On The Case

For FBI leakers, insider trading case is chilling tale of consequences

(Reuters) - An opinion last week by U.S. District Judge Kevin Castel of Manhattan in the government’s insider trading case against professional gambler William “Billy” Walters is a stark reminder that government officials put their careers – and even their liberty – at risk when they leak secret information to news organizations.

Whether leaks facilitate or impede justice is certainly up for debate, especially with the Trump administration calling for the scalps of sources disclosing contacts between Trump confidantes and Russian officials, even as the president himself occasionally serves as an unnamed source of news. As a reporter, my inclination is to protect sources who provide truthful information so I will admit to a bias in this story.

Judge Castel, as you will see, does not share my views. He wants his opinion to “deter other faithless federal agents” from leaking. The judge is so serious about holding leakers accountable that he ordered the government to provide him with written updates every two weeks about its investigation of the FBI agent who confessed to feeding reporters information about Walters.

“A known willingness to refer special agents for investigation and prosecution for their own misconduct may be bad for business, but it is essential to the federal prosecutor’s role in seeing that justice is done according to a process that respects the rights of others,” he wrote.

You are probably wondering what leak deterrence has to do with the Walters case. It’s complicated, but I’ll give you the basics. Between 2011 and 2013, the FBI and the Securities and Exchange Commission issued nearly three dozen grand jury subpoenas in an investigation of suspicious trading in shares of Clorox, including trading by Walters. In April 2013, the investigation widened to include trading in Dean Foods before Dean spun off its dairy business. The government learned that Walters was a longtime friend of Dean Foods chairman Thomas Davis.

Around the time the FBI began looking at Walters’ Dean Foods trades, the agent supervising the investigation, David Chaves, started leaking information about the investigation to reporters at the New York Times and the Wall Street Journal. According to a chronology later compiled by prosecutors from the Manhattan U.S. attorney’s office, Chaves repeatedly talked about the investigation in meetings, phone calls and emails with the reporters through June 2014. (Full disclosure: I know two of the reporters and respect the work of all four to whom Chaves leaked.)

The government contends that everyone at the FBI and the U.S. attorney’s office was outraged about the leaks, which came to light when Times and Journal reporters sought to confirm accounts of the investigation, which entangled pro golfer Phil Mickelson. (Mickelson was not accused of wrongdoing but agreed to pay back more than $1 million in profits from Dean Foods trades.) Chaves did not let on that he was the leaker as the government scrambled to respond to reporters’ inquiries.

Even after initial stories appeared in the Times and the Journal in May 2014 – leading the government to end covert surveillance and confront Davis, the former Dean chairman and alleged tipster – Chaves supposedly continued feeding information to Times reporters, though he switched from his FBI-issued phone to a personal cellphone.

In 2016, Davis pleaded guilty and agreed to cooperate with the government. The next day, the grand jury returned a 10-count indictment accusing Walters of reaping $40 million in profits from illegal trades based on confidential information from Davis.

Chaves’ leaks were only revealed because Walters’ lawyer, Barry Berke of Kramer Levin Naftalis & Frankel, asked in September for a pretrial hearing, arguing that the government improperly disclosed grand jury materials to Times and Journal reporters. Judge Castel set a date for an evidentiary hearing and ordered the government to be prepared to disclose communications between reporters and “any special agent of the FBI or assistant United States attorney who had participated or was participating in the investigation of the subject matter that led to the indictment returned in this case.”

According to the chronology the government produced in December in response to Judge Castel’s order, Chaves eventually admitted he was the leaker and spent several hours in two separate sessions with prosecutors on the Walters case. He was scheduled for a third interview but canceled it, invoked his Fifth Amendment rights and hired his own lawyers from Kobre & Kim.

The U.S. attorney’s office conceded in that December letter that in light of Chaves’ revelation, it could no longer trust the agent so Judge Castel should assume Chaves improperly disclosed grand jury materials. Prosecutors insisted Chaves acted without the knowledge or authorization of anyone else from their office, the FBI or the SEC. They did not offer a motive for Chaves’ disclosures, but said Chaves’ conduct was now under investigation by the FBI’s Office of Professional Responsibility and the Justice Department’s Office of the Inspector General.

Walters’ Kramer Levin lawyers moved to dismiss the insider trading indictment, claiming that Chaves’ misconduct prejudiced the entire investigation. In a subsequent reply to the government’s opposition to the dismissal motion, Walters’ lawyers argued that Chaves used reporters to reawaken a dormant investigation and, eventually, to pressure Dean Foods’ chairman to destroy evidence, incriminate himself and turn on Walters.

Moreover, according to Walters’ filings, Chaves and possibly other agents in the FBI’s white-collar unit seemed to have made a habit of leaking about investigations to goose witnesses and intimidate targets in other insider trading cases, including those targeting former Galleon Group head Raj Rajaratnam and David Ganek of Level Global. Walters' lawyers argued that even if Chaves’ leaks did not corrupt the grand jury investigation of their client, Judge Castel should dismiss the indictment under the U.S. Supreme Court’s 1988 ruling in Bank of Nova Scotia v. United States because the government engaged in "systemic and pervasive" misconduct.

In last week’s opinion, Judge Castel agreed with Walters that the apparent pattern of leaks from the FBI is “concerning.” He nevertheless denied the motion to dismiss the Walters indictment because he said Chaves’ improper leaks did not lead directly to Davis’ decision to cooperate against his alleged tippee, Walters. “Walters’ theory fails to adequately take account of Davis’ likely conduct in the absence of leaks – he would have learned of the grand jury’s investigation through subpoenas directed to him or to persons or entities close to him,” the judge wrote. “His first reaction – conceal and deny – and his reconsidered reaction – admit and cooperate – may well have been the same.”

That’s terrible news for Walters, who is now facing a March 13 trial date. But Walters is not the only defendant Judge Castel addresses in his opinion. The judge included an extremely unusual order just a few paragraphs into the Walters ruling, in which he directed prosecutors to “to report to the court in writing on the status of all investigations and proceedings against Special Agent Chaves or any other person making or concealing unauthorized disclosures related to insider trading investigations within 14 days of this memorandum and order and, thereafter, within 14 days of the close of every calendar quarter until further ordered.”

The judge, in other words, expects Chaves’ leaks to have consequences – as he took care to remind prosecutors at the end of his opinion as well. “The conduct on the part of at least one special agent of the FBI in leaking grand jury material is worthy of the full measure of the Department of Justice’s investigative and, if appropriate, prosecutorial resources,” he wrote. “The court trusts that these resources will be devoted to this matter.”

Chilling words if you are a whistleblower from inside the government.

I called and emailed Chaves counsel Sean Casey of Kobre & Kim but didn’t hear back.