Nov 4, 2011

Michael Kimelman: The Average Gatsby

He’s an American failure, but not a romantic one. An average Gatsby, not a great one. Michael Kimelman was all but guaranteed a successful career as a Wall Street lawyer, but that wasn’t enough. He wanted to work less and make more. Soon, he’ll be working in the prison laundry. How did he go from “white shoe” to white sheets in what appears to be record time?

Michael Kimelman was a first-year associate in corporate law at the old and distinguished firm of Sullivan and Cromwell. How old? Early partners preferred writing longhand to using that new-fangled invention, the typewriter. How distinguished? Partners may leave to become Secretary of State, but only temporarily. Starting salary for associates hovers around $200,000. Making partner means being a millionaire with job security.

It’s the kind of job that people dream about, but Michael was dreaming of something else. According to the article by Peter Lattman in The New York Times (10/23) “ ‘At S&C, I was working 100 hours a week and sleeping under my desk,’ Mr. Kimelman said, ‘Trading stocks seemed like a better life.” So “ . . . with the bull market raging in the 1990’s, he left the law” and “. . . pursued a career in the fast-money world of ‘prop shops,’ or proprietary trading firms, where dozens of traders buy and sell stocks with the firm's money. The traders then split their money with the firm, typically 50/50. Though Mr. Kimmelman lived comfortably, he was hardly a Wall Street titan. In his best year, Mr. Kimmelman said he earned $400,000 and never had more than $1 million in the bank.”

So far, so good. The unambitious among us might settle for a million in the bank, but not Michael. He wants his own "prop shop." Like F. Scott Fitzgerald’s Jay Gatsby, he believes in the green light: the promise of wealth and happiness that hovers just out of our reach. “. . . the orgastic future that year by year recedes before us.” Nothing wrong with that – unless you get involved with the Goffer brothers. In 2008, he opens Incremental Capital with his friend, Emmanuel Goffer as partner. To provide the initial funds, they approach Emmanuel’s brother, Zvi, “a fast-talking trader from Brooklyn.” What part of that description inspires confidence? (The words “a” and “from” don’t count.) Zvi, to his credit, has just been hired by a highly-regarded hedge fund named Galleon (as in “pirate ship”) and works for Raj Rajaratnam, one of the richest and most powerful men on Wall Street. Zvi arranges for Michael and Emmanuel to meet Raj and make their pitch. Everyone gets along, but no one gets money. That’s doubly a shame because Incremental Capital needs Galleon’s research as much as its money. To quote Mr. Kimelman, “ ‘Some guys do their own work, but there’s also a lot of piggybacking off of other people’s stock ideas.’ ” What’s worse, Galleon draws up the gangplank when they fire Zvi Goffer for poor performance. That green light is starting to flicker.

What do you do with someone who’s been fired for incompetence? If you’re Michael Kimelman, you hire him. He has reasons, though. Zvi knows everyone on Wall Street, just ask him, and he’s Emmanuel’s brother. To review, Mr. Kimelman is involved in a high-speed, high-risk financial operation (which he has not completely mastered) with two brothers, one of whom has been fired by a hedge fund for poor performance and is not exactly trustworthy. And he’s using his own money. What could go wrong?

The government could investigate Galleon on suspicions of insider trading. Well-founded suspicions, it turns out. Twenty-five executives, lawyers and traders are charged including Raj Rajaratnam himself. Far from being limited to Galleon, the trail leads into the boardroom of Goldman Sachs and down, way down, to Incremental Capital, whose star employee is busy passing out $100,000 bribes as if they were legal. So many people are arrested that the government decides to throw the small ones back. “Prosecutors offered Mr. Kimelman a deal shortly after his arrest in 2009: plead guilty to a sentence of participating in a conspiracy and receive no prison time, only a sentence of probation.” Great! The father of three young children grabs the deal with both hands and thanks all that’s holy for his deliverance, right? That’s one possibility. No shame in starting over. Gatsby is all about re-invention. Another is that he tries to beat the rap and get away clean. Given what you know, by now, about Michael’s judgment, which do you think he chose?

“ ‘Of course I have regrets about not pleading guilty; I could have ended this ordeal two years ago,’ said Mr. Kimelman. ‘But at the same time, I wouldn’t have been able to look at myself in the mirror if I admitted to something I didn’t do.’ ” Now, he’s been convicted of it and will have two-and-half years to ponder the difference. “With no parole in the federal prison system, he will serve out his entire sentence, though he can get a slight reduction for good behavior.” Michael Kimelman will be forty-three when he gets out of prison. Had he stayed with Sullivan and Cromwell, he’d be a partner by now.

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