There was a hint of retro in the air this week as Wall Street star Michael Douglas revisited the 1987 movie about corporate crime in order to help the Federal Bureau of Investigation combat insider trading. The bureau unveiled Douglas’s new public service announcement—featuring a clip of the Gordon Gekko character intoning his iconic “Greed is good” speech—alongside more up-to-the-minute information that agents are building insider-trading cases against 120 people, part of the FBI’s ongoing operation, Perfect Hedge.
But in-house counsel might want to think back even further than the 80s, says Judge Richard Holwell, who presided over the insider-trading trial of Galleon Group co-founder Raj Rajaratnam last fall. He recalls how the price-fixing scandals of the 1970s set a new precedent in the battle to staunch white-collar crime. In an interview with CorpCounsel.com, Judge Holwell—now a founding partner with Holwell Shuster & Goldberg—discusses his advice for in-house counsel, what makes insider trading such a simple crime, and how wiretapping has revolutionized the government’s game.
An edited version of that conversation follows.
CorpCounsel: How did you read Monday’s announcement from the FBI?
Richard Holwell: One of the goals of these prosecutions is to alter corporate behavior, so publicity is one of the ways to do that. If you went back in time to the 1970s and 1980s, you’d find a lot of highly visible criminal prosecutions in price fixing, for example, and generally that was a very successful effort to modify the behavior of businesses. You see very few criminal price-fixing cases these days, and that’s probably not because they’re being undetected. It’s likely the result of the fact that in-house counsel have finally been successful in making it part of the corporate culture that it’s not a good idea to engage in price fixing.
I think what’s going on here is a similar exercise of attempting to modify the behavior on Wall Street with respect to insider trading, and they’re able to do it on a bigger scale than they were in the days of Ivan Boesky, because they have decided to employ wiretaps in the process. That’s resulted in insider trading becoming a low-hanging fruit in terms of white-collar crime.
CC: Why is it a low-hanging fruit?
RH: Insider trading is by its nature a wire-fraud case, essentially—using the telephone to violate federal law. And it is pretty easy to get authorization from judges to put up taps on phones. Now, I’m not sure why it’s taken so long for the prosecutors and the FBI to employ this tool, but it’s an evolutionary situation. And once they started using it, I guess they were probably surprised at what a rich vein they had struck. You connect so many dots when you put up a wire on an active trader. It just leads from one insider trade to another. The numbers that they’re talking about don’t surprise me at all. [Insider trading is] unlike many corporate frauds in that, by its nature, it’s a network. I think it has been—at least from my view—relatively easy for the government, once it started using wiretaps, to develop these cases.
CC: So most other corporate frauds don’t have this network element?
RH: Yes, and they’re more complex. This is a rather simple crime. There is some legitimate concern by in-house counsel [about] the boundaries of what is inside information, and what are the boundaries of the insider-trading laws—that’s all true, and it does provide some counseling issues and difficulties. But what the government is bringing their indictments on is just plain-vanilla trading on inside information.
CC: These cases are really about people talking to one another.
RH: Yes. Somebody is getting on the phone saying, ‘I talked to my guy at X corporation, and their earnings are coming out in a week and they’re moving this way or that way.’ People shouldn’t, and in reality don’t, have any difficulty in understanding that that’s precisely the kind of information you can’t use.
CC: Are there any other key elements or patterns in these cases?
RH: Well, the use of wiretaps does two things. It makes it easier to get a conviction in court, because you’re playing the defendant’s conversation in the courtroom, and almost any conversation that you record can sound bad when you put it in a courtroom and put it on tape. It’s just the nature of wiretaps.
Beyond that, once you get names, then you can go out and flip witnesses. And that’s a pretty easy task generally, particularly in the area of white-collar crime. It’s one thing for a drug dealer or a member of the mafia to keep their mouths shut, but generally [when] business people get in the sights of the government, it’s going to be their inclination—which is undoubtedly correct—that cooperation will be the better course for them to take, and I’m sure that’s what their counsel generally advises them.
CC: What can in-house counsel do about this?
RH: First of all, I think you’re talking about a relatively modest percentage of the business world that engages in crime. But in-house counsel really has to keep repeating the message. It’s something that has to be drilled in from the day somebody walks in the door. You’ve got to be all over the subject, so nobody takes for granted that that’s not the way we do business. It would also be useful for companies to get out in front on the issue.
CC: How would they do that?
RH: I think the leaders—the movers and shakers—should be out there saying: ‘There are some problems in the industry, but we’re not going to tolerate it. That’s not how we do business.’ Right now, the financial industry is on the defensive. They need to attempt to take control of this situation themselves, and make sure that their culture—to the extent that there are any cracks in it—is cemented and shored up.
See also: “SEC Claims Record Enforcement for 2011,” CorpCounsel, November 2011.
