Case seen as wake-up call to Wall St

The US attorney for the southern district of New York has long been the justice department’s senior officer on the white-collar crime beat. But during the financial crisis, questions have been raised on whet­her the office was living up to its responsibilities.

In the 1980s, the Manhattan office under Rudy Giuliani brought prosecutions against Ivan Boesky, the insider trader, and Michael Milken, the junk bond king. Almost 15 years later, under Jim Comey, it prosecuted executives at WorldCom and Adelphia, and Martha Stewart, the lifestyle media mogul.

The Galleon case represents something of a comeback to critics who have found fault with the US attorney for not doing more. The charges filed last week against Raj Rajaratnam and five others amount to the biggest insider-trading case involving a hedge fund. The investigation is far from over.

Preet Bharara, who became chief of the office 10 weeks ago, says the case should be a “wake-up” call for Wall Street. The use of court-authorised wire taps in the case underscores the escalation of law enforcement efforts against financial crime. Wire taps are usually used to investigate mobs and drug gangs.

Christopher Conniff, a partner at Ropes & Gray and a former southern district prosecutor, says the recently created complex frauds unit also sent a signal on priorities. “Galleon is a high-profile case but the creation of a new unit says as much about the focus of the office,” he says.

Mr Bharara says that between the new group, which will focus on large-scale frauds including bank and mortgage fraud, and the long-established Securities and Commodities Fraud Task Force, there are now more than 30 prosecutors targeting sophisticated white-collar crime.

Many observers reject the suggestion that the office has been less visible in recent years, pointing to cases including those against Refco, the commodities broker that unravelled in 2005, once-prominent lawyer Marc Dreier who defrauded investors, and a stream of smashed “Ponzi” schemes, not least the one perpetrated by Bernard Madoff. The Galleon case itself was under investigation from at least November 2007.

“People have to remember that white-collar cases take a while to bring to fruition even if they are handed to you as in Madoff and even the Madoff case takes a while once you get beyond the guy himself,” says Daniel Richman, formerly of the southern district and now a Columbia university law professor.

Joon Kim, a Cleary Gottlieb partner and a former southern district prosecutor, says: “Any time a high-profile matter in New York is not handled by them, there are people who might say that the office is not what it used to be. But I don’t think that is necessarily the case . . . A lot of different factors, many beyond anyone’s control, affect where a particular case is brought and which investigations end up becoming big, headline-grabbing cases.”

Mr Bharara’s own reputation could help to keep the office in the limelight. He commands widespread respect and has a good sense of the role that US attorneys offices play as intermediaries between local needs and national policies, former prosecutors say. A former prosecutor in the office for five years himself, he came to the top job after serving as the chief counsel to Charles Schumer, the New York senator. He played a key role in the Senate judiciary committee’s investigation into the firings of US attorneys round the country.

“Remember that for eight years we were operating under an administration that was ambivalent about white-collar enforcement,” says Mr Richman. “Even as they touted the number of scalps their prosecutors took, they were assuring Wall Street that they were not going to regulate with a heavy hand. Things have changed.”