People
How U.S. Attorney Preet Singh Bharara Struck Fear into Wall Street and Albany
Part II
JEFFREY TOOBIN
PART II
Continued from yesterday …
Preet
Singh Bharara brought cases for insider trading, many based on
investigations that began before his arrival in the office.
One
of Bharara’s predecessors, Michael Garcia, had obtained wiretaps on the
phones of Raj Rajaratnam, a billionaire who founded the hedge fund
Galleon Group. The F.B.I. arrested Rajaratnam, and prosecutors showed
that he used a network of well-placed tipsters, including Rajat Gupta,
the former managing director of the consulting firm McKinsey &
Company, to illicitly gain about seventy-two million dollars through
stock trading for Galleon Group.
There was little ambiguity about
the criminality of Rajaratnam’s intentions. In one tape played at
trial, he called a contact and said, “I heard yesterday from somebody
who’s on the board of Goldman Sachs that they are going to lose two
dollars per share.”
Rajaratnam quickly traded his shares,
avoiding major losses, thanks to this inside information. Convicted in
2011, he was sentenced to eleven years in prison, and given a
ten-million-dollar fine, along with an order to forfeit more than
fifty-three million in gains. (Gupta, who was also a board member at
Goldman, was later convicted of insider trading as well.)
Bharara
followed up with a series of prosecutions of less well-known figures,
whom he nevertheless described as big fish. Announcing the arrest of a
group of mid-level Wall Street brokers, Bharara said, with some
hyperbole, that the case was “precisely the type of pervasive and
pernicious activity that causes average people to think that they would
be better off pulling their money out of Wall Street and stuffing it in a
mattress.” A prosecutor who served in the office at the time told me,
“Preet made promises that he couldn’t deliver. Those cases were not that
big.”
During this period, Bharara did pursue a major target -
Steven Cohen and SAC Capital Advisors - but the investigation ended on
an ambiguous note. Bharara’s prosecutors convicted six lower-level
former employees of SAC Capital, but they never brought a criminal case
against Cohen. Instead, in 2013 Bharara reached a deal with Cohen’s
company, which pleaded guilty to an indictment charging “institutional
practices that encouraged the widespread solicitation and use of illegal
inside information.”
SAC Capital paid a record $1.8-billion
penalty and was effectively shut down. Cohen, however, not only avoided
prosecution but was permitted to continue managing his
multibillion-dollar personal fortune.
“People are always trying
to make these cases mano a mano between me and someone,” Bharara told
me. “But we did the same in this case as we did in any other. We charged
as much as we thought was justified by the evidence.”
There are
some indications that the judges in Bharara’s courthouse resented the
hype underlying his insider-trading offensive. On December 10, 2014, the
Second Circuit Court of Appeals repudiated a key part of Bharara’s
legacy. In some of his major prosecutions, including the Rajaratnam
case, the defendant had traded on information provided by insiders who
were also making money from illegal trades based on inside knowledge.
However,
the cases that Bharara brought against Todd Newman and Anthony
Chiasson, who were stock traders for hedge funds, were different. Newman
and Chiasson were convicted of insider trading based on information
provided by a group of analysts who had obtained it from insiders at
Dell and other companies. As the Second Circuit noted, “Newman and
Chiasson were several steps removed from the corporate insiders and
there was no evidence that either was aware of the source of the inside
information.”
Moreover, there was insufficient evidence that
Newman and Chiasson knew that the insiders had benefitted in any way by
supplying the inside information. In the light of the attenuated
connection between the defendants and the source of the inside
information, the appeals court said, their convictions could not stand.
Between
the lines, the three judges’ opinion betrayed considerable distaste for
Bharara’s aggressive tactics. It referred to the “doctrinal novelty of .
. . recent insider trading prosecutions,” and suggested that Bharara’s
lawyers had attempted to place their insider-trading cases with a
sympathetic trial judge in the Southern District - of judge-shopping, in
other words.
The court said that Bharara was trying, in effect,
to act like a legislator, by rewriting the criminal laws to his liking.
As the court noted, “Although the Government might like the law to be
different, nothing in the law requires a symmetry of information in the
nation’s securities markets.”
According to the judges, there was
always going to be inside information circulating in the markets. But
criminal behavior would entail a meeting of corrupt minds - a tipster
and a trader who both profited from information that they knew was
unlawfully obtained.
Most scholars favor Bharara’s interpretation of the insider-trading laws.
“The
public wants to believe that you can get an advantage from hard work
and research, not because you know a guy who knows a guy,” Samuel Buell,
a professor at Duke Law School, said. Buell is also a former prosecutor
and the author of the forthcoming book “Capital Offenses: Business
Crime and Punishment in America’s Corporate Age.”
It’s hard to
quarrel with Bharara’s observation that “there is some core of material
nonpublic information that is so material and relevant and market-moving
that people shouldn’t be able to take advantage of that over the
average investor, and I think most people agree with that and those are
the kinds of cases that we brought.”
Still, the Newman reversal
led to a cascade of bad news for Bharara. He has had to dismiss twelve
pending insider-trading cases, and defense attorneys are seeking to have
more thrown out as well. (Both Rajaratnam and Gupta are appealing their
convictions.)
Bharara’s targets have even begun to take the
offensive against his office. David Ganek, of Level Global Investors, a
hedge fund that was raided in an insider-trading investigation in 2010,
sued the government for violating his civil rights. In a ruling on March
10th of this year, Judge William H. Pauley III allowed the case to
proceed, writing, “These raids sent shock waves through Wall Street:
investment bankers and traders were indicted, and multibillion-dollar
businesses - including Level Global - were shuttered. But five years
later a different picture has emerged. The Second Circuit rejected the
Government’s theory of insider trading. Criminal convictions were
vacated, and indictments dismissed.”
Bharara plays down his
conflict with Cohen, but he does little to hide his dislike for another
subject of a Southern District investigation: Governor Andrew Cuomo, of
New York. The cause of Bharara’s ire can be identified with some
precision.
In July, 2013, in response to New York’s long history
of corruption in state government (and to some of Bharara’s early
prosecutions of legislators), Cuomo created what was known as the
Moreland Commission. Cuomo’s charge to the commission, which was given
subpoena power, was to investigate corruption in state government, and
to submit recommendations by the end of the following year. Then, on
March 29, 2014, the day that Cuomo announced a budget deal with the
legislature, he abruptly shut down the Moreland investigation.
Bharara pounced.
“Preet
is a very intense guy, and he can get angry,” Rich Zabel, his former
deputy, told me. “It was just obviously outrageous to shut down the
Moreland Commission. We were, like, there is no way that is going to
stand. And we sent the van over.”
A van was dispatched to seize
the commission’s investigative files. Bharara told me, “Our first and
most important goal was to make sure that whatever they had under way
was not lost, and that there was not going to be a whitewash of things
that had been undertaken. If they weren’t going to do it, we were going
to do it.”
Bharara had to show that he could turn the dramatic
gesture into indictments and then into courtroom victories. In addition
to determining whether Cuomo had unlawfully obstructed the
investigators, Bharara had an opportunity to examine the prime source of
corruption in Albany in recent years - the outside activities of state
legislators.
“New York has a part-time legislature,” Blair
Horner, the executive director of the New York Public Interest Research
Group, told me. “That means that most legislators have other jobs. As
long as lawmakers are allowed to serve two masters, the temptation to
misbehave is too great. So what winds up happening, over and over again,
is that they take money in their private jobs to take action as
legislators.”
At the time, the most powerful figure in the
legislature was Sheldon Silver, who had been the Speaker of the Assembly
since 1994. Silver also worked as a lawyer for Weitz & Luxenberg, a
personal-injury law firm in New York City, but he had not fully
disclosed his income or the nature of his duties there. In 2011, the
state had passed a law mandating that legislators disclose outside
employment, and Bharara’s investigators decided to study Silver’s
disclosure forms.
“In the Silver case, we were looking at the flows of money,” Bharara told me.
Silver
had said publicly that he represented “plain, ordinary simple people”
in his law practice, and that his work consisted of spending several
hours a week evaluating possible claims for the firm to accept.
Bharara’s
team subpoenaed Weitz & Luxenberg’s records to see how the firm
accounted for its payments to Silver. The investigators found that over
the previous decade Silver earned a hundred and twenty thousand dollars
annually in base salary, and had received more than three million
dollars in referral fees, all from cases involving plaintiffs’ exposure
to asbestos.
The investigators tracked down the clients. Many
had been treated by Dr. Robert Taub, who ran a clinic at Columbia
University dedicated to research on mesothelioma, a deadly form of
cancer that is linked to exposure to asbestos. Taub, in turn, suggested
that his patients retain Weitz & Luxenberg in connection with any
legal claims they might have. (Asbestos cases can be extremely
lucrative, often generating a million dollars in fees for a plaintiff’s
law firm.)
Prosecutors say that Silver never met with the
patients referred by Dr. Taub, and that he received referral fees based
on their value to the firm.
This arrangement raised the question
of why Taub would refer cases to Weitz & Luxenberg. Taub told
investigators that he began sending patients as prospective clients to
Silver’s firm in the hope that Silver would arrange for the state
government to give financial support to his clinic at Columbia.
Beginning
in 2005, after Taub’s referrals began, Silver used a state health-care
fund that he controlled to send a total of five hundred thousand dollars
to the clinic.
Silver’s disbursements to Taub illustrated his
power as Speaker. As Bharara put it, “He was parcelling out money to
this doctor, Dr. Taub, for his mesothelioma clinic, and nobody had to
agree to it. There was no oversight, and nobody had to know about it,
and his fingerprints didn’t have to be on it.”
The circle was
complete: taxpayer money went to Taub’s clinics, the referrals went to
Weitz & Luxenberg, and the fees went to Silver. (Neither Taub nor
lawyers affiliated with Weitz & Luxenberg were charged.)
Bharara’s
investigators also noticed that Silver used peculiar wording on the
financial-disclosure form. He said that his income came from “Law
Practice (including Weitz & Luxenberg),” suggesting that he might be
receiving income from another law firm as well. “So when we started
looking at payments, because we were looking at the weirdness of Weitz
& Luxenberg, you start looking at bank accounts to see if there were
any other things that were not disclosed,” Bharara told me.
There
was a second firm, called Goldberg & Iryami, a highly specialized
outfit that consisted of just two lawyers. It represented
commercial-property developers who were contesting the assessments used
to determine their tax rates. Bharara’s investigators found that the
firm paid Silver based on fees from two large New York developers,
Glenwood Management and the Witkoff Group, but that Silver did no actual
work for the firm.
Why did the developers set up a scheme to
funnel money to Silver? Both Glenwood and Witkoff had significant
matters before the state legislature - bills that set subsidies and tax
rates that meant millions of dollars to them. In all, Silver made about
seven hundred thousand dollars from the real-estate firms. (Glenwood and
Witkoff were not prosecuted; neither was Goldberg & Iryami.)
Bharara and his team concluded that the money that went through those
companies to Silver amounted to an illegal kickback in return for the
Speaker’s services in the legislature. (Through his lawyer, Silver
declined to comment.)
Silver was arrested on January 22, 2015,
and Bharara - ignoring the traditions of the historically buttoned-down
Southern District - turned the event into a media extravaganza. At a
press conference, he said, “How could Speaker Silver, one of the most
powerful men in all of New York, earn millions of dollars in outside
income without deeply compromising his ability to serve his
constituents? Today, we provide the answer. He didn’t.”
The next
day, Bharara gave a speech at New York Law School in which he mocked the
state’s political leadership, and had some fun with the old adage that
Albany is governed by “three men in a room.” He said, “There are by my
count two hundred and thirteen men and women in the state legislature,
and yet it is common knowledge that only three men essentially wield all
the power - the governor, the Assembly Speaker, and the Senate
president.”
He went on, “Why three men? Can there be a woman? Do
they always have to be white? How small is the room - that they can only
fit three men? Is it three men in a closet? Are there cigars? Can they
have Cuban cigars now? After a while, doesn’t it get a little gamey in
that room?”
Bharara’s splashy announcements may be rooted in
something more than ego. Historically, prosecutors have made their names
in courtrooms, during trials, but in recent years trials have nearly
disappeared. Nearly all federal prosecutions end in plea bargains. Last
year, defendants pleaded guilty in 97.6 per cent of federal criminal
cases; there were 2,002 criminal trials in the federal system, forty per
cent fewer than in 2009. Federal sentencing guidelines virtually
guarantee lower sentences for defendants who plead guilty rather than go
to trial.
“Defense attorneys and their clients just don’t want
to take the risk of going to trial and losing, especially because
federal prosecutors have the time and resources to build strong cases,”
William G. Young, a federal district judge in Massachusetts, who has
studied the decline in trials, said. “We don’t try cases. We process
guilty pleas. And we impose sentences that have been, by and large,
negotiated in advance without our involvement.”
In plea bargains,
prosecutors serve, in essence, as both judge and jury, weighing the
merits of the charges and deciding, within certain ranges, on the
appropriate sentence. But their enhanced power also creates a dilemma
for them. Without trials, how do they tell the public about their work?
For
decades, federal criminal cases have usually begun the same way. A
law-enforcement official, from the F.B.I. or another agency, files an
affidavit (known as a complaint) with a federal magistrate judge stating
that there is probable cause to believe that the defendant has
committed a crime. These complaints, which are drafted by A.U.S.A.s,
have traditionally been dry, bare-bones documents outlining the
defendant’s behavior and the relevant statutes in colorless legal
language.
Bharara’s office, however, has employed what are known
as “speaking complaints,” which, under the guise of showing probable
cause, assume the form of forensic melodramas.
Continued tomorrow ...
Jeffrey Toobin has been a staff writer at The New Yorker since 1993 and the senior legal analyst for CNN since 2002.
[Courtesy: The New Yorker]
May 4, 2016