Money and Power

In the summer of 2005, Elvis Santana was looking for some stock market advice. The 22-year-old assistant at Macy’s had a stack of do-it-yourself trading books, a
subscription to Investor’s Business Daily, and about $30,000 saved up. But he still wasn’t really sure where to start. So when his younger brother told him about a
friend of his, a smart, polished guy named David Pajcin (“Jeff” to his friends) who had worked on Wall Street, Santana was eager to pick his brain. When they
met at a Barnes & Noble in Brooklyn, they hit it off.
Pajcin, then a 28-year-old former Goldman Sachs analyst, was personable and self-assured, the kind of guy who attracts friends easily and girlfriends even more
easily. He told Santana he was starting his own hedge fund and would be happy to teach him some investing basics. He even offered to share some of his stock
picks. All Santana had to do was give him a cut of any earnings. Soon after their meeting, Santana opened a brokerage account. His first buys were shares of
clothing retailer Casual Male (Charts) and call options of FedEx (Charts) – both tips from Pajcin. Within a day his buying and selling had netted him a profit of
$4,662.
About six weeks and numerous trades later, though, Santana complained to Pajcin that he was back where he’d started. Once again Pajcin was happy to help
out with a tip. “Jeff called me with something he said was solid,” Santana says. The stock wasReebok (Charts), then trading at about $42. Beginning on Monday,
Aug. 1, Santana bought 465 call options and 520 shares. On Wednesday, when Pajcin called about getting his cut, Santana checked his account balance. He was
up $463,279. “I was like, ‘Oh, my God,’ ” he says.
That same day, Aug. 3, David Markowitz, then a 34-year-old lawyer and an assistant regional director of the Securities and Exchange Commission’s New York
office, was reading the Wall Street Journal on his subway ride to work. As he skimmed the front page, he read that Germany’s Adidas-Salomon AG was “close to
buying rival Reebok International Ltd. for about $4 billion in what would be a big bid by two former giants of the athletic-footwear industry to challenge the
long-running supremacy of Nike Inc.” The Journal reported that Adidas was expected to pay about $59 a share for Reebok, a 34% premium over the $43.95 at
which the stock had closed on Tuesday. That afternoon Reebok rose to almost $60.
Markowitz had forgotten about the deal until about 5 P.M., when a fax arrived on his desk. The SEC’s Market Surveillance Unit in Washington had received a tip
from the Philadelphia Stock Exchange that some people had been buying a lot of Reebok call options over the past few days – 2,952 calls for Reebok had been
traded on Monday, and another 2,315 on Tuesday, compared with average daily volume of 112 the previous week. The options traded were as much as $8 “out of
the money,” and most were due to expire soon. That meant whoever had bought them was making a very confident bet that Reebok’s stock was about to soar.
When Markowitz got a breakdown of the Reebok transactions, he saw that most of the options had been purchased by a handful of people in Croatia, Germany,
New York, and California. Sonja Anticevic of Croatia had purchased 1,997 call options – 38% of all the options traded in the past two days – and 240 shares of
Reebok. She had made $2,044,161. “We knew something was clearly fishy,” says Markowitz. He also learned there was a pending request to wire $870,000 of the
proceeds to a bank in Salzburg, Austria. “That’s when we realized we had an emergency on our hands,” Markowitz says. “Once the money is gone, you often
never see it again.”
Two days later, on Friday, Aug. 5, the SEC filed a lawsuit against Anticevic to freeze the money until investigators could figure out what was going on. When the
news hit Croatia, reporters swarmed her apartment in a working-class suburb of the small southern city of Omis. Briefly appearing on her doorstep on Sunday,
Anticevic told reporters she “never bought a stock and I have no idea how that works.” Neighbors said she had been working as a cleaning lady to supplement
the monthly pension of 1,600 kuna (about $263) she received for decades of work as a seamstress in a local underwear factory. She lived with her husband and
daughter in a two-room apartment provided by the factory. The family had no computer. Croatian reporters calling the SEC for comment passed on the fact that
she did, however, have a nephew in New York named David Pajcin.
That tip led SEC investigators, FBI agents, and lawyers from the office of the U.S. Attorney for the Southern District of New York not only to Pajcin but eventually
to another young man, Eugene Plotkin. The two smart and ambitious sons of immigrant families had met in 2000 as trainees at Goldman Sachs. Over the next
five years, Pajcin, who soon left Goldman, and Plotkin, who stayed on, worked and partied together. They also, according to Mark Schonfeld, director of the
Northeast regional office of the SEC, ran “one of the most widespread, varied, and premeditated insider trading rings we have ever prosecuted.” Their total take
was not enormous – only about $7 million – but for sheer brazenness, Schonfeld says, Plotkin and Pajcin have few peers.
Now the two, along with 15 others, have been sued by the SEC for insider trading. Plotkin, Pajcin, and four others have also been indicted on federal criminal
charges of insider trading and conspiracy. Plotkin maintains his innocence. Pajcin has pleaded guilty and is helping the government try to convict his friend.
The playersDavid Pajcin (pronounced PIE-chin) was a charmer and a young man in a hurry. Funny and attractive, with a tall body-builder’s frame, he was born and raised in
Clifton, N.J., a son of Croatian immigrants. He excelled in school and athletics, earning a spot on the nationally ranked basketball team at Saint Anthony High
School in Jersey City. When it came time for college, Notre Dame offered him a full scholarship. There he flew under the radar, majoring in economics and not
releasing his photo for the yearbook. Soon after graduating cum laude, he landed a job in the commodities group at Goldman Sachs.
Like most young traders, Pajcin had to put in long hours, his time split between desk work and the crude oil or natural gas pits of the New York Mercantile
Exchange. “I was like, no, I can’t handle this,” Pajcin would later tell SEC investigators. “I just didn’t want to wait like four years and then still be on the floor.”
So after only 5� months at Goldman, Pajcin left for a series of jobs, none lasting longer than a few months, at small brokerage firms, day-trading shops, and a
bond futures trading company. He finally stopped working for securities firms in 2003. “We thought when we hired him he’d be great,” says Mark Shales, his
supervisor at Goldenberg Hehmeyer & Co., a brokerage where Pajcin worked for a few months. “He had all the right pedigrees: Notre Dame, Goldman. But he
never found his niche. He didn’t hang out with any of the other traders or spark any friendships. He just kind of came and went.” (Now in a federal holding facility
in Brooklyn, Pajcin declined to comment for this story.)
Pajcin did, however, make and keep the friends he wanted, and Plotkin was one of them. Plotkin, who sat down with Fortune for his only interview to date
(under the watchful eye of his lawyer, who would not let him discuss the charges against him), downplays their relationship. “We sat kind of close together in the
back of the room,” Plotkin says of their meeting at a training session at Goldman, “He’s a very socially outgoing person who makes friends easily, and I was just
one of those guys…. I wouldn’t say we were close.”
Plotkin was born in Moscow but grew up outside San Francisco. His family, he says, “came here for the American dream, that if you work hard and you do all the
right things, you can achieve.” After a year at the California Institute of Technology, he transferred to Harvard, where he majored in economics, wore a black
leather jacket, and played lots of pool.
At Harvard he also got into competitive ballroom dancing. “It just felt right,” he says. “When you’re in front of everybody, you get a chance to emote. You make
yourself very vulnerable and show who you are and who you can be.” By the time he graduated in 2000, he was a star of the Harvard-Radcliffe Ballroom Dance
Team.
Plotkin often told college friends his drive came from having grown up in modest circumstances. “Being an I-banker was that success,” one remembers. “To him
it symbolized the money and prestige he grew up living without.” So it was no surprise to those who knew him that he opted for Goldman Sachs and the promise
of money and prestige. He started as an analyst in the fixed-income research division and was eventually promoted to associate, a job that paid a base salary of
about $100,000 before a sizable bonus. He also kept dancing. “My days at the office would start early and end late – maybe around 7 or 8 – and then I’d go to the
dance studio for two hours before I went to sleep,” Plotkin says. Earlier this year the Web site DanceSportInfo.net ranked him, under the stage name “Gene
Michael” (Michael is his middle name), 49th in the country in the professional Latin category.
Whatever spare time Plotkin had he spent directing and starring in an independent movie he’d written and financed, alternatively titled One Way and Blindside.
Plotkin plays a young Wall Streeter at the fictional Galeon Partners (“the most exclusive and reputable wealth-management firm in the U.S.,” according to the
script) who becomes the victim of an elaborate conspiracy. Pajcin has a supporting role as a drug dealer who ultimately betrays him. Plotkin says he submitted
the picture without success to the Sundance Film Festival.
The plotAs pieced together by Fortune from SEC and U.S. Attorney’s filings and interviews with investigators, the tale of Plotkin and Pajcin’s alleged partnership as
insider traders begins in 2004. Pajcin took a vacation in Croatia and stayed with his aunt Sonja in Omis, a seaside town near the tourist hot spot of Split. He spent
his days on the beach and his nights at the clubs. One night a friend introduced him to a Croatian businessman living near Hamburg – Bruno Verinac. Pajcin later
met Verinac’s friend Perica Lopandic. They told Pajcin about an idea.
Most issues of Business Week contain a column by Gene Marcial called “Inside Wall Street.” It is not unusual for stocks, particularly those of small companies, to
move a few points on a mention by Marcial. If you could find out in advance which companies he was writing about, you could position yourself to profit nicely
from such a move. (This idea had occurred to other would-be insider traders. At least three times in the past decade the SEC and the U.S. Attorney have nabbed
people who got or tried to get their hands on Marcial’s column early.) But since the column is closely guarded in the magazine’s New York offices, the only way
to get an early look would be to steal a copy from Business Week’s printer. Verinac and Lopandic allegedly asked Pajcin if he would be interested in going back
to the States, hiring someone to infiltrate the plant, and sharing the info with them.
Pajcin was interested, and so was Plotkin. Back in New York, the two soon placed online job listings seeking factory workers. (They didn’t mention where.) One
response came from Nickolaus Shuster, a 23-year-old from New Jersey. Pajcin and Plotkin allegedly met him near Union Square in Manhattan and eventually
offered to pay him to move to Wisconsin and get a job at Quad/Graphics, which prints Business Week. Shuster agreed, eventually scoring a gig as a forklift
operator.
By early October, prosecutors say, Shuster was ensconced in Hartford, Wis., and had settled into a routine: On Thursday morning he would steal a copy of the
magazine, which is available online Thursday evening, and call Pajcin or Plotkin from the plant or his car. Pajcin would then trade on any tips Shuster had
turned up, which he also passed to Verinac and Lopandic. The group’s first trades, on Nov. 18, were the purchase of 6,500 shares of TheStreet.com (Charts) and
6,000 shares of Biolase Drills (Charts), a dental supply company based in Irvine, Calif. (Marcial had said Biolase would benefit from a recent management
shakeup and TheStreet.com might be ripe for a takeover.) The next day they sold the shares for a profit of $3,764. All told, the group, which ultimately totaled 12
people, made $282,573 on the scheme between November 2004 and July 2005, the SEC says.
Meanwhile, at Goldman, Plotkin, still pursuing the Wall Street career his friend had forsaken, had started recruiting for the firm at colleges and business schools.
He kept up with many of the students he met, offering to be a mentor and taking them out on the town for steak dinners and maybe even a trip to a strip club.
One of these potential prot�g�s was Stanislav Shpigelman, whom Plotkin met in the spring of 2004, when Shpigelman was a senior at Binghamton University in
upstate New York. Both of Russian descent, the two had kept in touch.
After Shpigelman took a job as a mergers and acquisitions analyst at Merrill Lynch in July 2004, Plotkin started calling him more often. Eventually they agreed to
meet on Nov. 6 at Spa 88, a Russian bathhouse nestled between a barbershop and a bodega near Wall Street. Pajcin joined them there. Shpigelman bragged
about a secret takeover he was working on: Procter & Gamble (Charts) was planning to buy Gillette. He said he had even flown to Ohio, where P&G has its
headquarters, to deliver files.
About two months later, on Jan. 25, prosecutors say, Shpigelman called Plotkin to say a bid for Gillette was imminent. The next day Pajcin and the rest of his
trading group started purchasing out-of-the-money Gillette calls. Two days later, when P&G announced a deal to buy Gillette for $57 billion, the group made
$158,930, its biggest score yet. A month later Shpigelman was at a Manhattan strip club with Pajcin and Plotkin when he got an e-mail on his BlackBerry from a
co-worker confirming that pharmaceutical company Novartis had bought a majority stake in the German generic-drug maker Eon Labs. The group made $85,473
trading in advance of that deal, the SEC says.
Throughout the spring and summer of 2005, the operations were purring along. Shpigelman allegedly tipped off Pajcin and Plotkin to three more deals. Shuster,
the forklift operator, had been fired by Quad back in January for undisclosed reasons (the company declines to comment), but he had continued to sneak into the
plant to steal copies wearing his old uniform. In May, Pajcin hired Juan Renteria Jr. to replace him via a classified ad in the Milwaukee Journal Sentinel. By the
summer, Pajcin had stopped trading in his own name, instead managing accounts in the names of his aunt Sonja and his girlfriend, Monika Vujovic, an exotic
dancer he had met at a club in New York. He was also passing tips to four others, including Elvis Santana, in exchange for a share of their profits.
Of course, not all of Pajcin and Plotkin’s schemes worked out, the SEC says. A plan to use strippers to coax inside information from bankers came to nothing.
Another idea was even more audacious. As luck had it, Jason Smith, a high school friend of Pajcin’s and now a mail carrier in Jersey City, had been empaneled
on a federal grand jury in Newark investigating alleged fraudulent accounting at Bristol-Myers Squibb. Smith called Pajcin on March 18, 2005, and told him a
high-ranking executive would probably be indicted. That day, Pajcin shorted 8,800 shares of Bristol-Myers. In early June, Smith called Pajcin and told him the
indictment was on the way. Pajcin, using his aunt’s account, shorted 10,500 shares. Mikhail Plotkin, Gene’s father, bought 50 put options, and Henry Siegel, the
father of an ex-girlfriend of Pajcin’s, purchased 200 puts. A week later, though, Smith had to admit that he had been wrong. The company had made a deal with
the U.S. Attorney, and the senior executive was not indicted. Pajcin and Plotkin’s group lost about $14,500.
Seven weeks later, though, came the $6 million Reebok payday – by far the group’s biggest. But only one day afterward, the SEC sent an e-mail to the address
listed on Sonja Anticevic’s brokerage account, which Pajcin used. The SEC had questions about those Reebok trades and the FBI was looking for Pajcin.
Authorities say Pajcin, Plotkin, and Smith met at Smith’s apartment in Jersey City and destroyed their laptops, hard drives, and cellphones. Soon after, Pajcin,
who had done most of the trading, flew to the Dominican Republic.
The case unravelsOnce the SEC’S Markowitz heard Pajcin’s name from the Croatian reporter, things began falling into place for investigators. Anticevic’s brokerage records, for
example, had a Croatian mailing address, but computer records showed the account had been set up and managed using public wireless hotspots in New York
and New Jersey. And the same hotspots had been used at the same time to access a brokerage account registered to Monika Vujovic, who investigators would
soon find out was Pajcin’s girlfriend. A review of the various Reebok traders’ accounts showed they were investing in many of the same stocks at the same time.
The SEC figured out that many of the stocks were involved in mergers or acquisitions – and that Merrill Lynch had worked on each of the deals. “It was an aha
moment,” says Markowitz. “It looked like there was a constant leak out of one of the biggest banks in the country.”
About a week into the investigation, Melissa Coppola, an SEC forensic accountant, came into Markowitz’s office. While the Merrill Lynch explanation worked for
five of the stocks the group traded, it didn’t for the 22 others. Then Markowitz remembered an old scam he’d heard about: “Were any of these stocks mentioned
in Business Week?” he asked. When Coppola checked, she unlocked much of the rest of the case.
While investigators focused on Pajcin almost immediately, it took them a little while to discover Plotkin. His name wasn’t on any of the accounts they examined,
but he would crop up as one of Pajcin’s most frequent e-mail and phone pals. He had bought plane tickets for Pajcin to go to Croatia, Germany, and Wisconsin,
and had traveled with him to Austria and Zurich. The two had also had a joint bank account. And investigators found that Plotkin’s father, Mikhail, had
participated in many of the suspicious trades.
Still, the main target was Pajcin. After about three months in the Dominican Republic and Cuba (where Smith allegedly met him with $10,000 in cash) he
returned to New York. He had little choice: The accounts he managed had been frozen, and if he didn’t appear, the SEC could confiscate the money. “It’s one
thing to be abroad with $7 million,” says Markowitz. “It’s another thing to be abroad with zero dollars.”
Pajcin looked sharp in a dark suit when he walked into a small conference room at the SEC’s Manhattan offices just after 11 A.M. on Nov. 22. He was unfazed by
the questions posed by SEC senior trial counsel Scott Black. (He would later tell the FBI that he had planned his answers with Plotkin.) He admitted advising
many of the people involved in the case to buy Reebok, but only because he thought the stock was a bargain, not because he knew anything about a pending
merger.
Pajcin held forth for the better part of seven hours on that subject, talking at mind-numbing length about the metrics he said he had applied to the stock. The
SEC’s Black then summarized this at length, concluding, “Have we covered all the components of your analysis with respect to Reebok specifically that you can
remember, sitting here today?”
Pajcin added a few things: “The correlation of volatilities, historical and implied in terms of the S&P and just a general strong dropoff in the five-day volatility,
making new highs, so those are all things I look at.”
About half an hour later, Black changed the subject to Business Week. Pajcin said he didn’t read it often. His answers became short. When he was shown some
copies of the “Inside Wall Street” column, he said he wasn’t familiar with it. Then when he was shown articles that had appeared the day he had sold stocks of
the companies mentioned, he looked like “a deer in headlights,” according to a lawyer who was present. His explanation? He had probably gotten the tips from
two guys he had met in Croatian nightclubs, whom he knew only as “Carlo” and “Vladimir.”
“How would you go about getting Carlo and Vladimir’s last names?” Black asked.
“I don’t know if I can get Vladimir’s last name, but Carlo I think would be a function of going and just trying to find people.”
“How would you know where to go?”
“Either to Zagreb or to Split … what’s cool about these countries, there is only like three major clubs, three major places everyone goes, so it would just be a
function of going there and being like, ‘Hey, hey, I’m a friend of Carlo….’”
“He was in a bad spot,” says Black. “We knew we had him on Business Week.”
When Pajcin walked out of the SEC’s offices around 8:10 P.M.-almost nine hours after he started testifying – FBI agents were waiting for him. They put him under
arrest for insider trading for the Business Week trades.
As the government’s investigation continued, Plotkin carried on working at Goldman, Shpigelman toiled away at Merrill, and for a time Renteria allegedly kept
stealing magazines from the printing plant. But while investigators knew most of what had transpired in the previous year or so, they had only enough evidence
to bring criminal charges against Pajcin for the Business Week scheme. And they still didn’t know who the mole was inside Merrill.
PunishmentThen, in early February 2006, Benjamin Lawsky, a 36-year-old assistant U.S. attorney assigned to the case, decided to try hardball. Along with FBI special agent
David Makol, Lawsky told Pajcin the government knew all about Reebok. Then Lawsky made him a proposition: Become a government cooperator in exchange
for the chance of a lesser sentence. Pajcin accepted and soon spent hours telling Lawsky, Makol, and the SEC about the scheme from start to finish. (The terms
of his cooperation, including which charges he has pleaded to, are sealed.)
About 9:20 A.M. on April 11, Plotkin was driving his leased black BMW south on the Palisades Parkway from his home in Rockland County, N.Y., to the Manhattan
offices of Goldman Sachs. A highway-patrol car pulled him over. “I thought I was getting a speeding ticket,” Plotkin says. “When the FBI arrived, I told them they
had the wrong man.”
That’s as much of a defense as Plotkin has offered so far. He and the two forklift operators, Renteria and Shuster, are the only ones left in the scheme pleading
not guilty. (Attorneys for Renteria and Shuster declined to comment.) Plotkin is under house arrest and wearing an electronic ankle bracelet after having spent
two months in jail. He’s set for trial in April 2007. If convicted on all counts, he could face more than ten years in federal prison.
As for the other people in the case, Shpigelman, the Merrill Lynch analyst, has pleaded guilty to one count of insider trading, and Smith, the grand jury spy, has
pleaded guilty to insider trading, conspiracy, and contempt for violating grand jury secrecy rules. Both likely face about four years in prison. (Shpigelman and
Smith declined to comment.)
The SEC’s civil case will probably not proceed until the criminal charges are resolved. Lawyers for Elvis Santana, Monika Vujovic, Sonja Anticevic, and Henry
Siegel say their clients acted on what they thought was legitimate advice. Lawyers for the other six people sued by the SEC either did not respond to requests
for comment or could not be reached.
When Plotkin spoke to Fortune in early September, he talked about his plans for the future. They don’t include Wall Street. His current ambition is to become a
novelist and screenwriter like Michael Crichton. “I’d love to do something with writing or something creative,” Plotkin says. “I never thought of it as a career
choice before, but maybe I was wrong not to.”
His lawyer, Edward Little, wouldn’t comment on any of the specifics of the case. “What’s happening to Gene is a real-life rendition of the movie he made,” he
says. “The bad guy in the movie is the government cooperator trying to shift blame for what he did to the good guy. Gene played the good guy there too.”
Indeed, toward the end of his script, Plotkin’s hero pleads, “I just want my life back.”
To which Pajcin’s sinister drug dealer responds, “Sorry, bud, but I don’t think that’s gonna happen.”