In the first clear courtroom victory in several months for insider trading prosecutors, a federal jury on Tuesday found a New York lawyer guilty on 38 felony counts of giving tips about a pending secret corporate recapitalization to friends and relatives who made $1.5 million from the information.
Immediately after the verdict was announced, U.S. District Judge Richard Owen ordered the defendant, Israel G. Grossman, to jail. Prosecutors had contended that Grossman might follow the example of two relatives implicated in the scheme and flee the country.
Grossman will face a maximum jail term of 190 years and fines of more than $9 million when he is sentenced Sept. 15. The case is not related to the more prominent prosecutions of inside traders Ivan F. Boesky and Dennis B. Levine.
Irving P. Seidman, Grossman's attorney, said he would petition the U.S. Court of Appeals for bail.
He also said he would appeal Grossman's conviction on the partial grounds that a U.S. Supreme Court ruling in June had materially weakened the federal mail-fraud statute, the basis for 19 of the 38 counts. In that ruling, the court found that the mail-fraud law could not be used to prosecute public officials who illicitly direct public funds into their own pockets in a way that does not result in a loss of money or tangible property to the public.
Seidman said he believes the ruling would apply equally to defendants in other fraud cases. "We believe that, in light of that ruling, the utilization of the mail-fraud statute is unconstitutional," the attorney said. In this case, he added, there is no evidence that Grossman received money or property from those who allegedly used his tips.
The case against Grossman, 34, was the first major insider trading prosecution in 1 1/2 years to come before a jury and the first such case to come to trial since the current insider trading campaign began with the arrest of Dennis B. Levine, a prominent investment banker, on May 12, 1986.
The verdict is likely to provide some much-needed cheer to federal securities prosecutors, whose vaunted campaign against insider trading ran into a number of vexing obstacles this spring and summer.
Among other problems, U.S. Atty. Rudolph W. Giuliani was forced in May to ask for dismissal of an indictment against three prominent Wall Street securities traders when his staff was unable to assemble adequate evidence against them before a speedy-trial deadline ran out; prosecutors say they still intend to re-indict the traders, whose public arrests in February had shocked the financial community.
Earlier this summer, Assistant U.S. Atty. Charles Carberry, the nearly indispensable head of Giuliani's Wall Street prosecution team, resigned to enter private practice amid talk that he was unhappy with Giuliani's management of white-collar crime cases.
Most of the major insider trading prosecutions of recent vintage have ended either in negotiated guilty pleas by defendants or in non-jury trials. This has led to a feeling in the legal community that prosecutors are loath to present the complex and confusing cases to juries.
Giuliani lost no time Tuesday in proclaiming that the Grossman verdict "proves that those who feel these (insider trading) cases are difficult to prove and difficult to present to a jury were wrong."
Grossman was charged with having tipped four relatives and two friends to a pending $1.5-billion recapitalization of Colt Industries, whose pension plan was a client of the law firm at which he worked in mid-1986. Although Grossman did not work on the Colt account, he shared a secretary with a lawyer who did and was known at the firm to have been "peculiarly interested" in the matter.
The Securities and Exchange Commission has civil charges pending against Grossman and his six contacts.
During five days in mid-July, 1986, according to prosecutors and SEC officials, Grossman placed 45 calls from his office to the friends and relatives. Within days or hours of those calls, they had placed $38,273 worth of orders for 1,400 extremely risky Colt stock options, representing the right to purchase 140,000 shares of Colt stock.
When the recapitalization was announced, the relatives sold the options for a profit of almost $1.5 million.
Seidman, Grossman's defense lawyer, argued during the trial that the government could produce no evidence proving that the Colt matter was the subject of any of Grossman's conversations.
"Unfortunately, there are no tape-recordings of what Israel Grossman said," Seidman told the jury when the trial opened two weeks ago. Instead, he produced testimony that Grossman's wife was pregnant at the time and that the subject of the phone calls might have been a family debate over what to name the child. "Does a family coincidence make you a felon?" he asked.