Andrei Chikatilo was serial killer who murdered at least 56 young women and children starting in 1978 until his capture in 1990. The details are as bad as one might expect, and apparently the murders and mutilations were how he achieved sexual release. His killings seemed unpredictable to investigators at the time, and even in retrospect there appears to be no clear pattern.

Now, however, UCLA mathematicians Mikhail Simkin and Vwani Roychowdhury have published a paper where they see not only a pattern, but one that is meaningful to those who might want to stop other serial killers. In their paper, “Stochastic Modeling of a Serial Killer,” published a couple of days ago, Simkin and Roychowdhury discovered that the killings fit a pattern known as a “power law distribution.” One of many kinds of statistical distribution (the bell curve being another), power law distributions are often found for out-of-the-ordinary events like earthquakes, great wealth, website popularity and the like.

First, they looked at a timeline of his killings. They saw apparently random periods of inactivity. Each time Chikatilo started killing again, however, the next murder would come soon after. And the one after that even sooner. And so on and so on until the next period of no killing.

The study doesn’t take account of the reasons for two of the longer pauses — Chikatilo’s first arrest and detention on suspicion of being the killer, and the period where the media started reporting on the investigation — but the reasons aren’t important. What’s important is being able to make some kind of sense out of the seemingly random events.

What they noticed was that, when these ever-increasing murders were plotted on a logarithmic scale, they came out in almost a straight line — indicating the possibility that a power law might be at work here. What’s more than that, they noticed that the curve’s exponent of 1.4 was pretty darn close to the 1.5 found for the power curve of epileptic seizures. What if (they wondered) the killings fit a neurological pattern? What if, like epileptic seizures, psychotic events like these killings came about when an unusually large number of neurons in the brain started firing together?

So they plugged in some givens of what is known about how neurons work, modeled on how epilepsy works. They made the model a little more realistic — seizures come unbidden when the conditions are met, but killers probably need some time to plan once their brain is ready for the next attack. Then they ran a simulation.

The simulated probabilities for the length of time between murders tracked the real-life data almost perfectly.

In other words, if you know when the last murder took place, you can calculate the probability that another killing will happen today. And the more time has passed since the last one, the less likely another will happen.

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Fascinating stuff, but so what? The so what is that statistical analysis has become a big part of modern crimefighting. CompStat has gone from an attempt to see where crime was happening in early 1990s NYC, to a tool used by police forces across the country to predict where to post their officers tomorrow. Homeland Security has a new thing they call FAST (for Future Attribute Screening Technology) they claim to be 70% accurate in the lab, that is said to calculate the probability a given individual is planning to commit a crime. “Predictive policing” has gone from science fiction to routine in the blink of an eye.

An appreciation of what statistics can — and cannot — do is becoming a big factor in law enforcement. Stats can’t tell you who the perp is, but they’re getting better and better at figuring out where and when the next crime might happen. Police departments that react responsibly, by focusing surveillance and manpower on those points where they are most likely to do some good, have a better chance of reducing crime rates with a more efficient use of their resources.

This latest study provides yet another tool, perhaps, for better and more accurate use of statistics by law enforcement. Catching a serial killer by focusing resources based on when and where he’s likely to strike next is a hell of a lot better than relying on the junk science of behavioral profiling.

Of course there’s always the risk that the numbers will be misjudged, that the models will be faulty, that the probabilities will be turned into junk science justifications for injustice. That’s a risk any time law enforcement meets math & science.

But when the numbers aren’t used to point the finger of guilt at a particular person, but rather as a guide to help catch whoever it might be (or prevent him from striking again), then it’s not a bad thing. If it helps law enforcement protect the rest of us, without violating our rights or punishing the wrong people, then hooray for numbers.

When we were just starting out in the law, we frankly had no problem with the concept of profiling.  Not racial profiling — that’s just a logical absurdity along the lines of “most people who commit crime X are of race Y, therefore it’s reasonable to suspect people of race Y of committing crime X.”  We’re talking about profiling as the concept that a significant number of people who commit crime X exhibit the combination of traits A, B and C, which is a combination rarely encountered otherwise, and therefore if one were to look for people exhibiting traits A, B and C, then one might have a better chance of catching someone guilty of crime X.

Intuitively, this sounds reasonable.  If we were to know, for example, that certain serial arsonists are motivated by a sexual mania, that these arsonists tend to remain near the scene to masturbate or so they can masturbate to the memory later, that they tend to have spotty work and relationship histories, and that they tend to have crappy cars — well then, there’s nothing wrong in letting the cops scan the crowd of spectators at a fire, question any who seem to be getting a kick out of it, and investigate those who are single, unemployed, and drive a beater.  (This is an actual profile, by the way.  We didn’t make this up.)

And emotionally, profiling sounds wonderful.  Catching a psychopath is often difficult, because they don’t play by the same rules as the rest of us.  Wouldn’t it be nice if there were some, er, rules that we could follow — a formula of some kind — that would make it easier to identify and catch them?

As we said, in our early years we thought this was a great concept.  Whenever we encountered some findings that certain traits had been identified with this type of serial killer, or that type of terrorist, we thought it was fantastic.  But we didn’t think too critically about it.  And for sure we never bothered to look for the underlying data, much less examine the methodology used to determine how strongly these traits correlated with perpetrators of that crime.

The problem is, nobody else was doing that, either.

Profiling only works if the profile is accurate.  That should go without saying.  But it has become plain over the years that the various profiles out there are not accurate.  They are not based on actual data, but instead only on anecdotes.  (And as we like to say, the plural of “anecdote” is not “data.”)  Nor are these profiles based on any significant sample size.  No profiling study ever did even a simple regression analysis to determine whether any particular trait happens to be a meaningful variable.

We figured this out soon enough, of course.  After our first couple of years with the DA’s office, we were already joking about the silliness of profiles.  It was almost a party game to figure out which psychopathic profile we and our friends happened to fit (secure in the knowledge that hardly any of us were really psychopaths).

And the rest of the world soon caught on.  The Onion did a piece entitled “Crime Reporter Finds Way of Linking Warehouse Fire to Depraved Sex Act.”  Malcolm Gladwell wrote an outstanding piece in 2007 called “Dangerous Minds: Criminal Profiling Made Easy,” in which he solidly debunked the whole profiling scam, showing how there’s no science or statistics behind it, and even the data it’s based on is mostly useless.

It’s now fairly common knowledge that criminal profiling is about as useful as a Tarot deck.  So of course the FBI has stopped using it, right?

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Wrong.

As a matter of fact, they’re expanding!  Just as the feds have (disastrously) tried to use street-crime investigative techniques like wiretaps to go after white-collar offenders, they are now (equally idiotically) starting to use criminal profiling to go after people for white-collar offenses.

Matthew Goldstein wrote an excellent piece on this for Reuters this week, called “From Hannibal Lecter to Bernie Madoff: FBI profilers famous for tracking serial killers are turning their attention to white collar felons.”  This (and the Gladwell piece linked to above) should be required reading for any white-collar defense lawyer now practicing.  When the Galleon case first came down, we were one of a handful of people doing white-collar defense who also had plenty of wiretap experience; now, of course, more of us are learning it the hard way.  Hopefully, with this new profiling issue, more of us will be prepared to deal with it ahead of time.  (And perhaps even nip it in the bud.  Like Barney Fife, we’re a big fan of bud-nipping.)

The agents in the FBI’s Behavioral Analysis Unit are the ones who profile serial killers and the like.  ”The hope is,” reports Goldstein, that they “can get into the minds of fraudsters and see what makes them tick.”

“This originally started out as an attempt to find a way to prevent and detect Ponzi schemes,” said Peter Grupe, the FBI’s assistant special agent in New York in charge of white collar investigations.  ”But it developed into something broader.”

The FBI’s profiling strategies are part of an aggressive new approach to financial crimes.  Facing widespread criticism over the lack of criminal cases stemming from the financial crisis, the FBI and federal prosecutors are keen on showing that they are not soft on white collar offenses.

Whoa!  Wait.  Let’s count how many things are wrong with just these few lines.

(1) They’re using profiling, which is not a reliable indicator in the first place.  And for which we would be willing to bet real money the feds have gathered very little actual psychological data, from a sample of offenders that is too small to be meaningful.

(2) They were just going to use profiling to catch Ponzi schemers, “but it developed into something broader.”  Whenever law enforcement says that phrase, it’s time to start screaming “no!”  It’s bad enough when the government says it in the first place, but when it’s that arm of the government that has the power to take away your liberty, property and reputation — to destroy your life almost at whim — only bad things can come of it.

(3) The feds are trying to create more white-collar cases for purely political reasons.  They sense some public pressure to prosecute people because of the financial crisis.  Ignoring the fact that the financial crisis was not caused by any, you know, crimes.  It was the result of stupid business decisions, stupid government actions, dramatic shifts in perceptions of liquidity, and banks shifting from lending to hoarding.  It may have exposed criminal conduct like Madoff’s, but it was not caused by criminal conduct.  Seeking to appease the masses with bread and circuses may have worked for Caligula (actually, it didn’t, did it), but it sure isn’t what the United States ought to stand for.  And it damn well isn’t an ethical or just exercise of the government’s authority.  In fact, it smacks of an offensive abuse.

(4) The feds want to show “they are not soft on white collar offenses,” not by actually catching actual criminals and convicting them, but by the functional equivalent of Captain Renault’s “round up the usual suspects.”  People who did nothing wrong are going to be rounded up, humiliated, their livelihoods destroyed, their savings spent and houses mortgaged to pay legal fees defending themselves against the might of the federal government.  Not because they did anything wrong, but because the feds have a new toy to play with.

(5) They’re using psychobabble to catch a “broader” array of white-collar types.  So apparently there are psychological markers for people who are more likely to commit insider trading, or fail to disclose bad news to shareholders, or take out a fraudulent loan, or swipe some money from the till?  Really?  They must be joking.  There are just too many kinds of people who wind up in these situations.  There is no “profile” of a white-collar offender any more than there is one for any other kind of theft or deceit.  People lie, cheat and steal for all kinds of reasons — and that’s all white-collar crime is.  So we guess the profile is anyone who hasn’t adopted West Point’s honor code as their own.  That really narrows it down, guys.  Nice job.

Don’t even get us started on the rest of what the FBI has to say for itself.  We don’t want this to turn into a rant.  But do read the rest of Goldstein’s article for yourself.

In the meantime, watch out.  Those Behavioral Analysis types might be looking at you.

Wiretaps are arguably the greatest invasion of privacy that the government can do.  They’re listening in on private conversations, not intended to be overheard by anyone else.  So to get a wiretapping warrant, the government has to do more than for a normal search warrant.  There has to be more than just probable cause that they’re likely to find evidence of a crime.  Only certain crimes count.  There has to be good reason to do a wiretap as opposed to some other less-invasive investigative technique.  Only particular conversations can be sought, over particular phones.  Etc. etc. etc.

Not only is there a heavier burden to meet before a wire can be granted, the government has to comply with some very strict rules as they carry out the eavesdropping.  On that issue of particular conversations, for example, they have to do what they can to minimize the amount of non-relevant or privileged conversations that get listened to.  This is called “minimization.”  When it appears that a call isn’t pertinent (i.e., it isn’t evidence of a crime), or that it’s privileged (as a call with one’s attorney, doctor or spouse), then they have to stop listening and recording.  The call gets “minimized.”

The cops or agents who are monitoring the wire have to do more than just act in good faith.  Their minimization has to be objectively reasonable — the law only cares what an ordinarily reasonable person have thought in the circumstances, not what the cop himself happened to think.  So a properly-run wire is going to have minimization procedures that are spelled out at the beginning of the investigation, in writing, signed by every agent before they get to monitor any calls, with a reference copy there at the monitoring location just in case there are any questions later.  The prosecutor is going to be involved throughout, and it’s really the prosecutor’s responsibility to make sure that everyone knows what they can and cannot do.  It’s also the prosecutor’s job to review all the calls that were intercepted and, among other things, make sure that the cops are minimizing properly.

But what happens if the government doesn’t do that?  What happens if oblivious or malicious agents record and listen to all kinds of personal calls that have nothing to do with the crime they’re investigating?  What happens if a lazy or inexperienced prosecutor fails to nip it in the bud, or if a malicious prosecutor allows it to keep happening?

It’s an important issue these days, because the feds have been doing exactly that.

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As we’ve pointed out a few times, the feds have been all gung-ho for doing wires on white-collar stuff these days, but the white-collar teams aren’t exactly the most experienced at doing wiretaps properly.  For one thing, the feds hardly do any wires in the first place, comparatively speaking.  It’s just too much of a bureaucratic hassle to go all the way up the DOJ chain of command to get the bosses to sign off on one.  And staying up on one is even more of a hassle, because you’ve got to do all that in a compressed amount of time to renew the wire before it expires, while at the same time trying to manage the wire itself and figure out just what the heck is being intercepted and whether it means anything.  State-level wiretaps are much more common, and tend to be done by people with more experience in doing them.  Expediting the process only leads to more errors by less-experienced folks without as much oversight.

Because of their relative inexperience, and also because of reduced oversight, the feds have been making a bunch of mistakes in the way they do their wires lately.

But at the same time federal judges are just letting them slide.  There haven’t been any consequences.  There’s no penalty for even the most egregious violations of people’s privacy rights.

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The exclusionary rule, as we’ve said repeatedly, is quite an elegant solution to a sticky problem.  There’s a constitutional line which the police cannot cross in gathering evidence.  Society wants the police to gather all the evidence they are allowed to, all the way up to the line.  Society does not want people to be convicted with evidence that was gathered by crossing the line and violating their rights.  We don’t punish the police officers personally for crossing the line, because then they’d be reluctant to go anywhere near the line, and society would lose lots of perfectly lawful evidence.  Instead, we let the cops go right up to the line and dance on that line.  And if they happen to cross the line, then we just don’t let them use that extra evidence against the defendant.  All of society’s goals are attained with no fuss or muss.

It’s a good thing it’s so elegant, because the exclusionary rule is really the only tool in the courts’ toolbox here.  If the government violated the Fourth Amendment, then the evidence gathered as a result of that violation must be excluded.  The problem is that the courts often decide it’s better to have all the evidence.  Courts routinely say that society wants the truth, or that there is a greater policy in favor of using as much evidence as is known, or stuff to that effect.  And when that happens, the courts get rid of that one elegant tool they have to protect your rights from government excess.

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And so, for example, we get decisions like Judge Holwell’s last November, declining to suppress wiretap evidence in the Galleon case even though the wiretap applications were little more than a fraud on the court.  The judge found that the issuing judge had been misled as to the necessity for the wire.  A situation crying out for suppression — and sanctions — and the defendant was forced to go to trial instead because that was preferable to the court.

And we get decisions like that of Judge Sullivan yesterday, declining to suppress wiretap evidence in another white-collar case even though the feds committed such outrageous and brazen violations of the minimization requirement that it was impossible to believe that it wasn’t completely intentional.

“The court is deeply troubled by this unnecessary, and apparently voyeuristic, intrusion” into the defendant’s private life, wrote the judge.  But that didn’t stop him from ignoring the exclusionary rule altogether, permitting these and other deeply troubling prosecutors to keep on doing whatever they like.

Namby-pamby judges in the past tried to deal with minimization violations by just suppressing the personal conversations.  This served no use whatsoever, because all that did was exclude evidence that wasn’t admissible at trial in the first place.  There was no penalty for violating this fairly important rule.

So there has been pressure on the courts to actually enforce the rule in a meaningful way, by suppressing all conversations that were intercepted on a wire where there were blatant violations of the minimization requirement.  Instead, the courts appear to have gone in the opposite direction.  ”We can’t suppress,” they seem to be saying, “because then we’d lose all that lovely lovely evidence.”

Well, they’re not being namby-pamby about it.  But that doesn’t make their decisions any less abhorrent.

This’ll be quick, because we’re pretty busy working on a wiretap case, which is always time-consuming if done right.  But as our mind’s on that topic anyway, we thought we’d quickly point out that the latest round of insider-trading cases is again largely derived from wiretaps.  Here’s a roundup over at the WSJ’s law blog.

We just wanted to jump in and point out that just because there were wiretaps, by no stretch of the imagination does that mean the case is a slam dunk.  There are all kinds of ways that agents and prosecutors can and do screw up wire cases.  If properly challenged, the recordings and all evidence gotten as a result of them can get thrown out, which pretty much kills the case.  Don’t go saying this can’t happen, because we happen to see it plenty.  (The one we’re working on right now is a prime example of how not to conduct a wiretap investigation, for example.)

But even if the evidence doesn’t get suppressed, that doesn’t mean it can’t be successfully attacked at trial.  Cross-examining taped evidence isn’t the easiest skill to master, but it’s definitely doable.

If you’re really interested, you can go take our CLE lecture on how to defend these kinds of cases over at West Legal Ed Center (shameless plug).  Or if you prefer, here’s a quick cut-and-paste from a longer post we put up the first time this happened, when the Galleon case broke (original post here):

Wiretap evidence is anything but a sure thing. We know. We did wires for years in the Rackets Bureau of the Manhattan DA’s office, and now we defend them. We’ve taught a nationwide CLE on how to successfully defend them for West LegalEdCenter. Wiretaps are not a sure thing.

They can be defeated with technicalities. Eavesdropping is probably the greatest invasion of privacy that the government can inflict, and so we make law enforcement jump through all kinds of hoops before they are allowed to get an eavesdropping warrant. There are so many i’s to dot and t’s to cross, that the feds hardly use wiretaps in the first place. You’d think otherwise, but it’s so. Plus, they have to go through so many steps in the chain of command to get permission to apply for a warrant, that by the time they could have done so the need or probable cause has evaporated. State prosecutors do way more wires than the feds do.

Because the feds rarely do them, they’re not necessarily as on the ball as certain state-level offices might be. And except for those few high-caliber state offices, the locals can be even more error prone.

That’s big, because little errors in wiretaps have big consequences. Usually, they mean the government loses the case. A little oversight leads to the suppression of all the evidence derived from that point forward in the case, and a multimillion-dollar investigation just went down the toilet. No bullshit.

What kinds of technicalities are there? Tons. Some are just stupid. One particularly stupid requirement is the “sealing” requirement. The idea is that we don’t want to risk having the tapes or CD-ROMs of the intercepted conversations tampered with. We don’t want Nixonesque 17-minute gaps in the evidence. We want the assurance that the evidence never had a chance to be fucked with, and is as pristine now as when it first came in. And so the law requires that the tapes or CDs be sealed immediately, which usually means having them wrapped in evidence tape and having a judge sign and date the tape with a Sharpie.

But “immediately” doesn’t mean “immediately.” Instead of sealing the tapes right after they were recorded, the law says they have to be signed within 24 hours after the expiration of the warrant. Warrants are typically good for 30 days. So the whole month’s worth of tapes or CDs have to be assembled and sealed no later than 24 hours to the minute after the expiration of the wire. And that can be a tough deadline to meet. Especially when, say, it’s 5:04 on a Friday afternoon and all the judges are on their way out of town for the weekend. Or when, out of the hundred or so tapes for that month, one of them by accident didn’t make it into the group to be sealed, which can easily happen. Or when the judge took forever reading that 160-page renewal application, and the deadline passed when he’d only signed half the tapes.

This 24-hour rule is not a “good faith” or “close enough” rule. 24 hours and one minute means the evidence on those tapes cannot be used, and any evidence that resulted from what was heard on those tapes must be suppressed. The case is over. It’s technicalities like these that make prosecutors sweat and cross their fingers and hope the defense attorney won’t be paying attention.

Another technicality, believe it or not, is who signed the warrant application in the first place. The law is very particular about who is allowed to sign the application. Only certain enumerated DOJ officials, or the elected head of the DA’s office, are allowed to do it. We once had to work pretty hard when a very good defense attorney named Marty Adelman noticed that we’d had a substitute sign on behalf of Mr. Morgenthau when the boss was out of town. We had to prove that he really was legitimately unavailable, not merely at a function or indisposed, and that the substitute was the legitimate second-in-line. We’d done it right, of course, but others don’t. At one point, about a gazillion wiretaps had to be thrown out because the U.S. Attorneys in D.C. were having them signed by someone not on the authorized list.

The big thing, of course, when trying to controvert an eavesdropping warrant, is not the technicalities but the probable cause.

There has to have been probable cause to believe that a particular crime, listed in the wiretap statute, was being committed. That evidence of that crime would be found by listening in on a particular phone. That a particular named person would be using that phone, whose conversations would be evidence of the crime. And traditional investigative methods like surveillance, undercovers, informants, subpoenas, etc. wouldn’t get the job done.

That’s a lot to prove. The warrant applications have a heavy burden to meet. A good defense attorney is going to look for chinks in the armor, weaknesses in the alleged probable cause, and is going to fight hard to get the warrants and all their fruits thrown out.

And doing that work, and making the prosecution work hard to defend itself, and letting them know that they’re going to be working this hard for the rest of the case, can convince them to rethink their plea position at the very least.

When looking at probable cause, a decent attorney is going to notice whether the warrant application sections laying out the arguments are just boilerplate, cut-and-pasted from earlier applications, or whether they actually are tailored to the investigation as it then stood. Boilerplate, if it doesn’t really apply here, is a fraud on the court! That warrant and everything thereafter just got thrown out.

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Well, what if the defense litigated the eavesdropping, but it’s all still coming in? They’ve got a trial on their hands. What do they do now? They can’t fight the tapes in front of a jury can they? How can you possibly cross-examine taped evidence?

It ain’t easy, but a smart lawyer can do it.

First of all, you have to realize how wires get started. They don’t come out of the blue. Probable cause does not land in some cop’s lap.

There’s an easy way, and a hard way, to start a wire. The hard way is to have all this suspicion, based on historical intel about your players, surveillance of their movements, and scuttlebutt from the community. Then you track down their phone numbers, and subpoena tons of call records to see who they’re calling and when. Then you look for patterns, and see what you can dig up about the people they call. And you try to put together a res ipsa argument that this criminal activity must be going on over that phone. That ain’t the easy way.

The easy way, like with any investigation, is to flip an informant. Someone screws up, and now needs to work off a likely sentence. The only way they can do that is by getting someone else in trouble. So they agree to wear a body wire, or introduce an undercover, or (usually) consent to the recording of their own phone calls with the target.

Bang. Right there, we’ve got all kinds of arguments for reasonable doubt. Arguments to piss the jury off at the government and want to acquit our client.

Because what is the informant trying to do? He’s trying to get our client in trouble. He’s trying to elicit an incriminating statement over the phone that’s going to let the government tap that number. That doesn’t just happen.

No, that call is going to be scripted. Or rehearsed. Or both. That call is going to have a purpose, and Mr. Informant is going to do whatever he can do to manipulate that conversation so he gets the incriminating words he wants. Or at least words that sound incriminating.

You see where this is going, don’t you? You may never use the word “entrapment” itself, but by golly you’re going to plant that concept in the jury’s mind. That informant was out to save his own skin. That informant did not tell our client the truth. That informant lied about what that conversation was about. Those lies were scripted and rehearsed with the agents beforehand. This whole case is built on lies. And the conversation didn’t go according to plan. Our client was not about to incriminate himself. So that informant manipulated him, changed the subject, hounded him, cajoled him to say things he otherwise never would have said. Throw some in-check indignation, and you can have one pissed-off jury.

And you fight the recordings themselves. “But look at the transcripts, they’re cut and dried,” you say? Poppycock. Those transcripts are nothing but interpretation. Any defense lawyer who sits back and relies on the government’s own interpretation of what is on those tapes needs to find another line of work.

Because everything on those recordings is open to interpretation. Nobody in the real world speaks in clear prose, with footnotes explaining their jargon and inside references. Nobody talks like that.

People throw ideas around. They talk things through. They change their mind. Taken out of context, a statement on Day 1 can sound really incriminating. But in context with a statement on Day 2, it’s perfectly innocent.

People talk in code. Not just spies and crooks, but everyday folks. Nobody spells it all out, that would infuriate the listener. Stuff that the other person also knows goes unsaid. People use jargon that outsiders can easily misinterpret. Phrases like “you’re going to put me in jail” could really be a schtick between friends for “my boss isn’t going to like this,” rather than the literal meaning. But taken out of context, perfectly innocent words can sound damning. Any one of us could face prosecution if our own conversations were selectively lifted out of context.

So it is critical that the defense listen to all of the intercepts, not just those highlighted as the prosecution’s greatest hits. The defense needs to get the whole context, and be able to explain ostensibly incriminating conversations as being perfectly innocent. The client should help as much as possible.

Other room for interpretation is what the freaking words were in the first place. We had plenty of occasions where we listened to a tape and heard one phrase, our detectives heard at least two different phrases, and our trusted paralegals heard it yet another way. Nobody enunciates every consonant. Speech is casual. It’s rushed. It’s muddled. It’s amazing that our brains can separate out as much as we do. But in doing so, we often see patterns where they don’t exist, and hear words and meanings that were never said. It’s like optical illusions for the ear, and they happen all the time. Have an inaudibility hearing if you have to, and get the statement tossed altogether if need be.

So any fool who relies on the government’s transcripts deserves to be called a fool. Make your own dang transcript, and make sure you can sell it to the jury. Youwant to be the voice they trust.

There are tons of other ways to tear the intercepts apart. These are just a starter. But this post is already getting far too long…

The feds are really ramping up their insider-trading enforcement.  But instead of going after real insiders, they’re going after consultants and investors who use them.  This is a big risk for the feds, and they could lose big.

It started a year ago, when the feds indicted a bunch of people in what we collectively refer to as the “Galleon” case.  For the first time ever, the feds had used wiretaps in a white-collar investigation.  It looked like the gloves were coming off, and the feds were going to start getting down and dirty, using street-crime law enforcement techniques to go after Wall Streeters.

Then in May, Lanny Breuer announced a “new era of heightened white-collar crime enforcement — an era marked by increased resources, increased information-sharing, increased cooperation and coordination, and tough penalties for corporations and individuals alike.”  In the wake of an economic bubble bursting, they were gunning for the suits who had profited.  And unlike the last time they tried, in the wake of the dot-com bubble, now there was no 9-11 to divert their resources.

To some extent, such a strategy is like shooting fish in a barrel.  Real frauds like Ponzi schemes and the like, which can hide amidst a rising market, come to light pretty easily when the market collapses.  And we saw a lot of those prosecutions in the past couple of years.

But to a larger extent, it’s a political strategy.  Going after those who make money by moving it around, instead of creating something of value, is always going to be a populist move.  It wins brownie points for the DOJ and the president.

And now comes the takedown.

On Saturday, the Wall Street Journal reported that the feds had been conducting a 3-year investigation into possible insider trading.  They had been approaching people out of the blue, telling them they were in trouble, and suggesting that they wear a wire (with at least a couple people refusing to do so, and then emailing all their clients to tell them what had just happened).  The feds had been subpoenaing records for a while.  The targets seemed to be Goldman Sachs and consultants who matched knowledgeable industry leaders with hedge fund managers looking for an edge.

That seems to have forced the feds’ hand, and on Monday they started executing search warrants at Diamondback Capital Management and Level Global Investors, which had been identified in the Saturday story.  Then they raided Loch Capital Management later in the day.  We hear that more raids are coming, and as we speak a lot of investment firms are doing some heavy internal reviews, to figure out if they might be on the list.

Because nobody knows what kind of behavior the feds are going after.  And if past performance is any indicator of present results, the feds may just well be going after perfectly innocent behavior.

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The reason is that the feds don’t seem to understand the difference between illegal insider trading and lawful sharing of information.  In a conference yesterday, while the raids were going on, an associate director of the SEC’s enforcement division said that “there’s a lot more patterns and serial insider trading than we previously thought had occurred.”

Translated, this means that the feds are suddenly taking note of all the consultants and analysts out there, who give hedge fund managers insights into where an industry or company is going.  As one would expect, plenty of those consultants used to be high-ups at such companies.  Hence their ability to provide insights.

But that’s not insider trading.

Insider trading is a fairly new crime, one of the countless new federal crimes created in the last decade.  One commits the crime of insider trading by first, knowing some secret, non-public information.  Second, one must have a fiduciary duty to the owner of that secret information, a duty not to disclose it.  Third, one must divulge that secret in violation of that duty.  And fourth, the person who uses that secret information had to know that it had been shared in violation of that duty.

That last step is bloody hard to prove.  You have to be able to prove actual subjective knowledge on the part of the recipient of the information, that it was a secret.  “Knowledge” is not the same as “this sounds like a secret” or “this is probably a secret.”  “Knowledge” is “I know this really is a secret.”

And even if the information being divulged to hedge fund managers was secret at one point, it’s not as if the information is coming directly from the executive with the fiduciary duty.  He spilled the beans to someone else, who shared that info with a consultant, who mentioned it to one of these firms that matches consultants with investors, and eventually the information got shared with the hedge fund manager.

In that case, the executive sure committed a crime.  But that’s not who the feds are targeting!  They’re going after the consultants, the hedge funds, and the firms that match them up.  None of them breached a fiduciary duty, the end user had zero privity with the one who did breach the duty, and it’s going to be hard to prove any actual knowledge by any intermediary or investor.

That’s a lot of room for reasonable doubt.  A good defense lawyer will have a heyday with this kind of case.

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And don’t forget, a hedge fund manager (or any other trader)’s primary function is to gather information.  You keep your ear to the ground, listen to rumors, and try to predict what’s going on.  A good trader has a network of sources to rely on, and everyone and their mother has a tip.  Most of the “sure thing” tips one hears are utter bullshit, but every now and then one is worthwhile.  The trick is being able to spot the gold.

This “relentless pursuit of data,” as it has been characterized, is completely normal and perfectly legal.  It is what the market is supposed to do.  It is precisely what the law is supposed to encourage.

It’s not the same thing as an insider profiting from his own knowledge at the expense of the market.  It is the market trying to make the best judgment call from the available data.  If a real insider happens to seed the market’s data with secret information, it is not the market’s fault, and it’s not a crime to use it if one learns it from a third party, without knowing it was a secret.

There’s all kinds of room for reasonable doubt here.  And don’t even get us started on the way the feds are all of a sudden using wiretaps and body wires to gather evidence.  Forget the suppression issues we keep seeing — a good defense lawyer with experience with these things can often fight such evidence successfully at trial.  It’s not always as strong as you might think.  But that’s a topic for a whole nother post.

Suffice it to say, for now, that the feds are taking a huge risk here.  A very expensive, three-year investigation, could very well go down the toilet, because they’re going after the wrong people, for the wrong activity, with the wrong tools.

The other day, we drew a contrast between the Manhattan DA’s new public integrity unit and the way the feds go after FCPA violations, and some folks asked just what exactly the feds do in these cases.  That’s a good question.  Especially now, as the FCPA has become a major star of the feds’ redoubled efforts to fight white-collar crime.

The Foreign Corrupt Practices Act, among other things, says it’s against the law for any U.S. citizen or business to pay a bribe to a foreign official.  The penalties can be staggering, with fines calculated as the amount of income the briber hoped to receive down the road as a result of paying the bribe.  “Any” U.S. citizen means just that: anybody, not just a corporate executive.  A “foreign official” means anyone with a government job — including people working in industries that are government-owned or government-controlled.

“Bribery” includes giving anything of value in the hopes of getting something in return.  It’s really a broad standard.  A bribe doesn’t have to be an explicit tit-for-tat, and it doesn’t have to be just for the purpose of landing a choice contract.  A bribe can be just a nice dinner at a fancy restaurant that might make get you looked on with more favor next time contracts are being awarded.  A bribe can be a “facilitation payment” to a petty bureaucrat, some grease to ensure that you are allowed to do what you are already entitled to do (this, by the way, is an example of where Wikipedia, at least as of today, get things wrong).  See here for a more thorough discussion.

As with many white-collar offenses, this one is enforced by both the SEC and the DOJ.  As of this year, the SEC now has a special unit dedicated to investigating and punishing suspected offenders.  As we mentioned the other day, the point is to keep as much expertise in the institutional memory, and also to better coordinate investigation and enforcement.  On the criminal side, the DOJ’s Frauds Section is the main enforcer as a matter of law, though some local U.S. Attorney’s offices like the SDNY will handle most of the work in-house.

Over the past few years, the number of FCPA cases has risen dramatically, in part because the SEC and DOJ have been working together so closely on these cases.  They don’t have to reinvent the wheel so much, which leads to efficient use of resources and manpower.  At the same time, far more resources, lawyers and special agents are being focused on FCPA cases.  In the 2011 budget, the funds allocated to these cases is up 23%.

But that reallocation of resources is a lagging factor, merely reacting to the fact that so many more cases are coming in.  The number of bribes is not changing, so far as anyone can tell — there aren’t more bribes to report, and enforcement isn’t reducing the number that take place — but the number of cases are definitely on the rise.  The reason for more cases is not a bigger budget, however.  As with any investigative law enforcement (as opposed to the fait-accompli street-level policework) the vast majority of cases come from informants.  And now we’re seeing a lot more informants.

FCPA informants can be defendants trying to shave a few months off their sentence, as with other kinds of cases.  But there’s more than that going on in FCPA cases.  There’s a whistleblower provision that awards a first-come-first-served prize of nearly 1/3 the penalties extracted.  With fines that can easily add up to many millions or even billions of dollars (the Siemens fines were something like $1.6 billion), the mercenary temptation has become a huge factor here.

The sharks are already out in force.  A number of plaintiffs’ lawyers are already out there trolling for tipsters, hoping to cash in on the next big score.  A third of a third is still pretty damn big, when you look at some of the fines that get handed down.  The SEC is creating an Office of the Whistleblower just to handle the process.

Informants can also be the companies themselves, once they find out that a bribe took place, and they want to get in the SEC’s good graces and minimize their exposure.  The official term for this is “self-reporting.”  The unofficial term of art used by the SEC and the DOJ to refer to self-reporters is “grovelers.”  This should give some indication of how much respect is given by law enforcement to self-reporters.

As the number of investigations and criminal prosecutions here has risen, prosecuting individuals has become a major priority.  So it’s not just corporations at risk here.  Individuals have some massive potential exposure now.

So lots more informants are coming in, for a variety of reasons.  And more and more of them are (wisely, very wisely) coming in with lawyers.

This is just a bare-bones summary, but already you’ve probably spotted some serious problems with the way we enforce the FCPA.

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You may be asking yourself what possible harm is done to the United States when a business pays a bribe in order to get equal treatment in a foreign country, when not paying the bribe would mean the business (and potential tax revenue therefrom) is going to be awarded to a Chinese or Russian firm.  That’s a good question.  But that’s more of a problem with the FCPA itself, than with the way it’s enforced.

One major problem is that our enforcers have created a strong disincentive for anyone to ever self-report.  The costs of hiring Kroll or whomever to do an internal investigation, overseas, can easily set you back somewhere in the tens of millions of dollars.  And once you do self-report, it’s not as if the SEC is going to forgive all and say “go forth and sin no more.”  You may avoid fines, but you’re still going to have to withdraw from the deal, lose the benefit of any associated deals.  The SEC can impose a monitor, claw back the revenue you earned (or expect to earn) from the bribed deal.  And the SEC might go ahead and issue a fine, anyway.  And if you do self-report, it’s not as if the SEC is going to limit its investigation to that one deal — no, they’re going to look at other contracts you got, and see if any bribery was involved there (the presumption being that if it happened here then it must have happened there before), and you’re going to get penalized for not self-reporting any other bribes they uncover.  Only in the rarest of cases will a self-reporter avoid prosecution, and then only if they have already taken care of the matter completely to the SEC’s satisfaction internally, with full documentation and reporting, and it was only a one-off exception that slipped past a strict regime of controls to prevent it, and new stronger controls have now been implemented at great cost, etc.

As a result, more and more companies are just going ahead and taking the chance that the SEC will never find out.  After a serious and thoughtful cost-benefit analysis, it just doesn’t make a lot of economic sense to be a “groveler.”  The feds will screw you.  Being a straight shooter has real, severe consequences.

Well, it’s not as certain as that.  There is no certainty at all about what the feds will do in a given case.  The outcome of every case can be viewed on the Frauds Section’s website here, and if you can spot an underlying principle or rule that makes their behavior even slightly predictable, then do it and go make a lot of money advising corporations on what to do.  Because there is no certainty at all right now, and that’s even worse than the certainty of getting screwed.

The whole whistleblower thing is just a disaster.  Companies have no chance of self-reporting if they don’t find out about the wrongdoing in the first place.  The briber isn’t bloody likely to tell on himself, so the company’s only going to find out about it from a whistleblower.  But there is no incentive to tell the company about it, when there’s a fantastical, unimaginably huge payday out there for whichever tattletale makes it to the SEC’s door first.  The incentive is to report it to the feds, not the company.  Companies and their shareholders (like you, your school, your pension) are justifiably afraid of getting socked by the feds before they ever even had a chance to do something about it.

Corporations are putting all these resources into compliance programs, internal investigations, Sarbanes-Oxley controls, and it doesn’t matter.  A whistleblower can just bypass all that, and take it straight to the feds.  Anyone except for an auditor can be a whistleblower, so the incentive for an employee or manager is to not bother with any investigation, and just report it.  Even with its own mercenary bounty, there’s no way a corporation can compete with the payday offered by the feds.

Meanwhile, what counts as a bribe is getting more and more idiotic.  You sent flowers to the official’s wife on her birthday?  You’re screwed.  You took the officials out for a purely marketing dinner or other social occasion?  No, you didn’t.  The SEC is going to decide for themselves whether the product you were marketing merited such a nice restaurant or the expense of that event.  That training course you offered?  The SEC has decided it was a bribe.  Your day-to-day business decisions are going to be second-guessed by a bunch of lawyers who in all likelihood have never run a business.

It’s no surprise that executives and marketing reps and sales managers are afraid of doing the wrong thing.  Folks are calling in the lawyers and blowing an insane amount of time, money and well-being on little nonsense matters like these that, a few years ago, nobody would have thought twice about.  There are too many FCPA cases these days, and too much is at risk, so it is imperative to stress out about it now.

At the same time, as we mentioned in passing above, the enormous costs of dealing with the FCPA, all the cases, all the fines, all the tax dollars and manpower thrown at enforcement… none of it is having the slightest effect on the underlying problem.  The actual amount of bribery is unchanged.  The law is not deterring any unlawful conduct that wasn’t already deterred.  (Though it is deterring a lot of perfectly lawful conduct, depressing lawful revenues, and forcing a lot of money to be wasted on non-productive things like lawyers.)

Another huge problem is how the feds decide what the fines and disgorgement ought to be.  There are no consistent internal policies on how to calculate these things.  As with most other economic calculations in the white-collar arena, the feds tend to be appallingly simplistic, exhibiting not even rudimentary familiarity with the kind of financial calculations that would render a meaningful and accurate amount.  As with USSG intended loss calculations on the DOJ side, the SEC’s disgorgement calculations can be pure conjecture, of what they estimate your future revenues would have been had you gotten that deal.  And including other downstream deals that you might not have gotten “but for” that initial nice dinner.  The potential fines are unpredictable, and so disproportionate to the amount of any bribe that “disproportionate” isn’t even the right word to describe them.  (For more on defending against such calculations by the feds, see our CLE lecture at West Legal Ed Center on the subject.

The whole topic of foreign bribery can be confusing.  The kind of bribery the FCPA is concerned with is precisely the kind of bribery that is created and caused by the foreign government.  A morass of regulations and bureaucracy — especially in a place with a high proportion of government employment — creates an incentive to cut through the red tape.  Government functionaries are always paid little, and some countries pay them even less with the full expectation that they’ll be making up the difference in baksheesh.  Prohibiting Americans from paying that baksheesh doesn’t stop the civil servant in Cairo or Juarez from taking his bribes.  All it does is mean that someone else is going to get the contract, or be able to fulfill their contract, instead of the American company.

But let’s say we just want to hold American citizens up to a higher standard.  There’s nothing that says we shouldn’t.  And maybe we’re arrogant enough to think that doing so will raise the standards of the rest of the world.  (Yeah, how’s that going for you, USGAAP?)  Even if we stipulate that the law is necessary and proper, the feds are going about enforcing it in exactly the wrong way.

Hey, you asked.

As we were coming out of court the other afternoon, we got a call from one of the nice folks over at the WSJ, asking us what we thought about the Manhattan DA’s new Public Integrity unit.  We didn’t even know it had been formed — though we had heard Vance talk about the idea on the campaign trail.  The soon-to-be new DA had talked of ideas for a variety of new units, some of which we thought were good ideas (like the Wrongful Convictions unit, which would create office-wide policies while also investigating innocence claims), and some of which we thought were more public-relations than practical (like the Public Integrity unit).

As proposed by Vance, we said to the reporter, the Public Integrity unit didn’t really seem necessary.  It was to be a sub-unit of the Rackets Bureau, which has already been investigating and prosecuting public corruption cases with a fair amount of success for many years.  Carving out a specialty unit isn’t going to increase the number of cases they get, or improve their success rate, or have any extra effect on corruption beyond the usual.  It’s not like this is an area of crime that was being ignored.  Far from it.

It’s not going to increase the number of cases coming in, because that has nothing to do with whether there’s a special unit or not.  Public corruption cases are hard to come by, because usually the only people who know about the bribery are the ones benefiting from it.  And they’re not likely to self-report.  The DOI does what it can with the resources it’s got to ferret out a case here and there, but the reality is that (for the most part) law enforcement sort of lucks into these cases.

If you want to have an effect on public corruption, the trick is to either get magical surveillance powers to spot all the bribes going on, or else solve the root of the problem itself.  We have so much public corruption in NYC because we have a truly byzantine labyrinth of regulations, rules, laws, permits and procedures that serve as a massive impediment to doing business and getting things done.  Name an industry, and we can name any number of stupid rules or procedures in the way.  Businesses have a huge incentive to grease the wheels.  And the petty functionaries who stand in the way of doing business tend to be very poorly paid (few government workers actually make enough here relative to the cost of living here), so they have a huge incentive to accept money to look the other way.  The system is set up to guarantee bribery, not prevent it.

And of course, that’s a huge invitation to organized crime.  Which is why the Rackets Bureau is involved in the first place.  (Though many of these cases don’t really have an o.c. component these days.)

If you want to have a more noticeable effect on public corruption, the way to do it is systemic change.  A new sub-unit of the Rackets Bureau just doesn’t seem like a practical solution, though it may have some public-relations benefit in sending a message that the new DA is indeed focused on this problem.

We said all this and more to the reporter, a nice enough fellow.  We’re saying it now, though, because the way it came out (link here) isn’t quite what we were saying — especially after the piece got expanded and revised — and the comments page there won’t let us post a comment to clarify our statements.  So we’re saying it here.

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That said, there are a couple of ways the new unit could actually be worthwhile.  The best way would be to focus in one place those prosecutors with real experience investigating and trying these kinds of cases.  Then keep them there and build up a substantial institutional memory, so experience doesn’t evaporate with the fairly high turnover of ADAs who leave to go make enough elsewhere to pay for rent and kids and things.  If the ADAs assigned there were to work hand-in-hand with the folks over at DOI, it’s conceivable that there could be improvements to efficiency in doing what they do.  An ideal situation might be something analogous to the way the feds deal with FCPA cases — there’s a special unit at the SEC, and in the Fraud Section of the DOJ, which coordinate fairly closely to deal with international bribery.  The federal units benefit from that synergy and their institutional memory, developing more consistent policies than if the cases were handled by all and sundry.  So that could be a good way to take this new unit.

And, on reading the WSJ piece, we learned not only that the unit was in fact announced that day, but that our former colleague Dan Cort will be heading it up.  And we like Dan a lot.  He’s smart and fair-minded, and he’s got plenty of high-level experience with this stuff, so he’s an excellent choice to lead the unit.

UPDATE: While in court today, we bumped into Mike Scotto, and learned that he’s just been made the Chief of the Rackets Bureau.  For those defense attorneys who haven’t worked opposite him before, let us tell you he’s a great pick for boss there.  Culture comes from the top, and with Mike there, we have every reason to expect the highest levels of professionalism and good judgment from his people.  He’s down-to-earth, decent, and knows what he’s doing.

It should come as no surprise to anyone with any experience in criminal law that perfectly innocent people will sometimes confess to crimes they did not commit.  Perhaps they were in a suggestible state, and the police led them to believe they’d done it.  Maybe they were broken by the interrogation and said whatever the cops wanted to hear, just to end it.  Maybe they didn’t really confess, but had their words taken out of context (or invented) by the cops.  (For tips on defending cases involving a confession, see our CLE lecture over at West Legal Ed Center.)

In recent years, there has been growing attention to the phenomenon of false confessions, and folks have begun investigating the reasons why an innocent person will not only confess to a crime he didn’t commit, but will often do so with such detail that it seems impossible for them not to have committed it.  The New York Times had a decent article yesterday on this very phenomenon.  The article reports on a study by UVA (wahoowa!) law professor Brandon Garrett, into reasons why an innocent person may sometimes confess with extraordinary detail.

To defense lawyers, the new research is eye opening. “In the past, if somebody confessed, that was the end,” said Peter J. Neufeld, a founder of the Innocence Project, an organization based in Manhattan. “You couldn’t imagine going forward.”

The notion that such detailed confessions might be deemed voluntary because the defendants were not beaten or coerced suggests that courts should not simply look at whether confessions are voluntary, Mr. Neufeld said. “They should look at whether they are reliable.”

Professor Garrett said he was surprised by the complexity of the confessions he studied. “I expected, and think people intuitively think, that a false confession would look flimsy,” like someone saying simply, “I did it,” he said.

Instead, he said, “almost all of these confessions looked uncannily reliable,” rich in telling detail that almost inevitably had to come from the police. “I had known that in a couple of these cases, contamination could have occurred,” he said, using a term in police circles for introducing facts into the interrogation process. “I didn’t expect to see that almost all of them had been contaminated.”

This is another good bit from the article:

Steven A. Drizin, the director of the Center on Wrongful Convictions at the Northwestern University School of Law, said the significance of contamination could not be understated. While errors might lead to wrongful arrest, “it’s contamination that is the primary factor in wrongful convictions,” he said. “Juries demand details from the suspect that make the confession appear to be reliable — that’s where these cases go south.”

Jim Trainum, a former policeman who now advises police departments on training officers to avoid false confessions, explained that few of them intend to contaminate an interrogation or convict the innocent.

“You become so fixated on ‘This is the right person, this is the guilty person’ that you tend to ignore everything else,” he said.

There’s been growing pressure for police departments to videotape interrogations, and the practice has been adopted here and there.  There are no good reasons not to tape interrogations — digital cameras are commodities now, and digital memory is insanely cheap.  Detectives can review sessions at will, gleaning more (and more accurate) data from them over time.  They can only help the police do their job.  Objections stem primarily from a fear that interrogation techniques will make the police look bad and undermine their efforts (much like the objections to public videotaping of police in action).  Such objections are only valid if what is being taped shouldn’t have been done in the first place.

The only reason for a police officer to oppose videotaping confessions is because he doesn’t want evidence of his own misconduct.

Professor Garrett’s article is worth a read.  You can find it here, 62 Stan. L. Rev. 1051.

For as long as we can remember, the word on the street has always been that cops cannot lie.  So if you’re doing a drug deal with an undercover cop, and you ask him point blank if he’s a police officer, then he has to tell you the truth.  He might try to technically get out of it by saying yes in a sarcastic tone of voice, but he has to be able to testify later on that he did say he was a cop.

And for as long as we can remember, we thought that was dumber than dirt.  The first time we heard this, back in our dim and distant teens, we imagined something like this:

It just made no sense.  And, of course, it’s simply not true.  No undercover cop is ever going to jeopardize his investigation or his safety by admitting to the fact that he (or she) is a cop.  And there is no rule anywhere that says they have to.

But even so, this myth has persisted.  We can’t count how many cases we’ve dealt with where the suspect asked an undercover if he was a cop, the undercover said no, and that was apparently good enough.  You’d think that, after suspects keep getting arrested anyway, word would get out that undercovers don’t have to admit the fact.  It seems like important information, something that would quickly become common knowledge among people who have a reason to care about such things. 

It’s not just lying about being a cop, by the way.  Cops are allowed to lie about anything.

Let’s repeat that: The police are allowed to lie to you… about anything.

The most common example of this is police interrogation.  The cops are allowed to use any deception they like, in order to get a confession. 

For example, they can tell you your partner’s being interrogated upstairs, and just confessed, so you’d better come clean if you know what’s good for you (when they haven’t even arrested your partner yet.)  They can say the victim told them you did it before she died (when she’s actually still alive, and never said anything of the sort).

The biggest lie (and one that works all the time) is that this conversation is strictly off the record.  “Just between you and me.”  Nothing you ever say to a police officer is ever off the record.  If it can be used against you, it will.

The second-biggest lie (also one that works all the time) is that, if you come clean, the officer will make sure you get treated leniently.  He’ll make sure the DA gives you a lighter charge.  He’ll put in a word with the judge to make sure you get off with a lighter sentence.  He’ll only arrest you for the misdemeanor.  Complete horseshit, of course — that cop’s going to make sure you go down for whatever it is you just confessed to — but it works all the time.  People cut their losses, seeing themselves in a hopeless situation, and grasp at the opportunity to at least minimize the bad.

Oh, and if you think innocent people don’t do that too, then you’ve got another think coming.  Innocent people do confess to crimes they didn’t commit, for a variety of reasons.  (That’s a subject for a whole nother myth.)  And lying cops is one of the big ones.

And the cops are completely within their rights to lie this way.  Unlike prosecutors and judges, who have professional ethics to comply with, the police are allowed to use whatever lawful tools they have in order to solve a crime.  It’s not against the law for them to lie.  They’re allowed to.

And so they will.  They’re trained to do it.  They’re supposed to do it.  They’re gonna do it.

You’ve been warned.

The SEC and DOJ’s investigations of Goldman Sachs have been big news for a couple of weeks now. We tend not to post right away on stories like that, because we don’t want to be yet another one of those blogs that just tries to jump on the bandwagon, simply repeating news without adding anything of value to the conversation. So we like to wait until we have some analysis to add.

In the Goldman Sachs case, as pretty much everyone reading this is aware by now, the SEC says Goldman created a mortgage-based investment, sold it to investors, and then bet against it by shorting it themselves. They also say Goldman messed up by letting hedge fund manager John Paulson pick some of the assets, despite the fact that his fund was betting heavily against the housing bubble (and ultimately made a killing when it burst). The SEC filed its suit about 2 weeks ago. Then during this past week, they referred it to the DOJ for criminal investigation. The fine folks at the Southern District are now looking into whether any criminal acts took place.

We’re sure the SDNY is going to be a lot more careful than, say, the Eastern District was with the Bear Stearns case. [Full Disclosure: We represented one of the BSAM fund managers in that case, who was ultimately not indicted.] You know, maybe actually reading emails in context, actually figuring out how hedging is supposed to work, stuff like that?

Nevertheless, it’s a tough job. So as a good citizen, unaffiliated with the case in any way, we’d like to make their job easier. We’ve pored over the factual allegations that have been made, and delved into the facts that have been publicly disclosed so far. And after a great deal of legal analysis and number-crunching (yes, we do this for fun), here is a complete list of all criminal activity that we have been able to identify at Goldman Sachs here:

1).

You’re welcome, guys. Hope this helps!