Not so uncomfortable that Slaine wouldn’t eventually dabble in it himself. He left Galleon to start his own hedge fund with two traders who had left SAC Capital. The fund dissolved for performance reasons, and then after bouncing around a bit Slaine landed at a hedge fund known as Chelsey Capital, the same Chelsey Capital where Erik Franklin had worked when he was busted for insider trading in 2007.
Slaine was there for only a short stint, less than a year beginning in February 2002, before ultimately setting out on his own, using his connections to both hedge funds and the Wall Street banking business to manage money. And he had largely dropped out of sight except for several honorable mentions in a book about the Wall Street trading culture, The Other Side of Wall Street, written by Todd Harrison, a former trader turned financial website entrepreneur. Slaine was described as a tough but fair trader who loved the action of “the desk” as much as he loved working out. Harrison also described Slaine as someone who understood at least some of Wall Street’s dark side; it’s a place where many of your friends exist as long as you help make them money.
With his muscular physique and blue-collar Boston accent, David Slaine was an intimidating presence even on Wall Street trading floors. People who know him say he came from fairly humble beginnings on the Wall Street scale where many of its highest paid people attend private academies and Ivy League colleges.
Those close to Slaine describe him as a product of a broken home, in middle class Malden, a suburb of Boston (voted in 2009 as the “Best place to raise your kids,” by Bloomberg Businessweek). He was a standout high school athlete, and later attended Clark University in Worcester not far from where he grew up. He was known to his many friends as “Slaineo,” for reasons that no one seemed to recall, but it sounded cool and didn’t annoy Slaine. In fact, for a legendary hothead, Slaine had many friends. He earned his way to the big investment bank Morgan Stanley because he was a gifted trader; he would eventually run the firm’s trading desk that specialized in technology stocks, just in time for the tech bubble of the mid to late 1990s.
Morgan Stanley, thanks to its star Internet analyst Mary Meeker, had cranked out huge profits underwriting and trading technology stocks, and Slaine was in the middle of the action. When Slaine first got to Wall Street in the early 1990s he barely had enough money to make rent. One person who knows him said he “slept on a mattress in his living room” because he couldn’t afford the entire bed.
That soon changed. He was now rich, earning millions of dollars a year, becoming a legend at the firm all while developing a deep network of contacts across Wall Street given his position at one of the financial world’s power centers.
For Slaine, however, it wasn’t all about making money. These same people say he took young traders under his wing and aided them in their careers. One of those was Harrison, as the two bonded over stocks and lifting weights.
Another one was a fellow weight lifter named Craig Drimal, whom Slaine brought with him as a trading assistant when he moved from Morgan Stanley to Galleon Group in 1998, his first foray into the lucrative but high-pressure hedge fund business. Unlike Harrison, Drimal would figure prominently in Slaine’s new career as an FBI informant.
By the time Harrison released his book in 2011, David Slaine had been a key witness in the government’s ever-growing insider trading crackdown for about five years. Ironically, Slaine’s involvement in the probe had little to do with his time at Galleon and much to do with his purported reason for leaving the fund.
Slaine’s name surfaced with the FBI with its piercing of the Babcock-Franklin-Guttenberg insider trading ring in 2007. Slaine had left Chelsey a few years earlier but Franklin had a pretty good recollection of what he had done in the past, namely trade on insider tips.
Franklin and another cooperating witness told Chaves and Makol that Slaine dabbled in the same inside information received from Guttenberg’s UBS pipeline of analyst recommendations as they had done, trading profitably on the upgrades and the downgrades before they were made public. His trades were relatively small, and not as frequent as the others. But he was far from innocent, they said. Slaine even used the tips to trade on his personal account.
The scheme, of course, was pretty simple, and to Chaves it underscored just how much easy money could be made through insider trading, Wall Street’s version of a crystal ball. Guttenberg would tell Franklin when UBS was ready to upgrade a stock, so he could start buying shares before the public announcement. Just before the downgrades were about to hit the tape they “shorted” those shares, and profited from the decline that occurred once the ratings were publicly announced. It was such easy money, anyone with a computer and a lack of morals could do it.
They pointed Chaves to Slaine’s trading in a technology company called Nvidia in November 2002. Slaine, who ran Morgan Stanley’s Nasdaq trading desk, was familiar with the company since it traded on the tech-heavy exchange. A good “tape reader” might be able to figure out when to buy and sell for a profit.
But that’s not how Slaine was doing it. Instead, he followed Guttenberg’s tip: A UBS downgrade was coming the next day. Slaine and Franklin quickly shorted the stock. After the downgrade, they covered their position for quick profits on a 200,000 share position.
Franklin helped refer the government to more than twenty trades Slaine made using the UBS insider tips. A little arithmetic showed that Slaine made as much as $500,000 from this circle of friends alone.
In Chaves’s opinion, they had probably only scratched the surface—though the more thorough investigation seemed to suggest that Slaine wasn’t a serial insider trader, particularly compared to others now being targeted in the probe. Still, his résumé suggested he knew a lot about Wall Street’s dark side. Based on all the places Slaine worked, it reeked of the type of information-sharing clusters that Chaves now believed existed at every major hedge fund.
Slaine had worked on Wall Street for about twenty years and he traded at major firms like Morgan Stanley and at Galleon—so he covered the highest levels of Wall Street and hedge funds. He brushed shoulders with traders who worked everywhere, including Cohen’s SAC Capital.
Government agents began digging into Slaine’s background. While his record wasn’t exactly spotless, he had stayed off the regulators’ radar grid, which was a plus since he couldn’t be fingered as a possible cooperator. By early 2007 Slaine’s net worth was estimated at tens of millions of dollars, though he didn’t live lavishly by the standards of a very above-average trader. He did charity work for poor people in the Bronx, and playing off his affinity for dogs, he even started a charity to find homes for retired police dogs. He had an Upper East Side Manhattan residence, and a summer home in the Hamptons.
He continued to lift weights and trade and was a devoted father. Unlike many other rich Manhattanites, he wasn’t very politically active; campaign contribution records show he gave money to Connecticut Senator Joe Lieberman, “probably because someone asked him,” said one friend.
Government investigators, meanwhile, did a little more research and found that Slaine had formerly worked briefly at a hedge fund called CJS Partners, which he had opened with former SAC traders. The feds had long concluded that most of the roads in the insider trading road map involved some connections to SAC even if investigators still couldn’t come up with the evidence to bring charges.
In other words, they believed Slaine was the prototype of the modern insider trader with an extensive network of contacts, both on Wall Street and at major hedge funds (thanks to being at Galleon, he had the taint of working for what the feds considered the ultimate dirty shop). If the witnesses could be believed, he had a massive circle of friends who feasted on insider tips.
Slaine appeared smart enough to disguise his trades, for sure, never getting too greedy by placing such a large bet that it would stand out on the regulators’ computer screens. He only dealt with people he trusted—or thought could be trusted.
He was, to Chaves’s mind, the perfect
cooperating witness.
Knowing what he knew about Slaine, however, Chaves couldn’t discount the possibility that upon approach the trader might have an urge to fight—literally. Slaine seemed like the type of guy who might take a swing when told he was a crook. That is, of course, unless he were confronted by an agent of equal size, strength, and seriousness, which is exactly what Chaves had in mind.
David Makol had been with the FBI for ten years. He came from the SEC, where he worked in the examinations unit, and made use of his background in forensic accounting. He ultimately moved to the FBI, where he immediately began to work on white-collar crime, specializing in insider trading.
Makol had been on Chaves’s squad since at least 2002, working on the Martha Stewart case as well as one involving former Goldman Sachs and Merrill Lynch brokers who enticed a forklift driver to get them advance copies of a market-moving column from BusinessWeek magazine.
Despite his pedigree, Makol, at just over six feet in height, can be an intimidating presence, particularly with his FBI badge in his hand, which according to people who have been subject to some of his methods, can make him seem three inches taller. He can be blunt in explaining to targets what they face if they don’t cooperate: lots of jail time that will change their lives forever and damage the people they love.
According to people with firsthand knowledge of his tactics, Makol has been known to squeeze every last piece of information from cooperators and to use every mental trick at his disposal. At times, he plays good cop to his colleagues’ bad cop. Or depending on the situation, Makol simply plays bad cop. FBI officials describe Makol as a tireless worker and consummate professional who is skillful at one of the most difficult jobs in law enforcement: getting criminals to give up their lives of crime.
“An asshole,” was how one person with firsthand knowledge of Makol’s methods describes him. His main tactic, though, is surprise. Makol is most effective when he catches the target doing something ordinary—getting a bagel or sitting at a restaurant and then shocking the person into submission. Being told while you’re walking your dog that you’re going to jail both underscores that your life as you know it is about to change dramatically unless you cooperate and also ensures that you have no time to prepare yourself for the psychological and emotional onslaught.
Makol did his homework on Slaine. He knew he was a trading desk legend based on the issues with his temper—the trading desk fights, including one allegedly over whether a colleague stole some of his french fries, and another when he allegedly coldcocked his friend and supervisor at Galleon, Gary Rosenbach, while they sat in the sauna after a grueling day of trading.
The truth of both incidents was more complicated, and they shed further light on Slaine’s complex personality, friends say.
The fight at Morgan was less about french fries and more about a long-simmering feud with a coworker of equal size and heft. One day they were discussing a client matter in a conference room when all hell broke loose. “I was in the room next door and I thought they were about to crash through the wall,” said one person with firsthand knowledge of the incident. That person and five others soon broke up the melee.
As for the other fistfight, Slaine clearly lost his temper with Rosenbach, who was pressuring him on his performance and, as Slaine would say later, something more troubling. The two were once close friends and accustomed to speaking freely with each other, though Slaine had been under tremendous pressure at work to churn out bigger returns, as just about everyone was at Galleon or any hedge fund in the business. That pressure came primarily from Rosenbach who “continually gave David shit,” according to one person with knowledge of the matter.
After they finished working out one afternoon and both were seated in a steam room, Rosenbach began taunting Slaine once again. According to friends and supported by a Bloomberg News report, Slaine would later tell the FBI that his anger was fueled when Rajaratnam bet against a stock he was holding using insider information, but Rosenbach’s demeanor angered him further. At one point, during the encounter, Rosenbach put his hand up to Slaine’s face; Slaine responded by slapping it away and slapping Rosenbach’s face as well.
The altercation revealed something else about Slaine: He may have been a crook, but at least initially he was a somewhat reluctant one, who used insider trading not simply to make a lot of money, but because he had to in order to keep his job. Something else made Slaine flippable.Friends recalled that Slaine’s attitude toward the business was more cynical than anything else. In his mind it was a business where friendships didn’t matter; when you leave a place like Morgan Stanley or a big hedge fund like Galleon and you need a favor, your friends quickly forget all the favors you have done for them, he told people. Not exactly the type of people you go to jail trying to protect.
Makol and Chaves doubted that a guilty conscience alone would make him switch to the side of the angels. But something else would. They believed they had strong evidence against him that could put him in jail for a long, long time, and of course, the element of surprise. And they planned to use it to rattle a guy who seemed to have the rest of Wall Street rattled for years.
Chaves and Makol had narrowed the best evidence to a series of trades including one involving an insider tip on a UBS upgrade that Slaine used to earn more than $500,000, punishable under the sentencing guidelines by about twenty years in prison.
Makol approached Slaine twice, including a second more extended visit to his apartment a few days after their first encounter on the street. This time Slaine was seated with his wife Elyse, with whom he had just separated, and was attempting reconciliation.
After presenting the evidence, Makol reminded Slaine several times that he faced many years in prison because they had an airtight case, according to people who know Slaine, and said, ominously, “You will probably never see your family and daughter again.”
The words about his daughter “scared David” is how one friend put it. Makol underscored his anxiety by asking Slaine to look through the eyes of his daughter—around twelve years of age, with a bright future that would be considerably less bright if her dad were in jail.
“David was going to receive more jail time than for rape,” is how one friend described the situation, which isn’t that much of an exaggeration. For more than a decade, law enforcement authorities have been steadily ramping up the penalties for various white-collar crimes to the point where they match or even surpass those mandated for violent robberies and rapes. Under the federal guidelines, the maximum sentence for insider trading is nineteen to twenty-four years, while a rapist could get fifteen years to life in prison.
What was most surprising to FBI officials was how easily Slaine flipped when confronted with his actions and the price he would have to pay. There were no histrionics, no crying, and no “Fuck you, I’m innocent” moment, just a quiet resignation that he had been caught, and was ready to make amends.
Slaine’s friends offer a different version of Slaine’s decision to become a cooperator. According to their accounts, following Makol’s second visit, Slaine met with a series of attorneys who explained his options. The case against him was good but not airtight. The witnesses against him, including Erik Franklin, were conflicted individuals, but juries convict people all the time based on evidence supplied by murderers. Franklin had even worn a wire to secretly record Slaine about his trading activities.
And Makol was right about one thing: If he fought and lost, they said, he would lose big. The government would stop at almost nothing to put him in jail for a long time.
In the weeks leading up to the decision, some people who know Slaine say his decision to cooperate was made easier by the advice of his older brother, Mason Slaine, a longtime publishing executive who didn’t share his brother’s interest in weight lifting, fighting, and stock trading, and instead made his mark, according to the financial website Minyanville, as “a business entrepreneur and private investor.”
A Harvard graduate who w
as once the CEO of Thomson Financial, Mason Slaine was regarded as a man of integrity who wouldn’t cheat on his taxes, much less trade on an illegal inside tip. David Slaine is said to admire his brother, and according to one person, it was Mason’s influence that finally convinced David to cooperate and get on with his life.
Elyse Slaine has told people that the government’s interest in her husband appeared to begin innocuously a few months before the FBI came calling, with an official notification that a few of his trades were being questioned. It was something that David Slaine seemed to take in stride as a routine matter.
Of course, it all depends on your definition of innocuous, as the next five years of Slaine’s new life as government informant CS-1 would demonstrate.
Chaves took a simple approach with potential cooperators. There would be no guarantees on the all-important issue of jail time. But if the witness delivered, so would the FBI. It is, after all, the most important law enforcement agency in the country and maybe the world. And it can make things happen for friends and against foes; at least that’s what the statistics show.
Time served in prison for the average insider trading defendant is less than two years, but that’s only because so many cooperate. Nearly half of those who cooperate never end up in jail. Those who don’t cooperate, people like Sam Waksal, often spend more than five years behind bars.
Faced with those odds, Slaine vowed to live up to his end of the bargain and his end, according to the government, was pretty simple: Once he signed on he was compelled to provide the feds with everything he knew about insider trading on Wall Street and doing what they asked him to do to catch the bad guys.
Circle of Friends Page 16
