New mission, same focus: Interview with Preet Bharara, former U.S. attorney for the Southern District of New York

After making his mark bringing down fraudsters and other bad guys during his close to eight-year tenure as U.S. attorney for the Southern District Court of New York, Preet Bharara has a new career, several in fact.

The 52-year-old former prosecutor, known for his aggressive stance against Wall Street fraudsters, is now dedicating much of his time to teaching, working on several task forces — including one on insider trading — and relating his experiences and thoughts through books and podcasts. And it all appears to be going very well.

Vox Media recently bought his podcast company, Café Studios, which he co-founded with his brother Vinit Bharara in 2017. The podcasts, including the flagship platform “Stay Tuned with Preet,” explore how law and policy intersect with politics, news, business, history and technology. The company also produces newsletters, articles and live events.

“I am enjoying it very much,” says Bharara in a recent interview with Fraud Magazine. “I miss subpoena power. Who wouldn’t? It is a different mission now, but it is consistent to what I was doing before, and I get to talk about fraud with guys like you. … At some point in the future, it would be great to get back into public service. But I think some of what I am doing now is a public service."

Bharara’s name was floated late last year as a potential head of the Securities and Exchange Commission (SEC) — a post that was eventually filled by Gary Gensler, who himself took a hard line toward banks while chairman of the U.S. Commodity Futures Trading Commission (the CFTC). (See The Finance 202: Preet Bharara, Gary Gensler top list of potential picks for SEC chair, by Tory Newmyer with Brent D. Griffiths, The Washington Post, Dec. 9, 2020.)

Bharara was the chief federal law enforcement officer in the Southern District of New York, which includes Manhattan, between August 2009 and March 2017, when then-President Donald Trump famously fired him from his post.

During that time, he acquired a reputation as a fierce Wall Street watchdog, cracking down on insider trading and other securities fraud in the wake of the 2007-2008 financial crisis. The New York Times described him as one of the “nation’s most aggressive and outspoken prosecutors.” And the TV show “Billions” is loosely modeled on Bharara’s investigation of SAC Capital, the hedge fund founded by Steven Cohen, which eventually pleaded guilty to insider trading and paid $1.8 billion in fines. (See Billions: Based on a True Story? by Aaron Karesh, The Commentator, April 15, 2018, and Greed sometimes is not good: Billionaire Steven Cohen’s hedge fund reaches $1.8 billion plea deal, By Matthew Deluca and Patrick Rizzo, NBC News, Nov. 4, 2013.)

Aside from SAC Capital, one of Bharara’s biggest and best-known busts was catching Raj Rajaratnam, the billionaire founder of New York-based hedge fund, the Galleon Group, in one of the most high-profile insider-trading cases in a generation and the first to use wiretaps for this type of crime.

In all, Bharara’s office prosecuted nearly 100 Wall Street executives. His 2019 book “Doing Justice” describes how his office investigated a string of fraudsters who beguiled investors and banks with their charm, while fleecing them out of millions of dollars.

There was Ken Starr (not to be confused with the Whitewater independent counsel during President Bill Clinton’s administration), the so-called “Broker to the Stars,” who ran a Ponzi scheme and whose clients included Al Pacino and Martin Scorsese. Then, there was Hassan Nemazee, who was accused of fraudulently obtaining millions of dollars in loans from sophisticated Wall Street banks. Nemazee’s lavish lifestyle, stylish dress and pleasant manner acted as a sort of cloak that hid more nefarious dealings.

Asking the tough questions — no matter how uncomfortable that might be — is key to catching these types of fraudsters, says Bharara.

“What deters that kind of fraudster is the fear that everyone he might deal with will ask questions. …,” writes Bharara. “That sometimes can generate unpleasantness and offense, but that’s what it takes. It seems obvious, but people con very sophisticated victims every day, sophisticated victims who don’t ask the right questions."

Bharara was a keynote speaker at the ACFE’s 32nd Annual Global Fraud Conference that was held June 21-23, 2021. (The following interview has been edited for clarity.)

You’ve been involved in some of the biggest insider-trading and securities fraud cases on Wall Street in recent years, including SAC Capital and the Galleon Group. What were some of the lessons you learned from those cases, and in retrospect is there anything you would have done differently?

I don’t know what I may have done differently. Certainly, we didn’t do everything perfectly. You can see that in the book I wrote, “Doing Justice,” and in particular cases, it is possible we were under-aggressive and in other cases perhaps over aggressive. The overriding lesson — not necessarily for me as a prosecutor but more from the standpoint of corporate governance — was the importance of the culture at a firm.

It is interesting to see why some places had a real serious fraud problem and other places didn’t. And you can boil most of it down to one thing: the culture of the place. Some people think it is trite, but it is true; places where the tone at the top wasn’t a voice of integrity had bigger problems. It is just as simple as that. People have to understand in their bones at these organizations that everyone at the top to the middle to the line-level people have to care about integrity.

You had principals of firms, where you asked: “Did you ever talk about integrity? Did you ever talk about doing the right thing? Did you ever say you had limits?” And sometimes you could see that it was an uncomfortable question, and that they really hadn’t. And what many places did for a substitute for culture is have very nicely drafted, lengthy compliance programs and high-level lawyers, but that seemed to be window dressing as opposed to a real commitment.

We have a new group of regulators and prosecutors coming in under the new Biden administration, what does this mean for prosecution of fraud cases over the next four years, especially white-collar crimes?

It is not always aligned this way — but as a general matter there is increased emphasis on cracking down on white-collar crime in Democratic administrations. There seems to be an added emphasis that nobody is above the law when it comes to white-collar crime, and that we can’t pay attention only to violent crime and crimes that are committed in certain communities. The bigwigs with all the privilege of power, and money and capital can’t be spared if they are engaging in fraud. And that seems to be the character of Democratic-appointed administrations.

Questions about insider trading came to the forefront again last year after some politicians were accused of so-called “coronavirus trades” before markets took a hit from news about the pandemic. In 2018, you helped create a task force with the aim of clarifying and simplifying laws on insider trading. (See The Bharara Task Force on Insider Trading.) Early last year, the task force called on Congress to revamp current legislation, which it sees as outdated and confusing. Do you expect to see more progress on this front?

I think there is a lot of anger about the different ways in which people have manipulated the system. We prosecuted a number of people for insider trading as you pointed out — every time there is a scandal that involves the potential of insider trading on the part of an elected official in Congress, there is a lot of anger about that. People don’t like folks who game the system, and I think that translates into more intense focus on fraud. (See Insider trading by Congress? It’s time to fix the law, by Patrick Augustin, Francis Cong and Marti G. Subrahmanyam, The Hill, April 19, 2020, and Report on Insider Trading by the Bharara Task Force, Feb. 13, 2020.)

But the most significant and most high-profile fraud investigation around is centered at the Manhattan DA’s office, and it involves the former president of the United States. (See Prosecutor in Trump criminal probe convenes grand jury - Washington Post, Reuters, May 25, 2021.) That is a fraud case. We are talking about fraud here. To the extent that becomes something of a model for making sure no matter who you are, how much money you have, or how powerful you are or were, that if you commit fraud, you can be held accountable. There is an argument to be made that people see that and they apply that to other people in fraud prosecution. I would expect an uptick.

Trillions of dollars have been pumped into the economy to help Americans through the economic crisis caused by the pandemic. The government set up several agencies to investigate potential fraud and abuse of recent stimulus packages. That includes the U.S. Special Inspector General for Pandemic Recovery (SIGPR), which was modeled on the Special Inspector General for the Trouble Asset Relief Program (SIGTARP), the watchdog for the $700 billion Trouble Asset Relief Program (TARP) created to mitigate the economic impact of the 2007-2008 financial crisis and initially headed by Neil Barofsky. (See Relentless TARP Watchdog, by Dick Carozza, CFE, Fraud Magazine, November/December 2009.) From your experience, what are some of the challenges faced by SIGPR and other agencies, and what is the best approach on this front?

We worked very closely with the SIGTARP when I was U.S. attorney. The SIGTARP was an alumnus of the Southern District of New York — Neil Barofsky. We worked very closely with him and his successor. In fact, I believe one of the earliest criminal referrals they made was to the Southern District of New York, if I am not mistaken.

Looking at that experience, one of the challenges for people doing that kind of work is politics. When governments give money in special circumstances — and massive amounts of money — to help solve a problem when there was a financial crisis in the late 2000s or in the pandemic now, it’s not a great look for those governments if it turns out they were taken advantage of and that institutions or individuals got over on them. So, sometimes they don’t like investigations.

It has been known to happen that executive branch officials don’t always see eye to eye with inspectors general. The most extreme case of that took place in this last administration, which fired a number of inspectors general. There is a bill circulating to give inspectors general more protection so they are only able to be terminated for cause. (See Senators Reintroduce Bipartisan Bill To Bolster Protections For Inspectors General, Chuck Grassley, March 4, 2021.)

People who are responsible for policing waste, fraud and abuse and for the distribution of those funds have to be prepared for pushback from the money distributing entities and have the political will to do what it takes. If you go back and look at the SIGTARP’s tenure, it was marked by a lot of strife between that office and the Treasury secretary. Obviously, as is true with all fraud investigations, proving fraud, proving intent — given the massive amounts and limited resources — is difficult.

One of the problems SIGTARP had — and that the new entity might have — is being starved of resources. It is not just resources. Starting up an office from scratch is very hard. It is one thing to go in and become the FBI director or the U.S. attorney with an existing infrastructure, and existing agents who are trained. You may just have to shift the priorities. I remember talking to Neil [Barofsky] back at the beginning of SIGTARP. They had to find office space, agents who were trained, deputies and lawyers. That takes months. Just think how far behind you are while fraud may be taking place as we speak. So, there are institutional, political and general challenges of proving someone is engaged in fraud.

In your book “Doing Justice,” you talk about innovation, citing as an example the way your office used wiretaps to catch insider traders. What other innovative techniques have been or could be used to bring down fraudsters, and how do you encourage innovation in this field?

Broadly speaking, you can divide innovation into two categories. One is the kind of innovation that applies some tool that is used in some circumstances and then applied to some other circumstance, which for whatever reason, nobody had done before. An example of that from criminal law is the racketeering, or RICO, statute, which was initially formulated with a particular scourge in mind —  the Cosa Nostra, the traditional Italian Mafia. But the way the law is written it doesn’t say Italian Mafia; it doesn’t say it is only allowed to be used against the Cosa Nostra. So, that later became a tool used against other organized crime groups and violent organized gangs as well. Not everyone loves it, but that is an innovation using a tool that was invented for one purpose and it can be applied as necessary in some other circumstances.

And the same for wiretaps. I can’t take credit for being the innovator there. It happened with my predecessor. But I believe we were the first to use it in any significant way for insider trading. It always struck me as strange that insider trading has at its core an element of communication. And, generally speaking, it is easier to hide what we have done by phone because there is no documentary record of it, as opposed to a text or an email. Especially in the time before encrypted apps, why wouldn’t you use wiretaps? But it is always hard because to get a wiretap on anyone, you need an entry into the particular communication device and to have probable cause that that device is being used for some criminal purposes. And that sometimes requires a cooperating witness, someone on the inside, to give you that leg up.

The other category of innovation involves technology. To get good at detecting fraud, institutions need to make sure they are hiring people who are not just good at looking at paper spreadsheets but are also able to use technology in a serious way.

But getting people to change is very difficult. Until fairly recently, the Department of Justice was using Blackberries. We found that people conducting fraud investigations all understood that you issued subpoenas, tried to execute search warrants and surveillance — all those standard techniques. But a lot of people were not taking advantage of searching suspicious activity reports [SARs] databases. 

Sometimes you can find a lot of corroborating evidence in SARs, but it was also a complicated process. You had to reach out to somebody in the paralegal office, who was responsible for processing those reports, and then you had to go to a lawyer.

We tried to simplify this — sometimes innovation is about simplifying things for people who are not tech savvy or stuck in their ways. So, we literally put an icon with a dollar sign on everyone’s [computer] desktop, and got people used to the idea that when you are investigating financial fraud, one of the things you should do is a SARs check. To do that, you click on the icon and a form will come up, and all you have to do is put in certain data, and it will automatically run, and you will get a nice report if there is anything in the SARs. That is not mind-boggling, but you would be surprised how much of a difference that makes and how much more fraud can be detected if you make things user-friendly. Sometimes the most important innovation is being user-friendly.

But sometimes you can rely on technology too much. There is a story I tell of someone who was searching suspicious activity reports at financial institutions, but he was yielding no leads on insider trading. One investigator thought this was peculiar and decided to conduct a physical SARs search. He took days reading through suspicious activity report after suspicious activity report. What he discovered was that people were filling out the SARs in ways that weren’t being captured by word searches. For instance, they weren’t using the term “insider trading” although what they were describing was insider trading. Sometimes you need to go back to old-fashioned methods to make technology work.

One of the points that stood out in your book is how easily investigators can be fooled or found wrong whether it is being taken in by a charming chap like Hassan Nemazee or the confirmation bias in the case of Brandon Mayfield, who was wrongly accused by the FBI for the terrorist bombings in Madrid. What can prosecutors and fraud investigators do to overcome these psychological blind spots?

There is an obvious focus on the part of investigators to make sure they keep an open mind, but much of that focus is keeping an open mind on people you might think to be guilty because of some bias you have. Or you are jumping to conclusions or jumping that gun in some way. And that is important. You don’t want to accuse someone like in Brandon Mayfield’s case of being connected to a giant terror attack in Madrid, Spain, unless you have all your ducks in a row.

On the other side of the coin, it is important not to assume innocence on the part of people just because they look and talk in a certain way. And that is the kind of bias that doesn’t get the same amount of attention. The greatest example in modern history is Bernie Madoff. How did Bernie Madoff get away with what he did? He walked and talked and spoke in a certain way and moved in certain circles. He built up a mystique of exclusivity. People trust people who are referred to them by other folks. That is how Ponzi schemes are born.

The important thing here is that investigators should not form a theory of the case until they have done the full investigation. In the Hassan Nemazee case, the banks were victims — and they are not very sympathetic victims — but he fit the profile. It is a kind of reverse profile. It is terrible to profile people because they look a certain way, or their skin is a certain color.

But the other kind of profiling happens also when assumptions are made because a person drives a certain car, has a certain academic pedigree and socializes with certain prominent politicians. Investigators need to be open to that. People say all the time that so and so is such a good guy, and everyone loves that person. Maybe I am a cynical human being, but I always question these things, because you never know. In the newspaper article about Hassan Nemazee, his friends were quoted saying he was a lovely guy, and somebody wrote “but for this fraud, he was a really stand-up guy.” I thought that was a caveat for the age.

What are the toughest and most relevant fraud cases you have taken on and why?

They are all tough. But there is a class of fraud cases that is more fraught and that is when you have in real-time identifiable actual victims. Not to minimize any of these fraud cases, but it is one thing when you have a CFO of a company or someone else cooking the books to meet the numbers at the end of the quarter. That could mean accounting fraud that subjects you to a lot of prison time, and I get all that.

But Ponzi schemes like the Bernie Madoff case, and Ken Starr, who were defrauding both sophisticated and unsophisticated people in real time, are difficult. In these cases, there is a balance. On the one hand, you want to bring it to an end quickly because money may be getting dissipated, and there will be less in the pot to give back to victims. On the other hand, if you go too quickly, you may not discover the scope of all the victims and you may be leaving on the table additional evidence that would crucially prove the defendant’s guilt. I teach a seminar at NYU law school and we spend a lot of time on this question. In fraud cases that are ongoing, when do you charge?

In the case of Nemazee, this story opens with his planning to go to the airport at Newark to get on a plane to Italy. There is very little evidence accumulated at that time. Was he leaving because he had some suspicions and would never come back? You can arrest too soon and lose the case, and arrest too late and all the money is gone. So, I think that is a category of fraud that investigators need to be sensitive to, and it is hard to know how to balance that.

Paul Kilby is editor-in-chief of Fraud Magazine. Contact him at pkilby@acfe.com.