Every human has a handful of defining moments in their life. Whether it be a birth, sickness, death, an epiphany, transcendent event or moment, we all have only a handful of these events and they can forever shape us and/or change our destinies. Mine came on June 5th, 2008. It was a beautiful day at Stinson Beach, California. The sun was out, and I could hear the waves crashing in front of my house. The house had all glass windows that just stared at the ocean.
The phone rang but it was too nice of a day to be bothered with phone calls, so I let the call go to voicemail. Most of my phone calls related to my business of running several investment and hedge funds, and every phone call usually required me to do something which would inevitably ruin my day. So, when the phone rang on that beautiful June summer day, I decided not to answer the phone and instead enjoyed the day watching the crashing waves, playing the piano and reading a book.
Later that day, just before dinner, I listened to my voicemail messages and one of them was from a woman at the Securities Exchange Commission (SEC) who said her office was beginning an investigation into one of my hedge funds, and that I needed to come into the San Francisco office of the SEC with my lawyer for an interview. I was not alarmed at all. I knew I had not done anything wrong and had worked very closely with all our attorneys and accountants to make sure that the hedge fund was run according to all applicable provisions of the law. Additionally, for various inane reasons, I had been subpoenaed by the SEC to testify in New York and Washington D.C. on numerous occasions and, other than the enormous expense for my lawyers and time that these meetings cost me, nothing ever became of all the SEC subpoenas.
The hedge fund in question, BayStar Capital, specialized in a form of investments called PIPES (Private Investment in Public Companies). I was at the forefront of creating and executing PIPE transactions and was the financial poster boy for this type of investment strategy, having been featured in articles in the New York Times and Wall Street Journal. The problem was the SEC didn’t understand PIPE transactions or how they worked, and the SEC has an institutional bias that whatever they don’t understand must somehow be against or breaking the law. Thus, on numerous occasions I would haul myself and my army of lawyers and accountants at a cost to me of $20,000 per day to answer inane and basic questions that the SEC personnel and their lawyers would ask me.
It was amazing to me that these people at the SEC who were supposed to be in charge of regulating the U.S. public markets and trading therein, did not even have the most basic understanding of how the public markets really worked, and they were simply using me for a free instructional class into the very basics of arbitrage and shorting trading strategies which were the essence of PIPE transactions. Other then the cost and pain of all these meetings with the SEC, nothing ever became of any of the SEC investigations, so I mistakenly presumed that this new inquiry by the San Francisco office of the SEC would be no different.
Early that year I had fired a junior accountant in my firm that was not able to perform his job duties. His name was Nathan Randel and he couldn’t keep up with the complications the job required, had a drinking or drug problem, and would often miss work with no explanation. Finally, at my wits end, I sat him down and told him I had to let him go and that he would get a year’s severance of his salary of $150,000 per year. What I didn’t know is that little Nathan had quite the nasty streak in him, and unbeknownst to me, ran to the SEC and the U.S. Attorney’s office in San Francisco and told them that my hedge fund was making non-disclosed intercompany loans between various sub funds within the group of investment and hedge funds that I managed.
What little Nathan forgot to tell the SEC or U.S. Attorney’s office is that he found a contingency employment lawyer, and although little Nathan’s salary was only $150,000 per year, he filled a lawsuit against my company for $5 million in lost wages. How that is possible is irrelevant other than to say that in the U.S., anyone can sue anyone for any amount, regardless of how frivolous or absurd the lawsuit may be. Most people just settle these lawsuits for the nuisance value and that is how contingency lawyers make their money. Upon learning of little Nathan Randal’s lawsuit, the SEC and U.S. Attorney’s office deemed him a non-credible whistleblower and witness, but the damage had been done and the SEC opened a full-scale investigation in all aspects of all my hedge funds.
Now the bad part. The government has unlimited resources both financial and people, that they can throw at any investigation or prosecution. Also, the government can issue press releases and hold press conferences, and without any proof whatsoever, they can publicly allege whatever they want. As long as they say they are allegations they can say anything. They don’t have to prove anything to put out a press release alleging something. Thus, before the defense has even had a chance to start, the government’s press office makes sure the defendant looks like a horrible person in the court of public opinion. The government put out so many press releases on my case about what a horrible person I was, regardless that none of their statements or allegations were relevant or had any basis in fact, I was a pariah in the court of public opinion. The government knows salacious allegations, regardless if true or even remotely relevant, will make it to press and sell newspapers. Also, once the government spends money on a case, they need to justify their return on investment and get a guilty plea. That’s why the government’s conviction (guilty pleas) rate is 99 percent in any case once they have arrested someone.
For illustration, let’s take Martha Stewart as she is a popular figure and most people have heard of her. For reasons unbeknownst to anyone on this planet, the government bought an insider trading case against Martha Stewart. The case was ridiculous from the start and Martha Stewart wasn’t guilty of anything but some bad decisions because the government had scared the living daylights out of her. Whether you like Martha Stewart or hate her, its pretty hard to find the public good for putting Martha in prison. But after spending millions and millions of dollars to convict her for anything and holding daily press conference expounding on how bad Martha Stewart is as a person, the U.S. Attorney in New York, to justify his expenses, existence and to make a name for himself, indicted Martha Stewart for insider trading and spent millions of dollars of taxpayer money in a 6-week jury trial!
The essence of the government’s case for insider trading against Stewart was that Stewart avoided a loss of $45,673 by selling stock in a company that a friend of hers told her to sell. Not knowing any better, Stewart told her broker to sell the shares, and the day following her sale, the stock value fell 16%. Thus Stewart, who had a net worth of hundreds of millions of dollars, saved less than $50,000 by selling the stock. Yet despite the obviousness that Stewart had no idea what she was doing and wasn’t involved in insider trading, the government indicted Stewart on nine counts, including charges of securities fraud and obstruction of justice and of course wasn’t able to prove anything at trial other than Stewart (who the government scared the living daylights out of) made false statements to federal investigators. So, after all that time and tax payer money the result was that Martha Stewart was sentenced for perjury and spent five months in prison.
One more interesting footnote to the Martha Stewart case, as I will explain later and is also applicable to my case, was that Stewart wanted to go to prison in Connecticut or Florida to be near an airport so that her family and friends could easily visit her. The judge agreed with Stewart and recommended to the Federal Bureau of Prisons (BOP) that Stewart be given her first choice, Federal Correctional Institution, Danbury (the prison in the Netflix show Orange is the New Black ), or her second choice, Federal Correctional Complex, Coleman.
What few people know is that despite a judge’s order or recommendation, the Bureau of Prisons (BOP) can stick a prisoner at their sole discretion, wherever they want. Thus, in an obvious and documented act of pure vindictiveness, the BOP ignored the judge’s order and recommendation and sent Stewart to the Federal Prison Camp, Alderson in West Virginia, about as remote of a location as you can find, which made it very difficult and sometimes impossible for Stewart’s family and friends to visit her. The bureaucrats at the BOP love to use their power to punish inmates and for no reason whatsoever, that’s what they did to Stewart.
Now for the life of me, if someone could explain to me the social justice or public good of putting Martha Stewart in jail I would love someone to email me their reasoning. If, and I say if, Martha Stewart really did something wrong, there were a zillion ways to punish her economically other than wasting millions and millions of dollars to put her in jail for five months.
I use the Martha Stewart case as illustrative of a popular case where, for self-promotion and headlines, the government prosecutors wasted tax payer money to shine in front of the podium and get their picture taken. During the case, the government’s press department made Martha Stewart look like public enemy number one and ruined her reputation, and that was before the case had even begun.
Luckily, I didn’t have the public profile of Martha Stewart, but I was well known enough in the financial world that the government could put out enough press releases to have the press destroy me, and I hadn’t even been charged with a crime yet. The lesson here, and I unfortunately didn’t know this at the time, is that I was finished before I even started!!! I had a delusion that there was justice in the justice system. Boy was I wrong!!
If all this wasn’t enough, I said I was going to get to the bad part, or let’s say the beginning of the bad part, as the story keeps getting worse. Here is the beginning of the bad part for me. Unbeknownst to me or most people, the government can, without a trial or even a court hearing, seize all your assets without proving anything. So long before your trial begins, the government can take all your money if they feel like it. Well guess what, if the government takes all your assets and money you can’t pay your lawyers and lawyers do not work for free. Thus, the lawyers who I had already paid 11 million dollars to, quit on me and I was stuck with a government appointed lawyer.
As I said in my first blog, if you don’t have the money to pay good lawyers you are dead, and that was the beginning of the end of me. The first thing my court appointed lawyer, who was a tax attorney and not even a criminal defense attorney, said to me was the infamous words “you need to plead guilty or the government will throw the book at you and will put you away forever”. As stupid and incompetent as my court appointed lawyer was, he was, for all the wrong reasons, correct on this point. I just didn’t know that at the time.
The Sixth Amendment to the U.S. Constitution guarantees a defendant has the right to a jury trial. Sounds good right? Well, not exactly. In 2015 only 1.6% of federal court defendants had a jury trial. The reason for this is it’s a tremendous roll of the dice for a defendant to go to trial in federal court. In 2015, 97.6% of federal defendants were convicted by a guilty plea. Forcing defendants to accept a guilty plea or roll the dice and be put away forever, the conviction rate in federal courts is a staggering 99 percent!!!
Between guilty pleas and trials, the conviction rate was 99.8% in U.S. federal courts in 2015: 126,802 convictions and 258 acquittals. That wasn’t an anomaly. In 2014, the conviction rate was 99.76% and in 2013, it was 99.75%. Worse, in 2015, there were twenty federal judicial districts that had a 100% conviction rate!!!
Not only is a defendant who goes to trial very likely to be convicted, but once convicted, there is a very low probability a wrongly convicted federal defendant can win exoneration. From 2011 to 2015 only 19 prisoners in the U.S. were exonerated.
As an expert in criminal justice once said, the odds are so heavily stacked against a defendant that it would be appropriate if every federal courthouse had Dante’s admonition inscribed above its entrance: “Abandon hope all ye who enter here.” A federal criminal court today functions as little more than a processing facility to transform hapless defendants into convicts. The acquittal of a federal defendant is becoming rare enough that it is almost as newsworthy as a confirmed story of a man biting a dog. For all but a handful of federal defendants the presumption of guilt is the operative principle underlying their prosecution, with the presumption of innocence an illusory catch phrase.
Thus, my new court-appointed attorney turned to me and said that I needed to plead guilty, regardless of my guilt or innocence, in order to avoid 6 years in jail (he even went on to say his firm did not have the resources or time to go to trial without being paid), so I entered a guilty plea. Despite all the press and the allegations of all the things I supposedly did, the prosecutor asked me to plead guilty to one count of wire fraud for not disclosing intercompany loans on one of my hedge funds financial statements. No one lost any money and I was not required to pay any restitution or fines but for a $100 court fee!!! Given federal sentencing guidelines, a reluctant judge had no choice but to sentence me to 14 months in prison, of which I spent 10 months behind bars. The prosecutor got his conviction and ruined my life and my family’s life. He immediately put out 3 press releases extolling his great victory. He was very happy. I tried to kill myself and ended up in the hospital for a month.
In my next blog post I will tell the story of how sentencing works, self-surrender to prison and how to surivive in a cell with seven members of the Sinaloa cartel and the “shot caller” for the largest Hispanic gang in the prison. Read it now…
Lawrence Goldfarb’s new book, From Hell to Eternity, will be released in 2018. Sign up to receive news, information and updates.
Author’s note: I do not want the reader to get the impression that people should not in some way adequately pay for a crime. If I committed a crime I should have been in some way punished. All I am saying is the U.S.’s institutional bias of putting everyone in jail that is accused of a crime is wrong. As you will find out in my later blogs, prisons do not deter crimes and in fact, turn otherwise law-abiding citizens into criminals, sometimes for the rest of their lives. Our criminal justice system is broken.