Seventh Circuit Upholds Non-Incarceration Sentence for Beanie Baby Creator

This guest post was authored by Mara Smith, a summer associate with Montgomery McCracken.

On Friday, the Seventh Circuit upheld what it determined to be a substantively reasonable sentence for billionaire Ty Warner, the creator of Beanie Babies. We previously blogged about Warner’s district court sentencing, during which Judge Kocoras found that Warner’s “very unique” circumstances warranted a non-incarceration sentence – well below the term of imprisonment recommended by the Sentencing Guidelines. Following this sentencing, the government appealed, arguing that Warner’s sentence was far too lenient.

As you may recall, Warner’s prosecution came out of the DOJ’s initiative to combat offshore tax evasion, which started in 2008 with a targeted investigation into the Swiss bank UBS, where Warner had an offshore account. In early 2009, UBS admitted wrongdoing and agreed to cooperate with the U.S. government investigation by handing over information about some U.S. offshore clients. Not long thereafter, Warner attempted to enroll in the offshore voluntary disclosure program (“OVDP”), but he was ineligible because the government had already acquired his account information and an investigation was pending. Ultimately, in 2013, the government charged Warner with one count of willful tax evasion. Less than a month later, Warner pled guilty to the charges and agreed to pay $56.3 million in penalties.

Although Warner’s Guidelines range was 46- to 57-months imprisonment, neither side proposed a sentence in that range in their pre-sentencing submissions. Rather, the government requested incarceration “in excess of a year and a day” while Warner argued that probation and community service were sufficient. In January 2014, Warner was sentenced to two years’ probation, at least 500 hours of community service, a $100,000 fine, and costs. The district court based this decision on, among other things, testimony revealing Warner’s consistently philanthropic character, his attempt to disclose the account through the offshore voluntary disclosure program, and his willingness to pay a penalty more than ten times the amount of the tax loss.

The government did not agree that this was a sentence “sufficient, but not greater than necessary” to achieve the purposes of sentencing. See 18 U.S.C. § 3553(a). But, thankfully for Warner, the Seventh Circuit did, concluding that the district court “fully explained and supported its decision and reached an outcome that is reasonable under the unique circumstances of this case.” See slip op., at 2. While upholding the sentence, Judge Kanne, who delivered the Seventh Circuit’s opinion, noted that “[i]n other cases, justice might demand a harsher sentence, but here it does not.” The Seventh Circuit made the following important points while reviewing the district court’s analysis of the 3553(a) factors:

• The Appropriate Benchmark: “No one disputes that he deserved a below-guidelines sentence. … While the court was not strictly bound by the[] [parties’] recommendations, it was well within the court’s discretion to use that range as a benchmark,” meaning that the real choice before the district court was between probation and roughly a year in prison – not 46 to 57 months. Id. at 16.
• Characteristics of the Defendant: According to the district court, the character letters submitted on Warner’s behalf showed that he consistently displayed concern for others and acted with “the purest of intentions” when making “overwhelming” charitable contributions, which he often did “quietly and privately.” at 2, 18. Indeed, Judge Kocoras – on the bench for 3 decades – had “[n]ever … had a defendant in any case – white collar crime or otherwise – demonstrate the level of humanity and concern for the welfare of others as has Mr. Warner.” Id. at 16. Such character is an appropriate mitigating factor and the district court did not err by placing as much weight on it as it did. Id. at 17-18
• Seriousness of the Offense: While his offense was serious, his crime was isolated and uncharacteristic. Further, the district court properly took into account that Warner attempted to enroll in the OVDP and, after he could not be accepted, he cooperated with the government and paid full restitution, a $53.6 million FBAR penalty, and a $100,000 fine.
• General Deterrence: The Seventh Circuit noted that, while incarcerating Warner would have sent a stronger message to the general public than probation, the message sent by his existing sentence – which included a penalty more than ten times the amount of the tax loss – was sufficient.
• Disparity: Finally, the appellate court noted that, while most individuals receiving probation for offshore tax evasion had caused smaller tax losses, Warner’s unique situation meant that his sentence “did not cause any unwarranted disparities among similar ” Id. at 28 (emphasis in original).

In light of the above, the Seventh Circuit concluded that the district court’s decision was “reasoned” and “justified.” Id. at 31.

The district court’s careful and thoughtful analysis (as well as the Seventh Circuit’s affirmation thereof), also shows how courts are willing to fully consider the sentencing factors and to impose a sentence that is reasonable and appropriate for the person in front of them – even where that is wholly inconsistent with what the Sentencing Guidelines recommend. As we have blogged before in connection with the sentence of former Virginia Governor Bob McDonnell and Sentencing Guidelines reform proposals by both an ABA Task Force and United States Sentencing Commission, the fraud guidelines for white collar offenses have steadily increased over the years and may very well result in an unreasonable sentence. It is our job as white collar practitioners to ensure that the district court has all of the information it needs to make that careful and thoughtful analysis so that we may obtain the appropriate sentence for our clients.

Former First Lady of Virginia Sentenced: Did Husband’s “Throw Momma Off the Train” Approach Work?

Photo: Associated Press

Readers of the White Collar Alert know that we have been closely following the downward spiral of former Virginia Governor Bob McDonnell and his wife Maureen McDonnell after their ill-fated relationship with Virginia businessman, Jonnie R. Williams Sr. Maureen McDonnell was convicted of eight counts of corruption and one count of obstruction of justice, but then acquitted on the obstruction charge after Judge Spencer found that there was insufficient evidence.  Judge Spencer sentenced her to 12 months and 1 day in prison.

Her husband was sentenced on January 6, 2015 to two years in prison, which we noted was a significant victory for the defense, considering the fact that it was a large reduction from the 10 to 12 year sentence recommended by the U.S. Probation Office and the 6 to 8 year sentence that the Court calculated using the Sentencing Guidelines. Mr. McDonnell was convicted of 11 counts of corruption as well as one count of making a false statement. In Mrs. McDonnell’s case, the prosecutors sought a total of 18 months in prison (despite a possible range of up to 6 1/2 years) while the defense requested a probationary sentence with community service.

So what could have prompted Judge Spencer to mostly follow the prosecutor’s request for a sentence of incarceration when the defense presented a strong case for probation? Especially in light of his substantial downward departure for her husband, it wasn’t out of the question that he could have decided that a very lenient sentence would be sufficient here: Mrs. McDonnell was being sentenced on 4 fewer counts, and Justice Spencer acknowledged at her husband’s sentencing that “while Mrs. McDonnell may have allowed the serpent into the mansion, the governor knowingly let him into his personal and business affairs.”

Today was the first time the public heard extensively from Mrs. McDonnell, who was tearful and at one point said “I am the one who opened the door and I blame no one but myself.” She also thanked Judge Spencer for “showing mercy to my husband.” Mr. McDonnell was present in the courtroom but remained quiet, a stark contrast to his earlier behavior. During the trial, he spent approximately 24 hours on the witness stand and explained in detail how his marriage was broken, how his wife sought attention from Jonnie R. Williams Sr., and he claimed to be clueless about many of his wife’s actions.

Judge Spencer acknowledged that Mr. McDonnell’s attorneys had presented a “let’s throw momma under the bus defense” at trial and that his sentencing had also focused on “throw[ing] momma off the train.” Despite recognizing Mr. McDonnell’s improper deflection of culpability, however, Judge Spencer said that he did not want to allow a wide disparity between Mr. and Mrs. McDonnells’ sentences because there was “joint criminal behavior.” It is impossible to ever know just how much her husband’s extensive and detailed testimony against her contributed to the Judge’s sentencing decision today. But I can’t help wondering what both of their respective sentences might have been had Mr. McDonnell not given such testimony that painted his wife in a very harsh light.

Landmark $1.375 Billion Settlement in S&P Case Highlights DOJ’s FIRREA Civil Enforcement

Just two years after the ink dried on the Department of Justice’s civil complaint against McGraw-Hill Financial, Inc. and its wholly owned subsidiary Standard and Poor’s Financial Services LLC and almost a decade after S&P was alleged to have misled investors by promoting all-star grades of residential-mortgage bonds as independent and objective, S&P settled prosecutions being conducted by the DOJ, the District of Columbia, and nineteen states for over $1.375 billion, the largest record settlement involving a credit rating firm in history. The settlement agreement requires S&P to pay the DOJ $687,500,000 as well as pay similar amounts to the nineteen states and the District of Columbia.

The DOJ initiated suit against S&P on the basis that it violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), a previously underutilized statute that, as we discussed on White Collar Alert, has been rejuvenated by the DOJ in recent years. As detailed in the government’s complaint, S&P was alleged to have knowingly misled investors by overrating residential mortgage backed securities (“RMBS”) and collateralized debt obligations (“CDOs”) during the onset of the 2007 financial crisis. The complaint asserts that S&P’s conduct was fueled by its desire to maintain business relationships with and profit from the banks and companies that issued the RMBS and CDOs. When the housing market collapsed, S&P’s ratings turned out to be inaccurate and in many instances, based on mortgage packages that S&P knew were likely to default. As Attorney General Eric Holder summarized:

On more than one occasion, the company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised. … While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.

Although the settlement agreement and its sixteen-point statement of facts did not require an explicit admission of wrongdoing by either S&P or McGraw Hill, it did require S&P to retract its earlier assertion that the DOJ’s prosecution was political retaliation for the firm’s 2011 downgrade of the United States’ credit rating.

What this historical settlement signals is the increased (and successful) use of FIRREA by the DOJ. The statute has been around for over twenty years without a significant track record, but the DOJ has started to feature it more prominently in civil enforcement actions against financial services and securities companies. Not only does it have a longer statute of limitations, but a civil enforcement action under FIRREA has a lower standard of proof than a criminal enforcement action and provides for the recovery of significant monetary penalties. Although the S&P prosecution is the first enforcement action of its kind against a rating agency, we wouldn’t be surprised to see the government dip its toe into the cool FIRREA waters more frequently in the future.

Commission Proposes Limited, Though Significant, Amendments to Fraud Guidelines

As we previously noted, the U.S. Sentencing Commission has been considering changes to the Sentencing Guidelines for economic crimes. This deliberation over Section 2B1.1 stems, in part, from criticism from practitioners, judges, and scholars suggesting that “the fraud [G]uideline[s] may be fundamentally broken.” Indeed, as my colleague Lathrop Nelson noted just last week, the Section’s focus on monetary loss and the use of numerous enhancements (which are often not an appropriate measure of culpability) have resulted in ever-increasing sentences for first-time offenders.

It was these concerns that led the American Bar Association Criminal Justice Section Task Force on the Reform of Federal Sentencing for Economic Crimes to propose a fundamental rewrite of the Section in Fall 2014. The proposed modifications would reduce the impact of loss on the ultimate sentence, enhance or subtract levels based upon the defendant’s level of culpability and the impact on the victim, and cap sentences for offenders whose conduct was not otherwise serious.

Last week, the Commission responded, publishing several proposed amendments to Section 2B1.1. In the accompanying news release, the Commission stated that they “have not seen a basis for finding the guideline to be broken for most forms of fraud, like identity theft, mortgage fraud, or healthcare, but [that their] review has helped … identify some problem areas where changes may be necessary.” As a result, the Commission did not make the wide-ranging modifications suggested by the ABA Task Force, but did suggest some significant changes, including the following –

• A change of the ambiguous and seemingly all-inclusive definition of intended loss to: the pecuniary harm “that the defendant purposely sought to inflict” as inferred from all available facts;
• A slight reduction in the enhancements for the number of victims;
• The addition of an enhancement where the victim suffered substantial hardship;
• A revision of the enhancement for use of “sophisticated means,” such that it will only apply if the defendant’s conduct is “sophisticated,” rather than offense as a whole; and
• A special rule for determining the Guidelines range in fraud on the market cases, which will be based on the defendant’s gain from a fraud, rather than loss, which courts have had difficulty calculating.

The Commission has raised questions regarding, and is specifically seeking input on, several of these proposed amendments. The period in which to submit comments remains open until March 18^th. It is anticipated that ABA Task Force, among others, will weigh in. Let’s hope that the ultimate amendments to Section 2B1.1 – even if narrow in scope – help limit what are often “nonsensical,” “hocus-pocus” calculations.   See Leah McGrath Goodman, “Nonsensical Sentences for White Collar Criminals,” Newsweek (June 26, 2014).

ABA Task Force Proposes Significant Change to Fraud Guidelines

When the U.S. Sentencing Commission adopted the original Sentencing Guidelines in 1987, it sought to ensure that white collar offenders faced “short but definite period[s] of confinement.” U.S. Sentencing Commission, Fifteen Years of Guidelines Sentencing: An Assessment of How Well the Criminal Justice System is Achieving the Goals of Sentencing Reform, at 56 (Nov. 2004). However, over the last twenty-five years the Commission has abandoned its original goal of ensuring short sentences and – without any empirical basis – steadily increased the prison terms for economic crimes. See United States v. Gupta, 904 F. Supp. 2d 349, 350 (S.D.N.Y. 2012) (recognizing that fraud Guidelines “appear to be more the product of speculation . . . than of any rigorous methodology”). As a result, first-time, non-violent offenders convicted of economic crimes will often face Guidelines’ ranges equivalent to those of serious violent offenders. Compare USSG § 2B1.1 (2012) (total offense level of 32 considering a base offense level of 6 and loss amount of $100 million) with USSG § 2A1.3 (offense level of 29 for voluntary manslaughter); USSG § 2A2.1 (offense level of 33 for assault with intent to murder); USSG § 2A3.1 (offense level of 30 for criminal sexual abuse); USSG § 2A4.1 (offense level of 32 for kidnapping or abduction); USSG § 2A6.2 (offense level of 18 for domestic violence). See also Ellen C. Brotman, “Make Probation a Real Option at Sentencing,” Federal Sentencing Reporter, Vol. 23, No. 4, pp. 257-260 (April 1, 2011) (noting the “harshness” of the Sentencing Table as a result of, inter alia, the Commission’s failure to consider probation when setting the ranges).

Thankfully, according to its priorities adopted for the 2014–2015 amendment cycle, the Commission intends to consider changes to the Guidelines for economic crimes. And in light of this, the American Bar Association Criminal Justice Section Task Force on the Reform of Federal Sentencing for Economic Crimes – a group composed of judges, practitioners, professors, and observers from the DOJ and Federal Defenders – recently released for the Commission’s consideration a final report containing what is intended to be “a free-standing substitution in the Guidelines Manual for the existing Guideline Section 2B1.1.”

In short, the report proposes a base offense level between six (6) and eight (8) which would be altered by three (3) specific offense characteristics: loss, culpability and victim impact. As to those specific offense characteristics, the report suggests:

• A loss table that only includes six (6) levels of loss, which would increase the base offense level by a minimum of four (4) levels (for offenses where the loss exceeds $20,000) and a maximum of fourteen (14) levels (for offenses where the loss exceeds $50,000,000);
• A multi-tiered “culpability” table, where three (3) to ten (10) levels can be subtracted or added depending on the defendant’s level of culpability, as determined by an array of factors, including: the defendant’s motive, the defendant’s personal gain, the degree to which the offense and the defendant’s contribution was sophisticated or organized, the duration of the offense, extenuating circumstances, whether the defendant initiated the offense or merely joined in conduct initiated by others, and whether the defendant took steps to mitigate the harm from the offense; and
• The inclusion of a “victim impact” table, which would allow for the addition of zero (0), two (2), four (4), or six (6) levels where the impact upon the victim is categorized as minimal, low, moderate, or high, respectively.

The report also contains a unique proposal to cap the offense level at ten (10) for non-serious offenses by first-time offenders. According to the commentary, in determining whether the offense is non-serious the district court should consider (1) the offense as a whole, and (2) the defendant’s individual contribution to the offense.

In its notes, the Task Force indicates that the specified offense levels are “tentative,” and were only included in light of current statutory requirements. Indeed, the Task Force recommends the Commission place less emphasis on “arithmetic calculations” – as considerations such as culpability and victim impact are not easily quantifiable – and instead provide the judiciary with greater sentencing authority.

It will be interesting to see the Commission’s response to the Task Force’s proposal. In the meantime, though, practitioners should consider calculating their clients’ Guidelines ranges using the proposed model and advocate for that calculation in their clients’ sentencing memos. This will invariably result in a total offense level that is lower than that proposed by the government and/or set forth in pre-sentence investigation report, and it may be persuasive in securing a downward variance from the sentencing court. See, e.g., United States v. Robert Rivernider, et al., Sentencing Transcript at 208-212 (D. Conn. Dec. 18, 2013), available at http://www.nacdl.org/criminaldefense.aspx?id=34256 (where government sought 324-405 months incarceration and the PSR recommended 262-327 months, the Court sentenced the defendant at 144 months using the guidance of the Task Force’s draft proposal).

“World Tour” FCPA Compliance Lesson: Review Employee’s Expense Reports

On Monday, the SEC sanctioned two former defense contractors, Stephen Timms and Yasser Ramahi, for violating the Foreign Corrupt Practices Act. Timms and Ramahi worked in sales for FLIR Systems Inc., a company headquartered in Oregon that produces thermal imaging, night vision, and infrared cameras and sensor systems. The heart of the prohibited conduct is that Timms and Ramahi took Saudi government officials on a “World Tour” in order to secure business for the company. Timms and Ramahi agreed to settle the SEC’s charges and pay financial penalties.

According to the SEC press release:

            Timms and Ramahi traveled to Saudi Arabia in March 2009 and provided five      officials with expensive luxury watches during meetings to discuss several business opportunities. Timms and Ramahi believed these officials were important to sales of both the binoculars and the security cameras. A few months later, they arranged for key officials, including two who received watches, to embark on what Timms referred to as a “world tour” of personal travel before and after they visited FLIR’s Boston facilities for a factory equipment inspection that was a key condition to fulfillment of the contract. The officials traveled for 20 nights with stops in Casablanca, Paris, Dubai, Beirut, and New York City. There was no business purpose for the stops outside of Boston, and the airfare and hotel accommodations were paid for by FLIR. Prior to providing the gifts and travel to the Saudi Arabian officials, Ramahi and Timms each had taken FCPA training at the company that specifically identified luxury watches and side trips as prohibited gifts.

      In addition to this, Timms and Ramahi then falsified records to try and hide their misconduct. In fact FLIR’s own finance department “flagged the expense reimbursement request for the watches during an unrelated review of expenses in the Dubai office and questioned the $7,000 cost, Timms and Ramahi obtained a second, fabricated invoice showing a cost of 7,000 Saudi Riyal (approximately $1,900 in U.S. dollars) instead of the true cost of $7,000 in U.S. dollars.” Then, the men also directed “FLIR’s local third-party agent to provide false information to the company to back up their story that the original submission was merely a mistake.” The SEC’s investigation into this is “ongoing” but so far, FLIR has not been subject to any SEC action. Instead, two former employees of the company consented to the entry of the order by the SEC.

The SEC’s enforcement action demonstrates the value of a rigorous training and compliance program, as well as employing responsible and astute people within your company’s finance department. An effective compliance program not only educates employees on company policies and legal obligations, but also enables employers to monitor and detect policy or legal violations. Most bad acts within the realm of the white collar world leave a trail of discoverable evidence behind them. There is often some sort of cover-up after the fact that the government can trace, and this can lead to multiple indictments. Companies who routinely review records, and hire outside help if necessary when issues are discovered can avoid legal ramifications.

 

What Not to Do Before a Federal Sentencing: Lesson Learned from the Giudices

Teresa and Joe Giudice – the reality show husband and wife duo from the show Real Housewives of New Jersey – were sentenced to jail last week after pleading guilty to federal charges for bank and wire fraud. Perhaps lost amid the media frenzy that accompanied their sentencing hearings is a practical lesson for defendants preparing for sentencing: provide full and accurate financial disclosures prior to sentencing.

Judge Esther Salas sentenced Teresa to 15 months in prison, with her sentence to begin in January 2015, and Joe Giudice was sentenced to 41 months in prison to be served consecutive to Teresa’s commitment. Judge Salas staggered their terms so that one parent can be home with their four children, and Joe’s term will start when Teresa’s ends.

During sentencing, Judge Salas revealed that she almost applied the downward departure requested by Teresa’s attorney, which would have allowed Teresa to receive probation or house arrest. So what went wrong for Teresa? Judge Salas told Teresa:

For a moment, I thought about probation until I read the government’s report. What you did in the financial disclosure really sticks in my craw. It’s what the court has a problem with. It shows blatant disrespect for the court. I’ve seen a lot but I’ve never seen the confusion and work that went into these financial documents…I need a full picture of who you are, I need a full disclosure of your financial assets. It’s not because I want to be nosy. Because of that, I don’t think you respect the laws of this country. You are not as bad as your husband, you do not have the criminal record that he has had, but you are complicit in it. Getting this financial information that I need to judge this case was like pulling teeth, it was the most difficult in all my years as a judge and as a lawyer.

Enter table flip.

If Teresa had just taken the time to do one thing properly, she wouldn’t be facing over a year in jail away from her children.   Nothing she did prior to pleading to guilty landed in her jail; it was just her simple failure to fill out her financial disclosure form accurately. What should we learn from this?

The SAC Saga Continues: Steinberg Sentenced to 3 1/2 Years in Prison

This afternoon Michael Steinberg, a former SAC portfolio manager who was convicted of insider trading last year, was sentenced by U.S. District Court Judge Richard J. Sullivan to 42 months in prison. Judge Sullivan also “ordered Steinberg to pay a $2 million fine and forfeit the more than $365,000 in compensation he gained from the illegal trading. But [he did] allow[] Steinberg to remain free on bail pending appeal.” Kevin McCoy, Ex-SAC Capital Trader Gets Prison Sentence, USA Today, at http://www.usatoday.com/story/money/business/2014/05/16/michael-steinberg-sentencing/9091093/.

The government had argued that a sentence within the advisory Guidelines range of 63 to 78 months was “sufficient, but not greater than necessary, to comply with the purposes” of sentencing. 18 U.S.C. § 3553(a).  As recently reported by the New York Times, this requested sentence was “greater than the prison sentences meted out to 50 other former traders and analysts who have either pleaded guilty or were convicted at trial in the federal government’s … six-year crackdown on insider trading in the hedge fund industry.” But the government argued that “hedge fund managers, like Steinberg, who sought to insulate themselves from liability by using their analysts to obtain the illegal information, profited the most from the criminal scheme[,] … earn[ing] millions of dollars for their hedge funds and personally profited by receiving enormous bonuses as a result.” United States v. Steinberg, S4 12-CR-121 (RJS), Doc. 383, Gov’t Sentencing Memo. at 32 (May 9, 2014). Such behavior, argued the government, warranted a long prison term.

Steinberg’s counsel had argued in response that a sentence of no more than 24 months in prison would sufficiently achieve the purposes of sentencing. Steinberg’s dedication and support to his family, devotion to charity, altruism and generosity, limited role in the conspiracy, and lack of knowledge (he was at least four steps removed from the tipper) warranted this substantially reduced, below-Guidelines sentence. See United States v. Steinberg, S4 12-CR-121 (RJS), Doc. No. 380, Sentencing Memo. on behalf of Michael Steinberg (May 2, 2014); Doc. 385, Letter from Barry H. Berke to the Honorable Richard J. Sullivan, at 1 (May 14, 2014).

According to reports, Judge Sullivan agreed with some of Steinberg’s arguments. His decision to vary downwards by 21 months was motivated by the fact that Steinberg’s crimes constituted a marked deviation in what has otherwise been a “very good” life and by “mov[ing] … letters from family members.”

While Steinberg received a significant variance from “a judge who has imposed some of the longest sentences on insider traders,” his 3 ½ year sentence is representative of the marked increase in insider trading sentences as of late. According to an analysis by the Wall Street Journal, defendants convicted of insider trading received a median sentence of 2 ½ years in the two years preceding the October 2011 sentencing of Raj Rajaratnam (who is currently serving an 11 year jail sentence), compared to a median sentence of 1 ½ years over the preceding decade and just 11 ½ months from 1993 to 1999. This increase in the length of sentences comes in large part from the emphasis the Guidelines place on the amount of gains and losses – a fact that has been criticized by numerous judges, including Judge Sullivan’s colleague Judge Jed S. Rakoff.

Despite today’s result, Steinberg may still hold out hope for a successful appeal. It is anticipated that Steinberg’s counsel will raise a legal challenge similar to the one raised last month by Todd Newman and Anthony Chiasson before the Second Circuit – namely that, as a tippee, Steinberg needed to know that the tipper provided inside information for a personal benefit. As reported by White Collar Alert, the appellate panel appeared to push back strongly against the government’s contention that establishing that the information was provided in violation of a duty of confidentiality is sufficient.  Stay tuned for further updates from White Collar Alert.

Bharara’s Fire Dies Out: Cohen Remains Uncharged And Turns His Losses Into Gains

As the chapter closes on the decade-long insider trading investigation of SAC Capital Advisors, our question has finally been answered—at least for now: billionaire hedge fund guru Steven A. Cohen has dodged criminal charges for his role in managing the company now convicted of systemic insider trading. It seems, after all, that Manhattan U.S. Attorney Preet Bharara did not have enough fuel in his fire to engulf Cohen.

What is undisputedly the largest insider trading prosecution in American history, the United States of America v. S.A.C. Capital Advisors, L.P., et al. drew to a close April 10, 2014, as U.S. District Judge Laura Taylor Swain accepted SAC’s guilty plea. SAC will pay an unprecedented $1.8 billion in penalties, serve a probation sentence of five years, wind down its business affairs as an investment advisor for third parties, and retain a compliance consultant to evaluate and report on insider trading compliance procedures.

With a sentence like that, one would think that SAC’s days are numbered. But Cohen has been quick to reinvent himself and christen Point72 Asset Management as the legal successor to SAC, a family office that will assume the reins of Cohen’s investing, trading, and portfolio management. Perhaps in an attempt to get out from under the SEC’s watchful eye, Point72 was specifically founded as a “family office,” a wealth management office that will not be subject to SEC regulation as other investment advisors, such as SAC, are. 17 C.F.R. § 275.202(a)(11)(G)–1. Just how wide a net can a family office cast when soliciting clients, you ask? Point72 will be permitted to invest and manage the money of Cohen’s family members, key employees, certain non-profit organizations, estates, and trusts, and any company owned and operated for the benefit of family clients. Id. And what’s more, key employees include Point72’s executive officers, directors, trustees, and general partners, not to mention employees who have participated in Point72’s investment activities for the past twelve months. Id. Does Point72 sound like a revamped version of SAC? Perhaps, but then again, Cohen’s uncanny ability to turn such massive losses somehow into entrepreneurial opportunities are conceivably the reason behind his seemingly endless success.

To those critics who think that SAC walked away essentially unscathed, the terms of the plea were unequivocally supported by SAC and the Government alike. As the Government wrote in its sentencing memorandum of April 3, 2014:

The $900 million fine imposed on the SAC Entity Defendants pursuant to the Plea Agreement is, to the Government’s knowledge, the largest criminal fine ever imposed in an insider trading case. When combined with the $900 million judgment in the Forfeiture Action, it represents an amount that is several times larger than the illicit gains and avoided losses resulting from the insider trading alleged in the Indictment. This financial penalty, together with the non-financial penalties and considerations set forth in the Plea Agreement, is an appropriate punishment for the criminal conduct at SAC Capital – where eight employees to date have been convicted of insider trading – and provides a strong message of deterrence to other institutions…

Gov’t Sentencing Mem. at 2, United States of America v. S.A.C. Capital Advisors, L.P., et al. (2^nd Cir. 2014) (13-CR-00541-LTS).

But alas, prosecutors have left themselves wiggle room. The executed plea agreement unambiguously reserves the right to investigate and pursue charges against other individuals—i.e. Cohen. Id. at 7. So perhaps I spoke too soon, perhaps the question still remains: Will Bharara ever have enough fuel to fire the indictment of Cohen?

Bharara’s Infernal Region Expanded By One: Martoma Convicted

For those of us following the prosecutions of SAC Capital Advisors LP, today marked another milestone in U.S. Attorney Preet Bharara’s quest against insider-trading.  Mathew Martoma, ex-SAC fund manager and pharmaceutical-industry analyst, was found guilty this afternoon of one count of conspiracy and two counts of securities fraud.  He became the seventy-ninth consecutive individual to have pled guilty or to have been convicted by the U.S. Attorney’s Office in the federal government’s recent crackdown on insider-trading.

After deliberating for two days, federal jurors concluded that Martoma received insider information regarding Alzheimer’s disease drug trials and manipulated the information to trade large blocks of Elan Corp. and Wyeth shares.  Ultimately, Martoma made profits for SAC amounting to $276 million.

And yet, despite seven consecutive convictions of SAC fund managers, the million dollar question remains: will Martoma’s conviction add enough fuel to Bharara’s fire to motivate the U.S. Attorney’s Office to pursue a prosecution against SAC kingpin Steven Cohen?