I came across this story about two Defendants in New York who were appealing to the Second Circuit Court of Appeals their convictions for “insider trading”, which as we all know is a rarely prosecuted federal crime arising out of a securities investigation that usually starts with the SEC. These Defendants also argued on appeal that their sentences were too long. Both issues, the insider trading question and sentencing arguments, are matters we have come across frequently, and we will be following the case closely.
The basic idea of an “insider trading” case is that someone learns about “material non-public information”, such as the fact that one company might be in the process of buying another company. When companies prepare to engage in such moves, they need to hire bankers, lawyers, accountants, printers and lots of folks who work on the deal. It is illegal for anyone who learns such “material non-public” information to give a “tip” to anyone, and for the recipient of the tip (the “tippee”) to make trades (such as buying the stock of the company that is about to be purchased.)
Attorneys for Zvi Goffer, a former securities trader , and Michael Kimelman, co-founder of a trading firm, recently asked the United States Court of Appeals for the Second Circuit to vacate their clients’ 2011 convictions. Prosecutors claimed that Mr. Goffer (a securities trader), was the ringleader of a scheme which traded on material non-public information prior to public announcement of deals involving computer network equipment makers and drug companies. Mr. Kimelman, the other Defendant, apparently worked with Goffer’s brother. Although the attorney for the securities trader claimed that his client had not breached anyone’s trust, one of the judges noted that the trader apparently paid kickbacks to lawyers at a large law firm in return for information on upcoming corporate acquisitions.
Perhaps the more interesting aspect of this appeal concerns the challenges to the sentences imposed for insider trading. The trial judge imposed a 10-year sentence on Mr. Goffer, and two and one-half years for Mr. Kimmelman. The defense lawyers contrasted the treatment their clients received with the high-profile insider trading case against Rajat Gupta, the former Goldman Sachs director convicted for leaking non-public information to Galleon founder Raj Rajaratnam. Gupta got a shorter two-year prison sentence in October. The scheme involving Gupta and Rajaratnam supposedly netted $50 million, far more than what was involved here, the defense attorneys argued, yet the sentences were almost as severe.
We are very sensitive to sentencing arguments in federal court, for we handle many similar matters. Likewise, we also occassionally represent people caught up in SEC investigations, some of which turn into federal insider trading criminal cases. We had some good luck on appeal for a bank executive caught up in an insider trading case. We convinced the trial judge to impose no jail time, but the prosecutors appealed, similar to the situation described in this post. However, in our case, we convinced the Court of Appeals to reverse itself and affirm the sentence of probation. Because of that and similar cases, we look forward to seeing how the Second Circuit resolves these cases.