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Saturday, December 07, 2013

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.   


Posted by Miriam Baer on December 7, 2013 at 11:15 PM | Permalink


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My point was simply that in both cases the government seeks to quantify the magnitude of the illegal activity and this naturally leads to different treatment of sellers and buyers in the two contexts. I'm sure there are interesting discussions to be had about whether current approaches to drug sentencing and insider trading sentencing are consistent with deterrence and retribution, but I don't see any anomaly in the facts that drug dealers are treated differently than leakers of inside information and drug users are treated differently from those who trade on inside information. Frankly, the two groups don't seem to be analogous at all.

Posted by: AF | Dec 10, 2013 11:37:54 AM

Thanks for commenting, AF. I don't know that either type of enforcement truly directs law enforcement's energies towards "those who profited most from illegal activity" - particularly because neither narcotics distribution nor insider trading sentencing hinge on "profit." The Sentencing Guidelines impose penalties on narcotics offenders according to the amount of drug (weight) they distributed or foreseeably distributed by joining a conspiracy. Thus, narcotics sentencing is - very loosely - tied to the amount of harm, as measured by the weight of narcotic involved, that offenders potentially caused others. I can see how one might conclude that: (a) the offender who spreads around kilos of cocaine is more deserving of a long sentence than the offender who sells dime baggies of heroin; and (b) deterrence is better served by imprisoning the wholesaler, since that might actually disrupt the supply of the drug if would-be suppliers either dropped out of the business or charged such a high price that fewer buyers purchased the narcotic in question. (Mind you, there are plenty of ways in which the deterrence story can go south).

For insider trading, the Guidelines impose penalties based on the offender's "gain." Gain, interestingly enough, is not the same thing as "profit." (I'll try to discuss this at length in a post later this week). Moreover, since the "loss" here is difficult to identify, much less measure, it is difficult to say with certainty that the end-user of the information causes the market more harm than the original leaker. Indeed, I could imagine situations in which we might conclude that the leaker of the information has imposed greater "harm", since he in fact breached a duty either to the issuer (classic inside trading) or to his source (misappropriation insider trading). Moreover, it is not clear to me that deterrence is served by offering cooperation agreements (and therefore sentencing leniency) to company insiders who leak information. I'll revisit these issues later this week.

Posted by: Miriam Baer | Dec 9, 2013 4:42:37 PM

The principle in both cases seems to be that we focus our energies on those who profited most from the illegal activity. That principle seems very easy to justify under theories of deterrence and reasonably compatible with retribution as well.

Posted by: AF | Dec 9, 2013 12:24:16 PM

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