Law: The inner circle

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Robert Morgenthau, US attorney for the southern district of New York, and Robert Kennedy, US attorney-general, in 1961

The most powerful legal fraternity on Wall Street congregated last year at Capitale, a lower Manhattan ballroom that was once the headquarters of the Bowery Savings Bank. As a winter rain fell, federal judges, top regulators, titans of the defence bar and highly paid corporate counsels gathered to honour an institution that helped make them what they are today.

It is called the US Attorney’s Office for the Southern District of New York. That is hardly a household name, even in the US, where it is just one of 94 local prosecutor offices of the US Department of Justice, responsible for the New York City boroughs of Manhattan and the Bronx, and several suburban counties to the north.

But its location and history have made this US attorney’s office the New York legal world’s equivalent of the playing fields of Eton, a proving ground for the attorneys who count on Wall Street. Many go on to run the courtrooms and government offices where big regulatory questions are decided.

Over the decades, southern district prosecutors have secured the convictions of a rogues’ gallery that includes the leaders of all the New York mafia families, international terrorists such as Ramzi Yousef, and Wall Street high-flyers including Michael Milken of Drexel Burnham Lambert and Raj Rajaratnam, the co-founder of hedge fund Galleon Group.

Former assistant US attorneys – or A-USAs, as they are known – from the southern district include everyone from Mary Jo White, the new chairman of the Securities and Exchange Commission, and Rudolph Giuliani, the former mayor of New York City, to 21 of the 46 judges in the federal district court in Manhattan, and Richard Appel, co-creator of The Cleveland Show, an animated sitcom.

“Once you’ve been an A-USA – short of flying a plane without any training – you can do anything,” says Preet Bharara, who serves as the US attorney in the southern district after working there as a junior prosecutor.

Southern district prosecutors are thorns in the side of Wall Street but that experience makes them attractive to banks and New York’s elite law firms once they have left government. It is typical for southern district prosecutors to “graduate” to the private sector – and then sometimes return to public service at more senior levels. It is a legal circle that keeps turning.

The revolving door in the southern district has its defenders, who argue that it is one of the reasons New York lawyers are so good at what they do. But critics wonder whether the cosy legal world at the southern tip of Manhattan explains the paucity of prosecutions of senior bankers for their roles in the financial crisis.

The party at Capitale, held to mark the 50th anniversary of the office’s securities fraud office, was a snapshot of its alumni in full flower. The 100 diners included people on all sides of the big legal questions facing Wall Steet: Judge Jed Rakoff, perhaps the financial industry’s toughest critic on the federal bench; Robert Khuzami, until February the enforcement director of the SEC; Andy Levander, the lawyer for Bob Diamond, the former Barclays chief executive, in the Libor investigation; and Gary Naftalis, who represented Rajat Gupta at the insider trading trial of the former Goldman Sachs director.

“It’s a pretty tight group,” says Edward Little, a defence lawyer and former prosecutor at the office. “You have to be a little crazy to go there. It’s highly motivated people in intense trial situations. You end up being life-long friends with people you try cases with or investigate cases with.”

Concerns about the revolving door have only increased with the appointment of Ms White to head the SEC. She cut her teeth as an A-USA, taking on targets such as anti-Castro Cuban terrorists, before moving to Debevoise & Plimpton, a prestigious law firm known for its Wall Street clientele.

Ms White then returned to the public sector, first as acting US attorney in the eastern district of New York (which includes Brooklyn, Queens and Long Island) and US attorney in the southern district, only to return to Debevoise a second time to represent clients such as JPMorgan Chase.

When President Barack Obama asked Ms White to leave Debevoise yet again for the public sector, he noted her history as a tough prosecutor. But during her confirmation hearing in March, senators questioned her ability to regulate the bankers who had recently employed her.

“Nobody questions your integrity or your aggressiveness or your toughness,” said Senator Sherrod Brown, a Democrat from Ohio. But after casting the sole committee vote against her confirmation, Mr Brown said: “I do question Washington’s long-held bias towards Wall Street and its inability to find watchdogs outside of the very industry that they are meant to police. Mary Jo White will have plenty of opportunities to prove me wrong. I hope she will.”

At the Senate hearing, Ms White vowed to be a zealous advocate for US investors. She subsequently tapped another southern district veteran, Andrew Ceresney, who also worked with her at Debevoise, to co-lead the SEC’s enforcement division.

“The SEC has rigorous procedures to avoid even the appearance of partiality in our work and many highly qualified individuals to assure our effectiveness should recusal become necessary,” an SEC spokesman says.

The southern district office has a long history as an apolitical institution. It was a pioneer in the practice of hiring on merit after Henry Stimson was named as its head by President Theodore Roosevelt, who pushed to professionalise government service at the dawn of the 20th century. “It’s an office that is totally free and has been for years from politics,” says Robert Fiske, who was US attorney from 1976-1980.

The office’s independence was highlighted in the 1960s when Republican President Richard Nixon and his attorney-general John Mitchell sought to replace Robert Morgenthau, the then-US attorney and a Democrat, with a political ally.

“Morgenthau, who was the outgoing US attorney, refused to leave until Mitchell agreed to appoint someone who everyone agreed was a person of integrity,” Judge Rakoff says. “It was a four-month stalemate until Mitchell finally gave in.”

This independent streak earned the southern district a nickname: the sovereign district.

Mr Morgenthau, now 93 and still spry enough to take to the dais at Capitale for an address to his fellow prosecutors, says he created the securities fraud office in the 1960s with the purpose of sending a message to Wall Street. “There were no criminal prosecutions and I wanted to get the industry to listen,” he says.

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The office has maintained the attention of bankers ever since. When Mr Giuliani was US attorney in the 1980s he turned up the public heat on Wall Street, using unprecedented tactics – including handcuffing traders at their desks and taking them on “perp walks” after their arrests – in his prosecutions.

Since then, the office has prosecuted executives involved in the WorldCom accounting fraud as well as Bernard Madoff. Today it is investigating alleged insider trading at SAC Capital. But it cannot claim big victories in criminal cases against bankers linked to the financial crisis.

Defenders of the southern district office say Mr Bharara, who trained as a young prosecutor under Ms White, has continued the office’s tradition of taking on Wall Street. His national profile has grown to the point where a Time magazine cover read: “This Man is Busting Wall St.”

The evidence comes in the form of an insider-trading investigation that has seen the convictions of more than 70 people, including such senior Wall Street figures as Mr Gupta and the hedge fund manager to whom he was accused of passing secrets, Mr Rajaratnam. Mr Bharara went beyond the tactics of Mr Giuliani and used wiretaps to gain evidence against financial figures.

But the Gupta case merely highlights the reach of the southern district network. In early meetings with prosecutors Mr Gupta hired Ms White as his defence attorney, meaning that she would be facing off against Mr Bharara, who had worked for her years earlier at SDNY.

Nor did the ties end there. After Mr Gupta was charged, the case was tried before Judge Rakoff, who was chief of the securities fraud unit in the late 1970s. Mr Gupta hired as his trial attorney Mr Naftalis, who as deputy chief of the criminal division was Mr Rakoff’s boss. Ms White had overlapped with Mr Rakoff as young prosecutors.

During the trial, Goldman Sachs and several of its employees were called to testify. All were represented by Steven Peikin, a former chief of the southern district fraud unit created by Mr Morgenthau – and a member of the securities unit when Ms White ran the office. His former colleague, Robert Hotz, was part of the team that represented Mr Rajaratnam.

To veterans of the New York bar, this is just another fact of life in the city. To them, the revolving door in the southern district is a sign of stability. With the players switching sides so frequently, fair play is virtually institutionalised.

“We have too much power in the hands of prosecutors. By having this revolving door, you have well-trained lawyers out there keeping the government honest,” says Charles Stillman, a prosecutor in the late 1950s who is now a prominent defence lawyer.

Yet the criticism has followed Ms White to Washington. Six weeks into her job running the SEC, she has drawn fire for a proposal to regulate derivatives that watchdogs say is too friendly to Wall Street.

In her confirmation hearing, Ms White sought to head off suggestions that she had grown too friendly to her former banking clients. “You represent different kinds of clients and you are ethically bound to represent them to the best of your ability,” she told lawmakers. “That does not change me as a person.”

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Case history: 50 years of SDNY

1960s

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John Mitchell, later embroiled in Watergate

Robert Morgenthau is appointed in 1961 by President John F. Kennedy as US attorney for the Southern District of New York. He sets up an office to police fraud on Wall Street.

The independence of the SDNY is challenged in 1969 when Richard Nixon, the Republican president, and his attorney-general, John Mitchell seek to replace Mr Morgenthau as US attorney in Manhattan and replace him with a political ally. Mr Mitchell is later found guilty of conspiracy and obstruction of justice for his role in the Watergate break-in and cover-up.

Mr Morgenthau’s defence of the SDNY’s independence helps earn the office the nickname of the “Sovereign District”.

1970s

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Leroy ‘Nicky’ Barnes, a drug lord known as ‘Mr Untouchable’

With the help of Bob Leuci, a New York City police officer turned informant, SDNY prosecutors bring corruption charges against other officers in a national investigation, elevating the profile of a young prosecutor, Rudy Giuliani.

The office also gains street credibility with the prosecution of Leroy “Nicky” Barnes, a flashy Harlem heroin kingpin known as “Mr Untouchable”, who is convicted of running a vast criminal drug enterprise.

The drug lord, who once posed for the cover of The New York Times magazine, also turns informant, leading to convictions of 16 other drug traffickers.

1980s

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Ivan Boesky, convicted of insider trading in 1987

Amid a dealmaking frenzy on Wall Street booms Ivan Boesky, an arbitrageur, makes $200m – in part based on tips from insiders. Boesky co-operates with the SEC and informs on several others, including junk bond trader Michael Milken. Under the deal with Mr Giuliani, Boesky receives a three-and-a-half-year prison sentence as well as with a $100m fine. In 1989, Mr Giuliani charges Milken with 98 counts of racketeering and fraud.

In another move, Mr Giuliani indicts 11 mob figures, including the heads of New York’s “Five Families”. Following their convictions at the so-called Mafia Commission trial, the bosses each receive sentences exceeding 100 years in prison.

1990s

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Mary Jo White, now head of the Securities and Exchange Commission

Mary Jo White oversees prosecutions of mob boss John Gotti and the terrorists responsible for the 1993 World Trade Center bombing, chief among them Ramzi Yousef.

Her office also oversees the terror conspiracy case against Egyptian cleric Shekih Omar Abdel-Rahman, who plotted to blow up New York City landmarks, and was the first prosecutors’ office to indict Osama bin Laden on terrorism related charges.

In 1995, Ms White announces indictment of Daiwa Bank, forcing the Japanese bank to close its operations in the US. The bank was accused of illegally covering up $1.1bn in bond trading losses in New York.

2000s

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Madoff leaves court after a bail hearing in 2009

The new millennium ushers in a wave of white collar crime prosecutions, with New York bringing fraud charges against Bernie Ebbers, the former chief executive of WorldCom, for running a massive accounting fraud, and obstruction of justice charges against lifestyle guru Martha Stewart. Ebbers is sentenced to 25 years in prison, while Stewart serves five months.

The SDNY prosecutes Bernard Madoff for running the largest Ponzi scheme in US history. From 2009, Preet Bharara brings insider trading charges against Galleon group and Rajat Gupta, former head of the McKinsey consultancy. Today, the office is investigating hedge fund SAC Capital for insider trading.