Foresees a Substantial Drop in Fraud, Insider Trading, Related Offenses : Prosecutor in Boesky Scandal Predicts a Change in Wall Street’s Ethics

Rudolph Giuliani is the U.S. attorney for the Southern District of New York. Along with its headline-making prosecution of political corruption and organized crime, Giuliani’s staff in Manhattan has teamed with Securities and Exchange Commission investigators in the current investigation of the insider trading network surrounding Wall Street speculator Ivan F. Boesky.

The SEC is responsible for enforcement of civil statutes and regulations prohibiting investors from trading based on confidential corporate information if they have a duty to keep the information confidential, or receive the information from an insider bound by such a duty.

Giuliani’s office handles criminal prosecution in the insider trading cases. He was interviewed by Washington Post staff writers Peter Behr and David A. Vise.

Question: Where is the investigative process now?

Answer: There isn’t much I can tell you about that. I can tell you that all of the things involving Mr. Boesky are under investigation, under very active investigation. Since a great deal of it involves grand jury, I can’t talk about it, can’t say anything about it.

Q: Is another major shoe likely to drop any day?

A: I can’t give timetables on when there will be results. We’re not talking about the next couple of days or the next couple of weeks. The next two weeks. Beyond that I can’t say.

Q: You’ve heard the criticism that the government was too lenient in permitting Boesky to plead guilty to a single criminal charge with a maximum prison term of five years, after making $50 million in illegal insider trading profits. What’s your response?

A: Given the fact that he was pleading guilty rather than going to trial, and there was the prospect of a good deal of cooperation (from Boesky), it seemed like a very sensible deal. I approved the criminal disposition, because it fit our guideline, which is (that) we try to get as much exposure (to prison) as has ever been used by a judge in a situation like this.

Q: Yet he faces a lighter maximum sentence than some others implicated in the insider trading cases?

A: Right. The government is in a different bargaining position very often with different defendants. In the Boesky situation, the reason for the one count, rather than three or four, was that he came in very early (while the government’s investigation was still incomplete).

Q: What do you mean when you say he came in early?

A: He came in early in the sense that he was not indicted, he wasn’t convicted, he wasn’t looking at the jail house door, which is often when we get people to cooperate. You often have to invest a year to two years to get to that point, which also means sacrificing all of the things a person may be able to do for you quickly (by cooperating with investigators).

When you factor that all together, a five-year exposure is very substantial. Often when we get three or four or five counts, it’s overkill. We try to do the best we can, and get as much (jail) exposure as possible, but the rule of thumb that I use is, it’s a good deal for the government if the government has exposed someone to more time than any judge has ever given to that crime in the past.

(According to sources close to the investigation, Boesky tape-recorded conversations with employees and Wall Street contacts under government supervision, before the SEC’s announcement of its case against him. By design, Boesky concentrated on discussions of past deals rather than asking others about activity that might take place in the future, the sources said.

(Giuliani would not discuss these reports. He did describe the government’s general approach in obtaining tape-recorded evidence.)

Q: What about the danger of entrapment? When does the government become vulnerable to a defense attorney’s claim that a suspect was trapped by the government?

A: Well, in undercover situations, you’re often tape-recording two categories of crimes. One is historical. It is information about events in the past. You might be setting up situations in which you give the person opportunity to confess on tape--in which case, it is not entrapment at all because it’s past crimes that are being revealed.

You work out a scenario where it becomes important for them to talk about what happened in the past. As a legal matter, you have no entrapment problems with that. Entrapment arises where there’s evidence that the government actually initiated the criminal conduct . . . and really has created the crime and has snared an innocent person into committing that crime.

Q: After a major case like Boesky’s is revealed, do other people come forward and begin cooperating because they don’t want to be the last one in the door?

A: I don’t think I should answer that because I think that if I do, I could end up commenting on this investigation. That’s a common phenomenon, but I can’t tell you whether that happened in this particular investigation.

Q: Do you get people coming forward regardless of whether they may have received a subpoena?

A: It’s different in different situations. I can tell you that this investigation is very, very similar to other insider trading investigations that we’ve done and local corruption investigations. It’s the same phenomena. Although the white-collar crimes are somewhat more complex, you get more cooperation.

Q: You get more cooperation in Wall Street cases than in organized crime or political corruption cases? Is that because the Wall Street people are more afraid of the consequences? Or they have less loyalty to each other?

A: I think it’s all of those things. And they (the white-collar criminals) have not gotten to the stage where they relate to themselves as criminals. They may have committed crimes, but they don’t think of themselves as criminals. Once they do, it becomes very difficult for them to cooperate, because it’s inconsistent with their notion of themselves. That’s true in organized crime. And there is a group of corrupt politicians who think of themselves as criminals.

Q: They aren’t kidding themselves.

A: Yeah. They aren’t kidding themselves, and they’re sort of loyal to each other.

Q: What do you think about the impact of what the government is doing in the insider trading area? Do you think you’ve sent a strong message to the market?

A: If you can present people with the distinct possibility, even if not the probability, that they could be caught and that they can be held up to public shame, ridicule and possible prison sentences, you’re going to be able to affect their behavior.

It’s worked in other white-collar areas, so there’s no reason why it wouldn’t work here, assuming we bring a sufficient number of cases. I think you’re going to see a tremendous drop in fraud, security fraud and insider trading.

Q: Sen. (William) Proxmire (the incoming chairman of the Senate Banking Committee) suggests that there should be tougher penalties on investment firms whose employees have engaged in illegal insider trading. Is that required to strengthen deterrence?

A: I think he’s right, but in my experience as a prosecutor, the key thing is going to prison. People will pay any fine, by and large, they’ll forfeit any amount of money, but they do not want to go inside a penitentiary. There’s a fear of that that puts it on a different qualitative level.

Q: What about the firms? Do they need prodding?

A: If there was more institutional concentration on this problem, it would not have gotten to this level. . . . I just don’t know whether the laws are sufficient now or not. Maybe we’ll be able to demonstrate that in the next year or so. . . . I have absolute faith that with enough of these cases, you’ll see a different ethic emerging in Wall Street, if it hasn’t emerged already.

Q: Were you personally surprised when it became clear to you that you were dealing with insider trading investigations involving a managing partner in one of the biggest houses, and the best known arbitrageur--not clerks and people at Xerox machines, but people at the core of this thing? Did that bowl you over?

A: No. There was no one point at which that happened. If you asked three years ago whether I would be surprised at the level and extent and almost acceptance of criminal behavior, insider trading, fraud and the things it leads to, I would say, yes. I’d be surprised. But we’ve had so many of these cases, and they just keep developing, one leading to another and another.

I began believing that it was a systematic problem. Not systematic in the sense of controlled by one person sitting somewhere, like in a Superman movie, but systematic, more grass roots, sort of a common set of assumptions and lack of values and ways of operating. And therefore it was not a big shock.

Q: We understand that investigators are looking into a number of possible securities violations in addition to insider trading crime. How far does the investigation go?

A: I can’t say much, except that it’s broader than just insider trading. I can say that.