Meanwhile Quattrone, who was in the middle of a bewildering myriad of civil and administrative proceedings, suddenly found that a federal grand jury was casting its eyes in his direction. The combination of proceedings required Quattrone and his lawyers to engage in a massive juggling act. In January 2003, the NASD told Quattrone that it was considering bringing disciplinary charges against him relating to the exaggerated value of a new stock issue and to the supervision of research analysts. Then, the following month, the U.S. attorney indicated that it was criminally investigating Quattrone based on an email he had sent in December 2000 during the prior kickback investigation, and the NASD requested a third day of testimony from Quattrone, in part to follow up on prior questions concerning that email. NASD refused Quattrone’s request to postpone that testimony until resolution of the new and unexpected criminal investigation. It also refused his offer to cooperate in other ways. Instead, in March 2003, NASD brought civil charges against him for failing to testify and eventually barred him from the industry for life as a sanction, even though by that time he had completed the required testimony before the NASD over a period of three more days. Also in March 2003, NASD brought separate civil charges against Quattrone relating to the allocation of IPO shares to executives of investment banking clients and the supervisory structure for research analysts, based on rules that had never been applied to these practices. NASD dropped these charges shortly before trial.
The biggest threat faced by Quattrone, however, was the criminal indictment returned by the grand jury in April 2003 based on his December 2000 email. Following a by-now familiar pattern, however, Quattrone, who refused to make a deal and announced that he was prepared to fight whatever the U.S. attorney threw at him, was charged not for taking commission kickbacks, not for unlawful hyping of new issues by Equities Division research analysts, and not for allocations to executives of investment banking clients. Rather, he was charged with that old standby, obstruction of justice, allegedly committed during the 2000 SEC and grand jury probes into brokerage commission kickbacks. In other words, having investigated Frank Quattrone head-to-toe, the Department of Justice, finding no violation (even arguable) to which Quattrone was likely to plead guilty rather than fight, resorted to the ever nebulous obstruction of justice statute.
The nub of the indictment involved Quattrone’s response to a single email sent on December 4, 2000, by one of his underlings, one Richard Char (a lawyer), to a group of his fellow CSFB bankers, including Quattrone. The email reminded staffers of the firm’s “document retention policy” requiring that certain documents generated in a deal become part of the permanent record and stored in the company’s archives, while draft documents created during the course of the deal be discarded. It noted, too, the circumstances during which the destruction-of-documents portion of the policy had to be suspended, such as when “a lawsuit is instituted.” 10
The policy Char reminded employees about was, of course, a guide to both the retention of permanent documents and the corollary destruction of drafts, notes, and other such documents that company policy did not decree merited permanent retention. Bear in mind that the investment bankers, after all, were not the focus of the 2000 kickback investigation, and CSFB’s general counsel’s office had not notified the group that the firm had received subpoenas requiring them to save their documents.
Quattrone was indicted because of his December 5th response to the Char email (dubbed by the courts as Quattrone’s “endorsement email”) that was short, simple, and to the point, and that the government claimed was meant to result in the destruction of documents that were subject to federal subpoenas:having been a key witness in a securities litigation case in south texas (miniscribe), I strongly advise you to follow these procedures. [lower case spelling in the original.]
Quattrone’s attorneys pointed out that although CSFB’s general counsel’s office had received, in October 2000, an SEC subpoena calling for the production of documents relating to over 300 CSFB IPOs, as well as a similar subpoena from the grand jury in November 2000, the general counsel’s office did not promptly notify all affected bankers to preserve documents responsive to the subpoenas; such notice was not sent until December 7, 2000, after Quattrone had sent the email that was at the center of the indictment against him. Quattrone’s big problem, however, was that it hardly mattered what he knew about the investigation and when he knew it. Innocent intent was not an adequate defense in the eyes of the prosecutors.
Nor was it sufficient for the trial judge. United States District Judge Richard Owen, appointed to the federal trial bench in 1973 by President Richard Nixon and widely reputed to be one of the most pro-prosecution judges in the entire federal court system, showed palpable bias against Quattrone. Judge Owen, many trial observers noted with varying degrees of frankness, exhibited a marked pro-prosecution bent during the trial. He clashed repeatedly with Quattrone’s trial attorneys, especially noted litigator John Keker who made it a point to document, for the record, the judge’s increasingly evident bias.
After a jury deadlocked at Quattrone’s first trial, a second jury convicted him of all three counts: obstruction of justice, obstruction of an agency proceeding, and witness tampering. In September 2004, Judge Owen imposed an 18-month prison sentence.
The Second Circuit Court of Appeals, while ruling there was sufficient evidence that Quattrone’s jury could have concluded that he was urging the destruction of documents relevant to the various government inquiries and hence that he might have acted with “corrupt intent,” nonetheless reversed the conviction. The three-judge appellate panel unanimously held, in 2006, that Judge Owen’s instructions to the jurors had allowed them to convict Quattrone without concluding that there was a “nexus,” or relationship, between Quattrone’s endorsement email and the impact it might have on the destruction of documents that, but for the destruction, would have had to be produced for the government. Only with the establishment of such a nexus could the defendant’s conduct, ruled the court, be considered intentional obstruction of justice. Without such an intent, Quattrone’s actions were merely a rather unremarkable, even routine, instruction to employees about the company’s equally unremarkable, routine document-retention-and-destruction policy.
Judge Owen, it turned out, had instructed the jury that if it found that Quattrone had urged the destruction of documents that were covered by subpoenas (even if he did not know that they were covered by subpoenas), this was sufficient evidence on which to find an intentional obstruction that amounted to a felony. This instruction, held the Court of Appeals, entirely eliminated the crucial requirement that the defendant had to be proven to have acted with corrupt intent to disrupt the investigation. Without such proof of corrupt intent, said the Second Circuit, the case was “a bare-bones strict liability crime” (a serious felony pinned on a defendant even in the absence of a conclusion that he acted intentionally to violate the law). While the Court of Appeals did not indicate whether it believed Quattrone’s explanation for his sending the confirmatory email was true (it was not, after all, the role of the appellate court to judge witness credibility, a task left to the jury), it did note that Quattrone’s lawyers had placed into evidence “several innocent explanations for his conduct” and that “each has some basis in the record.” In other words, Quattrone had produced evidence, including his own testimony, to bolster his claim of innocent intent, and Judge Owen had a duty to allow the jurors to decide whether a nexus existed between Quattrone’s actions and a corrupt intent to violate a known legal duty.
Interestingly, the Court of Appeals took the extraordinary step of ordering that Quattrone’s retrial take place before a different trial judge. While the appellate panel went out of its way to avoid direct criticism of Judge Owen, it admitted gingerly that “portions of the transcript raised the concern that certain comments [of Judge Owen] could be viewed as rising beyond mere impatience or annoyance.” And so, said the court, both “the interest and appearance of justice are better se
rved by reassignment” of the case to a different judge. This is as close as polite appellate courts get to criticizing even the most outrageous actions of a trial judge. And while some courts of appeal routinely assign retrials to a new judge when a conviction has been overturned, in this case the mention of the controversy concerning Judge Owens’s conduct obviously was not meant to be missed. The reassignment of the case was anything but routine.
Four days after the Court of Appeals released its March 20, 2006, opinion, the SEC overturned the NASD’s decision that had barred Quattrone for life from working in the securities industry. The NASD, ruled the SEC, violated its own rules and should not have summarily dismissed Quattrone’s claim that he was entitled to assert his Fifth Amendment privilege to postpone testimony before the agency while criminal proceedings were pending. Two months later, the NASD dropped all of its remaining charges against Quattrone.11 The NASD sought to justify its retreat on the ground that witnesses had scattered to other occupations and were no longer subject to NASD jurisdiction as registered securities-industry employees.12 Quattrone’s lawyers pointed out the more likely cause: Neither the NASD nor any other government agency had rules outlawing the practice until 2002, long after the conduct charged. “Frank Quattrone played by the rules, and the practices at issue were legal, common in the industry, and approved by CSFB’s senior management and legal counsel at the time,” explained one of Quattrone’s lawyers, Kenneth G. Hausman.13
The independent press by and large played the role of cheering section for federal prosecutors until it became obvious that the case was more witch-hunt than legitimate prosecution. During and after Quattrone’s legal victories, there was very little objective assessment of the case in the press. The staunchly conservative, pro-business Wall Street Journal editorial page, which virtually alone had earlier championed Michael Milken, was likewise supportive of Quattrone and used his Second Circuit reversal to drive home the lesson: juries can fairly decide these corporate fraud cases, editorialized the Journal, only “if they are given appropriate guidance from the court about where to draw the line on criminal behavior. In the rush to judgment in the post-bubble…days that line was not always clearly drawn.”14
What was more unexpected, and oddly predictive of the outcome of the case, was Roger Parloff ’s 2005 column in the more middle-of-the-road Fortune magazine, published months before the Second Circuit’s reversal of Quattrone’s conviction, headlined “Why Quattrone Deserves to Walk.”15 “There was no evidence,” explained Parloff, “that the timing of the file-cleaning email was anything other than unfortunate coincidence.”
But perhaps the most interesting comment came from an unanticipated source, namely Kathleen Ridolfi, director of the North California Innocence Project run out of Santa Clara University’s Law School, to which Quattrone donated time and money while temporarily out of the banking business during his legal travails. Ridolfi said that her project would likely have had to close its door but for the assistance of Quattrone, who raised more than a half million dollars for the organization. “He has a lot of courage,” Ridolfi said. “He stood up to the charges despite huge risks. I love the guy.”16
So the story ended relatively well for Frank Quattrone. Of course, he lived under a harsh spotlight for many months and with the possibility that he could land in federal prison for many years. The cost of skilled legal counsel to handle such a case would have bankrupted many. But it’s unlikely that the legal system, nor the news media that reports these cases, learned much about the dangers of vague statutes and regulations, overreaching prosecutors and enforcement agencies, and the toxic mix of ambitious prosecutors and pro-prosecution judges. The NASD in 2002 finally proposed 17 more specific rules delineating impermissible practices in the underwriting and distribution of IPOs.18 With clearer rules, it would be unlikely that IPO underwriters would again get caught up in a securities fraud investigation for sales practices such as those allegedly broadly engaged in by Wall Street before that time.
But the same could not be said for the “obstruction of justice” area of the law, for the government took steps to make sure that this particular trap for the unwary would remain as useful to prosecutors post-Quattrone as it had been earlier. As The National Law Journal reported in the aftermath of the case, with the passage of the Sarbanes-Oxley Act of 2002, the government assured that changes in the law would “ease [the] way for prosecutors.”19 The Act, explained the Journal, “eliminates the need for prosecutors to show that a defendant knew of a specific investigation prior to the shredding of documents.” And it cited as a source Patrick Robbins, former head of securities fraud prosecution in the San Francisco U.S. attorney’s office, who had by that time gone to his professional reward as a partner in the San Francisco office of Shearman & Sterling, the high-prestige “white shoe” corporate defense law firm.
If a “man on the street” survey were conducted asking what crime home décor maven Martha Stewart ended up spending five months in federal prison for,20 the answer would likely be “insider trading.” That, however, would be wrong. Insider trading was merely the crime for which she and her Merrill Lynch stockbroker were investigated, and for which the Securities and Exchange Commission sued her civilly. Because these days no lawyer, no judge, and surely no home décor maven can readily discern the boundaries of what qualifies as insider trading, prosecutors looking to pin a criminal rap on Stewart took advantage of her fears that her trading ImClone shares might indeed have been criminal. They focused on her answers to their questions when they interviewed her and ended up charging her with making false statements to federal authorities and a host of other “obstruction” crimes. The usual stuff. Only this time, the feds couldn’t resist the temptation to add a cutting-edge charge of securities fraud (about which more later). This was, after all, Martha Stewart, founder and CEO of the publicly traded company Martha Stewart Living Omnimedia (“MSLO”), and at that time one of the most famous women in the world.
The federal false statement statute makes it a felony to lie to any federal officer on any matter deemed “material” to that agency’s carrying out its mission or to commit a host of other “obstruction” crimes.21 A mind-boggling array of federal employees is covered by this statute, and misstatements, declared to be lies, may emerge from an equally mind-boggling array of interactions between a citizen and his or her government.
Martha Stewart and a friend were flying to a Mexican vacation spa on Stewart’s private jet on December 27, 2001. During a refueling stop, Stewart called her Merrill Lynch broker, Peter Bacanovic, and learned that a friend of hers and one of Bacanovic’s other clients, Samuel Waksal, was attempting to sell all of his and his family members’ shares in ImClone Systems, a company in which Stewart owned a modest stake.
Since Waksal was the CEO of ImClone, Stewart and her broker came to the logical conclusion that there must have been a compelling reason to sell. Of course, there are many reasons why insiders sell their stock, such as needing money to pay taxes or to buy another asset for diversification, but Waksal’s seemingly frantic efforts to dump his entire family’s holdings suggested something out of the ordinary about the company’s prospects. Bacanovic’s assistant, Douglas Faneuil (who ended up testifying against both Stewart and Bacanovic), speaking for his boss, told Stewart that ImClone had not yet issued a news release about the sale, but that Bacanovic thought Stewart would “like to act on the information” he had. Stewart consequently ordered the broker to sell all of her shares, producing approximately $230,000.
It turned out that Waksal sold his shares—illegally—because ImClone had just learned that the FDA had turned down the company’s application for approval of its major product, an anti-cancer drug called Erbitux®. The public announcement, which came on December 31, caused an 18 percent drop in share price. When a Merrill Lynch internal review noticed the ImClone trades by Waksal and Stewart, in advance of the Erbitux® announcement, it conducted an internal investigation and reported the matter to the SEC. Wi
thin days, both the SEC and the U.S. attorney in Manhattan began civil and criminal insider trading investigations.
The prosecution of Waksal was a straightforward matter, even under the often uncertain rules governing insider trading. He was a clearly defined “insider” at ImClone, the adverse material information he possessed had not yet been publicly announced, and he dumped a large number of shares owned by him and his family.
Winning an insider trading case against Bacanovic and Stewart would be far more difficult. Although Bacanovic had violated his employer’s rules against sharing information with one Merrill Lynch client about the investment activities of another, neither he nor Stewart owed a fiduciary duty to ImClone. Moreover, Bacanovic and Stewart knew only that Waksal was selling his shares. They did not know why.
But the government got lucky: once a federal investigation was launched, Stewart and her broker were less than candid in their responses to the government’s questions. It is possible that they believed that Stewart’s trading constituted insider trading and consequently decided to cover up the reasons for Stewart’s sale of her ImClone shares, but it was also possible that Bacanovic was concerned simply with having violated Merrill Lynch’s internal rules against sharing information about one client with another, and that Stewart thought her piggybacking on Waksal’s selling would not look good to her adoring public.
Three Felonies a Day Page 18