Mimesis Law
18 October 2019

Supreme Court Makes Preet Bharara’s Bad Day

Oct. 7, 2015 (Mimesis Law) — The Supreme Court said “no,” which is hardly unusual.  In the past 30 years, they’ve gone from hearing almost 150 cases per year to almost a third of that.  Whether it’s because they don’t see the need to hear as many cases, or they’ve gotten lazy, is a different debate. The fact remains that they say “no” to 99% of the petitions for certiorari.

But when you’re the United States Attorney for the premier prosecutorial office in the nation, an office that has established itself as the bane of American business, the sting of the slap hurts. Preet Bharara is not used to hearing the word “no.”

The case involved Todd Newman and Anthony Chiasson, two hedge fund managers tried and convicted for insider trading.  The problem was that they were down the line when they received news that the public lacked.  It was given them for free, no quid pro quo involved.  And they did with it as any good hedge fund manager would. They made money.

The Second Circuit Court of Appeals held that this wasn’t a crime.

First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.

A corollary to mass incarceration is over-criminalization.  There is a near-uncountable number of federal crimes, both extant and regulatory, meaning that some bureaucratic regulation of trivial purpose is backed up by a prison sentence if someone doesn’t abide.  Best estimates are in the neighborhood of 35,000 crimes, potential acts that can send a guy away for a while.

This is a harsh environment to navigate for business, not so much because each individual regulation doesn’t have a reason to exist, but because there are so many ways to screw up that conduct lacking any evil intent can still send a guy to Club Fed.  For Newman and Chiasson, their vacations would have been 54 and 78 months respectively.

Upon learning that the Supreme Court had declined to review the Second Circuit’s dismissal of the charges against the two, Bharara got on the horn to the media to explain his fall from grace.

In a conference call with reporters, Mr. Bharara said the ruling would make it more difficult for prosecutors to bring criminal cases when corporate executives pass on an inside tip to a friend or a relative expecting nothing special in return.

“We think there is a category of conduct that will go unpunished going forward,” he said.

And indeed, there will be a category of conduct that will go unpunished. In fact, there will be a great many such categories, including the one of which Bharara speaks.  They’re called lawful conduct.

Implicit in the contention that conduct will go unpunished is the notion that it deserves punishment, it is somehow wrongful conduct.  That Bharara sees conduct in such a light isn’t entirely surprising; he’s the guy who brings business to its knees, who keeps it “honest” in a way that the rest of the nation can’t or won’t.

But scurrilous conduct such as “insider trading” has been vilified in general, even though it’s conceptually a pretty ridiculous notion. No one on Wall Street waits until they read about it in the financial section to learn what’s going on in their sector of the economy.  They get paid to know. We expect them to know. It is their job to have their finger on the pulse of finance.

In the courtroom, however, the mechanisms of business are viewed through the naïve lens of prosecutors who have never cracked the Financial Times, never spent their days trying to decipher the significance of the interrelationships of supply and demand across industries. What seems “unfair” to a prosecutor is often what seems like a Thursday morning coffee klatch to a hedge fund manager.

So Preet Bharara and his small army of young prosecutors thought they had the power to scour Wall Street in search of people making more money than they thought appropriate. While we may be a capitalist society, we still suffer the prudishness of profit, when some people make what other people deem an obscene amount.  How much? There is no set amount, but, like Potter Stewart with obscenity, they know it when they see it.

Except it’s not a crime.  The Second Circuit said so. The Supreme Court agreed.  To buy inside information was prohibited.  To be downstream and receive it without any malicious intent is business.  There is little doubt that Preet Bharara’s complaint, that some conduct will go unpunished, is an accurate assessment of what will come in light of the Supreme Court’s refusal to hear the Newman and Chiasson case just because the appellate ruling made Preet sad.

And that’s how it should be.  We are up to our eyeballs in conduct that, for reasons good and foolish, are backed up by fines and imprisonment. If Bharara can’t find one rule, regulation or law out of the approximately 35,000 that can send a couple guys away, then the conduct should go unpunished.  And it’s about time the Supreme Court explained that to the prosecutor who would dictate how business in America should be done.

2 Comments on this post.

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  • Scott Jacobs
    7 October 2015 at 1:01 pm - Reply

    “The Supreme Court agreed.”

    Or at least didn’t disagree enough to feel it was worth the time and effort to do something…

    • shg
      7 October 2015 at 1:33 pm - Reply

      True.