John Marshall Mantel for The New York TimesMichael A. Kimelman, with his wife, Lisa Kimelman, exits Federal District Court in Manhattan on Wednesday.
Last Friday, on a crystalline autumn afternoon, Michael A. Kimelman sat in the backyard of his home in Larchmont, N.Y. His toddler son was perched on his lap, sucking on a pacifier. His older son played baseball with a friend, while his wife and daughter gawked at 10 fresh-egg producing hens housed in their new chicken coop.
It was a vision of suburban bliss, save one grim fact: Mr. Kimelman is on his way to prison.
At the Federal District Court in Manhattan on Wednesday, a judge sentenced Mr. Kimelman, a 40-year-old former trader convicted of insider trading, to two and a half years. He could have avoided prison by accepting a plea deal, but had rejected the offer and took his case to trial. In June, a jury found him guilty.
“This is a serious crime,” said Judge Richard A. Sullivan in a courtroom filled with Mr. Kimelman’s family, neighbors, and college fraternity brothers. “When people engage in this kind of conduct and get caught, they will get punished.”
Two years ago, Preet S. Bharara, the United States attorney in Manhattan, brought charges against 26 defendants in a seven-year insider trading conspiracy. At its center was Raj Rajaratnam, who once managed $8 billion at the Galleon Group and was among the world’s wealthiest hedge fund managers. He was convicted at trial, and prosecutors have asked for a prison term of as many as 24 years.
On Thursday, a judge will sentence Mr. Rajaratnam and is expected to hand down the longest prison term ever for insider trading.
But in Mr. Rajaratnam’s shadows lurked a mostly anonymous network of corporate executives, lawyers, consultants, and traders who exchanged confidential information about publicly traded companies. Twenty-four have either pleaded guilty or been convicted; one remains a fugitive.
Of the 13 who have received sentences, their average term has been three years.
The government placed Mr. Kimelman, a 40-year-old journeyman trader, at the outer edge of Mr. Rajaratnam’s insider trading web. His role in the case was marginal enough that prosecutors offered Mr. Kimelman a deal shortly after his arrest in 2009: Plead guilty to a charge of participating in the conspiracy and receive no prison time, only a sentence of probation.
“Of course I have regrets about not pleading guilty; I could’ve ended this ordeal two years ago,” said Mr. Kimelman in an interview at his home last week.
“But at the same time, I wouldn’t have been able to look myself in the mirror if I admitted to doing something that I didn’t do.”
Mr. Kimelman grew up in a comfortable, middle-class home in Tarzana, Calif., a town in the San Fernando Valley north of Los Angeles. He went east for college, graduating from Lafayette College in Pennsylvania, and then finished near the top of his class at the University of Southern California’s law school.
He landed a job practicing corporate law at Sullivan Cromwell, one of the country’s most prominent firms, but found the work uninspiring.
He had a growing interest in the stock market, and with the bull market raging in the late 1990s, he left law.
“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.”
He 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 profits with the firm, typically 50-50.
Though Mr. Kimelman lived comfortably, he was hardly a Wall Street titan. In his best year, Mr. Kimelman said he earned about $400,000 and never had more than $1 million in the bank.
In 2008, Mr. Kimelman teamed up with a friend, Emanuel Goffer, to form their own proprietary trading firm, Incremental Capital. They needed seed money to start the business, so they looked to Emanuel’s brother, Zvi Goffer, a fast-talking trader from Brooklyn. Zvi had recently landed a coveted trading job at Galleon working under Mr. Rajaratnam.
Zvi Goffer held out the promise of Mr. Rajaratnam investing $10 million into Incremental and getting access to Galleon’s research.
Aligning with Galleon and Mr. Rajaratnam, who was considered one of Wall Street’s savviest stock pickers, would have been a huge coup for Incremental.
“It’s very much who you know on Wall Street,” Mr. Kimelman said. “Some guys do their own work, but there is also lots of piggybacking off of other people’s stock ideas.”
Mr. Kimelman met Mr. Rajaratnam once while visiting Zvi Goffer at Galleon’s office. They shook hands, exchanged niceties. But Mr. Rajaratnam never put money into Incremental, and Galleon soon fired Zvi for poor performance. Zvi, nicknamed “Octopussy” because his arms reached into so many sources of information, joined Incremental and promised to use his contacts to help build the firm.
“Some guys under-promise and over-deliver,” Mr. Kimelman said. “Zvi was the exact opposite.”
At 5:30 a.m. on Nov. 5, 2009, a half dozen federal agents showed up Mr. Kimelman’s front door. While the agents searched the house with flashlights, his wife, Lisa, sequestered the children in the master bedroom. They handcuffed Mr. Kimelman and drove him away.
Federal prosecutors accused Zvi Goffer of paying nearly $100,000 in cash bribes to get secret information about big merger deals from two corporate lawyers. They said that Emanuel Goffer and Mr. Kimelman, as part of the conspiracy, knew about Zvi Goffer’s scheme. They also charged Mr. Kimelman with illegally trading in shares of 3Com in 2007.
During trial, the government played secretly recorded conversations during which Zvi Goffer arranged with Mr. Kimelman to meet in person rather than discuss things over the phone.
On 3Com, prosecutors showed phone records indicating that Zvi Goffer, who had received an illegal tip that the company was a takeover target, spoke with Mr. Kimelman for 25 minutes on the night of Aug. 7.
On Aug. 8, trading records showed that Mr. Kimelman bought a large block of 3Com stock just before a deal was announced. He earned about $250,000 in profits on the trade, the government said.
Mr. Kimelman’s lawyers blasted the government’s case, arguing that it was based on innuendo and guilt by association. They argued that even if Mr. Goffer told Mr. Kimelman to buy 3Com, there was no evidence that Mr. Kimelman knew that the recommendation was based on illegal information.
“They charged Michael Kimelman with insider trading, yet they have not brought a single witness to this courtroom to say, ’I told Mike about an insider,’” said Michael Sommer, a lawyer for Mr. Kimelman at Wilson Sonsini Goodrich Rosati, in his closing statement. “And with tens of thousands of recordings, text messages, instant messages, e-mails, there is not one which shows the slightest misconduct by this man.”
Judge Sullivan acknowledged that the jury’s decision was a close one.
“I thought it was a verdict that could go either way,” said the judge during a pre-sentencing conference.
In recent weeks, Mr. Kimelman has spoken with about dozen former prisoners about their incarcerations and received a range of advice. Find something to keep you busy so don’t go crazy. Keep your head down and you won’t get beat up.
Lisa Kimelman is a former Martha Stewart employee who now runs her own catering business. She has kept a sense of humor, writing a story in the October issue of Elle magazine about selecting a wardrobe for her husband’s trial. But Ms. Kimelman, the daughter of Michael H. Moskow, the former longtime president of the Federal Reserve Bank of Chicago, is also bitter about her family’s plight.
“My father worked for three presidents, and I was a White House intern,” Ms. Kimelman said. “I believed in our government, and it never occurred to me that our system would fail somebody.”
They have yet to tell their children, ages 7, 5 and 2, that their father is going to jail. Mr. Kimelman said that they wanted to learn his exact sentence before delivering the news. He worries about his family’s financial situation; his savings are wiped out and he is in substantial debt. Within 60 days, he must report to the Bureau of Prisons, which will assign him to a correctional facility.
Last week, as a reporter asked Mr. Kimelman his feelings about going to jail, Cam, his red-headed, freckled 5-year-old boy, ran up to him.
“Daddy, daddy, can I go inside and play Wii?” he asked.
“It’s the kids,” Mr. Kimelman said. “It’s the kids that kill you.”
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