To police Wall Street, go after the little guys

May 16, 2014


On Friday U.S. District Judge Richard Sullivan will sentence former SAC Capital Advisors hedge fund manager Michael Steinberg for his conviction in December on five counts related to insider trading. Steinberg is one of two former SAC employees whom federal prosecutors believe have firsthand knowledge of insider trading by SAC’s founder, Steven Cohen. Cohen has not been charged with any crime. Though Steinberg will likely receive a lengthy prison term, neither he nor Mathew Martoma, an SAC colleague convicted in January, is — at least publicly — cooperating with the government.

Prosecutors have been targeting Cohen in their sweeping crackdown on insider trading. Yet as a deterrent against future crimes, Steinberg’s conviction — like scores of others in the past several years — is even more valuable. Conventional wisdom holds that landing the big fish in high-profile white collar cases is the best deterrent against other people breaking the same laws. Yet for would-be criminals, the arrest of a colleague or a peer at another fund has a more personal, harrowing effect than the takedown of a less-relatable outlier like Cohen.

This generation’s insider trading crackdown is different from the one in the 1980s, when prosecutors punished big names like Ivan Boesky and Michael Milken — and in doing so, sent a message. While a handful of crooked investment bankers helped bring down Boesky and Milken — though Milken for crimes other than insider trading — those investigations didn’t expand like they have today.

cohen7777The current crackdown has notched scores of convictions and guilty pleas, with no end in sight. The Feds have been equally determined to pursue small-fry tippers as they have the big names. The broadness of the sweep brings it close to potential insider traders at all levels, which makes it so deterring. Their contact details are in the phones and computers of those who have been arrested or approached by the FBI, their e-mails and instant messages are on cooperators’ servers, and their trading records are one query away from positive correlations with crooked traders.

Today few people who commit crimes in finance delude themselves that their “friends” — an impermanent term on Wall Street, even in the best of times — won’t turn them in. Of the approximately 80 criminal cases filed in New York since the arrest of Raj Rajaratnam in 2009, only James Fleishman, a salesman at expert network Primary Global Research, refused to cooperate with the FBI. He paid a heavy price as a result: 14 months of a 2.5-year prison sentence.

The cooperation of Wall Street veteran David Slaine, who worked with Rajaratnam at the Galleon Group in its early days, helped lead to the use of wiretaps and the conviction of Rajaratnam and other Galleon colleagues in 2011. Slaine also helped the Feds convict employees at a competing New York hedge fund, as well as a technology trader in Silicon Valley, who then led investigators to even more suspects. Level Global’s Sam Adondakis helped the FBI gather evidence on friends he had invited to his wedding. Roomy Khan, a recidivist tech exec-turned-trader, rolled over — twice — on Rajaratnam, though her cooperation only kept her out of prison the first time.

Insider trading might not be the crime of the century, a status given to it by the Feds, according to Fox News’ Charles Gasparino in his book, Circle of Friends. But one look at the scores of cases filed by Federal prosecutors and SEC lawyers over the past seven years says it is the crime of a generation of finance professionals. Left unchecked, widespread fraud in our securities markets could do as much harm to our society as the bankers who almost took down our financial system in 2008.

Only the Feds know how many more traders, analysts and portfolio managers, and the public company insiders they corrupt, they are going to target for insider trading, but there are plenty of cases ahead. Two years ago the FBI disclosed it was working on approximately 240 investigations and will likely recommend criminal charges in half of them.

As for Cohen, SAC Capital pleaded guilty to five criminal charges in November and agreed to pay a $1.2 billion fine. It also paid $616 million in a civil forfeiture related to Martoma’s trades. In April, it changed its name to Point72 Asset Management, a reference to its address in Stamford, Connecticut. It is in the process of transforming itself to a family office that manages only Cohen’s personal funds, though the SEC charged Cohen with failing to supervise his employees, which may result in his banishment from the securities industry.

It’s unlikely that this denouement will satisfy many observers, especially in light of the evidence presented in Steinberg’s and Martoma’s cases. The two cases had many of the elements that secured the conviction of Rajat Gupta — cooperating witnesses, emails and IMs, phone records, trading records — but apparently not all. Prosecutors were wise not to bring a case against Cohen that they couldn’t win. It doesn’t diminish the very real deterrence against illegal insider trading of the scores of cases they have won.

PHOTOS: Michael Steinberg (L), a top portfolio manager at Steven A. Cohen’s SAC Capital Advisors hedge fund, departs Federal Court in Manhattan after being found guilty on charges that he traded on insider information in New York December 18, 2013. REUTERS/Lucas Jackson 

Hedge fund manager Steven A. Cohen, founder and chairman of SAC Capital Advisors, responds to a question during a one-on-one interview session at the SkyBridge Alternatives (SALT) Conference in Las Vegas, Nevada May 11, 2011. REUTERS/Steve Marcus 


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This jut doesn’t smell right. Paid content perhaps?
There is little deterrent in finance as most “crimes” are actually legal. Even those that aren’t are impossible to prove. Even if the government was actually trying to prove them, which they’re not.

Posted by tmc | Report as abusive

This article is so wrong in so many ways.
The major problem is that the sentences are so minuscule as to encourage rather than deter white color crime. I quote the article: “James Fleishman, a salesman at expert network Primary Global Research, refused to cooperate with the FBI. He paid a heavy price as a result: 14 months of a 2.5-year prison sentence.” Really 14 months of Club Fed is a “heavy price.” There are tens of millions of Americans who would happily spend 14 months at a Club Fed in return for some of the megabucks reaped by these Wall Street crimes. Compare 14 months at Club Fed to an Armed Forces tour in a combat zone. Our service men do this for very little money and the honor of serving our country.

Posted by QuietThinker | Report as abusive

Fighting the Feds is somewhat insane. No one has won and insider trading case in New York in over twenty years. The costs were enormous and the risks incredible. The only reason I did it was because I naively believed that a jury could not find me guilty beyond a reasonable doubt for a crime I did not commit. I did not factor in the lies of cooperating witnesses would trump the fact that THERE WAS NOT ONE SHRED OF DIRECT EVIDENCE presented at my trial.

The costs of fighting were terrible and my life will never be the same. But because I fought the one luxury I have is the ability to talk about it. If I had lied and plead guilty of course I couldn’t do that. Many people do just that. In fact my judge recently spoke about how it is that the innocent plead guilty every day. Did you get that? The judge who presided over my trial lectured on how the Feds cooperator’s game ensnares the innocent who rather lie about their “crime” than fight and likely face a long prison sentence. d-rakoff-james-treacy

Once indicted it’s more practical to take a deal regardless of whether you are innocent or guilty. This cooperators game is the sad state of our “justice” system and something that should truly concern Americans. But don’t worry about that. Just congratulate the Feds for busting Wall Street bad guys like me. That’s fine.

Posted by JamesFleishman | Report as abusive

The biggies are too expensive to jail?

Posted by nickir | Report as abusive