"The correlation of volatilities, historical and implied in terms of the S&P and just a general strong dropoff in the five-day volatility, making new highs, so those are all things I look at."--David Pajcin, November 22, 2005

Barney Gimbel has an excellent and quite thorough article in the current issue of Fortune ("Partner in Crime," Oct. 2, 2006) about the exploits of David Pajcin and Eugene Plotkin, the brain trust behind "Insider Trading, Inc." 

The article includes information from a Fortune interview with Plotkin (the first interview with him to date), as well as some priceless material from the SEC's questioning of Pajcin.  According to the article, the SEC brought Pajcin in for testimony on November 22, 2005, and asked him, among other things, about the purchase by numerous people connected to him (including his Croatian aunt) of out-of-the money call options in Reebok.  Although Pajcin did not know it at the time, the SEC had already figured out that the securities Pajcin and his contacts purchased were consistently either (1) merger or acquisition targets in deals worked on by Merrill Lynch (a Merrill Lynch analyst has already pleaded guilty to insider trading in this case) or (2) companies that were about to be profiled in Business Week's market-moving Inside Wall Street column. 

The article states that in response to the SEC's question, Pajcin

admitted advising many of the people involved in the case to buy Reebok, but only because he thought the stock was a bargain, not because he knew anything about a pending merger.

Plotkin held forth for the better part of seven hours on that subject, talking at mind-numbing length about the metrics he said he had applied to the stock. The SEC's Black then summarized this at length, concluding, "Have we covered all the components of your analysis with respect to Reebok specifically that you can remember, sitting here today?"

Pajcin added a few things: "The correlation of volatilities, historical and implied in terms of the S&P and just a general strong dropoff in the five-day volatility, making new highs, so those are all things I look at."

About half an hour later, Black changed the subject to Business Week. Pajcin said he didn't read it often. His answers became short. When he was shown some copies of the Inside Wall Street column, he said he wasn't familiar with it. Then when he was shown articles that had appeared the day he had sold stocks of the companies mentioned, he looked like "a deer in headlights," according to a lawyer who was present. His explanation? He had probably gotten the tips from two guys he had met in Croatian nightclubs, whom he knew only as "Carlo" and "Vladimir."

UPDATE: The Fortune article is available online here.