The New York Post by Kaja Whitehouse - May 15, 2011
Spilling insider tips over the phone has become taboo on Wall Street, thanks to Manhattan US Attorney Preet Bharara's aggressive campaign against insider-trading and his unanimous, headline-grabbing legal win this week against hedge-fund titan Raj Rajaratnam -- a case which trotted out a whopping 46 wiretaps to convict the one-time billionaire. But if Wall Street traders think Preet has wheeled out all his weapons, they'd better think again. The next insider trading trial -- focusing on three small-fry traders and starting tomorrow -- could have Wall Streeters watching their backs both on and off the phone. That's because in order to bring the next case, centering on the three partners of a start-up hedge fund called Incremental Capital, the government used surveillance techniques more common to cop shows than the trading floor -- namely, body wires and hidden video cams. In addition to thousands of wiretapped calls, the FBI also collected evidence from at least four different people who recorded face-to-face conversations with various defendants in the case, according to court records and people familiar with the case. In fact, there's a good chance that if Bharara didn't go all "Sopranos" on the Wall Street crowd, then the feds would never have hooked the big fish, Galleon founder Rajaratnam, whose famous wiretaps came as a result of the probe into this next group of defendants. Former Galleon trader David Slaine -- who kicked off the FBI's wider insider-trading probe, "Perfect Hedge," by recording conversations of fellow former Galleon trader Craig Drimal -- wore both a body wire and a hidden video camera to collect evidence for the feds starting back in 2007.
Another trader, Franz Tudor, wore a body wire for up to a year while working with the defendants in 2008, sources said. Also sporting body mics were Brien Santarlas, a lawyer with the Manhattan law firm Ropes & Gray, and Gautham Shankar, another trader. In November 2009, right after Rajaratnam's arrest, Santarles recorded his Ropes & Gray buddy Arthur Cutillo telling him to destroy a prepaid cell Santarlas used to talk to another defendant, prosecutors said. "Just take a walk outside and break it into pieces, and throw one piece in one garbage can and another one two blocks down the road. That's what I did," Cutillo said. How much, if any, of the body wires and secret videos will be entered into evidence by prosecutors in the upcoming trial remains unclear. Court documents suggest that some of the body wires, in fact, will be used by the defense to shore up their case against the government's allegation. The government says the three defendants to be placed on the hot seat this week -- Zvi Goffer, the founder of Incremental; his brother Emanuel Goffer; and his partner Michael Kimelman -- were engaged in a scheme to trade on illegal tips based on information they got from two Ropes & Gray lawyers, who have already pleaded guilty. Jury selection in the case starts tomorrow.
Ken Springer, a former FBI agent, says body wires, and even hidden videos, are more common FBI tools because they don't require a court order, as wiretaps do. So long as "one party is aware of it," they are considered consensual recordings, he said. While more common for the FBI to use, the use of wires -- and the publicity surrounding the government's use of wires by seemingly innocent colleagues that this trial is likely to generate -- is sure to amp up the jitters of some Wall Street traders even more. With all the hullabaloo over wiretaps, some stock pickers "may feel more comfortable talking in person," said Springer. But they would be mistaken. For example, months before the first wiretap for insider trading was ever approved, Slaine recorded his trader pal Craig Drimal saying he had just met with his source, whom the feds now point to as Zvi Goffer. During the September 2007 meeting, Drimal said the source was getting intel about a private equity deal from lawyers, adding that "he did not know why the lawyer was risking his career and possibly 'jail' by providing such information," prosecutors allege. The following August, Slaine recorded a meeting with Drimal and the other defendants on the premise that he was going to invest several million dollars in their hedge fund, Incremental. At the meeting, Slaine pressed them to identify their sources, to which Goffer allegedly said Slaine's not knowing would be "better for everybody." Kimelman allegedly joked about the information coming from a guy fixing a pothole, the feds say. During the trial, prosecutors are expected to say Goffer, 34, is at the center of the alleged conspiracy to pay lawyers for insider tips. When the married father of two was arrested in 2009, he hit the headlines with the nickname "Octopussy," a reference to the James Bond flick, because of his many sources. But people close to Goffer says he never heard the nickname before his arrest, and was put off by it. They blame the handle on Drimal, who called him that in one of his wiretapped calls, which then made it into the Securities and Exchange Commission's civil complaint, which was filed alongside the criminal complaint. Despite the resounding victory in the Rajaratnam case -- and even the chance that potentially embarrassing conversations will be played in court for the world to hear -- the trio don't appear to be backing away from the fight. A spokesman for Kimelman said his client "is as committed as ever, as is his defense team, in establishing his innocence and exonerating him at trial." Earlier last week, the 40-year-old former lawyer demanded that federal judge Richard Sullivan let the jury know that he rejected a sweet, no-jail plea deal to prove his innocence. The judge on Friday rejected Kimelman's request, saying the defendant didn't make his request in a timely manner. Kimelman's lawyer, Michael Sommer, said Kimelman passed on the deal "despite the possibility that, if convicted at trial, he could be sentenced to a period of imprisonment," because he believes he's innocent.
Wire we talkin’?
If traders hate US Attorney Preet Bahara using wiretaps to gather insider-trading evidence, then they will absolutely dread how the lawman gathered evidence for his next case, starting tomorrow — he went “Sopranos” on Wall Street and got traders to secretly record and videotape friends talking about criminal acts.
- Emanuel (The Younger) Goffer, 32 - Ex-Galleon securities trader - Facing 25 years.
- Zvi (Octopussy) Goffer, 34 - Ex-Galleon trader - Was seen taking notes during Raj’s trial.
- Michael (No Plea) Kimelman, 40 - Ex-Galleon securities trader - Turned down no jail plea agreement.