Mike Kimelman co-founded Incremental Capital, a proprietary-trading firm. On a November day at 5:30 a.m., he was greeted by a half-dozen federal agents with German Shepherds. His then-wife and children were sequestered in the master bedroom while he was charged for conspiracy and illegally trading shares of 3Com in 2007. He served 21 months in prison. In this Q&A, Kimelman tells ex-Galleon trader Turney Duff about the fear of going to prison, that day and how it changes you.
Duff: After receiving your law degree and working in corporate law, you headed to Wall Street to work for a prop shop. What was the biggest draw?
Kimelman: Almost entirely time, rather than money. I was working 100-hour weeks, living in NYC and in love with my future wife, who I had recently met. I didn't want to look back and say I spent my 20s proofreading SEC Filings and sleeping under my desk. Plus, I felt my skillset was particularly well-suited to the intellectual-analytical challenge of trading and money management.
Duff: Before you were arrested did you ever worry that you might be working with the wrong crowd?
Kimelman: Yes and no. In my situation, I felt I was making the best decisions for my business and for my family. It's hard to make the leap from minor personal transgressions to endemic criminal activity. If that were the case, and we couldn't be friends or in business with anyone who smoked marijuana, or drove home from the bar after a few cocktails, or put an occasional lunch on the corporate credit card, I'm not sure how many friends or business partners would be left.
Duff: How much fear did you have about insider trading before you were arrested?
Kimelman: Prior to Raj Rajaratnam's arrest, personally it was on the low end but probably in the middle as the owner of a large trading firm. As a former M&A lawyer, I had studied the field extensively and it had been drilled into my head what was permitted and what wasn't. As long as you didn't know (or shouldn't know) the info you were hearing was coming from someone breaching a fiduciary duty, it was playable. What most people fail to realize, is that the entire industry is (was) based on the flow of information — the entire playing field, from analysts, to research services, websites, brokerages, chat rooms and other services where traders congregated and exchange information, tips, calls, gossip, 95 percent of which were absolute garbage.
Hearing fourth-hand on a trading desk unsourced that CSCO might get upgraded by Merrill is night and day to Raj getting a call directly from a Goldman Sachs board member. One is an unverifiable rumor, the other is a breach. The reality is that the government made a conscious decision not to prosecute these cases for almost two decades, and — not unlike steroids in baseball — everyone knew it was going on. Type up any chart of a company that had a significant corporate event from 2000-2007 and you can see the stock run days or weeks before the announcement. Numerous academic studies show the same leakage. But "hearing" vs. "knowing" are two separate animals, and the government woke up one morning and decided to expand the definition of what was permissible, and what wasn't.
Duff: They got you on one trade. Trading records showed you bought a large block of 3Com stock just before a deal was announced. You earned a total of $290,000 in profits on the trade. But given the most recent overturn (Todd Newman and Anthony Chiasson) they didn't prove you knew the information was considered illegal.
Kimelman: It amounted to a "strict liability" case. It's particularly head-scratching especially when they had an FBI informant sitting next to me on the trading desk wearing a body wire for almost 18 months trying every day to implicate me in a series of schemes, both old and new. The fact that they didn't even call him at trial should have been proof enough for a jury that this case didn't make sense.
Duff: I realize there's no good time to get arrested, but 5:30 a.m. with the wife and kids sequestered in the master bedroom seems a little aggressive to me. Do you think they could have done it differently?
Kimelman: Of course, and "aggressive" would be an understatement! This type of arrest was designed solely to embarrass and intimidate me and to inflict the maximum amount of terror and trauma on my family. As you can imagine, my family was scared to death by the German Shepherds and brigade of agents nearly taking the door off the hinges and "searching" my house for God knows what. And to top it off, the perp walk in front of neighbors and TV crews alerted in advance .
Duff: How much fear did you have waiting for trial?
Kimelman: The fear never goes away, it was just a debilitating low-level constant that ate away at my psyche and my overall being. I became incredibly depressed, never slept, and just waited for 18 months in this incapacitated limbo state. I questioned every single day what this was going to do to my children and would I be around to be a father to them? In hindsight, I realize this time period was really designed to test my will and ability to survive. The waiting game for trial is a nasty two-pronged approach: You can't work because of the publicity of the trial but you are draining yourself and your family financially in the process. It is absolutely brutal and many in my position do not survive it.
Duff: Your role was considered marginal enough that you were offered a deal to plead guilty to a charge of participation in the conspiracy and receive no prison time, only a sentence of probation. Why didn't you take it?
Kimelman: In retrospect it's easy to say that's the right move, but it was very simple for me. I didn't think I broke the law, and if I wasn't willing to stand up and say that, how could I look my children in the eye and tell them with a straight face they should stand up for the right thing, or the underdog, as I try to teach them to do. What was I supposed to do? Stand up in front of the judge and perjure myself and say I did it? Other people in our case took that approach for sure. Bottom line, if I had a clear mind at the time and understood that nobody actually wins at trial (98 percent), I might have taken the deal. But then again, I can be stubborn when I think I'm right.
Duff: What did you do to prepare for going to prison?
Kimelman: I tried to make sure my affairs were in order and spend as much time with my children as possible. I spoke to people who had survived the experience and got some solid advice. Until you go through something like this, you never realize how many people you know have parents, siblings or friends who have been through something similar. I wrote my kids letters, made recordings. Tomorrow is promised to no one. If I didn't come home, I wanted them to know who I was, and that they were loved.
Duff: What do you wish you knew then that you know now about going away?
Kimelman: We don't have the space Turney.
I ran into flack at Lewisburg [penitentiary in Pennsylvania] because the BOP [Federal Bureau of Prisons] in their infinite wisdom, put my two codees [co-defendants] in the same prison as me. These were the same two codees the government forced me to go to trial with because they know they could make a strong guilt by association case since they didn't have the evidence to try me on their own.
A guy on the inside [one of my co-defendants], who blamed me for his conviction, did everything possible to jack my time, from putting a bounty on me to bragging to the other inmates that he had hired someone on the outside to rape my 8-year-old daughter, and then promised he would rape her again personally when he got out.
From a societal point of view, I learned what an abject disgrace our prison system is (really the entire criminal-justice system). While I get that it's supposed to be punitive, I find it hard to believe that the American public would allow it to exist in its present state if they knew what it was like.
Duff: What are you doing now?
Kimelman: I'm finally starting to bounce back professionally. Aside from completing the book I started while I was in prison, I've pivoted into three areas of interest to re-build my career. After coming out, I struck a co-development deal with two production companies and I've been busy developing and writing a couple of scripted and unscripted projects. The second is doing some advisory work for a firm that has investments in Eastern Europe and Central Asia. Finally, I've been working for a real- estate investment firm that is active nationwide and am helping them target attractive opportunities.
Obviously, it's been very difficult to get anything going because of my probation restrictions. For the first 18 months, I was allowed to travel 2 hours north to the Catskills without notice, but wasn't allowed to take a 7 minute train to Brooklyn, or cross the Connecticut border which is 10 minutes from my front door without prior approval by my probation officer. There are severe travel and other restrictions while on probation (3 years) that make it very difficult to gain employment, or to perform certain jobs. And many firms, banks or other institutions won't even touch you while you're on probation. I'm still trying to figure it all out, and have to contend with doors being slammed in my face constantly, but that's life. Most importantly, I'm striving to be the best father I can, and to make amends for the lost time.
I'm also volunteering my time to several causes that I feel strongly about, including prison and education reform.
Duff: How has your relationship with your kids changed if at all?
Kimelman: It's stronger. Once you've had everything taken from you, and you don't get to see your children for months if not years, you understand how incredibly lucky you really are to have healthy children and to be able to play a meaningful role in their lives. I probably prioritize things in my life differently than I did before, specifically my relationships with my kids, parents, and close friends. A lot of people don't value these relationships the way they should and you truly do.
It's also a bit clichéd but you don't sweat the little things. While I was away, my kids hadn't seen me in quite some time so my parents flew 3,000 miles from California to New York to pick them up and drive four hours to Lewisburg to visit me. While they were waiting with other families in the visiting room, the administration decided to cancel all visits for the weekend because some inmate got caught smoking. From my vantage point, I could see my 3-year-old and 6-year-old sobbing hysterically as they were escorted back to their car. Once you've gone through that, and other episodes that rival it, you don't get caught up in the minor stuff. So yeah, if they want to eat pancakes with their hands or stay up past their bedtime to watch the Yankee game with me, have at it.
Duff: What's next?
Kimelman: That depends somewhat on Judge Sullivan. If he vacates my conviction as we've asked him to do in light of the Newman decision, I'll probably take my family and parents on a celebratory trip, which would be my first in many years. Until that time, I'll keep grinding. And if anyone wants to work or partner up with a serial entrepreneur, disbarred lawyer and ex-CFA trading at a severe discount to FMV, DM me on Twitter.
Until that time, I will continue my work projects and continue volunteering for causes like prison and education reform.
Commentary by Turney Duff, a former trader at the hedge fund Galleon Group. Duff chronicled the spectacular rise and fall of his career on Wall Street in the book, "The Buy Side," and is currently working on his second book, a Wall Street novel. He is also featured on the CNBC show, "The Filthy Rich Guide." Follow him on Twitter @turneyduff.
Want to know more about what life is like on the inside? Tune in to the CNBC documentary "White Collar Convicts: Life on the Inside," featuring interviews with Mike Kimelman, former Tyco chief Dennis Kozlowski, former NYPD commissioner Bernard Kerik and former Qwest CEO Joseph Nacchio. Wednesday, April 29 at 10pm ET/PT. Here's a clip where Ja Rule talks about how Kozlowski did his laundry — and was pretty bad at it.