Wired on Wall Street: Trader Betrays a Friend

In the movie "Wall Street," Bud Fox wears a body wire and gets his partner arrested for insider trading. David Slaine has done that in real life.

For more than a year, Mr. Slaine, a senior Wall Street trader, was a government mole who wore a wire strapped to his torso, helping prosecutors to build the biggest insider-trading case in two decades.

Craig Drimal leaves a New York federal court after being accused of participating in an insider-trading ring. Reuters

Using extensive contacts developed over a 27-year Wall Street career, Mr. Slaine has provided leads on possible insider trading by others not yet implicated in a sprawling case involving hedge fund Galleon Group, people familiar with the matter say. That case has rocked Wall Street and Silicon Valley and raised questions about the integrity of the nation's financial markets. Mr. Slaine's identity as an informant is being revealed by The Wall Street Journal for the first time.

In a brief telephone interview Thursday night, Mr. Slaine said: "You got the wrong guy." He said he has "nothing to do with that case." He declined to provide a lawyer's name.

A criminal complaint filed in a New York federal court in November describes in detail the involvement of a cooperating source dubbed "CS-1." The Wall Street Journal has confirmed that Mr. Slaine is that cooperating source. This story of his involvement in the case was pieced together from information contained in the complaint and from interviews with Wall Street traders, lawyers and government officials involved the case.

Mr. Slaine's saga demonstrates how the U.S. has used Wall Street players to go undercover and turn on their colleagues. Mr. Slaine, 50 years old, has told prosecutors, among other things, that his friend and weight-lifting partner, Craig Drimal, traded on inside information. In November, Mr. Drimal was arrested at his Weston, Conn., home. Mr. Drimal declined to comment.

Mr. Drimal, 53, is among 21 individuals charged by the government in the Galleon case. The first wave of arrests included Galleon founder Raj Rajaratnam and five others. Mr. Rajaratnam has pleaded not guilty and is free on $100 million bail. Anil Kumar, a former McKinsey & Co. executive, has pleaded guilty to insider trading and will cooperate with the U.S.

Mr. Drimal is allegedly part of a second trading ring whose members—one of them was referred to as "Octopussy," after the James Bond movie—met on street corners to exchange cash for tips and used disposable cell phones, according to the government. The two alleged rings shared some connections, including Mr. Drimal, who worked at Galleon. They were unconnected in other respects, and the U.S. probes of the two rings proceeded separately.

Mr. Slaine has agreed to plead guilty to conspiracy and securities fraud-charges. His cooperation was the starting point of the investigation of the second ring, which resulted in the complaint against Mr. Drimal and 13 others. Mr. Slaine is believed to be the first witness to agree to cooperate with prosecutors in either case.

Mr. Slaine's involvement began in 2007, when the FBI confronted him with what the authorities said was evidence that he had traded on inside information. Mr. Slaine agreed to cooperate in a bid to win a more favorable resolution of the matter. Mr. Slaine told prosecutors that he believed that his friend, Mr. Drimal, was part of an insider-trading conspiracy involving a wide ring of other hedge-fund managers and lawyers.

Mr. Slaine's behind-the-scenes role is especially significant because of his extensive contacts on Wall Street. He is a former Nasdaq trading chief at Morgan Stanley, who also traded at Jefferies Group , JEF 1.62% Galleon and Oracle Partners, a health-care hedge fund. In addition, he ran a fund with two former employees of SAC Capital Advisors, a big hedge fund.

Mr. Slaine grew up in Malden, Mass., where he played high-school basketball and football, then attended Clark University in Worcester. After a couple of brief jobs on Wall Street, he joined Morgan Stanley in 1986, trading small stocks. By the late-1990s, Mr. Slaine had risen to become head of Nasdaq trading, putting him at the epicenter of the initial-public-offering boom in technology stocks. Former colleagues say he had a deep network of contacts.

While at Morgan Stanley, he met Mr. Drimal, then a nightclub bouncer at the Vertical Club in Manhattan. The two quickly formed a friendship based on a shared passion for weight lifting and their mutual ability to bench-press 400 pounds.

As his power grew at Morgan Stanley, Mr. Slaine at times lashed out at colleagues. He once smashed a computer keyboard in a fit of rage, says a person familiar with the incident. In 1993, he triggered a fist-fight with a colleague on the trading floor after needling him because he wouldn't share his french fries. Others broke up the fight.

In 1998, Mr. Slaine ran afoul of regulators, when the National Association of Securities Dealers (now known as Finra) accused him and five other Morgan Stanley traders of artificially inflating the prices of Nasdaq securities to minimize losses for the firm. The NASD in 2000 sanctioned Mr. Slaine, suspending him from the securities business for three months and fining him $100,000.

Mr. Slaine left Morgan Stanley and landed a job trading health-care stocks at Galleon with another friend, Gary Rosenbach, who then was the No. 2 executive under Mr. Rajaratnam. Messrs. Slaine and Rosenbach exercised together frequently. Mr. Slaine was best man at Mr. Rosenbach's wedding.

Shortly after arriving at Galleon, Mr. Slaine persuaded Galleon officials to give a position to Mr. Drimal, who then was working as a bouncer at the Roxy nightclub in Manhattan. Mr. Drimal was brought into Galleon as an assistant. Mr. Drimal—nicknamed "the Mayor" at the gym because of his affable demeanor—was eager to help out around the Galleon offices.

Mr. Slaine's performance trading stocks for Galleon's health-care fund faltered, creating tension, a person familiar with the matter says. One morning early in 2001, before trading began, Messrs. Rosenbach and Slaine were in a steam room together after exercising at an Equinox Fitness Club. Mr. Rosenbach was pressuring Mr. Slaine to improve his performance. As Mr. Rosenbach lay on his back on a bench, Mr. Slaine punched him, giving him a black eye and ending their friendship.

Later that year, Mr. Slaine left Galleon to form his own hedge fund, CJS Capital, with two partners, Robert Jaffe and Robert Cannon, both former SAC traders. By 2002, CJS's performance had stumbled and Mr. Slaine went to work for health-care hedge fund, Oracle Partners.

The insider-trading troubles began for Mr. Slaine in February 2007 after the government charged 13 traders and employees at UBS AG, Morgan Stanley and other firms in a separate case. A hedge-fund trader in that case got inside information that originated with a UBS trader, according to government documents. That trader subsequently pleaded guilty and told prosecutors that Mr. Slaine also had been given tips based on inside information in 2002. Morgan Stanley declined to comment.




At the meeting's end, Mr. Drimal told Mr. Slaine to destroy the list. He warned him to "be careful" in trading the securities because no news of the takeovers had surfaced publicly. Mr. Drimal said he was nervous about having "too much success" and said his source was golden, according to the complaint.

After the meeting, Mr. Slaine went to a nearby hotel where an FBI agent was waiting, says a person familiar with the matter. The pair went to a room where Mr. Slaine removed the wire. For the next hour, he answered questions about the meeting.

The following day, Mr. Slaine called Mr. Drimal from his home, with FBI agent David Makol guiding him on what to say. Mr. Slaine began to question Mr. Drimal about the four stocks. Mr. Drimal said he didn't want to talk about it on the telephone because if the government were listening in, it would be "like shooting fish in a barrel," the complaint says.

On Sept. 17, Mr. Slaine, again wearing a wire, met Mr. Drimal again. Mr. Drimal told Mr. Slaine that a source had told him that a group of private-equity firms was going to make a bid for 3Com Corp.

Mr. Drimal, admitting he was nervous, said his source—trader Zvi Goffer —had gotten the information from lawyers involved in the deal, the complaint says. After the meeting, Mr. Slaine met the FBI agent, Mr. Makol, in a hotel room, handing him his wire and strategizing about a meeting between the two traders the next day.

The next day, Mr. Slaine repeated the drill, again outfitting himself with his wire and connecting with Mr. Drimal. This time, Mr. Drimal told Mr. Slaine that Mr. Goffer was paying cash to the lawyer who was providing the information. He said he didn't know the lawyer's name and admitted the lawyer was risking going to "jail," the complaint says.

Mr. Goffer, a 32-year-old trader who also once worked at Galleon, was referred to by some people in the alleged ring as Octopussy because he "had arms in so many sources of inside information," the government says. "Octopussy" is the title of a 1983 James Bond film.

On Sept. 20, Mr. Drimal told Mr. Slaine that 3Com would be bought by Bain Capital and a Chinese private-equity firm. On Sept. 26, the two met again and Mr. Drimal told him that Hilton Hotels Corp. would be acquired. Like Mr. Drimal's other tips, it proved to be good.

Three months later, Messrs. Drimal and Goffer tried to recruit Mr. Slaine to work at a firm that would eventually be called Incremental Capital. Mr. Slaine wore a wire to the meeting. Mr. Goffer told him his source had given him advance information about four deals that had gone through: Alliance Data Systems , Avaya Inc., 3Com and Axcan Pharma Inc., according to the complaint.

Mr. Goffer told Mr. Slaine he had received the information from a "childhood friend in the construction industry."

During 2008, Mr. Slaine spoke with Messrs. Drimal and Goffer repeatedly about investing as much as $2 million in Incremental Capital. On Aug. 9, Mr. Slaine met again with the pair about investing. Mr. Slaine told Mr. Goffer he was "turned off" by what he viewed as Mr. Goffer's dubious claim that he was getting information from someone in the construction business.

"I wasn't born yesterday," Mr. Slaine said, adding that if he was going to invest $2 million in Incremental he wanted to know the source of the information. Mr. Goffer wouldn't divulge his source. He told Mr. Slaine that if the government ever asked Mr. Slaine where he got the information, it would be better if Mr. Slaine could say he didn't know, the complaint says.

On Nov. 5, the FBI showed up at the Connecticut home where Mr. Drimal lives with his family and two Rottweilers. Within a few hours he was escorted to Manhattan to be arraigned on charges of insider trading. He pleaded not guilty, and is thinking about striking a plea deal, according to people involved in the case. Mr. Goffer was arrested the same day and also pleaded not guilty to insider-trading charges.

Mr. Drimal hasn't spoken to Mr. Slaine since his arrest.

Write to Susan Pulliam at susan.pulliam@wsj.com
