SEC "not taking on Fried Frank"

For Art's sake, a masterclass

Meet Audrey Strauss (left). Her name—and that of her firm, Fried Frank et al—is one to keep at the top of the To Call list should the US Securities and Exchange Commission’s enforcement division show up unannounced, according to the the US Senate report on The Gary Aguirre affair released late Friday.

Strauss represented Pequot Capital Management and its founder Art Samberg in the agency’s insider-trading investigation that—after a belated start, its distinctly restrained prosecution once senior SEC staff realized that they had big game on their line, and a final flurry of look willing when Aguirre’s complaints became public—was abandoned when the statue of limitations expired.

Samberg’s defense, in the famous allusion of US Attorney Patrick Fitzgerald announcing the perjury and obstruction of justice indictment of Scooter Libby, may not have tossed sand in the umpire’s eyes. But it certainly stirred up plenty of dust on the base-paths.

Step I: Limit the investigation

Step II: Spin out document production

Step III: It was never a fair fight anyway

Step IV: Prepare the witness

Step V: And they all lived happily ever after

Step I: Limit the investigation

Gary Aguirre, the SEC attorney whose firing in precipitated the Senate inquiry, got the file on Pequot’s controversial GE-Heller trades shortly after he joined the agency in Sep. 2004, already more than three years after the trading had occurred. According to the report, SROs—self-regulatory organizations such as the New York Stock Exchange—had identified between 17 and 25 sets of suspicious trading involving Pequot.

Strauss’s first step was to get the investigation limited. A chat with then director of enforcement Stephen B. Cutler—now general counsel at JP Morgan Chase (represented by Fried Frank as trustee and collateral administrator in relation to numerous CDO transactions, among 30,300 Google hits on the query "Fried Frank" +"JP Morgan", but I digress)—in Feb. 2005, seemed to do the trick [Emphasis added]:

The staff initially believed that the key to bringing an insider trading case against a large hedge fund would be to demonstrate a pattern of suspicious behavior in a series of transactions...following a meeting between Pequot’s lead counsel, Audrey Strauss, and ...Cutler, the staff was ordered to investigate only a few of the suspicious transactions identified by the self-regulatory organizations...

This account was corroborated by Eric Ribelin [a branch chief in the office of market surveillance], who added that the team members working on the case were left out of the meeting between Strauss and the director of enforcement.

Step II: Spin out document production

With Cutler, who announced his resignation in Apr. 2005, in his box, Strauss then went to the next arrow in her quiver: document sort-of production.

Aguirre’s first Pequot subpoena was issued Feb. 7 2005; on Feb. 23, when Aguirre complained about Fried Frank’s lack of cooperation with previous information requests, his supervisor, Mark Kreitman [an assistant director in the enforcement division] wrote [Emphasis added]:

Agreed. We need to continue to document this pattern of behavior with a view to possible 17(b) charge and perhaps some disciplinary action against the law firm.

However, others in the SEC doubted the resolve of Aguirre’s supervisors to support pressing for complete compliance with document subpoenas. In an email exchange with Eric Ribelin, one wrote:

I have seen these [SEC enforcement] Lawyers get all huffy before. They are empty suits. When push comes to shove, no one in the SEC is going to take on [Fried Frank] or any other major player. Not going to happen...When Fried Frank gets a handle on the email, they will produce them, and not before[.]

Prophetic words. After a second subpoena was issued on Mar. 22, document production began in April, but slowed in May as Pequot raised claims of attorney-client privilege. With Kreitman reportedly giving a big assist...to Pequot [Emphasis added]:

Pequot withheld over 200,000 pages of documents sought by the Mar. 22 2005 subpoena based on claims of privilege...

Pequot retained two outside attorneys, Irving Pollack and Larry Storch of Fulbright & Jaworski LLP, to review the documents that were being withheld. They were friends of Mark Kreitman [who] instructed Aguirre not to contact Pollack or Storch. Although Strauss had delegated the backup-tape issue to them, she did not officially acknowledge that Pollack and Storch represented Pequot for some time.

Kreitman’s instruction that Aguirre not contact them because it was not clear whose interests they represented had the effect of delaying the investigation. Aguirre repeatedly attempted to deal with Strauss on document production issues, only have Strauss refer him to Pollack and Storch. Yet, because Aguirre was instructed not to talk to Pollack and Storch, the document production dispute continued to linger into June 2005 with little or no clarification...

That would be the Joseph Heller, as opposed to the GE-Heller, Circle of Hell. Strauss officiallly acknowledged the role of Kreitman’s friends July 13. Not that it did a lot for building the case against Pequot:

...this concession came too late to have much practical effect as many of the documents sought were never produced, even after Aguirre was fired. When documents were produced, they were delivered, on the day of, days after, and weeks after testimony was taken...

Step III: It was never a fair fight anyway

Strauss had lots more help from the SEC, anyway [Emphasis added]:

Despite the number and complexity of the remaining suspicious Pequot transactions, the SEC assigned only one staff attorney to the investigation full-time: Gary Aguirre. He had part-time assistance from just a few other staff...His pleas for additional assistance went largely unanswered. Without full-time assistants to focus on tasks such as document management and correspondence tracking, it is difficult to imagine how one full-time attorney could conduct a complex securities investigation effectively.

By contrast, one law firm representing Pequot said it had 59 attorneys and paralegals working on the case and reviewing documents 6 days and 60 hours per week.

Aguirre was fired, while on vacation, on Sep. 1 2005, days after being notified of a two-step pay rise, and days before his 12-month probationary employment period was to end.

Step IV: Prepare the witness

Any good attorney will always make sure a witness is well-prepared. Samberg testified twice before Aguirre was fired, on May 3, and Jun. 7 2005:

In his second session on Jun. 7, 2005, it became clear that each of the reasons he had previously indicated [for making the GE-Heller trades] was highlighted in a Legg Mason analyst report that Samberg had reviewed in preparation for his May 3 testimony. During cross-examination by Gary Aguirre, Samberg conceded that he did not recall reviewing the report before ordering the trades and probably would not have done so because it was “sell-side research,” which Samberg had said publicly was not “worth a damn.”

James Eichner, who replaced Aguirre on the case, agreed that Samberg’s rationales for the trades were unpersuasive [Emphasis added]:

Mr. Eichner: [T]here was a sense that [Samberg] had...a chance to prepare and it seemed reasonable to think that he had sort of—I mean, spoon-fed is not...an inaccurate characterization...

«««

I mean, if you ask me what I thought, I would say that Samberg was spoon-fed this information after the fact by his attorneys. I think Gary [Aguirre] was right on that, but I’m just—

Question: And in fact...Samberg admits that he had not seen the documents which cited those six reasons by the time he made the trades?

Mr. Eichner: Right.

«««

I think that’s entirely correct, that Mr. Samberg had a suspiciously clearer recollection in the second examination than he did in the first about Heller.

Question: And is it accurate to say that Mr. Aguirre was able to establish in that deposition that [Samberg’s] lawyers had provided him with those exact rationalizations after-the-fact, after the trade—years after the trades?

Mr. Eichner: Yeah, I think...that was established in the second testimony[.]

Samberg had not reviewed analyst reports on Heller or consulted with others at Pequot before purchasing over one million shares. Even though Eichner and Aguirre disagreed on many aspects of the Pequot investigation, it appears that Eichner agreed that Samberg’s testimony added to the suspicion about Pequot’s trades.

Step V: And they all lived happily ever after

At this point, Strauss, Samberg and Pequot quietly slipped out of the narrative:

After firing Aguirre, the Enforcement Division appeared to lose interest in [Morgan Stanley chairman, and Samberg confidante] John Mack until the Pequot investigation became public [on Jun. 23, 2006, The New York Times ran a story by Walt Bogdanich and Gretchen Morgenson titled “SEC is Reported to be Examining a Big Hedge Fund”]...the SEC did virtually nothing to investigate John Mack as the potential tipper in Pequot’s GE and Heller Financial trading.

Only after The New York Times printed Aguirre’s allegations and he testified before the Senate Judiciary Committee did the SEC begin to re-evaluate Mack as the potential tipper in June 2006...

...The five-year statute of limitations for any Department of Justice criminal enforcement action against Pequot, Samberg, and Mack expired on or around July 27, 2006, leaving only the potential for the SEC to obtain other remedies such as disgorgement. When the SEC finally did take Mack’s testimony on August 1, 2006, it did so five days after the statute of limitations period applicable to civil and criminal penalties expired.

And so they all lived happily ever after. But when they come for me, I want Audrey Strauss in my corner.

Additional reading

Audrey Strauss
Partner, Securities Regulation and Enforcement/Litigation
Fried Frank Harris Shriver & Jacobson LLP

(Noted with interest: The Gary Aguirre Affair report hasn’t yet hopped onto the firm’s Media Mentions page. The legal profession just doesn’t get marketing.)

The Firing of an SEC Attorney
and the Investigation of Pequot Capital Management
Minority staff report
US Senate Finance & Judiciary Committees
Aug. 3 2007

Legal education corner

Now if a lawyer coaches or instructs his or her client to not tell the truth in court, this is called subornation of perjury—which is basically helping the client to commit perjury. But that’s no big deal either, since the act of suborning perjury is almost never prosecuted. Since lawyers know full well that the legal community barely raises an eyebrow when the topics of perjury or suborning perjury are brought up, they figure that skirting the truth and fabricating the facts may well be worth the minimal risk. So why not roll the dice and lie your ass off in court? Why not indeed.

The Truth, The Whole Truth and Nothing But The Truth
Power of Attorneys

Wikipedia: Subornation of perjury