Born to Steal: When the Mafia Hit Wall Street (10 page)

In 1993, twenty-four years after he emigrated from Iran, Gilani was fifty-four years old and could take satisfaction that
he was moving, slowly but inexorably, toward fulfilling the immigrant’s version of the American dream. He was a respected
professional—an accountant. In his various jobs he had always been conscientious, hardworking, and happy. By the early 1990s
he had acquired a sensitive if not prestigious position: compliance examiner in the Special Investigations Unit of the National
Association of Securities Dealers, the primary regulator of securities firms in the United States. He worked in the Whitehall
Street offices of the NASD’s District 10, which had jurisdiction over the hundreds of brokerage firms based in New York.

Gilani was responsible for seeing to it that brokers didn’t rip off customers. He took his job seriously. He wasn’t in it
for the money. Gilani was not paid “fuck you” money. Like most of the officials assigned to investigate the nation’s most
sophisticated brokerage firms, he was paid considerably less than the babes who sat behind the tall desks in the chop house
reception areas. In 1993 he was paid $34,800 before withholdings. In 1994 he was promoted to senior compliance examiner and
his salary was increased to $38,280.

Like most NASD examiners, even the ones in the elite Special Investigations Unit, Gilani had no Wall Street experience before
joining the NASD. He had no experience as an investigator. But it didn’t take particularly strong investigative skills to
see that some of the firms in District 10 stank worse than the Fulton Fish Market at high noon in July. Or that the worst
of them was the one just down the street from the Fulton Market.

Gilani’s job included investigating customer complaints. And a disproportionate share of the complaints concerned Hanover.

In the brokerage business, there are complaints and then there are
complaints
. It’s not unusual for customers to blame brokers for their own bad stock picks, or for buying stocks for customers that weren’t
right for them—“unsuitability” is the complaint that brokers get in such instances. That means a broker is not supposed to
sell pork belly futures to an old lady about to enter a nursing home. Complaints like that can be serious, or they can be
unjustified grousing by customers who are blaming their brokers for their own poor judgment.

But then there are the
complaints
. Such as the ones that came from customers who opened up their statements and found stocks they didn’t order.

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.

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 called “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.