The Winning Record of Prosecutors on Insider Trading

The conviction of the hedge fund manager Douglas F. Whitman brings the record of the United States attorney’s office for the Southern District of New York to 8-0 in insider trading cases that have gone to trial since the wide-ranging investigation came to light in October 2009. By any measure, that is quite an accomplishment, as prosecutors, led by Preet Bharara, have squared off against some very talented white-collar defense lawyers.

The Justice Department will not go undefeated forever, as the New England Patriots learned in 2007. But the message to defendants caught up in cases involving incriminating wiretap evidence should be clear by now: the chances of persuading a jury to acquit on all charges looks to be quite low, while cooperation with prosecutors can bring significant benefits.

The F.B.I. disclosed in February that it had identified 120 targets, or people likely to be charged, in current insider trading investigations. It is not clear how many cases involve wiretap evidence, but prosecutors are sure to try to obtain it whenever possible to keep the winning streak alive.

A jury on Monday convicted Mr. Whitman on four counts of securities fraud and conspiracy, based on receiving confidential information about Marvell Technology, Google and Polycom. The government says the tips generated over $900,000 in profits for his firm, Whitman Capital in Menlo Park, Calif. Under federal sentencing guidelines, the recommended sentence for Mr. Whitman is about 4 to 5 years, based on the trading profits and other factors.

In addition to recordings in which he discussed the companies, three cooperating witnesses testified against him. The key witnesses for the prosecution included the first appearance of Roomy Khan, a central figure in the investigation that led to the conviction of Raj Rajaratnam.

Mr. Whitman’s defense team tried to attack the government’s witnesses, particularly Ms. Khan, as self-serving liars. His lawyers also contended that he acted in good faith in analyzing stocks, which led him to make investment decisions unrelated to any inside information.

Unlike the other insider trading defendants, he was the first to testify in his own defense, trying to establish that the information was not material to him and so he did not violate the law.

The jury decided the case after less than a day of deliberations, clearly rejecting Mr. Whitman’s version of events by returning a guilty verdict. Many other defendants in recent trials received similarly quick verdicts against them, a testament to the strength of the government’s evidence.

A variety of defenses have been offered in the trials to try to refute the insider trading charges, all to no avail. Mr. Rajaratnam claimed the information he had received was not material to his trading, although he did not testify at his trial.

Rajat K. Gupta, the former Goldman Sachs director who was convicted of tipping off Mr. Rajaratnam, pointed to other potential sources of the inside information to argue that prosecutors had not met the burden of proving guilt beyond a reasonable doubt.

James Fleishman, who ran an expert network firm, offered the defense that he was unaware that outside consultants were breaching their duties by disclosing confidential information.

Winifred Jiau, a technology consultant and one of the first outside experts convicted, claimed the information she dispensed was also not material, when recordings showed her talking to hedge funds about earnings at Nvidia and Marvell Technology before they were announced. The jury did not buy that argument, however.

The problem for those recorded discussing a company’s prospects is that their statements at the time belie subsequent claims of ignorance, good faith or the unimportance of the confidential information.

It is as if the defendants were called as witnesses to prove the government’s case — their own words have proved to be so damning that the testimony of cooperating witnesses has been more like the icing on the cake than the centerpiece of the prosecution. A defendant’s decision whether to testify does not seem to have any appreciable effect on the outcome, as Mr. Whitman’s conviction shows.

How long can the federal government’s winning streak continue? Its sterling record will have to survive appeals of the convictions, the most important being Mr. Rajaratnam’s challenge to wiretapped evidence.

If the United States Court of Appeals for the Second Circuit finds that the government did not meet the requirements of the Wiretap Act when it sought authorization to listen to Mr. Rajaratnam’s telephone conversations, then some convictions tied to his case are likely to be overturned.

The more immediate issue is what prison terms those convicted will receive.

Judge Jed S. Rakoff of Federal District Court in Manhattan has a central role because he presided over the trials of Mr. Gupta and Mr. Whitman and will sentence them later this year.

Judge Rakoff has already expressed skepticism about the federal sentencing guidelines and the government’s recommendations of lengthy sentences for Ms. Jiau and Mr. Fleishman.

At Ms. Jiau’s hearing, he criticized “the mirage of something that can be obtained with arithmetic certainty” in the sentencing calculations based largely on the gains from the trading. He gave her a 48-month prison term, well below the 10-year sentence prosecutors sought.

Mr. Fleishman received a 30-month prison term, also far below the 108-month sentence recommended by prosecutors.
But compare those sentences to what some of the cooperators have received. Anil Kumar, who testified against Mr. Rajaratnam and Mr. Gupta, and Adam Smith, a trader at Mr. Rajaratnam’s hedge fund who spoke against his former boss, each received two years’ probation. That is quite a discount for those willing to come in and help convict others.

Even though Judge Rakoff has a penchant for sentencing below the recommended punishment, he is also more than willing to impose a prison term for insider trading. Defendants convicted in an insider trading trial appear to have little hope of avoiding time in a federal correctional institution, given the record so far.