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The Securities and Exchange Commission has received an award of only $1 from a convicted securities broker who profited from sneak peeks at a popular business magazine’s Wall Street column. U.S. District Judge Thomas C. Platt of the Eastern District of New York ruled that since federal prosecutors had “already made an example” of defendant Joseph T. Falcone by obtaining an insider-trading conviction against him, the judge had no basis to reward the SEC for “spending tens of thousands of taxpayer dollars” in pursuing civil penalties. “In this case, enough is enough,” wrote Platt, who granted the SEC’s motion, but awarded just $1 as nominal damages. Falcone, found guilty by a jury in 1999 on 13 counts of securities fraud, was a broker for Prudential Securities when he obtained the names of companies cited in upcoming issues of BusinessWeek‘s “Inside Wall Street” column. The stock values of companies mentioned in the column frequently climb after the magazine is distributed. But federal authorities were tipped off to possible fraud when stock prices for those companies mentioned began to rise before the publication dates. The facts of the criminal case revealed that Falcone obtained the information from another broker who received faxes containing the companies’ names from an employee for a distributor of BusinessWeek. In May 2000, Judge Platt refused to set aside Falcone’s conviction for insider trading, but he noted that he did so “with real reluctance,” since Falcone was not an employee or a fiduciary of the magazine. Specifically, he wrote in that decision that one could “legitimately argue” that the language of the Insider Trading and Securities Fraud Enforcement Act of 1988 did not encompass Falcone’s conduct, and that instead, the defendant could have been guilty of merely knowingly possessing stolen or embezzled goods. However, Judge Platt, in denying the motion to set aside the verdict, concluded that Falcone had committed securities fraud by misappropriating the information in the magazine. In 2001, the 2nd U.S. Circuit Court of Appeals affirmed. Falcone, whose ill-gotten gains totaled $5,354, spent about $75,000 on legal fees for his criminal defense. He now works as a manager at a Dunkin’ Donuts, Judge Platt wrote. Other defendants in the case, including the distributor’s employee and the broker who initially received the faxes, pleaded guilty to one felony count each. The latest decision, SEC v. Smath, 99-CV-0523, signed Aug. 9, stemmed from the agency’s motion for disgorgement and civil penalties against Falcone. The SEC had sought the $5,354, plus interest, and three times that amount in penalties. Falcone previously agreed that he would refrain from arguing that he did not violate securities law if the government moved for such funds. And although Falcone, in responding to the motion, did not assert that he was not liable, he nevertheless argued that he was not an insider trader. He also argued that he had not been convicted of a crime but a “judicially prescribed” misappropriation instead, that he was subjected to a double penalty, and more. Judge Platt wrote that even though he agreed with Falcone’s assertions, the 2nd Circuit was bound to follow a 1997 U.S. Supreme Court decision, U.S. v. O’Hagan, 521 U.S. 642, because “no one yet has been able to convince” that court that it should not rely on the O’Hagan case. The judge noted that O’Hagan, which first affirmed the so-called misappropriation theory under securities law, involved a “true insider,” a law firm partner who pirated the use of nonpublic information — two distinctions from the case before him, he wrote. In addition, the judge observed that Falcone had no prior criminal history and had a “lengthy and financially burdensome criminal trial.” Platt also noted that although the 2nd Circuit affirmed the conviction, it found that the defendant’s actions did not fall within the confines of traditional insider trading. BROAD DISCRETION As a result, Platt used what he concluded was broad discretion in determining disgorgement and penalty amounts to award the SEC $1. “While this Court would have no objection to an order of disgorgement of the profits and interest due to the victims in this case, it sees no basis to reward the SEC for spending tens of thousands of taxpayer dollars in the pursuit of this action against Defendant. Plaintiff has already made an ‘example’ of Defendant and proved to the world that ‘crime’ does not pay,” he wrote. The case against Falcone and the other defendants is not a unique situation for BusinessWeek regarding its “Inside Wall Street” column. Earlier this week, federal prosecutors charged a former postal worker with securities fraud and conspiracy for obtaining the names of companies cited in the column while the magazine was processed in a Mount Vernon, N.Y., postal facility. The worker allegedly received $154,268 in illegal profits. The charges against the postal worker are part of a larger case involving three other defendants. According to Assistant U.S. Attorney Michael Cornacchia of the Eastern District of New York, three securities fraud actions, with a total of 10 defendants, have arisen from the BusinessWeek column. Sandeep Salva in Manhattan represented the SEC. Richard Haley in Hauppauge, N.Y., represented Joseph Falcone.

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