Oklahoma Criminal Defense Blog

Very commonly in cases prosecuted by the federal government, the authorities pressure people to “cooperate” with the government.  This is a euphemism.  The pejorative term for this is “snitch.”  People do it because they believe it will give them a better deal, a lower sentence or no sentence, depending on their own case.  Federal cases so often charge multiple people and charge conspiracies that as investigations sweep up individuals, those individuals become part of the government’s case as it increases in number of individuals and breadth.

Ephraim Karpel was one of those.  He worked on Wall Street and was never charged with a crime.  But federal authorities had a talk with him in 2008, and he agreed to cooperate in their investigation.  The feds had some leverage on Karpel, so he agreed to cooperate for his own perceived self-interest.

Two F.B.I. agents approached him outside a restaurant, went inside with him, and told him they had evidence he was involved in insider trading.  What they had was a recorded telephone conversation between Karpel and Zvi Goffer, whose phone they had tapped.  In that call, Karpel had told Goffer that Walgreens, the drugstore company, had made an offer to buy Matria Healthcare.  Karpel told Goffer his source was a banker.

The Walgreens buy never happened.  But that call was one of 20 plus recorded calls played by the prosecution during the jury trial of Goffer, nicknamed Octopussy because his arms reached into so many sources of information.  Goffer was convicted of insider trading last month with two accused co-conspirators, his brother Emanuel, and Michael Kimelman, formerly of the well-regarded Wall Street law firm of Sullivan & Cromwell.

With that conviction, the government continued its string of convictions in its campaign against insider trading at hedge funds.   Of the 49 people charged, 43 have either pled guilty or been convicted at trial.  Wiretaps played a crucial role in the evidence in Goffer’s case, just as it had in the recent conviction of high-profile trader, Raj Rajaratnam, of the Galleon Group.    Goffer had sat in on some of Rajaratnam’s jury trial, but it apparently did not help enough.

Karpel had a lot of Wall Street connections.  He had worked for 18 years at Mutual Shares, an investment firm run by Michael Price.   Karpel rose to the be head trader there, and then left to work as an analyst.   He worked at P. Schoenfeld Asset Management and then at Tigris Financial Group, a commodities firm.  He was a specialist in metals and mining stocks.

For 3 years, Karpel was a cooperating witness.  At first, he secretly taped his conversations with fellow traders.   The government investigation changed Karpel’s life.  It terrified him and his wife, and working for the government against his friends was a great conflict to him.  Even after the F.B.I. stopped asking Karpel for help after a year, the pressure continued, because about that time, his employer, Tigris, learned of his involvement in the investigation and dismissed him.   He continued to work for the company but as a consultant but was depressed after losing his job there.  Finally, last month, he hanged himself in his office.

Given the scope of the financial meltdown of 2008 and the suspicions of some wrongdoing to explain it, everyone has been expecting some big time prosecutions.  Not much so far.  Lee Farkas may be the biggest thing so far, and he isn’t all that big.

Farkas was a mortgage industry executive, chairman of the firm of Taylor & Whitaker in Florida.    He was accused of carrying out one of the largest bank fraud schemes in history.  He caused the failure of Colonial Bank, resulting in the loss of billions for investors and the federal government.  However, his firm was not a large one, and his deeds began long before the financial crisis, so it really had nothing to do with the meltdown.

There was a prosecution in 2009 against some Bear Sterns hedge fund managers that resulted in an acquittal.  Recently federal prosecutors dropped an investigation into Angelo Mozilo, the former head of subprime lending giant Countrywide Financial.  He’s the one who testified to Congress that his performance at Countrywide was better than Warren Buffet’s performance at Berkshire Hathaway was for the same period.   The statement was correct, but it omitted the period immediately after that period when Countrywide’s performance dropped off a cliff, so the statement was grossly misleading.   He would have been a wonderful fish for the feds to fry.

U.S. District Judge Leonie Brinkema sentenced Farkas to 30 years.  There is no parole in the federal system.   The government asked the judge to impose the maximum sentence of 385 years, or, in the alternative, a sentence of at least 50 years so Farkas would spend the rest of his life in prison.    The criminal defense attorneys for Farkas asked for a 15-year sentence, so they certainly acknowledged the prospect of a significant sentence.  In addition to the 30 years in the sentence, the judge ordered Farkas to disgorge about $38.5 million.

Former fellow executives of Farkas decided to cooperate with the government to improve their chances at a sentence.  The former chief executive and treasurer of Taylor, Bean pled guilty and agreed to testify against Farkas.  Their sentences ranged from 3 months to 8 years.

Farkas did not plead guilty.  After 10 days of trial, the jury found him guilty on all 14 counts of securities, bank and wire fraud and conspiracy to commit fraud.   The government’s case was that Taylor, Bean was facing losses, and they schemed to hide the losses.  In 2002, a they began to secretly overdraw Taylor, Bean’s accounts at Colonial Bank and sold Colonial $1.5 billion of worthless and fake mortgages.  The U.S. Government guaranteed the worthless loans.

As things bled, Farkas persuaded Colonial Bank to seek $570 million in taxpayer bailout funds to staunch the flow.  After initially approving this payment, the U.S. Treasury canceled the order.   Colonial then filed bankruptcy in 2009, the 6th largest bank failure in U.S. history.   Farkas was busy spending $40 million from Taylor, Bean and Colonial to fund his fancy lifestyle for usual things: private jet, vacation homes, a collection of classic cars.

At sentencing, the judge did not think Farkas was remorseful but just regretted getting caught.  That’s never good to have the sentencing judge to believe that about you, but federal judges are sophisticated about human nature and the fine art of sentencing, so such things are just part of the mix to them.  Sentencing is an art that has generated lots of literature, lots of theories and opinions and speculation, some science, but requires a strong will to wield.

Bernard Madoff swindled billions of dollars from his investors for years, but once caught, he promptly pled guilty to the criminal complaint filed against him in federal court.  He did not plea bargain with the government.  He just took his medicine.  Well, maybe.  That way, just pleading to the Complaint as Madoff did, he did not have to give an interview with the prosecution and answer all those detailed questions about where the money went and to whom.

Madoff admitted his guilt to the 11 counts filed against him, including counts alleging fraud, money laundering, and perjury.  Madoff then returned 3 months later, on June 29, 2009, to the courtroom to find out what sentence he would receive.  Considerable motions and memoranda were filed in preparation for the sentencing hearing.  Madoff’s criminal defense lawyers had asked United States District Judge Denny Chin for a 12-year sentence.  The presentence report from the probation department recommended a 50-year sentence, and the United States Attorney asked for a 150-year sentence, the maximum sentence under the advisory guidelines, achievable only by running the maximum sentence for every count consecutive to the other counts.

As the judge pondered an appropriate sentence, a just sentence, he considered what the judge described as the unprecedented scale of Madoff’s crime, its duration over 2 decades, and the thousands of victims it harmed.   Originally, it was believed that Madoff had caused losses in the neighborhood of $65 billion, but the court-appointed received after investigation estimated investors’ losses at about $10 billion.  The judge reflected also that none of the counts to which Madoff carried a life sentence, but any sentence that totaled over 15 or so years would probably be an effective life sentence in light of Madoff’s age.

Of course, Madoff’s lawyers urged the lower sentence in order to give Madoff some sliver of hope he might get out before he died.  They also argued Madoff should be given credit for pleading guilty without bargaining with the government, but, as noted above, Madoff could have had his own selfish motive for taking that path.

Madoff personally addressed the court in his allocution, expressed regret and apologized to the public, the court and the victims of his Ponzi scheme, some of whom were present in person.   The judge had already read a number of letters from victims of Madoff’s scheme.   He found many had lost their life savings, many had lost their trust in the financial system, faith in humanity, suffered loss of dignity.

The judged was struck by one man who had invested his life savings with Madoff and died 2 weeks later.  The man’s widow then met Madoff, who told her not to worry and that her money was safe.  Trusting Madoff, the widow then invested her own 401(k) with him.   That is the kind of damning story that might have gotten lost in the numbers.  But it wasn’t, to Madoff’s detriment.  And, midst all the letters written by these victims of Madoff, the judge received not one letter written on behalf of Madoff.

Judge Chin sentenced Madoff to 150 years in prison.   He explained that Madoff did not deserve a lower sentence, that the punishment should be in proportion to the blameworthiness, and Madoff’s conduct was  “extraordinarily evil.”  The judge thought the 150 year was, among other things, symbolic, and that it should be symbolic given the enormity of Madoff’s crimes.  The judge also doubted Madoff was genuinely remorseful, although that probably would not have changed the sentence rendered.

Speculation continues about why Madoff did it.  He had to know he would get caught.  All Ponzi schemers know they will get caught.  Was it just for the fun of it?   Psychopaths lie, manipulate, and deceive in sometimes similar ways.  People always wonder why someone would do something like this, but there is never a good answer.

The federal Bureau of Prisons projects Madoff’s release date for the year 2039, but it is considered academic given Madoff’s age.   He is serving his time at the medium security Federal Correctional Facility at Butner, North Carolina.  Medium security is not a country club. Meanwhile, Judge Chin was nominated to the U.S. Court of Appeals for the Second Circuit, where he now serves.

Raj Rajaratnam was a Wall Street hedge fund manger, co-founder of Galleon Group, managing billions of dollars.  He bragged about taking risks and how it made his adrenaline pump.  Now is on trial in New York defending himself of insider-trading charges, specifically with securities fraud and conspiracy charges.  He is facing up to 20 years in a federal prison.   And, if he is sentenced to 20 years or close to it, he will serve his time in a prison, not a country club low security facility.

The trial is expected to go on for 6 to 8 weeks.  Observers make the usual dire predictions of the defendant’s chances of winning, based on government statistics that the Department of Justice wins 90 % of its jury trials.  Of course, the prosecution claims it has overwhelming evidence against Rajaratnam.

The United States Attorney in Manhattan has described its case to the trial judge as proving Rajaratnam traded illegally in 35 stocks.  They claim they have 173 secretly recorded telephone conversations between defendant and his associates, some of whom are charged as co-conspirators.  It will use wire-tapped conversations with well known stars in the investment world, including that of Lloyd C.  Blankfein, chief executive of Goldman Sachs, and the testimony of confidential informants, so often used in the prosecution of organized crime and drug cases.

From this government sweep, 19 traders have already pled guilty.   Some of them are cooperating with the government and will likely testify at trial.

Rajaratnam is from Sri Lanka.  He is well known for his philanthropy for South Asian charities.  His friends say he will never plead guilty, that his reputation is at stake and also the reputation of the South Asian immigrant community and the people of Sri Lanka.  They suggest he would rather be found guilty than ever plead guilty. Besides, as criminal defense lawyers who practice in federal court well know, a guilty plea this late, 17 months after his arrest, would not bring a significantly different sentence than a sentence he would receive from a guilty verdict at trial.

Rajaratnam came to the United States as a student at the University of Pennsylvania’s Wharton School.  He began at Needham & Company as a stock picker and was known for having a vast network of sources in the technology industry.  Indeed, his defense at trial will be his theory of investing called the mosaic theory.  His method was to pick stocks based upon his constant collection of pieces of information about the companies to compose a “mosaic.”  He dug as deeply and as broadly as he could to collect as much data in as much detail as he could.  He claimed this portrait of companies gave him an advantage over his competitors.  His lawyers claim he used meticulous research into all the details of a company’s fundamentals, and this made him an exceptional analyst.  His lawyers also say, importantly, that Rajaratnam did not know he was trading on confidential information about the companies he analyzed, that he gathered from company executives and other sources who revealed this information in violation of their duties by revealing it but didn’t tell him it was confidential.

His company managed about $7 billion at its zenith. Rajaratnam co-founded it in 1997.   It paid among the highest commissions on Wall Street.   He was known as “Raj,” which means “king” in Hindi.

Raj’s legal bills already exceed $20 million, and they will go up dramatically during the trial.  His net worth was $1.5 billion in 2009, according to Forbes magazine.  His alleged co-conspirators have not had such resources to pay their lawyers, so they did not have the option of fighting the government.   Defense of such white-collar accusations are seriously expensive.

The United States Attorney has, Preet Bharara, has charged 46 people with insider trading since August,2009, when he took office.  Of those, 29 have pleaded guilty.  He believes insider trading is rampant.  Just like in the 1980s, when Rudolph Giuliani as United States Attorney in this Manhattan office, prosecuted high profile insider trading cases, including Michael Milken and Ivan Boesky.    Raj’s prosecution has not reached nearly the level of public consciousness as Milken and Boesky, but the trial is just beginning.

Bharara’s pursuit of insider trading surprised many who thought he would go after the top executives in the large banks in the financial meltdown.   The scuttlebutt is that the evidence  available would have been difficult to prove guilt in those cases.  Since such bank cases weren’t pursued before the meltdown, there would be no evidence of taped telephone conversations to corroborate the testimony of government witnesses.

The wiretaps are critical in the case against Raj.  Last November, Judge Richard Howell, the trial judge, denied a defense request to prohibit the government from introducing the conversations at trial.  Those wire taps had resulted from a federal judge’s approval in 2008 to tap Raj’s phone.  The application for that order claimed the-then two year investigation had stalled with all other investigation techniques, so a wire tap was needed.   Such predicate is required to obtain permission for the wire tap order.  With that order in hand, and extensions of it, the government then recorded more than 2,400 telephone conversations over nine months in 2008.

Raj Rajaratnam is charged in U.S. District Court for the Eastern District of New York with insider trading on the stock market.  A billionaire hedge fund manager, he is facing evidence of 2,400 telephone recordings of his own voice.  The government placed a tap on his telephone in 2008.

Not surprisingly, Rajaratnam’s lawyers are attacking this evidence.  A federal statute, United States Code, Title 18, Section 2516 identifies a list of crimes for which the government is authorized to record telephone conversations.  Securities fraud is not listed, but money laundering and mail fraud are listed, and these crimes are commonly charged along with securities fraud.

The government had to file an application for a judge to issue an order allowing the wire tap.  In that application, the government recited it needed the wire tap order because it was investigating violations of wire fraud and money laundering.  But the charges filed did not include those charges, so Rajaratnam’s attorneys  are attacking the application as disengenuous, as intended to find only evidence of securities fraud, which is not a valid basis for a wiretap order.  But the U.S. Attorney did specifically give notice it was seeking the wiretap for insider trading as the principal crime it was investigating.  If the defendant’s lawyers can prove the wiretap order would not have been granted if the whole truth were not told, the order could be invalidated and the recorded conversations suppressed.

It is true that the Wiretap Act does not mention securities fraud, but it is not certain that Congress intended to exclude wiretaps from the investigation of securities fraud.  Inferring the omission of something in a legislative enactment to be an affirmative declaration calls for an interpretation.  It is a rule of statutory construction in latin and therefore incontestible:  “Expressio unius est exclusio alterius,” which in English can be translated, “The expression of one thing implies the exclusion of what is not expressed.”
Ck spelling of latin phrase

Another avenue of attack on the application is focusing on the cooperating witness quoted in the application.  The F.B.I. agent’s affidavit quotes a woman named Roomy Khan extensively.  Rajaratnam’s lawyers claim the affidavit does not give a clear picture of her criminal past, the character of her conversations with the defendant, or the changing versions of her recitals.

The application described Ms. Khan as not having been charged with any other crime and had been cooperating with the government since 2007.   But the defendant’s lawyers claim she was charged with wire fraud in 2001 and agreed to cooperate with the government at that time.  Of course, the government will reply they were referring only to the present investigation.

The defendant also attacks what the wiretap application’s affidavit describes as Rajaratnam’s statements to Ms. Khan as conveying insider information, when if fact the information was based on publicly available information.

The final avenue of attack on the government’s affidavit is the constancy of Ms. Khan’s statements.  These are presented in the government’s affidavit as being straightforward.  But the defendant’s lawyers received, as they routinely do in discovery, copies of the F.B.I. interviews, known as 302’s.  These interviews viewed over time show changing stories from Mr. Khan, and government investigators were aware of this when they presented the affidavit for the wiretap to the judge.  But the affidavit softens the changing versions.  It omits any reference to her obstruction of the investigation although, by her initial concealing of facts, this is arguably what she did.  Instead, the affidavit describes her as having been proven to be reliable.

Wiretaps are granted only after other investigative methods have been tried unsuccessfully or would be unsuccessful if tried.  The affidavit does not detail other investigative methods but states that other investigative attempts have failed.  In fact, Rajaratnam and his hedge fund, Galleon Group, were responding to a series of discovery demands, subpoenas and inquiries, and Rajaratnam’s lawyers claim they were cooperating with the government.  Obviously, the government did not agree, else the government would not have sought the wiretap.  The government was on the trail of unusual transactions, and it wasn’t getting the explanations with the methods they had tried.