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Witness in Insider Trading Inquiry Sentenced to 21 Days

Richard Choo-Beng Lee, left, who helped build the government’s case, was sentenced to 21 days in prison for his involvement in insider trading. Most other cooperating witnesses got probation.Credit...Darren Ornitz/Reuters

A federal judge has broken with what has been standard practice in the government’s multiyear crackdown on insider trading in the hedge fund industry by sentencing a major cooperating witness to spend time in federal prison as opposed to a probationary sentence.

Judge P. Kevin Castel of the Federal District Court in Manhattan sentenced the witness, Richard Choo-Beng Lee, on Wednesday to serve 21 days in prison over the strong objection of his defense lawyer, who called the period of incarceration “completely unjust.”

The insider trading investigation conducted by the office of Preet Bharara, the United States attorney in Manhattan, has resulted in more than 80 guilty pleas and convictions. And all but two of the nearly dozen cooperating witness in the investigation have been sentenced by judges to serve nothing but a probationary sentence.

The sentence of prison time — albeit a brief one — is surprising given that Mr. Lee, known as C.B., was one of the first people to cooperate with the insider trading inquiry and one of the last to be sentenced.

In a court filing last week, federal prosecutors praised Mr. Lee’s level of cooperation and said he had provided critical information in building a case that led to the indictment and guilty plea of SAC Capital Advisors, the once-mighty hedge fund founded by Steven A. Cohen.

Mr. Lee, 59, worked for Mr. Cohen’s firm from 1999 to 2004. After Mr. Lee was approached by Federal Bureau of Investigation agents in early 2009, he agreed to secretly record phone conversations with dozens of people, including Mr. Cohen, who was never charged by prosecutors with any wrongdoing.

Mr. Lee’s lawyer, Jeffrey Bornstein, said his client was considering an appeal.

After the nearly hourlong proceeding, Mr. Bornstein said he was disappointed in the sentence and called it “unfair and unjust” especially given the length of Mr. Lee’s cooperation.

Mr. Bornstein also said he had hoped Mr. Bharara’s office would have been “more proactive” in objecting to the prison sentence.

At the proceeding, Arlo Devlin-Brown, an assistant federal prosecutor, told Judge Castel that he had “no legal objection” to the prison sentence.

In the court filing, Mr. Devlin-Brown had asked Judge Castel to be lenient but did not recommend a specific sentence.

The judge’s sentence is all the more surprising given that Mr. Lee’s former hedge fund partner, Ali Far, who also pleaded guilty and cooperated with the investigation, was sentenced by another federal judge on Feb. 11, 2013, to one year of probation.

Mr. Bornstein told Judge Castel that Mr. Lee could have asked to be sentenced at the same time as Mr. Far, but he decided not to at the request of federal prosecutors.

“He should be treated similar as all these other people who have been sentenced,” Mr. Bornstein told the judge. “For you to sentence him to prison serves no purpose.”

He said the sentence would impose a hardship for Mr. Lee, who is unmarried and spends some of his time caring for his elderly mother. The only reason Judge Castel was imposing a prison sentence, Mr. Bornstein contended, was that he had the power to do so.

Judge Castel took exception to Mr. Bornstein’s comment and said a brief stay in prison was needed to acknowledge the fact that Mr. Lee had broken the law and that insider trading was a serious crime. The judge said a probationary sentence was unnecessary. Mr. Lee, he said, would be able to get on with his life once the 21-day sentence was over.

“It sends the message that these activities are a crime and cooperation is greatly valued. That is why it is 21 days,” said Judge Castel, who also ordered Mr. Lee to pay a $100,000 fine.

In settling a related lawsuit filed by the Securities and Exchange Commission in 2010, Mr. Lee and Mr. Far agreed to pay $2.1 million in the disgorgement of profits and penalties.

The two men were the owners of a small hedge fund in Northern California called Spherix Capital when federal agents approached them in early 2009 with evidence that they had broken federal securities laws.

Mr. Lee never testified at any insider trading trial, but he was an important source behind the scenes for the government — at one point secretly recording 171 phone calls with 28 people.

In a phone call with Mr. Cohen in the spring of 2009, Mr. Lee tried to get a job at SAC. Mr. Lee, according to the government’s filing, told Mr. Cohen that “he was obtaining information from insiders with access to quarterly earning information and other confidential data.”

Mr. Cohen did not hire Mr. Lee. But Mr. Lee secretly recorded a call that helped federal authorities win court approval for a wiretap during the summer of 2009 on one of Mr. Cohen’s phones.

Mr. Cohen, 59, closed his hedge fund as part of the firm’s guilty plea. He now oversees a large family office called Point72 Asset Management that manages mostly $11 billion of his own money and employs many of the traders and analysts who formerly worked at SAC.

Although prosecutors never charged Mr. Cohen, the billionaire investor still faces a charge of civil administrative failure to supervise proceeding filed by the S.E.C. The action seeks to bar Mr. Cohen from managing money for others, which would forbid him from opening another hedge fund.

On Wednesday, the administrative law judge overseeing the S.E.C. case lifted a stay that had been in place since August 2013 at the request of Mr. Bharara’s office. The judge’s action will allow the case to move forward.

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Prison Term for Witness in Insider Crackdown. Order Reprints | Today’s Paper | Subscribe

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