After Boesky, other cases. Government urges leniency for inside trader's cooperation

The future of more than one white-collar criminal will be affected when Ivan Boesky is sentenced today. For the last year, the former stock arbitrager has been feeding government investigators information about his colleagues' trading activities. His unprecedented revelations have given the government fodder for at least 12 investigations, targeting some big names on Wall Street.

Today Mr. Boesky and other people facing investigation find out just how much government cooperation is worth.

Boesky was allowed to plead guilty to a single felony charge for insider trading activity, meaning that at most he could spend five years in jail and pay a penalty of $250,000. He has already agreed to pay $100 million in civil penalties in a settlement with the United States Securities and Exchange Commission (SEC).

But regardless of how US District Judge Morris Lasker rules, ``a signal has already been sent: You're rewarded for cooperation,'' says Paul Fischer, a private lawyer in Washington and a former SEC official. (Credibility wanted on Wall Street, Page 21).

The Boesky sentencing is unique, says Joseph Auerbach, because prosecutors have advised the court at great length about the value of Boesky's testimony. The government has recommended leniency.

``This tells the judge that Boesky has done a lot for the government,'' says Mr. Auerbach, who is counsel to Sullivan & Worcester, a Boston law firm, and professor emeritus at Harvard. Indeed, the extent of Boesky's cooperation has delayed sentencing four months.

In sentencing Boesky, Judge Lasker needs to strike a countervailing balance, says John Olson, a partner at Gibson, Dunn & Crutcher in Washington. ``If the sentence is too light, there will be less of a deterrent for people to cooperate,'' Mr. Olson says. ``If it is too heavy, prosecutors may have a hard time getting cooperation.'' He, like other securities lawyers, thinks Boesky will get between two and three years in jail.

Beyond Boesky's sentencing, the future for insider traders may also depend on how Congress and the new Supreme Court justice act. Next year, Congress is expected to pass a law tightening the definition of insider trading. And the new court justice could be the swing vote in interpreting securities law.

With Boesky's cooperation, government investigators were quickly able to elicit guilty pleas from heavy hitters like takeover specialist Martin Siegel, at Kidder, Peabody & Co., and Boyd Jefferies, former chairman of Jefferies & Co.

Then last May, the government's investigation stalled when prosecutors withdrew charges against three arbitragers, on the grounds that they needed more information to develop a case. In addition, rumors of investigations have been swirling around Michael Milken, chief of junk bonds at Drexel Burnham Lambert; corporate raider Carl Icahn; and arbitrager John Mulheren, head of Jamie Securities Inc. No charges have been brought against these men.

Tape recorded evidence helped win some quick prosecutions early on, notes Richard Phillips, a partner at Kirkpatrick & Lockhart, a Washington law firm. One of those was stockbroker Dennis Levine, who later fingered Boesky. ``The government could get Levine, Boesky, and Siegel cold.''

But when the government tried to prosecute other cases, it found that tapes were not as incriminating. ``The prosecution jumped the gun in the case of the three arbitragers,'' Mr. Phillips says. ``This has made law enforcement officials more cautious, and they have resorted to painstaking investigations, poring through thousands of documents and interviewing hundreds of witnesses.''

The case of R. Foster Winans, a former Wall Street Journal reporter, is a promising but ambiguous tool for prosecutors. The US Supreme Court last month upheld a lower court's verdict that Mr. Winans misappropriated, or stole, sensitive property by leaking information in his ``Heard on the Street'' column.

The ruling gives prosecutors more leverage in using the mail- and wire-fraud statutes, but the court was split when it came to the misappropriation theory, a cornerstone in the government's insider-trading prosecution.

Enter Judge Anthony Kennedy, who is expected to be confirmed a Supreme Court justice in February. Although Judge Kennedy has not specifically ruled on this kind of insider-trading case, securities lawyers say he is likely to be receptive to upholding government prosecution.

It may take at least two years before a similar case works its way to the Supreme Court, however. In the meantime, says Leo Herzel, a securities lawyer at Mayer, Brown & Platt, a Washington law firm, ``The most likely outcome of the Winans decision is that there will be a statutory rule to clear [the ambiguity] all up.''

Congress is moving in that direction. Sens. Donald Riegle (D) of Michigan and Alfonse D'Amato (R) of New York have introduced a bill that would specifically define insider trading, including the theory of misappropriation.

SEC chairman David Ruder has broken with his predecessors and come out in support of a specific definition. ``Insider trading is a natural outcome of human greed, and it is something which is very hard to find,'' he told Congress this week.

Because the definition is vague, prosecutors usually have to base their cases on circumstantial evidence. ``It is the rare case in which we have a confession or an indication by others that they have participated with or observed insider trading,'' he added.

To the chagrine of his colleagues, Boesky did both. ``Obviously he was the spider who started the web,'' observes Tamar Frankel, a professor of law at Boston University. ``And he was the first to destroy it to help the government. Boesky was helpful, but a lot of people paid for it - their lives are finished.''