by Matt Taibbi
Here again we have a major difference between the prosecution of ordinary street crime and the regulation of global finance. If you jump a fare on East 125th Street in Harlem, there’s no question which police force and which city’s set of laws apply to you. No lawyer is going to stand up in court and make the pseudometaphysical argument that the bus was actually built in Conway, Arkansas, or that the injured parties were actually the Chinese buyers of a transportation bond issued by the city of New York. No, you jump a fare in Manhattan, and it’s Manhattan cops who will knock you on the head and throw you in jail. And no judge will excuse you from the New York City dock because your home address happens to be Paterson, New Jersey.
But this sort of thing happens all the time in global financial crime. Crimes happen everywhere and nowhere, and unless a major federal regulator asserts jurisdiction, defense lawyers can keep their clients from ever going near a courtroom simply by challenging the venue. This is exactly what happened in the Fairfax case.
After he stripped Chanos and Loeb from the case, Hansbury held his next hearing in January 2012. This was the one where I sat watching as Bowe faced off against Collins and the rest of the lawyering multitude defending Morgan Keegan and the remaining hedge funds (Sender’s Exis Capital, for instance) still in the suit. This next hearing was to decide an even bigger metaphysical question—whether Fairfax was entitled to use New Jersey’s RICO statute to make its case.
If Bowe and Fairfax could not use the RICO statute to sue, they had little chance of winning a case in which most of the bad acts had technically been committed by middlemen and stooges. Like mob cases in the days before racketeering laws, the big shots would get off without ever seeing the inside of a courtroom.
Hansbury showed up in court that January afternoon looking bored. His Honor is a frowning, thin-lipped, narrow-shouldered man with Bob Newhart’s balding head and laconic delivery. He yawningly asked Collins to begin his presentation, and the hotshot Texan lawyer complied by entering into the legal version of a Sesame Street counting game. Collins proceeded to list each of the major players in the case, then note their addresses and locations at the time of their alleged involvement. After each entry, he would argue to the judge about whether that person’s conduct could really be said to have occurred in New Jersey.
In some cases, he would mention a player like Contogouris’s ridiculous accountant Rekuc, whose office was in New Jersey, and he would generously “give” that player to Bowe despite the fact that Rekuc only ever met with the other defendants in New York.
Using this generous math, Collins actually calculated, down to the percentage point, how much of the crime had taken place in New Jersey. Even if you conceded every possible New Jersey connection to Bowe and Fairfax’s lawyers, Collins said, less than 8 percent of the crime had taken place there. “So giving them all that, what do you end up with?” Collins asked. “You get 7.6 percent, doing the right comparative analysis, using their statement of facts … 7.6 percent.”
Collins went on, explaining that even some foreign countries could claim more ownership of the crime alleged in the lawsuit. “Your Honor, they’re barely beating Australia, barely beating Australia here,” he deadpanned.
Around the courtroom, all the lawyers in the gallery were frantically entering that 7.6 percent number into their notepads. Nobody laughed at the absurdity of calculating what percentage of a crime took place in what state. In my mind, the matter was much simpler: if a crime took place in New Jersey at all, be it 7 percent of the overall scheme or 1 percent of it, and the ostensible victims lived in New Jersey, then any law officer in that state should want to see the local laws applied. Why did it matter if the crime also took place in New York, and Toronto, and Australia, and wherever else?
Bowe tried frantically to make the same argument when Collins finally finished and Hansbury gave him a chance to respond. “We’re talking about a New Jersey statute,” Bowe said. “And if the intent of that New Jersey statute was to apply to the conduct in this case then the New Jersey Court should apply it without doing a balancing test to determine whether or not some other state has a bigger interest or not.”
Hansbury shrugged, seeming unimpressed. When speaking to Bowe, he acted like a man taking a sales call from a telemarketer.
I’d seen the same phenomenon at more than one white-collar fraud case. If judges in regular criminal courts treat everything that comes out of the mouth of a defense lawyer like a ploy to get some definitely guilty scoundrel out of trouble, in civil trials involving financial companies, they treat plaintiff’s counsel like parasites trying to use the courts to wrangle money out of hardworking, successful people.
Throughout the Fairfax case, this seemed to be the main preoccupation with the judges. Were the Fairfax lawyers engaged in some elaborate ambulance-chasing effort, trying to use the civil code of the state of New Jersey as a weapon to take down their target? The fact that the democratically elected state legislature of New Jersey had in fact passed a tough civil RICO law for, quite possibly, precisely this sort of case seemed secondary to the possibility that someone was trying to use a New Jersey judge to suck money out of a bunch of New York hedge funds.
It was obvious that the latter possibility greatly troubled Hansbury as he repeatedly interrogated Bowe. “Isn’t that a significant policy difference,” he asked, “that in New York you can’t bring a private RICO claim, but in New Jersey you can?”
Bowe, caught off guard, hesitantly tried to argue that it wasn’t a significant difference in the sense that both states have a RICO statute and bar the same conduct, but there was just a “procedural” difference in that while in New York the state has to file those charges, in New Jersey the people are explicitly allowed to “bring private rights of action.”
“But if I accept your argument,” the judge said, wincing, “is that not going to open the flood gates to New Jersey every time somebody is unhappy with an outcome in New York under a RICO claim? If they can touch New Jersey, they file it here? Isn’t that what’s going to happen?”
Bowe tried to argue. “The fact of the matter is, if the New Jersey statute so provides, it so provides,” he sighed. “And the fact is the New Jersey statute provides.”
It was a valiant effort, but everyone in the room could tell Bowe was toast. Every question the judge asked him was a laser blasted right into the heart of his case. When addressing Collins, meanwhile, the judge was more often asking, collegially as it were, what the Texan’s opinion was on a matter of law. In fact, the judge didn’t interrupt Collins at all during his entire argument and bothered to ask him a question or two only toward the end of the hearing, as though it wouldn’t look good if he didn’t challenge him at all.
As I was walking out of the courtroom, the other reporter covering the case chuckled. “Those guys are dead,” he said, referring to Fairfax.
He was right. A year later, on September 12, the entire case was dismissed, this time by a different judge, Donald Coburn. This was despite the fact that Hansbury that spring had agreed that Fairfax had “suffered massive pecuniary/economic loss in this case” and that Coburn himself agreed that “it’s clear here that there was evidence of intent to adversely affect the actual business dealings.” Toward the end, Coburn even seemed to signal his belief in the underlying claim of the suit. “If someone says an insurance company doesn’t pay its debts and doesn’t settle its claims, that could certainly affect its ability to sell its product,” he said. “There is sufficient evidence on which a jury could find there is an intention to harm their interests.”
But Coburn disallowed the testimony of one of Fairfax’s expert witnesses, whose main function was to calculate the amount of damage the attacks against Fairfax had caused. Among other things, the company had been forced to borrow money and liquidate assets at disadvantageous prices during the most desperate period of its war with the hedge funds, and the company claimed it suffered losses of up to $6 billion through these transactions. Coburn didn’t buy
Fairfax’s arguments and allowed the company to proceed with a suit only for $19 million against the two remaining defendants, Morgan Keegan and Exis.
Rather than go to court over $19 million, Fairfax decided not to fight a motion to dismiss and elected to appeal the case later on and try to bring all the defendants back in. Who knew? Maybe there would be news of some kind that would change the landscape a little.
A few months later news broke that the federal government was pursuing what it called “the most lucrative insider trading scheme ever charged” against SAC Capital. The complaint asserted that an SAC employee, Mathew Martoma, had obtained inside information about a failed trial for an Alzheimer’s drug that was being tested by a pair of companies SAC was invested in. According to the Feds, Martoma passed that information to “Portfolio Manager A,” the “owner” of the hedge fund, who in turn liquidated the firm’s $700 million position in the two companies and then turned around and shorted them. According to the complaint, the two moves saved the firm from $194 million in losses and then earned it about $83 million on the short trade. News reports confirmed the obvious, that the unnamed coconspirator was Cohen.
Another SAC vet, Noah Freeman, told the FBI that “you were expected to provide your trading ideas to Cohen” and that doing so meant providing insider information. “At SAC Capital you were paid a percentage of Cohen’s trade if Cohen placed a trade based on your tip,” Freeman said. Another SAC analyst, Jon Horvath, pleaded guilty to being part of a “criminal club” that swapped nonpublic information about technology companies.
For a while, it looked as if Cohen himself might get away. In March 2013 the SEC settled insider trading charges with Cohen for $616 million, and Cohen was so depressed by the paltry fine (which was only a fraction of his rumored $8 billion personal fortune) that he immediately went out and bought a $155 million Picasso (Le Rêve) and a $60 million, Gordon Gekko–style beach house in the Hamptons (right next to his existing $18 million house on the same beach). But later in the year, SAC itself was criminally indicted on insider trading charges, and Cohen was also charged civilly by the SEC for failure to supervise in the Martoma case. As of this writing, it appears that at the very least, SAC will be shut down. Meanwhile ten former SAC employees have been charged or implicated in illegal trading, and five have admitted guilt.
But none of the charges had anything to do with Fairfax, and no action has yet been taken against any of the others in the case. Anyone who took the extremely belated action against Cohen as proof that the state actually polices the stock markets in a meaningful way would be missing the point.
When Harlem residents Michael McMichael and Anthony Odom drove down 161st Street in a new-looking Range Rover, police immediately profiled the car as being bought with illegal income. But when Stevie Cohen claimed to be 400 percent more efficient than the entire investing world fifteen years running, talked publicly about his billion-bucks-a-year income, and bought a 6,000-square-foot, Zamboni-treated skating rink for his mansion just a few years after opening his own business, nobody blinked until decades had passed and multiple companies had been destroyed.
Put it this way: If someone is breaking into your home, you call 911 and the cops show up right away, sirens blaring. You don’t have to put in any work convincing anyone you’re really in trouble, no matter who you are.
But if someone tries to destroy your company with an insider trading scheme, getting regulatory help is a delicate political matter. Unlike street crime, where there are always enough officers to pound on a door, the resources devoted to policing financial markets are so meager that allocating any of them is a major political decision. And the issues are confusing enough that if one side hires enough lawyers and analysts and presses the case aggressively enough, the victim could end up being investigated before the aggressor, which is a serious problem in a business where the mere announcement of an inquiry can result in huge amounts of money being won or lost.
What happened with Fairfax was the opposite of Justice by Attrition. An offense takes place, the perpetrators are identified, but over a period of years the whole thing just goes away in a cloud of paperwork. Regulators used the fine print not to lean on a suspect or whittle away his right to a speedy trial but to avoid claiming jurisdiction; the courts used it to avoid imposing punishment, and defense lawyers used it to disappear the case altogether.
* * *
*1 The Fairfax story is often included in with other legendary bear-raid stories involving companies like Overstock.com, Dendreon, Afinsa (a Spanish collectibles company), and Biovail, another Canadian firm, all of which were targeted by some of the same hedge funds described in this story, many of which ended up out of business and/or mired in scandal. Many of those tales revolve around the issue of naked short selling, a type of financial counterfeiting that allows short investors to artificially depress the stock prices of target companies. Whether naked short selling is a serious social contagion or meaningless conspiracy theory is a passionately debated topic on Wall Street, and to even broach the subject inspires strong emotions: right or wrong (and I believe wrong), in some quarters, if you bring it up at all, eyes roll automatically. One of the reasons I originally shied away from the Fairfax story was that it has a naked short-selling angle that makes some serious observers dismiss it out of hand as nutty conspiracy. So even though naked short selling was actually a factor in the Fairfax case, I’ve left it out of this narrative, because it’s the other craziness that went on in this case that’s really interesting.
*2 Buffett himself, it should be said, has seemed to go against his own principles. The legendary investor has been heavily criticized in the postcrash era for his investments in companies that seemed to violate his business principles, most notably a large share of the ratings agency Moody’s; Buffett had previously criticized the industry.
*3 I myself experienced Loeb’s legendary epistemological style in the fall of 2013, after I wrote a Rolling Stone article about hedge funds like his that received indefensibly high fees from state pension funds. The piece had been out only about three minutes when I started receiving angry emails from the “Angry Investor” about my literary irrelevance.
*4 A279 [Jul. 17, 2006, email from SpymI4 to Sender, EXIS-0001312].
*5 A282 [Jul. 17, 2006, email from Sender to Contogouris, EXIS-0001316].
*6 A283 [Jul. 17, 2006, email from Contogouris to Sender, EXIS-0001317].
*7 A520 [Jul. 18, 2006, email from Sender to Contogouris, EXIS-0095883].
*8 A284 [Jul. 18, 2006, email from Contogouris to Sender, EXIS-0001320].
*9 A3763 [Jul. 18, 2006, email from Sender to Contogouris, EXIS-0063838].
*10 A3764 [Jul. 18, 2006, email from Contogouris to Sender, EXIS-0063839].
*11 A281 [Jul. 17, 2006, email from Contogouris to Sender, EXIS-0001315].
*12 A4128–A4143 [Nov. 6, 2006, email from Heller to Contogouris, EXIS-0064564]; A4138–A4143 [Nov. 6, 2006, email from Heller to Sender: (“[Contogouris] tells me he told us FFH would lose 22 a share. Like he has any clue about their #s. but ep fcx and mmr he wiffed”), EXIS-0093214–EXIS-0093219].
Maria Espinosa didn’t know what hit her. It was like waking up underwater and not knowing which way to swim to get to the surface. There’d been a loud banging noise, and now there was a man standing before her at her apartment door, in his forties and nearly twice her age, like her Spanish speaking and of Latin origin, but unlike her a full American citizen, American born.
He was gruff and powerful looking and he held up some kind of ID before reaching across the doorway, putting his hand on her shoulder, and moving her aside to let himself in.
“He pushed me,” Maria would explain later. “He just walked right in. Went straight to the kitchen.”
Maria thought maybe it was the police. The police had been to her tiny Los Angeles apartment many times in recent years because her boyfriend, Eduardo, the father of her three-year-old son, Carlos, beat and terrorized her regularly. It was worse whe
n he drank, and he drank a lot. She’d been staying with the boyfriend for the sake of her son, but lately things had gotten so out of hand that she’d finally kicked him out. Now she was alone, jobless, taking care of a young child, with barely any English, and far from her family in Mexico.
And now there’s a strange man in her apartment, American but Spanish speaking, and she has no idea what he’s doing there. He’s in the kitchen, opening her cabinets, looking in her refrigerator. She asks him what he’s doing.
“You applied for help,” he says. “You applied for food stamps, right?”
Now Maria remembers. She had indeed gone down to the local welfare office a few days before and applied for food stamps and temporary assistance. She had legal status, and as a victim of domestic violence, she qualified for benefits. They’d been very nice to her at the welfare office, and when the counselor approved her application he added, with a smile, that everything was fine, but they were just going to “send someone to check.”
They didn’t tell her they were sending someone to barge into her apartment and start conducting a bizarre search through her kitchen cabinets. He’s looking at cans of beans, peering under bags of flour, like he’s looking for something in particular. He turns to her.
“You have a problem with drugs, right?” he asks.
Maria is mortified.
“No,” she says. “No, I don’t have a problem with drugs. I never take drugs.”
He shrugs. She starts to explain about Eduardo. At the mention of that name he raises a finger, like he’s remembering something.
“Oh, that’s right,” he says. “We hear you’ve had a lot of problems with the police.”
Maria shakes her head anxiously. He’s got her confused with someone. “No, no, I didn’t have problems with the police,” she protests. “I called the police because I’m afraid of that man. I’m worried he’s going to kill me, each time that’s what I was worried about. I’m not in trouble with the police.”