A Dell Cooperator Does Well (and Probably Some Good too)

Barry Berke's cross-examination of Jon Horvath, the key witness in the Michael Steinberg trial, continued on Thursday and Friday and is expected to finish on Monday.  Not surprisingly, Horvath confirmed that he never explicitly told Steinberg that he was passing him "illegal information."   We also learned that Steinberg advised Horvath that SAC's walls "have ears" and therefore Horvath should "be wary" of other SAC employees who might poach trading ideas.  (Side note: not a particularly cooperative environment, eh?). The implication one might draw is that Steinberg's directive to keep information "quiet" may have been aimed at preserving his own advantage vis a vis other SAC managers - ie, he didn't want other SAC traders to steal his (or his group's) ideas.  Horvath's direct testimony, by contrast, had implied that Steinberg desired secrecy because Steinberg knew that he was dealing with material nonpublic information and wanted to maintain his advantage vis a vis the market. Which interpretation will the jury embrace?  

 

Meanwhile, a different cooperator, Daniel Devore, was sentenced on Thursday to "time served," which in his case effectively meant no prison term. Devore, who worked for Dell and was the original leak of some of Horvath's information, has been cooperating with the government since at least 2010 (here is an unsigned copy of his cooperation agreement, for those who are interested).   He apparently has played a significant role in assisting the government in its investigation and prosecution of insider trading within hedge funds. 

Usually, the SDNY does not schedule its cooperators for sentencing until the cooperators have completed their cooperation by testifying in all relevant trials.  As the government reportedly advised, it does not expect to call Devore to testify against Steinberg, although it included Devore on its list of potential witnesses.  Why would the government elect not to call Devore?  Presumably because Devore's testimony would only magnify the lengthy distance between Steinberg and the initial leak - which is hardly helpful if the jury has any doubts about Steinberg's state of mind. 

Here's what interests me:

When it comes to federal drug enforcement, we tend to target the wholesale sellers of narcotics for our harshest punishments and recruit buyers and middlemen as cooperating witnesses to help us in that endeavor. So, at least in an ideal world, buyers and middlemen cooperate and receive relatively lenient sentences, and sellers and distributors go to jail for a long time. (Yes, I know there are those who say the entire enterprise is flawed, and I share some of those concerns, but bear with me).  

When it comes to insider trading enforcement (at least lately), we seem to focus our energies on identifying and punishing the suspected "buyers" or "users" of information (ie, Raj Rajaratnam, Michael Steinberg to a lesser extent, and if anyone ever makes a case against him, Steve Cohen), and we recruit the sellers of said  information -- and the middlemen -- as cooperating witnesses, whom we later reward with lenient sentences. Accordingly, insider trading's punitive landscape turns narcotics enforcement upside down: Sellers of information cooperate, while users and buyers go to jail.  Can this "mirror image" be justified by familiar theories of deterrence or retribution?  Let's tackle that question next week.