Illustration by Kagan McLeod
It’s 9:57 a.m., and David Glass is walking down Broad Street, his feet falling hard on the December sidewalk. Sniffling from a head cold, the 32-year-old day trader looks straight ahead, barely registering the gift-shop windows filled with executive golf putters and bull and bear figurines. His cell phone startles him. “Yo,” he answers, betraying nothing. “Sorry, I meant to call you last night.”
With a deep breath, Glass enters the fluorescent-lit brokerage office of his firm, Jasper Capital. He high-fives friends, curses an investor who pulled $1 million from the firm, pecks out instant messages on his computer, asks about football scores. CNBC blares in the background. “What price are you short at?” he asks another trader. “$22.70? Oy! Right in the tush.”
He might be any trader at any firm in the financial district, but not today. Today, he’s wearing an FBI wire, preparing to coax a colleague into incriminating himself for agents listening in a van down the block. The Securities and Exchange Commission is cracking down on what one official calls “one of the most pervasive Wall Street insider-trading rings since the days of Ivan Boesky and Dennis Levine.” On the elaborate chart the U.S. Attorney will later use to diagram the crimes, arrows trace the flow of illegal stock tips from name to name, from an investment banker at UBS Securities to two hedge-fund traders to two others at Bear Stearns. The arrows multiply, travel down through every echelon of Wall Street, from a lawyer at Morgan Stanley and her husband to a broker in Florida, and further down still, thirteen people in all, with one accusatory arrow aimed at Glass himself. Wearing the wire is his chance to stay out of jail.
He approaches the office of Sam Childs, a compliance officer paid to enforce SEC rules whom the commission hopes to nab for allegedly demanding money from Glass in exchange for keeping quiet about the insider-trading scheme. Glass closes the door and sits down. In a conspiratorial whisper, he says he’s worried the SEC might be closing in on the man at the top of their food chain, the one passing along the inside information. That means the monthly payments to Childs will have to stop. The hidden microphone captures the rising tension.
Childs: That puts me in a really weird position, all right?
Glass: Wait, how does that put you in a weird position?
Childs: Well, I’m fucked financially, because I was counting on it …
Glass: Dude, I’ll work something out. I’m just saying, though, if I’m not going to eat, then tough.
Childs: I don’t know, I said that you could have paid me all at once … I didn’t want it to be like that, where every month he was paying. Now I really gotta be careful with what I say to them.
Glass: It also would’ve looked bad, to take a $100,000 check.
Childs: I know. But now because I’m screwed out of the whole thing, I can still go down on something.
Glass: You go down? On what? You can’t go down on anything. You’re not connected to this at all.
It’s a sterling performance. Two months later, Childs, along with everyone else in the ring, would be arrested.
To understand why more than a dozen successful, well-paid professionals would risk their careers and reputations—not to mention jail time—to trade on illegal stock tips, one must only look at the way Wall Street has changed in recent years. Making, say, $3 million a year used to be enough. Now hedge funds flip stocks like so many casino chips, reaping millions in a day, raising the stakes, stoking the envy, leaving everyone hungry for a larger piece of the ever-growing pie. Did you hear about the hedge-fund trader who lost $6 billion on one bad trade? He got fired, spent a few months on the beach, and returned to raise millions for a new fund. No penalty. No limits. Just monstrous sums of money. And the greed, it would seem, has gone viral.
The stock market today isn’t so much about stocks as it is about stock movements. Hedge-fund traders don’t just invest in securities; they move markets, fundamentally altering stock valuations through the sheer size of their positions. When the price of Apple Inc. drops fifteen points not long after it announces a strong earnings report, it’s usually because of a hedge fund cashing out, the smart money exiting the building. As for the average investor buying stocks based on news reports and SEC filings—on the actual value of an underlying business? He’s the sucker at the table, the easy mark. Learning where a stock is headed only after hedge funds have already driven it up or down, he doesn’t have a prayer—and neither do smaller traders like David Glass. Glass needed an edge. And if he happened to find a little inside information, he figured, it would be justice, not a crime—the only way to beat a system that had become stacked against him.