Will Wall St.’s New Cop Keep Heat on Fraud? : Securities: U.S. Attorney Otto G. Obermaier has doubts about using RICO in investment fraud cases. And he has represented white-collar defendants himself.

Otto G. Obermaier, the new U.S. attorney in Manhattan, bristles at suggestions that his appointment will mark a letup in the 4-year-old crackdown on Wall Street fraud.

Before a reporter can even finish asking him what his new reign will mean for criminal prosecution of insider trading and securities fraud, Obermaier, 53, jumps in:

“Nothing. It means nothing.”

Obermaier is filling the shoes of Rudolph W. Giuliani, a zealous and publicity-hungry prosecutor who launched an unprecedented wave of criminal cases against major Wall Street figures before he stepped down last year to make a losing run at becoming New York City’s mayor.

Giuliani won praise for bringing law enforcement into an area that had become corrupt and for raising the standards of conduct on Wall Street. But by the end of his five-year tenure, Giuliani was also reviled by interests as diverse as the conservative Wall Street Journal editorial page and the American Civil Liberties Union. The accusations included making promiscuous use of the harsh racketeering law, known as RICO, bringing criminal charges for offenses that previously had been handled only under civil law and ordering highly publicized arrests even though his office wasn’t fully prepared to bring a case.

Obermaier, by contrast, is regarded as a thoughtful, intellectual lawyer without political ambitions, described by one friend as more a diplomat than a crusader. He comes to the job after 19 years in private practice, much of it spent representing the type of white-collar defendants he now must prosecute.

He is on record criticizing the use of RICO--the Racketeer Influenced and Corrupt Organizations Act--in securities fraud cases. In published articles, he has expressed doubts about whether insider trading cases should be prosecuted as criminal offenses. And his appointee to head the criminal division in his office, Gerard E. Lynch, 38, a former Columbia University law professor, was one of the most prominent scholarly critics of RICO, particularly its use in white-collar crime cases.

Despite Obermaier’s long tenure as a defense lawyer, current and former prosecutors praise him as a first-rate lawyer and say they don’t doubt his commitment to tough prosecution. They note that, before he went into private practice in 1970, he was the chief trial lawyer in the Securities and Exchange Commission’s New York office, and before that he was an assistant U.S. attorney.

Nevertheless, many white-collar defense attorneys and other legal authorities in New York say they expect a change in approach under Obermaier. They expect more thoughtful consideration of specific charges before an indictment is brought. They also say it is probable that there won’t be any flashy arrests designed for television cameras and that leaks about pending investigations may be less likely.

John C. Coffee Jr., a Columbia law professor and friend of Obermaier’s, said he expects that under Obermaier there will be “a greater willingness to recognize that some kinds of misconduct are best dealt with through injunctions and civil penalties” rather than criminal indictments.

Giuliani was widely criticized for bringing major felony charges against individuals who some claimed were guilty only of marginal infractions, and Coffee says that under Obermaier this may be less likely. But he predicts that Obermaier’s term won’t bring any relief for big-league crooks. Referring to former stock speculator Ivan F. Boesky and former investment banker Dennis B. Levine, both of whom pleaded guilty to insider trading-related charges, Coffee says: “I have no doubt that if you catch a new Boesky tomorrow, or a new Dennis Levine, he would indict them in a moment.”

Obermaier himself, as the man whose many duties include being the top federal cop on Wall Street, asserts that he is, in fact, contemplating no big changes at all.

In an interview, Obermaier seems slightly ill at ease and reveals little about himself. He says that his office, the second-largest U.S. Attorney’s Office in the country after the District of Columbia’s, is a “proud institution.” He adds: “One doesn’t come into an institution and make dramatic changes.” Asked what his personal priorities are as U.S. attorney, Obermaier asserts: “I don’t have any.”

Obermaier also declines to respond in any detail to the main criticism of him as U.S. attorney--the fact that his old law firm, Obermaier, Morvillo & Abramovitz, represented so many prominent defendants in matters under investigation by the U.S. Attorney’s Office that he will have to “recuse” himself from a long list of cases--that is, disqualify himself from having anything to do with them and turn supervision over to a subordinate. These include some of the office’s biggest pending prosecutions. It was because of this that Giuliani initially opposed Obermaier’s nomination.

Obermaier maintains that the recusals won’t have any impact at all on how cases are managed. But the impact is unclear because Obermaier refuses to disclose how many cases he has recused himself from. A spokeswoman said: “It’s not something he chooses to make available.”

It is known that Obermaier has disqualified himself from the big case pending against former Drexel Burnham Lambert Inc. junk bond chief Michael Milken, as well as from the pending real estate racketeering case against Imelda Marcos, wife of the late former Philippines president. One of his law partners had represented her co-defendant, Adnan M. Kashoggi. Obermaier himself for a time represented John A. Mulheren, who is due to go on trial soon on criminal securities fraud charges.

Pete Romatowski, a Washington securities lawyer who spent six years as an assistant federal prosecutor in New York, says Obermaier’s recusals inevitably will hurt. Romatowski praises Obermaier but said the recusals mean he won’t be able to have final say on which charges are brought, or negotiate plea agreements. “It’s going to be a handicap,” Romatowski said. “The public interest would be better served if Otto were in a position to participate.”

Most of the cases from which Obermaier has disqualified himself apparently will be supervised by Roger S. Hayes, who joined the office in November as chief deputy U.S. attorney after serving as a state court judge. Before he was a judge, Hayes worked in the Manhattan district attorney’s office, and he served for a time as head of the trial division. But his only experience in the federal system was during law school, when he worked as a student intern in the U.S. attorney’s office in 1967.

Knowledgeable sources said Hayes was given his new high-ranking job because his long association with the office of Manhattan District Atty. Robert Morgenthau will help Obermaier avoid turf battles with the city prosecutor. Such disputes had plagued the Giuliani years.

Although Obermaier insists that he intends to change nothing about the office, at least one difference is already apparent. Obermaier has made clear that he has little interest in cultivating the press. Whereas Giuliani at times held two press conferences a day as U.S. attorney, Obermaier, who took office more than two months ago, has held none.

Ira Glasser, executive director of the American Civil Liberties Union, says of Obermaier: “I don’t see early on the same sort of taste for splashy stuff that Giuliani displayed almost from the beginning.”

Both Obermaier and Morvillo, his former partner, are on record challenging aspects of RICO, including the financial forfeiture provision, which they have suggested gives prosecutors too much power. And Obermaier, in a column on white-collar crime that appeared in the New York Law Journal in 1986, openly questioned the filing of criminal charges in some insider trading cases; he seemed to indicate that he wasn’t personally convinced that insider trading should be considered a crime.

Although he didn’t take an explicit stand in the article, he noted that “insider trading is unique among crimes . . . in that responsible and respected scholarly opinions are held that it has no harmful effects on the securities markets.”

Obermaier asserts that whatever views he may have expressed earlier won’t have any effect on how cases are handled. But on RICO, he does allow that “I think that every thinking person probably believes that the statute is a little bit on the broad side.”

The RICO controversy came to the fore in the Giuliani years because of its use in the case against Drexel Burnham and in a related case against a much smaller securities firm, Princeton/Newport Limited Partners. In the Princeton/Newport case, criticism centered on whether the racketeering law, originally enacted by Congress as a means of fighting organized crime, should be applied to what Giuliani’s critics contended were only relatively minor tax law violations.

In the Drexel case, some legal authorities raised the issue of whether the pretrial forfeiture of assets allowed under RICO forced the firm to settle the charges by pleading guilty to six criminal charges rather than by trying to exonerate itself in a trial. RICO, they charged, was being used as a bludgeon to force a company to plead guilty, since the forfeiture provision meant that the firm might go out of business even before a trial could be held.

In the Princeton/Newport case, six defendants were ultimately convicted of racketeering offenses for temporarily transferring the ownership of stocks and bonds to claim illegal tax benefits. As it happened, Obermaier’s firm represented one of the defendants.

Princeton/Newport did go out of business before a trial was held. Defense lawyers attributed this to the fact that prosecutors were able to freeze much of the firm’s assets under RICO. But prosecutors received what was widely viewed as a sharp de facto rebuke when the judge who presided over the case sentenced the defendants to just a few months in prison and ruled that four of the defendants wouldn’t have to forfeit any of their salary or profits from the partnership. This was in contrast with the lengthy sentences and heavy financial forfeiture permitted under RICO. The judge found that given the relatively minor nature of the offenses, anything harsher would have amounted to cruel and unusual punishment.

Lynch, the new head of the criminal division, in a lengthy law review article published in 1987, challenged recent uses of RICO. In the article, titled “RICO: The Crime of Being a Criminal,” one of his main criticisms was that the law could be interpreted so broadly that even minor offenses could be considered a pattern of racketeering activity. “Within the white-collar area, virtually any securities fraud or mail fraud case can be made as a RICO case,” Lynch said in an interview. “There’s nothing that prevents you from using it in fairly trivial, run-of-the-mill cases.”

But Lynch also said that his criticisms were based mainly on academic concerns and that, if anything, he has to be on guard against a personal bias against white-collar criminals. He also said it would be wrong to assume that, as a prosecutor, he won’t make use of every available tool, including RICO. “It would be wrong to think that anybody, including me or Otto, is going in there with the attitude that we’re going to do something different with RICO,” Lynch said.

Meanwhile, outward appearances indicate that the pace of major securities fraud indictments has slackened considerably since the heady days of 1987 and 1988. Then, using information obtained from Boesky, Giuliani and his staff brought charges against former Los Angeles brokerage chief Boyd L. Jefferies, investment banker Martin A. Siegel, corporate raider Paul A. Bilzerian, GAF Corp., Drexel and a slew of others. Lynch says that more than anything else, the pace of prosecutions has and will depend on what wrongdoing rank-and-file prosecutors stumble onto.

As mandated last year by Congress, the U.S. attorney’s securities fraud unit will soon receive several additional assistant prosecutors. For his part, Alan Cohen, head of the unit, said: “Whatever the numbers show, the fact is that we are investigating and prosecuting criminal activity in the securities and commodities markets as vigorously as we ever have.”

Obermaier and his former partner are on record challenging aspects of RICO, including the financial forfeiture provision, which they have suggested gives prosecutors too much power. And Obermaier has openly questioned the filing of criminal charges in some insider trading cases.