When is a five-year statute of limitations for securities fraud not five years? When it’s six years, or 10 years, or never, according to Manhattan U.S. Attorney Preet Bharara.
The government’s chief prosecutor of Wall Street crimes, Bharara was asked by CNBC’s Jim Cramer about his investigation of SAC Capital Advisors LP and its founder Steven A. Cohen at a conference yesterday in New York.
“My understanding is that if you are going to bring some of the cases, the statute of limitations is up, so if you don’t do it this afternoon, is it over?” Cramer said.
Cramer was referring to a five-year deadline to file securities fraud charges against anyone tied to allegedly illicit trades by former SAC fund manager Mathew Martoma in late July 2008.
No, Bharara said, declining to discuss SAC or Cohen. Prosecutors bringing an insider trading case aren’t limited to a five-year deadline and have years to bring conspiracy charges. Bharara said prosecutors have a “variety of options” which can give the government years to file charges.
“There are a lot of armchair lawyers and armchair prosecutors who think that they know what the legal theories are that we can pursue and what statute of limitations issues are and often they are quite wrong,” said Bharara, speaking at the CNBC Institutional Investor Delivering Alpha conference in New York.
The Dodd-Frank Act, passed in 2010, gives U.S. prosecutors as long as six years to bring securities fraud charges, Bharara said. Federal prosecutors can also use a conspiracy charge to bring a case involving a continuing pattern of misconduct that spans years, and while prosecutors normally have a five-year deadline to bring mail fraud and wire fraud charges, the deadline can be pushed to 10 years if the crimes affect a financial institution, he said.
“A lot of people thought the statute of limitations is five years in particular cases, but a bank fraud statute has a statute of limitations of 10 years,” Bharara said. “If you’re talking about wire fraud and mail fraud, which is specifically five years, but if it affects a financial institution, it’s 10 years.”
Bharara, whose office has charged more than 80 people with insider trading and won convictions against 73 portfolio managers, hedge fund analysts and employees at publicly traded companies, today refused to discuss any specific investigation.
Bharara said the time limit for bringing conspiracy charges could be open-ended if prosecutors can show continuing misconduct.
“If you’re talking about ongoing misconduct, the conspiracy theory elongates the statute, which people have not appreciated, as far as I can tell,” Bharara said.
The government could also get around any five-year deadline by using a charge of conspiracy if they find evidence that steps were taken to further an insider-trading scheme after the trades occurred, said Doug Burns, a former federal prosecutor in New York. Prosecutors could also link a string of new insider-trading acts with an old act, calling it one continuing conspiracy to get around any statutory deadlines.
“You can think of conspiracy as a wheel, with each prong is a spoke of that hub” Burns said. “The government very often can bring a multi-prong conspiracy and as long as one of prongs occurs within the statute of limitations, and viewed as one ongoing conspiracy, it avoids any statute of limitations issue. The government has tremendous leeway to fashion a conspiracy to include ongoing conduct.”
In May, prosecutors in Bharara’s office issued grand jury subpoenas to Cohen and five SAC executives, a person familiar with the matter said.
As part of their probe into SAC, prosecutors have interviewed Tom Conheeney, SAC’s president; Steve Kessler, head of compliance; Phillipp Villhauer, head trader; and Chief Operating Officer Solomon Kumin, according to a second person familiar with the matter. Cohen declined to testify before the grand jury, said three people familiar with the matter. Cohen has denied any wrongdoing.
“People shouldn’t be waiting for time to run out. That’s not a good way to behave,” said Bharara, who told Cramer that he doesn’t “even wear a watch.”
Martoma was charged by Bharara’s office in November, accused of helping the hedge fund make $276 million by trading in shares of Elan Corp. and Wyeth LLC, using illegal tips about a drug to treat Alzheimer’s disease.
When Martoma learned the companies would report negative data on the drug, he had a 20-minute phone call with Cohen, according to a civil complaint by the U.S. Securities and Exchange Commission. The hedge fund owner, at Martoma’s recommendation, sold off almost all of the fund’s $700 million position in Elan and Wyeth, then sold the stock short, prosecutors claimed. Martoma, who has pleaded not guilty, is scheduled to go to trial on those charges in November.
In March, Stamford, Connecticut-based SAC reached a record $602 million settlement with the SEC, in which the $15 billion fund neither admitted nor denied fault. A federal judge in New York in April conditionally approved the accord.
Bharara wouldn’t address Cramer’s questions about the SAC investigation and didn’t say today if Dodd-Frank, passed in 2010 could be retroactively applied to trades such as Martoma’s that occurred in 2008. His office declined to comment when asked about the issue.
Daniel Richman, a former federal prosecutor and a professor at Columbia Law School in New York, said that the six-year deadline under Dodd-Frank can’t be applied to crimes that occurred before it was passed. However he said prosecutors could still get around a five-year deadline by charging new crimes.
“Prosecutors have two ways to push against a limitations period,” Richman said in a telephone interview. “They can frame the fraudulent scheme, the conspiracy, or the racketeering pattern as extending far beyond the big payout or key meeting. And they can identify new crimes, like regulatory filings, false statements or monetary transactions--that relate to, or involve the proceeds of past crimes.”
Cramer asked Bharara about stories declaring that the government has reached a deal with Cohen and won’t prosecute him.
Elephant in Room
“Let’s use the elephant in the room -- that’s Steve Cohen -- that you’ve made a deal and that deal is that there will not be a prosecution?” Cramer asked.
Bharara said he wouldn’t discuss Cohen’s case and said they were news stories of people “dealing in speculation.”
“I sent an e-mail to folks in recent times saying I don’t understand how this is being reported because I’m pretty confident that I’m the one making this decision, and I’m pretty confident that I haven’t made a decision on this, so I don’t know how it’s being reported that way.”
Bharara said that if a chief executive gets a call from his office informing them they’re under federal investigation, they should be prepared to cooperate with the government. He said the executive might want to check whether or not the individual “has an extra pair of underwear.”
“The most important thing to think about doing at that moment is to think about how forthcoming you should be in and to cooperate, because the history is that those who come forward and are voluntary with information do better than those who don’t,” he said.
The case is U.S. v. Martoma, 12-cr-00973, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Patricia Hurtado in New York at firstname.lastname@example.org