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"The deputy director for enforcement at the Securities and Exchange Commission, Walter G. Ricciardi, said he has seen a surge in insider trading, market manipulation and illegal short-selling among hedge fund advisers in the last year. He attributes the increase to a new generation of people in the financial services sector who were not around to see traders like Ivan Boesky and Michael R. Milken “led out in handcuffs.”




Life After Securities Fraud

November 2, 2007
Street Scene
By JANET MORRISSEY

http://www.nytimes.com/2007/11/02/business/02insider.html?ref=business

When federal marshals snapped the metal handcuffs around his wrists behind his back and led him away on a chilly December day in 2000, hedge fund manager Michael L. Smirlock wondered if his life was over.

Hours earlier, Mr. Smirlock had received a call from his lawyer, William Brodsky, telling him that he had been indicted for securities fraud.

“It was very traumatic,” Mr. Smirlock said, as he recalled the moment while sitting in his third-floor office at Strive, a nonprofit organization where he works as executive director. “Life seemed over — temporarily.”

Reports of insider trading and securities fraud have become frequent these days. But long before Enron, WorldCom and the notorious $6,000 shower curtain that was a part of an executive’s downfall at Tyco, investors were burned in the unregulated hedge fund industry in the late 1990s as mortgage-related funds incurred heavy losses from the Russian and Asian financial debacles.

Sandwiched in all that were the convictions of hedge fund managers like Mr. Smirlock, as well as the crash and bailout of the hedge fund Long-Term Capital Management.

The deputy director for enforcement at the Securities and Exchange Commission, Walter G. Ricciardi, said he has seen a surge in insider trading, market manipulation and illegal short-selling among hedge fund advisers in the last year. He attributes the increase to a new generation of people in the financial services sector who were not around to see traders like Ivan Boesky and Michael R. Milken “led out in handcuffs.”

Mr. Smirlock is a reminder of what can happen. He recently broke a nine-year silence, having declined all interviews until now.

Leaning back in a chair, his hands nervously straightening items on his desk, Mr. Smirlock recalled being photographed, fingerprinted and placed into a holding cell. “I remember the worst part of it was seeing my lawyer come in, and he was almost in tears looking at me,” he said. “I was not in a good way.”

Was he suicidal? “No, but life sort of spiraled downward from that point on, for sure,” he said.

Mr. Smirlock, now 51, spent 37 months from 2002 to 2005 in a federal prison camp in Pensacola, Fla., after pleading guilty to securities fraud when he was chief executive of Laser Advisers, where he managed three hedge funds and a real estate investment trust.

The charges related to the hedge funds, which had about $365 million in capital that was leveraged and invested in more than $5 billion in bonds. The S.E.C. and federal prosecutors found that from late 1997 to June 1998, Mr. Smirlock had falsely inflated the value of certain securities that hid about $12.6 million in trading losses. (Conditions in the mortgage market exacerbated the situation, causing the funds to lose more than $70 million — but only $12.6 million of the losses were attributed to the fraud.)

Among his contemporaries were Michael W. Berger and Mark Yagalla. Mr. Berger, portfolio manager of Manhattan Investment Fund, faced similar securities fraud charges in the late 1990s. But Mr. Berger fled the country just before sentencing in 2002. He was caught by the F.B.I. in Austria in July.

Mr. Yagalla stole more than $30 million from his Ashbury Capital Partners fund to buy lavish cars, a helicopter, oil wells, furs, Rolex watches and luxury homes for himself and his former girlfriend, once a Playboy playmate. His offenses left investors, many of them retired, wiped out. Mr. Yagalla declined to comment for this article.

The securities fraud was the second misstep for Mr. Smirlock. The first came in 1993 when trading irregularities led to a $50,000 fine, a three-month suspension and his resignation from Goldman Sachs, where he was a partner.

After the latest problem, he was sentenced to prison and ordered to pay $12.6 million in restitution.

“It was just hubris — ego,” Mr. Smirlock said. “I never blamed anybody else but me. I accepted full responsibility for what I did.” Around the same time, his marriage was crumbling.

Prison changed his perspective on life, people and himself, he said.

“Where people get the idea that you spend all day playing golf or swimming is insane,” he said of the federal prison camp. It was a place, he said, where a small misunderstanding could escalate into violence in seconds, where friendship and loyalty were tested daily, and where long days offered time for reflection and regret.

“There is nothing sadder than listening to somebody on the phone finding out that his wife has cancer and is going to die while he’s in prison,” Mr. Smirlock recalled, “or a guy begging his children to send him $50 so that he can shop at the commissary.”

Then there was the violence. “I learned it hurts more to hit than be hit,” he said.

The prison time taught Mr. Smirlock a lesson about people. “Nobody is better than somebody else in a lot of respects,” he said. “It’s just the cards you’re dealt with.”

For that reason, Mr. Smirlock has worked for nonprofit organizations since his release. He worked at the Iris House, a nonprofit that helps women with H.I.V., upon his release. He is now head of Strive, which helps ex-convicts, single mothers and others find jobs.

He said he does not miss Wall Street, but misses his friends. “The number of people that I felt I let down and did let down, and there’s nothing I can do to pay them back and make up for things,” he said. “My friends deserved better.”

Mr. Smirlock cut all contact with his Wall Street friends when he went to prison and did not respond to their letters. Has he contacted them since his release? “No,” he said, gazing out of his office window. “They still deserve better.”

http://www.nytimes.com/2007/11/02/business/02insider.html?ref=business







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