Did You Hear the One About the Rabbi, the Inmate, The Hedge Fund, and the FBI?

November 12, 2010

The other day, the BrokeAndBroker Blog ran the story about a lawyer who was barred from appearing before the Securities and Exchange Commission when he was found to have engaged in unethical and improper professional conduct while representing a prospective witness in an SEC administrative proceeding. See, http://www.brokeandbroker.com/index.php?a=blog&id=636 

Today, we have the tale of a rabbi who was convicted of extortion, blackmail, wire fraud, and false statements charges stemming from his $4 million scheme to extort a hedge fund. 

Truly, you just can't make this stuff up.

Psst . . . Rabbi, Have I Got A Story For You

From December 2009 to February 2010, 64-year-old Rabbi Milton Balkany a/k/a "Yehoshua Balkany" ("Balkany") claimed to be the spiritual advisor to, in communication with, and in control of an federal inmate serving about an eight year sentence at the Otisville, New York federal prison (the "Inmate"). According to Balkany, the Inmate had advised him that in 2004 and 2005,  a Hedge Fund had obtained material, non-public information (the "Inside Information") and used the purported Inside Information to profit from trading in at least six stocks. According to press reports, the Hedge Fund (not identified in the federal proceeding) was SAC Capital, which is operated by billionaire Steven Cohen.

Psst . . . Hedge Fund, Have I Got A Deal For You

Balkany told lawyers from the Hedge Fund that representatives from the Federal Bureau of Investigation ("FBI") and the U.S. Attorney's Office for the Southern District of New York ("USAO") (collectively, the"Government Officials") were purportedly aware that the Inmate was in possession of the Inside Information, and that, as of December 2009, the Government Officials were anxious to speak with the Inmate.

Wow -- that's pretty heavy!  Here you have this vulnerable Inmate serving about an eight year sentence and the feds are eager to get information from this guy. I mean, you know how these things work, you scratch our back and maybe we can scratch yours -- maybe even reduce your sentence. Send you home early. Just give us the down and dirty on the Hedge Fund. For a guy doing fairly heavy time in a federal prison that's a sweet deal.

Psst . . . FBI Agent, Have I Got A Case For You

In truth, that whole story about the Government Officials wanting to have a sit-down with the Inmate was make believe. In truth,  the Government Officials never contacted the Inmate about any purported Inside Information. The intriguing part of this story is that while Balkany was apparently spinning that yarn to the Hedge Fund's lawyers, the rabbi himself had  contacted the USAO in January 2010 by telephone, and had conversations during which he attempted to induce the USAO to make contact with the Inmate.

Talk about working both sides of the street!  Of course, what's unclear here is whether the Inmate told Balkany that he had knowledge of insider trading at the Hedge Fund, whether there was insider trading at the Hedge Fund, and, well, the permutations of what-if and who-said-what could go on endlessly. No point speculating about what we don't know and haven't been told.

Anyway, while having conversations with the USAO, Balkany made false statements and concealed material information from the Government. Frankly, that's just not a great idea. That type of double-dealing rarely ends well for the conniver.

The $4 Million Man

Moreover, while keeping the plates spinning over at the USAO, Balkany is separately advising the Hedge Fund's attorneys that he was in frequent contact with the Inmate, and that the Inmate would follow his instructions as to what he should and should not tell the Government Officials. Balkany told the lawyers for the Hedge Fund that he would instruct the Inmate not to tell the Government Officials about the Hedge Fund's purported illegal trading if the Hedge Fund made certain payments --specifically, $2 million to the Bais Yaakov school where Balkany was the Dean, and another $2 million to another school as a "loan."

Whatever was gumming up the works, Balkany attempted to give some assurances to the Hedge Fund when he stated to its lawyers that

In regard to your concern and your company . . . you can go to sleep at night completely comfortable, without any worry. That's what I can tell you.

I always wondered what a good night's sleep was worth.  In some quarters, the value is apparently $4 million. 

Notwithstanding the promise of a restful night, the Hedge Fund wasn't chomping down on Balkany's baited hook and that seemed to upset him. Balkany attempted to pressur the Hedge Fund into paying the $4 million, by falsely claiming that the Government was about to approach the Inmate for the Inmate's cooperation. The threat was that if the Hedge Fund did not pay, Balkany would attempt to help the Inmate reduce his prison sentence by permitting him to speak to the Government Officials.

Mr. Gondorff, Meet Mr. Hooker -- Meet Mr. Lonnegan

On February 18, 2010, it looked as if Balkany's persuasion won out. On that day, Balkany received two checks from the Hedge Fund totaling $3.25 million. At the time he received these checks, Balkany advised a representative of the Hedge Fund that the Inmate would not discuss the Hedge Fund with the Government Officials at a meeting between the Inmate and the USAO that Balkany claimed was scheduled for the following day. However, no such meeting was scheduled to occur.

Of course there was this one teensy-weeny fly in the ointment -- the government was involved with the $3.25 million payoff. I guess it's what they call a "sting."

On February 18, 2010, Balkany was arrested. On November 10, 2010, following a seven-day trial in the Southern District Court of New York before Judge Denise L. Cote, Balkany was found guilty by a federal jury of extortion, blackmail, wire fraud, and false statements charges stemming from his $4 million scheme to extort the Hedge Fund into paying millions of dollars to the Bais Yaakov school and to another school on behalf of Balkany.

Balkany faces a maximum sentence of

  • 20 years in prison on the wire fraud count,
  • 2 years inprison on the extortion count,
  • 1 year in prison on theblackmail count, and
  • 5 years in prison on the false statement count.

On the wire fraud, extortion, and false statement counts, Balkany also faces a fine of the greater of $250,000 or twice thegross gain or gross loss from the offense;  and on the blackmail count a fine of the greater of $100,000 or twice the gross gain or gross loss from the offense. Balkany is scheduled to be sentenced on February 18, 2011.

See the  Criminal Complaint (see http://www.scribd.com/doc/27108403/Balkany-Milton-Complaint )

For details of Balkany's controversial background, see http://en.wikipedia.org/wiki/Milton_Balkany.