The March trial of
Securities and Exchange Commission v. Richard Harriton
will be like old home week in downtown Manhattan.
The case will return a group of former high-profile government lawyers to their old stomping ground to defend former
executive Harriton in his battle with the SEC. There will be no less on the line than his professional future, potential large fines and the way major Wall Street firms run the obscure but profitable business of clearing trades for smaller firms.
The SEC alleges Harriton took part in illegal activities of a notorious New York brokerage,
, for which Bear cleared. Harriton resigned from Bear, but has steadfastly denied any wrongdoing.
In a case some legal experts are calling the most significant securities fraud claim since the days of Michael Milken, Harriton's defense team plans to call more than 110 witnesses. Among them are his former boss, Bear Chairman Ace Greenberg, and some of Wall Street's most respected securities attorneys, according to documents obtained by
"You look at Harriton's
witness list and it's all the white hats from the white-shoe firms," says Jonathan Kord Lagemann, a New York lawyer representing investors in separate litigation against Harriton and Bear.
Harriton's defense team is equally impressive. "They've got a lot of horsepower," says Max Folkenflik, a New York lawyer also representing investors in a separate lawsuit against Harriton and Bear. "It would be nice if the SEC had more manpower on it to help
lead SEC attorney Judith Starr because it's an important case." Still, he says, "the case is often more important than the lawyers."
The SEC, which plans to call about 35 of its own witnesses, sued Harriton last year and is seeking to ban him from the securities industry. Judith Starr, the SEC's lead lawyer in the case, has made it clear what the agency wants. "We're trying to throw this man out of the industry," she has said in an interview.
Starr's no newcomer to high-profile trials. She worked on SEC enforcement cases against the likes of legendary penny-stock promoter Robert Brennan, which resulted in a $75 million fine. However, the members of Harriton's legal team have, on average, over three decades' more experience than the members of the SEC team.
"They're older," Starr says, but adds that she didn't exactly "just fall off the turnip truck myself. Ten years as a government lawyer gives you a whole lot more trial experience than 30 years in private practice."
Leading the defense is New York lawyer Howard Wilson, once the chief of the criminal division for the
U.S. Attorney's Office for the Southern District of New York
in the late 1980s. Working under then-U.S. Attorney for the Southern District Rudolph Giuliani, Wilson's division led criminal prosecution efforts against Wall Street financiers Milken and Ivan Boesky.
Wilson says he'll reserve any comments he has on the Harriton case for the courtroom.
Also on Harriton's defense team are former Deputy Director of the SEC's Division of Enforcement Wallace Timmeny of
Dechert Price & Rhoads
and Saul Cohen and Lionel Pashkoff of large New York law firm
Pashkoff was chief enforcement attorney for the SEC in the early 1970s. Cohen was the SEC-approved general counsel for
Drexel Burnham Lambert
after the firm, where Milken built his ill-fated junk-bond empire, settled securities charges with the agency in the late 1980s.
Their witness list includes Philip Hoblin, former general counsel of
Shearson Lehman Brothers
, and Robert Kleinberg, a onetime general counsel and managing partner of
CIBC World Markets
and the former co-chairman of the
National Association of Securities Dealers
Bear of a Case
The charges against Harriton stem from his role as head of clearing for Bear when the company cleared for Baron, which was closed by regulators in 1996 and forced into bankruptcy.
The company and 12 of its employees were indicted and charged with securities fraud by the Manhattan district attorney. Last year, Bear Stearns paid $38 million to settle its Baron-related claims with the SEC, but wasn't criminally charged. At the time of the settlement, though, the SEC charged Harriton individually with securities fraud -- a civil charge -- related to Baron.
The SEC claims Harriton charged customers for Baron trades he knew were unauthorized, provided Baron with capital to keep it in business despite its illegal activities and used money from the Baron initial public offering to reduce Bear Stearns' exposure from Baron trading.
In legal filings in his SEC case, his lawyers argue that federal regulators, not Harriton, are to blame for allowing the Baron wrongdoing to continue. "The SEC and NASD knew of Baron's extensive fraudulent and illegal activities and did not warn or notify Harriton and
Bear Stearns of such fraudulent and illegal activities," according to the filings.
Clearing Firm Concerns
The trial is being closely watched not only because of Harriton's prominence as the onetime head of clearing for Bear Stearns, but also for its implications for the clearing industry overall, say his lawyers and other legal observers.
While the securities clearing business isn't high-profile, major firms such as
Donaldson Lufkin & Jenrette
have significant operations.
"This case certainly will be viewed by many as defining the obligations of the clearing industry into the future," says Timmeny, a Washington, D.C., lawyer on Harriton's defense team.