Today's Outrage: Caught With Their Pants Down

(Qwest, Galleon Group, Goldman insider trading story updated with new SEC case)

NEW YORK ( TheStreet) -- Let's call it the case of white collar crime meeting the waistline.

Former Qwest Communications ( Q) CEO Joseph Nacchio, currently serving a 70-month sentence for selling $52 million worth of stock based on insider information, is suing his former defense team at Roseland, N.J.-based Stern & Kilcullen. The former Qwest CEO alleges that among the $25 million in billings from his former legal team, he footed the bill for tens of thousands of dollars in breakfasts, in-room movie rentals charged to hotel room bills, and yes, attorney underwear purchases, according to a court complained made by the former Qwest CEO's complaint in state Superior Court in Newark, N.J., and reviewed last week by Bloomberg.

There are also some actual legal charges made in the case, such as professional negligence and the failure of the Naccio's lawyers to use a key witness who might have prevented a conviction. Yet the part about the underwear bilking may prove what happens when a smart guy who is dumb enough to get embroiled in insider trading is sent to jail for 70 months; he's got too much time in the prison library to review his own case (and he's probably pretty jealous of those on the outside able to watch movies in hotel rooms while in their silk underwear).

It was a busy week in the world of insider trading last week, too. Goldman Sachs ( GS) CEO Lloyd Blankfein made for the biggest white collar crime headline, when he took the stand in the case against Galleon Group founder Raj Rajaratnam. Blankfein testified that former Goldman Sachs director Raj Gupta violated the investment bank's confidentiality policy in passing on information to the Galleon Group manager.

The financial press was on the edge of its collective seat during Blankfein's testimony, with bloggers furiously posting with each step that Blankfein took towards the witness stand -- "he's on the stand right now!" There was at least a minor embarrassment for the Goldman Sachs CEO as Blankfein had to listen to lawyers read out loud from Goldman's praise of Gupta when he resigned from the board. Yet the Blankfein testimony was much ado about some typical legal back-and-forth, with Blankfein noting that Goldman's code of conduct does not address whether confidential information is the same as "material inside information," the legal standard for insider trading, and the Goldman CEO stating that at the time of the statement about Gupta's resignation he really did know all that much about the allegations.

The insider trading focus from regulators shows no sign of slowing down, either, with a new case brought by the Securities and Exchange Commission on Tuesday against an FDA scientist accused of generating $3.6 million in illicit profits by trading with advanced knowledge on at least 27 public FDA drug approval decisions involving 19 publicly traded companies.

When it comes to the hedge funds and biotech community (and one Goldman Sachs former director), there seems to be a mistaken belief that profiting from privileged information is a legal right of society's most privileged. The new SEC case against the FDA chemist follows a case launched last November against a French doctor accused of serving as an insider information conduit between drug trials and hedge funds.

Which brings us back to the exciting world of insider traders getting the shaft when high-priced lawyers buy designer underwear at Barney's.

Noted legal blogger and law professor Jonathan Turley wrote that the legal world hasn't had such a high-profile case involving undergarments since former Covington & Burling partner David Remes, a human rights lawyer who represented Guantanamo Bay detainees, made worldwide headlines for dropping his pants during a 2008 news conference in Yemen to demonstrate how detainees were body-searched. Remes would later say that he wished the world cared more about the suffering of the detainees than the fact that he dropped his pants to make their case.

A Shakespearean character once said brevity is the soul of wit, and one should be brief. So let's be brief about the briefs case, and take our lead from Remes. After a week during which the Goldman Sachs CEO took the stand in the market's most high-profile insider trading case, let's hope the courts pay more attention to investors suffering when the investment bank bigwigs and hedge funds play naughty, as opposed to one convicted insider trader getting caught with his pants down, and then crying out about underwear for which he shouldn't have paid.

--Written by Eric Rosenbaum in New York

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