The much-heralded (and hyped) insider-trading crackdown by Manhattan’s very own US attorney, Preet Bharara, was always based on a dubious moral premise: that a bunch of Wall Street traders who profited so much during the bubble years needs to be held accountable for the 2008 financial crisis, even if their alleged crimes had nothing to do with the meltdown.
Now we know that much of Preet’s legal premise for all those prosecutions was pretty dubious as well.
That’s the conclusion handed down Wednesday by the Second Circuit US Court of Appeals, which said resoundingly and with prejudice (meaning a retrial isn’t likely) that Bharara brought a bogus case against two hedge-fund executives. The court overturned their convictions for insider trading and proved, finally, that sanity has returned to the judicial system when it comes to what is largely a victimless crime.
The sanity will be felt in the days and weeks ahead. The bogus legal reasoning Bharara and his deputies used to convict Anthony Chiasson and Todd Newman was duplicated in many of the other 80 or so insider-trading wins Bharara has racked up during the past five or so years with barely a single loss.
As odd it may sound, Bharara and his peeps successfully argued for years that traders didn’t really have to know the information they were trading on was the illegal variety; it was apparently good enough for Preet and many judges and juries that traders should have known — despite the notion of intent that’s the bedrock of American criminal law.
It was also not a big deal to Preet & Co. that the offending traders didn’t really pay off their sources to obtain the illegal information. In Preetworld, criminals will share something as nebulous as friendship to get people to break the law and risk significant jail time by forking over insider secrets.
Again, the appeals court — relying on common sense (and years of judicial precedent) — said that from now on the government will have to prove that payoffs occurred, because real criminals never work for free.
It was pretty clear from the get-go that neither Newman nor Chiasson had any clue about where the information they were getting actually came from. (In the world of Wall Street, information often passes through several layers of sources.) Nor was there much evidence that the analysts who gave them the information had paid off their sources — even if the payoff was something as flimsy as “friendship.” Indeed, the court ruled the payoff has to be something of “consequence.”
The big question is how could someone as savvy as Preet Bharara have erred so badly?
It begins with Preet’s vaunting ambition. People close to him say one reason he pumped up the insider-trading cases with theatrical press conferences and midnight raids to arrest traders in their pajamas in full view of TV cameras was because he lusted for Eric Holder’s job as US attorney general.
With that post recently filled by Eastern District US Attorney Loretta Lynch, word is that now Preet is looking to run for office, possibly New York governor.
Then there was the obvious pressure to do anything to prove to the public that Wall Street was being held accountable for the excesses that led to the 2008 financial crisis — even if, as we all know, insider trading (i.e., trading on material, non-public information) had zero to do with the excesses that led to 2008 financial collapse.
The financial collapse caused real damage. But let’s be honest: Insider trading hurts almost no one (even in the worst-case scenario, a trader with an insider tip doesn’t encourage someone on the other end to make a trade). Yet Preet’s folks made it seem like they were doing God’s work by putting people in jail for this stuff.
My guess it was pure diversion: Prosecutors knew average Americans were boiling mad over the financial crisis and judge and juries would convict for just about anything — and they couldn’t care less if the punishment fit the crime.
Also keep in mind, for Preet to go after the true culprits of the financial crisis, he would’ve had to hold accountable (for example) the numerous federal bureaucrats who prodded government-backed mortgage lenders Fannie Mae and Freddie Mac to insure loans made to increasingly more risky (“subprime”) borrowers.
These loans were a large part of what caused the collapse of Fannie and Freddie, as well as many banks, and at least one of the bureaucrats behind this shell game was our very own governor, Andrew Cuomo — who as chief of the Department of Housing and Urban Development back in the 1990s encouraged Fannie and Freddie to make increasingly risky loans.
For some reason, I can’t see Preet going there. So instead he chose the low-hanging fruit of insider trading. Fueled by the public’s lust for banker blood, the Obama administration’s obsession with class warfare and his own vaunting ambition, he pushed the envelope and tried to put innocent men in jail because they worked on Wall Street. And finally he lost.
Charles Gasparino is a Fox Business Network senior correspondent.