WEBVTT - Why Insider Trading Ensnares Them All

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<v Speaker 1>Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every

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<v Speaker 1>day we bring you inside an analysis into the most

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<v Speaker 1>important legal news of the day. You can find more

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<v Speaker 1>episodes at the Bloomberg Law Podcast, on Apple podcast, SoundCloud,

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<v Speaker 1>and on Bloomberg dot com slash podcasts. Billy Walters was

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<v Speaker 1>one of the most successful sports gamblers in Las Vegas,

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<v Speaker 1>but he just can't seem to win in court. Last week,

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<v Speaker 1>the Supreme Court turned down Walter's appeal of his seventeen

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<v Speaker 1>conviction for masterminding a six year insider trading scheme with

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<v Speaker 1>former Dean's Food chairman Tom Davis. Insider trading, time and

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<v Speaker 1>time again, seems to entrap people who should know better,

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<v Speaker 1>from a former US congressman to a former student body

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<v Speaker 1>president at the n y U Stern School of Business.

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<v Speaker 1>Joining me is Peter Henning, a professor at Wayne State

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<v Speaker 1>University Law School. Peter, why did Billy Walters think the

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<v Speaker 1>Supreme Court should review his conviction? The basis for his

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<v Speaker 1>appeal was the fact that an FBI agent had been

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<v Speaker 1>leaking information to the Wall Street Journal in the New

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<v Speaker 1>York Times, and Walter's claim was that that ended up

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<v Speaker 1>tainting his conviction because of prosecutorial misconduct. Now the Supreme

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<v Speaker 1>Court chose not to pursue the case, though I think

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<v Speaker 1>mainly because after the Salmon decision in ten they're pretty

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<v Speaker 1>much done with insider trading and they didn't see any

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<v Speaker 1>real basis to overturn his conviction. So he's left serving

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<v Speaker 1>out his approximately five years sentence. So Peter, insider trading

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<v Speaker 1>has been in the news a lot lately. We had

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<v Speaker 1>a former congressman pleading guilty to tipping his son, a

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<v Speaker 1>former Parella Weinberg partners managing director convicted of tipping his father,

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<v Speaker 1>and a former student body president at n y U

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<v Speaker 1>Stern leading guilty to trading on inside in information himself,

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<v Speaker 1>all trading away their careers. Is there anything common to

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<v Speaker 1>all of them? Well, in each case you had essentially

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<v Speaker 1>a tipper. Congressman Collins tipped off his son, and then

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<v Speaker 1>his son in turn tipped off his fiancee's father. Both

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<v Speaker 1>of them have entered guilty pleas along with Congressman Collins,

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<v Speaker 1>so they were able to get information in advance. And

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<v Speaker 1>that's also been true of the Sean Stewart case, who

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<v Speaker 1>was at Parella Weinberg and also bilt to say, who

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<v Speaker 1>was a junior analyst at RBC and had been student

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<v Speaker 1>body president at the Stern School of Business. In each

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<v Speaker 1>of those instances, it's like they stumbled across very valuable

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<v Speaker 1>information and then either used it for themselves or, in

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<v Speaker 1>Sean Stewart's case, told his father and his father traded

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<v Speaker 1>on five different deal and made well over a million

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<v Speaker 1>dollars with someone else who he provided the information to.

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<v Speaker 1>So inside information just has this allure to people that

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<v Speaker 1>somehow they think that they can just trade on it

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<v Speaker 1>and no one's ever going to notice. Let's go into

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<v Speaker 1>a little bit more depth on these, So let's start

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<v Speaker 1>with former New York Republican Congressman Chris Collins, who tipped

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<v Speaker 1>us on in a phone call on the White House

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<v Speaker 1>lawn at Trump's first congressional picnic. And there's a wonderful

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<v Speaker 1>picture where you can see Congressman Collins talking on the

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<v Speaker 1>phone over the shoulder of Jared Kushner, and he got

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<v Speaker 1>that information. It was an Australian pharmaceutical company and one

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<v Speaker 1>of their drug tests was not going to work, and

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<v Speaker 1>so he knew that as soon as it got announced

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<v Speaker 1>that that would drive the stock price down substantially. And

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<v Speaker 1>so you can see him, and the government got all

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<v Speaker 1>his phone records from his cell phone. You can see

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<v Speaker 1>him trying to call his son, and eventually they talked

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<v Speaker 1>for about six minutes, and then almost immediately the son

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<v Speaker 1>calls his fiance's father and essentially tips him off. So

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<v Speaker 1>in these cases, it's really more of a matter that

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<v Speaker 1>you get valuable information and you want to avoid losing

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<v Speaker 1>a lot of money, and that was what happened in

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<v Speaker 1>the Collins case, and his son and his fiance's father

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<v Speaker 1>avoided about seven hundred thousand dollars in losses by being

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<v Speaker 1>able to dump their shares before the information was disclosed.

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<v Speaker 1>In your opinion, did a court ruling lead Collins to

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<v Speaker 1>make the guilty plea. I think it was that the

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<v Speaker 1>Judge Broderick in the Southern District of New York rejected

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<v Speaker 1>Congressman collins claim that what he was doing was protected

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<v Speaker 1>by the speech or debate clause of the Constitution. In fact,

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<v Speaker 1>what Judge Broderick found was that the government didn't use

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<v Speaker 1>any information that it obtained in violation of the speech

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<v Speaker 1>or debate clause, and therefore that really wasn't going to

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<v Speaker 1>be a defense for Congressman Collins. It would not have

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<v Speaker 1>applied to his son or his fiance's father, but it

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<v Speaker 1>was one possible lineup defense for Congressman Collins. But as

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<v Speaker 1>soon as Judge Brodrick rejected that, and I expected, his

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<v Speaker 1>attorneys said that we're not going to have much luck

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<v Speaker 1>on appeal here. That's what led him to, I think,

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<v Speaker 1>decide to plead guilty. And now prosecutors are recommending a

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<v Speaker 1>sentence of from forty six to fifty seven months, so

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<v Speaker 1>that will be a substantial term of imprisonment for Congressman Collins.

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<v Speaker 1>And there are news reports that he has been begging

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<v Speaker 1>his associates and friends to write glowing letters about him

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<v Speaker 1>in an attempt to get leniency. Does that work It

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<v Speaker 1>has in the past, for example, in the case of

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<v Speaker 1>inside or trading case of Rusjah Gupta, who had been

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<v Speaker 1>a head of Mackenzie. He ended up getting letters from,

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<v Speaker 1>among others, Bill Gates. And that can be persuasive to

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<v Speaker 1>a judge when people write and say that this is

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<v Speaker 1>really a good person who went off the rails this

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<v Speaker 1>one time. But how much it's going to persuade Judge

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<v Speaker 1>Broderick is a different question, because one of the basis

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<v Speaker 1>for prosecutors seeking a significant sentence is that Congressman Collins

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<v Speaker 1>lied to the FBI, and so I suspect that the

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<v Speaker 1>government is going to argue very strenuously that lying to

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<v Speaker 1>the FBI and trading on inside information is not just

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<v Speaker 1>a one off, but in fact, this was something that

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<v Speaker 1>Congressman Collins not only engaged in but should be punished for.

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<v Speaker 1>Let's turn now to Sean Stewart, the former Perella Weinberg

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<v Speaker 1>Partners managing director. For the second time, he heard a

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<v Speaker 1>jury pronounce him guilty for insider training and it took

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<v Speaker 1>them just sixty five minutes. That's right, and that is

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<v Speaker 1>a very quick decision by the jury, which leads me

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<v Speaker 1>to think that Stewart's claimed that he really just kind

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<v Speaker 1>of accidentally told his father that they were drinking beers

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<v Speaker 1>and he was telling his father about his work. That

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<v Speaker 1>the jury did not buy that story and therefore convicted him,

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<v Speaker 1>and he was convicted on nine counts, and nine counts

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<v Speaker 1>in sixty five minutes is very quick, and so will

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<v Speaker 1>he be facing additional prison time He's already served over

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<v Speaker 1>a year in federal prison from his la your conviction.

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<v Speaker 1>It will be an interesting question whether Judge Rakoff will

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<v Speaker 1>impose additional time on him. Now, Judge Rakoff has been

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<v Speaker 1>fairly tough on insider traders. For example, he gave Rajac

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<v Speaker 1>gupt to two years in prison for tipping off Raj

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<v Speaker 1>Raj Rottenham. So there is at least a chance that

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<v Speaker 1>Sean Stewart will be sent back to a federal prison.

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<v Speaker 1>Will find out at the end of January when his

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<v Speaker 1>sentencing is scheduled. What I've found fascinating about the trial

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<v Speaker 1>and the retrial of Sean Stewart was that we've discussed before,

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<v Speaker 1>the most important decision for a defendant is whether to

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<v Speaker 1>take the stand or not. Stewart didn't take the stand

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<v Speaker 1>in his second trial, but he did in his first,

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<v Speaker 1>so it seems like nothing work for him. No, it didn't.

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<v Speaker 1>And by taking the stand in the first trial, that

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<v Speaker 1>was really because his father couldn't testify, and his father

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<v Speaker 1>didn't testify in the second trial either to say that

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<v Speaker 1>he just got the information from Sean more or less

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<v Speaker 1>by accident, and so really by not testifying, I think

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<v Speaker 1>that let the jury see that there really wasn't that

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<v Speaker 1>much to the defense, that it was really just an

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<v Speaker 1>accident that his father took this information and went out

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<v Speaker 1>and tipped someone else and traded on it. I think

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<v Speaker 1>the power of the insider trading narrative is very, very strong,

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<v Speaker 1>and when jurors see confidential information being doled out, the

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<v Speaker 1>immediate reaction is you've done something wrong and therefore you're

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<v Speaker 1>guilty of a crime. And finally we have the former

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<v Speaker 1>student body president at the n y U Stern School

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<v Speaker 1>of Business who earned his graduate degree and is now

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<v Speaker 1>pleading guilty to insider trading. And the amount involved was

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<v Speaker 1>just a little bit under a hundred thousand dollars, which

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<v Speaker 1>always leads me to the question would you sell your

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<v Speaker 1>career on Wall Street for a hundred thousand dollars? And

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<v Speaker 1>the answer to that question ought to be no. But

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<v Speaker 1>in fact, in this situation built to siy is the

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<v Speaker 1>former student body president at the Stern School of Business,

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<v Speaker 1>And you just wonder what was the temptation there? What

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<v Speaker 1>was it that he saw and said to himself, well,

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<v Speaker 1>I'm going to go ahead and make a hundred thousand

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<v Speaker 1>dollars because now he is likely to be sentenced to

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<v Speaker 1>a term in a federal prison, and any hopes that

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<v Speaker 1>he had of a Wall Street career are basically done.

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<v Speaker 1>No firm is ever going to touch someone who has

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<v Speaker 1>been convicted of insider trading. We've seen that repeatedly, and

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<v Speaker 1>so he has very little hope of a financial career

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<v Speaker 1>in the future. And you wonder, why what is it

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<v Speaker 1>that drew him to buy the options and then make

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<v Speaker 1>a hundred thousand dollars and get caught. You mentioned the

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<v Speaker 1>Supreme Court has sort of done with insider trading. Do

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<v Speaker 1>you think we've seen the last of all the high profile,

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<v Speaker 1>you know, appellate court rulings on insider trading. Is it

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<v Speaker 1>a settled area now? I think it is a fairly

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<v Speaker 1>settled area. And after the Salmon case in the Supreme

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<v Speaker 1>Court made it very clear that if you are providing

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<v Speaker 1>information to a family member or a close friend, that

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<v Speaker 1>that's really the end of the analysis, that that is

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<v Speaker 1>enough to establish what the Supreme Court is called the

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<v Speaker 1>quid pro quo for giving information and then getting something

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<v Speaker 1>in return. And it's that warm, fuzzy feeling that you

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<v Speaker 1>get when you give a gift. So in the Salmon case,

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<v Speaker 1>one brother was giving a gift to another brother to

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<v Speaker 1>be able to make some money. And the Supreme Court

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<v Speaker 1>I think has largely resolved the tipping issue, so whether

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<v Speaker 1>they'll really returned insider trading, it would have to be

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<v Speaker 1>a case that really brings up some new issues. But

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<v Speaker 1>for the most part, insider trading law is fairly well settled.

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<v Speaker 1>I would say the cases are easy to determine. There's

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<v Speaker 1>always a little bit at the edges, but for the

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<v Speaker 1>most part it is a fairly well settled area of law. Now,

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<v Speaker 1>thanks Peter. That's Peter Handing, professor at Wayne State University

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<v Speaker 1>Law School. Thanks for listening to the Bloomberg Law Podcast.

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<v Speaker 1>You can subscribe and listen to the show on Apple Podcasts, SoundCloud,

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<v Speaker 1>and on Bloomberg dot com slash podcasts. I'm June Brosso.

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<v Speaker 1>This is Bloomberg. Yeah,