Bloomberg News

Dream Insider Informant Led FBI From Galleon to SAC

December 03, 2012

Dream Informant Led FBI on Insider Chase From Galleon to SAC

David Slaine, left, a former Galleon Group LLC employee who pleaded guilty to criminal charges, exits federal court in New York on Jan. 20, 2012. Photographer: Stephen Chernin/Bloomberg

David Slaine had a secret for the FBI that summer day, one of scores he would eventually reveal in his role as a dream informant. The subject was Teterboro Airport. Slaine claimed a money manager he knew was using it to profit quietly on trades of health-care stocks.

Slaine, a former Morgan Stanley (MS:US) managing director and ex-partner at the Galleon Group LLC hedge fund, said the trader paid off people to find out who used the small New Jersey airport, located close to many of the world’s biggest drug companies.

The bribed tipsters were watching for bankers who “were coming in and out of Teterboro Airport,” agent David Makol wrote in a summary of Slaine’s Aug. 18, 2007, conversation with the Federal Bureau of Investigation, one of more than 200 they had with him. “All the major players involved in the pharmaceutical industry would come in and out of that airport.”

During the U.S. crackdown on insider trading over the past five years, Slaine, 53, became a tip-mining machine as he worked undercover, often wired for sound under FBI orders, from mid-2007 until at least June 2009.

The government’s most productive informant in a broad investigation of Wall Street insider trading, he was also among the first to cooperate. His work led directly to the conviction of 12 people and indirectly to a half-dozen more. His leads helped prosecutors win judicial permission to wiretap the mobile phone of Galleon Group co-founder Raj Rajaratnam, who was later convicted.

‘Extraordinary’ Cooperation

U.S. agents used evidence he gathered to build cases leading to executives at expert-networking firm Primary Global Research LLC. He passed information about Steven A. Cohen’s SAC Capital Advisors LP, and he took the witness stand to tell jurors about secret recordings he made of traders now in prison.

“Slaine’s cooperation has been nothing short of extraordinary,” Assistant U.S. Attorneys Andrew Fish and Reed Brodsky wrote in court papers before Slaine was sentenced this year for his own illegal trade. “Slaine’s cooperation was one of the key factors that led to a series of successful investigations and prosecutions.”

His testimony was “credible and consistent,” Fish said in court.

An examination of Slaine’s work with the FBI, based on hundreds of documents never before revealed, shows how the bureau turned Slaine, how his cooperation deepened, how his information created a domino effect of new investigations and new informants, and how the case took a personal toll on Slaine. The FBI reports also offer a glimpse of how, in the words of Slaine’s friend Robert Sager, the “multiyear experience” of cooperating with the FBI was so “tremendously traumatic.”

Goldman Sachs

At one point, a year into his cooperation, Slaine’s wife came up with a plan to extract him from the FBI’s grip. It didn’t work.

Slaine gave the agency an insider’s view of Wall Street from the vantage of one of its more successful operators, relaying rumors (“Raj liked the pretty girls”), pointing out market peculiarities (unusual activity in Goldman Sachs Group Inc. (GS:US) stock) and recounting instances where others used illicit information to trade shares.

The reports, which summarize Slaine’s information, show how common insider trading had become on Wall Street, with illicit tips passed along as part of friendly chatter at Equinox health clubs, on Manhattan street corners and at everyday eateries familiar to New Yorkers such as Burger Heaven and Pret A Manger.

Astonished

In an unrelated case brought this month by the Justice Department and the U.S. Securities and Exchange Commission, the FBI said one alleged accomplice in an insider-trading ring involving health-care stocks told another: “At the end of the day, the SEC’s got to pick their battle because they have a limited number of people and a huge number of investors to go after.”

That smug sentiment is one reason so many insider traders are astonished when confronted by the FBI.

One informant, who asked not to be identified because he is on probation, said that when the FBI first approached him about his illegal trading, they sat him down and showed him an elaborate flow chart of suspects. The display had photographs with large circles around major FBI targets and smaller circles around lesser ones, including him. Agents told him it would be a shame to go to prison for being a small circle. Terrified and feeling powerless, he said, he chose to cooperate.

Hanged Himself

That path, however, can take a devastating toll of its own. In one case related to Galleon, Ephraim Karpel agreed to cooperate with prosecutors in 2008. For more than a year, he taped fellow traders. Last year, two days after jurors at a trial of three traders heard him in a wiretapped conversation, Karpel, who was never charged, hanged himself in his Fifth Avenue office. He was 50.

“Week after week, month after month and eventually year after year, David’s involvement with the FBI caused incredible strain on his ability to sleep, eat and communicate with the people he loved,” Slaine’s friend Sager wrote in a letter to Slaine’s sentencing judge.

FBI spokesman Jim Margolin said in a statement: “If there is a suggestion that the FBI exerts undue pressure on people or puts them in uncomfortable situations by seeking their cooperation, I think it’s important to remember whose actions created the uncomfortable situation.”

“We’re talking about people who’ve broken the law,” he said. “When agents approach a prospective cooperator and confront him with the crimes he’s committed, they’re hoping to gain his cooperation to assist the investigation, but they’re also offering that person an opportunity.”

Poor Background

Slaine was first confronted by the FBI about insider trading in June 2007 after it had investigated leaks of ratings changes by UBS Securities. He is a burly man with salt-and-pepper hair who retains his Boston accent. He grew up poor in a working-class neighborhood in Malden, Massachusetts. A star shooting guard on his high school basketball team, he went to Clark University in Worcester, Massachusetts, and began trading stocks after earning a bachelor’s degree in 1982. Before landing at Morgan Stanley in 1986, he worked at Smith Barney Harris Upham & Co., as well as Troster Singer Stevens Rothchild, according to regulatory records.

Within three years, Slaine was running the over-the-counter desk. Last year, Slaine told the jury at the insider trading trial of Zvi Goffer, Goffer’s brother and another trader -- a case in which Slaine gathered critical information -- that he earned tens of millions of dollars trading stocks in his career.

Tough Guy

“He was a tough, no-nonsense guy,'' Timothy Caffrey, a former Morgan Stanley managing director who worked for him, told Slaine’s sentencing judge. “He was demanding. He had an extremely high bar set for himself and expected those who worked with him to have the same.” Slaine rose to become a managing director overseeing Nasdaq trading and risk.

Nasdaq accused Slaine and other Morgan Stanley traders of manipulating stock prices. In 1998, Slaine was censured, fined $100,000 and suspended for 90 days by Nasdaq’s market regulation committee. Morgan Stanley was fined $1 million. In 2000, Nasdaq reduced Slaine’s fine to $2,500 and Morgan Stanley’s to $495,000. Mary Claire Delaney, a firm spokeswoman, declined to comment.

Slaine left Morgan Stanley in January 1998 and joined Rajaratnam’s fledgling hedge fund, Galleon Group, which then managed $300 million. He oversaw a portfolio of health-care and technology stocks, Slaine said at the Goffers’ trial.

Partner Slapped

Slaine told the FBI he left Galleon in January 2001 after learning that Rajaratnam had bet against Nortel Networks Corp. (NRTLQ:US) based on inside information. He said he had a confrontation with Rajaratnam’s partner, Gary Rosenbach, and ended up slapping him, according to an FBI report.

“Throughout my career, I refused to work for certain firms knowing it was how they got their ‘edge,’” Slaine wrote in a letter to his sentencing judge. “I am not, nor have I ever been a man driven by greed.”

Doug Koff, a lawyer for Rosenbach, and Benjamin Harris, a spokesman for Rajaratnam, declined to comment.

Slaine, who for more than a decade has volunteered at a charity for needy Bronx residents, took a job as head trader at Chelsey Capital, a Manhattan hedge fund. In early 2002, an analyst named Erik Franklin rejoined Chelsey. Franklin arrived with a secret: A longtime friend, who was a member of the investment review committee at UBS Securities, had agreed to repay a $25,000 loan by tipping Franklin to UBS ratings changes before the firm made them public. The tips generated $2 million in profit on insider trades for Chelsey, according to court papers. At his guilty plea in 2009, Slaine admitted he used an illegal tip as well. He made $532,287.

One Trade

It was the only time Slaine traded on illegal information, prosecutor Fish later told a judge.

“It was just one trade,” Slaine’s ex-wife, Elyse Slaine, said in an interview.

Aided by Franklin, prosecutors on March 1, 2007, announced charges against 13 people over the UBS tips and other leaks. While Slaine wasn’t arrested, Franklin and another Chelsey trader pointed the government toward him. By June, two FBI squads were investigating insider trading, with one joining an SEC probe of Rajaratnam and one pursuing other leads.

That month, agents from FBI squad C-35 arrived at Slaine’s Manhattan apartment.

“They wanted to talk about insider trading,” Slaine said at the Goffers’ trial.

Slaine, who declined to comment for this story, didn’t testify about what happened next. Sager, who said he spoke to Slaine often about his cooperation, said that once Slaine made a commitment to the FBI, he saw it through.

SAC Capital

“Of course, 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,” Sager told Slaine’s judge.

On June 12, 2007, Slaine spoke to the FBI for the first time, according to agency reports. He fielded questions about traders at four firms, according to an FBI report from that day: Chelsey, Galleon, Schottenfeld Group LLC and Cohen’s SAC Capital Advisors. Citing information he got from former colleagues, he said a woman he named “had faxed a report to Steve Cohen’s office prior to the downgrade of the stock Amazon,” the FBI report said. He identified his ex-colleagues by name.

Neither of his former colleagues has been charged with wrongdoing, and both declined to comment. The SEC had previously investigated the Amazon allegations and not brought a case.

Coming Clean

Clearly intrigued, prosecutors reached a deal with Slaine in July 2007 in which he agreed to gather evidence secretly in hopes of winning their support for leniency at sentencing. On July 25, Slaine came clean. After outlining his career for the agents, he told them more about traders who’d been at SAC, Schottenfeld and Galleon, where his workout partner and friend Craig Drimal had worked, according to the FBI report.

The FBI raised Drimal’s name and asked about a suspicious trade in ATI Technologies Inc. Slaine said he gave Drimal permission to make the ATI trade through Slaine’s account. If the trade paid off, Drimal said he would repay a $20,000 loan he owed Slaine with the profit, according to the report.

Jonathan Gasthalter, a spokesman for SAC, declined to comment. Cohen has not been accused of wrongdoing. Others previously associated with SAC have been charged, including Jon Horvath, a former technology analyst who pleaded guilty and is cooperating with prosecutors; Noah Freeman, an ex-portfolio manager who pleaded guilty and is cooperating; and Donald Longueuil, a former portfolio manager who is serving a 30-month term.

SAC’s Martoma

Mathew Martoma, a former portfolio manager for SAC unit CR Intrinsic Investors, was arrested Nov. 20 in what prosecutors said was a record-setting insider case. The fund netted $276 million trading on a tip about a clinical drug trial, they said.

Beginning on July 25, 2007, Slaine gave the agents details of Drimal’s family life, describing him “as looking like Bruce Willis and being soft-spoken,” according to a report from July 30. He reviewed Drimal’s ties to Galleon, named another trader who “always has information” and mentioned others who worked with Rajaratnam. Agents hadn’t yet approached other Galleon cooperators.

The agents’ questions weren’t all about stocks. “Raj (Rajaratnam) loves the strip clubs,” the agents wrote in summary of Slaine’s comments. “Raj plays one person against the other but he does keep his word with paying up his debts.”

New Territory

From July 27 to Aug. 7, the agents spoke to Slaine seven times as the debriefings moved into new territory, including his ex-colleagues at Morgan Stanley. Slaine, who had started his own firm in 2006, continued to tell agents about Drimal and other traders. He flagged suspicious trades in Kos Pharmaceuticals Inc., Medimmune LLC and other companies.

On Aug. 14, after running into the fund manager with the purported Teterboro ties as he was leaving Bloomingdale’s, Slaine told the agents the fund manager claimed to have a source on the board of directors of a medical company considering a takeover. Slaine named the fund manager and said “he is no longer with his wife and that women are ‘all over him,’” according to the report.

The fund manager was never charged. In an interview, he called Slaine’s account of the Teterboro payoffs, which didn’t identify the tipsters, “ridiculous.” He said he’s happily married and didn’t have sources on a medical company’s board.

Instant Message

By then, Slaine had begun gathering evidence for the FBI as well as passing along information. On Aug. 8, he gave the FBI an instant-message exchange he had with a fund’s principal. The same day, he tried to record his first telephone call. The target was Drimal.

“I just do what they ask me to do,” Slaine testified at the Goffers’ trial about his actions as a cooperator.

Slaine began recording calls with Drimal and others on almost a daily basis. On Aug. 21, for the first time, the FBI had him record a meeting at a fund manager’s office. It turned out that Slaine was skilled at getting people to “incriminate themselves,” Fish, the prosecutor, later told his sentencing judge.

“I would set up a meeting, and I would go to see the FBI, and they would give me a device,” Slaine testified at the Goffers’ trial. “I would go to the meeting. I would record the meeting, leave the premises, go back to the FBI and give them the device.”

It isn’t clear how Slaine wore the recording device. In another case, the informant hid it as part of a baseball cap, according to a person closely involved in the case.

Burger Heaven

With Drimal an FBI target, Slaine met him on Sept. 4 at a Burger Heaven restaurant on 54th Street in Manhattan while wearing a recording device. There, Drimal gave him a slip of paper with four stock symbols that had been passed along by Drimal’s source.

“He told me those four stocks were in play,” Slaine testified. Drimal told Slaine to destroy the paper.

“I gave it to the FBI,” Slaine testified.

In a Sept. 20 conversation, Drimal told Slaine that Zvi Goffer was getting tips from lawyers.

“I know who the law firm is,” Drimal said in a conversation Slaine recorded and which was entered into evidence in the Goffers’ trial.

“Which law firm is it?” Slaine asked.

“Ropeson,” Drimal replied, a reference, it turned out, to the Ropes & Gray LLP law firm. Jurors later convicted Zvi Goffer, his brother and a colleague of trading on tips from two lawyers at the Boston-based firm, who were convicted and sent to prison. Tim Larimer, a Ropes & Gray spokesman, declined to comment.

Fuller Reports

By then, Slaine was giving fuller reports, thick with information both relevant and gossipy. He was working hard to draw people out and mentioned a trader nicknamed “Shakes,” who worked at Schottenfeld.

“We call him ’Shakes,’ because he gets nervous; he literally shakes he’s so nervous about the whole thing,” Drimal told Slaine, according to an FBI report summarizing a recorded call. It was a reference to Gautham Shankar, who later pleaded guilty to insider trading, cooperated with prosecutors and got probation. Drimal added, “When Shakes has something, you play it big.”

Richard Schottenfeld, chairman of Schottenfeld Group, declined to comment.

Over the next year, Slaine recorded the fund manager with the purported Teterboro connections, wore a wire in a meeting with another money manager who wanted to hire him, and taped analysts, traders and Zvi Goffer, according to FBI reports.

Wiretap Help

As the months went by, he related details about several traders who eventually cooperated in the U.S. probe. Prosecutors cited evidence Slaine gathered in requesting a judge’s approval to wiretap the phones of Goffer and Drimal. They referred to recordings of Drimal and Goffer in seeking approval to wiretap Rajaratnam’s phone, according to court records.

Alexander Dudelson, a lawyer for Goffer, declined to comment.

To outsiders, Slaine appeared as his regular-guy self. “Normal -- you wouldn’t have thought anything,” his friend Stephen Temes said in an interview. The subterfuge was taking a toll, however.

Soon after Labor Day in 2008, more than a year after he began cooperating, Slaine told agents he was “having serious marital issues” and thought his wife might compromise the investigation. According to a report of their Sept. 4 conversation, Slaine said he had “serious concerns” that his wife would call Drimal to alert him to his cooperation. He didn’t think his wife had Drimal’s mobile phone number, he added.

Fake Plan

Today, Elyse Slaine, now his ex-wife, said she never really intended to call Drimal and had no intention of harming her husband.

“I just thought it would make the FBI leave David alone,” she said. “The whole thing was devastating, and I just wanted it to stop.”

It didn’t.

“Nobody wants to hurt other people,” said Elyse Slaine, who separated from her then-husband in 2004. The two briefly sought to reconcile in 2007 before getting divorced in 2010. “While David wanted to do the right thing, it also tore him apart.”

Slaine’s cooperation pushed others into the government’s arms. Five people in the Goffer case pleaded guilty and worked with prosecutors. Four people pleaded guilty, didn’t cooperate and went to prison. Three were convicted at a trial and are behind bars.

Franz Tudor

Along with Shankar, one of the new cooperators was Franz Tudor, a health-care trader who told agents about leaks he gave to Anthony Scolaro, then a portfolio manager for Diamondback Capital Management LLC, according to court papers. Scolaro’s subsequent cooperation -- including FBI debriefings and 43 recorded calls he made -- helped the government secure a search warrant for Diamondback’s offices in Stamford, Connecticut. Scolaro pleaded guilty and got probation. Diamondback paid $9 million to resolve a U.S. investigation.

Scolaro’s lawyer, William Brodsky, declined to comment. Tudor’s lawyer, Avrom Robin, didn’t return a call seeking comment. Shankar’s lawyer, Frederick Sosinsky, didn’t return an e-mail request for comment.

“Slaine’s cooperation led to the approach of other individuals who in turn cooperated with the government,” prosecutors wrote. One of them “led the government” to Karl Motey, whose own work helped the U.S. begin an insider probe of the Primary Global firm. More than a dozen others associated with that firm have been convicted. Motey pleaded guilty. His lawyer, Alexandra Shapiro, declined to comment.

Unique Cooperation

“What was so unique about Mr. Slaine’s cooperation -- he basically uncovered a crime in progress and allowed us to do this wiretap investigation,” Fish told the judge at Slaine’s sentencing. Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara in New York, declined to comment for this story.

While Slaine’s day-to-day involvement with the FBI tapered off by fall 2008, he still passed along the occasional tip. Agent Makol wrote on Sept. 24, 2008, that Slaine advised that the government “needs to investigate the stock price spike of Goldman Sachs (Goldman Sachs Group Inc.) 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.”

Rajat Gupta

Former Goldman Sachs director Rajat Gupta was sentenced in October to two years in prison for tipping Rajaratnam to Buffett’s $5 billion investment in the firm. It’s unclear if Slaine’s tip contributed to Gupta’s prosecution. Gupta’s lawyer, Gary Naftalis, and Goldman Sachs spokesman Michael DuVally declined to comment.

FBI records in Slaine’s case show agents in October 2008 fielding information about an alleged tipster known only by his nickname. During a discussion of a pharmaceutical company, the tipster “showed everyone approximately $10,000 to $20,000 in cash and said this is how I get to talk to people,” according to one FBI report.

The tipster shows up in FBI files of another case, in which he tells a trader to try on his leather coat and put his hand in his left pocket. The trader “pulled out a stack of cash,” the FBI report said. “This was how he got people to talk,” the tipster said.

The alleged tipster was never charged.

Drimal

On Oct. 16, 2009, the FBI arrested Rajaratnam and five others. Drimal, Goffer and 12 others were charged on Nov. 5. Four days before Drimal’s arrest, FBI agents approached him and asked if he’d wear on a wire on others -- including Slaine, according to Drimal’s wife, Arlene Villamia-Drimal, a lawyer who represents her husband. Drimal refused, she said.

The Wall Street Journal, citing unidentified persons, named Slaine as a cooperator on Jan. 16, 2010, and detailed some of his meetings with Drimal and Goffer.

“He was crushed,” Arlene Villamia-Drimal said of her husband. “He believed David was his friend.”

Over the ensuing months, Fish said, Slaine spent hours listening to wiretap recordings, reviewing transcripts, explaining the industry and meeting with prosecutors. In May 2011 he testified at the Goffers’ trial. By then, Drimal had pleaded guilty. He was sentenced to 66 months in prison. Zvi Goffer got 10 years. Rajaratnam got 11 years after his conviction at a trial in 2011.

Slaine’s Sentence

Slaine appeared in Manhattan federal court for his sentencing on Jan. 20. He apologized to his family. U.S. District Judge Richard Sullivan called him “a good person” who had committed a “serious crime” and sought to make amends by cooperating. He sentenced Slaine to three years’ probation and 300 hours of community service. He imposed a $500,000 fine and forfeiture of $532,287, the amount of his illegal profit. Slaine separately paid the SEC an additional $304,098.

Like most Galleon cooperators, he never spent a day in prison. Nevertheless, his ex-wife said, his life was forever altered.

“Why can the government pick and choose whose lives they can destroy?” she said.

As he awaits the end of his probation, Slaine today works with disadvantaged youth in a basketball league and does other volunteer work.

“He comes from humble beginnings,” said Jonathan Schindler, who operates a Manhattan program preparing food for needy Bronx residents, where Slaine volunteers. “It comes from a desire to help people.”

Slaine also works at a new venture far from the rat race of Wall Street. He is a partner in a small New York chain that trains and grooms dogs. It’s called Spot.

“He loves animals,” Elyse Slaine said.

To contact the reporters on this story: David Glovin in New York at dglovin@bloomberg.net; David Voreacos in Newark at dvoreacos@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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Companies Mentioned

  • MS
    (Morgan Stanley)
    • $30.76 USD
    • 0.87
    • 2.83%
  • GS
    (Goldman Sachs Group Inc/The)
    • $157.44 USD
    • 0.22
    • 0.14%
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