Appeal in Insider Trading Case Centers on Wiretap

October 24, 2012

The New York Times on October 23, 2012 released the following:

“BY PETER LATTMAN

In March 2008, the Justice Department made an extraordinary request: It asked a judge for permission to record secretly the phone conversations of Raj Rajaratnam, a billionaire hedge fund manager.

The request, which was granted, was the first time the government had asked for a wiretap to investigate insider trading. Federal agents eavesdropped on Mr. Rajaratnam for nine months, leading to his indictment — along with charges against 22 others — and the biggest insider trading case in a generation.

On Thursday, lawyers for Mr. Rajaratnam, who is serving an 11-year prison term after being found guilty at trial, will ask a federal appeals court to reverse his conviction. They contend that the government improperly obtained a wiretap in violation of Mr. Rajaratnam’s constitutional privacy rights and federal laws governing electronic surveillance.

Such a ruling is considered a long shot, but a reversal would have broad implications. Not only would it upend Mr. Rajaratnam’s conviction but also affect the prosecution of Rajat K. Gupta, the former Goldman Sachs director who was convicted of leaking boardroom secrets to Mr. Rajaratnam. Mr. Gupta is scheduled to be sentenced on Wednesday.

A decision curbing the use of wiretaps would also affect the government’s ability to police Wall Street trading floors, as insider trading cases and other securities fraud crimes are notoriously difficult to build without direct evidence like incriminating telephone conversations.

“Wiretaps traditionally have been used in narcotics and organized crime cases,” said Harlan J. Protass, a criminal defense lawyer in New York who is not involved in the Rajaratnam case. “Their use today in insider trading investigations indicates that the government thinks there may be no bounds to the types of white-collar cases in which they can be used.”

More broadly, Mr. Rajaratnam’s appeal is being closely watched for its effect on the privacy protections of defendants regarding wiretap use. Three parties have filed “friend-of-the-court” briefs siding with Mr. Rajaratnam. Eight former federal judges warned that allowing the court’s ruling to stand “would pose a grave threat to the integrity of the warrant process.” A group of defense lawyers said that upholding the use of wiretaps in this case would “eviscerate the integrity of the criminal justice system.”

To safeguard privacy protections, federal law permits the government’s use of wiretaps only under narrowly prescribed conditions. Among the conditions are that a judge, before authorizing a wiretap, must find that conventional investigative techniques have been tried and failed. Mr. Rajaratnam’s lawyers said the government misled the judge who authorized the wiretap, Gerard E. Lynch, in this regard.

They say that the government omitted that the Securities and Exchange Commission had already been building its case against Mr. Rajaratnam for more than a year using typical investigative means like interviewing witnesses and reviewing trading records. Had the judge known about the S.E.C.’s investigation, he would not have allowed the government to use a wiretap, Mr. Rajaratnam’s lawyers argue.

Before Mr. Rajaratnam’s trial, the presiding judge, Richard J. Holwell, held a four-day hearing on the legality of the wiretaps. Judge Holwell criticized the government, calling its decision to leave out information about its more conventional investigation a “glaring omission” that demonstrated “a reckless disregard for the truth.”

Nevertheless, Judge Holwell refused to suppress the wiretaps, in part, he said, because they were necessary to uncover Mr. Rajartanam’s insider trading scheme. “It appears that the S.E.C., and by inference the criminal authorities, had hit a wall of sorts,” Judge Holwell wrote.

On appeal, Mr. Rajaratnam lawyers argued that the government’s lack of candor should not be tolerated. They described the government’s wiretap application as full of “misleading assertions” and “outright falsity” that made it impossible for Judge Lynch to do his job.

“The government’s self-chosen reckless disregard of the truth and of the critical role of independent judicial review breached that trust and desolated the warrant’s basis,” wrote Mr. Rajaratnam’s lawyers at the law firm Akin Gump Strauss Hauer & Feld.

In their brief to the appeals court, federal prosecutors dispute that they acted with a “reckless disregard for the truth.” Instead, they argue that omitting details of the S.E.C.’s investigation was at most “an innocent mistake rising to the level of negligence.” In addition, they said that the S.E.C.’s inquiry failed to yield sufficient evidence for a criminal case, necessitating the use of a wiretap.

Once Judge Lynch signed off on the wiretap application, the government’s investigation into Mr. Rajaratnam accelerated. The wiretapping of Mr. Rajaratnam’s phone, along with the subsequent recording of his supposed accomplices, yielded about 2,400 conversations. In many of them, Mr. Rajaratnam could be heard exchanging confidential information about technology stocks like Google and Advanced Micro Devices.

Three years ago this month, federal authorities arrested Mr. Rajaratnam and charged him with orchestrating a seven-year insider trading conspiracy. The sprawling case has produced 23 arrests of traders and tipsters, many of them caught swapping secrets with Mr. Rajaratnam about publicly traded companies.

Among the thousands of calls were four that implicated Mr. Gupta, a former head of the consulting firm McKinsey & Company who served as a director at Goldman Sachs and Procter & Gamble. On one call in July 2008, the only wiretapped conversation between the two men, Mr. Gupta freely shared Goldman’s confidential board discussions with Mr. Rajaratnam. On another, Mr. Rajaratnam told a colleague at his hedge fund, the Galleon Group, “I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share.”

Those conversations set off an investigation of Mr. Gupta. He was arrested in October 2011 and charged with leaking boardroom secrets about Goldman and P.& G. to Mr. Rajaratnam. A jury convicted him in May after a monthlong trial.

On Wednesday at Federal District Court in Manhattan, Judge Jed S. Rakoff will sentence Mr. Gupta. Federal prosecutors are seeking a prison term of up to 10 years. Mr. Gupta’s lawyers have asked Judge Rakoff for a nonprison sentence of probation and community service. One proposal by the defense would have Mr. Gupta living in Rwanda and working on global health issues.

Regardless of his sentence, Mr. Gupta plans to appeal. And because prosecutors used wiretap evidence in his trial, Mr. Gupta would benefit from a reversal of Mr. Rajaratnam’s conviction.

Yet a reversal would not affect the convictions of the defendants in the conspiracy who have pleaded guilty. As part of their pleas, those defendants waived their rights to an appeal.”

————————————————————–

Douglas McNabb – McNabb Associates, P.C.’s
Federal Criminal Defense Attorneys Videos:

Federal Crimes – Be Careful

Federal Crimes – Be Proactive

Federal Crimes – Federal Indictment

Federal Crimes – Appeal

————————————————————–

To find additional federal criminal news, please read Federal Criminal Defense Daily.

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition Defense, OFAC SDN Sanctions Removal, International Criminal Court Defense, and US Seizure of Non-Resident, Foreign-Owned Assets. Because we have experience dealing with INTERPOL, our firm understands the inter-relationship that INTERPOL’s “Red Notice” brings to this equation.

The author of this blog is Douglas C. McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.


Bribes Without Jail Time

April 30, 2012

The New York Times on April 27, 2012 released the following:

“By JAMES B. STEWART

As reported in a front-page article in The New York Times this week, the Wal-Mart Mexican bribery scheme has all the makings of a gripping criminal prosecution: millions of dollars in illegal payoffs to Mexican government officials and evidence of a cover-up scheme that went all the way to Wal-Mart headquarters in Bentonville, Ark.

And the Foreign Corrupt Practices Act, which outlaws the bribery of foreign officials by American executives, carries stiff penalties for those convicted: fines of up to $5 million and up to 20 years in prison.

So who’s likely to go to jail?

No one, if past precedent is any guide.

Exhibit A for any lawyer representing potential Wal-Mart defendants would probably be last year’s bribery case against the huge poultry, pork and beef producer Tyson Foods. Like Wal-Mart, Tyson employees bribed Mexican officials. When Tyson officials learned about the scheme, they covered it up. Even worse, they tried to keep the bribes going by changing the nature of the illegal payments. The scheme ultimately reached into Tyson’s executive suite in Springdale, Ark., with the company’s president of international operations and its chief administrative officer among those involved.

Last year, the Justice Department charged Tyson with conspiracy and with violating the Foreign Corrupt Practices Act. Tyson didn’t contest the facts, agreed to resolve the charges with a deferred prosecution and paid a $4 million criminal penalty. The company paid an additional $1.2 million and settled related regulatory complaints that it had maintained false books and records and lacked the controls to prevent payments to phantom employees and government officials.

It’s axiomatic that people, not corporations, commit crimes. So what happened to the Tyson executives involved? Not only did the Justice Department and the Securities and Exchange Commission take no action against them, but the executives involved weren’t even named.

As I reported in a column last year, the highest-ranking Tyson executive involved was Greg Lee, then its chief administrative officer. Tyson announced in April 2007, the same month it disclosed its conduct to the government, that Mr. Lee would retire early. There was no mention of any bribery investigation. John Tyson, the company’s chairman, praised his “dedicated service to the company over the last three decades,” and the company paid Mr. Lee nearly $1 million and awarded him a 10-year consulting contract worth an additional $3.6 million. Mr. Lee was entitled to be reimbursed for his country club dues, to the use of a car and to “personal use of the company-owned aircraft for up to 100 hours per year,” according to his employment agreement. (Mr. Lee didn’t respond to my messages seeking comment.)

Wal-Mart’s Mexican bribery scandal, and the question of what to do about it, reached company headquarters in September 2005, according to the account by David Barstow of The Times. This was little more than a year after Tyson executives covered up their scandal. Given the subsequent outcome of the Tyson case, is it any wonder that Wal-Mart executives’ first reaction would have been to sweep the matter under the rug? Only after Mr. Barstow started asking questions did the company turn itself in to the Justice Department, no doubt hoping for something like the resolution its Arkansas neighbor received.

Neither the Justice Department nor the S.E.C. would comment on the Tyson case, now closed, or the continuing Wal-Mart investigation.

Both agencies have stepped up their investigations and prosecutions of Foreign Corrupt Practices Act violations in recent years, and they now have units dedicated to foreign bribery cases. Last year, the S.E.C. brought cases against 14 companies and 12 people. Major companies caught up in recent bribery investigations include Johnson & Johnson, Halliburton and Siemens. Just this week, the former Morgan Stanley executive Garth Peterson pleaded guilty to violating the act while based in Shanghai. Morgan Stanley wasn’t charged, and it appears to have been a model corporate citizen. It fired Mr. Peterson and didn’t mince words. It turned over evidence to the government and disclosed the inquiry in an S.E.C. filing.

Despite this laudable effort, an outcome like that in the Tyson case — in which a company admits the facts and pays a fine but no individuals are charged — hardly seems isolated. According to research by Qi Chen, working with Prof. Andrew Spalding at the Chicago-Kent College of Law at the Illinois Institute of Technology, 37 of the 57 companies involved in bribery enforcement actions from 2005 to 2010 settled bribery accusations and had no related individuals charged.

One of the most vocal critics of the failure to charge individuals has been the former Republican-turned-Democratic Senator Arlen Specter, who held hearings on the issue in 2010 while chairman of the Senate Judiciary Committee. “Criminal fines are added to the costs of doing business,” Mr. Specter said then. “Going to jail is what works to deter crime.”

This week he told me: “I’ve been speaking out on this issue everywhere I can. The Justice Department takes the view that deferred prosecutions are sufficient to deter bribery. But it obviously hasn’t worked. Maybe the Wal-Mart case will finally impel them to take a different view.”

That is not to say that no one has gone to jail for violating the Foreign Corrupt Practices Act. Albert J. Stanley, former chairman and chief executive of KBR, the global contracting concern that was once a subsidiary of Halliburton, was sentenced in February to 30 months in prison for a scheme to bribe Nigerian authorities in return for contracts to build liquefied natural gas facilities. Frederic Bourke, co-founder of the handbag maker Dooney & Bourke, was sentenced to one year and a day for his involvement in a scheme to bribe officials in Azerbaijan in a failed effort to take over the state-owned oil company. Last year, eight former executives of the German technology giant Siemens were charged with bribing Argentine officials in what the Justice Department characterized as “a stunning level of deception and corruption.” But the defendants live abroad and may never be successfully prosecuted in the United States.

I couldn’t find a case of an executive at a major American-based, publicly traded company who was successfully prosecuted and sent to jail. A majority of individual prosecutions appear to involve people of relatively limited means who are in smaller or privately held companies or who are officials in foreign companies based outside the United States, where there is little likelihood of a conviction. A typical case seems more like that of Gerald and Patricia Green, two Hollywood producers who were convicted of bribing the head of the Bangkok film festival. The couple was sentenced to six months in prison followed by six months of home confinement in 2010. At the time, Mr. Green was 83 years old and suffered from emphysema.

“It does appear that executives from U.S. public companies are not being pursued with the same vigor as individuals at private companies or who work on their own,” said Richard L. Cassin, founder of the firm CassinLaw and author of “Bribery Abroad” and “Bribery Everywhere.” “There are still a lot of enforcement actions against corporations where there are no indictments against individuals. The percentage of criminal cases against individuals is still very tiny.”

He suggests this may be partly because corporate executives, especially those with prominent lawyers whose fees are paid by their employers, are less likely to settle. And the Justice Department has suffered some embarrassing setbacks in a few recent litigated cases against individual defendants.

Asked for comment, the department provided this statement: “Prosecuting individuals who violate the law is an important part of our F.C.P.A. enforcement efforts. Since 2009, the Justice Department has secured convictions against 36 individuals for F.C.P.A.-related offenses. In all cases, we thoroughly review the facts and the law to determine whether criminal charges against individuals can be brought.”

An S.E.C. spokeswoman said: “We’re committed to holding individuals accountable. Where we have the evidence to bring cases against individuals, we do so, and we view that as a high priority.”

According to both the Justice Department and the commission, an important aspect of assessing a company’s cooperation is how it disciplines any executives found to be involved in a bribery scheme. Wal-Mart issued a statement this week saying: “We will not tolerate noncompliance with F.C.P.A. anywhere or at any level of the company. We are confident we are conducting a comprehensive investigation, and if violations of our policies occurred, we will take appropriate action.”

I asked Wal-Mart who, if anyone, involved in the bribery allegations had been disciplined, but I didn’t get a response. Eduardo Castro-Wright, who was described in The Times’s article as the driving force in the bribery conspiracy, is the former head of the company’s Mexican operations and remains at Wal-Mart, where he became vice chairman in 2008. Wal-Mart announced last September that Mr. Castro-Wright would retire on July 1, and he has since emphasized that his decision to retire had nothing to do with any bribery allegations.

In a send-off that echoes Tyson’s praise for Mr. Lee, Wal-Mart’s chief executive, Mike Duke, said: “Eduardo has made many contributions at Wal-Mart, beginning in Mexico and continuing until today. He has been a strong advocate for our customers and in every assignment has brought passion and commitment to the job.”

Mr. Castro-Wright isn’t a member of Wal-Mart’s board, but this week he resigned from the board of the insurer MetLife. “I now must focus my energy in spending personal time with my family and in protecting my good name,” he said, and confidently predicted that “these outside distractions will be resolved favorably within the next several months.”

But Wal-Mart may not turn out to be another Tyson. Professor Spalding told me “a lot has happened” since 2010, which is when he compiled the statistics on individual prosecutions. “The Department of Justice is making a strong push to hold individuals liable,” he said.

“Despite some recent embarrassing losses, the department must be looking for some high-profile prosecutions. Wal-Mart is about as high profile as you can get. This case could turn out to be a poster child for individual liability.””

————————————————————–

Douglas McNabb – McNabb Associates, P.C.’s
Federal Criminal Defense Attorneys Videos:

Federal Crimes – Be Careful

Federal Crimes – Be Proactive

Federal Crimes – Federal Indictment

————————————————————–

To find additional federal criminal news, please read Federal Criminal Defense Daily.

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition Defense, OFAC SDN Sanctions Removal, International Criminal Court Defense, and US Seizure of Non-Resident, Foreign-Owned Assets. Because we have experience dealing with INTERPOL, our firm understands the inter-relationship that INTERPOL’s “Red Notice” brings to this equation.

The author of this blog is Douglas C. McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.


Weighing the Legal Ramifications of the Wal-Mart Bribery Case

April 24, 2012

The New York Times on April 23, 2012 released the following:

“BY PETER J. HENNING

The United States government puts a premium on corporate cooperation in foreign bribery cases, relying on companies to conduct thorough internal investigations and voluntarily disclose any wrongdoing.

Indications that Wal-Mart Stores may have taken steps to keep an internal investigation from digging deeper into $24 million in questionable payments — and later promoting an executive who may have been implicated in them — may affect how the government decides to proceed against the giant retailer.

Wal-Mart first disclosed in December that it had started “a voluntary internal review of its policies, procedures and internal controls pertaining to its global anticorruption compliance program.” That review was the result of reporting by The New York Times about bribery by Wal-Mart de México to secure permits and approvals to build new stores.

The company’s disclosures did not give any information about where the foreign bribery issues had arisen, only that the focus was on whether “permitting, licensing and inspections were in compliance with the U.S. Foreign Corrupt Practices Act.” Wal-Mart said it had informed the Justice Department and the Securities and Exchange Commission about the internal investigation, and the company issued a statement in response to the Times article that its outside advisers “have and will continue to meet with the D.O.J. and S.E.C. to report on the progress of the investigation.”

Companies caught up in investigations of foreign bribery often seek to exert a measure of control over the flow of information by meeting early and often with government investigators in an effort to establish credibility regarding the scope and integrity of the investigation, usually sharing the results as quickly as possible. If corporate counsel can demonstrate its reliability, then the Justice Department and the S.E.C. are more likely to accept the findings of the internal investigation without conducting an independent review.

Cooperation is also important because it is a significant factor for prosecutors in deciding how to resolve a case. The Justice Department has allowed companies to pay reduced fines and avoid a guilty plea to criminal charges by entering into deferred or nonprosecution agreements because they came forward voluntarily and readily provided information.

While Wal-Mart may be angling for the same type of resolution, it is questionable whether being prodded by The Times’s reporting to start an internal investigation shows that it took affirmative steps to address a problem. The company had dropped its earlier investigation, and likely would have let that sleeping dog lie if not for potential media scrutiny.

The Times article also raises two significant red flags for investigators that may cause them to take a more aggressive approach in the case. First, the Mexican bribery involved senior management at the subsidiary, not just low-level employees operating on their own. One factor cited in the Justice Department guidelines for deciding whether to charge a business organization is the “pervasiveness of wrongdoing within the corporation,” and the most important consideration “is the role and conduct of management.”

Second, Wal-Mart’s own investigators raised questions about $16 million in “contributions” and “donations” to local governments, but there was no further review of those payments. Simply ignoring these types of transfers is sure to raise questions for the government about whether the company can claim it had an effective compliance program back in 2005 when these issue first came to light, another important consideration in determining whether to file charges.

Wal-Mart also pointed out twice in its statement that the payments in Mexico took place more than six years ago. That may be an effort to explain why it may be unable to conduct a complete investigation. Whether the excuse will fly with the Justice Department and the S.E.C. remains to be seen.

The time lag may present a problem if the Justice Department wants to prosecute any individuals for bribery of Mexican officials. The statute of limitations for a violation of the Foreign Corrupt Practices Act is five years. The limitations period can be extended if the government was seeking evidence from a foreign country, but that does not appear to be the case because Wal-Mart only disclosed the issue in late 2011. So charges related to conduct before 2007 may be lost due to the passage of time.

One way the government can try to avoid the statute of limitations is to charge a conspiracy, which only requires that one act in furtherance of the criminal agreement take place within the last five years. If active steps by Wal-Mart executives to cover up payments to foreign officials occurred in 2007 or later, then prosecutors might be able to pursue that charge.

The statute of limitations will not work as much in Wal-Mart’s favor, however, because the company is required to annually file financial statements covering the previous five years. It is likely that questionable payments were not properly reflected on the company’s books and records. So even if no charges can be brought for any foreign bribery, at a minimum it could be charged with violating the accounting provisions of federal securities law for not properly disclosing the payments made by Wal-Mart de México.

Another potential avenue that prosecutors are likely to investigate is obstruction of justice under 18 U.S.C. § 1519, which was added by the Sarbanes-Oxley Act. If there is evidence that anyone at the company covered up or destroyed records “with the intent to impede, obstruct, or influence” a future investigation, that could be grounds for a criminal charge.

One factor working against Wal-Mart is that the Justice Department may be looking for a prominent case to demonstrate the need for vigorous enforcement of the Foreign Corrupt Practices Act as a response to recent criticisms of the law. The Chamber of Commerce, which hired a former attorney general, Michael B. Mukasey, to lobby for changes to the statute, has argued that aggressive application of the law has caused companies to shy away from overseas investments for fear of being scrutinized.

The Times article makes it clear that Wal-Mart appeared to be more concerned with protecting its fast-growing Mexican operation than with thoroughly investigating allegations that corruption helped fuel its success. Prosecutors can make an example of Wal-Mart to show that the Justice Department will not tolerate foreign bribery, even by a leading American company. That would bolster the argument that revising the statute would send the wrong message to the rest of the world.

The payments at issue are comparatively paltry, perhaps totaling less than $50 million, although that number could increase as the internal investigation moves forward. The ultimate cost to Wal-Mart for the legal and accounting fees for the investigation, along with any monetary penalties the Justice Department and the S.E.C. may seek, will probably far exceed the bribes.”

18 U.S.C. § 1519

————————————————————–

Douglas McNabb – McNabb Associates, P.C.’s
Federal Criminal Defense Attorneys Videos:

Federal Crimes – Be Careful

Federal Crimes – Be Proactive

Federal Crimes – Federal Indictment

————————————————————–

To find additional federal criminal news, please read Federal Criminal Defense Daily.

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition and OFAC SDN Sanctions Removal.

The author of this blog is Douglas C. McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.


S.E.C. Told to Share Notes in Insider Trading Case

March 28, 2012

The New York Times on March 27, 2012 released the following:

“BY PETER LATTMAN

A federal judge has ordered Securities and Exchange Commission lawyers to turn over their notes to federal prosecutors handling the criminal case against Rajat K. Gupta, a former director of Goldman Sachs.

The ruling was part of a flurry of pretrial orders from Judge Jed S. Rakoff, who is presiding over the case.

Mr. Gupta, who is charged with leaking Goldman’s boardroom secrets to his friend, the convicted hedge fund manager Raj Rajaratnam, is scheduled to go on trial May 21.

Among the more significant orders, Judge Rakoff said federal prosecutors must review the S.E.C.’s notes about 44 interviews of witnesses during its investigation of Mr. Gupta and disclose any exculpatory evidence to the defense. Federal prosecutors in the United States attorney’s office in Manhattan, who jointly conducted the 44 interviews with the S.E.C., argued that they had no obligation to review the S.E.C.’s notes because the two investigations were separate.

Judge Rakoff disagreed with the government’s position.

“That separate government agencies having overlapping jurisdiction will cooperate in the factual investigation of the same alleged misconduct makes perfect sense; but that they can then disclaim such cooperation to avoid their respective discovery obligations makes no sense at all,” Judge Rakoff wrote.

The S.E.C. and the Justice Department have long run parallel investigations, but the line between them can often become blurred. Judge Rakoff noted that there was a constitutional duty for prosecutors to disclose any exculpatory evidence — called Brady material — to the defense, regardless of whether the notes came from the S.E.C.

“To hold that these memoranda were not created as part of a joint factual investigation would make a mockery of the ‘joint investigation’ standard as applied to the defendant’s constitutional right to receive all information the government has available to it that tends to show his innocence,” Judge Rakoff wrote.

In other rulings, Judge Rakoff ordered that Lloyd C. Blankfein, the chief executive of Goldman Sachs, must sit for an additional two hours of depositions to be taken by Mr. Gupta’s lawyers. Mr. Blankfein was deposed for seven hours last month, and is expected to be a witness at Mr. Gupta’s trial.

The dispute over Mr. Blankfein’s testimony arose when, during the February deposition, Mr. Gupta’s lawyer asked Mr. Blankfein whom he had met with to prepare for the deposition. He responded that he had met with both federal prosecutors, S.E.C. lawyers and an F.B.I. agent. When Mr. Gupta’s lawyer asked Mr. Blankfein what the government asked at these meetings, the S.E.C. objected, citing work product protections.

Judge Rakoff ruled that Mr. Blankfein must answer these questions.

“By asking Blankfein what topics he recalls were discussed, what questions he was asked and what documents he was shown, defendants seek to discover how the preparation sessions affected Blankfein’s testimony, and do not demonstrate a mere naked attempt to obtain the S.E.C.’s and the U.S.A.O.’s legal opinions and strategy,” the judge wrote.

Judge Rakoff also issued several rulings that went against Mr. Gupta. He denied his lawyers’ motion to suppress the use of wiretaps at trial and to dismiss three of the counts in the government’s complaint that were claimed to be either vague or duplicative.

On the wiretap issue, Judge Rakoff said: “The simple truth is that, in both this and numerous other cases, insider trading cannot often be detected, let alone successfully prosecuted, without the aid of wiretaps.””

————————————————————–

Douglas McNabb – McNabb Associates, P.C.’s
Federal Criminal Defense Attorneys Videos:

Federal Crimes – Be Careful

Federal Crimes – Be Proactive

Federal Crimes – Federal Indictment

————————————————————–

To find additional federal criminal news, please read Federal Crimes Watch Daily.

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition and OFAC SDN Sanctions Removal.

The author of this blog is Douglas C. McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.


U.S. Inquiry Grows Over Olympus Payout

October 28, 2011

The New York Times on October 27, 2011 released the following:

“BY BEN PROTESS AND HIROKO TABUCHI

Federal authorities are intensifying an investigation into the large fees that the Japanese company Olympus paid to an obscure American brokerage firm. The Securities and Exchange Commission and other regulators have now begun their own inquiries into the $687 million payout, according to people briefed on the inquiries.

The Federal Bureau of Investigation opened the case only two weeks ago, but the inquiry has now grown to touch nearly every corner of the federal law enforcement arsenal. Federal prosecutors in Manhattan have jumped on the case, while the S.E.C. has begun an examination of the now-defunct brokerage firm, Axes America.

An S.E.C. spokesman declined to comment.

While the focus of the investigation is not yet clear, securities lawyers speculate that investigators will potentially examine whether the steep fees were kickbacks to Olympus officials involved in the deal. So far, it is believed that federal authorities are possibly interested in whether the fees amounted to money laundering or other illicit acts. A spokesman for the F.B.I. in New York declined to comment.

The F.B.I. began its examination soon after Olympus fired its chief executive, who had confronted the company’s chairman about the suspect payouts. Japanese regulators are now looking into the matter as well.

The questions arose from Olympus’s 2008 takeover of a British medical device company, the Gyrus Group. Olympus, which runs both a medical equipment business and a less lucrative digital camera business, has described the $687 million payout as a fee to Axes America for advising on that deal.

But when Olympus announced the acquisition, it said only that Perella Weinberg, an independent investment bank, advised on the deal. The company made no mention of Axes America, according to a recent PricewaterhouseCoopers report.

By any measure, the fees were eye-popping. The funds amounted to 36 percent of the value of the Gyrus deal, the PricewaterhouseCoopers report said. Olympus later doled out the bulk of the $687 million to a Cayman Islands company linked to Axes, a firm called Axam Investments.

At a news conference in Tokyo on Thursday, the newly installed president of Olympus, Shuichi Takayama, defended the funds paid to Axes and Axam, saying that Olympus had determined that the fee “would fully pay off.” He said the advisers were hired to give wide-ranging guidance to Olympus, including identifying potential takeover targets in the medical field.

“Olympus sought acquisitions as part of a strategy to find new growth areas and reduce our dependency on endoscopes,” Mr. Takayama said. “These acquisitions were part of that effort.”

Mario Takeno, an official at Japan’s securities watchdog, the Securities and Exchange Surveillance Commission, told a parliamentary committee on Thursday that the agency would “closely watch” the findings of a third-party committee set up by Olympus to investigate the payments.

“It’s clearly worth investigating,” said J. Mark Ramseyer, a professor of Japanese legal studies at Harvard Law School, who added that the fees were “bizarrely huge.” While the PricewaterhouseCoopers report did not identify “improper conduct,” it said that “given the sums of money involved and some of the unusual decisions that have been made, it cannot be ruled out at this stage.”

Axes America itself presents a curious case.

Just weeks after Olympus closed the deal for Gyrus, the firm shuttered its doors. And after the affiliated Cayman Islands company, Axam Investments, scooped up its portion of the bounty, it too shut down.

It was a peculiar end for both firms. In its 10-year history, Axes America never drew much notice on Wall Street. The firm, run by a longtime Japanese banker, Hajime Sagawa, generated mediocre revenue and never drew the ire of regulators.

Mr. Sagawa could not be reached for comment. A relative in Boca Raton, Fla., said he had planned to return from a business trip late last week, potentially to meet with the F.B.I. But the relative said on Wednesday that Mr. Sagawa had not yet returned to Florida. He has not been accused of any wrongdoing.

Michael C. Woodford, the recently fired Olympus chief, who is British, was in New York on Wednesday meeting with F.B.I. agents and federal prosecutors. He declined to provide specifics of the meeting. As Mr. Woodford flew to New York, Olympus fell deeper into turmoil. On Wednesday, the company’s chairman, Tsuyoshi Kikukawa, resigned.

At Thursday’s news conference, the executive vice president, Hisashi Mori, did most of the talking.

Mr. Mori said he had been introduced to the advisers by a person in Japan whom he declined to name. The advisers had worked with Olympus in an informal capacity for no fee since around 2004 before being formally hired two years later ahead of the 2008 Gyrus deal, he said.

An official said there had been no discussion of Mr. Woodford’s concerns over the acquisitions before the board voted to oust him.

Tensions flared at the news conference, as reporters berated Mr. Takayama and his colleagues for long-winded responses. “What is the point of this press conference if you are not going to address the main issues?” one reporter asked.”

————————————————————–

Douglas McNabb – McNabb Associates, P.C.’s
Federal Criminal Defense Attorneys Videos:

Federal Crimes – Be Careful

Federal Crimes – Be Proactive

Federal Crimes – Federal Indictment

Federal Crimes – Detention Hearing

Federal Mail Fraud Crimes

————————————————————–

To find additional federal criminal news, please read Federal Crimes Watch Daily.

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition and OFAC SDN Sanctions Removal.

The author of this blog is Douglas McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.


U.S. Expected to Charge Executive Tied to Galleon Case

October 26, 2011
Rajat K. Gupta
Douglas Healey for The New York Times
Rajat Gupta at his home in Westport, Conn., on Wednesday morning.

The New York Times on October 25, 2011 released the following:

“BY AZAM AHMED, PETER LATTMAN AND BEN PROTESS

Federal prosecutors are expected to file criminal charges on Wednesday against Rajat K. Gupta, the most prominent business executive ensnared in an aggressive insider trading investigation, according to people briefed on the case.

The case against Mr. Gupta, 62, who is expected to surrender to F.B.I. agents on Wednesday, would extend the reach of the government’s inquiry into America’s most prestigious corporate boardrooms. Most of the defendants charged with insider trading over the last two years have plied their trade exclusively on Wall Street.

The charges would also mean a stunning fall from grace of a trusted adviser to political leaders and chief executives of the world’s most celebrated companies.

A former director of Goldman Sachs and Procter & Gamble and the longtime head of McKinsey & Company, the elite consulting firm, Mr. Gupta has been under investigation over whether he leaked corporate secrets to Raj Rajaratnam, the hedge fund manager who was sentenced this month to 11 years in prison for trading on illegal stock tips.

While there has been no indication yet that Mr. Gupta profited directly from the information he passed to Mr. Rajaratnam, securities laws prohibit company insiders from divulging corporate secrets to those who then profit from them.

The case against Mr. Gupta, who lives in Westport, Conn., would tie up a major loose end in the long-running investigation of Mr. Rajaratnam’s hedge fund, the Galleon Group. Yet federal authorities continue their campaign to ferret out insider trading on multiple fronts. This month, for example, a Denver-based hedge fund manager and a chemist at the Food and Drug Administration pleaded guilty to such charges.

A spokeswoman for the United States attorney in Manhattan declined to comment.

Gary P. Naftalis, a lawyer for Mr. Gupta, said in a statement: “The facts demonstrate that Mr. Gupta is an innocent man and that he acted with honesty and integrity.”

Mr. Gupta, in his role at the helm of McKinsey, was a trusted adviser to business leaders including Jeffrey R. Immelt, of General Electric, and Henry R. Kravis, of the private equity firm Kohlberg Kravis Roberts & Company. A native of Kolkata, India, and a graduate of the Harvard Business School, Mr. Gupta has also been a philanthropist, serving as a senior adviser to the Bill & Melinda Gates Foundation. Mr. Gupta also served as a special adviser to the United Nations.

His name emerged just a week before Mr. Rajaratnam’s trial in March, when the Securities and Exchange Commission filed an administrative proceeding against him. The agency accused Mr. Gupta of passing confidential information about Goldman Sachs and Procter & Gamble to Mr. Rajaratnam, who then traded on the news.

The details were explosive. Authorities said Mr. Gupta gave Mr. Rajaratnam advanced word of Warren E. Buffett’s $5 billion investment in Goldman Sachs during the darkest days of the financial crisis in addition to other sensitive information affecting the company’s share price.

At the time, federal prosecutors named Mr. Gupta a co-conspirator of Mr. Rajaratnam, but they never charged him. Still, his presence loomed large at Mr. Rajaratnam’s trial. Lloyd C. Blankfein, the chief executive of Goldman, testified about Mr. Gupta’s role on the board and the secrets he was privy to, including earnings details and the bank’s strategic deliberations.

The legal odyssey leading to charges against Mr. Gupta could serve as a case study in law school criminal procedure class. He fought the S.E.C.’s civil action, which would have been heard before an administrative judge. Mr. Gupta argued that the proceeding denied him of his constitutional right to a jury trial and treated him differently than the other Mr. Rajaratnam-related defendants, all of whom the agency sued in federal court.

Mr. Gupta prevailed, and the S.E.C. dropped its case in August, but it maintained the right to bring an action in federal court. The agency is expected to file a new, parallel civil case against Mr. Gupta as well. It is unclear what has changed since the S.E.C. dropped its case in August.

An S.E.C. spokesman declined to comment.

The case could be a challenge for the government. Many of the defendants convicted of insider trading, including Mr. Rajaratnam, have been caught on wiretaps swapping secret information.

At Mr. Rajaratnam’s trial, the government played a recorded conversation between Mr. Gupta and Mr. Rajaratnam in July 2008. On that call, Mr. Gupta divulged that Goldman was considering a purchase of either Wachovia or American International Group.

Evidence that Mr. Rajaratnam traded on this information was never presented, however.

Two of the most incriminating calls played in court pertained to tips that the government said had come from Mr. Gupta. But those calls were conversations between Mr. Rajaratnam and his employees, which could make them inadmissible in a trial of Mr. Gupta.

In one call played for the jury, Mr. Rajaratnam told a colleague, “I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share.” In the other, Mr. Rajaratnam said to his trader, “I got a call saying something good is going to happen to Goldman.”

The S.E.C.’s original case also outlined evidence that could potentially be used at trial. That includes Mr. Gupta’s phone records of on Sept. 23, 2008. That day, the Goldman board met via telephone to consider Mr. Buffett’s $5 billion investment in Goldman.

“Immediately after disconnecting from the board call, Gupta called Rajaratnam from the same line,” the S.E.C. filing says. A minute later, Galleon funds bought more than 175,000 shares of Goldman just before the market closed, the agency says, and later netted a $900,000 profit when the deal was announced.

Though he had an enviable résumé and earned millions of dollars a year at McKinsey, Mr. Gupta became fixated on the extraordinary wealth showered on hedge fund managers and private equity chiefs, according to trial testimony. Consultants are well paid, but the compensation pales in comparison to those Wall Street titans.

Around the time of his retirement in 2007, he and Mr. Rajaratnam helped start New Silk Route, a private equity firm focused on investments in India. Though Mr. Rajaratnam never had an active role in the firm, he and Mr. Gupta were good friends, having met through their philanthropic interests.

Mr. Gupta periodically visited Mr. Rajaratnam’s hedge fund, Galleon, on Madison Avenue and 57th Street in Midtown Manhattan. The two would order Indian or Chinese takeout and kibitz in Mr. Rajaratnam’s office. Mr. Gupta became an investor in Galleon’s hedge funds.

As part of his foray into Wall Street, Mr. Gupta took a senior adviser post at K.K.R., the firm co-founded by his friend Mr. Kravis. During Mr. Rajaratnam’s trial, prosecutors played a tape of the hedge fund manager gossiping with a friend about Mr. Gupta’s ambitions.

“My analysis of the situation is he’s enamored with Kravis, and I think he wants to be in that circle,” Mr. Rajaratnam said. “That’s a billionaire circle, right?””

————————————————————–

Douglas McNabb – McNabb Associates, P.C.’s
Federal Criminal Defense Attorneys Videos:

Federal Crimes – Be Careful

Federal Crimes – Be Proactive

Federal Crimes – Federal Indictment

Federal Crimes – Detention Hearing

Federal Mail Fraud Crimes

————————————————————–

To find additional federal criminal news, please read Federal Crimes Watch Daily.

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition and OFAC SDN Sanctions Removal.

The author of this blog is Douglas McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.