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Craig Drimal never had a clue when he confided in David Slaine about his trading on illegal tips that his former colleague would relay the information to federal agents. And when Drimal passed Slaine a slip of paper with symbols for four stocks that were “in play” as they lunched at a Burger Heaven in midtown Manhattan, he certainly didn’t plan for it to end up in a file at the FBI. The force of Slaine’s betrayal didn’t hit him until Nov. 5, 2009, when Drimal and 13 others where charged with insider trading. Drimal pleaded guilty and last year was sentenced to 5½ years in jail. “He was crushed,” says Arlene Villamia-Drimal, his wife and lawyer. “He believed David was his friend.”
A former Morgan Stanley (MS) managing director and onetime partner at the Galleon Group hedge fund, Slaine spent two years mining for leaks while working undercover for the FBI. The evidence he gathered led directly to the conviction of Drimal and 11 other people and indirectly to an additional half-dozen convictions, according to court papers. His work also helped prosecutors build a case against Galleon Group co-founder Raj Rajaratnam. “Slaine’s cooperation has been nothing short of extraordinary,” Assistant U.S. Attorneys Andrew Fish and Reed Brodsky wrote in court papers before Slaine, 53, was himself sentenced this year on securities fraud and conspiracy charges. He declined to comment for this story.
Through Slaine, the FBI got an insider’s view of Wall Street. Hundreds of reports detailing his contacts with the agency are thick with information both relevant and gossipy (“Raj loves the strip clubs”). They reveal how common insider trading had become on the Street.
A burly man with salt-and-pepper hair who retains his Boston accent, Slaine grew up poor in a working-class neighborhood in Malden, Mass. A 1982 graduate of Clark University, he ended up running the over-the-counter desk at Morgan Stanley. In 1998 he jumped ship to Galleon, where he oversaw a portfolio of health-care and technology stocks. He quit that firm in 2001.
Slaine was trading his own portfolio in the winter of 2007 when the FBI charged 13 people—including former colleagues from a stint at hedge fund Chelsey Capital—in a $15 million illegal trading scheme. Two men subsequently fingered Slaine as a minor participant. In June of that year, FBI agents showed up at his Manhattan apartment asking about Drimal, who also had worked at Galleon, and traders at other firms, including Steven Cohen’s SAC Capital Advisors, now at the center of another insider-trading investigation.
A month later, Slaine agreed to secretly gather evidence for the government in hopes of winning support for a lenient sentence. “Part of David’s involvement with the FBI was motivated by his hope that his efforts would be considered in determining his formal punishment, but it was also very much a way for him to show” his family that he “cared about doing the right thing,” Slaine’s friend Robert Sager later told U.S. District Court Judge Richard Sullivan. The judge sentenced Slaine on Jan. 20 to three years’ probation and 300 hours of community service and ordered him to pay a $500,000 fine and forfeit $532,287 in illegal profits.
From July 2007 until at least June 2009, Slaine had more than 200 conversations with FBI agents. Those exchanges helped lay the groundwork for prosecutions of stock traders and an expert networking firm. The feds prized Slaine for his ability to get people to “incriminate themselves,” Fish, the prosecutor, later told Judge Sullivan. “I just do what they ask me to do,” Slaine testified at the trial of traders he helped place behind bars. “I would go to the meeting. I would record the meeting, leave the premises, go back to the FBI, and give them the device.”
To outsiders, Slaine appeared unchanged. “Normal—you wouldn’t have thought anything,” says his friend Stephen Temes. Yet the subterfuge took a toll on Slaine’s personal life. “The whole thing was devastating,” says Elyse Slaine, now his ex-wife. “Why does the government pick and choose whose lives they can destroy?” She points out that the charges against her former husband involved a single trade.
Slaine continued passing on the occasional tip even after his involvement with the FBI tapered off. Agent David Makol wrote on Sept. 24, 2008, that Slaine said the government “needs to investigate the stock price spike of Goldman Sachs (GS) that occurred at the end of the trading day on Sept. 23, 2008, prior to the public announcement that Warren Buffett was investing in Goldman Sachs.” It’s not known whether Slaine’s heads-up helped investigators close in on former Goldman director Rajat Gupta, who is appealing his conviction for tipping Rajaratnam to Buffett’s $5 billion investment in the firm.
The bottom line: The FBI turned trader David Slaine into an informant and used him to help crack more than a dozen cases against Wall Street professionals.