The Sihpol Verdict
A jury instructs Eliot Spitzer on the rule of law.
Friday, June 10, 2005 12:01 a.m.
The world is discovering why New York Attorney General Eliot Spitzer has been so reluctant to take his business targets into an actual courtroom. A jury of regular men and women might be inclined to instruct him in securities law and the concept of criminal intent.
Mr. Spitzer received precisely such an education yesterday, when a jury found former Bank of America broker Theodore C. Sihpol not guilty on 29 counts, including several of grand larceny, related to after-hours mutual fund trading. The judge declared a mistrial on four other counts in which a single juror had held out for conviction. Mr. Spitzer must now decide whether to retry the case on those four counts. But given the magnitude of his repudiation, and the suffering his office has already imposed on Mr. Sihpol, a prosecutor with any sense of decency would throw in the towel.
Mr. Sihpol is the exception to the usual Spitzer rule of using strong-arm tactics to coerce settlements out of business. The Attorney General has become famous for assailing a business practice that is either controversial or legally ambiguous, and then using leaks via the media and the threat of indictment or the destruction of an entire company to force his targets to surrender.
In the case of mutual fund "late trading," that tactic worked with Bank of America and Canary Capital, the hedge fund whose trades Mr. Sihpol had helped execute. But when Mr. Sihpol, a mid-level functionary, refused a plea offer that included jail time, the Attorney General came down on him like J. Edgar Hoover on John Dillinger, with multiple counts and potential jail time of up to 30 years.
This led Mr. Spitzer into the terra incognita of a jury trial, where he'd have to prove to a dozen men and women that "late trading" was illegal. In the normal course of things, mutual funds are valued once a day, in a price known as the Net Asset Value (NAV), usually after the New York market closes at 4 p.m. Mr. Spitzer argued that Mr. Sihpol, who had been helping Canary execute trades at the same-day price even after the 4 p.m. close, was a felon.
Mr. Spitzer's public declarations had made the case seem a sure thing, and even we were inclined to think that on mutual funds he might be right. But Mr. Sihpol's attorneys argued that nowhere in the pertinent law, the Investment Company Act, is there any mention of "late trading" or "4 p.m." Rather, the law says only that trades can't be made after the NAV is "next computed." As it happens, many current-day NAVs are not set until approximately 5:30 p.m. Mr. Sihpol's manual trade tickets were received before that time.
This helps explain why Mr. Sihpol had done his work entirely in the open, and with the approval of superiors. His attorneys argued that what Mr. Spitzer had called criminal--"late trading"--was in fact accepted practice, with no law prohibiting it. And, as it happens, in November of 2003 the director of the SEC's enforcement division testified before Congress that more than 25% of broker-dealers responding to an SEC survey had reported that customers had placed or confirmed mutual fund orders after 4 p.m. and received the same-day price. The SEC later termed that estimate "conservative."
Smaller firms actually advertised their ability to do post-4 p.m. trades, while leading law firms, including Akin Gump and Piper Marbury, advised their clients that such trading was permissible so long as they got the order in before the new computation. Prior to Mr. Spitzer's September 2003 indictment of Mr. Sihpol, there had never been any SEC enforcement proceeding or other criminal prosecution based on so-called "late trading."
Only after Mr. Sihpol was charged did the SEC propose a rule to create a "hard" 4 p.m. cutoff. Within a few months it had reported that the proposal had received a record number of comments, "[t]he most pervasive theme [being] that people do not like the proposal." No kidding. No wonder Mr. Sihpol's defense team was confident enough of its case that it didn't call a single witness.
Mr. Spitzer's real mistake here, paradoxically, may have been taking on the little guy. Corporations are all too willing to settle with prosecutors, because their reputational risk from going to trial is greater than paying a fine and giving Mr. Spitzer his "victory." We've seen this with the big Wall Street investment banks and more recently Marsh & McLennan. In this case, Edward Stern, the former head of Canary Capital and a member of one of America's wealthiest families, paid a $40 million settlement to make Mr. Spitzer go away.
However, Mr. Sihpol had his freedom to lose. In addition to fighting Mr. Spitzer, he had to sue his former employer, Bank of America, to pay his legal fees. (According to his lawsuit, the bank sought to check with Mr. Spitzer before it originally decided not to pay.) One lesson here is that juries, forced to make a decision about a defendant's fate, want to make sure that the alleged behavior is in fact criminal. Prosecution by press release won't do in court.
The Justice Department has understood this, and has built a record in business fraud cases that has held up in court on Enron, WorldCom and Adelphia. Mr. Spitzer, by contrast, has used New York's overbroad Martin Act to prosecute financial cases of dubious legal merit. Business fraud deserves to be prosecuted, but the criminalization of widely accepted business practices ex post facto is both unjust and offensive to the rule of law. Congratulations to Mr. Sihpol and his jury for reminding Eliot Spitzer that to be convicted of a crime in America you should first have to break the law.
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Originally Posted by DelawareDistrict
Or is it: "which which is which"?
