How Much Cooperation Is Enough to Avoid Prison?

How much cooperation with the government does your client have to provide to avoid prison?

If portfolio manager Reema Shah is any example, the answer is…over a year.

On May 21, 2014, Ms. Shah pleaded guilty to conspiracy to commit securities fraud and insider trading. However, since 2009, Ms. Shah had been working as a government cooperator.

For about a year, she activley gathered information on co-workers and friends, and turned that information over to federal investigators as part of their investigation into SAC Capital Advisors LP and other targets.

In return, she was sentenced to probation.

Ms. Shah’s Career

Ms. Shah was a portfolio manager for a subsidiary of Ameriprise Financial Inc. The sentencing memorandum submitted by her counsel paints a picture of an intelligent, charming, hard-working mother who made friends everywhere she went.

But she apparently took advantage of those friendships to get insider information and advance her career.

Over the years, Ms. Shah had jobs with many of the big names in the finance and business world. Early in her career, she worked at KPMG, Stern Stewart and Morgan Stanley. In 2000, she settled into a more permanent position at Segilman Investments where she initially felt welcomed and comfortable.

However, when the firm added a hedge fund service in 2004, the professional pressure increased substantially. Ms. Shah was expected to perform at a consistently high level.

The Insider Trading

To meet her superiors’ expectations for returns, Ms. Shah began using and sharing confidential information.

Ms. Shah was required to provide the company with “data points” that could predict companies’ performance. In 2004, the government alleged, Shah began to conspire with others at Segilman Investments to make securities trades based on material nonpublic information. One of her alleged main sources for this information was Robert Kwok, a Yahoo! employee.

According to the government, Mr. Kwok and Ms. Shah met at a conference in 2008 and began to trade confidential information shortly after. Mr. Kwok proved to be very helpful. He provided Ms. Shah with a stream of “data points,” including information about a proposed Microsoft-Yahoo! partnership and Yahoo!’s acquisition of Catalyst Semiconductor. In addition, Mr. Kwok revealed the quarterly earnings for companies like Monolithic Power Systems, MEMC Electronics Materials, Marvell, and Cisco Systems Inc. before they were announced to the public.

In exchange, Ms. Shah gave Mr. Kwok advance information she had picked up from friends and colleagues. She supposedly disclosed the confidential earnings information of companies like Electronic Arts, Netflix, eBay Inc., and Autodesk.

Cooperation

Unfortunately for Mr. Shah, federal investigators took notice of her trading activity.

In September 2009, they approached her armed with accusations of insider trading.

The government must have already developed a strong case against her, since Ms. Shah apparently agreed to fully cooperate during her very first proffer session. While her first instinct was to leave Segilman Investments immediately and distance herself from the wrongdoing, the government had other plans for her.

It wanted her to be a confidential informant.

Federal investigators wasted no time putting her to work. Beginning in October 2009, Ms. Shah worked for the government. She taped phone calls, handed over copies of emails and text messages and wore recording devices during meetings with her friends and co-workers.

Most of her cooperation was in that first year. At the end of one year, Ms. Shah had recorded her meetings with nearly 80 different people and had tapes of approximately 700 phone calls.

She turned out to be a crucial player in the government’s subsequent securities investigations.

The conversations Ms. Shah captured led to many prosecutions and convictions of people and entities engaging in insider trading. In addition, according to media reports, she provided information about an unnamed SAC Capital portfolio manager, which helped lead to the company’s guilty plea and $1.8 billion settlement last year.

The government also employed Shah’s recorded calls as the basis for a number of Title III applications for other securities investigations. Finally, the government will keep Ms. Shah in the wings as a potential witness in later prosecutions.

All of this lasted at least a year and maybe more. Was it worth it?

Guilty Plea

Ms. Shah pleaded guilty to violating 18 U.S.C. § 371, 15 U.S.C. §§78j(b) and 78ff, 17 C.F.R. §§240.10b-5 and 240.10b5-2, and 18 U.S.C. §2. Although her criminal offenses carry a maximum sentence of 5 years of incarceration and 3 years of supervised release, the government asked that her sentence be mitigated under U.S.S.G. §5K1.1.

The sentencing judge seems to have been swayed by Shah’s cooperation and the government’s recommendation, and sentenced her to two years’ probation.

What Was It Like?

It’s hard to imagine how difficult the last few years were for Ms. Shah.

Imagine holding down a job, raising children, caring for your elderly parents and – oh, by the way – wearing a wire and recording conversations of your friends and co-workers. For several years, she not only had to live with betraying friends and colleagues, but also with the uncertainty about whether her cooperation would keep her out of prison.

I don’t blame Ms. Shah. She had a family, and she did what she needed to do. But I also don’t have any doubt that the government recognized her incredible value as an informant and pressured her mightily to help.

Consider the recent revelations about Monica Lewinsky and the incredible (and entirely inappropriate) pressure put on her to wear a wire in her meetings with the President of the United States. The agents threatened Ms. Lewinsky with 27 years in prison if she did not help them and ignored her repeated requests to talk to her lawyer. (Not surprisingly, the later government investigation of the incident found no unethical conduct by the prosecutor in charge.)

Ms. Shah did plead guilty, and she would have to face some punishment for her offenses.

But surviving these last few years under that pressure and uncertainty seems like punishment enough.

This entry was posted in Insider Trading, Securities fraud, Sentencing and tagged . Bookmark the permalink.

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