Caught in a prosecutor’s net with the wounds of the financial crisis still raw
As I inched my Honda Civic up Third Avenue in Midtown Manhattan, I checked my phone…
Who am I meeting with again? Oh yeah, Michael.
He had sent me an e-mail mentioning writing a book, my sobriety, and that he’d worked on Wall Street for years. He asked if we could meet and I agreed. I parked my car and walked to our meeting spot, a coffee shop a few blocks over. As soon as I entered he spotted me and we shook hands.
Michael Kimelman looked successful: clean haircut, well-dressed, and well-mannered. We found a table near the front, and immediately started playing the “Wall Street name game,” connecting on several peers.
If this were a gameshow, we’d have advanced to the next round. We knew a lot of the same people, and although we’d never actually met, we joked about being at the same party and pushing each other out of the way for a drink. And then…
“I just served 21 months,” he said. “Fifteen inside and six at a halfway house… I was charged with conspiracy and insider trading.”
Then he went into the particulars… He had gotten into bed with the wrong people, it was guilt by association, and the charges were based on innuendos. He explained the mistakes his lawyers made, dirty tricks by the prosecuting attorney, and how unfair the judge was. And then it happened…
I kept waiting for him to say it. I knew it was coming…
“But I didn’t do it. I’m innocent.”
As I took the last few gulps of my coffee and wiped the table clean with a napkin, I had a single thought: GUILTY.
I hadn’t seen one bit of evidence, talked with a single witness or heard closing arguments, but I thought I knew enough to make the verdict.
He’d mentioned his firm was linked to the notorious Galleon Group. As a former Galleon trader, I had firsthand knowledge of their improprieties. My onetime boss, Raj Rajaratnam, is currently serving an 11-year sentence for insider trading.
His company was a prop shop – considered “fast money.” Here he was, a white guy wearing a cashmere coat and nice shoes, who probably had just got an $80 haircut, and he was convicted of insider trading. Of course he’s guilty…
But then I read an advance copy of his book and started researching his case. Had I been too quick to judge? Did I make a mistake? These are the questions that swirled in my head. A large shadow had been cast and its name was doubt.
In the late ’90s, Michael Kimelman visited a friend who was a prop trader. He was immediately lured by the flashing red and green lights of the market… and by the large P&L number on his friend’s computer screen. But on this day, his resume was more useful as a paper airplane than in getting a job.
Despite working for the prestigious law firm Sullivan & Cromwell, and attending Lafayette College and USC law school, his friend’s firm hired people like they picked their stocks – all gut.
Surprising even himself, Kimelman left the office that day with an offer contingent on taking the Series 7 exam and becoming a licensed trader.
His timing was sublime. When he passed the Series 7, the dot-com boom was just beginning… The markets only went up, and he had success almost immediately. When he wasn’t courting his soon-to-be wife, he was out networking and building his career. He loved trading – everything about it. And as his career grew, he started to move around looking for higher payouts or better trades. With prop trading, the talent and information surrounding you can raise your own game.
In 2008, Kimelman teamed up with a friend, Emanuel Goffer, to set up their own proprietary trading shop called Incremental Capital. The idea was to have all of the potential upside of a hedge fund, with the added benefit of making money off of ticket charges from their own traders. It wasn’t foolproof, but it’d be incremental money that hedge funds couldn’t make. And when it came time to look for seed money, they had Emanuel’s brother, Zvi, who at the time was working for Raj Rajaratnam at the Galleon Group.
Building any business from the ground up is a difficult task, but starting a financial firm in the middle of the 2008 financial collapse seems almost crazy. But Kimelman and his partners saw this as a once-in-a-career opportunity. Very talented people were out of jobs and looking for work. So while they continued to raise capital, they were slowly trying to hire a money-making roster of all-stars.
Wind Breakers at the Door
BANG… BANG, BANG, BANG!
It was 5:30 a.m. on a November morning in 2009 when Kimelman heard the banging at his front door. Confused, he was unsure if it was real or a dream. With sleep still in his eyes, he opened the door to a half-dozen federal agents in FBI windbreakers, and a couple of German Shepherds. His wife and children were sequestered to the master bedroom while feds searched his house.
The feds completed their search and asked a few questions before parading him in front of curious neighbors and some TV crews that had been given a heads up. He was under arrest for conspiracy and illegally trading shares of 3Com in 2007. The trade in question was before Incremental Capital, and during a period when he’d hear hundreds of rumors a day and occasionally trade on one or two.
Shortly after the arrest his prosecutors made the kind of sweetheart deal they won’t make if they have a case against you… admit to a lesser charge and get probation instead of prison.
It was the hardest decision of his life, but Kimelman refused. He would have his day in court.
Witnesses and Wiretaps
For nearly a month, Kimelman woke up and took the train to the city before stepping inside Manhattan’s Southern District Courthouse. He’d sit between two other defendants, who were likely guilty, and one of which had seven informants and 500 hours of tape against him.
After a stressful day in court he’d go to his lawyer’s office and prepare for the next day. By the time he got home, his kids were asleep… Something he was having difficulty doing himself.
The trial took its toll on Kimelman. Emotionally, he felt knocked around, like a tennis ball at the U.S. Open. He overthought every statement, question, and comment. At jury selection, he was convinced he’d already lost the case, only to feel better after the opening statements. It was gut-wrenching. And then the court played the tapes.
Traders speak fast and use a kind of “verbal shorthand.” The faster you trade, the more trades – and money – you can make. Kimelman realized the sound of two fast-talking traders speaking in code might sound illegal to the layman. And slides of his own profitable trades were shown, though they weren’t part of the case. The jury would look at him every time they saw a quick $200,000 profit.
The wounds from the financial crisis were still raw.
The case against Kimelman was based on one call the government didn’t record, and where they instructed the jury to speculate what he was told by an inside source. The FBI had no hard evidence to show, despite nearly two years of wiretaps, seven informants, thousands of instant messages and e-mails, and hundreds of body wires, including an FBI informant who sat next to Kimelman on the trading desk for two years.
The feds couldn’t point to a single illicit trade or comment that proved Kimelman’s guilt. In fact, they didn’t even call the wired informant at trial.
The only witness who Kimelman’s lawyer called at the trial was the lead FBI case agent. The attorney asked her one question. “Can you show me one wiretap, one body wire, one phone call, one e-mail or instant message where anyone passed Michael Kimelman inside information and he traded on it?”
After a few seconds of silence, she reluctantly answered, “No, I can’t.”
But the gamble of calling a single witness didn’t pay off.
The closing statement by the prosecuting attorney reminded the jurors of everything that was wrong with Wall Street… people losing their homes… the worst economic meltdown we’ve ever seen… and the Occupy Wall Street protest was only 500 yards from the court house.
The jury’s verdict: guilty.
Hard Time and No Appeal
Kimelman’s stay at Pennsylvania’s notorious Lewisburg Penitentiary wasn’t near a “Club Fed” experience.
The Federal Bureau of Prisons put his two co-defendants in with him, and one of them blamed him for everything that went wrong during the trial. Worse, a prison bounty was put on Kimelman, and his co-defendant bragged to other inmates that he had hired someone to rape Kimelman’s eight-year-old daughter. And then he promised to do the same, himself.
There is little escape once you are in the crosshairs of the government…
Since Michael Kimelman’s trial, the judge on his case has been overturned multiple times by the Second Circuit Court of Appeals. He was the only judge on the circuit who refused to instruct properly on “knowledge and benefit” – meaning the trader must know that his source is being rewarded for sharing his information.
There was no evidence that Kimelman knew the information was from an insider… or that he knew the source had been rewarded. The shadow of reasonable doubt is overwhelming.
Using a similar argument, the verdicts for about a dozen other high-profile insider-trading convictions were overturned in the past three years. Not so for Kimelman. The appeal on his behalf went back to the same judge that had made the mistake. Essentially, his lawyers were asking the judge to overrule himself…
The judge denied the request earlier this year.
Since his release, Michael Kimelman has become an advocate for inmates re-acclimating into society, giving keynotes and seminars, and penning a memoir, Confessions of a Wall Street Insider: A Cautionary Tale of Rats, Feds, and Banksters. He currently performs compliance consulting for hedge funds through his company, Tradecraft Advisers, and is a partner at a firm that offers advice on cryptocurrency markets.
Turney Duff is a former trader at one of the biggest hedge funds in the world, the Galleon Group, where its founder and several Galleon employees were found guilty of insider trading. Turney rose through the ranks and then fell prey to the trappings of Wall Street: money, sex, drugs, alcohol, and power. Turney chronicles his spectacular rise and fall in his bestselling book, The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess.