Confessions of a Wall Street Insider

by Michael Kimelman

  We went drinking Thursday evening, but agreed to cut our customary twelve to fifteen drinks to a sobering six to eight. Around 7:30 p.m., Zvi took a call from Craig Drimal, and when he came back told us we’d be having an extra guest the next day at Incremental. I asked who.

  “The one and only Gary Rosenbach,” Zvi said with a devilish grin, referring to Raj’s partner and billionaire cofounder of Galleon.

  Sure enough, at eight the next morning, ninety minutes before the market opened, Todd and Gary arrived. Todd was decked out in hedge fund master casual—charcoal-gray slacks and an expensive blue cotton mini-check oxford with the sleeves rolled up. Gary was a bit more casual, wearing cotton khakis and Timberland slip-ons, a light gray wool V-neck sweater, and a white T-shirt that was frayed around the collar.

  The meeting began well. Our pitch seemed to work its magic, just as it always did.

  Perhaps it was because he had recently left Galleon—or because he was in the process of retiring—but Gary came off as less fearsome than his “Sicilian Jew” reputation.

  At first.

  Towards the end, Gary suddenly grew restless—just as Zvi would often do—tapping his hands and rolling his eyes in their sockets.

  “So, let me just cut to the chase,” he said as our pitch concluded. “What makes you guys different? Why should I give you my money? How do I know you’re not just going to blow it up like every other asshole out there?”

  Zvi could sense a kindred spirit in Gary, and opened his mouth to say something bellicose and braggy. I cut him off before he could even get started.

  “Because we’re fanatical about risk management,” I said. “So fanatical, in fact, that we sat down with RBC and reprogrammed their software to meet our needs. Strict position limits, concentration limits, in real time. We keep reserves to protect against netting risk and, again, what Galleon and the others missed. You guys paid tens, maybe hundreds of millions in commissions. Now it may have been a net plus because you got the first call from analysts and got hooked up in the IPO and secondaries, but we’re still going to get some of those on the strength of Mike Curtis’s* relations and, even better, we cut a very aggressive deal with Goldman where we keep those commissions in-house. We’ll pay them .03 a share, charge our traders .10, and keep the million or more in monthly commissions in the till. If we’re trading with an unlevered $25 million capital base, with the turnover you’re talking anywhere from $10 mil and up in commissions. That’s a 40 percent return … if we break even trading. Let that sink in. Even if we if we lose money, we’ve got a $10 million cushion, giving us the ability to withstand some serious drawdowns and not lose a penny! That’s the model you guys want to be involved with. And this is a golden age for fallen angels—guys like George Rubis, Tim Pierotti**, and a bunch of SAC folks who have returned double digits for years, and just suffered a once-in-a-lifetime setback. We’re picking these guys up for pennies on the dollar.”

  Gary bought it all. You could see it in his face. He saw the chance to do something on his own, without Raj. Moreover, it was something that wouldn’t require major oversight on his part. He could check in from Colorado while he was rustling steers on the high plains, and/or make Todd his eyes and ears.

  “I might not do the whole $25 million,” he allowed cautiously.

  $25 million?!

  Then I understood.

  Without telling me, Zvi must have told Drimal—or even Gary himself!—that we wanted $25 million … not the $10 million we were actually looking for.

  “But I’ll do at least $10 million,” Gary finished.

  Jesus. That was the best “bad news letdown” I’d ever heard in my life. It took everything for me not to smile and ask Gary if he needed the wiring info, then and there.

  Zvi and I walked Todd and Gary to the elevator and shook hands, making plans to speak again soon. When we turned back around, with ear-to-ear grins, there was Tim Pierotti, a former Galleon trader who was now working for us. He looked as though he’d seen a ghost.

  “Was that Todd Deutsch and Gary?” he asked, incredulous.

  “Yup,” I said. “We’ve been talking to Todd about investing, and now it looks like Gary might be along for the ride.”

  “Wow, I was thinking about talking to Leon Shaulov about coming in, but I’m glad I didn’t if you guys already have Todd.”

  “Why not both?” I wondered aloud.

  Tim’s jaw dropped.

  “Are you kidding me? Those guys want to kill each other … and practically did on more than one occasion on the trading floor.”

  “Todd and Leon almost fought?” I asked. “Seriously? I never heard that.”

  Tim nodded.

  “When Todd was getting mauled in 2007 at Galleon, Leon was printing money and being very loud about it on the desk. Todd snapped one day and screamed at Leon to shut the fuck up. Leon came right back at him with, ‘Oh, I get it, Todd. The reason you’re losing money is because I’m too loud. Okay. I got it, big guy.’ Todd had been merciless on the desk for the previous three years, calling anyone that couldn’t keep up with him ‘a member of the JV’ or ‘an amateur.’ Anyway, Todd rushed him and the rest of the floor broke it up. I really think they might’ve killed each other if it had been allowed to go on.”

  “Good to know,” I said. “We’ll put them on separate floors if Galleon goes under.”

  At the bar that night, Zvi and I were genuinely psyched. It had been an ungodly grind, but it looked like we could be close to finished. Maybe we had really done it. Maybe this was it!

  I kept my emotions in check, however, since I’d seen more than one deal fall through in the “paper up” stage. With Todd already on board, and now Gary wanting to play the bank, we seemed in good shape, though. I was still a little disappointed that we hadn’t been able to finalize the deal with Stevie yet, but this was still a big development. Enormous, in fact. And there was a chance that we might still be able to also work Stevie into a minority investor deal with us, as they were with MERC.

  “What does this mean for MERC?” I asked Zvi.

  “What does it mean for MERC?” Zvi almost spat the last word. “It means they can sit on my dick and spin. Fuck MERC. Those guys are fucking scumbags anyway. I would never go into business with them except as a last resort.”

  I didn’t agree with the scumbag part, but certainly wasn’t jazzed up to have them as a partner.

  “Okay, but let’s not say anything to them until Gary and Todd have money deposited, papers signed and we’re rolling,” I cautioned.

  “Gotcha,” Zvi replied.

  Would he actually have the sense to hold his tongue? I could only pray.

  The next thing that happened was I got a call from Craig Drimal. You’ll recall that at this point, Drimal was a limited investor in Incremental, but still worked for Galleon.

  “It’s Gary Rosenbach,” Drimal said, naming his investor friend. “He just called me and … well … I think something very bad is happening.”

  “What?” I said. “Spit it out.”

  “It happened at a party at Steve Starker’s house,” Drimal began.

  Starker’s house was near Old Oaks, the elite old-guard Jewish country club in Purchase where Starker, Gary Rosenbach, Eric Mindich, and dozens of other Westchester power players were members. Drimal explained that all these folks had been at the party, along with Mike Brown, MERC’s co-CEO. Brown mentioned he was putting money into this hot new prop fund called Incremental. Gary, somewhat surprised, said he was also looking at us and possibly considering investing. Then Brown mentioned that an ex-Galleon guy was running it.

  Gary had been blindsided by this detail and belligerently asked who the hell it was.

  “Why, Zvi Goffer,” Brown had said, confused that Gary could be considering making an investment of his own without knowing this most-basic basic fact.

  Incredibly, Gary, a managing partner of Galleon, had never known that Zvi had been employed at Galleon! Apparently Raj had kept Zvi a secret from
Gary. Such a thing seemed almost impossible! Even if Zvi didn’t sit on the main trading floor, he attended the morning meetings. And Drimal had never bothered to tell Gary about Zvi’s background either—he just assumed Gary knew.

  “He was pissed, Mike,” Drimal told me. “Very pissed.”

  And he was.

  No one could have predicted Gary’s response. Gary felt deceived and lied to, and soon cut off all contact with us.

  The deal was off.

  If that seems extreme to you, then you need to understand Gary.

  He was very controlling—with a legendary, vindictive temper that had more than earned him his “Sicilian Jew” nickname, in both his personal and professional life. Galleon was his baby and he wanted to be in control and have a say/stake in every part of it. But Raj was the real power behind Galleon. Gary knew this, and their partnership had been fraying for years. For Gary not to know that Zvi had been a portfolio manager at his own shop was beyond humiliating. More than that, it raised red flags for Gary that Drimal might be working with Raj to do things behind his back. Gary thought of Drimal as one of his acolytes. Gary expected Drimal to stay loyal, and to keep him abreast of everything. That, obviously, had not happened.

  So less than a week after our savior had appeared, he was gone, felled by an offhand comment at a suburban BBQ. This chance conversation also probably erased any prospect we had that Starker was going to invest. On top of that, MERC knew we were still shopping. Zvi, Drimal, and Raj’s complicity had essentially knocked down nearly all of our investment prospect pins with a single bowling ball.

  The loss was devastating.

  Just as it all began to feel totally hopeless, Todd Deutsch called to say he was still interested. Yeah, MERC was pissed, he said, but their deal was still on the table; they were also getting more aggressive on the terms … and all the while the doomsday clock was ticking steadily down.

  Todd, at thirty-eight years old, did have one major oddity: his dad ran all his money, estimated at around $150 million.

  “Go out to Long Island and talk to him,” Todd told me. “If you can get my dad on board, then I’m in.”

  Matt Subilia, our CFO, accompanied me on a hurried journey out to the Deutsch estate, which was in fact a fairly average house in Oyster Bay, with a big backyard and a swimming pool. We were given the grand tour personally by Todd’s dad. This tour included mementos of Todd’s basketball accomplishments at Oyster Bay High School, with mandatory viewings of video of some of his high school playoff games. Having attended a Los Angeles public school with several alums who’d gone on to play for UNLV, I politely feigned interest in Todd schooling a group of short Jewish kids for a few minutes before suggesting we catch one of the last Indian summer days out on his elevated deck. Deutsch Senior told us to get comfortable, that his wife would rustle up some food, and brought out an eighteen-pack of Coors Light from the fridge. The sight made me grimace. After a particularly rough Tuesday night—so rough, I didn’t realize until I found my receipt in my pocket the next day that I’d caught a cab from 46th and 3rd to Grand Central, a mere three blocks away—I’d decided it was detox time, and had committed myself to not drinking for three days, just to dry out a little. But that had been yesterday, and today there was a bunch of Coors Light in front of me and a guy with an expression that seemed to say: “Time to chug, son, and I’ll write you a $75K check for every beer you get down.” Since Matt was the designated driver, I ended up knocking back about half of them on an empty stomach. To his credit, Mr. Deutsch knocked back quite a few himself.

  And all the time I had to listen to Mr. Deutsch reminisce about famous people he knew.

  “Marty Schotteheimer kicked my ass in college.”

  “Doug Kass and I are friends, but I don’t want to give him money.”

  It went on and on.

  His wife made some unidentifiable hors d’oeuvres, which I whispered to Matt that he’d better eat if he wanted to keep his job. (I watched him point out things in the greenery behind Mr. Deutsch while tossing most of it over his shoulder in the bushes). But at the end of the day, it was a done deal and we stumbled out.

  Todd would put in $250K on October 1, with another $500K to follow January 1. The amount was irrelevant; the important part was we had another hedge fund all-star with an impeccable reputation in our corner. From a recruiting and training perspective, there weren’t many names that could compare (sans the Big Guy, of course).

  At the same time, in a move I couldn’t have been happier about, Gittlin accepted our offer to come over as Incremental’s new CFO, and said he wanted to put some of his family’s money to work, in the area of $2 million to start with the promise of much more to follow.

  Bruce Gittlin, Adam’s father, was a big-time NYC landlord, with a net worth of “it doesn’t matter anymore.” The RBC cover was now less than thirty days away from vanishing. And as the squares on the calendar ticked off, the stress of trying to find capital to keep the firm afloat while simultaneously trading (and risk managing) one of the toughest markets in history was becoming increasingly brutal. We drank too much and I seemed to always have a hangover. I was simultaneously losing hair and gaining weight. Tick-tock, tick-tock, went everything in my life. Meanwhile, MERC was starting to make things difficult—first by telling us that they didn’t want Stevie Cohen involved at all and then by making unreasonable requests (aka demands). For example, they wanted to keep all the money in their own accounts, wanted to have a say on risk, and then on who we could hire. Soon, it was like RBC all over again. Instead of being a passive capital partner, what they really wanted was to co-manage Incremental, and with absolutely zero equities experience on their end.

  Is this how it happens? I wondered. Is this how it always is? How it must be? As good as it fucking gets? Is there no other way?

  It all felt so, so, hopeless.

  Then the king died.

  * Curtis was formerly head of syndicate trading at Galleon, meaning he was responsible for getting the firm allocations of stock in an IPO or secondary offering based on the huge amounts of commissions Galleon paid to those same firms and the strength of his contacts in the industry.

  ** Both skillful former Galleon portfolio managers.

  CHAPTER FIFTEEN

  THE KING IS DEAD

  ______________

  WITH THE DOOMSDAY CLOCK TICKING AWAY, my day-to-day the stress was borderline debilitating. Life at home suffered as well. I had started taking Ambien every night—alcohol alone, even in copious quantities, couldn’t quiet my wired mind anymore. I’d come home and listen to Lisa bemoan her catering disasters—the wrong extra virgin olive oil, or a stale crab puff causing a fury with some sexually frustrated Greenwich housewife. Yet when I mentioned my own concerns—the market tailspin, the back and forths with Incremental, the way every ally slowly became another RBC—all I heard, when I had a good trading day, was about our getting a second home, a new car, or a refinished kitchen.

  At Incremental we were beyond desperate now, and had decided to turn to a guy named Uri Cohen, whom Nu had once worked for at Spectrum Securities. Uri was a brilliant Orthodox Jew, strictly kosher, a tall, skinny thirty-year-old who wore thick eyeglasses and made a point of keeping out of the limelight. He was, more importantly, a trader at heart who made a fortune on the “rebalancing” once a quarter or year.*

  At our first meeting with Uri, he got us instantly. He loved the model, and was willing to give us exactly what we needed. I didn’t love it, but only because, frankly, Uri was a no-name brand—and yes, names mattered in the trading world. Besides, from a purely business perspective, we still had Gittlin’s money. But Nu and Zvi genuinely adored Uri. Nu had been trading his account at Uri’s firm only last year, but had allegedly made upwards of $7 million there. And Uri was the only one left who understood the risk, had the capital, and wasn’t making us dance through hoops. Deutsch’s dad had agreed to wire us the money on October 1 but then Todd had called us to say there had been a glitch of sorts
, travel-related, I believe*, and after apologizing profusely promised the wire would be authorized on the first of November. One month away felt like a goddamn eternity.

  And hey, Uri was onboard and ready to go all in with just a few minor details regarding structure and percentages left to work out. We scheduled a final meeting with him for October 16, 2009, to ink the deal. So it was a day like any other, right? Well, not quite. A mere few hours before we were scheduled to meet, Wall Street was rattled and the hedge fund world was rocked to its core by a 9.2 Richter scale event.

  With CNBC and Bloomberg streaming from multiple flat-panel televisions on most trading floors all day, it takes a lot to actually grab traders’ attention through the daily mash of noise. But the “BREAKING NEWS” scrolls and pictures of Raj being escorted handcuffed by FBI agents in flak jackets with the sub-headline “Galleon Co-Founder Raj Rajaratnam Arrested” did it in a big way.

  “Turn this up!” came screams from the trading floor as we all stopped what we were doing and looked on in stunned silence. With half a dozen ex-Galleon guys on our floor, and Zvi’s close ties with Rajaratnam still very much intact, the news blaring from the TV speakers was very, very relevant to all of us. As we sat there quietly and digested the CNBC loop, Franz Tudor slowly walked over to Zvi’s desk and motioned him over. I could hear them speaking.

  “This is crazy, right?” Franz said. “Do we have anything to be concerned about?”

  “It’s fucking nuts. I don’t know. I mean this is … this is really fucked up.”

  Zvi did not sound confident—a true rarity.

  Franz did a walk-by on several other traders—Nu, Joe Mancuso, some of the Galleon guys, and myself—just to get a read on how we were feeling.

  “Mike, are you worried?” Franz whispered.

  “About what? Raj? What do you think they got him on?”

  As I said at the start, when I first heard about Raj, I was only thinking about sex. Raj was supposed to be an over-the-top hedonist. To me, the likeliest scenario was that someone had snuck into one of his famed parties who wasn’t quite eighteen.