Tuesday, April 14, 2015
Earlier this month, the Second Circuit, as expected (at least by me), denied Southern District of New York U.S. Attorney Preet Bharara's request for reargument and reconsideration of its December 2014 ruling in United States v Newman which narrowed, at least in the Second Circuit, the scope of insider trading prosecutions. I would not be surprised if the government seeks certiorari, and, I would not be all that surprised it cert were granted.
In Newman, the defendants, Newman and Chiasson, were two hedge fund portfolio managers who were at the end of a chain of recipients of inside information originally provided by employees of publicly-traded technology funds. The defendants traded on the information and realized profits of $4 million and $68 million respectively. There was, however, scant, if any, evidence that the defendants were aware whether the original tippors had received any personal benefit for their disclosures.
The Second Circuit reversed the trial convictions based on an improper charge to the jury and the insufficiency of the evidence. Specifically, the court ruled that:
1) the trial judge erred in failing to instruct the jury that in order to convict it had to find that the defendants knew that the corporate employee tippors had received a personal benefit for divulging the information; and
2) the government had indeed failed to prove that the tippors had in fact received a personal benefit.
Thus, at least in the Second Circuit, it appears that the casual passing on of inside information without receiving compensation by a friend or relative or golf partner does not violate the security laws. "For purposes of insider trading liability, the insider's disclosure of confidential information, standing alone, is not a breach," said the court. Nor, therefore, does trading on such information incur insider trading liability because the liability of a recipient, if any, must derive from the liability of the tippor. To analogize to non-white collar law, one cannot be convicted of possessing stolen property unless the property had been stolen (and the possessor knew it). Those cases of casual passing on of information, which sometimes ensnared ordinary citizens with big mouths and a bit of greed, are thus apparently off-limits to Second Circuit prosecutors. To be sure, the vast majority of the recent spate of Southern District prosecutions of insider trading cases have involved individuals who have sold and bought information and their knowing accomplices. Although Southern District prosecutors will sometimes now face higher hurdles to prove an ultimate tippee/trader's knowledge, I doubt that the ruling will affect a huge number of prosecutions.
The clearly-written opinion, by Judge Barrington Parker, did leave open, or at least indefinite, the critical question of what constitutes a "personal benefit" to a provider of inside information (an issue that also might impact corruption cases). The court stated that the "personal benefit" had to be something "of consequence." In some instances, the government had argued that a tippee's benefit was an intangible like the good graces of the tippor, and jurors had generally accepted such a claim, likely believing the tippor would expect some personal benefit, present or future, for disclosing confidential information. In Newman, the government similarly argued that the defendants had to have known the tippors had to have received some benefit.
Insider trading is an amorphous crime developed by prosecutors and courts - not Congress - from a general fraud statute (like mail and wire fraud) whose breadth is determined by the aggressiveness and imagination of prosecutors and how much deference courts give their determinations. In this area, the highly competent and intelligent prosecutors of the Southern District have pushed the envelope, perhaps enabled to some extent by noncombative defense lawyers who had their clients cooperate and plead guilty despite what, at least with hindsight, seems to have been a serious question of legal sufficiency. See Dirks v. S.E.C., 463 U.S. 646, 103 S.Ct. 3255 (1983)(test for determining insider liability is whether "insider personally will benefit, directly or indirectly"). As the Newman court refreshingly said, in language that should be heeded by prosecutors, judges, and defense lawyers, "[N]ot every instance of financial unfairness constitutes fraudulent activity under [SEC Rule] 10(b)."
As I said, I would not be shocked (although I would be surprised) if Congress were to enact a law that goes beyond effectively overruling Newman and imposes insider trading liability on any person trading based on what she knew was non-public confidential information whether or not the person who had disclosed the information had received a personal benefit. Such a law, while it would to my regret cover the casual offenders I have discussed, would on balance be a positive one in that it would limit the unequal information accessible to certain traders and provide a more level playing field.
Thursday, December 11, 2014
Here are two (ahem) differing views on yesterday's Second Circuit insider trading decision in United States v. Newman. The Wall Street Journal editorial writers are understandably happy at the ruling and contemptuous of Preet Bharara, dubbing him an Outside the Law Prosecutor. The Journal exaggerates the extent to which the case was an outlier under Second Circuit precedent and incorrectly states that "the prosecution is unlikely to be able to retry the case." The prosecution cannot retry the case, unless the full Second Circuit reverses the panel or the U.S. Supreme Court takes the case and overturns the Second Circuit.
Over at New Economic Perspectives, Professor Bill Black insists that the Second Circuit Makes Insider Trading the Perfect Crime. Black thinks Wall Street financial firms will enact sophisticated cut-out schemes in the wake of the opinion to give inside traders plausible deniability. He compares the fate of Newman and his co-defendant to that of Eric Garner and calls for a broken windows policing policy for Wall Street. Black's piece is outstanding, but in my view he underestimates the extent to which the Newman court was influenced by Supreme Court precedent and ignores the opinion's signals that the government needed to do a much better job of proving that the defendants knew about the tipper's fiduciary breach. As a matter of fact, in the typical insider trading case it is relatively easy to show such knowledge. That's what expert testimony and willful blindness instructions are for.
Wednesday, December 10, 2014
The Second Circuit's decision in United States v. Newman is out. The jury instructions were erroneous and the evidence insufficient. The convictions of Todd Newman and Anthony Chiasso are reversed and their cases have been remanded with instructions to dismiss the indictment with prejudice. Here is the holding in a nutshell:
We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.
Wednesday, July 16, 2014
As my editor, Ellen Podgor, noted last week (see here), the winning streak in insider trading cases of the U.S. Attorney's Office for the Southern District of New York ended with the jury's acquittal of Rengan Rajaratnam, the younger brother of Raj Rajaratnam, who was convicted of insider trading in 2011 and sentenced to eleven years in prison.
The U.S. Attorney has done an excellent job in prosecuting insider trading, securing convictions by plea or trial of 81 of the 82 defendants whose cases have been concluded in the district court. The office has appropriately targeted primarily professional financial people who seek or provide insider information rather than those incidental offenders who by chance have received or provided insider tips and taken advantage of their knowledge. A few of these trial convictions, however, appear to be in jeopardy. At oral argument in a recent case the Second Circuit Court of Appeals seemed sympathetic to the contention that a trader may not be found guilty unless he knew that the original information came from a person who had received a benefit, and not only had violated a fiduciary duty of secrecy. Judge Naomi Reice Buchwald, who presided over the Rajaratnam case, agreed with that contention and thereupon dismissed two of the three counts.
Whether the prospective Second Circuit ruling, if it comes, will make good public policy is another matter. Insider trading (which fifteen years ago some argued should not be a crime) is, or at least was, endemic to the industry. Presumably, the U. S. Attorney's successful prosecutions have had a positive step in putting the fear of prosecution in traders' minds. Such deterrent to a particularly amoral community seems necessary: a recent study demonstrated that twenty-four percent of the traders interviewed admitted they would engage in insider trading to make $10 million if they were assured they would not be caught (the actual percentage who would, I suspect, is much higher). See here.
The latest Rajaratnam case, indicted on the day before the statute of limitations expired, was apparently not considered a strong case by some prosecutors in the U.S. Attorney's Office. See here and here. Indeed, jurors, who deliberated four hours, described the evidence as "no evidence, period" and asked "Where's the evidence?" That office nonetheless did not take this loss (and generally does not take other losses) well. It was less than gracious in losing, making a backhanded slap at Judge Buchwald, a respected generally moderate senior judge. A statement by the U.S. Attorney Preet Bharara noted, "While we are disappointed with the verdict on the sole count that the jury was to consider, we respect the jury trial system . . . ." (Italics supplied.)
Southern District judges, generally out of deference to and respect for the U.S. Attorney's Office, whether appropriate or undue, rarely dismiss entire prosecutions or even counts brought by that office, even in cases where the generally pro-prosecution Second Circuit subsequently found no crimes. See here. It is refreshing to see a federal judge appropriately do her duty and not hesitate to dismiss legally or factually insufficient prosecutions.
Such judicial actions, when appropriate, are particularly necessary in today's federal system where the bar for indictment is dropping lower and lower. The "trial penalty" of a harsher sentence for those who lose at trial, the considerable benefits given to cooperating defendants from prosecutors and judges, and the diminution of aggressiveness from a white-collar bar composed heavily of big firm former federal prosecutors have all contributed to fewer defense challenges at trial and lessened the prosecutors' fear of losing, a considerable factor in the prosecutorial decision-making process. Acquittals (even of those who are guilty) are necessary for a balanced system of justice.
Lastly, it is nice to see a major victory by a comparatively young (43) defense lawyer, Daniel Gitner of Lankler, Siffert & Wohl, an excellent small firm (and a neighbor), in a profession still dominated by men in their sixties or seventies.
Tuesday, March 25, 2014
The Second Circuit Court of Appeals affirmed Rajat Gupta's convictions for securities fraud and conspiracy to commit securities fraud. (See here). The decision should be a hit for future evidence casebooks as it provides detailed analysis of a host of different evidence rules - Rules 403, 801, 802, 803, and 804.
But what the decision summarily denies is the argument that the "wiretap authorizations were obtained in violation of Title III of the Omnibus Crime Control and Safe Streets Act of 1968, ... and the Fourth Amendment to the Constitution." The Second Circuit notes that since Rajaratnam's challenges were rejected, "Gupta's Title III and constitutional challenges are thus foreclosed." Hopefully a higher Court will examine the use of wiretaps in such white collar cases.
Tuesday, February 11, 2014
To the surprise of nobody I know, Mathew Martoma, the former SAC Capital portfolio manager, was convicted of insider trading last Thursday by a Southern District of New York jury. The evidence at trial was very strong. It demonstrated that Martoma had befriended two doctors advising two drug companies on the trial of an experimental drug, received confidential information from them about the disappointing result of the drug trial prior to the public announcement, and then had a 20-minute telephone conversation with Steven A. Cohen, the SAC chair, a day or so before Cohen ordered that SAC's positions in these companies be sold off. The purported monetary benefit to SAC, in gains and avoidance of loss, of the trades resulting from the inside information is about $275 million, suggesting that Martoma receive a sentence of over 15 years under the primarily amount-driven Sentencing Guidelines (although I expect the actual sentence will be considerably less).
Cohen is white-collar Public Enemy No. 1 to the Department of Justice, at least in its most productive white-collar office, the U.S. Attorney's Office for the Southern District. That office has already brought monumental parallel criminal and civil cases against SAC, receiving a settlement of $1.8 billion, about a fifth of Cohen's reported personal net worth, but it has apparently not garnered sufficient evidence against Cohen to give it confidence that an indictment will lead to his conviction. It had granted a total "walk" -- a non-prosecution agreement -- to the two doctors whose testimony it felt it needed to convict Martoma, unusually lenient concessions by an office that almost always requires substantial (and often insubstantial) white-collar wrongdoers seeking a cooperation deal to plead to a felony. As an FBI agent told one of the doctor/co-conspirators, the doctors and Martoma were "grains of sand;" the government was after Cohen.
In an article in the New York Times last Friday, James B. Stewart, an excellent writer whose analyses I almost always agree with, asked a question many lawyers, including myself, have asked: why didn't Martoma cooperate with the government and give up Cohen in exchange for leniency? Mr. Stewart's answer was essentially that Martoma was unmarketable to the government because he would have been destroyed on cross-examination by revelation of his years-ago doctoring his Harvard Law School grades to attempt to secure a federal judicial clerkship and covering up that falsification by other document tampering and lying. Mr. Stewart quotes one lawyer as saying Martoma would be made "mincemeat" after defense cross-examination, another as saying he would be "toast," and a third as saying that without solid corroborating evidence, "his testimony would be of little use." See here.
I strongly disagree with Mr. Stewart and his three sources. The prosecution, I believe, would have welcomed Mr. Martoma to the government team in a New York minute -- assuming Martoma would have been able to provide believable testimony that Mr. Cohen was made aware of the inside information in that 20-minute conversation. When one is really hungry -- and the Department of Justice is really hungry for Steven A. Cohen -- one will eat the only food available, even if it's "mincemeat" and "toast." And there is certainly no moral question here; the government gave Sammy "the Bull" Gravano, a multiple murderer, a virtual pass to induce him to testify against John Gotti. Given the seemingly irrefutable direct, circumstantial and background evidence (including, specifically, the phone call, the fact that Cohen ordered the trades and reaped the benefit, and generally, whatever evidence from the civil and criminal cases against SAC is admissible against Cohen), testimony by Martoma to the effect he told Cohen, even indirectly or unspecifically, about the information he received from the doctors would, I believe, have most likely led to Cohen's indictment.
I have no idea why Martoma did not choose to cooperate, if, as I believe, he had the opportunity. "Cooperation," as it is euphemistically called, would require from Martoma a plea of guilty and, very likely in view of the amount of money involved, a not insubstantial prison term (although many years less than he will likely receive after his conviction by trial). Perhaps Martoma, who put on a spirited if unconvincing defense after being caught altering his law school transcript, is just a fighter who does not easily surrender or, some would say, "face reality," even if the result of such surrender would be a comparatively short jail sentence. (In a way, that choice is refreshing, reminding me of the days defense lawyers defended more than pleaded and/or cooperated.) Perhaps Martoma felt cooperation, a condition of which is generally full admission of all prior crimes and bad acts, would reveal other wrongs and lead to financial losses by him and his family beyond those he faces in this case. Perhaps he felt loyalty -- which it has been demonstrated is a somewhat uncommon trait among those charged with insider trading -- to Cohen, who has reportedly paid his legal fees and treated him well financially (and perhaps Martoma hopes will continue to do so), or perhaps to others he would have to implicate.
And perhaps -- perhaps -- the truth is that in his conversation with Cohen, he did not tell Cohen either because of caution while talking on a telephone, a deliberate effort to conceal from Cohen direct inside information, or another reason, and he is honest enough not to fudge the truth to please the eager prosecutors, as some cooperators do. In such a case his truthful testimony would have been unhelpful to prosecutors bent on charging Cohen. That neutral testimony or information, if proffered, which the skeptical prosecutors would find difficult to believe, would at best get him ice in this very cold wintertime. Lastly, however unlikely, perhaps Martoma believed or still believes he is, or conceivably actually is, innocent.
In any case, it is not necessarily too late for Martoma to change his mind and get a benefit from cooperation. The government would, I believe, be willing to alter favorably its sentencing recommendation if Martoma provides information or testimony leading to or supporting the prosecution of Cohen. Indeed, I believe the government would ordinarily jump at a trade of evidence against Cohen for a recommendation of leniency (or less harshness), even if Martoma is now even less attractive as a witness than before he was convicted (although far more attractive than if he had testified as to his innocence). However, the five-year statute of limitations for the July 2008 criminal activity in this matter has apparently run, and an indictment for substantive insider trading against Cohen for these trades is very probably time-barred.
To be sure, federal prosecutors have attempted -- not always successfully (see United States v. Grimm; see here) -- imaginative solutions to statute of limitations problems. And, if the government can prove that Cohen had committed even a minor insider trading conspiratorial act within the past five years (and there are other potential cooperators, like recently-convicted SAC manager Michael Steinberg, out there), the broad conspiracy statutes might well allow Martoma's potential testimony, however dated, to support a far-ranging conspiracy charge (since the statute of limitations for conspiracy is satisfied by a single overt act within the statutory period). In such a case, Martoma may yet get some considerable benefit from cooperating, however belatedly it came about.
Tuesday, July 30, 2013
1. Barring a miracle, the government will win.
2. The law on corporate criminal liability may be unfair, but it has been around since 1909.
3. The government has to prove that: a) at least one SAC employee committed securities/wire fraud (several have already pled guilty); b) the employee was acting within the actual or apparent scope of his/her authority/employment at the time; and c) the employee intended, even in part, to benefit the corporation.
4. If the government can prove the above elements it will win, even if the employees who engaged in securities fraud/insider trading violated SAC's insider trading compliance policies or Steven Cohen's direct orders.
5. Give credit where credit is due. This is a well-crafted speaking indictment. Preet Bharara alleged more than he will technically need to prove at trial. He charged that SAC created an atmosphere in which insider trading was bound to flourish. Why did he do this? First, to make his case in the court of public opinion. Second, to help prevent jury nullification. Third, to rebut a defense that the guilty employees were acting against the interests of the company. Here is the SAC Indictment.
6. The attempt to obtain all of SAC's profits through criminal forfeiture allegations is, to put it mildly, a stretch. Significantly, the government did not try to seize funds through civil forfeiture in conjunction with the indictment. This was only partly to protect innocent third parties. The government also did not want to see its resources diverted, give up unnecessary discovery, or embarrass itself.
7. Like John Dowd in the Rajaratnam case, Ted Wells is in the catbird seat. No one in the criminal defense bar expects him to win. If he loses it will in no way dim his reputation. If he wins, he achieves true legendary status. Conversely, no AUSA worth his/her salt can afford to lose this case.
8. How to defend this case? By arguing that all the employees who pled guilty were greedy sorts who were in it 100% for themselves. They could not have intended to benefit the company, because the company made it so clear, time and again, that insider trading actually was bad for the company. Hence the key importance of the indictment's allegations that SAC's compliance policy was essentially a sham.
9. Insider trading law may be stupid, but, contrary to popular myth, is not for the most part vague or confusing to the professionals who have spent their careers in the securities industry.
10. When an employee vocalizes his reluctance to say more over the telephone, concomitantly referencing his "compliance" training, it's a pretty safe bet he knows insider trading is illegal.
Tuesday, July 2, 2013
Yesterday, in United States v. Goffer, an insider trading/securities fraud criminal appeal, the Second Circuit again refused to alter a standard conscious avoidance jury instruction to comport more fully with the Supreme Court's opinion in Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060, 2068-72 (2011). According to Judge Wesley, Global-Tech was not "designed to alter the substantive law. Global-Tech simply describes existing case law." The instruction given by the trial court "properly imposed the two requirements imposed by the Global-Tech decision." Moreover, Appellant Kimelman's request "that the district court insert the word 'reckless' into a list of mental states that were insufficient" was unnecessary, because "Global-Tech makes clear that instructions (such as those in this case) that require a defendant to take 'deliberate actions to avoid confirming a high probability of wrongdoing' are inherently inconsistent 'with a reckless defendant...who merely knows of a substantial and unjustified risk of such wrongdoing."
I don't know. Sounds a little circular to me. According to Global-Tech, willful blindness has "an appropriately limited scope that surpasses recklessness and negligence." Why not just say it squarely in a jury instruction? The problem here is that district courts are generally afraid to alter standard jury instructions in light of emerging case law. And appellate courts are generally reluctant to vacate major securities fraud convictions unless the jury instructions are blatantly improper. The Goffer opinion can be found here.
Monday, April 22, 2013
The government decision to delay Miranda warnings, and also the first appearance before a judge and the assignment of counsel, for Dzhokhar Tsarnaev, the surviving alleged Boston Marathon bomber, was a tactical one, no doubt based largely on an evaluation that any admission Tsarnaev makes is unnecessary to a government case (eyewitnesses, an admission, videotapes, possession of explosives, flight, etc.) which appears to be overwhelming.
The broad "public safety emergency exception" which the government asserts is a questionable Department of Justice attempt to expand the narrow exception announced in New York v. Quarles, 467 U.S. 649 (1984). The government's aggressive stance is based in part on a belief that Miranda does not prescribe a procedural requirement for police questioning, but is only a prerequisite for the admissibility at trial of statements made by a defendant. Under such reasoning, government agents are free to violate the dictates of Miranda (and perhaps other constitutional rights) with no harm to their case except a return to the status quo ante.
Aggressive law enforcement tactics against criminal suspects accused of particular heinous crimes, such as terrorism, murder, kidnapping and large-scale drug dealing, gradually work their way into the general law enforcement toolbox. Tactics used against drug dealers and organized crime figures, such as extensive electronic surveillance, undercover agents, forfeiture of assets and disallowance of attorneys' fees, and exceedingly high bail requests, for instance, are no longer uncommon in white collar cases.
I wonder whether the "public safety emergency exception" is so far off. If it is acceptable under this exception to allow the government to disregard Miranda and Federal Rule of Criminal Procedure 5(a)(1)(A) (requiring agents to bring one arrested before a court "without necessary delay") in order ostensibly to prevent future terrorist crimes, will it also become acceptable to detain for 48 hours and question without Miranda warnings, for instance, those who have provided inside information about unknown persons to whom they might have provided such information in order to deter imminent or future insider trading or those who have hacked computers about accomplices or others who might commit imminent or future computer crimes?
Wednesday, October 24, 2012
The sentencing is today at 2:00 PM Southern District of New York Time. (And is there really any other time in the Universe?)
As I noted on Monday, Gupta's Guidelines Range, according to the Government and the Probation Office, is 97-121 months.That's a Level 30. Gupta's attorneys put Gupta's Guidelines Range at 41-51 months. That's a Level 22. The different calculations are based on different views of the gain and/or loss realized and/or caused by Gupta. Gupta's attorneys are seeking a downward variance and asking for probation, with rigorous community service in Rwanda. Serving a sentence in Rwanda is not as strange as it may sound on first hearing. After all, criminal defendants in Louisiana regularly do time in Angola.
But seriously, lawyers and germs, there is a practice pointer in here somewhere. Practitioners naturally strive to obtain the lowest possible Guidelines Range as a jumping off point for the downward variance. It is psychologically easier for a judge to impose a probationary sentence when the Guidelines Range is low to begin with. It is legally easier as well, because the greater the variance from the Guidelines, the greater the judicially articulated justification must be.
But too many lawyers push the envelope in their Guidelines arguments, thereby risking appellate reversal on procedural grounds. This is a particular danger when the judge is already favorably disposed toward the defendant and looking for ways to help him. Failure to correctly calculate the Guidelines is a clear procedural error. (Some of the federal circuits try to get around Booker, Gall, and Kimbrough by setting up rigorous procedural tests. The Fourth Circuit is the most notorious outlier in this regard.) Lawyers must be on guard against the possibly pyrrhic and costly victory of an incorrectly calculated Guideline range, followed by probation. One solution is to have the court rule on alternative theories. "This is the Guidelines Range. These are my reasons for downward variance. Even if the Guidelines Range was really at X, as the Government argues, I would still depart to Y for the same and/or these additional reasons." If the judge already likes your client, getting him or her to do this is often an easy task.
Of course, Judge Rakoff needs no instructions in this regard. One of our ablest and sharpest jurists, and a leading Guidelines critic, he will attempt to correctly calculate the Guidelines Range in an intellectually honest manner and will downwardly (or upwardly) vary as he damn well sees fit, with ample articulation.
Monday, October 22, 2012
As my colleague Solomon Wisenberg wrote, see here, former Goldman Sachs director Rajat K. Gupta is scheduled to be sentenced this Wednesday, October 24, by Judge Jed S. Rakoff of the Southern District of New York upon his conviction of insider trading and conspiracy.
The sentencing decision in this case is a particularly difficult one. On the one hand, Gupta is (or was) a man of exceedingly high repute who has done extraordinary good works, as attested to in sentencing letters by Bill Gates and Kofi Annan, and, if sentencing were based on an evaluation of the defendant's entire life, even considering the serious blemish of this case, Gupta might well deserve commendation and not punishment.
On the other hand, the crime for which Gupta was convicted, albeit arguably aberrational, was a brazen and egregious breach of the faith which was placed in him precisely because of his outstanding reputation. Indeed, while Gupta's motivation appears not to have been greed or personal gain, a factor that ordinarily would suggest leniency, one may conclude that his crimes resulted from an arrogance of power and privilege and the belief that as a "master of the universe" he was above the law.
Gupta, having gone to trial and expected to appeal (challenging the same wiretap that is a subject of the appeal by Raj Rajaratnam discussed by my other colleague, Ellen S. Podgor, see here), is at somewhat of a disadvantage. Since any statements he may make discussing his motivation or showing remorse could probably be used as admissions in a potential new trial, he did not admit wrongdoing or demonstrate remorse, factors viewed favorably by most sentencing judges. Although I strongly doubt that Judge Rakoff will "punish" Gupta for going to trial, as some judges do, the judge will be unable to consider any understandable and perhaps sympathetic motivation or any remorse, if either exists, as a mitigating circumstance.
As often happens, both sides have made extreme sentencing requests. The government asks for a sentence of 97 to 121 months, what it claims is the appropriate sentencing guidelines range. The defense is seeking probation with community service in Rwanda, supported by a request from a Rwandan governmental official, or alternatively New York. At first blush, the request for community service in Rwanda struck me as either a "Hail Mary" hope, an accommodation to a client or family who are unwilling to accept reality, or a deliberately lowball request in the expectation of a middle ground sentence. On further consideration, however, I believe that a sentence of, say, two years performing "community service" in Rwanda while living in spartan conditions (a modest one-room apartment, cooking his own meals, not having servants, etc.), might not be inappropriate. Rather than wasting Gupta's enormous talents and intellect in prison, such a sentence would enable him to provide considerable benefit to society. Indeed, such a sentence would probably be much more onerous for Gupta than confinement in a federal minimum security camp. To be sure, there is a serious question whether such community service could be suitably monitored.
Of course, Judge Rakoff, however independent, fearless and innovative as he is, will not sentence Gupta in a vacuum. He will no doubt consider sentences that he and other judges have meted out to lesser-known defendants in other insider trading cases and how his sentence will appear to the public in terms of deterrence and equal justice. Gupta should not buy his plane ticket yet.
Wednesday, July 11, 2012
The news that Barclays officials told the New York Fed in 2007 about potential problems with Libor highlights key differences between the regulatory mind and the prosecutorial mind. It also shows the difficulty in successfully prosecuting white collar fraud in the wake of regulatory incompetence.
When the typical federal prosecutor learns that a financial institution or corporation has lied, his instinct is to prove and charge a crime against the individuals responsible for the falsehood. Virtually any material lie in the context of publicly traded or federally insured entities constitutes a federal crime.
When a regulator learns that he has been lied to, the response is not necessarily the same. A famous example of this occurred during one of the SEC’s many examinations of Bernie Madoff’s shop. Madoff was caught flat out lying to SEC examiners. Did the scope of the examination expand? No. Were prosecutors immediately informed? No. Madoff was given a slap on the wrist. His massive Ponzi scheme continued for several years, claiming thousands of new victims.
While prosecuting S&L fraud twenty years ago, I was appalled to discover repeated instances in which the very fraud I was investigating had been contemporaneously revealed in some format to federal banking regulators and/or examiners who had often done nothing in response. This put putative defendants in the position of arguing that their frauds really weren’t frauds at all, because they had not deceived anyone. They argued that the regulators knew all about their conduct and failed to act, so: 1) it wasn’t deceptive conduct; and 2) they thought they had a green light going forward. Sometimes our targets and subjects were right. Sometimes they had only disclosed the tip of the iceberg.
By ignoring material financial falsehoods, the regulators and examiners allow frauds to continue and decrease the likelihood of future accountability through the criminal process.
But sophisticated fraudsters often reveal their conduct to regulators through a glass darkly. They are hoping that overworked regulators, with whom they are friendly, will miss, or misunderstand, the half-assed disclosures being made. The trick is to disclose just enough, but not too much. The typical regulator, unlike the typical prosecutor, does not distrust mankind or see a fraudster around every corner. The typical regulator has known the institution and executives he is currently monitoring for years. Often his ass has been kissed during that period in perfectly appropriate ways. He has been respected and deferred to. These intangibles, and his workload, may prevent him from noticing or following up on potential red flags.
We don’t have the full story yet on what the New York Fed knew about Barclay’s Libor problems, but the alacrity of the New York Fed’s acknowledgement that it knew something is striking. Timothy Geithner ran the New York Fed at the time, and we know that he has never met a wrist that couldn’t be slapped or a falsehood that couldn’t be excused.
The question remains—how can we bridge the regulatory/prosecutorial mental divide in order to punish real corporate fraud? Here is one answer—by training regulators and examiners to have zero tolerance for misleading or obstructionist behavior. The discovery of any lie or intentionally misleading conduct by a publicly traded or federally insured institution in any context should result in immediate fast-tracking to appropriate civil and/or criminal enforcement officials and/or federal prosecutorial authorities. This does not mean that prosecution should automatically or even usually ensue. It does mean that individuals who actually know something about fraud can take a critical and timely look at red flag behavior.
Once this process is in place, it may create a business climate in which elite corporate and financial institutions, and their officers, directors, and employees, will know that lying in any form will not be tolerated. The success of such a structure depends on the DOJ green-lighting prosecutors fearless enough to investigate and charge the flesh and blood financial elites who commit fraud. Almost every indication to date (outside of the insider trading context) is that current DOJ leadership is not up to the task.
Friday, June 15, 2012
Peter Lattman & Azam Ahmed, NYTimes, Rajat Gupta Convicted of Insider Trading
Patricia Hurtado & David Glovin, Bloomberg, Ex-Goldman Director Rajat Gupta Convicted of Insider Trading
Tuesday, June 12, 2012
The New York Times reported yesterday that Rajat K. Gupta, a former Goldman Sachs director on trial in the Southern District of New York for providing inside information to his friend and business colleague Raj Rajaratnam so that Rajaratnam could make trades based on those tips, will not testify, according to a letter his highly respected lawyer, Gary Naftalis, submitted to the court on Sunday night. See here. The prior Friday, Mr. Naftalis told the court and the prosecutors it was "highly likely" that Mr. Gupta would testify. I was quite surprised by that declaration and even suspected that it might be a feint to divert prosecutorial resources from the preparation of cross-examination of other witnesses and the summation to preparation for the cross-examination of Mr. Gupta. (While I personally have never made such a feint, I have on occasion considered doing it.)
The government's case against Mr. Gupta is a circumstantial one -- essentially a pattern of incidents in which Mr. Gupta allegedly received secret information at board meetings and very shortly thereafter telephoned Mr. Rajaratnam, and Mr. Rajaratnam then placed trades based on the matters discussed at the board meeting. Most of the critical evidence -- Mr. Gupta's presence at the board meetings at which the information in question was discussed, his calls to Mr. Rajaratnam and Mr. Rajaratnam's firm's trading -- are virtually irrefutable. On the other hand, there is no "smoking gun" in the form of testimony or recordings as to what was said in the critical conversations.
On the witness stand, Mr. Gupta would no doubt be thoroughly and harshly cross-examined on whatever explanation he provided about the substance and timing of the phone calls. Interrogation about these repeated events would allow the prosecutors in effect an extra summation to hammer on these facts, indeed perhaps even better than a summation since the defendant would have to respond directly to each of the allegations, whereas in summation an attorney would have the option of ignoring, glossing over or generalizing about all or portions of the evidence.
In any case, white-collar or not, I believe that when a defendant testifies, the standard of proof beyond a reasonable doubt is diluted. Jurors, rather than asking themselves whether the prosecutor has proved the case beyond a reasonable doubt, focus more on whether the defendant probably told the truth.
I would not be surprised if Mr. Gupta's legal team had spent much of this past weekend cross-examining him and trying to convince him that the better choice for him was to decline to testify. The decision whether to testify is one of the very few that virtually all lawyers, and all ethics rules, decree belongs ultimately to the client. It is often difficult to convince white collar clients, especially those whose egos have become enlarged because of their extreme success, that they will be unable to convince a jury.
While my reading leads me to believe that this is a difficult case for the defense, I believe Mr. Gupta's decision not to testify is a correct one. A similar decision seems to have worked for John Edwards.
Monday, May 21, 2012
By 3:00PM on the first day of trial a jury was selected! FoxBusiness.com has the story here. Buffett may be called to testify. That's Warrren, not Jimmy.
According to Fox:
"Earlier Monday, a jury of 12 New Yorkers and four alternates were chosen. They include a fourth grade teacher, a physician’s assistant and an executive at a nonprofit. The four man, eight woman group also includes a psychiatric nurse and a freelance beauty consultant. They’ll decide whether Gupta leaked confidential information about Goldman and P&G to former Galleon hedge fund manager Raj Rajaratnam."
Uh-oh. Sounds like a lunchbucket Manhattan jury. Not always a good sign for high-dollar, high-rolling white collar defendants. On the other hand, the government's case here is much weaker than the one it brought against Raj Rajaratnam. And Gupta is represented by Gary Naftalis, whose skill is every bit as great as his reputation. This should be the first fair fight in a big insider trading case in quite some time.
Sunday, April 1, 2012
We don't need new legislation insuring that defendants receive the exculpatory information they are entitled to under the U.S. Constitution, because the DOJ has learned its lesson from the Ted Stevens case and will NEVER let something like that happen again.
For example, in the high-profile insider trading case of U.S. v. Rajat Gupta, the DOJ recently argued that its prosecutors did NOT have to review 44 SEC interview memos for Brady material, even though the memos summarized interview sessions jointly conducted by SEC and DOJ attorneys. According to SDNY prosecutors, the overall DOJ and SEC investigations were not technically "joint" in nature, so SDNY AUSAs had no Brady obligations with respect to the SEC memos. The SEC attorneys were capable of conducting the Brady review on their own. Yeah, right. Just like the FBI and IRS Special Agents were capable of conducting the Brady review in U.S. v. Stevens. I completely forgot about the Brady training that SEC attorneys receive on a regular basis. DOJ's position is not only contrary to SDNY and Second Circuit case law--it also violates the letter and spirit of the Ogden Memo, promulgated after Stevens to prevent future Brady debacles. I guess SDNY didn't get the memo. (They're special you know.) Judge Jed Rakoff was having none of it. See his Gupta Brady Ruling, issued last week, for details. In truth, all of the SEC memos should be turned over in their entirety to the defense, just as all of the 302s and MOIs in Stevens should have been turned over.
It is clear that the DOJ has learned almost nothing from the Ted Stevens case. Suppression of exculpatory and/or potentially exculpatory evidence is largely not an issue at the line level. The typical AUSA knows Brady/Giglio when he sees it, and knows to disclose it. The problems tend to arise in high profile cases, particularly those captained out of DC. The sickness extends to very high levels at the DOJ. The Stevens prosecution clearly showed this. The Bill Allen-Bambi Tyree subornation of perjury allegation, reported in 2004 to a federal judge by DOJ prosecutors in a sealed pleading, was classic Giglio material. It should have instantly been recognized as such by the Chief and Deputy Chief of the Public Integrity Unit and they should have ordered it turned over immediately to the defense. It wasn't and they didn't.
The DOJ has run out of scandals and excuses. Enough already. At long last, have they no shame?
Saturday, March 3, 2012
The official opening of the 26th Annual ABA White Collar Crime Conference began with opening remarks from Raymond Banoun, chair of the Institute, followed by remarks of the chair-elect of the ABA Criminal Justice Section, William "Bill" Shepherd of Holland & Knight. Shepherd noted how the ABA includes all aspects of criminal justice (prosecutors, judges, and criminal defense lawyers). He encouraged folks to get involved in the section.
The first panel, titled Recent Trials, featured three recent cases: Raj Rajaratnam, Loren Stevens, and the Lee B. Farkus trials.
The moderator, Ronald J. Nessim, took the speakers through several topics, including the Indictment, key pre-trial issues in each case, the media, discovery, proffers, parallel proceedings, joint defense agreements, and the trial.
Discussing the Farkus case, the prosecutor on the case -Charles Connolly-talked about the issue of how do you simplify a complex fraud scheme to make it understandable for the jury, and what schemes do you charge. Professor Bruce Rogow, defense counsel on the Farkus case, responded that the Indictment was too long and too difficult. Sara Bloom, the prosecutor handling the Lauren Stevens case said the indictment was narrowly tailed. Defense Counsel Reid Weingarten responded that he is still astonished that Lauren Stevens was indicted. Jonathan Streeter, prosecutor on the Rajaratnam case, noted that he did not try to include everything in the indictment. Simplification was a key theme throughout his comments on this panel. John M. Dowd, defending Rajaratnam, discussed the bill of particulars. He emphasized that the case was really not about wire fraud, although that was the basis for the wiretap.
The government power in these prosecutions was brought to life in the discussion of the venue issue in the Farkus case and the perp walk in the Rajaratnam case. The audience was clearly perturbed by the use of a perp walk in the Rajaratnam case, where the accused had cooperated for three years, had no record, was arrested in his apartment, handcuffed for some time at the station, and finally paraded in a perp walk. This was described by defense counsel as "toxic and prejudicial" and the audience applause to that statement sounded like there was agreement. Perp walks need to stop.
Interestingly none of the defense counsel expressed major discovery problems in their cases. Connolly, the prosecutor on the Farkus case, noted how they made the sixty million documents available to defense – they made a mirror imagine for defense and set up weekly conference calls with the defense. That said, John M. Dowd pointed out problems with items such as the affidavit for the wiretap and Bruce Rogow discussed problems with respect to cooperation in the Farkus case coming on the eve of trial. He also noted how the inability during trial to go into certain motivations by cooperating witnesses made his case difficult.
Reid Weingarten emphasized that one needs to think carefully before agreeing to a proffer. He noted that once you make a proffer it is problem putting the client on the witness stand.
Sara Bloom and Reid Weingarten briefly discussed how the government refused to waive a jury trial, despite the defense agreeing to do so in the Stevens case. There was also a discussion about joint defense agreements, and John Dowd noted that when you put a joint defense agreement in writing that is the first act of mistrust.
A key word used throughout this panel by the government was simplify - one needs to make a white collar case understandable to the jury.
(esp)(Blogging from Miami)
Friday, January 13, 2012
Former Denver hedge-fund operator Drew "Bo" Brownstein, about whose case we wrote (see here), was sentenced Wednesday to a prison term of one year and one day following his plea of guilty to insider trading charges. Brownstein had received confidential information from his friend Drew Peterson concerning a pending purchase of Mariner Energy by Apache Corp. and used that information to reap about $2.5 million in profits for himself and his asset management firm. Drew Peterson, who has pleaded guilty but has not yet been sentenced, received the information from his father, H. Clayton Peterson, a Mariner director, and personally netted about $150,000 from it. The older Peterson also pleaded guilty, and received a probationary sentence.
The sentence of 366 days was between the 46-month high under the applicable Sentencing Guidelines range and the probationary sentence requested by defense counsel and above the six-month sentence suggested by the probation officer. The one-year and one-day sentence will allow Brownstein to earn "good time" of 47 days. Under federal law, good time is permitted only for a sentence of more than one year. 18 U.S.C. 3624(b).
Thursday, December 8, 2011
The New York Times yesterday wrote that in the wake of a CBS 60 Minutes report which said that members of Congress bought stock in companies while considering legislation that might affect those companies, Congress is considering laws banning such trading. The CBS report said none of the trading was illegal at the time. See here.
The 60 Minutes report said that the current chairman of the House Financial Services Committee, Spencer Bachus (R-Ala.), then the ranking Republican on the committee, bet stock prices would fall at the time he was being briefed privately that a global financial crisis might be imminent. According to the Times, at that time Congressman Bachus' office denied he had used nonpublic information as a basis for trading.
I do not venture to assess whether any Congressperson traded on inside information. I am also generally opposed to "new laws" since most are unnecessary and duplicative. Nonetheless, I see no reason that Congress should not be held to the same standard as private businesses or citizens. I also suggest consideration that a new statute, a mirror image to 18 U.S.C. 1001, which criminalizes a false statement to a government official, be enacted prohibiting false statements by a government official to the public.
Wednesday, October 26, 2011
Here is the Reuters story. Nothing posted yet on PACER. WSJ Law Blog also has coverage. This will be a much tougher case than Rajaratnam was for the government to prove. This morning's WSJ has a decent background piece (subscription required) on the case.