It was New York Chief State Chief Judge who observed that prosecutors had so much control over grand juries that they could convince them to "indict a ham sandwich." In today's environment, prosecutors can also get a guilty verdict from a jury just as easily. That is what happened in the prosecution of three hedge fund managers (Todd Newman, Anthony Chiasson and Michael Steinberg).
In the post-2008 crash environment, it seemed easy for prosecutors to indict and convict anyone who worked on Wall Street. The challenge was finding someone on Wall Street to indict! Since prosecutors did not bring criminal cases against individual bankers responsible for the crash, they chose settlements with those banks and then proceeded to attack the hedge fund industry.
Operation Perfect Hedge indicted approximately 100 individuals who were either part of the hedge fund industry or were consultants to it. It led to a lot of national press, high profile arrests and convictions, like that of billionaire Raj Rajaratnam (currently serving 11 years in federal prison) and once-respected Goldman Sachs board member, Rajat Gupta (currently serving 2 years). The media was quick to ordain the head of the operation's prosecution, U.S. Attorney of the Southern District of New York Preet Bharara, as the new "sheriff of Wall Street" ... Time Magazine even put him on the cover in February 2012 with the title, "This Man Is Busting Wall Street." The lead-in to the story was about corruption at Level Global, the firm where Anthony Chiasson had worked. When the Time story ran, Chiasson was preparing his defense and Bharara seemed to be warming up the potential jury pool with the publicity. In December 2012 Chiasson and Newman would be found guilty for using insides information to trade on Dell (public at the time) and Nvidia shares. Mission accomplished ... until recently.
In December 2014, both Chiasson and Newman had their convictions overturned and Bharara immediately let the press know that the sky was falling by putting out a statement "... today’s decision by the Court of Appeals interprets the securities laws in a way that will limit the ability to prosecute people who trade on leaked inside information." The headline in the New York Times read, "Appeals Court Deals Setback To Crackdown On Insider Trading." Most major media outlets ran similar headlines and stories ... and have continued to do so.
Earlier this month, the Supreme Court denied to hear the Newman case and simply rejected it without any comments. The case put forward by such a powerful U.S. attorney, on such a well known case, was simply put in a pile of thousands of cases rejected by the Supreme Court. Bharara, once again, assembled a conference call with the media to tell them that the "... Supreme Court has now opened the door for insider trading."
Last Thursday, Bharara made a surprise announcement by dropping all of the charges against Michael Steinberg, who was going to win his appeal anyway, and all six government cooperators who had all previously pleaded guilty. Bharara's statement said, "These prosecutions were all undertaken in good faith reliance on what this Office and others, including able defense counsel for all those who pled guilty, understood to be the well-settled law before Newman.” However, there are questions as to whether it was really "good faith" or whether it was prosecutorial overreach. As to his tip of the hat to "able defense counsel," well that was to cover the attorneys who may have allowed their clients to plead guilty to charges they never understood.
One of those cooperating witnesses was Jesse Tortora, who was an analyst for Todd Newman. He pleaded guilty to obtaining illegal insider information and testified against Newman at trial. Tortora's attorney, Jacqueline Arango, issued a statement about Bharara's dropping charges against her client, “After five long years, my client is thrilled to be vindicated. Justice was served in the end.” The last time I looked, 'vindicate' means to clear of blame or suspicion. The guy pleaded guilty ... hardly sounds like an attorney who thought her client was ever guilty.
All of these low level cooperators were pressed by government prosecutors to give up bigger fish or face decades in prison. Those bigger fish were supposed to lead to the BIG fish, former SAC Capital head Steven Cohen, who was never criminally charged. These cooperators had limited funds to defend themselves, so they listened to a government narrative to go after their bosses. It worked, until an appeals court accused the prosecutors of judge shopping, not understanding the law, having insufficient evidence to even charge Newman/Chiasson and promoting incorrect jury instructions. Where is that story? Instead, we read, courtesy of the press-loving Bharara, how insider trading has now become legal ... nothing could be further from the truth. Bloomberg's Matt Levine, one of the few to write something balanced on the case, put it best when he wrote of the conclusion to the Newman case, "we're back in a world where it's only illegal if you know that you're insider trading."
Now Newman, Chiasson and Steinberg are free men. The Securities and Exchange Commission has also dropped its case, so the saga that began with an FBI raid on three hedge funds (Level Global, Diamondback and Loch Capital) in November 2010 has ended. The three funds are all out of business, their former employees displaced with a blemished resume, and the insider trading laws are pretty much where they were before all this started. While it might be easy for Bharara and his, mostly now 'former', prosecutors to move on, it may not be so easy for those caught up in this case. It is one thing for a defendant to be cleared of charges, but it is another to be able to move on with one's life after such a life-altering event.
When former Labor Secretary Raymond Donovan was acquitted of fraud and larceny charges by a New York court in 1987, he asked a rhetorical question to the gathered media, "Which office do I go to to get my reputation back?" Today, almost 20 years later, Newman, Chiasson and Steinberg want to know the same thing.
