Common Sense: SAC Case Tests a Classic Dilemma

So far, Mr. Martoma has defiantly asserted his innocence and refused to cooperate with prosecutors. He could change his mind, but the clock is ticking. The government faces a mid-July deadline when it must decide whether to seek criminal charges against Mr. Cohen relating to the trades at the center of Mr. Martoma’s case.

For all concerned, the stakes are huge. The government has already convicted 73 people in the last three years in an insider trading crackdown that in its sweep and impact has been without precedent on Wall Street. But none of them has had the iconic status of an Ivan Boesky, the 1980s arbitrageur who wore a wire to record secretly the junk bond titan Michael Milken. With a net worth estimated by Forbes at $9.3 billion, Mr. Cohen could be the marquee name that would lend the investigation a new level of public awareness and potential deterrence.

Mr. Martoma could face decades in prison if convicted. His potential prison term is especially severe because the federal sentencing guidelines are based on the amount of the illegal profit, which in Mr. Martoma’s case are said to be huge. Prosecutors have called the case the most lucrative insider trading scheme ever.

Mr. Martoma is married to a medical doctor and they have three children. A long prison term could be devastating for his family. With his wife and children inside his house in Florida, Mr. Martoma fainted on his front lawn in late 2011 when F.B.I. agents arrived to warn him that he might face charges.

But Mr. Martoma may also be in a uniquely advantageous position to make a deal with prosecutors. He’s the only former SAC trader who, the government has said, had direct dealings with Mr. Cohen concerning suspicious trades. The government said the two had a 20-minute telephone conversation the night before SAC started trading shares of two pharmaceutical companies based on confidential information Mr. Martoma gained from a doctor involved in clinical trials of an important Alzheimer’s drug. So far as is known, Mr. Martoma hasn’t told prosecutors the substance of that conversation.

This is about as close as possible to what in game theory is known as the “prisoner’s dilemma,” Randal Picker, University of Chicago law professor and a co-author of “Game Theory and the Law,” pointed out. The game was developed by RAND Corporation scientists and formalized in 1950 by a Princeton mathematician, Albert W. Tucker, who gave the game its name.

In the now-classic version, the police have arrested two suspects and are interrogating them in separate rooms. Each can either confess and implicate the other, or remain silent. If only one confesses, he goes free and the other gets a harsh sentence. If both confess, each gets a reduced sentence, but still goes to jail. If neither confesses, the government lacks the evidence needed to convict and both go free.

Game theorists have demonstrated that the rational choice, or dominant strategy, is always to confess and implicate the other, even though the optimal outcome for both occurs if neither cooperates. That’s because, as Professor Picker explained, if one prisoner has confessed, the best the other can hope for is also to confess and get the moderate sentence rather than the harsher sentence reserved for those who don’t cooperate. If one prisoner doesn’t confess, the other can go free by implicating him. Although they collectively are better off if neither cooperates, their individual self-interest dictates cooperation.

That may be one reason that, when it comes to white-collar crime, “the overwhelming majority of people tend to cooperate, in my experience,” said John F. Savarese, a partner at Wachtell, Lipton, Rosen Katz and chairman of the New York City Bar Association’s White Collar Criminal Law Committee.

Article source: http://www.nytimes.com/2013/06/01/business/sac-case-tests-a-classic-dilemma.html?partner=rss&emc=rss