Wall Street crime, New Yorker edition

Posted by John McDermott on Jun 20 20:21.

George Packer has written nearly 11,000 words on financial crime for this week’s New Yorker. Like most New Yorker articles, it’s an exercise in curious ambivalence and worth a read if you have a spare half hour. (Although we still prefer Packer’s essay on the absurdity of the US Senate.)

The essay has two narratives disguised as one. First, a play-within-a-play account of the Galleon trial, featuring an interview with Preet Bharara, the US Attorney for the Southern District of New York. Second, a reflection on what this trial tells us about insider trading more widely, and the lack of financial crisis prosecutions. Or, why it’s all Grisham and no Taibbi.

From the second, we draw a few implicit conclusions.

1. It’s very hard to build a successful white collar crime case. No surprises here but Packer’s essay does a good job at getting this point across. The SEC amassed 10m documents for the Galleon trial. One prosecutor, Andrew Michaelson, first looked into the Rajaratnam family in October 2006. The trial, according to Packer, would have died without one errant IM conversation.

IM Administrator: The Galleon Group archives and reviews incoming and outgoing instant messages.

rajatgalleon: hey

rajatgalleon: u back

roomy81: i am here

roomy81: did not go any where

rajatgalleon: call me..just got back today

roomy81: please let me know on JNPR

roomy81: donot buy plcm till i het guidance

roomy81: want to make sure guidance OK

We’ve emboldened the key piece of evidence, which is misspelt and easily missable.

2. It’s getting even harder as Wall Street pulls ahead in the arms race. This is a familiar argument but worth repeating.

The S.E.C. remains so starved of resources that its budget this year falls short of Raj Rajaratnam’s net worth at the time of his arrest. The agency lacks the technology to keep track of the enormous volume and lightning speed of algorithmic trades, like the ones that caused last May’s “flash crash” of the stock market.

3. Insider trading trials have their own logic and economics. Packer emphasises the south Asian and Pubjabi connections in the Galleon trial and clearly enjoys piecing the puzzle together. This is quite interesting but obscures a simpler fact: it’s easier to catch the second guy than the first. In other words, the marginal cost of looking for the next guy is much lower than the cost of starting a whole new trial. And even though past costs are sunk there will surely be a psychological drive to keep pursuing case until all leads run out.

4. There’s strong faith in the deterrence effect. Packer quotes a few lawyers that say the Galleon trial has led to greater caution amongst hedge funds.

Bharara’s campaign of deterrence has had a particularly strong effect at hedge funds. Several New York attorneys told me that clients have called in a panic. “There are a lot of nervous people out in the Hamptons,” one criminal lawyer said. Stanley Sporkin, a retired judge who was regarded as one of the S.E.C.’s most aggressive enforcement chiefs when he served, in the nineteen-seventies, told me, “People on Wall Street are going to be coming to work with brown pants on. It’s going to change the way they work for a long time.”

With resource-intensive cases and budget cuts, it’s unsurprising that some rely on a strong deterrent effect from Galleon. It’s certainly changed the behaviour of some actors. But this will eventually wear off. More importantly, a deterrence effect will only work across Wall Street if no-one feels above the law. That does not appear to be the case — and nor will it so long as the people brought to criminal trial are relative small fry. (One could call it the Gupta test.)

_________

Apropos of nothing, really, the Packer article also includes this gem, which we reproduce for pure entertainment.

After a Wall Street Journal article suggested that the defense had been caught off guard by Brodsky’s cross-examination of one of its witnesses, Dowd shot off an e-mail to the reporter, Chad Bray:

This is the worst piece of whoring journalism I have read in a long time. How long are you going to suck Preet’s teat?

All to hurt a decent, honest witness, Brodsky could not lay a glove on.

It did not work. The jury was not impressed by the worst cross examination ever delivered.

So in the style of Preet, try to smear him by working the sycophants in the back of the Courtroom. He learned from Schumer in the Senate. . . .

Preet is scared shitless he is going to lose this case so he feeds his whores at the WSJ.

What a disgrace for an otherwise great paper.

Related links:
A dirty business – New Yorker
Networked – Harvard Magazine
The trouble with defining insider trading – FT Alphaville
In-depth Galleon trial coverage – FT

This entry was posted by John McDermott on Monday, June 20th, 2011 at 20:21 and is filed under Capital markets, People. Tagged with , , , , .

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