Nov. 5 (Bloomberg) -- During his first debriefing by two FBI agents on June 12, 2007, Wall Street insider David Slaine mentioned suspicious trades by two hedge funds: Raj Rajaratnam’s Galleon Group LLC and Steven A. Cohen’s SAC Capital Advisors LP.
His leads paid off. In October 2009, Galleon began shutting down after Rajaratnam’s arrest for trading on inside leaks. Yesterday, prosecutors announced that SAC would plead guilty to insider trading, pay a record $1.8 billion and close the fund to outside investors.
Without Slaine, Rajaratnam and Cohen might still be investing clients’ money. He was the first person to cooperate with the government and was acknowledged in all but name at yesterday’s press conference announcing SAC’s plea, according to two people familiar with the investigation.
“What started with a key cooperator led to thousands of hours of relentless investigative work by a team of FBI agents, uncovering an extensive network trafficking in inside information,” said April Brooks, special agent in charge of the criminal division of the Federal Bureau of Investigation’s New York office.
During the U.S. crackdown on insider trading over the past seven years, Slaine, 54, has emerged as one of the most important witnesses ever to share secrets with U.S. agents probing white-collar crime.
His work led directly to the conviction of 12 people and indirectly to a half-dozen others, according to court papers. On top of that, his leads helped agents build cases against other insiders, some of whom cooperated with prosecutors and ratted on even more. In all, more than 75 people have been convicted.
The SAC plea “is the latest step in the largest insider trading investigation in history,” Brooks said.
If the plea is accepted by a federal judge, Stamford, Connecticut-based SAC Capital will admit to five counts of wire fraud and securities fraud in a conspiracy that prosecutors trace to 1999. SAC must close its affiliated hedge funds to outside investors.
Cohen, 57, hasn’t been charged with criminal wrongdoing and may continue to trade his own fortune, estimated at about $9 billion. The government is continuing its investigation and no one is immune from prosecution, Manhattan U.S. Attorney Preet Bharara said yesterday.
Cohen faces an administrative action filed by the U.S. Securities and Exchange Commission for his alleged failure to supervise SAC.
Jonathan Gasthalter, a spokesman for SAC with Sard Verbinnen & Co., said in an e-mailed statement that the hedge fund takes “responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC’s liability.” To date, six former SAC fund managers and analysts have pleaded guilty to insider trading.
Two others are scheduled for trial, one this month and one in January.
Slaine never worked at SAC. Running the over-the-counter desk at Morgan Stanley, he made a name for himself as one of Wall Street’s savviest traders. In 1998, after Nasdaq accused him of manipulating stock prices, he left Morgan Stanley and joined Rajaratnam’s Galleon Group. Later, he took a job as head trader at Chelsey Capital, a Manhattan fund. While there, he traded on an illegal tip. A colleague told prosecutors about it.
FBI agents came calling in mid-2007. By then, the bureau was mining trading records and tailing suspects as part of a probe into illegal trading. Yet the agents lacked a witness. Slaine, fearing he would go to jail, agreed to talk.
Internal FBI documents show how Slaine furnished the agents with a road map of Wall Street wrongdoing. Most of his tips concerned Galleon and traders who once worked there. A few involved SAC.
Slaine’s lawyer, Stephen Kaufman, declined to comment on his client’s cooperation.
On June 12, 2007, during his first meeting with FBI agents, Slaine mentioned two former SAC traders by name and passed along details of an illegal trade by Galleon. In a more extensive debriefing on July 25, 2007, he again discussed the two ex-SAC traders and said one of them “would get the information for Steve Cohen.”
“Someone sent a fax from Lehman Brothers to SAC Capital saying downgrade Amazon,” according to the FBI report, which summarized Slaine’s comments. “SAC Capital shorted 100,000 shares of Amazon.”
Agents were curious about the relationship between Galleon and SAC, according to the reports. On August 25, 2007, Slaine told them “there are people from SAC Capital that came to Galleon,” according to the report.
In September 2007, the FBI wanted to know about trader Craig Drimal, who had once worked at Galleon. Slaine helped them build a case, telling the agents that “Drimal took the information” he got to the same ex-SAC trader he had mentioned earlier. Drimal later pleaded guilty.
In December, as the agents turned their sights on a trader named Zvi Goffer, Slaine offered another SAC tidbit: According to Slaine, “Goffer stated he had a friend at SAC in the accounting department,” according to the FBI documents. Goffer was also convicted.
When the market plummeted in September 2008, Slaine told the agents that “Steve Cohen (SAC Capital) covered his position in financial stocks.” He also whetted the government’s appetite for Diamondback Capital Management LLC, which would close after the FBI raided the fund in 2010.
Slaine “described Diamondback Capital as another SAC Capital,” the agents reported on October 2008. He passed along other tips as well.
Slaine “advised that the government should look into the shorting of GE prior to the downgrade by the bond rating agencies,” the agents wrote after a January 2009 meeting, referring to General Electric Co. “SAC Capital shorted GE heavily just prior to the downgrade,” Slaine told them, according to the reports.
Slaine spoke to the agents more than 200 times and wore a wire on the FBI’s behalf. His leads helped the government win court approval to wiretap Rajaratnam’s mobile phone, and he passed along information that led to a probe of expert-networking firm Primary Global Research LLC, according to court papers.
The expert-networking investigation ensnared two ex-SAC fund managers. One of them, Noah Freeman, who pleaded guilty and agreed to cooperate, told the FBI in December 2010 that he “and others at SAC Capital understood that providing Cohen with your best trading ideas involved providing Cohen with inside information,” according to court records.
Slaine’s cooperation became public in January 2010. Slaine left Wall Street and co-founded Spot, a small New York chain that trains and grooms dogs. Last year, he was sentenced to three years’ probation, community service and forfeiture of $532,287, the amount of his illegal profit at Chelsey Capital.
Prosecutors called his cooperation “exceptional.”
“Perhaps the greatest impact of Slaine’s cooperation may be that his assistance was the launching point for many successful and ongoing criminal investigations of multiple insider-trading networks” they told a judge.
The criminal case is U.S. v. SAC Capital Advisors LP, 13-cr-00541, U.S. District Court, Southern District of New York (Manhattan). The civil case is U.S. v. SAC Capital Advisors LP, 1:13-cv-5182, U.S. District Court, Southern District of New York (Manhattan).
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