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by Bill Singer

Did Preet Bharara Blink In The Fight Against Insider Trading?

May 13, 2013

Another insider trading case goes to the jury and another defendant is now headed off to pay his debt to society.  Veteran Wall Street regulatory lawyer Bill Singer sees an unending parade of prosecutions and convictions involving fairly similar allegations.  Spit in the ocean?  Pouring water on the sands? Sending a message? Alas, prosecutors don't seem to be deterring more insider trading but taxpayers are certainly footing the bills for these trials and incarcerations. In the end, would it make more sense to simply decriminalize insider trading and make it clear -- once and for all -- that Wall Street is a rigged casino?  That's the debate. Pick your side.

Chiasson Sentenced

Stripped to its basics, portfolio managers Anthony Chiasson and Todd Newman; and analysts Sam Adondakis, Jesse Tortora, Jon Horvath and Danny Kuo shared inside information about such firms as Dell and Nvidia with each other, and the analysts forwarded their findings on to their portfolio managers. At trial, Newman was convicted of one count of conspiracy to commit securities fraud, and four counts of securities fraud. Newman was sentenced on May 2, 2013 to 54 months' imprisonment. Horvath and Kuo pled guilty to one count of conspiracy to commit securities fraud and two counts of securities fraud. Tortora, Adondakis,  and Goyal pled guilty to one count of conspiracy to commit securities fraud and one count of securities fraud and they are awaiting sentencing. 


Following a six-week jury trial, Chiasson was convicted of one count of conspiracy to commit securities fraud and five counts of securities fraud as part of an insider trading scheme that netted over $70 million in illegal profits.  On May 13, 2013, Chiasson was sentenced in Manhattan federal court to 78 months in prison, one year of supervised release, and ordered to pay a $5 million fine. 

Here We Go Again

Nah, sorry but I'm not going to offer a ton of background on this case.  It's pretty much a carbon copy of so many similar cases going back years.  And, yeah, when they filed the charges, the Feds made a point of labeling this case as yet another of the "largest insider trading scheme" in history. Been there. Done That. 

As readers of my BrokeAndBroker Blog know, I'm pretty much fed up with these insider trading cases. I think that they have become an excessive drain on our limited federal law enforcement assets (both human and financial).  For decades, federal prosecutors have trumpeted each new insider trading case as the biggest, most important, most expensive matter to be brought before the courts; and, with equal panache, have promised that the case du jour would be the one to send the famous (or infamous) "message" to Wall Street that enough is enough and, you know, we mean business, blah, blah, blah.

For my part, I have absolutely no confidence in the ability of the federal, state, or self-regulatory cops of Wall Street to make even a slight dent in the pernicious practice of insider trading. With each new generation of cases and prosecutors, this scourge of our securities markets seems a resistant super bacteria that will not go away, will not respond to any regulatory or prosecutorial antiseptic, and simply hangs in there as it rolls up even larger numbers of victims for more dollars.  At some point, you have to recognize that some wrongs cannot be stopped and you, therefore, must ask whether your triage needs to be reconsidered.

Moral Hazard

No - absolutely, unequivocally "NO," I do not believe that insider trading is a good thing or even something that we should condone. That being said, there is a dangerous moral hazard in pretending to the public that regulators and/or prosecutors are controlling a pervasive fraud. Frankly, the public deserves far more honesty and candor. 

Insider trading is not diminishing or retreating. Despite years of prosecutions, convictions, and prison sentences, well-educated industry professionals persist in crossing over the line, fueled by the apparent belief that they are smarter than the last batch of convicted defendants or that they have found a new way to avoid detection. While we may debate many aspects of this dilemma, one thing is clear: No one is getting the message about the significant personal and professional costs of getting caught and prosecuted for insider trading.  Despite the headlines and the clanging cell-doors, the misconduct goes on and folks who should know better (and do know better) take the odds of getting away with the crime.

Ultimately, I would just as soon legalize insider trading and warn the public that the casino is rigged, that the games of chance are fixed, and that the croupiers and pit bosses are on the take. You want to put your chips on the table? Hey, go ahead but you've been warned.

Bharara's Fatigue?

To some extent, the press release announcing Chiasson's sentencing ("Former Hedge Fund Co-Founder Anthony Chiasson Sentenced in Manhattan Federal Court to 78 Months in Prison for Insider Trading" May 13, 2013 ) seems to acknowledge my concerns.  Maybe I'm reading a tad too much into Preet Bharara's victory lap, but he too seems to have grown somewhat fatigued, and his post-game analysis seems to be tinged with a bit more restraint than previous iterations:

Manhattan U.S. Attorney Preet Bharara said, "With his sentence today, Anthony Chiasson chose to be part of a corrupt circle of friends that cheated the market to gain an unfair trading advantage, and, for that, he lost his career, his reputation, and now he has lost his liberty. Such catastrophic losses should deter those who would be tempted to break the law, but for those who are undeterred, we are not going away."

Bharara's characterizations bear repeating. Some of Wall Street's best and brightest voluntarily choose to go over to the darkside of corruption and cheating.  Many of these miscreants knew in advance that what was at risk were their careers, reputation, and liberty - but they just didn't factor those negatives into the equation with enough weight.  Finally, and to his credit, I think Bharara sounds the perfect pitch when he stresses that those embarking upon insider trading "should" be deterred by the record of convictions and sentences; however, the U. S. Attorney then acknowledges that such a prospect has failed to deter many who were aware of the dire consequences of their conduct. 

Zombie Prosecutors

Bharara states the proposition in what I feel is the proper tone:  For those of you who are willing to throw the dice and take your chances, we are going to just keep plugging away with our investigations, prosecutions, and, hopefully, convictions.  It's no longer about deterrent as much as it is about persistence. Bharara is tapping Wall Street on the shoulder and reminding its participants that effective or not, his office will continue to bang its head against the wall of insider trading.  All of which conjures up the image of a zombie army of prosecutors in pursuit of the fresh meat of Wall Street's insider traders.

Conclusion

Bharara is the best Sheriff of Wall Street that I have seen in some three decades on the Street.  And while, at times, he may come off as Don Quixote tilting at monsters who are actually windmills, I have a soft spot for the Man of La Mancha.  In the end, I still don't agree with the criminalization of insider trading because I have found that the moral hazard of such a failed effort is to provide false assurance to the public that the markets are fairly regulated and the bad guys ultimately pay.  Notwithstanding, I compliment Bharara for his measured post-trial commentary.  

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