The first shot was fired across the East River a year ago, when then-U.S. Attorney Zachary Carter of Brooklyn’s Eastern District indicted 85 people in one day for allegedly swindling thousands of victims out of more than $100 million. The FBI called it the biggest boiler-room scam in history.
It took a year, but a riposte finally came last month, when U.S. Attorney Mary Jo White of Manhattan’s Southern District indicted 122 people for trying to scam more than $50 million, calling it a “joint venture” between five Mafia families. Now this is the biggest boiler-room scam ever. For now.
The race to make the biggest pump-and-dump brokerage bust is still on – and several witnesses from the prosecution and the defense tell New York that the competition is far from friendly. Manhattan District Attorney Robert Morgenthau, White’s longtime rival, has been doing his own policing on Wall Street, taking down the brokerages Meyers Pollock Robbins (20 indicted, plus 22 guilty pleas), A.S. Goldmen (33 indicted, first trial conviction last week), and Duke & Company (24 indicted, plus 22 guilty pleas). The result is a three-way jurisdictional free-for-all, and the infamous case of broker Marisa Baridis, who was investigated in 1997 for insider trading by both White and Morgenthau, may be only the first of many problems caused by the intramural jockeying.
“I have a major white-collar case that is being pursued by the Southern District and the D.A.’s office,” one prominent white-collar defense lawyer says. “It’s a major case, and neither side has talked to the other. There’s clear animosity. It’s all ego. Each office feels they’re more important. Every prosecutor thinks they’re taking the lead. There’s no real reason to do this. It shouldn’t be a question of who gets the bad guy.”
The bull market and the dot-com frenzy have created more than enough fraud work to go around: The recent fraud indictment against platform-shoe mogul Steve Madden was a team effort by the Southern and Eastern Districts. “We had a joint press release,” crows Rob Khuzami, chief of the Southern District’s securities-fraud unit. But the problem for prosecutors is that instead of busting high-profile Boesky-like figures, most cases tend to corral large numbers of largely unknown defendants – dozens of low-level cold-callers – under single mega-
indictments that can’t help but overlap jurisdictions. “Is there competition? Sometimes we just bump into each other,” deadpans one source in Morgenthau’s office, who justifies the D.A.’s right to get in the stock-fraud game by noting that the state’s securities law predates the Federal Securities Act. Adds Jason Brown, the Eastern District former criminal-division chief who just left to join the defense firm of Holland & Knight: “The good part is that it keeps everyone competitive and on their toes. The bad part is that it’s ultimately an inefficient use of resources.”
Hefty indictments can be unwieldy. “To put 40 or 50 people together is just to try to make a big sound when it’s announced,” says defense attorney Jeffrey Hoffman of Hoffman Pollok and Pickholz. “There is definitive federal case law that holds that they’re not going to get more than ten people tried at any time.” But while defense lawyers may cry foul, they’re also kicking up their heels at the rush of new work: A pump-and-dump bust with 122 defendants is the legal equivalent of Ford coming to town and opening an auto plant.
Ben Brafman, once famous for defending the likes of Peter Gatien, now says securities cases make up 30 percent of his firm’s practice. Five years ago, they took up just 10 percent. The rivalry between prosecutors has proven good for business. “I just resolved a case with a defendant named in a Southern District indictment and two separate Eastern District indictments,” he says. “All three cases covered the same time period and the same general behavior. They’re racing each other to the courthouse. These securities prosecutions of today are what the insider-trading cases were to prosecutors in the eighties.”