I was pacing now, heart racing, head swirling.
“To me it does,” Sommer answered soberly. “Clearly, it means something to you as well. And if we were forced to go to trial down the line, we would make those very powerful arguments. But remember that to laymen, circumstantial evidence can be convincing. How many times have you heard someone say, ‘I don’t believe in coincidence’? You be surprised how many people think that way. And that can put a rope around your neck. Uh … pardon the terminology.”
“What’s our next step?” I asked anxiously.
“Nothing,” Sommer said. “We wait to hear back from them. They’re going to discuss what they’ve heard today with their supervisors and with the head of the criminal division. If they come back to us and it’s clear they haven’t seen the light, then we continue to work our way up the ladder. All in all, Mike, this was a fairly positive meeting. There were no surprises.”
“I’m starting to think that you purposely waited until I was in Florida to hold this meeting, so you could be confident I wouldn’t show up at 26 Federal Plaza and give them an earful.”
“I can’t say the thought didn’t cross my mind,” he answered. “But no, the timing just happened to work out that way.”
Right. No surprises today.
Those wouldn’t come for another few weeks.
Our return home from Florida to Larchmont was a return to an inherently unknowable future. This was made painfully clear as soon as we got back. I was in the kitchen, playing with Phin and making him a bottle, when I heard Lisa yelling from her office.
“What do you mean they didn’t get paid? I don’t understand.”
That didn’t sound good.
Lisa’s catering business was always dancing from one catastrophe to another. I can’t tell you the number of times I’d had to deliver a last-minute tray of hand-rolled canapés or a vat of mojito mix to a McMansion in Greenwich, sometimes with our kids in the car. Usually we were able to pull everything off seamlessly. Somehow, in front of the green curtain, the clients were never the wiser that their pricey, beautifully executed party had come within a hair of potential disaster.
I was keeping Phin busy in his bouncy harness by offering him various dolls, which he would quickly toss off the tray and laugh. I would try to catch the dolls before they hit the ground. Lisa burst out of the office, breathing fire, tears of anger in her eyes. She motioned me into the living room, so we could talk.
“Mike,” she seethed. “None of my vendors have been paid, and I’ve had three servers call in the last hour to tell me their checks bounced.”
“What happened?”
“Why don’t you tell me?” she snapped.
“Me? What does this have to do with me?”
“I called the bank and they told me the account is frozen and in the process of being closed!” Lisa shouted. “THEY WON’T TELL ME WHY.”
“I don’t understand.”
“It has something to do with you,” Lisa sobbed. “She wouldn’t give me any details over the phone, but it was Rosie, the teller we always see, and she said it was because of you.”
I felt like collapsing.
Now they were dragging Lisa’s business down? For what? Why?
“I don’t get it,” I said.
“Is your account or the joint account working?” she demanded.
We had a joint account, and I also had my own personal account that I never got rid of when we married.
“I dunno. I haven’t gotten money out recently. I didn’t have a problem last week. I’ll go check.”
As soon as I logged in on my bank’s website, I faced a strange red warning that hovered over the “Accounts” page. It notified me that my account was indeed suspended, and said to please call customer service. I nearly vomited. I discovered the same notification when I tried to log into our joint account too.
“This is crazy,” I said, struggling to keep my voice at an even keel—Phin was right nearby—but Lisa lost it, screaming,
“What are we going to do, Mike? WE HAVE NO MONEY! YOUR SHIT IS FUCKING WITH MY BUSINESS NOW, MIKE!”
Her normally green eyes turned red, bloodshot with rage and pain.
“How could I do this? What did I do? Lisa, I didn’t do this. Let me call the bank. Maybe they’’ll talk to me.”
After waiting on hold for ten minutes, they finally patched me through to the manager.
“I’m not at liberty to say, sir. The only thing I can tell you is there is an ongoing investigation for a suspicious transaction.”
“What transaction?”
“I can’t say, sir.”
“Well what’s suspicious about it?”
“I can’t tell you that either, sir.”
“So, what can you tell me?”
“I can give you the number of corporate. Perhaps they can give you more information. I’m very sorry.”
I called, but it was a Saturday, and the recording said they were closed until Monday.
I hung up, defeated.
“WHAT ARE WE GOING TO DO?” Lisa screamed again, now starting to cry.
I reached over to comfort her but she pushed me away.
“NO! You did this to us. You put us all in danger. Everything. How could you?”
She bolted up the stairs.
I wanted to follow but knew nothing good could come of it. I knew Lisa. She needed time to calm down. Frankly, so did I. I stepped out to the front porch to catch my breath and put on the happy face for the kids. I had a sinking feeling that this was only an opening salvo.
As it turned out, I was right. Over the next week, all the dominoes began to tumble. My credit cards were declined, one by one, and then canceled. I received a vicious runaround from my bank’s corporate and local offices. They refused to provide a concrete reason, other than to tell me a “suspicious transaction” had taken place in my account. Finally, one senior customer service rep took pity on me and called me back on her cell phone, presumably to avoid the call being recorded internally, and told me that according to their system, I had been red flagged as a potential money launderer, and that there was no specific transaction. Someone in the government had sent my bank a little heads-up. I was sure that had to be it.
This made me furious.
There was even less evidence that I was a money launderer than that I’d traded 3Com on inside information. Yet, as I was later to learn, despite not presenting a single shred of evidence, the government had no problem convincing a magistrate judge to sign off on the money laundering charge in the complaint.
Imagine what that did to me. Try living day-to-day in our society with no bank account or credit cards. Try paying your mortgage every month with a money order from CVS. That was bad, but by far, the worst of it was the damage the government’s hardball tactics inflicted on Lisa’s catering business. Her checks to vendors bounced, she couldn’t pay staff, and she wasted countless hours trying unfreeze her accounts and credit cards. It severely damaged her business. At the time, her business was the only thing putting food on our table.
The government was trying to get me to cooperate or to plead out. Putting me on the equivalent of a financial no-fly list was just another tactic to that end. The damage to my wife and her business was acceptable collateral damage—as far as they were concerned—in their mission to get me to cop a plea.
I figured if I could absorb these blows and play rope-a-dope until the government had finished with discovery and the dirty tricks, then it would be our turn to go on the offensive. Little did I know that these were also pipe dreams. It was about to get even worse.
CHAPTER NINE
LEAP OF FAITH
______________
TO REALLY UNDERSTAND HOW WE ARRIVED at this point in our lives, it’s necessary to return to the past, to three years earlier. Almost a decade had passed since I had escaped the uptight legal world of Sullivan & Cromwell, the hundred-hour work week, and sleeping under my desk. Throughout my subsequent time as a trader—despite t
he assholes and the backstabbers—not a day went by that I regretted the decision to hang up my lawyer’s hat. The ride had never been dull. Hanging out at a bar and downing Ketel Ones among friends, even in the aftermath of the market, still seemed light years better than the suffocating sobriety of Sullivan & Cromwell. I probably could have coasted along like that indefinitely, allowing Lisa to spend a small fortune remodeling our kitchen, taking family vacations, and squirreling away a comfortable nest egg.
But then things started to unravel at Remsenberg. I left for greener pastures, but it soon became clear that they were never going to be as green as they should be. The only real way to get where I wanted, where I felt I needed to be, would require a gamble. It would be the biggest yet of my life. I would branch out and start my own firm.
Prop trading, potentially viewed, is a form of gambling. We on the Street prefer the term “speculation,” and realistically it is much more akin to a game of skill than chance (think poker vs. roulette), but there are still elements of chance to it. When the firm is yours, you become the house—and with that small fee on every trade tacked on, the house does always win … if only to a certain degree. If the traders are losing, and profits tumble, those small fees won’t save you.
I had made it easy—perhaps too easy—for the Goffer brothers to tempt me away from Quad Capital, where I had gone with Jon Deigan (JD) after the meltdown at Remsenberg. Incremental Capital (ICAP) had been my idea to begin with, so I was itching to go. I had done the legwork and the research. I knew what we needed, and it was exactly what we had. JD had the charisma; I would be the operational and trading brains. My biggest mistake, in retrospect, was planting the Incremental seed early in the Goffers’ minds, back when JD and I had collaborated on first marketing the Incremental concept.
The name said it all in terms of our goal. We’d be coupling a transactional model of commissions—just like the rake* in poker—while betting on talented traders taking small calculated risks. Incremental profits, bit by bit. But before I knew what was happening, JD had dropped out and Zvi was onboard.
I tried to adjust. Maybe it wouldn’t be so bad. I figured that with Zvi and Nu’s capital and connections, they would be okay minority partners for the fund. When JD fell out of the picture, any obstacle to their joining the firm went with him. In retrospect, of course, leaving was the smartest move JD ever made. His gut instinct about Zvi—that he was all talk and full of shit—was the correct one. And he never forgot Zvi’s physical threats back at Remsenberg.
While still at Remsenberg, I’d once broached the possibility of bringing aboard the Brothers Goffer to JD.
“I know you’re gonna hate the idea, but what if we just bring over Zvi and Nu and give them a tiny piece? These guys can recruit like mad and they’re good traders. Zvi has a lot of connections. Granted, a lot of them are bullshit, but he’s tight with a couple of these Galleon guys that are real hitters.”
“You know, you’re right,” JD said, and paused to stroke his chin before pointing a finger at me. “I do hate the idea. He’s a fucking retard and his brother is half that smart. That guy blows smoke, that’s all. Remember when he was going to break my legs for asking Nu to rein in his risk? And I saved the firm because of that. If those guys had been here for the Cypress disaster (CY:NYSE)* they’d have been down another $750K+. They’re no-talent Brooklyn knuckleheads. And that’s the generous assessment.”
I knew JD was right about a lot. They were inexperienced. But they were also fast learners and absolute animals when it came to making connections. And Zvi was also the #1 performer at Schottenfeld, a respected prop firm with a lot of great traders. You don’t get to be the top trader at a firm like that by accident.
For Zvi, running his own firm was a necessity. His personality made it inevitable that no matter where he went, he would eventually clash with management and be fired or quit—unless, that is, he became the manager himself. His attitude was, “I know more than you, so why the hell are you telling me what to do?” Oddly enough, on this particular issue, I saw his power wars with management as somewhat legitimate because he was right most of the time. This was not because Zvi was a genius, but because the typical managers were even dumber than he was. The reality is, most people running prop trading firms were absolute morons at that time. Capital was king, and if you had access to capital then you could open up a shop. Anybody with capital could. The formula was simple—capital, plus talent, plus a diligent risk management framework and you had an almost certain money maker. Capital was easy (or was before the financial world imploded in 2008). Risk management required finding the sweet and narrow middle ground. The so-called piker firms like Trillium or Schoenfeld Securities erred on the side of caution and produced small trading profits (but lots of commissions), and the so-called “cowboy firms” had no risk matrix whatsoever and were essentially ticking time bombs. You had to be in the tightrope’s middle, the sweet spot that reined in the shooters and the cowboys, but gave some leeway to traders with talent making smart, calculated bets.
As we began, I was anointed the brains of our operation, doing most of the legwork required to build the firm literally from scratch. Nu, I would quickly discover, was a first-class alcoholic, interested in little other than getting ripped. It was decided early on that his primary responsibility would be training a crew of young traders, and entertaining the more seasoned traders at Sutton Place, our local midtown-Manhattan watering hole. We had our spot unofficially reserved on the balcony overlooking the Second Avenue, and a regular set of bartenders who scrupulously attended to our every need.
I had heard enough about Zvi from people within the proprietary trading business to know that he should come equipped with warning lights. Zvi had made and lost a fortune at the Schottenfeld Group, along the way earning a reputation for being plugged in to the “smart money” pipeline. The “made a fortune” part was oft broadcast and widely known. The “lost a fortune” part was always concealed to the best of Zvi’s ability. Zvi often bragged about being the first trader at Schottenfeld to make over a half-million dollars in one day, for which he’d been rewarded with five bottles of Dom Perignon, delivered to his trading desk by the buxom receptionist. Zvi’s desk looked like a Dom tasting room, with dozens of bottles stacked neatly on top and underneath the desk, each courtesy of a $100K+ trading day. On his desk, Zvi had a red Staples “That Was Easy” button that he gleefully pressed every time he made a hugely profitable trade. Trading came easy for Zvi Goffer. Or so it seemed.
It was no secret that Zvi had left Schottenfeld to work directly for Raj Rajaratnam at the Galleon Group as a portfolio manager. It’s impossible to overemphasize the importance of this. It was important to our success at Incremental, but also one of the reasons Incremental got dubbed “Baby Galleon.”
The Galleon Group was a highly successful hedge fund. More than that, everyone in the business knew it was the epicenter of information on the Street. Not illegal insider information, per se (though later it turned out that Raj had a great deal of that as well*), but superb research and impeccable street connections—those most invaluable commodities in the trading game. Zvi also had excellent inside contacts at that motherlode of all hedge funds, Stevie Cohen’s SAC Capital. Because of these connections, with Zvi onboard, Incremental would ultimately raise $200 million to trade with, and our firm would be off to the races.
We were in the right place at the right time. Portfolio managers were being downsized by cost-cutting investment banks like Goldman Sachs, or fired from hedge funds. By the fall of 2009, Incremental Capital had hired more than fifty traders, mostly Ivy League graduates with outstanding track records. We also had a laundry list of some of the biggest names in the business—SAC Capital, Millennium Partners, Todd Deutsch—breaking down our doors to invest.
Working with Zvi, I learned more of his weird quirks. He shuffled his feet constantly under his desk, and would bite his nails until they literally bled. Quirks aside, I continued to feel I was in a good p
lace with a good partner. Once, when I brought Zvi to a Minyanville charity event during Incremental’s earliest days, Rick Schottenfeld came up to Zvi and pronounced, “I never should have let you go. You might very well be the next Stevie Cohen.” Cohen, at the time, was widely recognized as the most successful trader in history.
So I was hardly alone in seeing the talent and ability in Zvi, despite his flaws. I made the Faustian bargain. I took the risk. I told myself I could easily suffer through Zvi’s mania and irrationality. I chose to see whatever Raj and Schottenfeld saw in him. I was determined to play four corner defense, until I could gain more control, and then, as soon as all was right and I was correctly positioned, I planned to just sell the damn thing. That thing being Incremental. From the word go, I knew we were less than two years from monetizing it.
What I didn’t know was that there were already informants among us, wearing wires.
But I’m getting ahead of myself.
Our first serious backer at Incremental was Whitney Quillen, of W. Quillen Securities, as good a guy as there could be. An old-school gent whose family were proprietors of horses, manses, and superior jawlines, Whitney sublet us space at a very reasonable rate at 145 East 57th Street, right next door to Hammacher Schlemmer and Le Colonial. The latter had a French-Vietnamese themed bar upstairs that reminded me of what it must have been like in Saigon before the shit hit the fan. The Gerber Group also had offices in our building, which meant we kept our eyes open for Gerber’s wife, Cindy Crawford. Whitney was enamored of Zvi after their first meeting. In exchange for a sweetheart deal on rent, he asked Zvi to make some trades through his desk. We had a “friend” on the desk anyway in Adam Weinstein (not his real name), who had put the final nail in Remsenberg not too long ago after perpetually playing Ahab to the white whale of Steve Jobs’s Apple.
Around this time I had a brilliant idea that I would revisit later with another trader. Algo trading, or computerized program trading, was just starting to make a big splash on Wall Street. My idea was to build a black box that would take the trades of certain designated traders and “flip” them on the back end so that buys become sells and sells become buys. You could apply it to a trader like “Adam,” who loses large sums of money most of the time, and mirror his executions without his knowing. So if Adam is down $5K, he’d actually be up $5K. The Algo would turn a trader with an abysmally low win ratio into a gold mine by doing the exact opposite of what he was doing. It worked for George Costanza, why couldn’t it work for ”Adam Weinstein”?
Confessions of a Wall Street Insider Page 13