Aaron Swartz at a Creative Commons event. (Photo credit: Wikipedia)

For those of us who have covered white-collar crime cases, we know that prosecutors and defense attorneys play for keeps.  In our justice system there is only one victor, one loser, one verdict … and in the middle of it all is a defendant, a person.  One of those defendants arrested and charged in 2011 was Aaron Swartz (26), who chose to end his case on his own terms … he hung himself in his Brooklyn apartment last weekend.

When Swartz was indicted in July 2011, I recalled reading about but his case and found it unworthy of blogging about here.   What turned me off?  Swartz was portrayed by prosecutors as a computer hacker who had wrongfully accessed some free documents from an on-line academic journal repository at the Massachusetts Institute of Technology (MIT).  My first thought was that a guy like Swartz was going to get suspended from school (I believed him to be a student).  So why would I think about writing about this case when I had insider traders scrambling around New York to find a lawyer at the time?  However, I should have paid attention, because what I forgot about in the Swartz case was that he was an innocent man until proven guilty who was charged with a crime that could have put him in prison for 35 years, 3 years of supervised release and a $1 million fine.  So what was this terrible crime that Swartz was charged with that would send him away for so long?

In a press release by the U.S. Attorney (Carmen Ortiz) in the District of Massachusetts on July 19, 2011, there was no mention of Swartz’s programming skills, his genius or his contributions to society (co-developed RSS, a system of constantly updating subscription feeds, at age 14 – instrumental in creation of Reddit – a proponent of free information – etc.).   According the federal indictment, he was charged with hacking a not-for-profit organization (JSTOR) from “a restricted computer wiring closet in the basement of MIT to download millions of articles from academic journals” (many of which were available for free).  JSTOR archives academic journals and institutions, like MIT, pay an annual fee for its students and professors to use the system to download articles for research.  For some reason, Swartz, who was at the time a fellow at Harvard University’s Safra Center for Ethics, felt that he needed every academic article housed on JSTOR.  There was no evidence ever presented as to what, if anything, Swartz planned to do with the data (sell it or give it away) … all we know is that he downloaded it … but, his plot, if there was one, did not go far.  He was found out in early 2011, the documents turned back over to JSTOR who was satisfied that justice had been done.  JSTOR issued a statement about Swartz over the weekend stating:

“Aaron returned the data he had in his possession and JSTOR settled any civil claims we might have had against him in June 2011.”

However, the full force of the U.S. government was not satisfied and an investigation involving the Secret Service, the U.S. Attorney’s Cybercrime Unit and the Cambridge Police Department ensued … as did a lengthy court battle which was to conclude with a trial in 2013.  A review of the legal docket for Swartz’s case on Pacer shows that there was much legal wrangling over evidence, the merit of the case and the severe penalties sought by the government for an infraction that the computer world considered innocuous.  Alex Stamos, who was to be an expert witness for Swartz, wrote a blog about the case:

“… what Aaron did [allegedly did] would better be described as “inconsiderate”. In the same way it is inconsiderate to write a check at the supermarket while a dozen people queue up behind you or to check out every book at the library needed for a History 1o1 paper.  It is inconsiderate to download lots of files on shared wifi …. but none of these actions should lead to a young person being hounded for years and haunted by the possibility of a 35 year sentence.”

With so many Wall Streeters either in prison or heading to prison, I thought I would give a recap of what the holidays are like in federal prison camps.  Believe it or not, prisons do try to make the holidays a bit more special than the normal grind (work, read, workout, read some more).

As one might imagine, the minds of inmates are filled with memories of Christmas or Hanukkah meals with family and friends …. not with bunk mates who are doing time for bank fraud and cooking methamphetamine.  However, one makes a life out of what one is given.  So here’s a look at the life of an inmate in federal prison during the holidays (in their own words).

From an inmate incarcerated in a prison in the Eastern U.S. (anonymity for the sake of everyone who may wish to get in on the meal plan of federal prison):

“Thanksgiving had the traditional meal which was served at lunch time. It was turkey, stuffing, cranberries, pie, etc and in ample quantities. Also, just like on the outside, during Federal Holidays there are no work assignments on the Camp (Yes, there are vacation days in prison).”

“On each holiday, there is a morning 8:00-11:00 visit session, and a 12:00-3:00 visit session, depending on your registration number (even gets one side and odd gets the other).   It was great being able to spend six hours of the day with my wife on Christmas.   For Christmas, the Thursday before, all inmates were given a “goodie bag” for lack of a better term, filled with candies, cookies and a small carton of Egg Nog. It was given out in the afternoon, and each housing unit was called separately to receive their bag, where you had to present your ID as well.” (wouldn’t want anyone getting two goodie bags).

“On Christmas Day there was a holiday meal served, consisting of a Cornish Game Hen (whole), vegetables, dessert, etc. which was also very satisfying. ”

“Overall, the atmosphere at the Camp is mixed. As one would expect, most inmates probably feel the distance from family and friends most over the holiday; thus, in a way you can feel a layer of “melancholy” for lack of a better word, through the camp. For some inmates, most likely including myself, where it is their last Christmas away from family, there was some expression of optimism during this season, by looking forward to the next.”

So the meals are noticeably better over the holidays, which helps lift the morale a little.  But what about the families who give up their holidays to head to visit someone in prison.  Family members from all over the country put aside their normal family gatherings to trek across the country to spend the holidays in a cheap hotel (most prisons are in small towns), a prison visitation room, and eat a meal from a vending machine.  Some prisons allow local church groups into the visitation room to sing Christmas carols in the background to add to the holiday spirit … sounds depressing, and familiar.

There is no other time of year when an inmate understands the damage their actions have caused their family members.  If they are lucky, they have visitors.  If they are unlucky, they spend the holidays alone and make due with a phone call home where everyone exchanges wishes of a day when they will all be together.

The holidays are depressing for many, but for inmates and their families a Cornish Hen does little to lift ones spirits.  Who says prison camps are country clubs?

Former SAC Capital’s Mathew Martoma (38) entered his “NOT” guilty plea yesterday in Manhattan federal court (my favorite 500 Pearl Street).  The government is accusing Martoma of trading on inside information associated with a tip he got on an Alzheimer’s drug which had failed during test trials.  The information is alleged to have allowed Martoma/SAC avoid over $260 million in losses on publicly traded stocks Elan and Wyeth.

Martoma Enters Plea of NOT GUILTY (Photo by Rick Maiman)

The media has started its speculation as to when, or if, Martoma will begin his cooperation with the government in hopes of winning leniency by turning on SAC’s founder and billionaire, Steve Cohen.  Cooperating with the government is one way to reduce the number of years one spends in prison.  Martoma’s cooperation may indeed happen, but he was just arrested in November 2012 … so this case has more to play out and Martoma has a lot to process.  Getting arrested is not something that is easy for a person to grasp.

Martoma was approached by two FBI agents while he worked in his front yard of his Florida home in 2012.  The agents told him that they had information that he had committed a crime of illegally trading in stocks.  His reaction?  Martoma fainted.  White-collar defendants are usually not tough guys.

Tactics used by the FBI are meant to intimidate individuals and get them to cooperate in their investigation.  Cooperating witnesses are powerful in persuading jurors to convict and getting other co-conspirators to plead guilty.  Some agents have told me that they carry a a copy of the Federal Sentencing Guideline Table as a visual aid in showing targets how much prison time they could be looking at should they consider NOT cooperating.  However understandable these tactics may be at getting to the bottom of solving a crime, they are a part of the punishment of a white-collar perpetrator.  Martoma’s punishment is already starting whether he is found guilty or not.

There are stages of emotions that come with being the focus of a criminal indictment.  Like Mr. Martoma’s reaction to the FBI approaching him with information, the initial reaction was fear, absolute terror.  The criminal activity presented by the agents to Martoma in his front yard had occurred in 2008, nearly 4 years prior.  Martoma had forgotten about his offense those years ago until he was reminded by two concerned agents …. then he found the floor.  Shock.

The next stage is denial.  Being comfortable in a successful lifestyle, it is confusing to pair the criminal actions of a person to the characteristics of a successful career, family and social status.  Denial is the best coping mechanism.  However, reality awaits when the job is lost, friends turn their backs and those that remain start to ask questions based on what they read in the papers.  Since Martoma’s arrest in November, his social calendar has probably cleared up a bit.  The only meetings he’s attending are with his legal team, his new friends, who come with a price tag of $750/hour.  And you thought dogs were expensive when it comes to companionship.  This is where Martoma is today, surrounded by paid attorneys who are giving him options and comfort …. and believe me, one of the options they are discussing is cooperation.

As time progresses the defendant enters a stage of confusion.  A wondering of “Who am I?” and “Am I that bad person I read about?”.  Right now, Martoma is thinking he’s a good guy….and he probably is a good guy, but that does not mean he is not capable of doing something illegal (bad).

Confusion leads to exhaustion.  Where is my life going?  What is the cost of my actions?  How will my family survive?  How will I recover financially?  The questions follow the person to bed every night, but alcohol and sleeping pills help for a while.

Then there is acceptance, a realization that the only way out of the criminal probe is to surrender and admit one’s guilt.  Acceptance takes a while.  What is prison like?  How will people view me?  What will life be like after prison?  You know your life must be total hell when the thought of prison seems like a relief.

Martoma’s not there yet, but the case is still warm.  There’s a bit more processing to come for Mr. Martoma, but it will come … trust me.

After attending numerous conferences during the year, I can tell you that compliance officials in corporate America were concerned that employees would jump at the opportunity to run to the federal government to rat out the company through the whistle-blower reward program.  The provision entitles the  whistle-blower to a cash reward based on the fine paid by the company .  However, I don’t think companies have anything to worry about, but the employees just might.

Bruce Green (Fordham Law) and Ellen Podgor (Stetson Law) recently published a paper on corporate internal investigations and the substantial risks posed by them to employees.  When a company believes there has been a crime or ethical breach, the internal investigators descend into the ranks of staff to find out who knows what.   No Miranda Rights.  No taking the 5th.  No legal representation (the company has lawyers of course) …. just people trying to figure out what, if anything, has gone wrong.  Whereas people believe that the corporate interests are aligned with their own personal interests, that just is NOT the case.   It is a confusing time and it can leave employees in a bad situation when the criminal justice arm of the feds come knocking.

Legal papers are known for presenting unintended consequences and Green/Podgor present their share …. but I have found out that some of their concerns are being played out in our legal system today.  When one considers the vast amount of evidence gathered in an investigation, it is not only used to find the “bad guys”, it’s used as a way to get the company out of more trouble with the feds.  In our U.S. justice system, information that you have on other people helps reduce punishment, imposed as fines on corporations and years in prison for people.   Once a company has their arsenal of data, it is used for its benefit, not the employees’.  We are seeing this playing out right now in the case of the BP Oil spill.

Kurt Mix, whose case has been written about here, worked at cleaning up the oil spill in the Gulf of Mexico but he was arrested earlier in 2012.  His charge?  Obstruction of justice associated with him allegedly deleting some text message strings when he was under orders from BP to not delete ANYTHING.  The feds said that Mix deleted the text string to hide information related to flow rate of oil into the Gulf of Mexico, a number that would be used in calculating the fine BP would pay for damages (recently settled).  All that information that Mix and other BP personnel gathered during the cleanup was handed over to the government as a means to minimize the damage, but it did nothing for Mix.  In fact, Mix has had a difficult time clearing name and has made claims that BP has information that could clear him …. but BP has been slow in releasing that information as it was more concerned with reducing the affects of the spill on shareholders.

In addition to Mix not having access to information that would help him fight the charges against him, some of the very information, now evidence, he helped gather during the spill was used to bring criminal charges against BP executive David Rainey who the feds have charged with lying to Congress about the amount of oil spilled into the Gulf (a calculation Mix personally worked on).  BP’s information was turned over to the government as part of the subpoena to preserve information related to the spill, good for BP, but bad for Mix and Rainey.  Think about it, if Mix had information that he personally could have used to throw Rainey under the bus, the feds would have gladly given him a pass (no jail).  Instead, he’s looking at prison and Rainey’s chances are not looking so good either.

To all those compliance officers out there, relax.  Corporations have the upper hand on obtaining and using information gathered during an internal investigations.  Employees?  Not so much.

Peter Madoff Enters Federal Court Today (Photo by Rick Maiman)

Peter Madoff (67) decided to plead guilty on June 29th of this year for his role in the largest Ponzi scheme in U.S. history and today U.S. District Judge Laura Taylor Swain put her stamp of approval on a 10 year prison term that had been recommended by the prosecution and agreed to by Peter Madoff.  He also agreed to forfeit all of his assets up to $146 billion (guess he gets to keep anything above that).  Madoff’s sentence represents only the second prison term handed down in the Madoff Ponzi scheme (Peter’s brother Bernie being the other at 150 years).  Madoff’s accountant, David Friehling, is still awaiting sentencing along with others who have pleaded guilty.

The youngest of the three Madoff siblings (older sister Sondra was not associated with the firm), Peter was a graduate of CUNY- Queens and obtained his law degree from Fordham.  In his sentencing memorandum he said that even though he was the Chief Compliance Officer of Madoff Securities and held other positions for decades, he was swindled by his elder brother, having no idea that he was sitting on top of a Ponzi scheme.  So let’s just say that he was a bad compliance officer … for a very long time.

Peter stated in court papers that he was always looking up to big brother Bernie, which was not that hard to believe since so many people had a high opinion of the guy for so many years.  I think that I speak for many when I say that Peter could still admire his brother but he certainly had to know that something was missing at Madoff Securities. ..like trade receipts for instance.  In addition to monitoring trading activity, Peter was responsible for monitoring the compliance program for the firm …. “Looks good!”  At its height, Peter would have been responsible in 2008 for compliance on over 4,000 accounts totaling $65 billion at Madoff Securities.  However, Peter said that he was stunned to learn of the fraud in December 2008 when Bernie confessed to him about the scheme, but that did not stop him from working with his brother to divvy up $300 million to friends and family after being informed of the Ponzi scheme.  The planned distribution was never made, but the intent was clear…”let’s keep what’s left in the family.”

Peter never knew a life of working for a legitimate firm and it showed in his sentencing memorandum.  In it he (his lawyer) wrote that, “Not withstanding his admitted wrongdoing, in some respects this case constitutes a personal tragedy for an otherwise decent and compassionate man.”  This just does not add up for Peter because here’s a list of the “few” indiscretions that he admitted to (without knowing about the Ponzi scheme):

1) Acknowledged that he engaged in money transfers meant to avoid taxes (includes money received for country club dues, cars leases, meals, travel, and life insurance payments)

2) Had his wife on payroll for a job she never did (begs the question of where the wife is in all of this)

3) Engaged in promissory notes (loans) from brother Bernie that were never meant to be repaid

4) Falsified books and records of an investment adviser

5) Provided large sums of money to his children with the intent of shielding them from taxes through the use of bogus promissory notes

6) Made false filings with the Securities and Exchange Commission

7) Committed mail and wire fraud

In other words, since Peter Madoff only knew a professional life of working with a con-man, brother Bernie, he had no idea of how to conduct any type of legitimate business and at the same time believed his life to be one of a “decent” man.  For anyone who has read my blog over the years, you know I tend to try to give every defendant the benefit of the doubt that they did have some good trait …. but for Peter, he seems to be a lost soul.  That is a tragedy because he will never know who he could have been.

Peter asked to serve his time in Otisville Prison Camp (north of NYC), which is where Ponzi Schemer Kenneth Starr is serving his 90 month prison term.  I’m sure they’ll have much to talk about as they walk the prison yard.[/entity]

Peter Madoff will be released in January 2021.  If he lives through the experience (Peter is a Bladder Cancer Survivor), he will be 75 years old when he next returns to New York.  One thing you can count on, if Peter does make it out, my good friend Rick Maiman will be there to snap a shot of him leaving the prison gates (THANKS FOR THE SHOT TODAY).