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The following is an extract taken from an article published in FORTUNE magazine about an insider trading ring which netted nearly $7 million in illegal profits. Orchestrated by Eugene Plotkin, a research analyst in the Fixed Income division of Goldman Sachs, and David Pajcin, a former employee of Goldman Sachs, and with the help of investment bankers, insider trades, moles, and even strippers, they targeted multi-million dollar deals including Procter & Gamble Co.'s purchase of Gillette Co., and Adidas-Salomon AG's acquisition of Reebok International Ltd.

Partners in crime

By Barney Gimbel, Fortune writer-reporter

  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 - 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 was Reebok 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 players

  David 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 51/2 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 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 plot

  As 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 and 6,000 shares of Biolase Drills, a dental supply company based in Irvine, Calif. (Marcial had said Biolase would benefit from a recent management shakeup and 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 proteges 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 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 unravels

  Once 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.

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