Guttenberg, Defendant In “Most Significant Insider Trading Case” Sentenced

One of the key participants in what many billed as the most significant insider trading case since the late 1980’s was sentenced on Monday. Mitchel Guttenberg, a former executive director in the equity research department of UBS Securities LLC was sentenced to 78 months imprisonment. In addition, he was ordered to forfeit $15.81 million in illegal trading profits. Mr. Guttenberg previously pled guilty to two counts of conspiracy to commit securities fraud and four counts of securities fraud in connection with an insider trading scheme.

The criminal charges against Mr. Guttenberg stem from his participation on the Investment Review Committee at UBS. Mr. Guttenberg became a member of that committee in 2001. The committee reviewed UBS analysts’ recommendations for upgrades and downgrades before they are released to the public. From the time he joined the committee through August 2006, Mr. Guttenberg repeatedly sold material non-public information regarding the recommendations to David Tavdy who has also pled guilty. Mr. Tavdy and others used the information to either purchase shares in the companies involved or sell short, depending on the recommendation, and then liquidate the holdings after the public announcement. This trading netted over $15 million in illegal trading profits.

Mr. Tavdy previously pled guilty to one count of conspiracy to commit securities fraud and two counts of securities fraud in connection with the insider trading scheme. Mr. Tavdy has not been sentenced.

In connection with this matter, criminal charges were brought against 13 defendants. There were nine related cases. See, e.g., U.S. v. Jurman, Case No. 1:07-cr-00 140 (S.D.N.Y. Filed Feb. 26, 2007). These cases have been resolved.

The SEC filed a case based in part on the same conduct, naming fourteen defendants. SEC v Guttenberg, Case No. 1:07-cv-01774 (S.D.N.Y. Filed March 1, 2007). The defendants were primarily securities professionals. The SEC’s complaint alleged two overlapping schemes. One was the UBS scheme involving Mr. Guttenberg. A second was the Morgan Stanley scheme. That part of the case alleged that a Morgan Stanley attorney misappropriated M&A information and, along with her husband lawyer, tipped a Florida broker who traded and split the profits with the couple. With the sentencing of Mr. Guttenberg, the “most significant insider trading case” since the late 1980s is drawing to a close.

The New Enforcement Manual And Cooperation

A previous post in this occasional series on the new Enforcement Manual considered its discussion of the Wells Process (discussed here). Another key section discusses “cooperation credit,” considered in Section 4.3 and titled “Waiver of Privilege.”

Perhaps the most striking point in the section is the statement that the staff shall not ask a party to waive either the attorney client privilege or the work product doctrine. This directive, while perhaps consistent with earlier Commission policy, is the first flat statement on the point. It mirrors the position recently articulated in the new chapter to the U.S. Attorney’s Office Manual authored by Deputy Attorney General Filip on cooperation discussed here.

Beyond this statement, the guidance is less clear. The Section discusses different paths to cooperation credit. One path is the production of facts. Here, it specifies that “if a party seeks cooperation credit for timely disclosure of relevant facts, the party must disclose all such facts within the party’s knowledge.” Privilege waivers are not required, just the all the facts.

Another path is a various other acts which may assist the staff with its investigation. These include “voluntary production of relevant factual information the staff did not directly request and otherwise might not have uncovered; requesting that corporate employees cooperate with the staff and making all reasonable efforts to secure such cooperation; making witnesses available for interviews when it might otherwise be difficult or impossible for the staff to interview the witnesses; and assessing in the interpretation of complex business records.” These examples are in part drawn from, and are consistent with, Seaboard, the SEC’s 2001 Release on cooperation.

The critical issue may be what happens if the company wants to cooperate and assert privilege. In this instance the Section states: “A party’s decision to assert a legitimate privilege will not negatively affect their claim to credit for cooperation. The appropriate inquiry in this regard is whether, notwithstanding a legitimate claim of privilege, the party has disclosed all relevant underlying facts within its knowledge.”

These pronouncements may present a dilemma for a business organization seeking cooperation credit. In most instances the company will have collected at least a significant portion of the facts available to it from an internal investigation. That investigation is frequently conducted by independent counsel acting under the direction of the SOX empowered audit committee. As the Manual acknowledges, much of that inquiry will be covered by privilege. Without a waiver, the company would have difficulty seeking cooperation credit which, when privilege is asserted, is based on producing all the facts.

The Manual however, states that the underlying facts to the investigation are not privileged. Under that view, the company would not have to waive privilege to produce all the facts to the SEC. If the company however, disagrees in whole or in part, then it may not be able to obtain cooperation credit either by producing facts or through other acts.

It seems doubtful that the Manual intended to alter traditional SEC cooperation standards. Under those standards a company not waiving privilege could obtain cooperation credit, although it would not avoid prosecution based on that credit as discussed here. At best, the position of the Manual is not clear. Unclear standards however, ratchet up the pressure on a business organization seeking cooperation credit to avoid or mitigate a possible prosecution because they tend to propel it toward any act which might build credit, including waiver.