A federal judge recently handed down prison sentences to 2 individuals charged in the government's insider trading investigation - one had cooperated with the feds, the other had not.  The strikingly divergent sentences sends a clear message Wall Street, reports Peter Lattman of the NYTimes.  

    Case #2.  On Thursday, 12/23, Manhattan-based federal Judge Richard Sullivan, sentenced forner UBS banker Nicos Stephanou to time served for tipping off friends about merger deals he was working on, including his friend, Joseph Contorinis, a former Jefferies Group fund manager.  Mr. Stephanou had already served 19 months after his arrest. 

Judge Sullivan cited Mr. Stephanou’s “exceptional” cooperation with the government as a factor in his light sentence - time served, no fine and $973K in disgorgement of profits, an amount he had already paid.  His lawyer, Christopher J. Morvillo, declined to comment.

    Case #1.  Earlier in the week, Judge Sullivan sentenced Mr. Contorinis to 6 years in prison and as much as $13 million in disgorgement.  Mr. Contorinis's case went to trial.  He testified on his own behalf and maintained his innocence.  Federal prosecutors, who accused Mr. Contorinis of netting $7 million in profit on Mr. Stephanou’s tips, utilized Mr. Stephanou as its star witness.  A jury convicted Mr. Contorinis. 

Lawyers for Mr. Contorinis at Paul, Weiss, Rifkind, Wharton & Garrison mounted an aggressive defense, arguing in part that his client traded on newspaper articles. Federal prosecutors, who had asked for a sentence of 8 to 10 years, accused Mr. Contorinis of lying during his trial testimony when he said that he relied on an analyst report to trade. A cooperator he was not.

During sentencing, Judge Sullivan told Mr. Contorinis that insider trading “does damage to the national economy” and “it’s very important to send a message through the sentence imposed on you.” He added: “You will become a poster child for what happens.”

Needles to say, the government's case, as well as it's overall investigation, has received a huge assist from cooperating witnesses.  Their case against the Galleon Group founder, Raj Rajaratnam, who's scheduled to go to trial in February, is based largely on the testimony of cooperating witnesses.  The latest round of insider trading charges involving expert-network research firms also relies heavily on cooperating witnesses.

Some food for thought.   [NYT Dealbook, 12/23]