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A Trader, an F.B.I. Witness, and Then a Suicide

In a Manhattan courtroom last week, federal prosecutors played for a jury a secretly recorded telephone conversation between two Wall Street traders exchanging stock tips.

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Two days later, one of those traders, Ephraim G. Karpel, hanged himself in his Fifth Avenue office, according to a law enforcement official.

Mr. Karpel was never charged with any wrongdoing, and until last week his name had not emerged in connection with the government’s vast investigation of insider trading.

Yet while working for a New York commodities firm, he had agreed in 2008 to cooperate with federal authorities, and for about a year he taped conversations with fellow traders, according to two people with direct knowledge of the matter who insisted on anonymity to discuss it.

“The government’s investigation changed his life forever and was his unraveling,” Fran Karpel, his wife, said in a telephone interview from her home in Livingston, N.J. “He sank deeper and deeper into a hole and couldn’t see a way out.”

Federal prosecutors’ increasingly aggressive and public stance in pursuing insider trading has led to headline-grabbing convictions and stepped-up compliance procedures at hedge funds.

But behind the scenes, the government’s hardball investigative tactics—using surveillance, pressuring witnesses and raiding offices—have also spawned a culture of fear on Wall Street and affected the lives of many who have not been accused of any crimes.

Whether the investigation played a role in Mr. Karpel’s death cannot be known. He had been depressed after losing his job, his wife said, and other factors may have contributed.

But according to Ms. Karpel, his death at age 50 came three years after a pair of agents from the Federal Bureau of Investigation approached him outside the Applejack Diner, at 55th Street and Broadway. The agents took him inside the restaurant and, seated at a table toward the back, told him they had evidence of his involvement in an insider trading network.

The government’s supposed evidence included a telephone conversation between Mr. Karpel and Zvi Goffer, a trader whose phone the F.B.I. had tapped.

On the call, recorded on Dec. 31, 2007, Mr. Karpel told Mr. Goffer that the drugstore chain Walgreens had made an offer to acquire Matria Healthcare.

“I’ve got the trade for the month of January for you,” Mr. Karpel said, according to a transcript of the call. “It’s coming from a banker.”

That call was one of more than 20 wiretapped conversations played during Mr. Goffer’s two-month trial, which is now in jury deliberations.

The Walgreens deal never happened, but the recorded conversation led federal authorities to approach Mr. Karpel and seek his help in building insider trading cases. It is unclear how investigators thought that Mr. Karpel could help them.

“Ephraim was a very popular guy and knew a lot of people,” his wife said. “He always called it a fishing expedition.”

Indeed, Mr. Karpel had many Wall Street connections. He worked for 18 years at Mutual Shares, an investment firm run by the fund manager Michael F. Price, rising to the position of head trader. Mr. Karpel then left Mutual Shares to work as an analyst, a job he considered more cerebral and respectable.

He developed an expertise in metals and mining stocks. After a stint at P. Schoenfeld Asset Management, Mr. Karpel joined Tigris Financial Group, a commodities firm run by the investor Thomas S. Kaplan.

None of Mr. Karpel’s former employers has been accused of any wrongdoing.

Raj Rajaratnam, confronted by media as he leaves the Daniel Patrick Moynihan United States Court House at 500 Pearl Street after being found guilty of 14 charges against him on May 11, 2011 in New York City. After eleven days of deliberation a jury convicted Rajaratnam with all 14 counts of securities fraud and conspiracy.
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Raj Rajaratnam, confronted by media as he leaves the Daniel Patrick Moynihan United States Court House at 500 Pearl Street after being found guilty of 14 charges against him on May 11, 2011 in New York City. After eleven days of deliberation a jury convicted Rajaratnam with all 14 counts of securities fraud and conspiracy.

Over the last two years, the United States attorney’s office in Manhattan, which has led the federal investigative effort in this area, has charged 49 people with insider trading crimes. Thirty-nine of them have pleaded guilty or been convicted by a jury,including Raj Rajaratnam, the billionaire hedge fund manager.

But the federal authorities’ techniques have rarely been seen on Wall Street before.

Late last year, F.B.I. agents conducted three simultaneous raids of large hedge funds. Two of those funds have since closed. And for the first time in an insider trading inquiry, the government has been using wiretaps—a method typically reserved for drug crimes and organized crime cases—to record the telephone conversations of Wall Street traders.

In one instance, the government came under official criticism for its wiretap practices. Earlier this year, Judge Richard J. Sullivan rebuked law enforcement officials for monitoring an intimate call between a trader and his wife, a conversation that was not germane to the trader’s case.

“The court is deeply troubled by this unnecessary, and apparently voyeuristic, intrusion,” wrote Judge Sullivan, a federal judge in Manhattan.

It was wiretaps that led the F.B.I. to confront Mr. Karpel on the street.

After the encounter, Mr. Karpel retained Daniel R. Alonso, then a partner at the law firm Kaye Scholer, who advised Mr. Karpel to cooperate with the government.

Mr. Alonso, now the chief assistant district attorney for Manhattan, would neither confirm nor deny that he had represented Mr. Karpel, citing legal ethics rules. Representatives of the F.B.I. and the United States attorney in Manhattan declined to comment.

Ms. Karpel said Mr. Alonso had counseled her and her husband to keep Mr. Karpel’s cooperation with the government quiet.

“Our lawyer said, ‘You can only discuss this with me, your rabbi or your therapist,’ ” Ms. Karpel said. “We didn’t have therapists and we belonged to a synagogue but didn’t want to talk to our rabbi, so we kept it a secret from everyone, even our family.”

“We were terrified,” Ms. Karpel added. “We had nobody to turn to.”

Ms. Karpel said her husband had been in horribly conflicted about his cooperation. She said he had been so worried about entrapping his friends that he began cutting himself off from Wall Street contacts.

By mid-2009, the F.B.I. began to lose interest in Mr. Karpel, according to his wife, and stopped asking for his help.

Around that time, however, his employer, Tigris, learned of his involvement in the investigation, according to a firm spokesman. Tigris dismissed him, but he continued to work with the company as an outside consultant until his death.

In recent months, Mr. Karpel had been in talks to join Javelin Partners, a fledgling Toronto firm that advises small mining companies. He never joined the firm but had been subleasing space at Javelin’s New York office on lower Fifth Avenue, which is where he was found.

After he lost his job at Tigris he became very depressed, Ms. Karpel said.

“He loved Wall Street and he loved his friends there,” she said. “He felt like he had to reinvent himself.”