Last week, the prosecution and the defense filed their sentencing memoranda in the Rajaratnam case. Raj was convicted of 14 counts in all — 9 counts of securities fraud, and 5 conspiracy counts. So what do the parties think that’s worth? The feds asked Judge Holwell to sentence Raj...
When we were just starting out in the law, we frankly had no problem with the concept of profiling. Not racial profiling — that’s just a logical absurdity along the lines of “most people who commit crime X are of race Y, therefore it’s reasonable to suspect people of race...
First, a shameless plug: Tomorrow, we’ll be participating in a Dow Jones webinar for Private Equity and VC types, discussing how the current environment of insider-trading prosecutions affects them, and what they might do about it. (Link here, if you’re interested.) Of course, those guys aren’t so much...
The feds are really ramping up their insider-trading enforcement. But instead of going after real insiders, they’re going after consultants and investors who use them. This is a big risk for the feds, and they could lose big. It started a year ago, when the feds indicted a bunch...
The other day, we drew a contrast between the Manhattan DA’s new public integrity unit and the way the feds go after FCPA violations, and some folks asked just what exactly the feds do in these cases. That’s a good question. Especially now, as the FCPA has become a...
What’s with all the lawyers getting arrested these days, being charged with financial frauds, Ponzi schemes and the like? Is this a new trend? It sure seems like one.
The latest news is the announcement about an hour ago that the SDNY is charging one Kenneth Starr (no, not that one, this one), money manager for a bunch of celebrities, with yet another Ponzi scheme, funnelling $30 million of investors’ money into his own pockets. He’s a lawyer in New York. (You can read the complaint here.)
Then there’s the former law firm partner Michael Margulies, charged the other day with embezzling $2 million from his firm and clients in Minneapolis over the past 16 years. Coincidentally-named lawyer James Margulies of Cleveland was charged the other day in a $60 million stock swindle. A couple of weeks ago, two lawyers were charged with a mortgage-rescue fraud involving stripping $3 million in equity. A lawyer went to prison a little before that for rigging tax-lien auctions.
That’s just a handful of headlines from this month alone. But it’s been going on for several months now. We’ve been noticing lawyers getting charged with increasing frequency ever since last July when Marc Dreier got sentenced to 20 years for hedge fund swindles totaling God knows how many hundreds of millions of dollars. It really kicked into high gear, however, in December, after Scott Rothstein was arrested for a $1.2 billion Ponzi scheme. And now there are several cases being announced every month.
What’s going on here?
Sure, these kinds of schemes tend to get noticed all at once, when the economy goes south, and the market’s gains no longer mask the fraud. So we’re not wondering why all of a sudden there’s a bunch of financial-fraud arrests. Our question is how come so many of these cases involve lawyers.
Has the profession changed? Is it something new about how lawyers are getting more involved as investment managers and financial advisors? Or is there a new focus by law enforcement? We really don’t know.
But it sure looks like something’s going on out there. What do you think?
Lanny Breuer, the DOJ’s Assistant Attorney General for the Criminal Division, gave a speech today announcing a “new era of heightened white-collar crime enforcement — an era marked by increased resources, increased information-sharing, increased cooperation and coordination, and tough penalties for corporations and individuals alike.”
You can read his prepared remarks here. We did, and we find them very troubling.
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“The techniques that have been used historically to go after organized crime or blue-collar crime need to be used at times in white-collar crime, because the American people expect no less.” That’s a quote from Breuer’s speech today.
That ought to scare you. It scares us. We’re going to have mob agents looking at Wall Street with the wrong filter. Bring a shopping bag to a friend’s house? It’s a cash delivery! Share gossip and rumors heard on the street? It’s insider trading!
And how many federal prosecutors really understand the day-to-day nuts and bolts of the financial world? Sure, they’re mostly bright and well-educated, but how many know the lingo? How many know what actually goes on at those long tables, with everyone on the phone and banging away on their keyboards? Considering where federal prosecutors come from, we’re willing to bet it’s not a big number at all.
So agents are going to be interpreting things wrong. And prosecutors are going to be interpreting things wrong. And now they’re just going to be doing it more.
How is that not scary?
The SEC filed its suit about 2 weeks ago. Then during this past week, they referred it to the DOJ for criminal investigation. The fine folks at the Southern District are now looking into whether any criminal acts took place.
We’re sure the SDNY is going to be a lot more careful than, say, the Eastern District was with the Bear Stearns case. [Full Disclosure: We represented one of the BSAM fund managers in that case, who was ultimately not indicted.] You know, maybe actually reading emails in context, actually figuring out how hedging is supposed to work, stuff like that?
Nevertheless, it’s a tough job. So as a good citizen, unaffiliated with the case in any way, we’d like to make their job easier. We’ve pored over the factual allegations that have been made, and delved into the facts that have been publicly disclosed so far. And after a great deal of legal analysis and number-crunching (yes, we do this for fun), here is a complete list of all criminal activity that we have been able to identify at Goldman Sachs here:
…
SEC Rule 10b-5 is one of the main securities fraud laws. It says you can’t mislead people in connection with the purchase or sale of a security. You can’t make an untrue statement of a material fact. And you can’t fail to state a fact, when without that fact the statements you just made would be misleading.
That seems simple enough. But federal prosecutors in New Jersey seem to be having a hard time figuring out what that means.
In June 2005, the feds in New Jersey indicted Frederick Schiff, the CFO of Bristol-Myers Squibb, for failing to disclose material facts to investors. Allegedly, Bristol-Myers (a drug company) was paying wholesalers to order more drugs than they really needed, so Bristol-Myers could report higher sales numbers and inflate its stock value. Schiff allegedly didn’t tell investors about it during conference calls and in SEC filings. (See the indictment here and the DOJ’s press release here.) That indictment got thrown out for a grand jury leak, so they got a second one in May 2006, and finally a third one in April 2007 that dropped allegations of accounting violations.
With respect to the omissions, the government kept changing its tune. First, they said the company had a duty to correct misleading statements of others, based on a “general fiduciary duty.” The district court helpfully pointed out that there is no such duty in the law. So then the feds said there was a statutory duty under SEC regs S-K, which might actually have worked, but then they changed their mind and put on the record that they weren’t pursuing that theory. There was a “theory of duty based on falsity of reported sales and earnings,” which the District Court said wouldn’t fly. Then they tried to say the stuff left out of filings is a material omission that is misleading if you include the earlier analyst calls in the context (calling it “all of a piece”). The district court ruled that, no, there is no affirmative duty under either the “falsity” or the “all of a piece” theory. “It defies logic,” the court ruled, “to charge as a crime that an utterance in an analyst call must have other words written in a later SEC filing in order to make the utterance in the prior phone call ‘not misleading.’” Thanks for playing. The feds appealed.
In a unanimous decision today (opinion here), the Third Circuit slammed the DOJ for constantly changing its theory of the case, for playing “musical chairs” with its theory of how Schiff’s conduct counted as an unlawful omission under Rule 10b-5.
More importantly, the Circuit said the DOJ’s ultimate theory of liability here — that Schiff had a “general fiduciary” duty as a “high corporate executive” to disclose the inventory issue — was simply overbroad. “This argument reaches too far.”
This is a big setback for the feds, who now are left with a much narrower …
We apologize to our loyal readers for the unusual delay between posts. We’ve been on trial, and you know how that goes. Trial is all-consuming. And then there’s all the work that piles up in the meantime. And the wife and kids need a token appearance from us once in...
We’ve asked it before, but what the heck is going on with some of these federal prosecutors nowadays? There was the whole Ted Stevens fiasco over the winter, when the feds actively withheld exculpatory evidence and witnesses in their rush to convict the former Senator. Then the 7th Circuit directed...
No law today. Let’s have a police procedural for a change. We’re in the mood for some white-collar stuff, so here goes. Forget about the Madoff case. Most financial crimes are nowhere near as headline-worthy, nor do they involve such massive amounts of other people’s money. But smaller scams...
So Marc Dreier was sentenced today to 20 years in prison, plus forfeiture of $746 million and restitution of nearly $388 million (that’s more than a billion dollars, with a “b”). That’s his punishment for his guilty plea to conspiracy, securities fraud, money laundering and wire fraud. The feds had...
When we started law school back in ’93, we felt that white-collar criminals just weren’t punished that harshly in this country. The Dilbert strip above, from about the same time, shows that we were not alone in thinking this. It seems that this was a common perception going at least...
The DOJ got an indictment this week against a Hitachi executive, in the government’s ongoing prosecution of alleged price-fixing in the LCD monitor industry. We first blogged on this back on November 13th, when Sharp, LG Display and Chunghwa all pled guilty to price fixing, agreeing to pay $585 million...
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