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Why This Inside Trader Wants His Conviction Overturned

June 9, 2016, 5:01 PM UTC
Katherine Grigorieva/Courtesy of Michael Kimelman

With his gray-flecked beard, sad eyes and slight build, Michael Kimelman looks much too soft for a man who spent 15 months in the brutal confines of the Lewisburg, Pa., federal penitentiary. Convicted of insider trading in 2011, Kimelman was one of the more than 80 people that U.S. Attorney Preet Bharara took down in a far-reaching Wall Street crackdown.

The 45-year old former lawyer and stock trader was one of the small fry snared in the net, and his story has been mostly forgotten. But three and half years after Kimelman was convicted—and 16 months after he came out of prison—an appeals court struck down two of Bharara’s other convictions, imposing a narrower interpretation of insider trading. Of the dozen or more people whose guilt was called into question in the wake of that ruling, Kimelman is the only one to do time—and the only one whose conviction still stands.

It’s not for want of trying. More than a year ago, on March 12, 2015, Kimelman filed a motion to vacate his conviction. In a supporting memo, his lawyer, Alexandra Shapiro, who also represented the two men whose guilty verdicts were overturned in the appeals decision, argued that Kimelman was convicted “on the thinnest of evidence,” and that a “clear and fundamental miscarriage of justice” had occurred. Last June, Shapiro requested a date for oral arguments. But the court denied the motion and has made no rulings since then despite a flurry of filings from Shapiro and the government. (The federal district court and the office of the U.S. Attorney for the Southern District of New York declined to comment for this story.)

For more about insider trading, see this video:

A former Sullivan & Cromwell lawyer turned stock trader, Kimelman was stripped of his licenses after being convicted of two counts of securities fraud and one for conspiracy. He was hardly a Wall Street titan. The trade he was convicted for netted him only $80,000 (the government alleged it earned the hedge fund where he worked at the time a quarter of a million dollars). Whatever wealth Kimelman accumulated was cleaned out by the trial and associated fines.

He has started to put his life back together with the help of a friend who put up capital for a new business venture, the Clarity Groupe, which mostly invests in residential real estate. Another friend helped him rent a small two-bedroom apartment in the middle-class Westchester County town of Mamaroneck, five minutes away from his three children, now 12, 10 and 6, who split their time with him and his ex-wife, who lives in the former family home in tonier Larchmont.

The marriage didn’t survive prison, but Kimelman has grown philosophic. “I’m very grateful for what I have,” he says. “Before I went away, my head wasn’t clear. I was drinking too much. I didn’t appreciate what I had in my life–three healthy children, an amazing and loyal cadre of family and friends,” he says from the cramped office in midtown Manhattan he now shares with several other entrepreneurs.

‘Drugs or money?’

When the talk turns to his prison experience, Kimelman describes it as nothing short of barbaric. Kimelman says he ate food that was “inedible,” wrapped himself in newspapers “like a homeless person” to endure freezing temperatures when the heat was turned off, and fended off requests for “shower dates.” Most of the time, Kimelman slept on a bunk bed, in a room the size of a basketball court, along with 125 other inmates whom you could reach out and hit without ever leaving your bed.

“Drugs or money?” were the first words Kimelman heard from his correction officer when he arrived at Lewisburg. He quickly learned that meant that most of the incarcerated were doing time for either financial or drug crimes. Kimelman says his teen years in the San Fernando valley of California, where he attended public schools rife with gang violence, helped him prepare for prison life. For the first four months in prison, he was held in a tiny cell with two African-American drug dealers who, he says, were “not the most friendly people.”

Zvi Goffer

Zvi Goffer, a former trader with Galleon Group LLC, arrives for a pretrial conference at federal court in New York in 2011.Getty Images

Kimelman is no saint, of course. He admits he got caught up in the fast-money, hard-drinking culture of Wall Street (he got sober in prison). And he made the fatal error of hooking up with Zvi Goffer, whose brother Emanuel had helped Kimelman start his trading firm, Incremental Capital, in late 2007. Zvi Goffer had contacts not only with convicted inside trader Raj Rajaratnam (where Zvi worked briefly) but also with Steve Cohen’s SAC Capital—prosecutor Bharara’s ultimate focus.

That made Zvi Goffer a target, and he was a rich one. Starting in 2007, Goffer –through a middleman– began paying lawyers at Ropes and Gray thousands of dollars in cash for tips on upcoming merger announcements. The government said those tips led to $10 million in profits in total for those who invested alongside Goffer. Among all the defendants connected to Goffer, Kimelman was the only one whom the government did not say knew about the cash payments. He was also the only one in Goffer’s circle who did not use pre-paid cell phones to avoid detection.

Kimelman’s bad luck may have been being tried alongside Goffer, making guilt by association almost unavoidable. Bain Capital’s 2007 bid to acquire 3Com was the first illicit info the feds knew that Goffer received, and he and others, including Kimelman, began buying the stock that summer. There was no direct evidence that Goffer had given any inside information to Kimelman, and rumors of a deal between Bain and 3Com had been reported in the Wall Street Journal before Kimelman bought 3Com’s stock. Kimelman purchased 94,200 shares the day after he had a 25-minute conversation with Goffer. The content of their conversation is unknown, but the government suggested Kimelman knew Goffer was getting inside tips because he joked with a prospective investor (in reality an FBI informant) that the source of Goffer’s tips was a construction worker fixing a pothole on the street.

On appeal, the government said that a reasonable juror could infer that Kimelman knew Goffer had obtained information illicitly. But there was no smoking gun. Another wired FBI informant who sat next to Kimelman at Incremental for 18 months came up empty-handed and did not testify. Today, as then, Kimelman says he did not know Goffer was receiving illegal information. But here’s the killing part. Even if he had known, that’s not a crime.

Redefining insider trading

Or at least, it isn’t any longer. On December 10, 2014, a three-person Second Circuit appellate court panel overturned the convictions of former hedge fund portfolio managers Todd Newman, of Diamondback Capital, and Anthony Chiasson, of Level Global, laying out a new standard for insider trading. That standard states a recipient of the tips can only be criminally liable for insider trading if he knew that the person who originally disclosed the information did so in exchange for a personal benefit beyond mere friendship. The appeals court held that the law requires “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”

Like Kimelman, both Newman and Chiasson were far-removed from the source of the illicit tips they traded on, and there was no evidence they knew whether the source of those tips had received a financial benefit. Without such knowledge, the appeals court said, their insider trading convictions could not stand.

The court specifically called out Judge Richard Sullivan, who previously worked in Bharara’s office and had gone along with the prosecution by refusing Newman and Chiasson’s request to instruct jurors that a guilty verdict would be contingent on having such knowledge. The appeals panel called his jury instruction “erroneous.”

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Preet Bharara, U.S. Attorney for the Southern District of New YorkPhotograph by Spencer Platt — Getty Images
Photograph by Spencer Platt — Getty Images

The appeals court decision sent shock waves through Bharara’s office. Prosecutors tried unsuccessfully to get a full appeals court rehearing, and the U.S. Supreme Court turned down their request for a review. Then the dominoes started falling. The conviction of Michael Steinberg, the highest-ranking lieutenant of Steve Cohen to be indicted in the massive sting, was dismissed shortly after the Supreme Court decided not to review the case, and a dozen similar cases were thrown out, including those of several people who had pled guilty and had become informants.

Sullivan was also the judge at Kimelman’s trial, and at the sentencing had expressed some sympathy toward the convicted trader, saying, I thought it was certainly a close case. It wouldn’t have shocked me had it gone the other way.” Shapiro reminded Sullivan of that statement in her letter to the court, and pointed out that the case closely tracks the Newman one, but Sullivan to date hasn’t done anything about it.

Meanwhile, Bharara’s office is fighting Kimelman’s motion, arguing in court filings that it is too late for him to vacate his conviction and that he should have raised this issue in his own appeal.

It’s a Catch-22 situation: The government dropped cases similar to Newman that were still ongoing—either on appeal or pending sentencing—when the ruling came down. But Kimelman’s appeal had already been denied, and he was sentenced and did time, and lawyers say that the further a convicted defendant gets from the trial and appeal, the harder it is to overturn the conviction. Kimelman remains on probation, so that gives him the legal right to ask the court to vacate the sentence. But lawyers who have followed the insider-trading cases say that the government has dug in its heels to avoid giving any more ground. “The government is not inclined to say, poor guy, we screwed up his life unnecessarily,” says one such attorney.

Moreover, the Supreme Court recently agreed to hear another insider trading case, from California, that also concerns the “personal benefit” issue. Although the details are different from the arguments of Newman and Kimelman, the case raises the possibility that the Supreme Court will partially validate prosecutors’ view of insider trading.

“Mr. Kimelman is relying on a construction of insider trading that is not universally accepted,” says Michael Bowe, a white-collar criminal defense partner at Kasowitz Benson who has followed the insider trading cases closely. “I think most courts would wait for the Supreme Court to speak before deciding whether vacating is warranted. The story is simply not yet finished.”

Last month the impact of the Newman decision was underscored in Bharara’s first post-Newman insider trading indictment. Professional gambler William Walters, who allegedly paid former Dean Foods Chairman Thomas Davis for illegal tips, was charged with insider trading, along with Davis, who pled guilty. Notably, the government was unable to indict a third person who made close to $1 million on those tips: professional golfer Phil Mickelson, whose information came from Walters. Mickelson allegedly used the profits to pay off gambling debts to Walters, but the fact that he wasn’t indicted suggests that even that apparently couldn’t pass the Newman “personal benefit” test.

‘There’s a big scarlet letter on me.’

Kimelman isn’t giving up, and for good reason. As a convicted felon, he can’t get back his law or securities licenses. He can’t even get a bank loan. Deals at Clarity Groupe sometimes fall through when prospective partners learn of his background. “There’s a big scarlet letter on me,” he says.

Kimelman was offered a plea deal shortly after his arrest in 2009, when agents came to his house at 5:30 am, handcuffed him, and took him away. Though he insists he is innocent, he says life would have been easier, in some ways, had he taken the deal. “I could have avoided a year and a half of pretrial anxiety with an axe hanging over my head,” he says. “I wouldn’t have gone to prison and been separated from my children and family. My marriage might have survived.”

In the meantime, he’s written a book about the case that is being published by Skyhorse Publishing and is due out in December. Kimelman, who is acting as his own agent, is also is working on a pilot for a TV series based loosely about the Bronx halfway house he stayed in for the last six months of his 21-month term, but so far it hasn’t been picked up.

Kimelman says he has no plans to sue the government and only wants “reputational redemption” for a case he believes never should have been brought. “This is a seven-year nightmare at this point,” he says. “How much more time and suffering does it take before someone does the right thing?”