I had been working as a trader at a hedge fund for a little more than a year. I noticed one of our outside lines ringing. "Galleon," I said, after one ring. The voice on the line was muffled. "Galleon," I said again, and this time I could barely make out: "Is Gary there?"
"No," I said. "He's out of the office." A few silent moments went by.
I was just about to hang up when I heard the whisperer's voice again: "Is Raj there?"
"Sorry," I said. "He's off the desk—can I help?"
I could hear him breathing. His voice made me imagine a trench coat and a phone booth. Very mysterious.
Finally, Mr. Whisper's voice grew a bit more intelligible. "Jefferies is going to upgrade Amazon in six minutes," he said. Then I heard a click, and just like that he was gone. I had no name, no phone number, and no idea whether the information was correct. I glanced at the clock on my computer. It was 12:59 PM. I didn't know whom to tell or even whether I should tell anyone. Mr. Whisper could have been some kind of whack job, or maybe this was one of my boss's sick jokes. I checked the clock. It was one sharp. Thoughts started to swirl in my head. Maybe I could just buy some AMZN and see whether they upgraded it. But then, just as quickly, I decided not to. Who calls in the middle of the day and talks like he's out of some Russian spy novel? The minutes on my computer clock moved like seconds. 1:02. But if I didn't buy any AMZN, and he was right, would Mr. Whisper call Raj or Gary later, expecting a pat on the back? Fuck. 1:03. Two minutes to decide. 1:04. Screw it, I said. I bought 100,000 shares of Amazon and pushed back in my chair, hoping Mr. Whisper knew what he was doing.
Exactly at 1:05 PM AMZN stock started to move up. At first it was a quick 50 cents, and then, seconds later, it was up $2. The Jefferies light started to ring, and I picked it up. He told me they were upgrading AMZN. I wanted to say I knew, but I thanked him and hung up. I kept watching the stock go up, and the idea that I might have done something illegal seeped into my thoughts. But only for the briefest of moments. This is how it's done, I reassured myself. Every day, my bosses pounded it into my head that I needed to get edge. This was what they were talking about. From then on, I said, every time the outside wire rang I was going to pick it up. I wanted to talk to Mr. Whisper. The stock was up $5, and I thought to myself that if I got this call every day I'd be a great trader.
When I arrived on the Street in 1994, insider trading was as commonplace as jaywalking.
I don't remember the first time I jaywalked, but it was probably somewhere in Cleveland in the early 70s. I'm sure I was holding hands with one of my parents and that we looked both ways. Not for the authorities, but for oncoming traffic. I know what you're thinking: This joker is going to try to compare insider trading to jaywalking. Fair enough. But the truth of the matter is that when I arrived on the Street in 1994, insider trading was as commonplace as jaywalking. There were things that might have seemed a bit questionable to an outsider, but they qualified as part of the game. We called it edge. In the span of two years I went from making about $40,000 a year as a sales assistant at Morgan Stanley to making $300,000 as the head trader on a billion-dollar fund at the Galleon Group. Edge was what got me there. Maybe the late 90s and beyond can be compared to the steroid era in Major League Baseball—if you want to put an asterisk next to my earning statistics, that's fine. I was never getting into the Wall Street Hall of Fame anyway. It's how things were done, maybe how they still are. Get an edge or get cut from the team.
I'm not sure I'd have been able to stay at the Galleon Group if I didn't try to get every available edge. For me the landscape shifted in August 2000, when the Securities and Exchange Commission introduced Regulation FD—which required that all public companies disclose material information to all investors at the same time. It was an effort to put an end to selective disclosure. The change didn't happen overnight. It took years for companies and investors to comply. What we were left with was, on paper, an even playing field of no disclosure.
But somebody needed to start talking. So on the Street we saw the emergence of "expert networks." Let's say an old source from Pfizer wouldn't tell us what was going on. Well, in that case maybe we could find a doctor or a lawyer familiar with Pfizer. They could be paid a consulting fee, like any other expert hired to help us understand a company or sector. Then we could use their information to formulate a trade. It was a new reworking of an old game: This sort of thing has been going on in every country club in America and all over the world forever. Another primary source of insider tips comes from within the very walls of Wall Street. Analysts know about upgrades before they become public, bankers work on deals before they're announced, and traders see massive order flows. Not everyone is doing this sort of thing, but it's not exactly unheard of, either.
"We're going to upgrade XYZ in ten minutes" or "We've got seventeen million shares of XYZ to buy at the close from our program trading desk" hardly makes you feel like Charlie Sheen posing as a janitor and stealing files from a law office. It's just a great call—it's edge. And the end result is a couple of fist bumps, maybe a smile from your portfolio manager (they're hard to come by), and more money. The guy on the other end of the phone gets more order flow, more commissions, and a few gold stars next to his name.
It can happen in person, too. I remember once in the early 2000s, at the Marquee in Chelsea: The club was at capacity, but VIP was spacious. It was darkly lit, to perfection. My feet vibrated from the booming bass, the bottles in front of me reflected the candlelight, and beautiful women fluttered about. It was hedge-fund mafia up in there, with a few dot-com clowns mixed in. Sitting across from me was Lance. Like me, Lance was a hedge-fund trader. He had an in at a few research boutiques like Avalon. Lance always got a wink or a nod before they put out a scathing research report on a company. Over in the corner was Michael—he was on the sell side and good for an early heads-up on upgrades and downgrades from his firm. He was sitting next to his client Pesto, who knew on Thursday what was going to be on the front cover ofBarron's on Saturday. A few tables down were some bankers with knowledge of some imminent takeovers. The guy trying to get into the VIP section was a Frenchman from UBS; Lance told me that he'd leaked all of their program-trading flow. That's a nice call. If you know a billion dollars of S&P is coming to market, adjust accordingly. The VIP host was playing defense, so I made my way over. "He's with me," I said. The Frenchman smiled and went to shake my hand. I don't usually like to share my cocaine, but for him I made an exception. I slid the tiny bag from my pocket into his hand with the skill of a professional pickpocket. "We should talk," I said.
One of the many things I learned doing this sort of stuff at the Galleon Group was how to not get caught. If you want to play it fast and loose there are certain rules you must abide by:
- Never trade options on a sure thing; it's the first place the feds look.
- Always have a paper trail—e.g., an email pitching you the idea for every reason except the inside information.
- Buy more than you want and then sell some before the announcement. It shows misperception. If you knew about the announcement, then why would you sell some right before?
- Never have anything in print. Only use the phones (this one is changing).
- Find the derivative stocks that will benefit from the news—play those big. If your info comes from Exxon but it helps Exxon suppliers as well? Play the suppliers.
- Be prepared for a phone call with the SEC. Play dumb, but have your story straight.
- Discuss the trading idea with other employees but withhold the secret sauce.
- Reward your informant handsomely.
This is the thing about jaywalking, though. Chances are pretty low that you'll get a ticket or pay a fine: That's not the risk. Even if you do get caught, you'll probably just be told not to do it. The real risk is getting run over by a Mack truck. And in the past five years that risk has increased dramatically. It starts with a knock on the door as you're getting the kids ready for school, or a tap on the shoulder in line at Starbucks; the feds will want to know everything. And even if you stay out of prison, your résumé won't be worth any more than a paper airplane. Gary left Galleon just months before the indictments came down, and now he's out in Texas riding in amateur rodeos. Raj is in prison in Massachusetts. So if you're still planning on jaywalking—look both ways.