As former hedge fund titan Raj Rajaratnam waits to hear his fate for insider trading — he could get two decades in prison when he is sentenced on July 29 — there is plenty of debate over whether his downfall will have a deterrent effect.
“There are a lot of nervous people out in the Hamptons,”one criminal lawyer told journalist George Packer, who wrote an exhaustive reprise of the case for The New Yorker.
Stanley Sporkin, a retired judge and a tough enforcement chief for the Securities and Exchange Commission in the 1970’s, put it a bit more crudely: “People on Wall Street are going to be coming to work with brown pants on. It’s going to change the way they work for a long time.”
Perhaps the behavior of hedge fund maestros will be affected, at least for a while. But what about the broader culture of Wall Street? “It is a remarkable failure of our system that we’ve not addressed the fundamental problems that brought us into the financial crisis,” Neil Barofsky, the former inspector general of the Troubled Asset Relief Program, told Packer. “And it is cynical or naive to imagine it won’t happen again.”
Meanwhile, there has been ample second-guessing over how the Department of Justice and other regulatory agencies have handled Wall Street cases, as Packer’s article makes clear.
“It is just very hard for me to understand why there haven’t been more indictments,” former Sen. Ted Kaufman (D-Del.) told Packer. “I am incredibly disappointed.”
In 2009, when he was on the Senate Judiciary Committee, Kaufman held a hearing on financial-fraud prosecutions just after a Brooklyn jury acquitted two Bear Stearns hedge fund managers of fraud and conspiracy — in the only criminal case linked to the big role players in the financial crisis, Packer notes.
As for the venues of the various financial fraud cases, Packer’s article notes that, under President George W. Bush’s Justice Department, major new financial fraud investigations were distributed to U.S. Attorneys’ offices around the country — Los Angeles, Seattle, Washington, D.C., New Jersey and Brooklyn, more formally known as the Eastern District of New York.
That sharing of cases was a mistake, Barofsky said. The far more logical venue would have been the Southern District of New York — Manhattan. That is, after all, where federal prosecutors are supposed to have the most expertise on Wall Street-related matters. (Barofsky himself worked in the Southern District, so he may not be entirely objective.)
The U.S. Attorney for the Southern District, Preet Bharara, was deeply invested in the Rajaratnam trial. Bharara has made financial crime a priority, and the case of Rajaratnam, a co-founder of the Galleon Group LLC hedge fund, was billed as the biggest insider-trading case in years.
Rajaratnam was nailed in large part because a lot of his erstwhile friends and trading partners were themselves caught in wrongdoing and induced to help prosecutors, in return for leniency when it was their own turn to stand before the sentencing judge. (See Main Justice’s report.)
A key witness, Anil Kumar, was put on regular retainer by Rajaratnam, who wanted inside information. Kumar, then a director of the McKinsey & Co. business consulting firm, was in a good position to provide it.
“And, once he was paying you, you started giving it to him?” chief trial prosecutor Jonathan Streeter asked the witness.
“Yes, that is correct, sir,” Kumar replied. “To my eternal regret.” (Kumar pleaded guilty to insider trading.)
Another trial figure who should feel some remorse, at least in the government’s view, was Rajat Gupta, another prominent figure at McKinsey. He was accused of insider trading in a civil action by the Securities and Exchange Commission.
The failure to lodge criminal charges against Gupta “is a much discussed mystery, but the answer might be simple,” Packer writes. “The prosecutors, consumed with other cases and with preparation for the Rajaratnam trial, might not have realized what they had on Gupta until shortly before the proceedings began.” Gupta has consistently denied any wrongdoing.
As for Barofsky’s remarks, one doesn’t have to be cynical to imagine future Wall Street scandals, Bharara’s determination notwithstanding. A long memory will suffice. Ivan Boesky, Michael Milken, Dennis Levine — names from Wall Street scandals of decades ago. They got caught.