missing the point,” he said, finally lowering his voice again. “You’re missing the point because you’re drunk, Michael. The King is saying ‘Be there.’ Do you realize how rare it is to get that type of edge in a stock? This is Raj. He makes more money in a day than you and your whole fucking family have made their entire lives; he is the best tech investor in the game. Period. You ignore a call like that at your own peril. I’m going to be there for size.”

  A lot of what Zvi was saying was true, or at least close to it.

  At the time, Raj’s reputation was pure gold. Universally considered one of the smartest guys in the tech space, Raj had built Galleon from $10 million to $7 billion in less than a decade. He was friends and partners with a Who’s Who of investors and contacts throughout the industry. I was debating telling Zvi that my daughter Sylvie was now two, and maybe I should actually check into opening up an IRA for her. Zvi’s teeth were grinding in frustration and the jaw muscle in his right upper cheekbone was popping in and out like a golf ball with a heartbeat.

  A core trait of Zvi’s was that he lacked all patience with other people’s questions or perspectives. After a certain point, Zvi would simply shut down, and any subsequent comment or argument would only enrage him. It was like dealing with the Incredible Hulk. In fact, according to Nu, Zvi even had a nine-inch foam action doll of the Hulk on his desk. (That bothered me. Not just because the Hulk was an irrational beast brimming with violence, and Zvi seemed to embody some of these characteristics, but because I loved the Hulk and felt an emotional connection to him. Growing up, I’d bonded with the big green monster. He was my favorite superhero. That he should have any connection to a guy like Zvi was always somehow disheartening.)

  Anyhow, I left the bar before Zvi could turn green and smash the place up.

  The next day, the tension at Remsenberg rivaled Kennedy’s blockade of Cuba, with the potential for full-scale global thermonuclear war.

  Nu had tried to buy another 10,000 shares each of ATYT and RBAK, as Zvi had hinted he should the night before. But the orders were rejected by the system, flashing him a message that he had exceeded his intraday buying power. Nu went to discuss the situation with Garrett and was told that he couldn’t be leveraged more than 6 to 1. That meant if Nu had $100,000 on deposit, he could purchase only $600,000 worth of stock. After Nu growled for a few seconds, Garrett turned spineless and immediately pointed the finger at JD. Two critical traits for a risk manager are (1) forewarned consistency, so traders know what is expected of them, and (2) a sturdy, healthy spine. Remsenberg’s risk parameters were ad hoc at best, and Garrett’s spine was never featured on the back of a milk carton because he never had one in the first place.

  Nu went to the conference room to fill in Zvi on the situation via conference call. I imagined that from Zvi’s point of view, this was no less a declaration of war than the Japanese bombing Pearl Harbor. There had been an hour of back and forth shuttling to and from Garrett’s room, the conference room, and a furious barrage of IMs between Zvi, Mancuso, JD, Garrett, and Nu. The end result was me (how’d I get dragged into this?) and everyone in the conference room, sans JD, with Joe frantically telling us that Zvi was coming down to the firm “to break JD’s legs.”

  I laughed out loud when Joe said this. The rest of the people in the room looked at me like I was out of my mind. This, it seemed, was serious business. I thought it was pure bluster, but my colleagues Nu, Joe, Eric, and Garrett were all guzzling the Zvi Kool-Aid. As if it were prophesied and already written, Garrett instructed us that the only chance JD had of saving his legs was for this determined Fellowship of the Conference Room to intervene somehow on his behalf. I still didn’t know Zvi that well and was unabashedly eager to see what kind of a person breaks another guy’s legs over proper financial risk management. I had intended to go out and grab a sandwich for lunch, but now I was prepared to stay and go hungry just to see how it would all play out.

  Actual fights on trading floors are extremely rare. There had been one wrestling match back at Datek, but that had been over issues of religious jingoism. A Pakistani trader had referred to Rediff, an Indian software company, as “pig shit.” An Indian trader had taken exception and offered a few choice words about the relative attractiveness of the Indian stock market compared to Pakistan’s. A few seconds later, one of them—I forget which—went all-in and brought up the disputed region of Kashmir. That was it. They ended up wrestling on the floor to the wild cheers of the rest of the traders.

  Ever the peacemaker, I went to the group with an idea. I proposed that if Nu bought puts on the position, we should really only calculate the exposure based on the part that was unhedged. This meant that if ATYT was trading at $15 and Nu bought puts with a strike price of $10, he really would only have $5 of exposure, because if the stock traded under $10, he would be protected from all further losses by the puts. The group seemed to like my solution and murmured their approval. Perhaps my proposal was the difference—perhaps not—but either way Joe intercepted a fuming Zvi on the street and cooler heads prevailed.

  Regrettably, my compromise may have avoided short term pain for JD, but it enhanced the myth of Zvi the Hulk. In retrospect, it would have been better to instruct Joe to stand down and let Zvi rage. Had Zvi’s bluff been called then, Zvi might have been much easier to deal with in the future. Instead, the threat of violence, which is always much more effective than actual violence, was left unchecked. And in the future, Zvi would use it to get his way.

  You won’t like me when I’m angry, Hulk would say. I tended to believe Zvi was telling the truth.

  * During the tech meltdown in 2000, I had shorted SUNW, the last tech soldier standing, and done so relentlessly, only to cover the day before my wedding/honeymoon. SUNW proceeded to drop 25 percent in the next two weeks, which would have paid for several dozen honeymoons had I still been short.

  CHAPTER EIGHT

  HERE TODAY, IN LIMBO

  ______________

  AMERICA IS AN ADD NATION. WE want things right now—from food to sex to entertainment. Americans will complain if a movie goes over two hours. Our parents and grandparents gladly sat through Gone With the Wind, Ben Hur, and Lawrence of Arabia. When it comes to courtroom dramas, we want our results lightning fast. Every movie goes from arrest to trial to resolution lickety split. On TV shows like Law & Order, they do it in forty minutes, if you don’t count commercials.

  The reality of a legal proceeding could not feel or smell or taste more different.

  Days meld into weeks, weeks into months, and so on, ad infinitum, as you weigh your options and seek solace in meds, booze, and denial. For me, in the months after my arrest, I consulted regularly with Moe and Sommer, with my parents, with a very select group of friends, and of course with Lisa. It was never easy, with any of them. I had my pick of options and scenarios for my future—from the sublime to the terrifying. There was also a new, surreal, unsettlingly routine to our daily lives. It was like walking through a nightmare. I had a genuine sense that at any point I might just wake up and it would all be over with. With one abrupt snapping awake, life as I knew it, and wanted it, would return. Of course that never happened. The nightmare was very real indeed. And it seemed to become even more real when I realized that I was still under observation.

  Sunday morning was traditionally my “me and the kids time,” which allowed Lisa to sleep late. But on one given Sunday during this period, Lisa got up early and we all decided to head to the Rye Bagel Shop, one town over from Larchmont.

  We drove to the r
estaurant; Lisa and our four-year-old, Cam, secured a table in front. With eleven-month-old Phinnie in my arms, Sylvie and I juggled an order for five that included the all-powerful aromatherapy of fresh black coffee and a garlic bagel for me, and other assorted bagels, cream cheese, and juices for the rest of the gang. I scooped up Phin like a running back gripping a football, balancing a crowded tray in my free hand, with Syl doing her best with the juices. Then, as we duck-walked back to the table in the front, I saw a man watching us. He was in his late thirties, with short black hair and a pock-marked face. His gaze was intense, unblinking. He also looked slightly familiar. The tendon in my left bicep was close to snapping, as little Phinnie continued to wriggle and squirm. I got to the table and began unloading bagels and cream cheeses and juices. I strapped Phin into the wooden high chair and sat down, eager to put some food and caffeine in my system. I took a bite of the bagel and looked up: the pockmarked man was still there, chatting to the cashier and handing over a bill in exchange for a cup of coffee. He turned and stared me right in the face. Where the hell do I know this guy from? I wondered. I had seen him before, I was certain, but couldn’t place it. He was not smiling as if he knew me. Rather, it was a strange, blank expression. He got his change, took another long look right at me—right through me—and turned around and walked out.

  “Hello, hun—are you here with us?” Lisa called playfully.

  “That guy who’s leaving, do we know him from somewhere?” I pointed him out to Lisa. She swiveled around just as he departed.

  “That guy? I can’t really see his face from here. Phinnie, NO!”

  Our toddler was intentionally dribbling juice out of his mouth, to the giggling delight of his older brother and sister.

  We were seated by the window and I had a clear view of Purchase Street. Twenty yards away, the pockmarked guy was crossing the road. As he did, he glanced back over his shoulder at us once more. Something about his walk … and then it hit me. It was David Makol, the lead FBI agent on my case. My interaction with him the day of my arrest had been brief. While in the booking tank, he had ripped the cell out of my hand while I was on the phone with Matt Subilia, Incremental’s CFO, trying to get him to dump our positions, fully aware of the inevitable bloodbath once word of our arrests hit the wire (little did I know that we were already on the CNBC loop, and Goldman had pulled the plug).