When does an insider trading case turn from civil to criminal? It's a question that has confounded white-collar defense lawyers for years.
For Gary Naftalis, a partner at Kramer Levin Naftalis & Frankel, the question is more than academic. As you'll no doubt recall, Naftalis, a dean of the white-collar defense bar, represents Rajat Gupta, the former Goldman Sachs Group director who has come under scrutiny in the government's enormous hedge fund insider-trading investigation.
The Securities and Exchange Commission first brought charges against Gupta in March, accusing him in a rare administrative proceeding of giving tips about Goldman to Galleon Group hedge fund manager Raj Rajaratnam. Naftalis called the allegations "baseless" and complained that Gupta had not been accused of sharing in any of the profits made by Rajaratnam. There was no evidence, Naftalis asserted, that Gupta had received any benefit from allegedly leaking information to the Galleon founder.
The SEC, however, claimed that Gupta was an investor in Galleon funds at the time of the alleged misconduct in the summer and fall of 2008 and "stood to benefit from his relationship with Rajaratnam."
After Naftalis challenged the SEC's ability to bring its case in an administrative court, where defendants are not provided certain protections they receive in federal court, the SEC dropped its case in August, citing the "public interest." (The SEC also said that the dismissal does not prevent it from refiling a case against Gupta in federal court.)
Since then, speculation has been brewing that the SEC was clearing the way for a criminal case. Last week, the Wall Street Journal reported that federal prosecutors are "moving closer" to bringing criminal charges against Gupta, citing people familiar with the situation.
Only a select group inside the halls of government knows just what's in store for the onetime Goldman Sachs director. One of those likely in the know is Richard Zabel, who is set to become the new deputy U.S. attorney for the Southern District of New York. On Tuesday evening, Zabel was on hand at a New York City Bar Association event. The topic: insider trading.
Don't get too excited. Zabel did not specifically discuss the Gupta case, or even, for that matter, allude to it indirectly. And like all prosecutors, he was careful to add the caveat that anything he said was only his views, and not those of the office he represents.
But he did address the question of when an insider-trading case turns the corner from a civil action to a criminal prosecution. One of the panel's moderators, Steven Peikin of Sullivan & Cromwell, first posed the question to George Canellos, who heads the SEC's New York office.
Canellos said that strictly civil insider trading cases typically involve evidence that's more "equivocal" than those that also lead to criminal charges. He added that criminal cases have to have "jury appeal" and often involve a significant "personal benefit" for the defendant.
Zabel chimed in, adding that his office has never proceeded on a theory that a defendant was "reckless" in providing inside information to someone else. Zabel said that such a case could likely lack the criminal intent element they need.
But like a good prosecutor, Zabel didn't close the door.
"I never say never," he said.
So there you go, Gary. Take that for it's worth.
(Reporting by Andrew Longstreth)
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