Oklahoma Criminal Defense Blog

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.

So many federal agents were moved to counter-terrorism investigations after the 9/11 attacks that the prosecution of more traditional crimes could not be given much attention.  Carter Stewart, newly-appointed United States Attorney for the Southern District of Ohio is going to change that.

Stewart’s district includes Cincinnati, Columbus, Dayton and all of southern Ohio.  “I would like to have more resources go back to our bread-and-butter cases,” Stewart said.  By “bread-and-butter,” Stewart referred to his priorities: financial crime, mortgage fraud, public corruption, environmental crime and the exploitation of children.  Criminal defense lawyers know those are traditional areas of federal prosecution because local law enforcement usually do not have the expertise or resources to pursue crimes in those areas.

Financial crimes and mortgage frauds obviously require experts in tracking down long, often sophisticated paper trials, sometimes in dealings local law enforcement personnel have never heard of.  Public Corruption focuses on the wrong-doing of state and local politicians, so state and local prosecutors have an obvious conflict, assuming they even want to pursue the wrong-doers in any given case.  Environmental crimes require specific expertises and can cross state lines.  Exploitation of children, most commonly prostitution of children, often requires investigations across state lines as the prostitutes are moved to locations like truck stops in various cities.

In Oklahoma, federal prosecutors have continued to prosecute the crimes they traditionally pursued, in addition to national security/counter-terrorism: more commonly those in the areas of drug distribution conspiracies, violent crimes, public corruption, and white collar crimes, child computer crimes, and gun possession charges on previously-convicted felons.

The headquarters of the F.B.I. for years after 9/11 decreed that counter-terrorism shall dominate all resources.   What was surprising was how much withdrawal there was from other areas of investigation in some districts.  In those years after 9/11, Ohio had several cases of alleged terrorism since 2001, including the case involving three men from Toledo convicted last year of plotting to recruit and train terrorists.  Authorities also prosecuted three loosely-linked terrorists over four years, including Iyman Faris, also known as Mohammad Rauf and sometime F.B.I. double agent, was convicted of helping in a plot to destroy the Brooklyn Bridge at the request of Khalid Sheikh Mohammed, the alleged architect of the 9/11 attacks.

Carter Stewart is following the lead of U.S. Attorney General Eric Holder, who has instructed new U.S. Attorneys to return to basic areas of prosecution.  Stewart’s top priority is still counter-terrorism but he has not decided on this next most important emphasis. But he is taking a close look at financial crimes.  “With today’s economy and the issues that we’re facing, I think that’s a direct result from fraudulent activity,” he said.