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The insider trading prosecution of Sean Stewart has all the elements of a Greek tragedy — a father used information passed along by his son to profit until they were betrayed by a co-conspirator, destroying family ties as the son is likely to end up in prison for what his father did.
On the prosecution side, the guilty verdict delivered by a jury last week is a vindication for the United States attorney's office in Manhattan. It will bolster efforts to pursue insider trading cases after a 2014 appeals court decision that appeared to hamstring its ability to successfully prosecute cases involving family members who share confidential information.
The younger Mr. Stewart was an investment banker at JPMorgan Chase and then Perella Weinberg who worked on health care transactions. He was convicted of tipping his father, Robert, about five different deals. The father made about $150,000 from the trading and shared the information with a friend, Richard Cunniffe, who made nearly $1 million.
Mr. Cunniffe was charged and became a cooperating witness in the case, recording conversations with Robert Stewart. In one, the father recounts that his son once said, "I handed you this on a silver platter and you didn't invest in this," apparently berating him for not taking advantage of the inside information. Robert Stewart pleaded guilty, along with Mr. Cunniffe, while Sean Stewart chose to go to trial.
The "silver platter" conversation turned out to be a crucial piece of evidence in the trial, making the father a witness against his son. The recording let prosecutors show that the confidential information about the deals was not somehow stolen from the younger Mr. Stewart but was dispensed as part of a plan.
Sean Stewart was in a difficult position. He could no longer pay his lawyers after an earlier divorce and large child support payments. So he was represented by appointed counsel from the Federal Defenders office, something that is uncommon in prominent insider trading cases, although certainly not unknown.
That office has some of the best defense lawyers available, but Mr. Stewart did not have the same resources as other defendants in insider trading cases, like in those of former hedge fund operators such as Raj Rajaratnam, who was convicted on 14 counts in 2011. Whether Mr. Stewart's inability to hire top legal counsel affected his case can never be known, but defendants would much prefer to have a phalanx of lawyers to fight the government.
Sean Stewart sought to call his father as a witness at the trial to try to show that the "silver platter" statement and others indicating the son's knowledge of the trading were not truthful but only boasts made to Mr. Cunniffe. In a statement after his arrest, Robert Stewart had claimed that his son did not know about his trading. That information could only come to light at trial if the elder Mr. Stewart testified on the stand.
Sean Stewart wanted to show that his father was not a reliable source of information. But Robert Stewart refused to help his son, instead asserting his Fifth Amendment privilege against self-incrimination to avoid testifying.
Usually when someone has admitted guilt — Robert Stewart had already entered his plea by the time his son's trial began — there is no basis to claim a privilege against self-incrimination because the potential for a future prosecution is gone. In this case, however, I suspect there was concern that prosecutors might charge the father with perjury if he testified inconsistently with statements he had made to Mr. Cunniffe.
Robert Stewart had already been sentenced to a year of home detention, well below what the Justice Department recommended, and in his plea, he did not agree to cooperate in the case against his son. So there was good reason to be suspicious that prosecutors may have been gunning for him if his testimony proved helpful to the defense.
The Justice Department refused Sean Stewart's request to grant his father immunity to allow him to testify, a decision the trial judge agreed with. With his father unavailable, Sean Stewart took the risk of testifying at trial, something that does not happen often in insider trading cases.
He testified that his father "betrayed" him by using the information. "I never ever gave my father information expecting him to trade," he told the jury. "My dad made some terrible mistakes. He used me."
Testifying for his own defense opened him up to the government's cross-examination, which focused on why he did not tell the truth when first questioned by his employer about his father's trading. A lawyer's favorite question to pose to an opponent is, "So you were lying about that, weren't you?" The prosecutor grilled him to raise questions about whether the jury should believe his story about lying to protect his father.
The toughest part of the case for the Justice Department was proving that Sean Stewart had received a benefit from his father in exchange for the confidential information. This requirement was heightened by the December 2014 decision by the United States Court of Appeals for the Second Circuit in Manhattan in United States v. Newman, which overturned the insider trading convictions of two hedge fund managers.
The appeals court held that the government must show that the tipper dispensed the information as part of "an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature." That meant prosecutors had to show that some tangible benefit passed between son and father. They showed that Robert Stewart spent some of his profits to hire a photographer and pay for the rehearsal dinner at his son's 2011 wedding.
Before the decision in the Newman case, it would have been easy to show the benefit because just the warm feelings among family members from conferring a gift would have been sufficient. The Supreme Court may well restore that position after hearing an appeal on the Newman case in October, or it could go in another direction, as I discussed in a recent column.
The question of whether there was a benefit proved to be a difficult issue for jurors deciding Sean Stewart's fate. Bloomberg reported that the jury's forewoman said they asked themselves, "What was he getting out of it?" over the six days of deliberations. In voting to convict, another juror said, "There were just too many contradictions in his story."
For the Justice Department, it shows that the Newman case may not have been as much of an impediment to pursuing insider trading cases involving tips as it was initially thought. This was the first tipping case to go to trial after that opinion, and the conviction means that even common wedding gifts from a father to a son can be enough to persuade jurors that there was a benefit exchanged for valuable information.
For the Stewart family, the cost of the trading far exceeds the modest financial gains realized. Sean Stewart testified that the relationship with his father was "damaged, perhaps permanently damaged," yet "I love him and I always will."
The recommended punishment under the federal sentencing guidelines for his conviction is more than five years. Mr. Stewart is almost sure to receive at least some time in prison, even if the judge imposes a punishment below the government's likely recommendation of a substantial sentence.
There is a Yiddish proverb that says, "When a father gives to his son, both laugh; when a son gives to his father, both cry." That certainly seems true for Sean Stewart and his father.