Born to Steal: When the Mafia Hit Wall Street Page 8

Complaints like that aren’t a sign that the firm is being a wee bit aggressive in its sales practices. They are red flags. When they happen over and over again, they mean the firm is in business to steal.

  They are complaints.

  Hanover got complaints. Usually those complaints would have been locked away in a file drawer, forgotten. And they would have stayed there, gathering dust, if Gilani hadn’t gone down the path of becoming a disgruntled employee and then, as so often happens to disgruntled employees, getting fired and becoming a disgruntled former employee.

  The lawsuit Gilani filed in late 1996 opened a rare window onto the internal workings of the NASD. His suit claimed he was a victim of racial discrimination. It also claimed that the public was a victim of the NASD. One of the things Gilani alleged in the suit was that he recommended action against Hanover Sterling and that the NASD didn’t do anything.

  In March 1993, as Louis learned his trade at Hanover, Gilani was assigned to investigate customer complaints of unauthorized trading at Hanover Sterling. Gilani believed that formal action should be taken in most cases. But Gilani’s supervisor did nothing.

  Between June and September 1993 Gilani was assigned to investigate seven complaints against Hanover brokers. They involved unauthorized trading—complaints. Again he recommended formal action—including two against “a principal of the firm” not named in the suit. And again, the NASD did nothing.

  Between October 1993 and June 1994 Gilani was assigned thirty-one more customer complaints against Hanover. Gilani saw a pattern of misconduct and a weirdly passive attitude by Hanover management. He recommended a full-scale investigation. According to the suit, his supervisor “told Gilani to ‘mind his own business.’”

  Gilani went over his supervisor’s head, to a NASD assistant director.

  Again, nothing.

  Gilani was persistent. The suit paints a picture of a man repeatedly, and with intriguingly little impact, banging his head against a brick wall: “Between June 1994 and February 1995 Gilani met with [his supervisor and the NASD assistant director] on at least five different occasions to express his grave concern about Hanover as a brokerage firm and the irreparable harm it was wreaking on its customers and on the markets the NASD was entrusted to protect. . . . Senior members of the NASD instructed Gilani to perform his job and to leave management decisions to the NASD’s management,” his suit alleged.

  In all fairness to the NASD, it should be noted that the NASD denied Gilani’s allegations quite vigorously at the time. The NASD said that Gilani was justifiably fired. He was, among other things alleged in the NASD’s defense, a “disruptive” guy who wasn’t a team player.

  Gilani was too conscientious.

  As soon as Gilani filed his suit, the NASD embarked on its “too conscientious” defense. In March 1998, he was called by the NASD lawyers to provide sworn pretrial testimony. The NASD’s lawyers were interested in two fusses Gilani made when he worked there, and their questioning brought out how ridiculously conscientious Gilani had been.

  Fuss No. 1 involved one of the cases he had submitted to his supervisor for action. Gilani was upset that he had recommended action against a broker and nothing had been done. The deposition doesn’t identify the broker or brokerage. It does say that the broker didn’t obey a NASD request for information—which is grounds to be automatically barred from Wall Street, forever.

  The broker wasn’t barred. In fact, nothing happened to him. Why was that? Because somehow the entire case file—a huge amount of paperwork—was “lost.”

  “I said, what do you mean?” Gilani testified. “This was a case with seventeen exhibits this high. It wasn’t just one folder you could lose.”

  This got Gilani mad, which was why the NASD lawyers wanted the file-loss episode brought out. “Team players” just didn’t make a fuss about things like disappearing files.

  Fuss No. 2 involved another incident concerning another unnamed broker and brokerage firm. The broker had stolen from a client (“misappropriated,” in NASD-speak). The broker had also risked an automatic bar from Wall Street by not responding to information requests. Gilani had recommended action, the NASD had done nothing, and—aha!—that upset Gilani.

  “Did you disrupt the meeting or not, Mr. Gilani?” a NASD lawyer asked.

  “No. No,” Gilani responded.

  “Did you disrupt the meeting or not?” the lawyer persisted.

  “No. No. I asked what happened . . . why was this case filed without action [concerning] the underlying violative act, and the fact that the rep also failed to appear for the interview. The combination of those are sufficient to bar a man from the industry,” Gilani replied.

  “You were very agitated when you said that. Weren’t you, Mr. Gilani?” said the NASD lawyer.

  At the time, the NASD was portraying itself as a regulatory William Tecumseh Sherman, waging scorched-earth warfare against stock fraud. Its public image was on the line, and this “examiners mustn’t get agitated” line of defense simply was not going to do the NASD any good. Gilani was a major embarrassment. He had to be silenced. He was.

  When Gilani filed his suit, which was in October 1996, he spoke freely about his experiences with journalists. Gilani’s complaint was even posted on his lawyers’ website.

  Gilani’s suit dragged on through the courts for a little over two years until February 25, 1999, when his lawyers filed a one-sentence stipulation and order agreeing that “all claims asserted in this action are hereby voluntarily dismissed with prejudice and on the merits.” Translation: Gilani was settling the suit. And, suddenly, the window that Gilani had opened on the NASD slammed shut.

  Massood Gilani was no longer able to talk about his experiences at the NASD. Several years later, his lawyer said that Gilani’s ability to speak now required the permission of the NASD—and the NASD wasn’t giving permission. *

  So all that remains in the public record is a sheaf of legal papers in a courthouse archive, and its portrayal of a NASD that worked hard to keep all those complaints from disrupting the daily routine at 88 Pine.

  Well, not all. Other glimpses of life at the NASD in the early 1990s have emerged now and then. Such as the account of a person who worked there when Hanover applied for its first set of papers from the NASD. He is familiar with how it happened. And he was always puzzled by it.

  He’s not a Massood Gilani. He wasn’t fired and doesn’t have an ax to grind against the NASD. But still, he wonders what the hell happened.

  When Ageloff, Catoggio, and Schatzer organized Hanover Sterling in 1991, they were rejected. “Initially they were turned down, the NASD didn’t like their backgrounds,” says this person. “And then all of a sudden it got accepted. And I could never figure out how they got approved. I was surprised.”

  As the years went on, Louis had his own experiences with the NASD. They were always good experiences. Or at least, they weren’t bad experiences. But in the early stages of his career he didn’t have any experiences at all. The NASD and Securities and Exchange Commission acted as if he didn’t exist. They didn’t have any official record of Louis except as an “assistant.” And they didn’t have the foggiest idea how he, and the other “assistants” and brokers, made a living.

  CHAPTER NINE

  At Hanover, the money was in the rips.

  Sometimes they were called chops. But call them what you want, they were where the money was. They were known informally at the chop houses as “commissions,” but they weren’t anything of the kind.

  Rips were the huge sums that the brokers earned from the stocks they sold. Ordinary stocks generated commissions for brokers. Ordinary Nasdaq stocks had “markups”—a reasonable profit for the broker and his firm. Chop stocks had rips.

  Rips performed several functions.

  They were motivators, without which brokers would not have been willing to push stocks that had all the appeal of wet tree bark.

  They kept the conscience quiet. They kept stirrings of the phony emotion ca
lled “guilt” from wafting out of the toilet bowls of their souls.

  Nobody knew how the term originated. Nobody cared.

  The rips were announced each morning. Bobby Catoggio, in his capacity as trader—the guy who brought the stocks into Hanover—would make the announcement. One stock, Mr. Jay’s, was selling for about $8 and its rip was $1.50, which meant that Hanover had the stock on its books for about $5 and split the $3 profit 50-50 with the broker.

  The difference between a rip and a markup was subtle.

  A $3 markup for the broker and the firm would not be so bad if this was a $100 stock. That’s a 3 percent markup. Reasonable. There are no hard and fast definitions of excess markups, but more than 5 percent is a red flag and more than 10 percent will almost invariably result in a visit, sooner or later, from a grim-visaged, Syms-suited NASD examiner.

  But Mr. Jay’s sold for about $8. If it cost Hanover $5, that looks a lot like a 60 percent markup, doesn’t it? Nope.

  Rips weren’t markups—if the chop houses were careful. It was all a question of timing. If a firm bought a stock at $5 and immediately sold it for $8, that would be a huge markup and that Syms suit would appear at the door. But if the firm waited a little while, and $5 was no longer the “prevailing market price”—voilÀ! It wasn’t a markup anymore. It was a “trading profit.” A rip. What made it even easier was that the house controlled the “prevailing market price” of the stock.

  So the brokers were paid vast sums and the regulators, who were looking for excessive markups, didn’t notice.

  True, rips weren’t foolproof, no matter how long the firms waited. Sometimes they got careless and the rips really were excessive markups. Since the brokers usually got the stock up to $8 (or whatever) by fibbing about it, they could be prosecuted for that. But the $1.50 that went to the broker—the “rip”—was at least superficially legal and, above all, was invisible to everybody, regulators and customers alike.

  The brokerage would add on a few cents’ commission. “The customer thinks he’s only paying three cents a share commission, which is very reasonable. A good commission. He’d be happy about that,” said Louis.

  “That’s how they made a ton of money at Hanover, because the brokers’ ‘buying power’ * was astronomical. The brokers could put away a million shares of stock in two days,” said Louis. A million shares times $1.50, or more, is nice money.

  “We would get crazy rips at Hanover. Eagle Vision was eleven with seven [a rip of $7 on an $11 stock]. It was paper—a Bulletin Board piece-of-shit paper stock. They were probably writing the certificates.”

  That’s what chop stocks were all about—paper. Moving paper. The brokers moved paper, stocks that were often barely worth the paper they were written on, if they were still written on paper—and they often weren’t, because by now stock certificates were being phased out. So the investors didn’t even have nice stock certificates to use as wallpaper, as in the old vaudeville routine.

  Louis wanted rips. He wasn’t getting them. Roy wouldn’t let him have his own client book. He wouldn’t let him become a broker. That was going to have to change, and fast. Louis was getting serious with Stefanie, and he knew how much women cost. He was prepared to pay.

  The summer of 1993 was hot, but it wasn’t hot enough—not for Louis it wasn’t. People were making money all around him at Hanover. Big money. And he wasn’t getting any of it.

  When Louis started at Hanover, the best brokers were making about $100,000 a month and it seemed great at the time. But that was just the beginning. The payouts went up and up: $200,000, $300,000. Half a million. And up. Louis was so frustrated, seeing other guys make money, that he quietly seethed.

  But still, he was making good money for a teenager who had just dropped out of community college. Fifteen hundred a week, on average, meant that he and Stefanie could go out to nicer restaurants. He could afford cabs. Cabs were awesome. He never took a cab in Staten Island. But after a few months at Hanover he could afford to take a cab from the ferry to 88 Pine, even though it was only a five-minute walk away. Some people might call that a nice, brisk walk in the morning. But Louis didn’t want to take a nice, brisk walk when hundreds of people were having the same nice, brisk walk off the ferry, crowding together, smelling in the morning like perfume and Right Guard and smelling at night like sweat and ass. The ferry stank, a piss and gasoline smell, and the bay smelled from dead fish and God knows what.

  Louis hated bad smells and he hated crowds and he hated subways. At night he started taking a car service back home. It cost him fifty bucks a night. He didn’t care. He could afford it.

  At Hanover he could order cigarettes from downstairs. Condoms if he wanted them. A guy came by and shined the brokers’ shoes, maybe the same guy who came to the investment banks and shined the Yalies’ shoes. A shoe is a shoe. Money is money.

  To get money, he would have to become a broker.

  As he worked at Hanover he saw Chris become famous in the chop house world as half of the team of “Chris and Rocco”—the other half being Rocco Basile. So why shouldn’t there be a Louis and—whoever? A “Louis and Benny,” maybe?

  Benny Salmonese would be a great partner. They had talked about teaming up. It was a bullshit talk, the way guys yammer away when they’ve had a couple of beers. But it made sense. Benny was no scrub—he worked late too. And Benny’s strengths offset Louis’s weaknesses, and vice versa. Benny was a few years older, a smooth talker, a deal-maker, a conciliator. Louis was still a teenager, rough around the edges as No. 3 sandpaper—and he didn’t have a broker license. Louis took the NASD test for the first time when he was at Hanover. He didn’t study. He got a 40.

  License, bullshit. Why shouldn’t he make money? Why shouldn’t he have a client book? He could get clients. It was only fair.

  Benny had a license. Perfect. They could both use it. They could both be Benny.

  That was the plan. Now they had to execute it. They had to execute it.

  Benny went to a little brokerage called Robert Todd Financial Corporation in July 1993. Louis had never heard about it but Massood Gilani, over at the NASD, sure had—just as well as he knew Hanover and just as well as he knew John Lembo, one of the most complained-about brokers at the most-complained about brokerage. Gilani’s District Management Information System Cause Examination Examiner Log for District 10 showed that Robert Todd was one of the little firms in Manhattan that was getting complaints. January 15, 1993—“unauthorized transaction.” January 20, 1993—“failure to execute sell order.” Red flags, no action. Todd stayed open. Benny, and soon Louis, would be in no danger of their livelihood being interrupted.

  “After Benny got to Robert Todd, I don’t hear from him for a few weeks,” said Louis. “Then one day he calls. ‘Louie, it’s Benny.’ I didn’t really think he’d call. Once he left Hanover I thought he was gone. He left three weeks, four weeks before he even called me. He says, ‘What are you doing?’ ‘I’m working, what do you think I’m doing?’ And he says, ‘Can you take lunch? Can you come up here? I want to talk to you.’ He wasn’t going to talk on the phones at Hanover, because Roy could sometimes listen in on the calls if he wanted. He could come right into your phone. You’d pick up the phone and Roy would be like, ‘Get off the phone!’ ”

  They worked out a great deal—great for Louis, great for Benny, great for Todd. Todd got 30 percent of the payout—in other words, 30 percent of the rips Benny and Louis were to generate. Louis and Benny agreed to split the remaining 70 percent. Louis got 40 percent of their share if he brought in more than $100,000 in rips. Otherwise he got 30 percent.

  Robert Todd was in the eastern part of Midtown Manhattan, in a building at 50th Street and Third Avenue grandly named the Crystal Pavilion. It was one of the newest of the new office towers that were built on Third Avenue since the mid-1950s, when the Third Avenue El was torn down. The El was a great backdrop for filmmakers, particularly if they were making noir tales of greed and betrayal—movies such as Side Street,
which Anthony Mann filmed back in 1950 in a rundown tenement at 850 Third Avenue, right down the street from the Crystal Pavilion. Side Street was about a part-time postman who stole thousands of dollars in a moment of impulsive greed.

  Third Avenue was a perfect backdrop for a fifties morality tale. It was run-down but decent, a vivid contrast with the bourgeois hypocrisy of the era, epitomized by an aerial view of Wall Street that began the film. Years later, filmmakers would have to look elsewhere to find that kind of melodramatic contrast. Blue-collar Third Avenue was gone, retreating to the outer boroughs and suburbs in the 1960s and 1970s. When Louis and Benny and the other Todd brokers came to the Crystal Pavilion in September 1993, a bit of blue collar came back to Third Avenue.

  A spit throw from the fictional angst of Side Street, Louis might have had his own, real-life moral dilemma. A lot of people in his position would have been wracked by guilt. Here he was, getting thousands of dollars a week in ill-gotten money—money that he needed to break out of his own blue-collar world, money that he didn’t take on impulse, but was removing with growing skill and calculation, by dint of hard work.

  Louis had no angst, no existential crisis. He never gave much thought to the morality of what he was doing. Like not letting customers sell stock.

  “I started realizing that you couldn’t get out, that it was all bullshit,” said Louis. “Even though the price was twenty, it didn’t matter, you couldn’t get out at twenty. I knew they were lousy companies. But at Hanover I wasn’t sure about anything yet. Once I got to Robert Todd, that was it. I knew that it was all bullshit. And I just treated it that way. I didn’t give a shit. I just wanted the money. It didn’t matter to me.”

  In the movie that Anthony Mann filmed down the street forty-three years before, the hero wound up back in the arms of his wife—bloodied and beaten, but with his integrity restored. It was a simple solution to a simple moral problem. But in Wall Street of the early 1990s, moral dilemmas were never simple. Brokerage and stock exchange executives, men of patrician backgrounds who held chop house brokers in contempt, turned a blind eye to the insane overhyping of stocks by analysts, and the web of conflicts of interest that would become a full-blown scandal in 2002. Across town, the rips of the chop houses were also nonissues. Complaints about rips—the heart and soul of the chop houses—never crossed Massood Gilani’s desk. No reason they would. Customers didn’t know about the rips. But the rips were not hidden so well that the NASD and SEC wouldn’t have found them if the NASD and SEC were looking, or if the NASD and SEC had given a damn. “The SEC guy would look at the ticket and say, ‘Oh, he marked it up an eighth [13 cents a share]. He did it right.’ He didn’t know about the $4 rip that we made,” said Louis.