Archive for the ‘White Collar’ Category

Who Are the Real Victims of Insider Trading?

Thursday, August 18th, 2011

 

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 in the range of 19.5 to 24.5 years.  The defense didn’t make a specific request, just said it ought to be “well below” what the feds want.

So 20 years, huh?  Wow, he must have been an awful bad guy.  Must have hurt a whole lot of people, right?

After all, a mugger in a dark alley only takes one person’s wallet.  A “white-collar criminal” can steal from thousands of people — and takes not just their wallet, but their life savings!  Right?

Well, hang on.  Did Raj actually steal from anyone?  How many investors did he really harm?  And did any of them really lose enough money to warrant locking someone up till we all have flying cars and jetpacks?

Judging from the feds’ sentencing memo, you bet.  Just look at this, from the introduction:

Raj Rajaratnam’s criminal conduct was brazen, arrogant, harmful, and pervasive.  He corrupted old friends.  He corrupted subordinates.  He corrupted entire markets.  Day after day, month after month, year after year, Rajaratnam operated as a billion-dollar force of deception and corruption on Wall Street.

Wow, that sounds awful.  So the victims are… who again?

But wait, there’s more:

Rajaratnam repeatedly leveraged the power of money and his position as the head of a 7-billion dollar hedge fund to induce friends, employees, and associates to participate in his criminal activities.  Although already rich, Rajaratnam did this to drive up his personal wealth through profitable trading in his hedge fund.  He did it to make sure that investors did not pull their money out of Galleon and to attract new money to his fund.  And he did it because of his egomaniacal drive to triumph over his competitors on Wall Street.

Again, wow.  (The feds sure like their adjectives, don’t they?  Comes off a tad over-the-top, if not insulting to the intelligence.)  So he was trying to increase his wealth, gotcha.  But at whose expense?  Guess we have to read more:

That was what he cared about: money and success.  What he did not care about, at all, was the extensive harm he left in his wake: harm to the capital markets; harm to the average, ordinary investors who played by the rules; harm to the companies whose secret information was misappropriated; and harm to the lives of those he corrupted.

Well, that sounds a little more like it… but again, who was harmed, and how?

Although particular investors on the other side of Rajaratnam’s illegal trades are not easily identifiable, there should be no question that ordinary investors paid the price for Rajaratnam’s crimes and that public companies were harmed by Rajaratnam’s repeated theft of corporate secrets.

Oh for crying out loud.  Are they joking?  Stripped of its demagogical rhetoric, this translates to “We have not identified any actual victims.  But we shouldn’t have to.  It’s obvious that lots of people must have been harmed, even if we don’t know who they were.”

If they don’t know who — or even whether — anyone was actually harmed here, how in blazes do the feds justify asking for 19.5 to 24.5 years of imprisonment?  Here’s how:

[The feds want that much time because they feel it is] proportionate to the historic nature of his crimes.  He is arguably the most egregious violator of the laws against insider trading ever to be caught.  He is the modern face of illegal insider trading.

That’s it.  That’s all.  “Because this is the first time we’ve ever caught someone so red-handed,” and “because this case got so much press.”  Those are the sole reasons why they are looking to put this guy away until he dies of old age.

Really?

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For the record, we’re predicting (more…)

Answering Your Most Pressing Questions

Saturday, July 16th, 2011
Real nice, Google.

Because we were bored out of our skull this afternoon, we checked this blog’s stats on Google Analytics.  Browsing through the various keywords people have used to find this blog over the past year, all we can say is “The hell is wrong with you people?”

Leaving aside the freaks and weirdos (and possibly some of their clients), however, it seems that most people find this blog by asking Google the same handful of questions.  The number one search engine query that get people here, every month this year, is something along the lines of “why become a lawyer.”  Number two includes variations on a theme of “can a cop lie about whether he’s a cop.”  The top five are rounded out by queries about what crimes Goldman Sachs may have committed, connections between Adam Smith and insider trading, and what one should say to a judge at sentencing.

We’re not sure that we’ve actually discussed all of these topics here.  Then again, we might have, and just forgot it (which is a distinct possibility — these posts are all written in a single pass, without any real editing, and usually are not given another thought once they’re posted.  If you ever wondered what “ephemera” meant, you’re looking at it right now.)

Still, in the interests of alleviating our boredom public service, here are some quick answers to our readers’ most pressing questions:

1. Why Should You Become a Lawyer?

Because you feel a calling to serve others.  Because you want to make a difference in the lives of others.  Because you are genuinely interested in the rules by which human society functions, why people behave the way they do, and the policies and interests underlying it all.  If those are your reasons, then you belong.

Not because you want to (more…)

Profiling Doesn’t Work? More Profiling!

Saturday, April 23rd, 2011

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 Y of committing crime X.”  We’re talking about profiling as the concept that a significant number of people who commit crime X exhibit the combination of traits A, B and C, which is a combination rarely encountered otherwise, and therefore if one were to look for people exhibiting traits A, B and C, then one might have a better chance of catching someone guilty of crime X.

Intuitively, this sounds reasonable.  If we were to know, for example, that certain serial arsonists are motivated by a sexual mania, that these arsonists tend to remain near the scene to masturbate or so they can masturbate to the memory later, that they tend to have spotty work and relationship histories, and that they tend to have crappy cars — well then, there’s nothing wrong in letting the cops scan the crowd of spectators at a fire, question any who seem to be getting a kick out of it, and investigate those who are single, unemployed, and drive a beater.  (This is an actual profile, by the way.  We didn’t make this up.)

And emotionally, profiling sounds wonderful.  Catching a psychopath is often difficult, because they don’t play by the same rules as the rest of us.  Wouldn’t it be nice if there were some, er, rules that we could follow — a formula of some kind — that would make it easier to identify and catch them?

As we said, in our early years we thought this was a great concept.  Whenever we encountered some findings that certain traits had been identified with this type of serial killer, or that type of terrorist, we thought it was fantastic.  But we didn’t think too critically about it.  And for sure we never bothered to look for the underlying data, much less examine the methodology used to determine how strongly these traits correlated with perpetrators of that crime.

The problem is, nobody else was doing that, either.

Profiling only works if the profile is accurate.  That should go without saying.  But it has become plain over the years that the various profiles out there are not accurate.  They are not based on actual data, but instead only on anecdotes.  (And as we like to say, the plural of “anecdote” is not “data.”)  Nor are these profiles based on any significant sample size.  No profiling study ever did even a simple regression analysis to determine whether any particular trait happens to be a meaningful variable.

We figured this out soon enough, of course.  After our first couple of years with the DA’s office, we were already joking about the silliness of profiles.  It was almost a party game to figure out which psychopathic profile we and our friends happened to fit (secure in the knowledge that hardly any of us were really psychopaths).

And the rest of the world soon caught on.  The Onion did a piece entitled “Crime Reporter Finds Way of Linking Warehouse Fire to Depraved Sex Act.”  Malcolm Gladwell wrote an outstanding piece in 2007 called “Dangerous Minds: Criminal Profiling Made Easy,” in which he solidly debunked the whole profiling scam, showing how there’s no science or statistics behind it, and even the data it’s based on is mostly useless.

It’s now fairly common knowledge that criminal profiling is about as useful as a Tarot deck.  So of course the FBI has stopped using it, right?

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Wrong.

As a matter of fact, they’re expanding!  Just as the feds have (disastrously) tried to use street-crime investigative techniques like wiretaps to go after white-collar offenders, they are now (equally idiotically) starting to use criminal profiling to go after people for white-collar offenses.

Matthew Goldstein wrote an excellent piece on this for Reuters this week, called “From Hannibal Lecter to Bernie Madoff: FBI profilers famous for tracking serial killers are turning their attention to white collar felons.”  This (and the Gladwell piece linked to above) should be required reading for any white-collar defense lawyer now practicing.  When the Galleon case first came down, we were one of a handful of people doing white-collar defense who also had plenty of wiretap experience; now, of course, more of us are learning it the hard way.  Hopefully, with this new profiling issue, more of us will be prepared to deal with it ahead of time.  (And perhaps even nip it in the bud.  Like Barney Fife, we’re a big fan of bud-nipping.)

The agents in the FBI’s Behavioral Analysis Unit are the ones who profile serial killers and the like.  “The hope is,” reports Goldstein, that they “can get into the minds of fraudsters and see what makes them tick.”

“This originally started out as an attempt to find a way to prevent and detect Ponzi schemes,” said Peter Grupe, the FBI’s assistant special agent in New York in charge of white collar investigations.  “But it developed into (more…)

What’s the remedy for blatant wiretapping violations by the feds? Finger-wagging, sure. But suppression? No way.

Thursday, April 21st, 2011

 

Wiretaps are arguably the greatest invasion of privacy that the government can do.  They’re listening in on private conversations, not intended to be overheard by anyone else.  So to get a wiretapping warrant, the government has to do more than for a normal search warrant.  There has to be more than just probable cause that they’re likely to find evidence of a crime.  Only certain crimes count.  There has to be good reason to do a wiretap as opposed to some other less-invasive investigative technique.  Only particular conversations can be sought, over particular phones.  Etc. etc. etc.

Not only is there a heavier burden to meet before a wire can be granted, the government has to comply with some very strict rules as they carry out the eavesdropping.  On that issue of particular conversations, for example, they have to do what they can to minimize the amount of non-relevant or privileged conversations that get listened to.  This is called “minimization.”  When it appears that a call isn’t pertinent (i.e., it isn’t evidence of a crime), or that it’s privileged (as a call with one’s attorney, doctor or spouse), then they have to stop listening and recording.  The call gets “minimized.”

The cops or agents who are monitoring the wire have to do more than just act in good faith.  Their minimization has to be objectively reasonable — the law only cares what an ordinarily reasonable person have thought in the circumstances, not what the cop himself happened to think.  So a properly-run wire is going to have minimization procedures that are spelled out at the beginning of the investigation, in writing, signed by every agent before they get to monitor any calls, with a reference copy there at the monitoring location just in case there are any questions later.  The prosecutor is going to be involved throughout, and it’s really the prosecutor’s responsibility to make sure that everyone knows what they can and cannot do.  It’s also the prosecutor’s job to review all the calls that were intercepted and, among other things, make sure that the cops are minimizing properly.

But what happens if the government doesn’t do that?  What happens if oblivious or malicious agents record and listen to all kinds of personal calls that have nothing to do with the crime they’re investigating?  What happens if a lazy or inexperienced prosecutor fails to nip it in the bud, or if a malicious prosecutor allows it to keep happening?

It’s an important issue these days, because the feds have been doing exactly that.

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As we’ve pointed out a few times, the feds have been all gung-ho for doing wires on white-collar stuff these days, but the white-collar teams aren’t exactly the most experienced at doing wiretaps properly.  For one thing, the feds hardly (more…)

Insider Trading, Expert Networks, and a Big Honking Due Process Violation

Wednesday, March 2nd, 2011

 

 

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 focus these days as, say, hedge funds and the expert networks that help them make investment decisions.  “In the spotlight” doesn’t begin to describe it.  Not a week goes by without some major news about insider trading allegations in the hedge fund world.

With all that reporting, and all the various cases that are going on, one might think the issues are pretty well understood by now.  But they’re not.  Not even by the very people who are doing the prosecuting and investigating, it seems.  It so unclear that a month ago the Managed Funds Association formally asked the SEC for guidance on what is and is not kosher when dealing with expert networks.  “Our industry would like to know where the sidelines are right now so that we can stay well within them,” MFA president Richard Baker said at the time.  “The trouble is the referees aren’t quite clear where those lines are.”

Amen.  Nobody knows where the line is between lawful and unlawful conduct.  The feds themselves admit it.  And yet they are prepared to prosecute people for crimes, when the public has no way of knowing that such conduct was criminal.  Even an investigation is enough to destroy a reputation, wipe out a career, erase a business.  A conviction will take away a real person’s liberty and rights.  Americans don’t allow their government to do that in a gray area.  But it is happening.  How that is not a serious violation of basic due process is beyond us.

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Expert networks are a fairly new thing.  It used to be that research was conducted by analysts who were more akin to investigative journalists than anything else.  They poked around, talked to people, and tried to piece together useful information about a company’s value or where an industry was headed.  The goal was to gain an insight that had value — something that wasn’t obvious to everyone else analyzing the public information.  Then along came Regulation FD, and all that changed.

Reg FD came about in 2000 as an attempt to (more…)

White-Collar Wiretaps

Friday, December 17th, 2010

This’ll be quick, because we’re pretty busy working on a wiretap case, which is always time-consuming if done right.  But as our mind’s on that topic anyway, we thought we’d quickly point out that the latest round of insider-trading cases is again largely derived from wiretaps.  Here’s a roundup over at the WSJ’s law blog.

We just wanted to jump in and point out that just because there were wiretaps, by no stretch of the imagination does that mean the case is a slam dunk.  There are all kinds of ways that agents and prosecutors can and do screw up wire cases.  If properly challenged, the recordings and all evidence gotten as a result of them can get thrown out, which pretty much kills the case.  Don’t go saying this can’t happen, because we happen to see it plenty.  (The one we’re working on right now is a prime example of how not to conduct a wiretap investigation, for example.)

But even if the evidence doesn’t get suppressed, that doesn’t mean it can’t be successfully attacked at trial.  Cross-examining taped evidence isn’t the easiest skill to master, but it’s definitely doable.

If you’re really interested, you can go take our CLE lecture on how to defend these kinds of cases over at West Legal Ed Center (shameless plug).  Or if you prefer, here’s a quick cut-and-paste from a longer post we put up the first time this happened, when the Galleon case broke (original post here):

Wiretap evidence is anything but a sure thing. We know. We did wires for years in the Rackets Bureau of the Manhattan DA’s office, and now we defend them. We’ve taught a nationwide CLE on how to successfully defend them for West LegalEdCenter. Wiretaps are not a sure thing.

They can be defeated with technicalities. Eavesdropping is probably the greatest invasion of privacy that the government can inflict, and so we make law enforcement jump through all kinds of hoops before they are allowed to get an eavesdropping warrant. There are so many i’s to dot and t’s to cross, that the feds hardly use wiretaps in the first place. You’d think otherwise, but (more…)

The Feds’ Insider-Trading Gamble

Tuesday, November 23rd, 2010

 

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 of people in what we collectively refer to as the “Galleon” case.  For the first time ever, the feds had used wiretaps in a white-collar investigation.  It looked like the gloves were coming off, and the feds were going to start getting down and dirty, using street-crime law enforcement techniques to go after Wall Streeters.

Then in May, Lanny Breuer announced 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.”  In the wake of an economic bubble bursting, they were gunning for the suits who had profited.  And unlike the last time they tried, in the wake of the dot-com bubble, now there was no 9-11 to divert their resources.

To some extent, such a strategy is like shooting fish in a barrel.  Real frauds like Ponzi schemes and the like, which can hide amidst a rising market, come to light pretty easily when the market collapses.  And we saw a lot of those prosecutions in the past couple of years.

But to a larger extent, it’s a political strategy.  Going after those who make money by moving it around, instead of creating something of value, is always going to be a populist move.  It wins brownie points for the DOJ and the president.

And now comes the takedown.

On Saturday, the Wall Street Journal reported that the feds had been conducting a 3-year investigation into possible insider trading.  They had been approaching people out of the blue, telling them they were in trouble, and suggesting that they wear a wire (with at least a couple people refusing to do so, and then emailing all their clients to tell them what had just happened).  The feds had been subpoenaing records for a while.  The targets seemed to be Goldman Sachs and consultants who matched knowledgeable industry leaders with hedge fund managers looking for an edge.

That seems to have forced the feds’ hand, and on Monday they started executing search warrants at Diamondback Capital Management and Level Global Investors, which had been identified in the Saturday story.  Then they raided Loch Capital Management later in the day.  We hear that more raids are coming, and as we speak a lot of investment firms are doing some heavy internal reviews, to figure out if they might be on the list.

Because nobody knows what kind of behavior the feds are going after.  And if past performance is any indicator of present results, the feds may just well be going after perfectly innocent behavior.

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The reason is that the feds don’t seem to understand the (more…)

How the Feds Enforce the FCPA

Monday, October 25th, 2010

 

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 major star of the feds’ redoubled efforts to fight white-collar crime.

The Foreign Corrupt Practices Act, among other things, says it’s against the law for any U.S. citizen or business to pay a bribe to a foreign official.  The penalties can be staggering, with fines calculated as the amount of income the briber hoped to receive down the road as a result of paying the bribe.  “Any” U.S. citizen means just that: anybody, not just a corporate executive.  A “foreign official” means anyone with a government job — including people working in industries that are government-owned or government-controlled.

“Bribery” includes giving anything of value in the hopes of getting something in return.  It’s really a broad standard.  A bribe doesn’t have to be an explicit tit-for-tat, and it doesn’t have to be just for the purpose of landing a choice contract.  A bribe can be just a nice dinner at a fancy restaurant that might make get you looked on with more favor next time contracts are being awarded.  A bribe can be a “facilitation payment” to a petty bureaucrat, some grease to ensure that you are allowed to do what you are already entitled to do (this, by the way, is an example of where Wikipedia, at least as of today, get things wrong).  See here for a more thorough discussion.

As with many white-collar offenses, this one is enforced by both the SEC and the DOJ.  As of this year, the SEC now has a special unit dedicated to investigating and punishing suspected offenders.  As we mentioned the other day, the point is to keep as much expertise in the institutional memory, and also to better coordinate investigation and enforcement.  On the criminal side, the DOJ’s Frauds Section is the main enforcer as a matter of law, though some local U.S. Attorney’s offices like the SDNY will handle most of the work in-house.

Over the past few years, the number of FCPA cases has risen dramatically, in part because the (more…)

On the Manhattan DA’s New Public Integrity Unit

Friday, October 22nd, 2010

 

As we were coming out of court the other afternoon, we got a call from one of the nice folks over at the WSJ, asking us what we thought about the Manhattan DA’s new Public Integrity unit.  We didn’t even know it had been formed — though we had heard Vance talk about the idea on the campaign trail.  The soon-to-be new DA had talked of ideas for a variety of new units, some of which we thought were good ideas (like the Wrongful Convictions unit, which would create office-wide policies while also investigating innocence claims), and some of which we thought were more public-relations than practical (like the Public Integrity unit).

As proposed by Vance, we said to the reporter, the Public Integrity unit didn’t really seem necessary.  It was to be a sub-unit of the Rackets Bureau, which has already been investigating and prosecuting public corruption cases with a fair amount of success for many years.  Carving out a specialty unit isn’t going to increase the number of cases they get, or improve their success rate, or have any extra effect on corruption beyond the usual.  It’s not like this is an area of crime that was being ignored.  Far from it.

It’s not going to increase the number of cases coming in, because that has nothing to do with whether there’s a special unit or not.  Public corruption cases are hard to come by, because usually the only people who know about the bribery are the ones benefiting from it.  And they’re not likely to self-report.  The DOI does what it can with the resources it’s got to ferret out a case here and there, but the reality is that (for the most part) law enforcement sort of lucks into these cases.

If you want to have an effect on public corruption, the trick is to either get magical surveillance powers to spot all the bribes going on, or else (more…)

The Holdout

Wednesday, August 18th, 2010

The news is full of reports today about the hung jury in the Blagojevich trial — they found the governor guilty of a single count of lying to federal agents something like five years ago, and hung 11-1 in favor of conviction on the remaining counts.  All kinds of pontificators are pontificating about why this happened.  Scott Turow, for example, says it’s because corporations have too much freedom to contribute to political campaigns, so bribery becomes perceived as the norm. 

That’s a bit of a stretch.  It’s hardly likely that the jurors were considering such things as the corrupting consequences of the extension of First Amendment protections to corporate campaign contributions.  Like most commentors, Turow seems to be slapping his own politics on top of a more prosaic observation — that to some, the governor’s actions just don’t seem criminal.  This observation, without all the other nonsense attached to it, was actually quite astute.  According to the jury foreman, the holdout appears to have thought Blagojevich’s actions were “just talk,” and nothing criminal.

From what we’ve seen in the newspapers, that’s not an insane perspective here.  It sure reads as if Blagojevich was just thinking out loud sometimes, or bouncing stupid ideas off people that never got carried out.  And the forman says the other jurors respected the holdout’s right to her position here.  It doesn’t seem like an unprincipled, irrational vote.

But other reports highlight a different take on the holdout’s position.  Another juror is on record saying that the holdout wanted more clear-cut evidence, tantamount to a videotape of a murder, before she’d ever have convicted.  And if, as is likely, the holdout was Jo Ann Chiakulas, then she had already made up her mind weeks beforehand that the governor was innocent.

Both takes ring true to us, and are not mutually exclusive.  It seems probable that the holdout had decided weeks ago, after the close of the prosecution’s case, that the government hadn’t given her that whatever-it-is she would have needed to vote to convict.  Jurors vote to acquit all the time, in even the most solid rock-crusher cases, and the most common reason given is that “there just wasn’t enough evidence,” or they “needed more.” 

Jurors can never articulate what “more” they would have needed.  That’s because this is humanspeak for (more…)

Skilling Decision: Good for Justice, Bad for Jurisprudence

Thursday, June 24th, 2010

jeff skilling

It looks like we spotted the trend.  Unfortunately.

Last week we noted that, when faced with an ambiguous statute, some on the Supreme Court are now willing to read new language into the statute, rather than toss it back to Congress to do it right.  And we wondered if that might be a harbinger of what was to come in the “honest services” cases of Black, Weyrach and Skilling.

Well, those cases came down this morning, and sure enough the majority decided to read in new language, rather than toss out the statute for being vague.

It’s great for the defendants, whose honest-services convictions got tossed.  But to get there the Court had to change the rules.  Now, judicial invention is a perfectly acceptable method of statutory interpretation… so long as the new language is what “everybody knows” the statute really meant to say.  And that’s bloody dangerous. 

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We’ve been paying close attention to this issue (see other posts here, here, here and here), as have many others, because the feds love charging people with honest services fraud.  It’s so vague and open-ended, that it potentially criminalizes any activity that’s outside one’s job description.  That makes it a great catchall when you can’t prove something more substantive.  But it’s also not at all what Congress intended.

“Honest services” fraud was originally a judge-created law.  There wasn’t any statute criminalizing it, it just sort evolved via common law, accepted in all the Circuits.  But we don’t do common-law crimes in this country, for one thing, and the mail fraud statute didn’t say anything about intangible rights, so in 1987 the Supreme Court threw out the common-law version of honest services fraud.  If Congress wanted to criminalize it, then that was up to Congress.

The idea was pretty simple: If you had a position of trust, and you abused that position for private gain (say, by taking bribes or kickbacks), then you were depriving people of the services you ought to have been giving them had you been honest.  You were getting paid under the table to do your job wrong.  So in 1988 Congress came up with 18 U.S.C. § 1346.

But the language didn’t say anything about abusing a position of trust.  Instead, it just said that (more…)

The Suspense is Killing Us

Wednesday, June 2nd, 2010

300 supreme court

There are four Mondays left in June.  Four more days in which the Supreme Court is expected to announce its decisions in the 27 or so cases still out there this term.  That’s about one case per day from now till then.  We’re picturing the Justices pulling all-nighters, stacks of empty pizza boxes in the halls at 2 a.m. next to the burn bags (do they still use burn bags there?), and sleepy zombie-like clerks dropping in their tracks every now and then.

Some of those cases have to do with boring old civ pro or shipping or labor law.  But a whole bunch are about the cool stuff, criminal law.  Here are a few of the criminal cases we’re watching particularly closely:

Black v. United States
Weyrauch v. United States
Skilling v. United States

This trio of cases attack the “honest services” fraud law.  18 U.S.C. § 1346 was supposed to prevent political corruption, but Congress wrote it so sloppily that it’s become a catch-all crime for federal prosecutors.  Anyone can get charged with it, and nobody knows what it means.  The Court telegraphed its dislike of the statute during oral arguments of all (more…)

New Trend: Lawyers as White-Collar Defendants

Thursday, May 27th, 2010

businessman arrested

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?

Be Very Afraid: “New Era” of White-Collar Prosecution at the DOJ

Wednesday, May 26th, 2010

corporate crime

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.

This is, of course, part of a larger trend back towards more white-collar enforcement. For much of the post-WWII era, through the early 1990s, white-collar cases didn’t get much attention. They were hard to spot in the first place, taking place behind closed doors in boardrooms and offices, not really part of any policeman’s beat. And allegations were challenging to investigate, and ever harder to prove to a jury. Agents and prosecutors lacked the knowhow and the tools to do the job.

And white-collar crime just wasn’t worth the effort — the law classified these crimes at the less-serious end of the spectrum. This wasn’t murder, it was just money. The crooks weren’t burglars or muggers, they were college-educated productive members of the community, involved in charities and otherwise living “normal” lives. Their crimes weren’t violent; they were almost administrative. Victims weren’t in your face, with visceral injuries and tangible losses; they were anonymous and diffuse. Devoting a lot of resources to prove minor offenses you didn’t really understand, with hard-to-identify-with victims, with easy-to-identify-with defendants, just wasn’t a big priority.

This all started to change in the mid-90s. By then, we’d gone through the junk-bond crisis and S&L meltdown of the (more…)

A Complete List of Goldman Sachs Crimes

Saturday, May 1st, 2010

Update: New York Investigating CDS Brokers

The SEC and DOJ’s investigations of Goldman Sachs have been big news for a couple of weeks now. We tend not to post right away on stories like that, because we don’t want to be yet another one of those blogs that just tries to jump on the bandwagon, simply repeating news without adding anything of value to the conversation. So we like to wait until we have some analysis to add.

In the Goldman Sachs case, as pretty much everyone reading this is aware by now, the SEC says Goldman created a mortgage-based investment, sold it to investors, and then bet against it by shorting it themselves. They also say Goldman messed up by letting hedge fund manager John Paulson pick some of the assets, despite the fact that his fund was betting heavily against the housing bubble (and ultimately made a killing when it burst). 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:

1).

You’re welcome, guys. Hope this helps!