U.S. Attorney Preet Bharara has made it clear that prosecution of insider trading cases is a priority. It should be. The public sentiment is that Wall Street is rigged against the individual investor. The sentencing of Winifred Jiau (43) on September 21 offers a glimpse at the harsh penalties that await anyone who trades on or passes on inside information. The government wants Jiau to go to prison for 97-121 months. However, what is the message that such a sentence sends to Wall Street? Perhaps "Confusion".
The WSJ wrote that Assistant U.S. Attorney Avi Weitzman stated in a court filing that, "After a two-week trial, it is now clear that Jiau used guile and manipulation to steal sensitive corporate information from multiple sources in an effort to line her own pocket..." Weitzman went on to further state, "Should Jiau receive a light sentence, the business community and Wall Street professionals would be emboldened to engage in similar crimes...." Jiau will become the poster child for insider trading.
There are most definitely messages being sent to Wall Street as a result of these prosecutions, but I don't think they really depend on the number of years a small player like Winifred Jiau gets in prison. Wall Street is a selfish place based on self interest....it is what makes the market efficient. Prosecutors can believe, or state, all they want that a long sentence for Jiau is a message for Wall Street, but there is no support that long sentences deter other people from committing crimes. I don't know about you, but I have not seen a dramatic drop in white-collar crime since Sarbanes-Oxley legislation went into effect about 10 years ago.
The truth is, a person has a greater chance of avoiding prison if they are not caught on tape being involved in insider trading activities. In two different trials, the defense (Rajaratnam in one case and Goffers/Kimelman in the other) fought hard to keep out of evidence government taped conversations that implicated them in insider trading. They failed and subsequently failed at trial to prove their innocence. However, Goldman Sachs board member Rajat Gupta, faces (maybe) a hearing with the Securities and Exchange Commission that he passed inside information on to Rajaratnam related to Warren Buffet's investment in Goldman during the height of the financial crisis. Goldman stock rose on the news and Rajaratanam cashed out of stock shares he had bought based on the hot tip. However, Gupta has not, and probably will not, ever see one day in prison....the conversation with Rajaratnam was not caught on tape and the government only had the facts that a call was made between Gupta and Rajaratnam shortly after a Goldman board meeting where the Buffet investment was disclosed. The SEC has even dropped its case against Gupta for the moment. No tape, no time.
In Jiau's case, she was caught on tapes made by hedge fund trader Samir Barai (Barai Capital Management), not government wire taps, who pleaded guilty in May to charges related to insider trading....specifically, receiving information from Ms. Jiau. Barai took to recording personal conversations to make sure he had the information right from his sources and to also accommodate a hearing problem he had. Those conversations with Jiau all took place prior to December 2008, after which Jiau had decided to leave the expert network world and move on to other, more honorable, pursuits. In other words, she understood that what she was doing was wrong and walked away. The tapes of Winifred Jiau fell into the government's hands when Jason Pflaum, an employee of Barai's, began cooperating with the authorities almost two (2) years later. Talk about bad luck.
Jiau is also in an unfortunate position in that the government has tied nearly $2.5 million to $7 million of "illegal profits" to the tips she passed on to Barai and another hedge fund trader, Noah Freeman. Jiau was paid approximately $208,000 over two years plus some gift certificates at The Cheese Cake Factory and a dozen Maine lobsters, a small fee compared to the millions reaped by the hedge fund advisors that traded on her information. The amount of the illegal gain plays a large part determining a sentence under the Federal Sentencing Guidelines, from which the prosecutors determine their position on sentencing. The judge, in this case U.S. District Judge Jed Rakoff, only uses these as a recommendation...he can do what he wants. In other cases of insider trading it was difficult or impossible to determine the amount of illegal gains. In the case of Don Chu, who worked at Primary Global Research, the government could not determine an amount of illegal profits and his sentence was two years of probation (no jail time). In the upcoming sentencing of Manosha Karunatilaka (a consultant to Primary Global) who passed on information, similar to that of Jiau, for Taiwan Semi-Conductor, the amount that traders gained from his information was determined to be less...thus a recommendation by the government of 37-46 months. So because the traders that acted on Jiau's information bought more shares for a bigger gain, something she had no say in, she is punished with 10 years in prison?
Winifred Jiau is looking at a prison sentence that not only seems unfair, it does not make any sense at all. Jiau should do time in prison for her acts, and she has. She has been incarcerated in a medium security prison in lower Manhattan and prisons across the country since her arrest last December in California. Her time in prison has been worse than any others sentenced who have ended up in minimum security camps. Her 9 months in prison, hard prison, should be worth something of measure akin to dog years compared to human years. It has been tough.
The government should send a message to Wall Street and those in the expert networks that prison time awaits them if they do not obey the law. This can be done by stating what has already happened to Winifred Jiau, not imposing a sentence that makes us forget who she is....if anyone even knows who she is now.
On another note, Donald Longueuil begins his sentence in a federal prison camp today. He too traded on the information received from Jiau. His sentence? 30 months. What message are we to derive from that?
