You could be Stevie Cohen and get away with a huge fine or end up behind bars like Raj Rajaratnam. Violate a federal securities law in the US and you will initially be facing the SEC. Cross your fingers that your next series of meetings aren’t with the Department of Justice. http://aroundwallstreet.com/2014/01/what-makes-a-securities-case-go-criminal/

1. What Makesa SecuritiesCase ‘GoCriminal’?
By Stephen Bornstein
January 27, 2014
A flagrant violation, compelling facts and a strong public message
You could be Stevie Cohen (http://aroundwallstreet.com/2013/08/stevie-cohens-big-bad-bet/) and get
away witha hugefineor end up behind bars like Raj Rajaratnam.
Violate a federal securities law in the US andyou will initially be facingthe SEC. Cross your fingers that
your next series of meetingsaren’t with the Department of Justice.
As the government agency responsible for administering the securities laws, the SEC has the power
topenalize you financially and ban you from the securities industry, but it cannot bring criminal charges
against you no matter how egregious your behavior. What the SEC can do, however, is refer your case
to the DoJ, which has the authority to indict you and put you in jail.
SEC investigations don’t ‘go criminal’unless the evidence shows that the offender acted with criminal
intent. That means that the perpetratormust have willfully violated the law, whether or not he knew
the specifics of the offense.The most compelling casesare those in which wrongdoersknew the law and
ignored or defied it.Raj Rajaratnam, who is now serving an 11-year sentence for insider trading,was
repeatedly heard on tape during his trial boasting about his inside sources at the public companies in
whose securities he illicitly trafficked.
If the offender intended to break the law, the SEC next considers the severity of the violation.How
flagrant was the offense? How large were the stakes? How many people were victimized? How long did
the wrongdoinglast? How much of a risk did it present to the securities markets?Did the offender
cooperateduring the investigation or try to obstruct it by making false statements or destroying
documents?Raj Rajaratnam ticked this box too by organizinga vast insider trading ring that netted his
hedge fund (Galleon Group)over $60 million in ill-gottengains and that has already resulted in dozens of
felony convictions.
Burden of Proof
Once the DoJ steps in, it will determine whether the facts of the case support a criminal indictment.
Unlike an SEC civil proceedingwhere the government simply has to have the better of the case, the DoJ
must prove its criminal charges beyond a reasonable doubt.
As a practical matter, the higher burden of proof means that the facts of the case have to be simple,
straightforwardand easily understood by a jury. Cases involving complex securities (like collateralized
debt obligations) or sophisticated trading strategies (like option spreads) will challenge this constraint.

2. To win a jury over, the incriminating evidence has to show clear illegality on the part of the
defendantand there can be nolegal ‘grey areas’ which defense counsel can use to create uncertainty
around the charges.
One way for the DoJtoeliminate that uncertainty is by having credible, cooperating witnesses who were
involved in the offense and have been ‘flipped’ or who have taped the defendant incriminating himself.
Stevie Cohen was never actually caught in a conversation in which insider information was passed to
him, but the current criminal case against one of his underlings, Mathew Martoma, is based largely on
the testimonies of two college professors who admittedproviding him with material, non-public
information (even though both received immunity in exchange for their testimonies).Another way for the
government to bolster its case is to impugn the credibility of defense witnesses byascribing their
testimonies to previous financial or other benefitsthey received from the defendant.
Prosecutorial Discretion
Because of its limited prosecutorial resources, the DoJ is naturally inclined to pursue cases against
highly-placed professionals, public company executives and investment fiduciaries whose convictions
would send a clear message to the markets thatsecurities violations will not be tolerated.Rajat Gupta
(http://aroundwallstreet.com/2012/10/guptas-appeal-could-blacken-his-name-instead-of-clearing-it/)is
a case in point. The former chairman of McKinsey and director of Goldman Sachs betrayed the latter by
divulging its corporate secrets to Raj Rajaratnamwho profited greatly fromthe illegal tips. Gupta was
tried andsentenced to two years in prison (now on appeal), but the evidenceagainst him was entirely
circumstantial, soit must have been his prominent professional standingthat impelled the DoJ to bring
the case against him despite its evidentiary weaknesses.
While the DoJ has thusfar elected not to prosecute Stevie Cohen personally for lack of convincing
evidence, it did file a criminal complaint against his hedge fund, SAC Capital, which pled guilty and
settled for $1.8 billion. The probative difference between the Cohen and SAC cases points up the
problem the DoJhas prosecutingindividual executives (http://aroundwallstreet.com/2013/12/whos-toblame/) in organizations where responsibility is diffuse. The charge in the SAC case was that the hedge
fund as a whole was a “magnet for cheaters” which was based upon the several convictions and pleas
the DoJ had already secured from SAC staffers. Even with all those lower-level convictions, however,
the DoJ has still not been able to prove that the hedge fund kingpin himself actually violated the law.
Under US law, prosecutors have discretion over whether to bring charges against an individual or
company, and their decisions not to bring suchcharges are neitherreportednor reviewable by the
courts.Though some might say that government transparency in such situations would be informative to
the public, how could the subject of anysuch reported decision clear his good name?
TAGS:GO CRIMINAL, SECURITIES CASE, CRIMINAL CHARGES, STEVEN COHEN, RAJ RAJARATNAM, SEC,
DOJ, CRIMINAL INTENT, VIOLATION OF LAW, INSIDER TRADING, GALLEON GROUP, FELONY
CONVICTIONS, BURDEN OF PROOF, INDICTMENT, CIVIL PROCEEDING, REASONABLE DOUBT,
COOPERATING WITNESSES, MATTHEW MARTOMA, IMMUNITY, PROSECUTORS, CREDIBILITY, RAJAT
GUPTA, MCKINSEY, GOLDMAN SACHS, CIRCUMSTANTIAL EVIDENCE, SAC