So Harsh That Federal Fraud Sentences Are Out Of Control


Potential sentences in federal criminal fraud cases are so extreme that recently when confronted by investigating law enforcement agents a former SAC trader fainted.  Recently the Wall Street Journal ran a story about James Martoma, the former SAC affiliate portfolio manager, who passed out cold in his yard in Boca Raton, Florida when he was told he faced almost 20 years in jail unless he flipped and testified against his former boss Steven A. Cohen, long a subject of investigations by federal prosecutors and securities regulators.

The WSJ asked me to comment on the effect of the federal sentencing guidelines in fraud cases on someone who might consider pressing for their day in court to defend themselves, but is being pressured to cooperate and testify against others.  I told the Journal;

“It’s an awful risk for somebody to go to trial,” said Charles A. Ross, a white-collar defense lawyer not involved in the case. “I don’t think people understand just how completely out of control the sentences can get in fraud cases.”

Fraud sentences are driven by complex loss calculations and additional jail time enhancements for such things as a client’s role in the offense, how many purported victims were involved, whether the situation involved “sophisticated means”, whether someone received more than $1 million from a financial institution, and whether someone abused a trust.  It is not uncommon to see possible sentences reach well north of fifteen years on a garden variety scam allegation.  This can chill a client’s desire to mount a serious fraud defense.

fraud sentencesProsecutors regularly use the threat of charges or actual charges to scare clients of fraud defense attorneys into naming others they may have been involved with in order to obtain leniency for themselves.  Despite changes to federal sentencing laws many judges still follow the sentencing guidelines and impose lengthy terms of incarceration on those who admit guilt to fraud charges but do not chose to turn on their friends.

Until changes are made to federal guidelines which bring potential sentences within a more reasonable range this unfair pressure to become of government witness will continue to erode and eat away at valuable constitutional rights like a fair trial.

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SAC Trader Fainted as Agents Pressed on Boss

As federal agents pressed Mathew Martoma late last year to turn against his former boss, hedge-fund billionaire Steven A. Cohen, he fainted in the front yard of his Florida home.

"It was an upsetting experience," Charles Stillman, Mr. Martoma's lawyer, when asked about the incident.

Mr. Martoma, who quickly recovered and refused to cooperate with the Federal Bureau of Investigation, confronted the government's accusations again Monday—this time in a New York federal court where he faced a judge on charges of insider trading.

Mr. Martoma was released after the hearing on $5 million bail.

The two episodes highlight the stakes of the government's investigation for Mr. Martoma, 38 years old, and for Mr. Cohen's hedge fund, SAC Capital Advisors LP.

If found guilty, Mr. Martoma faces up to almost 20 years in prison on criminal charges of participating in a $276 million insider-trading scheme.

The potential prison time renews pressure on him to provide investigators with information about his interactions with Mr. Cohen, one of Wall Street's most prominent and successful investors, who has averaged annual returns of about 30% over two decades.

Mr. Martoma has denied wrongdoing. He was fired as a portfolio manager from an SAC affiliate, CR Intrinsic, in 2010 after his performance declined, according to criminal and civil complaints filed in a New York federal court last week.

Mr. Cohen hasn't been charged with any wrongdoing. An SAC spokesman said: "Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government's inquiry."

SAC is battling negative publicity from the investigations into the firm and from five former employees, not including Mr. Martoma, who were charged with insider trading in the past three years. Some of those former employees are cooperating with the U.S. in its continuing probe.

Federal prosecutors and the Securities and Exchange Commission have accused Mr. Martoma of obtaining tips about a clinical drug trial for an Alzheimer's drug from a neurology professor working on it. The complaints allege that he traded on the information and advised Mr. Cohen, who was referred to as the fund "owner" but not by name in criminal and civil complaints.

The complaints allege that Mr. Martoma and the owner of the fund quickly dumped $700 million in stock of two companies involved in the trial in a week in July 2008, avoiding huge losses—and profiting by betting on the companies' shares to fall.

Authorities have called it the most lucrative insider-trading scheme ever criminally charged.

Mr. Martoma first came face to face with the FBI late last year. Two agents, including case agent Matthew Callahan, approached him as he and his family returned to their home in Boca Raton, according to people familiar with the incident. Mr. Martoma's wife took the children into the house while he chatted with the agents in the front yard, these people said. Mr. Callahan declined to comment.

The conversation began calmly, with the agents telling him about the benefits of "flipping" and working with them, the people said. Mr. Martoma resisted and the discussion became more heated: Agents raised the prospect of securities-fraud charges that could result in prison time away from his wife and three young children, the people said. That is when Mr. Martoma passed out from the stress, and his wife rushed outside, according to people familiar with the incident. After waking up, Mr. Martoma finished the conversation, said goodbye to the agents, and hired a lawyer.

On Monday, amid a crush of jostling media, Mr. Martoma and his wife left the federal courthouse in lower Manhattan after his first hearing in New York in the case.

U.S. Magistrate Judge James L. Cott ordered that Mr. Martoma be released on a $5 million bond, requiring him to post $2 million in cash or property to secure the bond. Mr. Martoma and his wife didn't respond to questions shouted by reporters.

He had previously been released on $5 million bail after appearing in a federal court in Florida last week. His wife is one of the three people expected to sign his bond.

"We took care of business today," Mr. Stillman said. "We'll be back another day."

There haven't been any negotiations about a possible plea. But lawyers uninvolved with the case say there could be enormous pressure on Mr. Martoma to cooperate. If he is convicted, federal sentencing guidelines, though only advisory, dictate a term of 15 to 19 years, while cooperators typically do little or no jail time.

"It's an awful risk for somebody to go to trial," said Charles A. Ross, a white-collar defense lawyer not involved in the case. "I don't think people understand just how completely out of control the sentences can get in fraud cases."

Andrew Frisch, a New York criminal defense attorney also not involved in the case, said that by filing a detailed complaint as they have here, prosecutors are trying to "to convince him the only viable way out is to cooperate."