The Department of Justice and Securities Exchange Commission loudly have trumpeted victories achieved in their renewed battle against insider trading and Wall Street malfeasance, repeatedly warning that there are more cases to come. Just yesterday, the United States Attorney for the Southern District of New York announced “the most lucrative insider trading scheme ever charged” against a former portfolio manager of the well-known hedge fund, SAC Capital Advisors. Media reports indicate that the government has long been trying to build a case against SAC, which is not charged in the criminal complaint unsealed yesterday, but whose founder repeatedly is referred to as the “owner” or “Portfolio Manager A.”
To date, notable signs of success in the government’s campaign include the insider trading conviction of Galleon founder Raj Rajaratnam and Goldman Sachs board member Rajat Gupta and the more than 60 convictions and lengthy prison sentences for dozens of hedge fund traders that grew out of the investigations spawned by these cases. Although these accomplishments have received a lot of media attention, the government’s war against Wall Street has resulted in some significant, but less heralded victories for the defense bar as well.
One notable insider trading decision, United States v. Contorinis, was issued by the Second Circuit Court of Appeals in August 2012. The defendant in that case, Joseph Contorinis, was a portfolio manager at Jefferies Paragon Fund who allegedly traded on tips received from a UBS AG investment banker friend about the pending acquisition of the grocery store chain Albertson’s Inc. Although the appellate court rejected Contorinis’s claim that he could not be guilty of insider trading because the marketplace was rife with rumors and press reports regarding the transaction, the court did vacate the $12.7 million forfeiture order issued against him. The Second Circuit found that the trial judge erred in ordering Contorinis to forfeit profits from the allegedly illegal trades he did not actually receive, but rather that went to his employer, an uncharged third-party. The Court reasoned that “‘forfeiture’ is a word generally associated with a person’s losing an entitlement as a penalty for certain conduct” and should, therefore, not apply to amounts acquired by someone other than the defendant. Accordingly, the issue of forfeiture was remanded to the trial court for a recalculation of the profits the defendant actually received.
In another case decided just last week, a federal jury in Manhattan rejected claims brought by the Securities Exchange Commission in a civil suit against Bruce Bent and his son, Bruce Bent II, alleging that the father-and-son team defrauded investors when their money market fund, the Reserve Primary Fund, collapsed in September 2008. The SEC asserted that the Bents misled investors about the stability of the fund, marketing the fund as a “nearly risk-free alternative to a bank account” and reassuring ordinary investors that the fund could be rescued despite its ownership of hundreds of millions of dollars of bonds issued by the then-recently bankrupt Lehman Brothers. The defendants argued that their intentions were pure; they fully intended to use other resources to make the fund whole and their inability to access those funds was unforeseeable. Although the SEC prevailed on a negligence claim against the younger Bent and on fraud and negligence claims brought against Reserve Primary Fund’s investment adviser and broker-dealer, the defeat of its primary fraud claims has been called a “significant loss” for the SEC.
The Bents case is reminiscent of other government losses. In 2009, a Brooklyn federal jury acquitted Ralph Cioffi and Matthew Tannin, two Bear Stearns executives, of charges that they conspired in a scheme to defraud investors about the sub-prime mortgage market. In July 2012, the SEC lost a negligence case brought against Brian Stoker, a Citigroup manager, accused of misleading investors by failing to explain how Citigroup selected assets contained in their portfolios and sometimes made wagers against the investments. These cases highlight the difficulty regulators and prosecutors have had in seeking to hold financiers liable for events leading to the financial crisis of 2008.
Although the losses may appear few and far between when it comes to insider trading cases, the final outcome of the Rajaratnam case still hangs in the balance, leaving the government’s investigative techniques – the case was the first to use wiretaps to investigate and prosecute white collar insider trading – and ultimate victory in question. The government contends that insider trading is on the rise and has reached a level of sophistication requiring investigators and prosecutors to rely on every investigative tool available. As evidenced by the unsealing of the SAC-related criminal complaint yesterday, the government’s war likely will continue, but predicting the outcome of the federal government’s campaign is premature.