The Last Hedge

by Green, Carey

  “You own that?” Dylan asked. “How much? Fifty shares?”

  “’Do I own this?’ I own over one million shares. When you’re filthy rich, you don’t worry about nickels and dimes.”

  “How did you find out about this stock?”

  Ryan laughed. “It’s a long story.”

  “I got a little time.”

  “Not today,” Ryan said. And with that, the conversation was over.

  Over the ensuing weeks and months, he would learn the details of the scheme. Ryan, the older kid, had a connection with the market maker, the dealer of the security that helped to stabilize the price in the open market. On the New York Stock Exchange, market makers were highly regulated. In the world of penny stocks, the market makers regulated themselves.

  Ryan’s contact on the exchange would text message him during the day, and would dictate the general flow of the stock, or if any unusually large orders were coming in. Ryan would then call several retail brokers who would place buys and sells in the accounts of Ryan’s relatives. It was as easy as one, two, three. Later on, Matt and John had become involved.

  “So who is your contact?” Dylan asked. He was amazed that Jerry’s Kids could be so brazen.

  “Why do you want to know?”

  “I’m just curious.”

  “Curiosity killed the cat. You want in?”

  “Me?” Dylan asked, half-hoping he could be included, half afraid that he would.

  “There’s always room for one more.” Ryan smiled at Dylan and took out a yellow Post- it note. He wrote three letters on it: “XMQ”. He then handed the piece of paper to Dylan. “Hold onto that,” Ryan said.

  “I will,” Dylan said. He folded the Post-it note and placed it in his pocket.

  For a while, Dylan forgot completely about the deal. Jerry’s Kids quieted down, and Dylan put his head down and began to focus on his work. The equities markets were robust that summer, and he kept plenty busy with the activities on the desk. He had no indication that anything was wrong until the morning that Jerry Matland called him into his office.

  Jerry Matland’s office was a corner job in the midst of the trading floor. Though it featured a fantastic view of Times Square to the East and downtown to the south, Jerry was seldom in the office. He preferred to work directly on the trading desk.

  “So what’s up Dylan?” Jerry asked, as Dylan walked into his office. “Having a good summer so far?”

  “Pretty good, Jerry. And you?”

  “I’m good. Terrific. Couldn’t be better.”

  Those were always Jerry’s words: He couldn’t be better. This was Dylan’s first trip to Jerry’s office since he had joined the group, and Jerry was sitting on the front of his desk, arm’s folded with his lasered white teeth gleaming. Though Jerry’s suits were always handmade, and his shirts were always impeccably white, Jerry’s hair was always a little past the shoulders and begging for a ponytail. He belonged in advertising.

  “Listen, Dylan. We have a problem. Could you please shut the door?” Dylan complied, then returned to the seat in front of Jerry’s desk.

  “What’s up Jerry?”

  “Dylan, do you know the symbol, XMQ?” Dylan’s heart began to beat a little faster. Jerry’s demeanor quickly shifted from that of class clown to that of executioner.

  “I think so. Yes, I know it. It’s a penny stock.”

  “That’s correct. Have you been trading in this security?”

  “No, I have not.”

  “Do you know of any trading activity of this stock by members of this desk?”

  Why was Jerry asking him this? Dylan began to calculate the probabilities of the situation, and surmised that the illegality of Jerry’s Kids had finally caught up with them. Somehow the powers that be had discovered their scheme, and now they were in trouble with management. He was relieved that he was not a target of the investigation. But why was he being questioned?

  “Nobody has said anything to me about it, so I don’t think so.”

  “Well,” Jerry said. “It’s complicated. You see, certain members of our desk seemed to have been obtaining information from the market maker who worked for the firm on the OTC accounts. It would also seem that some of these gentlemen have been trading these stocks out of their own account for personal gain. This is an obvious example of what is referred to in legal parlance as insider trading. Do you understand?”

  “Of course, Jerry.”

  “So, I ask you again, Dylan. Did you know?”

  ‘Did I know what?”

  “What was going on with some guys on the desk. Did you know?”

  “No, I mean, I don’t know.” Jerry’s mouth was open in bewilderment. Dylan could see why he was so successful as a trader. He was nearly dancing now, his body all kinetic and rasping with energy. His suit and his clothes could barely contain him, and Jerry was on the verge of jumping Dylan’s chair. “Dylan, come on. How the fuck do you expect me to believe that? You sit right next to these guys. ‘Jerry’s Kids’: that’s what you call them, right?”

  “Yes.”

  “So you sit right next to ‘Jerry’s Kids’, you don’t know what the hell is going on, right?”

  “You asked a question. I’m just trying to answer it.”

  “Dylan, I’ll rip your fucking head off if you sit here and lie to me like that! Here,” Jerry said as he picked up a sheet of paper from his desk. “XMQ was in three of your emails. You were dumb enough to go into the company website and download a research report on this company to your desktop. What were you thinking? You think emails don’t get preserved?”

  “Jerry, I---” Jerry was in his face now, red and raging. Dylan’s bluff was failing badly. He needed to move onto Plan B.

  “Ryan, John, and Matt have already been suspended. Should I fill out the form right now for you, or do you want to tell me what you know?”

  Dylan hesitated for a moment. “Okay,” he said. “I knew. I knew about their scam. What do you want me to do?”

  “I want you to deny everything. The emails aren’t conclusive if you didn’t buy the stock. If compliance comes to you, say you heard something on the desk about it, and you looked at research. But drop the bit about Jerry’s Kids and what you know.”

  “What?”

  “You’re not involved in the trades, and two wrongs don’t make a right. It’s enough that I’m losing three of my guys, I can’t have you involved in this too. John, Ryan, and Matt are done. That leaves me with you and Binky.”

  “So is Binky in trouble too.”

  “Yeah, you sent him the emails, dumb ass.”

  “So what about him?”

  “I can’t protect both of you. I can transfer you to a different group. But If I try to move both of you, it will look too suspicious. Let Binky deal with compliance on his own. If he goes down, he goes down.”

  “Jerry, I can’t throw him to the sharks like this!”

  “This is not friendship. This is business. Fuck him.”

  “Jerry, come on---”

  “Dylan, please, that kid has the silver spoon so far up his ass, when he blows his nose, money comes out. You need to be worried about your own fucking neck.”

  “He’s my best friend.”

  “Best friend?” Jerry mimed him. “What is he? Your boyfriend?”

  “Fuck you, Jerry,” Dylan said as he got up from his chair. “I don’t have to listen to this.”

  “You sit back down in that chair!”

  “You don’t own me!” Dylan slammed the door as he left Jerry’s office. Half the trading floor watched him as he went back to his desk, collected his wallet, and headed for the elevator. When he reached the lobby downstairs, it hit him: Hh career at the firm was finished.

  Chapter 15

  Conroy’s sterile white office in Brooklyn was devoid of windows or any type of view. No pictures were on the walls. His desk was centered in the middle of the room, and cluttered with files and books.

  “No windows here?” Dylan asked.<
br />
  “No, we don’t want the bad guys to see us,” Conroy said.

  “Look,” Conroy said, as he stopped walking. “I’m glad you’re talking to us. It goes without saying that you won’t mention any of this to anyone. Vanessa Remmerling will be joining us shortly.”

  “Is she your partner?”

  “We don’t have partners, at least not really. She’ll be working on this case, along with several other people in my group. Vanessa’s kind of taken the lead with some of these complex securities cases. She went to Princeton by the way. ”

  “Is that supposed to mean something to me?”

  “Not really, I just know how you Ivy Leaguers tend to adore one another.”

  “Guess you didn’t go to Yale.”

  “Penn State to be exact.” Conroy smiled as Vanessa Remerling entered the room.

  “Dylan,” Conroy said, “this is Vanessa. Vanessa this is Dylan.” They exchanged hellos.

  Vanessa Remerling was dressed in black slacks and a white blouse that was tied at her hip. She was tall, at least five ten, and her long slender legs were attached to a shapely torso and well-toned arms. Her dirty blonde hair was slicked back into a long ponytail that was held together using a black scrunchy. She smiled discreetly as she walked into the room.

  “First let me explain: Vanessa is our resident expert on white collar crime, particularly securities fraud and the NASD. She’s going to back me up on this case. Anything that you share with me will also be shared with Vanessa. Obviously, we know this stuff, but not nearly as well as you. That is why we like to talk to people who have subject matter expertise, Conroy said. “Again, I may ask some simplistic questions, so pretend I’m an idiot.”

  “That’s not so hard,” Vanessa said.

  “So, do you have something for me?” Dylan asked.

  “Yes.”

  Conroy took out a black portfolio and placed it on his desk. From inside, he took out several pieces of paper and pushed them towards Dylan. The young trader picked them up and looked them over.

  “So?” Conroy asked.

  “This doesn’t tell me anything: IBM, Ford, Xerox. These could technically be shorts without locates, but these are easy names. No one would care, not even the Exchange.”

  “Meaning?”

  “It’s like this,” Dylan said, as he took out a pen and flipped over a sheet of paper.

  “If you short a stock like IBM without a locate, no one cares. These are ‘easy to borrow’ stocks. There are over a zillion shares of IBM in the world, so you can borrow the stock from any bank or broker. You have no problem getting it, so the locate is merely a formality. A problem stock is a small company that everyone wants to short, like Taser. The stock went from ten dollars to one hundred in a week, then for some reason the bubble burst. Every fund wants to short it, but there are no shares in the marketplace. Why you ask? Well, in a newer company like this, most of the stock is still tied up in the owners of the company, or maybe the private equity funds that helped them go public. Now, these people are not going to loan you their shares because it’s not in their best interests for the stock to go down. So the few shares that are floating in the marketplace are very difficult to get, and you can’t short the stock without it.Understand?”

  “Yeah,” Conroy said. “I knew it.”

  “Well,” Dylan asked gruffly. “Do you have any examples of ‘difficult to get’ stocks?”

  “Not yet.”

  Dylan laughed. “This is what you needed information on? You could have taken me out for a cocktail. I would have explained this for a song.”

  “We haven’t compiled everything yet. This is just a sample. But since you’re here, why don’t you explain naked short selling to us in your words. Maybe I’ll buy you a cocktail afterwards.”

  Dylan then walked them through a thorough explanation of the hedge fund industry: how funds operated, the role of the prime brokers, and the landscape of the industry in general. Much of it was arcane technical details. Vanessa and Conroy took copious notes. At the end, both had a host of questions that Dylan tried to answer.

  “Why is this industry so loosely regulated?”

  “Lots of reasons. Let’s start with what a hedge fund is. Unlike a mutual fund, which is highly regulated, a hedge fund is an unregulated entity designed primarily for wealthy investors and financial institutions. Obviously, the topic has gotten a lot of attention lately, but ten years ago only a few super-sophisticated investors even knew what a hedge fund was. Then, during the dot-com boom, these guys became rock stars. Money flew in like a tornado. When the funds got big, they hired lobbyists in Washington to argue for their interests, and with a Republican administration, business is always first. Also, some of these guys are super-secretive. They don’t want people to know what their strategy is, or their mathematical formulas. Trust me, some of these guys have genius-level IQs, and if they had to disclose their methods, someone would surely find a way to reverse engineer their strategy. Which brings us to the present.”

  “Today you have over one thousand funds. The industry has evolved in such a way that you now have investors with patient money such as pension funds, retirement funds, even some state and local governments became attracted to the double- and triple-digit returns that some of these investment managers offer. So people blindly put money into these guys, and expect them to produce fantastic returns. It’s as simple as that.”

  “And you think some of these funds are fraudulent?”

  “No,” Dylan said. “You do. I thought that was why I was here. But if you’re asking my opinion, I read the papers. White collar crime is rampant.”

  “You’re right,” Vanessa said. “These funds can do almost anything these days. They can spread rumors that cause stocks to go down, or they can just take the money and disappear. There’s no one to stop them.”

  “I thought that’s what you guys were doing.”

  “We will.” She smiled at Dylan then at Conroy.

  “Of course,” Conroy added, “I appreciate you coming to talk to us here. It’s useful information. Can we count on you further if we need additional information?”

  “Look, I’ve done my part,” Dylan said. “but you’ve shown me nothing. So, that’s it. If something pops up, I’ll call you.”

  “Thanks for coming anyway. You need a lift uptown?”

  “Actually, my gallery is around the corner,” Vanessa smiled and raised an eyebrow.

  “What kind of a gallery?”

  “An art gallery; a little one,” Dylan said. “It’s not far from here. We’re having an opening.”

  “Ooh … Sounds fancy.”

  “Nothing of the sort,” Dylan said. “We’re trying to drum up some business.”

  “Open to the public?” Vanessa asked.

  “Anyone willing to buy art.”

  Vanessa looked at Conroy who shrugged. “I’m heading home. Gotta’ walk the wife’s new puppy.”

  “Hope he didn’t pee on the sofa again.”

  “Me too,” Tim said.

  “What kind of puppy?” Dylan asked.

  “A Viszla. My wife had them as a kid.”

  “I know the breed,” Dylan said.

  “Not many people do. Are you a dog person?”

  “No,” Dylan said. “I have a cat.” Vanessa raised one eyebrow.

  “You have a cat?”

  “Shocking?”

  “Not at all. I’m a cat person. Just surprised you have one. Does the cat paint?”

  “No, the cat does not paint, but it’s named Picasso. ”

  “Named Picasso?”

  “It’s a cute cat.”

  “I’m sure it is.”

  Chapter 16

  The gallery was packed and aglow. Stylish women in summer dresses and men in dark suits were drinking mail-order champagne from glasses purchased at Pottery Barn. A makeshift bar had been erected near the rear of the gallery, and Samantha, dressed in a bright summer yellow dress, was rushing back and forth, filling gue
sts’ glasses and expectations. Dylan had rushed in, scattered a few hellos, and left the room as quickly as he had entered.

  The featured artist that night was Kenneth Lowman, a young Californian who had painted a series of wall-sized landscapes depicting the Old West, complete with wild horses and rustic western saloons. His work was becoming both popular and expensive, and it had been a real coup for Samantha to snag him. The art economy was still dreadful, and despite the eager crowd, there had been no sales so far. Samantha, almost foolishly, had placed her expectations that a successful show might make the gallery whole financially. As the date of the opening approached, she had become far more skeptical.

  After his meeting with the FBI, Dylan had snuck into the gallery’s office and slammed the door him behind him. The meeting had scared him straight, though they had shown him no real concern. His immediate desire was to quit the hedge fund, but doing so would lead to financial ruin. He felt under his arms, and realized his shirt was soaked. Perspiration hung heavily from his brow, and he reached into the desk drawer and removed a fresh white shirt. He put the shirt on, but was still sweating. He saw his reflection in a small decorative mirror in the corner of the room. He looked like a ghost. He began to wonder how he would make it through the party.

  Dylan turned on the computer and brought up an Excel spreadsheet with the gallery’s finances on it. After paying Neuman his back rent, and several other past due bills, the gallery would still be in the red for over 75K. Dylan flipped the spreadsheet to a tab that contained his own finances. He had enough cash to maybe scrape by for six months. His stock portfolio had been cut in half, most of it in stock from his old company that he couldn’t sell for another year. The mortgage on his apartment was underwater, leaving him liable for at least another million and change. Shit! He slammed the monitor off with his hand. How had he let things get so bad? He was lost in these thoughts when Steve Neuman opened the door.