Wall Street’s new marshal Preet Bharara appears ready to dust off a lethal legal tool from the mobster prosecution playbook in his war on Wall Street: criminal racketeering charges.
Not since the go-go days of the 1980s, when then-US Attorney Rudy Giuliani slapped Michael Milken of investment bank Drexel Burnham Lambert with racketeering charges, have corporate professionals been so treated like common criminals.
Those days appear to have returned in full force with Bharara, who advocates tapping Wall Streeters’ phone lines and has unapologetically compared crooked hedge fund managers and company executives to mobsters.
Now, in a new twist on the trend, Bharara appears to be gearing up to pursue the powerful Racketeer Influenced and Corrupt Organizations Act as part of his effort to wipe out illegal trading — akin to what Giuliani did to turn Wall Street arbitrageur Ivan Boesky against Milken and prosecute the “Junk Bond King” in the mid 1980s.
And like Drexel, no organization tainted by the RICO brush can likely survive the stench, experts say.
Last week, Bharara gave the strongest indication yet that RICO is high on his mind when it comes to combating insider trading.
During a press conference to announce the arrests of three hedge fund traders and an analyst on Tuesday, Bharara twice accused the hedge funders of running a “criminal enterprise” – a key RICO concept. He also warned against illegal rackets.
“If you have converted a legitimate enterprise into an illegal racket, then you have done something wrong and you will not get a pass,” the 42-year-old prosecutor admonished.
Legal watchers say Bharara’s words — always carefully crafted — appear designed to send the stinging message that RICO charges could be on the horizon.
“That’s the message he’s sending,” said Robert Ray, a former prosecutor in Bharara’s office about Tuesday’s press conference. “They’re contemplating bringing a criminal RICO case,” concluded Ray, a partner with Pryor Cashman in New York
Bharara’s widespread probe has targeted hedge funds, so-called expert networking firms and the company executives who spilled information.
A spokeswoman for Bharara’s office declined to comment. But Bharara’s comments have legal experts abuzz over what the prosecutor has up his sleeve. If RICO charges are brought, they say, it would make the most sense in cases where they appear to be rounding up plenty of witnesses, like hedge fund SAC Capital Advisors and expert networking firm Primary Global Research.
SAC Capital Advisors, which has received a subpoena tied to the probe, has been battling several civil separate RICO lawsuits for years, including one from the founder Steven Cohen’s his ex-wife of 20 years.
Neither firm has not been charged with any wrongdoing but the first accusations of insider trading at SAC came during this week’s arrests.
* Noah Freeman and Donald Longueuil, were charged with insider trading for trades they made prior to and while working for SAC.
* Other former SAC employees have also been caught up in the probe.
* On Friday in a letter to investors, the hedge fund Level Global founded by David Ganek — a former associate of Cohen — said the “cloud of uncertainty” created by the insider trading probe harmed its ability to operate. The firm, which manages $4 billion in assets was raided by the feds in November but have not been charged with any wrongdoing.
Level Global was a client of Primary Global the expert network firm where 11 employees and consultants have been charged by the feds for insider trading.
* Diamondback Capital, founded by former SAC execs Richard Schimel and Larry Sapanski, was also raided by the feds in November, but no charges have been brought. The firm is now facing mounting redemptions of over 10 percent on its $5.5 billion assets under management.
* And on Friday, a Bloomberg report said that according to public filings, SAC had similar stock trading in 11 companies as other hedge funds, which have been charged in the ongoing federal investigation.
* Also several other hedge funders label as “co-conspirators” in a separate insider-trading case with the Galleon Group have also previously worked at SAC.
Both Primary Global and SAC declined to comment.
Legal experts say RICO is best used in cases with many unwieldy, disparate crimes that are really all part of one, larger money-making scheme. Rather than go after the individuals who committed the crime, RICO allows prosecutors to go after the “illegal enterprise,” said Latour “LT” Lafferty, a former federal prosecutor.
But the experts also caution that RICO has lost a lot of its allure in recent years when it comes to white collar crimes. One reason is that sentencing guidelines for many white-collar crimes, like wire fraud, have increased dramatically since the Milken days.
Bruce Maffeo, a former prosecutor in Brooklyn, says he would be surprised to see RICO used to nab people accused of insider trading.
“It’s a generational thing. I know they took a stab at this back in the ’80s with Milken. . . then it sort of went out of favor.”