ASPEN, CO > > SEE PAGE 3
T H E
January 13-18, 2013 / NACDL’s 33rd
Annual Advanced Criminal Law Seminar
National Association of Criminal Defense Lawyers
CHA M PION
WASHINGTON, DC > > SEE BROCHURE
February 20-23, 2013 / NACDL’s 2013
Midwinter Meeting & Seminar
LAS VEGAS, NV > > SEE PAGE 8
April 5-6, 2013 / NACDL & CACJ’s
“Making Sense of Science VI”
September/October 2012
White Collar
Crime Issue
v The SEC’s Cooperation Initiative
v The Willfulness Element of a False Statement Charge
v Defense Strategies and Compliance Issues in the New Insider Trading Environment
v Jury Instructions: Key Topics in Federal White Collar Cases
v The Most Effective Opening Statement Ever Given?
v Overzealous Bankruptcy Practice Can Lead to a Prison Cell
© Andrew Gombert | Newscom
Defense Strategies and
Compliance Issues in
The New Insider
Trading Environment
ith the perspective that nearly three years brings,
it is now possible to look back upon the wave of
insider trading prosecutions and enforcement
actions during this period as a revolution in white collar
criminal law. The sheer number of cases brought by regulators, the novelty of the investigative techniques employed,
the complexity of the insider trading enterprises uncovered,
the resulting convictions and guilty pleas, the magnitude of
resulting sentences and penalties, and the anticipated
impact on future investigations, sentencing, and compliance, all signal a new era in white collar prosecutions. What
this all means for white collar defense counsel and compliance personnel is becoming clearer, although still evolving;
initial thoughts are offered below.
W
How We Got Here (in Brief)
A comprehensive history of the current wave of insider
trading investigations has yet to be written, and is beyond
the scope of this article, but the basics are relatively well
known. In mid-October 2009, Raj Rajaratnam, billionaire
manager of Galleon Management, LP, was charged, along
with others, in a criminal complaint brought by the U.S.
Former Goldman Sachs director Rajat Gupta leaves federal
court in October 2011. Gupta was sentenced to two years’
imprisonment on October 24, 2012.
Attorney’s Office in the Southern District of New York and
a parallel civil complaint brought by the U.S. Securities and
Exchange Commission (SEC).1 The charging documents
hinted at a large network of senior corporate executives
from some of the most well-known blue chip companies —
IBM, Intel, McKinsey & Company, among them — who
had tipped and traded on material, nonpublic information.
Apparently as an outgrowth of the Galleon investigation, prosecutors and SEC enforcement staff turned their
focus to the so-called “expert network” firms that paired
hedge funds with industry consultants who, in some cases,
offered material, nonpublic information for expensive fees.
Roughly a year after the first Galleon charges, the U.S.
Department of Justice (DOJ) charged the first expert network employee, Donald Chu.2
Since these investigations — or, what has been called
“Operation Perfect Hedge” — became public, dozens of
defendants have been charged, convicted, or have pleaded
guilty. By one count, 66 individuals have been criminally
charged and 57 convicted in the Southern District of New
York since August 2009,3 with 57 enforcement actions
brought by the SEC in 2011 alone.4 And, in the case that
unleashed this tidal wave, Galleon, Rajaratnam received
both the second longest sentence ever imposed for an insider trading conviction (11 years) and the largest civil penalty
($92.8 million).5
There is no sign that the government’s interest is waning. In fact, one report indicates that the FBI has 120 “targets” still under investigation, and an equal number of “subjects.”6 “Operation Perfect Hedge” will draw to a close at
BY CHERYL A. KRAUSE
46
W W W. N A C D L . O R G
THE CHAMPION
some point, but its imprint — particularly
in the use of hi-tech investigative techniques — is likely to remain a permanent
fixture in this area of the law.
Wiretaps and Other Traps
W W W. N A C D L . O R G
the Board of Goldman Sachs.”11 Piecing
together such oblique references, together
with the timing of conversations that
Rajaratnam allegedly had with Gupta, and
the close proximity of large Galleon trades
in Goldman stock, the government
amassed significant circumstantial evidence that Rajaratnam received tips from
Gupta. Once again, the deterrent effect of
this evidence is substantial — a would-be
tipper must consider the risk not only that
his/her own conversations may be recorded, but that even if they are not, the recorded conversation of a co-conspirator could
implicate the unrecorded tipper.12
Nor does the potency of wiretaps and
consensually recorded conversations by
cooperators wearing a wire end there. In
addition to the inculpatory statements
relating to insider trading itself, recorded
conversations have revealed defendants’
vivid recounting of their efforts to avoid
detection, resulting in obstruction of justice charges, as well as the use of public
phones and disposable cell phones to
avoid detection.13 As the modus operandi
of insider trading defendants has come to
resemble the methods of their counterparts in traditional criminal enterprises,
so the government is increasingly using
the kind of techniques familiar in organized crime and drug cases.
In United States v. Kluger, for example, one of the co-conspirators stated,
without knowing that his comments were
being recorded, that, after learning of
another co-conspirator’s visit from the
FBI, he destroyed evidence: “I broke the
phone in half and went to McDonald’s
and put it in two different garbage cans.”14
Similarly, in United States v. Barai et al., a
defendant allegedly told a co-conspirator,
in a conversation recorded by law enforcement, that he used two pairs of pliers to
break apart a USB “flash drive” computer
storage device, along with some additional
external computer drives, placed this evidence in his black Northface brand jacket,
and then left his apartment building in
Manhattan at about 2 a.m. in order to discard the evidence in four different garbage
trucks.15 The government was able to corroborate this recorded conversation with
video surveillance from the apartment
building, which showed him leaving and
returning to his Manhattan apartment at
around 2 a.m. wearing a jacket apparently
with a Northface logo. Such recorded
admissions are doubly effective; they provide extremely strong evidence of guilt
with respect to the obstruction charges, of
course, but also of those defendants’ culpable states of mind with respect to their
insider trading conduct.
The deterrent effect of the govern-
SEPTEMBER/OCTOBER 2012
D E F E N S E S T R AT E G I E S A N D C O M P L I A N C E I S S U E S
Greater resources, a wider variety of
investigative techniques, and perhaps also,
to some degree, the humiliating oversight
of the Madoff fraud on the heels of the
greatest financial crisis since the Great
Depression, were all inputs that facilitated
the current wave of enforcement. But by
far the most significant aspect of those
prosecutions — with implications extending far beyond those cases, and likely to
cast a shadow for decades to come — was
the government’s use of techniques historically used in organized crime and drug
cases to investigate contemporaneous
criminal activity: wiretaps, consensual
recordings, and undercover cooperators.
It was not always this way. Prior to
Galleon, insider trading prosecutions typically were built on reconstruction of historical conduct and rarely involved
undercover agents or real-time cooperators who could provide contemporaneous insight into an illegal enterprise —
much less wire taps. The reasons for this
may be rooted in the advancement of
data analysis technologies used by the
government, discussed below, and perhaps the sheer fortuity of coming across
ongoing insider trading that presented
the government the opportunity to monitor an ongoing criminal enterprise with
law enforcement tools typically reserved
for other kinds of offenses.
In this sense, Galleon precipitated a
fundamental change in the government’s
approach to insider trading and white collar crime generally, and much of the credit
presumably goes to the government’s successful introduction of wiretaps. It was not
self-evident that the gambit would succeed. After all, although the uses of wiretap
evidence, given their extreme invasiveness,
and the potential for abuse, are narrowly
defined by Title III of the Omnibus Crime
Control and Safe Streets Act of 1968 (Title
III), codified at 18 U.S.C. §§ 2510-2522,
insider trading is not among the listed
offenses explicitly subject to a Title III
wiretap. Indeed, this was an argument that
Rajaratnam raised in seeking to suppress
the wiretaps in his prosecution.
In rejecting Rajaratnam’s suppression
motion, Judge Richard Holwell concluded
that, “[b]ecause Title III authorizes the
government to use wiretaps to investigate
wire fraud, the government was authorized to use wiretaps to investigate a fraudulent insider trading scheme using inter-
state wires even though Title III does not
specifically authorize wiretaps to investigate insider trading alone.”7 The implications of that result were seismic — not
only, most obviously, for Rajaratnam himself, but also for the many other defendants
who unwittingly made highly incriminating statements that were recorded by the
government.8 Since Judge Holwell’s holding, for example, Judge Jed S. Rakoff
reached a similar conclusion in pretrial
proceedings in United States v. Gupta —
the case involving Rajaratnam’s alleged
co-conspirator,
former
McKinsey
Managing Director and member of the
Board of Directors of Goldman Sachs and
Proctor and Gamble, Rajat Gupta.
Reviewing the same wiretaps that
were at issue in the Rajaratnam case, Judge
Rakoff concluded, like Judge Holwell, that
the lack of specific enumeration of insider
trading as an offense for which wiretaps
are permitted under Title III is not
grounds for their suppression: “The government is free to use evidence obtained
from an authorized wiretap in the prosecution of a crime not listed in” Title III,
provided there is an alternative basis for
seeking the wiretap, such as for the investigation of wire fraud or money laundering
(which are enumerated). The admission of
that wiretap evidence no doubt played a
central part in the jury’s verdict in the
Gupta case in June 2012, finding Gupta
guilty of conspiracy and securities fraud,
and in Judge Rakoff’s decision on October
24, 2012, to sentence Gupta to two years’
imprisonment notwithstanding the mitigating factors identified by the court.9
Judge Holwell’s holding in the
Rajaratnam case is now to be reviewed on
appeal by the Second Circuit. Oral argument in the appeal took place on October
25, 2012, with Rajaratnam challenging the
wiretaps on a different theory on appeal,
arguing that the wiretaps were improperly
sought by the government, and not, as he
had argued below, that wiretaps may not
be used to investigate insider trading cases
at all.10 Rajaratnam’s shift in legal strategy
on appeal suggests that the former Galleon
captain has resigned himself to the fact
that the ship has sailed as to the government’s ability to use wiretaps to investigate
insider trading.
As the Gupta case has shown, wiretap
evidence can potentially be quite persuasive when used as indirect, circumstantial
evidence, as much as when it is used as
direct evidence. For example, although
Gupta and Rajaratnam were never recorded on the same calls, the government successfully sought to admit certain recorded
conversations in which Rajaratnam refers
to conversations with “somebody who’s on
47
ment’s newly used techniques and the
power of the evidence in the government’s
hands cannot be overstated.
D E F E N S E S T R AT E G I E S A N D C O M P L I A N C E I S S U E S
Mosaic Theory Under
A Microscope
48
One result of the admissibility of
wiretap evidence is the potential to weaken significantly defendants’ ability to rely
upon so-called “mosaic theory” — the
idea that skillful analysts can piece together separate sources of information, each
of which, viewed independently, would
be “immaterial,” in order to create a picture that is greater than the sum of its
parts, i.e., an investment thesis that is in
fact material. The existence of damning
wiretap evidence greatly undermines a
defendant’s reliance on mosaic theory,
which is most likely why the Rajaratnam
jurors did not credit the statements of
John Dowd, Rajaratnam’s lead lawyer,
that “Raj built his success on shoe-leather
research, diligence, and hard work,” and
that “[h]e assembled a mosaic of information, did his own calculations, and figured out where these companies were
headed in their own market and in the
stock market.”16
Mosaic theory has also been tarnished
somewhat by what prosecutors might call
the cynical reliance upon that theory by
certain defendants. In one instance, for
example, in a series of incriminating
Blackberry instant messages, a defendant
wrote to a co-conspirator the Blackberry
equivalent of a “wink and a nod”:
Let’s not worry. …
No evidence we got exact info
So it doesn’t matter
Forget the past
No proof
So ur fine
Btw — we did mosaic threoy [sic]
We always do17
This is not to suggest, of course, that
there is no longer a place for mosaic theory. Indeed, as SEC officials themselves
remind, recent cases should not be understood to “indicate that the Commission is
seeking to undermine the mosaic theory,
under which analysts and investors are free
to develop market insights through assembly of information from different public
and private sources, so long as that information is not material nonpublic information obtained in breach of or by virtue of a
duty or relationship of trust and confidence.”18 Moreover, Regulation FD (Fair
Disclosure), which requires the public disclosure of information that is revealed
selectively, recognizes that “an issuer is not
W W W. N A C D L . O R G
prohibited from disclosing a nonmaterial
piece of information to an analyst, even if,
unbeknownst to the issuer, that piece helps
the analyst complete a ‘mosaic’ of information that, taken together, is material.”19
Nonetheless, the undeniable fact in the
post-Galleon world is that defendants’
retreat to the “mosaic theory” defense cannot be merely reflexive, for that defense
may well be challenged by strong direct
and circumstantial evidence.
Improved Data Analysis
In recent congressional testimony, the
SEC’s Director of Enforcement, Robert
Khuzami, noted that the SEC’s Market
Abuse Unit, a unit within the Enforcement
Division charged with investigating insider
trading cases, among others, is utilizing
new data analytics to discover insider trading. Mr. Khuzami referred to the Unit’s
leadership of the Enforcement Division’s
“Automated Bluesheet Analysis Project,”
which he described as “an innovative
investigative tool that utilizes the
‘bluesheet’ database of more than one billion electronic equities and options trading records obtained by the Commission
in the course of insider trading investigations over the past 20 years.”20
Khuzami explained that, “[u]sing
newly developed templates, Enforcement
staff are able to search across this database
to recognize suspicious trading patterns
and identify relationships and connections
among multiple traders and across multiple securities, generating significant
enforcement leads and investigative entry
points.”21 And he noted that even though it
is “still in its early stages of development,
this new data analytic approach already
has led to significant insider trading
enforcement actions that were not the subject of an SRO referral, informant tip,
investor complaint, media report, or other
external source.”22
In other congressional testimony, in
March 2011, Khuzami revealed that the
SEC is “doing things like canvassing all
hedge funds for aberrational performance.
Anybody who is beating the market indexes by three percent and doing it on a steady
basis, we are going to look for them.”23
While the government’s ability to canvas
hedge funds in this way reflects impressive
technological capabilities, Khuzami’s
“three percent solution” does raise the disconcerting specter of firms being penalized with unnecessary and costly queries
and investigations simply because they are
successful. It remains to be seen whether
this balancing of the public interest and
market protection will be workable, or
worth the costs.
The Continuing Usefulness
Of Traditional Techniques
Notwithstanding Judge Rakoff ’s
comment that “insider trading cannot
often be detected, let alone successfully
prosecuted, without the aid of wiretaps,”
the government will not dispense entirely
with the use of compelling circumstantial
evidence in cases where wiretaps, for
whatever reason, are unavailable. Because
the SEC, unlike DOJ, has no ability to
obtain wiretaps, circumstantial evidence
will continue to be a mainstay of SEC
insider trading investigation and enforcement in particular. Indeed, at a conference
held in late February this year, Sanjay
Wadhwa, Associate Regional Director of
the SEC’s New York Regional Office and
Deputy Chief of the SEC’s Market Abuse
Unit, acknowledged this limit on the
SEC’s work, while foreshadowing an
ongoing stream of SEC enforcement
actions involving insider trading over the
next six to nine months (i.e., between
August and November 2012). Wadhwa
assured his audience that “conventional or
traditional investigative techniques that
the SEC has used for years … continue to
be in our toolbox and we’re using them
very effectively.”24
In the example Wadhwa provided,
SEC v. Scott Allen et al., the SEC alleged
that defendant John Michael Bennett
made cash payments to defendant Scott
Allen in exchange for inside information,
and based these allegations on evidence
that Allen swiped his subway metro card
before and after a lunch scheduled on
Bennett’s calendar for which Bennett
incurred a credit card charge, and on a day
when Bennett made a large cash withdrawal from an ATM. Other occasions
when Bennett made large cash withdrawals shortly before he and Allen swiped
their subway cards supported the government’s argument.25 In fact, as the SEC
alleges in its complaint, “on four separate
days that Bennett withdrew $5,000 or
more of cash from his bank accounts,
Bennett and Allen swiped their
Metrocards at the 59 Street Columbus
Circle subway stop at the exact same
time.”26 As this case reflects, there undoubtedly remains a role for old-fashioned
detective work even in this era of high-tech
investigative techniques.
Some Words on Sentences
The new government enforcement
priority has also manifested in an instruction in the Dodd-Frank Wall Street
Reform Act to the U.S. Sentencing
Commission (Commission) to “review
THE CHAMPION
W W W. N A C D L . O R G
offense”; (5) “the number of participants
in the scheme (although such a scheme
may exist even in the absence of more
than one participant)”; (6) “the efforts
undertaken to obtain material, nonpublic
information”; (7) “the number of
instances in which material, nonpublic
information was obtained”; and (8) “the
efforts undertaken to conceal the
offense.”35 The significance of this proposed change should not be underestimated, with the potential for far longer
sentences and a backlash against their
application in these types of cases.
This increase in the base level for
organized insider trading is unlikely to
affect those who are already targets, subjects, or cooperators. Although the typical
rule is that the Guidelines applied at sentencing are those in effect at the time of
sentencing,36 an exception exists where this
would pose an ex post facto problem,37 as it
would for defendants receiving sentences
harsher than those applied at the time of
their offense. However, for future defendants whose conduct is still ongoing at the
time the amendments take effect, the
“organized scheme” amendment could
increase pressure to cooperate with
authorities in order to get the benefit of
“substantial assistance” departures to
counteract the effect of participation in
organized insider trading schemes.38
v Limit the use of consultants who might
be tempted to share information about
their own employers, particularly where
those employers are public securities
issuers.
Ounce of Prevention Worth
More Than a Pound of Cure
Finally, companies are advised to have
in place a crisis plan well in advance of a
regulator or agent’s call.
In this area, as in so many others,
proper training and education of employees can help greatly to avoid devastating
liability — or, significant collateral harm
from an investigation even if an individual
or company is ultimately able to avoid liability. Defense lawyers should make sure
their clients take the following steps:
v Adopt a written Code of Ethics with
clearly understandable policies and
procedures to avoid trading or tipping
on the basis of material, nonpublic
information.
v Encourage employees to raise issues
and consult with counsel whenever
there is uncertainty about the propriety
of conduct or terms of a third-party’s
engagement.
v Provide examples of the kinds of material, nonpublic information that
employees should not seek from consultants, market participants, or issuers’
employees.
v Maintain and regularly update a
“Restricted List” of securities for which
the company has material nonpublic
information and in which employees
may not trade or tip.
v Require consultants to provide copies of
the compliance policies of their respective firms and require employees to provide them to the company’s compliance
staff.
v Conduct due diligence on consultants
and maintain a “no call” list of consultants who might pose particular risks.
v Require employees to pre-clear consultations, and require that compliance
staff be invited to attend consultations.
v Require that notes from the consultations be available for review by compliance staff.
v Require consultants to agree to be
bound, in writing, by a statement
requiring that they not share material
nonpublic information.
Conclusion
In yet another sign of the times, the
Wall Street Journal recently reported that
hedge funds are increasingly seeking to
insure against the risk of costly regulatory enforcement and investigation, with
“[r]ates — up 5 to 10 percent this year
for hedge funds insuring themselves
against fraud or insider trading litigation, amid the government’s widespread
crackdown. …”39 Given the premium on
informational advantage to drive “alpha”
in the hedge fund industry, insurance is
likely a prudent “hedge” in its own right.
But in this area, as in so many others,
there is no substitute for cultivating a
culture of rigorous compliance well
before the FBI knocks on the door.
Thanks to Justin Danilewitz, a former
associate in the White Collar & Securities
Litigation Group, for his significant contributions to the research and writing of this
article while employed at Dechert LLP.
D E F E N S E S T R AT E G I E S A N D C O M P L I A N C E I S S U E S
and, if appropriate, amend” the Guidelines
relating to securities fraud.27 In response to
that command, the Commission proposed
new federal sentencing guidelines on April
30, 2012, that would increase the “base
level” for an insider trading offense that is
part of an “organized scheme.” This proposal will become law on November 1,
2012, if not altered by Congress.28
The sentencing increase has been
opposed by some in the defense bar as
unnecessary. As this constituency has
observed, “Operation Perfect Hedge” has
produced some of the longest sentences
for insider trading in history, and yet
some of those sentences were issued
below or at the bottom of the Sentencing
Guidelines ranges.29 As NACDL argued in
a public comment on the proposed
Guideline amendments, “[a]t present
there is no empirical evidence to suggest
that the existing guideline sentences for
insider trading are not high enough to
comply with the legitimate purposes of
sentencing.”30
According to published reports, Judge
Rakoff expressed similar sentiments in a
recent speech before the New York City
Bar Association. There, Judge Rakoff
observed the increased harshness of sentences created by the Guidelines since they
were adopted in 1987: “Has the nature of
white collar crime … changed so much
since 1987 that the guidelines should be
500 percent higher? No,” Judge Rakoff said.
“This was done partially in response to
political pressure.”31
Despite
this
criticism,
the
Commission’s proposed increase to the
advisory guidelines for sophisticated securities fraud schemes like insider trading
has gone forward.32 As a result, while the
current base level for an insider trading
offense is set at 8 under §2B1.4(a), the
proposed amendment, which would add
§2B1.4(b), states that “[i]f the offense
involved an organized scheme to engage
in insider trading and the offense level
determined above is less than level 14,
increase to level 14.”33 As the Commission
has explained in a new Application Note,
“[f]or purposes of subsection (b)(2), an
‘organized scheme to engage in insider
trading’ means a scheme to engage in
insider trading that involves considered,
calculated, systematic, or repeated efforts
to obtain and trade on inside information,
as distinguished from fortuitous or
opportunistic instances of insider trading.”34 Furthermore, a “nonexhaustive list”
of indicia of this kind of organization
includes: (1) “the number of transactions”; (2) “the dollar value of the transactions”; (3) “the number of securities
involved”; (4) “the duration of the
Notes
1. See Complaint, United States v.
SEPTEMBER/OCTOBER 2012
49
D E F E N S E S T R AT E G I E S A N D C O M P L I A N C E I S S U E S
50
Rajaratnam et al., No. 09-cr-1184 (RJH), Doc. 1
(S.D.N.Y filed Oct. 15, 2009); Complaint, SEC v.
Galleon Management, LP et al, No. 09-cv-8811,
Doc. 1 (S.D.N.Y. filed Oct. 16, 2009) (JSR).
2. Sealed Complaint, United States v. Don
Chin Trang Chu, No. 10-mag-2625 (S.D.N.Y.
filed Nov. 23, 2010), http://blogs.
reuters.com/felix-salmon/files/2010/11/
complaint.pdf.
3. David S. Hilzenrath, Big New InsiderTrading Cases Expected This Year, Regulator
Says, WASH. POST (Feb. 28, 2012), http://
www.washingtonpost.com/business/
economy/big-new-insider-trading-casesexpected-this-year-regulator-says/2012/
02/28/gIQAXHz7gR_story.html.
4. This marked the second-highest number of enforcement actions the SEC brought
(61 actions were brought in 2008) since 2004.
See SEC’s Year-by-Year Enforcement of Insider
Trading, http://www.sec.gov/spotlight/insidertrading.shtml. As Robert Khuzami, the SEC’s
Director of Enforcement, recently related during congressional testimony,“[a]pproximately
eight percent of the 650 average annual
number of enforcement cases filed by the
Commission in the past decade have been for
insider trading violations. In the past two
years, the Commission has been particularly
active in this area. In fiscal year 2010, the SEC
brought 53 insider trading cases against 138
individuals and entities, a 43 percent increase
in the number of filed cases from the prior fiscal year. This past fiscal year, the Commission
filed 57 actions against 124 individuals and
entities, a nearly eight percent increase over
the number of filed cases in fiscal year 2010.”
Testimony of Robert Khuzami, Director,
Division of Enforcement, U.S. Securities and
Exchange Commission, before the United
States Senate Committee on Homeland
Security and Governmental Affairs (Dec. 1,
2011), http://www.sec.gov/news/testimony/
2011/ts120111rsk.htm#P19_6355.
5. Rajaratnam’s sentence, handed down
in October 2011, was at the time the longest
sentence ever imposed for an insider trading
conviction. In June 2012, Matthew Kluger was
sentenced to 12 years in prison for insider
trading, which is currently the longest sentence ever imposed for an insider trading
conviction. See Chad Bray, Insider Case Gets
Longest Sentence, WALL ST. J. (June 4, 2012),
http://online.wsj.com/article/SB1000142405
2702303918204577446982337564066.html.
6. Peter J. Henning, Behind the Crackdown
on Insider Trading, N.Y Times Dealbook (Mar. 1,
2012), http://dealbook.nytimes.com/2012/
03/01/behind-the-crackdown-on-insidertrading/. DOJ defines a target as “a person as
to whom the prosecutor or the grand jury has
substantial evidence linking him or her to the
commission of a crime and who, in the judgment of the prosecutor, is a putative defendant.” U.S. Attorney Manual § 9-11.151. “A
W W W. N A C D L . O R G
‘subject’ of an investigation is a person whose
conduct is within the scope of the grand
jury’s investigation.” Id.
7. Memorandum Opinion and Order,
United States v. Rajaratnam et al., No. 09-cr1184 (RJH), Doc. 148 (S.D.N.Y. filed Nov. 24,
2010).
8. By Rajaratnam’s own count, “the FBI
spent nine months secretly recording over
2,200 private conversations between
[Rajaratnam] and at least 130 of his colleagues, employees, friends, and family.” Brief
for Defendant-Appellant, United States v.
Chiesi et al., No. 11-4416-cr, Dkt. 75 at 9 (2d Cir.
filed Jan. 25, 2012).
9. See Peter Lattman & Azam Ahmed,
Rajat Gupta Convicted of Insider Trading, N.Y.
Times Dealbook (Jun. 15, 2012), http://dealbook.nytimes.com/2012/06/15/rajat-guptaconvicted-of-insider-trading; Peter Lattman,
Ex-Goldman Director to Serve 2 Years in Insider
Case, N.Y. Times Dealbook (Oct. 24, 2012),
http://dealbook.nytimes.com/2012/10/24/
rajat-gupta-gets-2-years-in-prison. Gupta’s
two-year sentence is approximately onequarter the length of the sentence suggested
by the federal sentencing guidelines and
requested by prosecutors. See Lattman, supra.
10. Peter Lattman, Lawyer Denounces
Wiretaps in Appeal of Galleon Case, N.Y. Times
Dealbook (Oct. 25, 2012), http://dealbook.
nytimes.com/2012/10/25/rajaratnamslawyers-argueto-overturn-conviction; See
also Brief for Defendant-Appellant, United
States v. Chiesi et al., No. 11-4416-cr, Dkt. 75 (2d
Cir. filed Jan. 25, 2012).
11. Government’s Motion in Limine for
the Admission of Certain Statements, United
States v. Gupta, No. 11-097, Dkt. 55 at 2 (S.D.N.Y.
filed Apr. 30, 2012).
12. Admission of this type of evidence
must satisfy the co-conspiracy exception to
the hearsay rule, which in turn requires sufficient independent evidence of the defendant’s membership in the conspiracy before
the statements are admissible. See Federal
Rule of Evidence 801(d)(2)(E). Thus, counsel
should consider the absence of direct evidence of such membership a potentially valuable defense against admission of wiretap
evidence.
13. The use of disposable cell phones in
order to elude authorities has been repeated
in a number of cases. For instance, in one of
the earliest cases prior to the Galleon and
expert network cases, the defendant tipper
provided his tippees with disposable phones
and then, following the anticipated public
announcement of the acquisition of 3Com by
Bain Capital, LLC and Huawei Technologies,
destroyed the phone by breaking it in half,
throwing away one half and asking the
tippee to discard the other half, and by biting
the SIM card. See SEC v. Cutillo et al., No. 09-civ9208 (S.D.N.Y. Nov. 5, 2009) at 6, http://
www.sec.gov/litigation/complaints/2009/
comp21283.pdf.
14. Complaint, United States v. Bauer, No.
11-3536, Dkt. 1 (D.N.J filed Apr. 5, 2011), at 20.
15. Complaint, United States v. Barai et al.,
11-Mag-332 (Feb. 7, 2011) at 29-30.
16. Opening Statement of John Dowd,
United States v. Rajaratnam et al., No. 1:09-cr01184-RJH (S.D.N.Y.) at 54-55, available at
http://rajdefense.org/wp-content/uploads/
2011.03.09-Opening-Statement-by-JohnDowd.pdf.
17. Complaint, United States v. Barai et al.,
11-Mag-332 (Feb. 7, 2011) at 27-28.
18. http://www.sec.gov/news/speech/
2011/spch032111cvd.htm.
19.
http://www.sec.gov/rules/final/
33-7881.htm.
20. Testimony of Robert Khuzami,
Director, Division of Enforcement, U.S.
Securities and Exchange Commission, on H.R.
1148, the “Stop Trading on Congressional
Knowledge Act,” Committee on Financial
Services of the U.S. House of Representatives
(Dec. 6, 2011), http://www.sec.gov/news/testimony/2011/ts120611rk.htm.
21. Id.
22. Statement of Robert Khuzami,
Director of the U.S. Securities and Exchange
Commission’s Division of Enforcement, U.S.
Senate Committee on Homeland Security
and Governmental Affairs (Dec. 1, 2011), available at http://www.sec.gov/news/testimony/2011/ts120111rsk.htm#P19_6355.
23. Oversight of the U.S. Securities and
Exchange
Commission’s
Operations,
Activities, Challenges, and FY 2012 Budget
Request, Hearing Before the Subcommittee on
Capital Markets and Government Sponsored
Enterprises of the Committee on Financial
Services U.S. House of Representatives, 122th
Cong., Serial No. 112–14 (Mar. 10, 2011) at 32.
24. The SEC Speaks in 2012 - Workshops:
Workshop A, Enforcement: (Recorded
February 24 and 25, 2012 in Washington).
25. See Complaint, SEC v. Scott Allen et al.,
No. 11-Civ-6443 (S.D.N.Y. Sept. 15, 2011) ¶¶ 61
and 62.
26. See Complaint, SEC v. Scott Allen et al.,
No. 11-Civ-6443 (S.D.N.Y. Sept. 15, 2011) ¶¶ 63.
27. United
States
Sentencing
Commission, [Proposed] Amendments to the
Sentencing Guidelines (April 30, 2012),
Section 1079A(a)(1)(A) at 1, http://www.
ussc.gov/Legal/Amendments/ReaderFriendly/20120430_RF_Amendments.pdf.
28. Ibid. at 17.
29. See Letter from Practitioners Advisory
Group to Hon. Patti B. Saris, U.S. Sentencing
Commission, Chair (Mar. 8, 2012) at 1-2 (“In the
vast majority of the recent insider trading
prosecutions — including in particular the
high profile prosecutions in the Southern
District of New York — convicted defendants
have faced high Guidelines ranges and have
THE CHAMPION
received substantial sentences. . . . Raj
Rajaratnam, who was subject to a Guidelines
range of 235-293 months, received a sentence
of 132 months on October 13, 2011. …
Winifred Jiau, an expert affiliated with Primary
Global Research, faced a Guidelines range of
78-97 months, even though her conduct netted her relatively little gain. Her sentence was
48 months. … Zvi Goffer received 10 years on
September 21, 2011, a sentence near the bottom of the 121-151 month Guidelines range.
… Craig Drimal, another defendant in the
Goffer case, who was sentenced to 66 months
on August 31, 2011, had a Guidelines range of
57-71 months, and Emmanuel Goffer, sentenced to 36 months, faced a Guidelines range
of 41-51 months. … Looking beyond these
results, we are unaware of any recent insider
trading case in which a court expressed concern that it was unable to impose the appropriate sentence because the Guidelines range
was too low.” (citations omitted)),
http://www.ussc.gov/M eetings_
and_Rulemaking/Public_Comment/2012032
9/PAG%20comment%20letter%20re%20201
2%20proposals%20-%20FINAL.pdf.
30. Comment Letter from Lisa Monet
Wayne, NACDL President, to Hon. Patti B.
Saris, Chair, U.S. Sentencing Commission
(Mar. 19, 2012) at 3, http://www.ussc.gov/
Meetings_and_Rulemaking/Public_Comm
ent/20120329/NACDL%20USSC%20Com
ments%20-%203%2019%2012.pdf.
31. Ian Thoms, Law360.com, Rakoff
Slams U.S. Sentencing Guidelines for Being Too
Harsh (May 14, 2012).
32. The proposed amendments include,
W W W. N A C D L . O R G
for example, the creation of a new special
offense characteristic for insider trading,
which creates a minimum offense level of 14
“[i]f the offense involved an organized
scheme to engage in insider trading. …” See
Proposed Amendment to § 2B1.4 (Insider
Trading) (adding subsection (b)(2)); see also
Application Note 1 (defining “organized
scheme to engage in insider trading” for purposes of proposed subsection (b)(2) as “a
scheme to engage in insider trading that
involves considered, calculated, systematic,
or repeated efforts to obtain and trade on
inside information, as distinguished from
fortuitous or opportunistic instances of
insider trading”).
33. United States Sentencing
Commission, [Proposed] Amendments to
the Sentencing Guidelines (April 30, 2012),
§2B1.4(b)(2) at 17, http://www.ussc.gov
/Legal/Amendments/Reader-Friendly/
20120430_RF_ Amendments.pdf.
34. App. Note 1 to Proposed
Amendment to U.S.S.G. §2B1.4(b)(2) at 18.
http://www.ussc.gov/Legal/Amendments/
Reader-Friendly/20120430_RF_
Amendments.pdf.
35. Ibid.
36. U.S.S.G. § 1B1.11(a) (“The court shall
use the Guidelines Manual in effect on the
date that the defendant is sentenced.”); see
also 18 U.S.C. § 3553(a)(4)(A)(ii).
37. U.S.S.G. § 1B1.11(b)(1) (“If the court
determines that use of the Guidelines
Manual in effect on the date that the defendant is sentenced would violate the ex post
facto clause of the U.S. Constitution, the
court shall use the Guidelines Manual in
effect on the date that the offense of conviction was committed.”).
38. See U.S.S.G. § 5K1.1 (“Upon motion
of the government stating that the defendant has provided substantial assistance in
the investigation or prosecution of another
person who has committed an offense, the
court may depart from the guidelines.”).
39. http://dealbook.nytimes.com/2012/
03/13/the-high-cost-of-insider-trading/. n
About the Author
Cheryl Krause is a
partner in Dechert
LLP’s White Collar
and Securities Litigation Group and has
been recognized by
Best Lawyers in
America, Chambers
USA, and American
Lawyer Media for her criminal practice.
She is a former Assistant U.S. Attorney
(SDNY) and former law clerk to the Hon.
Anthony M. Kennedy.
Cheryl A. Krause
Dechert LLP
2929 Arch Street
Philadelphia, PA 19104
215-994-2139
Fax 215-655-2139
E- MAIL
[email protected]
SEPTEMBER/OCTOBER 2012
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