It's been 26 years since Richard Wigton and Timothy Tabor were arrested, and 24 years since federal prosecutors in New York announced they were dropping the cases against the two men.
But their names are being discussed again by Wall Street traders today as the classic examples of innocent victims caught up in an overzealous, politically ambitious prosecutor's insider trading investigation. It's a pattern that risks being repeated, with serious consequences, with this week's conviction of Michael Steinberg, a fund manager at SAC Capital Advisers LP, part of the Connecticut hedge fund led by Steven A. Cohen.
To refresh your memory, or fill you in if you are too young to remember, Wigton and Tabor were targeted back in 1987 by then-U.S. attorney for the Southern District of New York, Rudolph Giuliani. Mr. Giuliani had uncovered some genuine abuses — Martin A. Siegel pleaded guilty on charges related to selling Ivan Boesky information about corporate takeover battles he had worked on at Kidder, Peabody. But as Mr. Giuliani tried to amass more convictions, he faltered, bringing cases against Wigton and Tabor that were so weak that prosecutors eventually decided, wisely, not to pursue them. What people still remember, in addition to the fact that the cases were groundless, is that Wigton was marched through the offices of Kidder, Peabody in handcuffs, and that Mr. Tabor was arrested at home so late that he had to spend the night in jail.
Flash forward to this year, when FBI agents showed up at Michael Steinberg's apartment on Manhattan's Upper East Side apartment and arrested him. A New York Times article reported that "Mr. Steinberg has occasionally spent evenings in New York hotels to avoid being handcuffed at home in front of his two children. Federal agents refused to let Mr. Steinberg surrender of his own volition at F.B.I. headquarters downtown."
The similarities don't end with the handcuffs. The current U.S. attorney in Manhattan, Preet Bharara, is someone whose political experience includes stints as a campaign worker for Manhattan leftist Mark Green and as chief counsel to Senator Schumer on the Senate Judiciary Committee. Back in October of 2010, Mr. Bharara gave a speech to the New York City Bar Association in which he declared that "illegal insider trading is rampant and may even be on the rise," and in which he joked that the defense lawyers should support his enforcement agenda because it would help them make money.
Just as Wigton and Mr. Tabor were being pursued on the basis of accusations from Siegel, an acknowledged criminal who was their former colleague at Kidder, Peabody, so Steinberg was prosecuted largely on the basis of testimony of a former colleague at SAC, Jon Horvath, who pleaded guilty last year and who acknowledged that he was testifying in part because he hoped "to avoid jail time."
The astonishing account of Steinberg's conviction in the New York Times, whose news columns don't as a rule exactly overflow with sympathy for white collar criminal defendants, points to the weakness of the government's case against Steinberg. Prosecutors, the Times reported, "privately conceded that the case had flaws, as they relied on circumstantial evidence like emails and trading logs rather than the sort of incriminating wiretaps that underpinned past insider trading trials."
Truth be told, if a prosecutor thinks the government's case is flawed, he or she has an obligation to justice to share that view with the court and the defense, rather than to whisper it "privately" — or not so privately, as seems to be the situation here — to journalists.
The Times account goes on to note that since 2009, Mr. Bharara's office "has secured 77 insider trading convictions without losing a single trial." This exceeds the criminal conviction rate even in Communist China, and is enough to give pause to anyone concerned with due process.
Steinberg had asked Horvath in an email for "edgy, proprietary, market-moving information that we can use to make money on these stocks." Numerous news accounts of the five-week-long Steinberg trial make clear, however, that Horvath conceded Steinberg never asked Horvath explicitly to do anything illegal, and Horvath never told Steinberg explicitly that he had done anything illegal.
It would be one thing for the Securities and Exchange Commission to try to make a civil settlement or penalty out of this weak beer. But the five counts on which a jury found that the evidence against Steinberg met the criminal conviction standard of beyond a reasonable doubt carry a combined maximum term of 85 years in federal prison.
We live in an information economy in which people use "edgy, proprietary, market-moving information" all the time to make money. Bloomberg News acknowledges its reporters are paid bonuses for stories that move markets. Dow Jones sells customers "time-advantaged access" to "proprietary, exclusive news and scoops" and "news that can impact the markets." If asking for "edgy, proprietary, market-moving information" is illegal, every financial news editor in New York City will have to be thrown in prison.
Even the prosecutors themselves are not immune from the charge of using edgy or proprietary information to make money, if they advance their own legal careers with selective leaks of information. The indictment of SAC, for example, included the fact that a job candidate was described as "the guy who knows the quarters cold, has a share house in the Hamptons with the CFO of [a Fortune 100 industrial sector company], tight with management" — without mentioning that exculpatory fact that this candidate was never hired.
A sitting federal judge, Jed Rakoff, who is a former chief of the securities fraud unit of the U.S. Attorney's office in the Southern District (and who has also been on the other side of things as Martin Siegel's defense lawyer), is publicly warning that federal prosecutors are choosing to pursue insider-trading cases instead of financial-crisis related cases because doing so is a quicker and easier route to cashing in with a post-government job at a large law firm.
Galleon hedge fund manager Raj Rajaratnam and his ex-McKinsey managing director pal on the Goldman Sachs board Rajat Gupta are one thing, though even there one can make a case that the SEC unfairly emphasized Rajaratnam's wealth when it went after him. I'm not defending the behavior of every SAC defendant, or even the overall operation. But in Steinberg's particular case it's time for someone — either the prosecutors themselves or a federal judge — to stand up and say this has gone too far.
One other similarity between this era and the Giuliani one is the fear by those in the financial industry that if they speak out on these issues they will be targeted by prosecutors. For those who want to speak out, the comments section below is open or we're available at the contact listed in the about page.
