Oklahoma Criminal Defense Blog

Rod Blagojevich, former governor of Illinois, has had his two jury trials in federal court for bribery and corruption.  Now federal prosecutors are mopping up with some of the others caught in the investigation of Blagojevich.  Now it’s William Cellini’s turn.

Cellini is a power broker in Illinois state government.  His investment company, Capri,  made $220 million doing business with the state Teacher’s Retirement System.  And that connection is what allegedly brought him into a scheme to extort a campaign contribution to the Blagojevich campaign coffers.  The Blagojevich team knew how important it was for Cellini to maintain his dealings with Teacher’s Retirement System.

Cellini is being prosecuted for delivering a message to someone already given the message, Hollywood producer Thomas Rosenberg.  Rosenberg had an investment deal with the Teacher’s Retirement System until he got a visit from Antoin Rezko and Christopher Kelly.  Rezko and Kelly told Rosenberg his deal was dead unless made a $1.5 million contribution to Blagojevich.
Rosenberg then turned to an old friend whom he figured could enlighten and advise him.  He turned to Cellini.  But Cellini told him the only way to get his deal done was to make the contribution.  The government accuses Cellini of conspiracy in that extortion scheme, but the evidence so far described omits a critical link.  Granted Cellini had a motive to protect his connection with the Teacher’s Retirement, but Cellini did not deliver any bribe, threat, or (arguably) any message.  Rosenberg plainly said on cross examination by Cellin’s criminal defense lawyer that Cellini never asked for the contribution.  What Rosenberg said could have been simply a statement of fact, that Cellini believed, his opinion was that Rosenberg’s deal was finished unless he made the contribution.

But the government plugged that hole with the testimony of an inside witness.  Stuart Levine was charged and pled guilty to being part of this conspiracy.  He testified that Cellini agreed to approach Rosenberg, and that both Levine and Cellini were doing so to protect their influence with the Teacher’s Retirement System.  Certainly Levine’s testimony is suspect because he is cooperating with the government to lessen his sentences, so he has a motive to lie, fudge, create or enhance his testimony to make himself more valuable to the government.  As usual, critical facts in a trial hinge on the credibility of a witness.

A federal jury brought back verdicts in Alabama recently on an indictment charging 39 counts against 9 defendants with bribery.  After a two-year investigation by the F.B.I, two months of jury trial with evidence that included thousands of tape-recorded telephone conversations, and finally by a week of jury deliberations, the prosecution score was zero.

No one was convicted: All acquittals and mistrials.  The main target, Milton McGregor, was found not guilty on three counts and got a hung jury on 14 counts including one count of conspiracy.  (There is always a conspiracy count in federal court, at least when there has been an extensive investigation.)   McGregor is the multimillionaire owner of one of the largest casino complexes (including a greyhound racetrack) in the country name VictoryLand.   He was tried with two serving state senators, four former state senators, and four other people.

Two defendants, State Senator Quinton Ross and VictoryLand lobbyist Bob Geddie, were completely cleared by the jury’s verdict.   The jury could not reach a verdict on 33 other counts, so the government could seek a new trial for the seven remaining defendants, who include Senator Harri Anne Smith, former Senators Larry Means and Jim Preuitt, and McGregor.

All of this arose from some new gambling machines that were proposed for use in the casinos, called electronic bingo machines.  They looked like slot machines and were common for some time around the state.  However, the Governor Bob Riley declared them illegal, and several judges agreed with him, so legalizing them was proposed in the Alabama legislature. That is where the F.B.I. investigation took place.

As the casino-sponsored bill to legalize the machines was debated in the legislature, rumors floated of a federal investigation of money offered or paid for votes in favor of the new machines.   The F.B.I. made surprise visits to some of the legislators.  Indeed, when the 65-page indictment was unsealed last year, two of those originally charged pled guilty and testified at trial for the government as “cooperating witnesses.”  They and the recorded telephone conversations were the sum and substance of the government’s case.  Much discussion of money, contributions, promises, and deals were offered into evidence, but the criminal defense lawyers argued none of that constituted bribery.  The cooperating witnesses gave their opinions that bribery was implied or understood, but all of it fell short.  The jury obviously looked past all the theater of the government’s display, looked into all the mountains of evidence, and found it unpersuasive when held to the burden that is required in American courts: beyond a reasonable doubt.

The government’s case fell short of connecting McGregor to any discussion of money or votes.  And the government’s case was not helped by tape-recordings from one of its own witnesses, Senator Scott Beason.   One of the informant legislators, he referred on one of his tapes referring to customers of a gambling hall in a predominantly black counties as “aborigines.” Beason also recorded himself talking to Republican colleagues about how passage of the bill could hurt Republicans because the bill wouldn’t take effect unless approved by voters in the November election. He argued having the issue on the ballot would bring out more black voters, who traditionally favor Democratic candidates.

On a retrial, the government is sure to omit those tapes from the jury.  But jurors in that case will also know that legislators are constantly raising money, swapping favors, and trading deals on legislation on a daily basis, and the jury will still need evidence of bribery.

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.

Raj Rajaratnam, founder of the hedge fund Galleon Group, has been found guilty by a jury after 7 weeks of testimony and 12 days of deliberation on all 14 of the counts on which he was tried.  He was convicted of nine counts of securities fraud and five counts of conspiracy.  The government’s case presented Rajaratnam as collecting insider information from his friends to use it to gain an advantage in the stock market.  Mr. Rajaratnam, 53, was convicted of making more than $50 million in gains – or avoided losses – by trading on the information furnished by a senior partner at McKinsey & Co., a senior vice president of IBM, a former Goldman Sachs director and others.

This is considered a significant prosecution among other reasons because of the unusually aggressive techniques used by the United States Attorney in a white collar crime.  The evidence at trial came principally from wiretap recordings of the defendant’s telephone conversations, along with the live testimony of some his alleged co-conspirators, who testified to cooperate their way out of prison.  Some observers believe the use of wiretaps in white collar crimes is a game changer.

Over three dozen tape recordings, some from wiretaps, were played to the jury.  The government claimed Raj based his trading on the tips he got from his inside sources, and the jury was persuaded of just that.   One of them was Anil Kumar, a former classmate at the University of Pennsylvania’s Wharton School, who gave Raj information about confidential negotiations between ATI Technologies and Advanced Miucro Devices before the deal was announced publicly.  Raj made $20 million from that deal according to the government’s evidence, and Raj promised to pay Kumar a $1million kick back, Kumar testified.

Since the verdict, juror Leila Gorman has discussed how she and other jurors viewed the evidence, and she said wiretaps were only part of the picture.   She said the jury looked at evidence of e-mails, matched conversations and graphs to make their own timelines of Raj’s stock trades.  The jury believed the timing of Raj’s trades just could not have been coincidental, she said.  Often they were made just minutes after conversations he had, discussing the stock then traded.  Ultimately for the jury, she said, there were too many conversations and things from the testimonies that pointed toward guilt, too many sticky facts.

Wiretaps have long been used by the federal government to prosecute organized crime and drug sales, as any criminal defense lawyer will tell you, but they are rare in white-collar crimes.  Some observers of the trial who concede white collar crimes may deserve more attention from prosecutors wonder why this focus on insider-trading in hedge funds, rather than the Wall Street meltdown of 2008-2009, whose costs are vastly greater.  Some wonder why no high executive has been prosecuted from any of the financial firms that failed so abjectly and required a massive infusion of tax-payer money.  Given that the explosion of hardly-regulated hedge funds generated more than two dozen billionaires, all the money ill-gotten from all the hedge funds does not approach the money lost in the Wall Street crash of late 2008, from which the American economy has not yet recovered.

Charles Ferguson, who made the movie about the financial crisis entitled, “Inside Job,”  which was awarded the 2011 Academy Award for a documentary film, while conceding insider trading is a serious crime urges the government should be giving a closer look at the people and firms that caused the financial melt-down.

Last year, the F.B.I. conducted simultaneous raids on three Wall Street hedge funds.  Two of those funds have since closed down.  Wall Street is certainly talking about it.  The U.S. Attorney for the Southern District of New York (i.e., Manhattan), Preet Bharara, has filed a civil lawsuit against giant Deutsch Bank, alleging it lied about the quality of mortgages in its portfolio under a government program.  When he filed the petition, Bhara said the government did not have evidence sufficient to merit a criminal prosecution.  The jury’s verdict marks the 35th conviction for Bharara.  Over the last 18 months, his office has brought criminal insider trading charges against 47 individuals.

The Securities Exchange Commission can bring only civil cases, and turns over criminal matters to the U.S. Department of Justice.  The SEC lacks wiretap authority, the muscle that federal prosecutors can use to meet the higher burden of persuasion for criminal cases, beyond a reasonable doubt.

Insider trading involves material information — something that would cause an investor to change his or her view of a publicly traded security — as well as nonpublic information. Cases can be brought against those who trade on inside information as well as those who provide it. The definition of what constitutes material, nonpublic information is not as clear as many believe, and the current run of cases is changing perceptions about how that line should be drawn.

University of Chicago law professor M. Todd Harrison gave the example of an investor looking for an earnings forecast for a company. The investor could get nonpublic information from a company’s chief financial officer, which he said would be illegal. Or the investor could develop his or her own forecast by piecing together small bits of information from company suppliers, former employees and other sources. Prosecution of Mr. Rajaratnam and others is giving hedge funds pause about their information-gathering techniques.

Questions about what constitutes insider trading are nothing new. The SEC’s view of what’s against the law has frequently been overturned in court.  In 1983, the U.S. Supreme Court overturned an insider trading case against Raymond Dirks, who advised institutional investors on insurance stocks. Mr. Dirks told clients to sell shares of Equity Funding of America based on information about fraud that he had received from a former officer and others inside the company.

The Supreme Court threw out the SEC’s claim of insider trading, ruling that people who provided the information wanted to expose the fraud, received no benefit from disclosing the nonpublic information and did not breach their duty to shareholders.  Courts have routinely disagreed with the SEC, but the U.S. Attorney’s success has caused concern in the financial world.

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.