Michael Lauer’s Acquittal Is A Good Sign For Rajaratnam [Video-Today]

by Avinash Saxena

Eight years after the SEC dubbed Michael Lauer’s business”one of the largest hedge fund frauds in the history of the United States” a jury acquitted him of criminal charges.

Lauer who founded New York-based Lancer Group was accused by prosecutors in Miami of swindling investors out of $200 million beginning in 1999, but was acquitted of charges today including wire fraud and conspiracy to commit securities fraud.

He was facing 25 years in jail so it’s no surprise that he “raised his clenched fists in the air when the verdict was read and tightly hugged his attorney” as the AP reported.

For Lancer investors, who included Alfred Taubman and Britney Spears, the verdict may not be so thrilling.

Lauer’s alleged scheme: Buy large quantities of restricted stock in worthless shell companies, then buy a smaller amount of shares in the same companies at higher prices in the open market in order to show big gains. Lauer would report these inflated valuations to a third party administrator, Citco (which is also facing accusations of gross negligence), to show investors.

Read more about Citco and the hedge fund administration industry’s shoddy efforts to protect investors.

The inflated valuations generated larger fees for Lauer and his associates at Lancer, the government alleged. In other words, Lauer made false and fraudulent representations about his hedge fund in order to make more money from investors.

But the jury didn’t find anything criminal about Lauer’s behavior. In fact, one juror told the AP that the only thing Lauer was guilty of was “surrounding himself with a bunch of jerks.”

At first, I was shocked by the acquittal. The evidence regarding the shell companies Lancer was invested in was pretty incriminating. For instance, in the case against Citco (the company that was responsible for OK’ing Lancer’s books and records before it sent monthly statements out to Lancer’s investors) e-mails show an executives’ concerns about Lancer’s valuation practices and calls them “absurd.”

But that’s neither here nor there. Today, Lauer walked away a free man (though he was already fined $62 million by the SEC in a civil case) and announced on the courtroom steps that he would return to the hedge fund business.

What I can’t help but wonder is if tomorrow or the next day Raj Rajaratnam will step onto Foley Square in downtown Manhattan after his own acquittal has been announced and let the world know he is getting back to work in the hedge fund business ASAP.

Yes, Rajaratnam and Lauer were accused of two different crimes at two different times and in different jurisdictions. But whether Rajaratnam is guilty or not is not what concerns me.  I’m more troubled about the government’s ability to successfully try Wall Street on criminal charges.

As Forbes contributor and veteran Wall Street lawyer Bill Singer points out the defense lawyers on such cases are usually much more experienced than the prosecutors who tend to be younger and have, in many cases, the more difficult job of proving the defendant guilty beyondreasonable doubt.

“It’s easy to raise a doubt, but it’s much more difficult to make it go away,” Singer says.

That’s probably most true when it comes to financial cases that involve complicated issues like insider trading, valuations, derivatives, hedge funds, etc.

“Defense lawyers in these cases know that these jurors are human beings and human beings have a short attention span,” Singer adds.

That doesn’t bode well for prosecutors who are charged with explaining not just what insider trading means but explaining “the bowels of the financial industry like how trades are entered, how they are executed, who is involved and so on,” Singer says.

Those are explanations even a Wall Street journalist might be guilty of zoning out on.

And one more thing to keep in mind as the Rajaratnam jury continues its deliberation for the third day tomorrow is how long it’s taking them to decide.

“If this was an open and shut case, they should have come back within an hour or two,” Singer tells me.

Also of note, jurors announced their verdict on the Lauer case in a little more than 3 days.

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