March 25, 2023

Fair Game: At the S.E.C., a Chance to Get Tougher on Settlements

By nominating Ms. White, a former federal prosecutor, to head the S.E.C. last week, President Obama appeared to send a message that Washington was finally going to get tough with financial wrongdoers. Tough enforcement has been pretty much AWOL on his watch. Maybe Ms. White can change that with a new, aggressive approach.

Here’s a good place to start: The S.E.C. routinely lets companies and individuals settle cases against them without admitting or denying its findings. This lets bad actors pretend that they’ve done nothing wrong. It also makes it harder for investors to mount successful lawsuits against them.

Regulators say this is the best approach. The practice, they contend, helps the S.E.C. and other agencies avoid costly, time-consuming litigation that would tax already-stretched resources. Quick settlements, rather than long trials, mean victims get restitution faster. And there’s always the possibility that the S.E.C. might lose in court.

But these no-admission settlements can be little more than a wrist slap — and certainly do not qualify as punishment. Most financial penalties end up being paid for by the company’s shareholders or its insurance policies. That’s not much of a deterrent.

Here is another reason the S.E.C. should junk these arrangements: other prosecutors have already done so. Preet Bharara, the United States attorney for the Southern District of New York — hired by Ms. White in 2000 when she ran that office — has made it a priority to require admissions from defendants in civil fraud cases brought by his prosecutors.

Such admissions are a way to hold defendants accountable, as well as being an important part of the public record, Mr. Bharara says.

“When we’re talking about vindicating interests related to fraud, companies and individuals whenever possible should have to admit that they engaged in bad conduct for all the world to see,” Mr. Bharara said in an interview last week. “In addition to seeking accountability and punishment and remuneration, we also have the responsibility to speak the truth, to get at what actually happened.”

His office has extracted admissions from defendants in 23 civil cases since creating its civil fraud unit in March 2010. One case, from last May, involved Deutsche Bank and its mortgage unit, MortgageIT. Prosecutors accused the bank of reckless lending practices spanning a decade. They also contended that the bank made false certifications to the Department of Housing and Urban Development, which insured the loans.

In settling the case, defendants at MortgageIT and Deutsche Bank paid a total of $202.3 million. But perhaps more important, they also admitted, acknowledged and accepted responsibility for the misconduct uncovered by prosecutors.

These admissions not only bring much-needed accountability in such matters. They can also help private plaintiffs overcome some of the hurdles they face when bringing cases. “There are so many obstacles placed on investors trying to bring claims when a fraud is committed,” says Gerald H. Silk, a partner at Bernstein, Litowitz Berger Grossmann. “Having the ability to rely on admissions by corporate defendants in government actions will help insure that meritorious cases are not dismissed on technical procedural grounds.”

It won’t be easy to change the mind-set at the S.E.C. from one that regularly allows defendants to avoid culpability. Most of all, pursuing a more aggressive litigation stance requires that the agency’s prosecutors be ready and able to go to trial.

Having the threat of a trial hanging over settlement proceedings, Mr. Bharara says, helps his prosecutors secure admissions from defendants. “We’re not in the business of bluffing,” he says. “When people know you’re not bluffing, they come to the table.”

The S.E.C. is by no means the only government agency striking these unsatisfying settlements. In Congressional testimony defending the practice last May, Robert Khuzami, the S.E.C.’s departing enforcement director, noted that some federal agencies allowed defendants settling cases to deny any wrongdoing whatsoever. He cited a 2011 settlement between Facebook and the Federal Trade Commission involving accusations that the company deceived consumers by failing to keep privacy promises; that deal noted that Facebook “expressly denies the allegations set forth in the complaint.”

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DealBook: A Dubious Case Found Lawyers Eager to Make Some Money

Paul Ceglia, who prosecutors said filed a bogus lawsuit claiming a stake in Facebook.John Anderson/Wellsville Daily ReporterPaul Ceglia, who prosecutors said filed a bogus lawsuit claiming a stake in Facebook.

It always seemed like a scam.

For the last two years, Facebook’s founder, Mark Zuckerberg, had been locked in a bizarre battle with a suspected huckster, Paul Ceglia, who claimed that he owned as much as 84 percent of the social networking site. Mr. Ceglia produced a series of contracts and e-mails as proof of the deal he said he struck in 2003 with Mr. Zuckerberg, who was then still a student at Harvard.

Facebook called the evidence “phony” and “fraudulent.” Yet the media couldn’t get enough of the case, often taking it very seriously, in part, because Mr. Ceglia had what appeared to be an all-star cast of lawyers by his side, vouching for the credibility of the case.

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There was DLA Piper, the largest law firm in the nation, whose former chairman was Senator George Mitchell. Dennis Vacco, the former New York State attorney general, also took Mr. Ceglia as a client. Mr. Ceglia had also signed up, albeit only briefly because the firm quickly dropped him, Kasowitz Benson Torres Friedman, which has counted as clients the Federal Housing Finance Agency and the private equity firm Apollo Management.

Terry Connors, a respected former federal prosecutor, took on Mr. Ceglia and then dumped him as well.

Last Friday, Mr. Ceglia was charged with fraud, accused of forging the documents at the heart of the case. The United States attorney in Manhattan, Preet Bharara, stated: “By marching into federal court for a quick payday based on a blatant forgery, Paul Ceglia has bought himself another day in federal court for attempting a multibillion-dollar fraud against Facebook and its C.E.O.”

But guess who has come away seemingly unscathed?

The lawyers who represented Mr. Ceglia and — with dollar signs in their eyes — seemingly aided his cause.

Some of the law firms that worked for Mr. Ceglia not only took on the case, they argued volubly that they had vetted Mr. Ceglia’s evidence.

“I would not have gotten involved and DLA would not have gotten involved if we had any doubts about the facts or evidence in the case,” Robert Brownlie, a partner at DLA Piper, told The American Lawyer last year.

Mr. Brownlie ultimately withdrew from the case, but only after Kasowitz Benson dropped Mr. Ceglia first and wrote Mr. Brownlie a letter saying that it was “withdrawing from the case based on a determination that the purported contract at issue is a fraud,” according to a court filing. Still, it took Mr. Brownlie two more months before he chose to sever ties with Mr. Ceglia. What took him so long after it became clear his own client was suspected of engaging in fraud? The once-chatty Mr. Brownlie is not returning calls from reporters.

Mr. Vacco declined to comment, citing attorney-client privilege as the reason he could not explain why he no longer represented Mr. Ceglia.

Lawyers who initially agreed to take Mr. Ceglia’s case clearly hoped that they would make tens of millions if not billions of dollars as a result of a settlement, similar to the one that Mr. Zuckerberg reached with the Winklevoss twins and Eduardo Saverin, an early investor and friend of Mr. Zuckerberg’s. The twins were paid at least $65 million; Mr. Saverin, reportedly more than $1 billion.

When Mr. Ceglia was first looking for a high-powered lawyer to represent him, he had a local lawyer, Paul Argentieri, based in Hornell, N.Y., draft the equivalent of a promotional memo meant to attract other lawyers to the case. Mr. Argentieri indicated that he would be prepared to agree to a contingency fee arrangement — which would probably give any lawyer representing Mr. Ceglia a big chunk of any verdict or settlement in his favor. The memo also explicitly highlighted Mr. Zuckerberg’s previous settlements with Mr. Saverin and the Winklevosses, even though “they had no written agreements” with Mr. Zuckerberg, according to the memo.

As for the documents in Mr. Ceglia’s case, any lawyer worth his salt would have been quickly skeptical. According to the fraud case against him, Mr. Ceglia replaced one page of a two-page contract with Mr. Zuckerberg with a fake. Mr. Ceglia had a contract with Mr. Zuckerberg to do work on a site called StreetFax, not Facebook. “The spacing, columns and margins of page one of the alleged contract are different from the spacing, columns and margins of page two of the alleged contract,” the complaint says. In addition, Mr. Ceglia is accused of forging a series of e-mails that sounded rather fantastical on their face.

His lawyers, however, turned a blind eye until they had no choice but to withdraw — but not before burning through millions of dollars and the integrity of the justice system.

“Now that Ceglia is being brought to justice for his crimes, Facebook intends to hold accountable all of those who assisted Ceglia in this outrageous fraud,” Orin Snyder, a lawyer for Facebook and Mr. Zuckerberg, said in a statement on Monday. “Facebook will send a strong message that it does not tolerate legal shakedowns and will take aggressive action against all those who file abusive lawsuits against the company.”

Now that the big law firms have dropped Mr. Ceglia, who is representing him?

Dean Boland, a Lakewood, Ohio, lawyer who was once ordered to pay $300,000 to two minors for using their pictures in making a digitally crafted image of child pornography.

Reached by telephone, Mr. Boland said, “If I thought this was a fraud, I would have bailed out two seconds later,” adding that he’d “be the first one marching to the court” to turn Mr. Ceglia in. He said he was convinced that Mr. Ceglia had a strong civil case, which is still continuing, against Mr. Zuckerberg and Facebook.

Mr. Boland went so far as to say that the criminal complaint against Mr. Ceglia “will help in the civil case,” arguing that the government’s complaint suggests that the second page of Mr. Ceglia’s two-page contract with Mr. Zuckerberg is authentic.

Asked why so many other law firms had withdrawn from the case, Mr. Boland said, “You’d have to ask them.”

Asked to comment on the child pornography case he was involved in, he said, “I’m not getting into that. It’s on appeal.”

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DealBook: U.S. Charges Former Executive of Marvell With Fraud

Marvell Technology headquarters in Santa Clara, Calif.David Paul Morris/Bloomberg NewsMarvell Technology headquarters in Santa Clara, Calif.

Federal prosecutors announced charges on Wednesday against a former employee at the Marvell Technology Group, accusing him of participating in an insider trading scheme that funneled corporate secrets to hedge fund traders.

The former employee, Stanley Ng, was arrested on Wednesday at his home in Cupertino, Calif. He was charged with one count of conspiring to commit securities fraud.

“Stanley Ng and his co-conspirators traded inside information as casually as some people trade baseball cards,” Preet Bharara, the United States attorney for Manhattan, said in a statement. “Like so many others recently, he will now be held to account in a court of law.”

A lawyer for Mr. Ng did not immediately return a request for comment. Marvell has not been accused in any wrongdoing.

The arrest is the latest in a sweeping federal crackdown on insider trading. Since August 2009, the United States attorney in Manhattan has charged 52 people with insider-trading crimes. Of those, 48 have either pleaded guilty or been convicted by a jury.

At the center of many cases is the so-called expert networking industry, which acts as a matchmaker for employees of public companies and hedge funds. Mr. Ng, 42, is the 14th person to be charged with insider trading related to the use of such networks.

The first criminal trial involving an expert networking firm ended in June with the conviction of Winifred Jiau, a consultant at Primary Global Research. Ms. Jiau, prosecutors said, shuttled cash and corporate tidbits between company insiders and hedge fund traders. Her lawyer said Ms. Jiau, known as Wini, would appeal the verdict.

The charges against Mr. Ng were not surprising, after the former Marvell employee played a starring role at Ms. Jiau’s trial.

Ms. Jiau, according to testimony from former Nvidia employee Sonny Nguyen, recruited Mr. Ng and Mr. Nguyen to join an “investment club.” The condition for admittance was simple; the corporate employees must leak inside information to Ms. Jiau. They obliged her request, prosecutors said, turning over detailed earnings reports for Marvell and Nvidia ahead of their public release.

In turn, Ms. Jiau shared her own secret stock tips with the men, according to a complaint unsealed today in the United States District Court in Manhattan. She also invited the men to meals at the Cheesecake Factory restaurant and offered to treat them to “various free gifts,” according to the complaint.

The scheme heated up during the summer of 2008, prosecutors said, when Ms. Jiau sought another advance word on Marvell’s quarterly earnings. Ms. Jiau e-mailed Mr. Ng to see if he was available to chat. “Yes, call anytime,” Mr. Ng replied.

The two talked a few days later, each on cellphones. About two minutes after the call, Ms. Jiau contacted a hedge fund manager, Samir Barai. Ms. Jiau, prosecutors said, sold inside information to Mr. Barai and Noah Freeman, a former trader at SAC Capital Advisors. Mr. Freeman has said the illegal stock tips earned him and his funds millions of dollars.

Mr. Nguyen, the former Nvidia employee, has already pleaded guilty to one count of conspiracy to commit securities fraud and wire fraud. His sentencing is scheduled for November.

Like Mr. Nguyen, Mr. Ng was well-positioned to dole out corporate secrets, prosecutors said. As the so-called reporting manager to the Securities and Exchange Commission, he was allowed to thumb through earnings reports before their release.

“Incredibly, the person designated the ‘S.E.C. reporting manager’ for Marvell was allegedly using his special access to nonpublic information to violate the very federal securities laws he was supposed to be assuring compliance with,” Mr. Bharara said.

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DealBook: U.S. Attorney Sends a Message to Wall Street

In 21 months as United States attorney, Preet Bharara has made a major impact on corporate crime.Fred R. Conrad/The New York TimesIn 21 months as United States attorney, Preet Bharara has had a major impact on corporate crime.

Every few days during the trial of Raj Rajaratnam, the Galleon Group’s co-founder, Preet Bharara, the United States attorney for the Southern District of New York, would quietly enter the courtroom and take a seat in the last row of the gallery.

From that unassuming vantage point, Mr. Bharara watched his colleagues try to persuade a jury to convict the former hedge fund titan of securities fraud and conspiracy.

The consistent presence of Mr. Bharara at the largest insider trading case in a generation — and the office’s resounding victory on Wednesday — signaled that the chief federal prosecutor in Manhattan was back as the sheriff of Wall Street.

Over the last decade, the New York attorney general, federal prosecutors in Brooklyn, the Manhattan district attorney and even the Justice Department in Washington angled for their share of financial fraud cases, an area traditionally dominated by the Southern District. For example, Eliot Spitzer grabbed headlines when he was New York attorney general by focusing on malfeasance at investment banks.

But Mr. Bharara has not-so-quietly reaffirmed his office’s leading role in pursuing corporate crime with this landmark insider trading case, which relied on aggressive prosecutorial methods and unprecedented tactics. For the first time, federal authorities used wiretaps to listen in on stock traders swapping illegal tips.

“What this case has done,” said Neil M. Barofsky, a former Southern District prosecutor who recently served as the special inspector general for the government’s Troubled Asset Relief Program, “goes well beyond simply putting a billionaire hedge fund manager behind bars.”

“The case will impact an entire industry,” Mr. Barofsky said. He said that Mr. Bharara “did more than just oversee and support the prosecution — he made sure that the target audience, traders on Wall Street, fully understood the extraordinary lengths that his office will go to discover these crimes, and that justice will be served.”

It has been 21 months since Mr. Bharara, 42, was appointed United States attorney by President Obama.

In that short tenure, his staff has ventured far beyond Wall Street, prosecuting some of the nation’s — and the world’s — most prominent defendants. Among them: Faisal Shahzad in the Times Square bomb plot; agents in a Russian spy ring; Ahmed Khalfan Ghailani, the first Guantánamo Bay detainee to be tried in the civilian system; Viktor Bout, a Russian accused of being an arms trafficker; a Somali man charged with piracy; and four men charged in a plot to bomb synagogues in the Bronx.

Not every case has gone smoothly. In Mr. Ghailani’s trial, the jury acquitted him of more than 280 counts of murder and conspiracy and convicting him of a single count of conspiracy to destroy government buildings and property. Nonetheless, Mr. Ghailani received a life sentence.

Some academics and newspaper columnists have also criticized Mr. Bharara for not filing criminal charges against senior executives at the center of the financial crisis. Last week, when his office filed a civil mortgage-fraud lawsuit against Deutsche Bank, he said there was not enough evidence to justify a criminal complaint.

Mr. Bharara was an infant in 1970 when he came to the United States from India with his parents. He grew up in Eatontown, N.J., and earned degrees from Harvard and Columbia Law School.

After several years in private practice, including a stint at Gibson Dunn Crutcher in New York, Mr. Bharara became a federal prosecutor in Manhattan, handling organized crime, narcotics and securities fraud cases. In 2005, he became chief counsel to Senator Charles E. Schumer of New York, leading a Congressional inquiry into the firings of United States attorneys.

Rudolph W. Giuliani in  1986, when he occupied the United States attorney post that is now held by Preet Bharara.Jim Wilson/The New York TimesRudolph W. Giuliani in 1986, when he occupied the United States attorney post now held by Preet Bharara.

Some lawyers have wondered aloud whether Mr. Bharara may have political aspirations like his predecessors, including former New York Mayor Rudolph W. Giuliani, who filled the post in the 1980s. As with Mr. Giuliani, Mr. Bharara is a charismatic figure who is comfortable in front of cameras, can talk tough and has a knack for the witty sound bite. At a press conference announcing Mr. Rajaratnam’s arrest, Mr. Bharara riffed off a famous line from the movie “Wall Street.”

“Greed, sometimes, is not good,” he said.

Unlike Mr. Giuliani, whose political ambitions seemed barely hidden while he led the prosecutor’s office, Mr. Bharara has told friends he has no interest in elected office.

“Everything about Preet’s record suggests that he’s a federal prosecutor for all the right reasons,” said Randy Mastro, a lawyer at Gibson Dunn and a former top deputy under Mayor Giuliani. “The best prosecutors are often those who don’t have political ambitions.”

Mr. Mastro, who overlapped for a time with Mr. Bharara at Gibson Dunn, added, “But that doesn’t mean he shouldn’t be drafted into running.”

Ellen Davis, Mr. Bharara’s spokeswoman, said in a statement on Thursday: “Preet loves his job and has no desire to run for public office now or ever.”

Mr. Bharara has not commented publicly on the Rajaratnam verdict, other than a short statement in a press release. But in a series of speeches, he has explained his aggressive approach to corporate crime.

“When sophisticated business people begin to adopt the methods of common criminals, we have no choice but to treat them as such,” Mr. Bharara said weeks after revealing the use of wiretaps in building a case against Mr. Rajaratnam. “To use tough tactics in these circumstances is not being heavy-handed; it is being even-handed.”

He has taken that approach in other areas of financial crime.

His office secured convictions in two high-profile criminal cases against bank executives accused of stealing proprietary computer code related to high-frequency trading businesses, including a case against a former programmer at Goldman Sachs. More recently, Mr. Bharara’s prosecutors charged the operators of three popular online poker sites with fraud and money laundering.

And Mr. Bharara continues to pursue insider trading cases. Over the last 18 months, his office has charged 47 individuals with insider trading crimes, 36 of whom have pleaded guilty or been convicted. At a recent news conference, he indicated there was more to come.

“I wish I could say we were just about finished, but sadly we are not.”

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