Jan 20, 2011

Insider Trading Defendants Avoid Prison in 44% of New York Cases

By David Glovin and David Voreacos - Jan 20, 2011 12:00 AM ET

Jan. 20 (Bloomberg) -- Robert Heim, a partner at Meyers & Heim LLP and a former U.S. Securities and Exchange Commission attorney, discusses former New Castle Funds LLC consultant Danielle Chiesi's guilty plea yesterday in a federal court in New York as part of an ongoing insider-trading case. Chiesi was arrested in 2009 and charged with passing inside information to Galleon Group LLC founder Raj Rajaratnam and others. She pleaded guilty to three counts of conspiracy to commit securities fraud. Heim speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Almost half of the 43 defendants who were sentenced inManhattan federal court in the past eight years for insider trading avoided a prison term, with many never seeing the inside of a jail cell because they cooperated with prosecutors.
Nineteen who were sentenced since 2003, or 44 percent, weren’t incarcerated, an analysis of court cases by Bloomberg showed. Of the remainder, the average defendant got a prison term of 18.4 months. The greater the profit made on illegal trades, the longer the sentence. The longest term was 10 years. Danielle Chiesi, who pleaded guilty yesterday for her role in the Galleon Group LLC hedge fund insider-trading scandal, faces between 37 and 46 months in prison.
Since 2009, U.S. Attorney Preet Bharara in Manhattan has stepped up insider-trading prosecutions, charging more than 30 people in three overlapping rings. Of the three defendants sentenced so far in the Galleon ring, the average sentence has been 17 months. The nationwide investigation has implicated hedge funds, technology companies and so-called expert- networking firms.
“If you engage in accounting manipulation, you’re deceiving the entire investment community in that security, and that’s deemed to be very serious,” Kirby Behre, a partner at Paul, Hastings, Janofsky & Walker LLP in Washington and co- author of “Federal Sentencing for Business Crimes,” said yesterday in a phone interview. “But if you’re an insider trader who made $12,000 on a couple of sales, that’s a much more limited fraud.”

Trial Next Month
Galleon co-founder Raj Rajaratnam faces a trial next month on charges that he made $45 million on secret tips. If convicted, Rajaratnam, who denies wrongdoing, faces a long prison term because of the magnitude of stock trades and profits, former prosecutors said.
“He’s obviously looking at a lot of potential time because of the gains,” said Peter Zeidenberg, a partner at DLA Piper LLP and a former prosecutor who isn’t involved in the case. “It may be that the government has no difficulty in proving the gain or loss amount, but a lot of times they do. Those amounts are often not borne out at trial.”
Jim McCarthy, a spokesman for Rajaratnam, declined to comment.
Chiesi, a former New Castle Funds LLC consultant, admitted she passed inside information to Rajaratnam and others. She is to be sentenced on May 13. The advisory range of 37 to 46 months is based partly on New Castle’s profit of $1 million to $2.5 million from her crimes.
Winning Leniency
The U.S. sentencing guidelines take into account the amount of offenders’ profits, whether they acknowledged breaking the law, their role in the fraud and criminal record. Defendants who cooperate with prosecutors often win leniency, as do those who are ill or must care for ailing relatives.
“If you cooperate, that’s going to be your biggest driver,” Behre said. “The second-biggest driver is the perceived size of the fraud. That includes not only the personal gain but the overall size of the conduct investigated and prosecuted.”
None of the men who cooperated with prosecutors in a 2007 case stemming from leaks from Mitchel Guttenberg, an institutional client manager at UBS Securities LLC, was sent to prison. Guttenberg, the scheme’s ringleader, was sentenced to 6 1/2 years after pleading guilty. David Tavdy, a Bear Stearns Cos. trader who didn’t cooperate with prosecutors, got a 63-month term in that case.
Sick Spouse
Also in that case, Randi Collotta, an ex Morgan Stanley compliance officer who admitted leaking stock tips, was sentenced to two months in jail and four years of probation because her husband suffered severe heart problems. The guidelines called for a term of one year to 18 months.
“The trend in the last three to five years has been for judges to give below-guidelines sentences,” Behre said.
“A fair comparison” for insider trading “might be an embezzlement,” he said. “What do people who embezzle $200,000 get?”
Christopher Clark, a former federal prosecutor in Manhattan who is now a defense attorney at Dewey & LeBoeuf LLP in New York, said insider-trading sentences “are probably higher than they ought to be.”
“For somebody who’s making millions at Goldman Sachs, the possibility of going to prison for three years and not being able to work again in the industry is a substantial disincentive to insider trading,” Clark said in an interview.
Madoff, Dreier
The average sentence in 7,617 fraud cases in fiscal 2009 was 21.8 months, according to the U.S. Sentencing Commission, which establishes the guidelines. Of those convictions, 94.9 percent were the result of guilty pleas and 5.1 percent came at a trial.
In non-insider trading cases that year, judges in Manhattan federal court sentenced Bernard Madoff to 150 years for masterminding the largest Ponzi scheme ever, former KPMG LLP senior manager John Larson got 10 years for selling tax shelters to wealthy clients, and law firm founder Marc Dreier received a 20-year term for cheating hedge funds out of more than $400 million.
A review of government statements issued since 2003 by the Manhattan U.S. Attorney’s Office in cases in which the chief crime was insider trading showed that many sentences included probation or home confinement. Defendants typically were ordered to pay fines and restitution.
Top Priority
Ellen Davis, a spokeswoman for Bharara, declined to comment. In an October speech, Bharara said insider trading “is rampant and may even be on the rise.” He said his office’s investigation “will remain a top criminal priority.”
Offenders who take their cases to trial and lose often get lengthier prison terms than those who plead guilty, according to court data. Only four insider-trading cases have come before Manhattan juries since 2003. One ended before sentencing when the judge threw out the jury’s conviction and dismissed the case. The average sentence after the three trial convictions was 68 months.
The longest of the 43 insider-trading sentences -- 10 years -- came after the 2008 trial of formerCredit Suisse Group AG banker Hafiz Muhammad Zubair Naseem, who was convicted of leading a $7.8 million scheme.
In December, Joseph Contorinis, a former money manager at Jefferies Paragon Fund, was sentenced to six years when a jury convicted him of earning more than $7 million through an insider-trading scheme.
Press Attention
By contrast, the average sentence for an insider-trading defendant who pleads guilty was 14.6 months in prison, according to the data.
The second longest prison term since 2003 was in the case of Sam Waksal, the founder of ImClone Systems Inc. who was ordered to spend 87 months behind bars in 2003 after he pleaded guilty.
“Waksal was so high-profile,” Behre said. “Press attention is a factor.”
Not every trial conviction leads to stiff sentences. James Gansman, a former Ernst & Young LLP partner, was sent to prison for a year for leaking secrets to his girlfriend while guidelines recommended a term of as long as 51 months.
Others winning leniency included former Morgan Stanley Vice President Xujia Wang and ex-ING Investment Management analyst Ruopian Chen. The husband and wife were sentenced to 18 months each in 2007. Guidelines called for terms of 30 months to 47 months based on their earning of $611,000 through three trades based on secret tips.
Stepped Up Scrutiny
Twenty-eight of the 43 sentences reviewed by Bloomberg occurred in 2007 or later, when prosecutors stepped up their scrutiny of insider trading. In those cases, the average sentence was 17.2 months behind bars.
Among those sentenced was Eric Holzer, a tax lawyer who worked at Paul Hastings Janofsky & Walker. He was sent to a halfway house in 2009 for nine months after admitting he traded on stock tips gleaned from the wife of a former Lehman Brothers Holdings Inc. salesman.
In the Galleon cases, Mark Kurland, a co-founder of New Castle Funds, was sentenced to 27 months; former Atheros Communications Inc. Vice President Ali Hariri was sentenced to 18 months; and Robert Moffat, a former International Business Machines Corp. senior vice president got six months. Moffat, who said he had an “intimate relationship” with Chiesi, made no profit from leaking stock tips to her, prosecutors said.
The Chiesi and Rajaratnam case is U.S. v. Rajaratnam, 1:09- cr-1184, U.S. District Court, Southern District of New York (Manhattan).

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