CHAPTER NINE

LEAP OF FAITH

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TO REALLY UNDERSTAND HOW WE ARRIVED at this point in our lives, it’s necessary to return to the past, to three years earlier. Almost a decade had passed since I had escaped the uptight legal world of Sullivan & Cromwell, the hundred-hour work week, and sleeping under my desk. Throughout my subsequent time as a trader—despite the assholes and the backstabbers—not a day went by that I regretted the decision to hang up my lawyer’s hat. The ride had never been dull. Hanging out at a bar and downing Ketel Ones among friends, even in the aftermath of the market, still seemed light years better than the suffocating sobriety of Sullivan & Cromwell. I probably could have coasted along like that indefinitely, allowing Lisa to spend a small fortune remodeling our kitchen, taking family vacations, and squirreling away a comfortable nest egg.

But then things started to unravel at Remsenberg. I left for greener pastures, but it soon became clear that they were never going to be as green as they should be. The only real way to get where I wanted, where I felt I needed to be, would require a gamble. It would be the biggest yet of my life. I would branch out and start my own firm.

Prop trading, potentially viewed, is a form of gambling. We on the Street prefer the term “speculation,” and realistically it is much more akin to a game of skill than chance (think poker vs. roulette), but there are still elements of chance to it. When the firm is yours, you become the house—and with that small fee on every trade tacked on, the house does always win … if only to a certain degree. If the traders are losing, and profits tumble, those small fees won’t save you.

I had made it easy—perhaps too easy—for the Goffer brothers to tempt me away from Quad Capital, where I had gone with Jon Deigan (JD) after the meltdown at Remsenberg. Incremental Capital (ICAP) had been my idea to begin with, so I was itching to go. I had done the legwork and the research. I knew what we needed, and it was exactly what we had. JD had the charisma; I would be the operational and trading brains. My biggest mistake, in retrospect, was planting the Incremental seed early in the Goffers’ minds, back when JD and I had collaborated on first marketing the Incremental concept.

The name said it all in terms of our goal. We’d be coupling a transactional model of commissions—just like the rake* in poker—while betting on talented traders taking small calculated risks. Incremental profits, bit by bit. But before I knew what was happening, JD had dropped out and Zvi was onboard.

I tried to adjust. Maybe it wouldn’t be so bad. I figured that with Zvi and Nu’s capital and connections, they would be okay minority partners for the fund. When JD fell out of the picture, any obstacle to their joining the firm went with him. In retrospect, of course, leaving was the smartest move JD ever made. His gut instinct about Zvi—that he was all talk and full of shit—was the correct one. And he never forgot Zvi’s physical threats back at Remsenberg.

While still at Remsenberg, I’d once broached the possibility of bringing aboard the Brothers Goffer to JD.

“I know you’re gonna hate the idea, but what if we just bring over Zvi and Nu and give them a tiny piece? These guys can recruit like mad and they’re good traders. Zvi has a lot of connections. Granted, a lot of them are bullshit, but he’s tight with a couple of these Galleon guys that are real hitters.”

“You know, you’re right,” JD said, and paused to stroke his chin before pointing a finger at me. “I do hate the idea. He’s a fucking retard and his brother is half that smart. That guy blows smoke, that’s all. Remember when he was going to break my legs for asking Nu to rein in his risk? And I saved the firm because of that. If those guys had been here for the Cypress disaster (CY:NYSE)* they’d have been down another $750K+. They’re no-talent Brooklyn knuckleheads. And that’s the generous assessment.”

I knew JD was right about a lot. They were inexperienced. But they were also fast learners and absolute animals when it came to making connections. And Zvi was also the #1 performer at Schottenfeld, a respected prop firm with a lot of great traders. You don’t get to be the top trader at a firm like that by accident.

For Zvi, running his own firm was a necessity. His personality made it inevitable that no matter where he went, he would eventually clash with management and be fired or quit—unless, that is, he became the manager himself. His attitude was, “I know more than you, so why the hell are you telling me what to do?” Oddly enough, on this particular issue, I saw his power wars with management as somewhat legitimate because he was right most of the time. This was not because Zvi was a genius, but because the typical managers were even dumber than he was. The reality is, most people running prop trading firms were absolute morons at that time. Capital was king, and if you had access to capital then you could open up a shop. Anybody with capital could. The formula was simple—capital, plus talent, plus a diligent risk management framework and you had an almost certain money maker. Capital was easy (or was before the financial world imploded in 2008). Risk management required finding the sweet and narrow middle ground. The so-called piker firms like Trillium or Schoenfeld Securities erred on the side of caution and produced small trading profits (but lots of commissions), and the so-called “cowboy firms” had no risk matrix whatsoever and were essentially ticking time bombs. You had to be in the tightrope’s middle, the sweet spot that reined in the shooters and the cowboys, but gave some leeway to traders with talent making smart, calculated bets.

As we began, I was anointed the brains of our operation, doing most of the legwork required to build the firm literally from scratch. Nu, I would quickly discover, was a first-class alcoholic, interested in little other than getting ripped. It was decided early on that his primary responsibility would be training a crew of young traders, and entertaining the more seasoned traders at Sutton Place, our local midtown-Manhattan watering hole. We had our spot unofficially reserved on the balcony overlooking the Second Avenue, and a regular set of bartenders who scrupulously attended to our every need.

I had heard enough about Zvi from people within the proprietary trading business to know that he should come equipped with warning lights. Zvi had made and lost a fortune at the Schottenfeld Group, along the way earning a reputation for being plugged in to the “smart money” pipeline. The “made a fortune” part was oft broadcast and widely known. The “lost a fortune” part was always concealed to the best of Zvi’s ability. Zvi often bragged about being the first trader at Schottenfeld to make over a half-million dollars in one day, for which he’d been rewarded with five bottles of Dom Perignon, delivered to his trading desk by the buxom receptionist. Zvi’s desk looked like a Dom tasting room, with dozens of bottles stacked neatly on top and underneath the desk, each courtesy of a $100K+ trading day. On his desk, Zvi had a red Staples “That Was Easy” button that he gleefully pressed every time he made a hugely profitable trade. Trading came easy for Zvi Goffer. Or so it seemed.

It was no secret that Zvi had left Schottenfeld to work directly for Raj Rajaratnam at the Galleon Group as a portfolio manager. It’s impossible to overemphasize the importance of this. It was important to our success at Incremental, but also one of the reasons Incremental got dubbed “Baby Galleon.”

The Galleon Group was a highly successful hedge fund. More than that, everyone in the business knew it was the epicenter of information on the Street. Not illegal insider information, per se (though later it turned out that Raj had a great deal of that as well*), but superb research and impeccable street connections—those most invaluable commodities in the trading game. Zvi also had excellent inside contacts at that motherlode of all hedge funds, Stevie Cohen’s SAC Capital. Because of these connections, with Zvi onboard, Incremental would ultimately raise $200 million to trade with, and our firm would be off to the races.

We were in the right place at the right time. Portfolio managers were being downsized by cost-cutting investment banks like Goldman Sachs, or fired from hedge funds. By the fall of 2009, Incremental Capital had hired more than fifty traders, mostly Ivy League graduates with outstanding track records. We also had a laundry list of some of the biggest names in the business—SAC Capital, Millennium Partners, Todd Deutsch—breaking down our doors to invest.

Working with Zvi, I learned more of his weird quirks. He shuffled his feet constantly under his desk, and would bite his nails until they literally bled. Quirks aside, I continued to feel I was in a good place with a good partner. Once, when I brought Zvi to a Minyanville charity event during Incremental’s earliest days, Rick Schottenfeld came up to Zvi and pronounced, “I never should have let you go. You might very well be the next Stevie Cohen.” Cohen, at the time, was widely recognized as the most successful trader in history.

So I was hardly alone in seeing the talent and ability in Zvi, despite his flaws. I made the Faustian bargain. I took the risk. I told myself I could easily suffer through Zvi’s mania and irrationality. I chose to see whatever Raj and Schottenfeld saw in him. I was determined to play four corner defense, until I could gain more control, and then, as soon as all was right and I was correctly positioned, I planned to just sell the damn thing. That thing being Incremental. From the word go, I knew we were less than two years from monetizing it.

What I didn’t know was that there were already informants among us, wearing wires.

But I’m getting ahead of myself.

Our first serious backer at Incremental was Whitney Quillen, of W. Quillen Securities, as good a guy as there could be. An old-school gent whose family were proprietors of horses, manses, and superior jawlines, Whitney sublet us space at a very reasonable rate at 145 East 57th Street, right next door to Hammacher Schlemmer and Le Colonial. The latter had a French-Vietnamese themed bar upstairs that reminded me of what it must have been like in Saigon before the shit hit the fan. The Gerber Group also had offices in our building, which meant we kept our eyes open for Gerber’s wife, Cindy Crawford. Whitney was enamored of Zvi after their first meeting. In exchange for a sweetheart deal on rent, he asked Zvi to make some trades through his desk. We had a “friend” on the desk anyway in Adam Weinstein (not his real name), who had put the final nail in Remsenberg not too long ago after perpetually playing Ahab to the white whale of Steve Jobs’s Apple.

Around this time I had a brilliant idea that I would revisit later with another trader. Algo trading, or computerized program trading, was just starting to make a big splash on Wall Street. My idea was to build a black box that would take the trades of certain designated traders and “flip” them on the back end so that buys become sells and sells become buys. You could apply it to a trader like “Adam,” who loses large sums of money most of the time, and mirror his executions without his knowing. So if Adam is down $5K, he’d actually be up $5K. The Algo would turn a trader with an abysmally low win ratio into a gold mine by doing the exact opposite of what he was doing. It worked for George Costanza, why couldn’t it work for ”Adam Weinstein”?

We would never let Adam have any discretionary authority on trading, but as far as pushing a buy button when we told him to? Well, even Adam couldn’t fuck that up. It was easy business for Adam, and Whitney gave us a healthy discount on the rent.

When it came time to start raising money for Incremental, Whitney always told us he wanted to be a part of it. And it was Whitney’s interest that forced us to wrap our heads around what we were worth, when we had basically nothing.

I went to Zvi about it.

“How do we come up with a number? What are we worth? What’s even the mechanism for determining it?”

“Tell Whitney that for $200K, we’ll give him 1 percent, or 5 percent for a million.”

I laughed out loud. “So we’re only valuing ourselves at $20 million?”

“Is that the math?” Zvi asked. “Sounds fair. Generic-Carlin sold that worthless chunk of shit firm to RBC for $100 million.”

“Look, there’s potential, and then there’s reality,” I cautioned. “Do I think we could be worth that at some point? Yes, of course. I wouldn’t be here if I didn’t. But right now it’s just me and your brother and a few junior traders. A $1,000,000 valuation would be generous.”

“I work for Raj, the King of all Kings,” Zvi said mystically. “Franz is going to recruit some hedge-fund level A-talent for us. You were the top trader at the last two firms you’ve been at and know more about this business than anyone I’ve ever met. That’s not worth $1 million. That’s worth ten today, and it’s a steal at that.”

I liked being flattered, but I still thought the number was ridiculous. There was no real revenue yet, and we were currently trading out of a glorified walk-in closet with leaking ceilings. But then again, finance always contains that hint of fantasy, of mystery, of what might be. Companies without profits go public all the time. Remember Yahoo? Early stage conceptual companies raise millions in venture capital money every year without even having a prototype. So-called “value” in a market is ultimately nothing more than what one side is willing to pay for it. It’s all about perception.

Zvi suddenly decided to compromise: “Look, start at $15 mil. If he negotiates, fine. We can settle at ten.”

“Sorry, Zvi,” I replied. “There’s no way I can ask for $15 million with a straight face. No way in hell. Some things don’t need to be negotiated from a bullshit number first. When you do that, you lose credibility, which you can’t get back. I’d rather set a real price.”

“I’m not accepting less than ten,” Zvi said, adamant.

“‘You’re not accepting? You’re not a partner of this firm. Don’t tell me what you’ll accept.”

“Well, my brother won’t accept it. So there’s no difference.”

It was becoming increasingly clear that this was the reality I had bought into. Zvi wasn’t technically a partner. But Nu was his puppet. Nu had probably never disagreed with Zvi a day in his life, even about what to wear to school. If Zvi said oil was at $120 a barrel because the Bush family wanted it there, then that was what Nu thought too.

“You go ask him then,” I responded, doing my best not to lose my temper. “If you’re not willing to accept less than $10 million, then you go ask. I don’t want to create a situation where I ask for ten, he’s willing to do $7.5, and I go to say yes, but then I can’t because I remember—oh wait, Zvi’s got some science-fiction number in his head.”

“I can’t ask because I’m not a partner,” Zvi said with a smile. “I don’t even know how it would work, the mechanics and all that.”

“Think about it,” I said. “Once you sell to one guy, it’s always easier to sell to another using that as a baseline. Say Whitney bought X and we only had seven traders. That will be the floor. It can only go up from there.”

“Fine,” Zvi said dejectedly. By the tone in his voice and the look on his face, you would have thought that I had just forced him into involuntary bankruptcy.

“It doesn’t matter. He’s not going to do anything over $5. We’re not going to have to worry about it.”

“Anything less than $10 and I’m not doing another fucking share through his firm,” Zvi barked. Then he barged out of the room and headed for the elevator. This was a bad omen. Up until this point I had argued with Zvi, sure, but mostly about shit I didn’t care about. We had worked for separate firms. We’d no money, accounts, or interests intertwined. So if he loved something, but I didn’t love it, I just didn’t buy it. There was no interdependency. Now, we were getting joined at the hip. He was a part of key decisions about money. After all, it was his money.

I’d recently found out that he and Nu split everything.

Zvi had said he’d lost lost over $1 million in the AMD mess*. One time I asked him how.

“Oh, it was Nu actually,” Zvi responded. “He and I split everything up and down, always.”

Now that was a fact I would have preferred to learn before having gone into business with Nu. Because it meant that I was really in business with Zvi.

None of that mattered now. The doors were open and there was nothing but promise ahead of us. We had fought, sweated, cried, and bled to get to this point. I didn’t want the assurance of success. I just wanted the opportunity. We had finally arrived at the waterline; it was now sink or swim time. I was ready.

I thought.

* Rake is the scaled commission fee taken by a cardroom operating a poker game. It is generally 2.5 to 10 percent of the pot in each poker hand, up to a predetermined maximum amount.

* At Remsenberg, Zvi was hearing “imminent takeover” of CY and spread the word far and wide so half the firm was long CY. When no deal materialized, the stock dropped precipitously, causing significant losses and nearly putting the firm out of business.

* The Billionaire’s Apprentice, by Anita Raghavan (2013), remains the single best account of the rise and fall of Raj and Galleon, along with that of Rajiv Gupta, who ran McKinsey.

* Zvi, presumably via Drimal or one of his other Galleon contacts, was trumpeting AMD hearing that Raj was “all in” on the name and that he was going to piggyback the play for size.