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.
Thursday, October 13, 2011
Hedge fund billionaire Raj Rajaratnam was sentenced today to an 11-year prison sentence, reportedly the longest sentence ever for insider trading, by Southern District of New York Judge Richard J. Holwell. The sentence was below the approximately 19- to 24-year sentence requested by the government and above the approximately six to eight years requested by the defense.
The Southern District United States Attorney's Office has focused its guns on insider trading offenses, bringing 52 cases in the last two years, 49 of which have resulted in convictions. U.S. Attorney Preet Bharara, who has called insider trading on Wall Street "rampant," has claimed that harsh insider trading sentences are a deterrent because they "convince rational business people that the risk is not worth it." Indeed, since an individual's decision whether to cross the line to trade on confidential information is often based on the individual's benefit v. risk analysis, insider trading may well be one of the relatively few areas of criminality where harsh sentences do actually serve as a deterrent. The Rajaratnam case, which involved a pattern of seeking inside information from tipsters and trading on it for millions of dollars in profits, and cases like it, should be distinguished from those cases which involve a single instance of insider trading based on a casual tip where the decision to trade is not so deliberate and therefore not so deterrable.
The 11-year sentence given to Rajaratnam is the second double-digit insider trading sentence imposed in the Southern District in the past few weeks. A few weeks ago, Judge Richard Sullivan sentenced Zvi Goffer, a former trader at Rajaratnam's firm, Galleon Group, to a 10-year term. While Rajaratnam's criminal involvement was of far greater magnitude than Goffer's, Rajaratnam had serious medical problems and a considerable history of good works, which may well have led to a lesser sentence than he would have received otherwise. Of course, some judges sentence more severely, or more leniently, than others.
Wednesday, August 10, 2011
Last week was Family Week for insider trading actions. Two highly-publicized cases concerned the disclosure and misuse of inside information received from a close relative -- one a spouse, the other a parent.
Both cases implicate the question of whether disclosure of confidential information to a close relative should form the basis of a criminal or regulatory proceeding. While the law provides no safe haven from prosecution for unlawful disclosure to a spouse or child (although the marital privilege may provide some protection to a spouse), respect for family relations may in some cases militate against such a prosecution. Here, however, the facts and circumstances of each case – one justifying prosecution, the other working against it – seem to make that issue moot.
In one, SEC v. William A. Marovitz, 1:11-CV-05259 (N.D. Ill. August 3, 2011), the husband of former Playboy Enterprises CEO Christy Hefner agreed (with the usual non-admission and non-denial of wrongdoing) to pay approximately $170,000 to settle a civil action. The husband, William Marovitz, according to the SEC, traded and made profits on sales of Playboy stock based on information he received from his wife concerning, among other things, a sale of the company. According to the SEC, Hefner had talked with her husband about her concerns with his trading and had the company counsel also speak with him. The counsel sent Marovitz a memo warning of the "serious implications" of his trading Playboy shares and asked him to consult counsel before he did. According to the complaint, Marovitz never did.
Hefner was not charged. Not only was she uninvolved in his trading, she took precautions, however unsuccessful, to prevent her husband’s purported misuse of the information. Of course, she could have prevented any misappropriation of insider information by him by simply not disclosing it.
The settlement amount includes civil penalties. One wonders what, if any, additional penalties Hefner will inflict upon her husband for his apparent betrayal of marital trust.
In another case, U.S. v. H. Clayton Peterson, 11 Crim. 665 (S.D.N.Y.) (see also SEC v. H. Clayton Peterson, etc. al., 11-CV-5448 (S.D.N.Y.)), a father and son both pleaded guilty to criminal securities fraud and conspiracy violations in connection with providing, using, and disseminating inside information concerning the 2010 takeover of Mariner Energy in Denver by the Apache Corporation. H. Clayton Peterson, a Mariner director, pleaded guilty to tipping off his son, Drew Peterson, who traded for himself, clients and a friend for a $150,000 profit and tipped off another friend, reportedly Bo K. Brownstein, a hedge fund executive, who traded for his fund and relatives and friends for profits of more than $5 million.
Peterson Sr. apparently took an active role in the wrongdoing, not only on several occasions providing confidential information to his son, but also directing him on two occasions to purchase Mariner stock for his sister. His conduct, thus, was apparently far more culpable than Hefner’s.
Drew Peterson is reportedly cooperating against Brownstein and others, as, to the extent he can, most likely is his father. Often, the family that steals together squeals together.
Wednesday, June 15, 2011
Danielle Chiesi, the Wall Street blond bombshell who gave new meaning to the term “insider trading” by extracting from sexual partners confidential information which she relayed to convicted inside traders Raj Rajaratnam and Mark Kurland, is reportedly seeking a downward variance from a Sentencing Guideline range of 37-46 months, in part because her wrongdoing resulted from her “toxic” sexual relationship with Mr. Kurland. Ms. Chiesi’s sentencing memorandum highlights a letter from her current boyfriend which contends that Mr. Kurland, her twenty-year lover, exploited her and turned her into his “virtual servant.” Ms. Chiesi seeks to be sentenced to no more than the 27-month term that had been imposed upon Mr. Kurland.
Ironically, one of Ms. Chiesi’s lovers/sources, former IBM executive Robert Moffatt, now serving a six-month sentence for providing confidential information to Ms. Chiesi, at sentencing blamed Ms. Chiesi for manipulating him.
It will be interesting to see whether this “blame the man” explanation strikes a responsive chord with sentencing Judge Richard J. Holwell. Historically, women have received more lenient sentences than men for similar conduct, and the “blame the man” defense frequently worked at sentencing. However, that record was largely compiled with a male-dominated judiciary where some might have condescendingly viewed women as the “weaker sex.” Given changing societal and judicial views (and non-discriminatory mandatory sentences and sentencing guidelines), I suspect that differential has diminished considerably.
Sunday, May 15, 2011
As noted here by Sol Wisenberg, Raj Rajaratnam was found guilty on all counts. Many have been commenting on the case, see here, here, here, here, and here for example. Some predict that this decision will be the stepping stone for future insider trading cases (see here, here , and here) After all the government might say - the wiretaps seemed to work in this case, perhaps they can work in other insider trading cases.
Hopefully, the government will think this through rationally. The wiretaps were clearly questionable (see here) (Professor Dershowitz takes a different view here). It remains to be seen whether a higher court will find their use acceptable. If there are more prosecutions using these types of wires, and it turns out that a higher court finds them unacceptable - a lot of time and money will have been wasted by the government.
A second issue is with respect to what constitutes insider trading and when is the conduct illegal. The fuzzy nature of this question makes many of these prosecutions questionable. The question I always wonder is if the person knew that the conduct was illegal, would they have committed the act. If they knew that a heavy jail sentence would be following, would they engage in this activity. The concern here being that perhaps more time needs to be spent on making criminal offenses clearer and educating folks on what is legal and what is not.
(esp)(blogging from San Francisco)
Wednesday, May 11, 2011
Read all about it. Here is Katya Wachtel's report for businessinsider.com. Carrie Johnson of NPR's All Things Considered discusses the deterrent effect of Wall Street wiretaps in Wiretaps: Not Just For Mob Bosses Anymore, with a quote thrown in from yours truly.
Friday, May 6, 2011
Nathan Koppel, WSJ Blog, Sick Juror Deals Major Setback to Rajaratnam trial
San Francisco Chronicle (Bloomberg), Rajaratnam Jurors Listen to Chiesi Wiretaps in Insider Case