A Bank of America securities broker was acquitted Thursday of 29 charges against him in an investigation of the mutual fund industry, dealing a defeat to New York Attorney General Eliot L. Spitzer at a time when white-collar prosecutions around the country are running into problems.
Theodore C. Sihpol III was charged with allowing favored investors to trade after hours, but a state court jury didn't buy it.
Sihpol's acquittal came as the pace of big corporate convictions appears to be slowing. In Birmingham, a federal judge gave jurors in the trial of Richard M. Scrushy a four-day weekend after they reported they were unable to reach a verdict on charges that the fired HealthSouth Corp. chief executive orchestrated a $2.7 billion overstatement of the company's earnings. In New York, jurors completed their fifth day of deliberations in the second fraud trial of two former top executives of Tyco International Ltd. without a verdict, although they indicated Thursday that they had agreed on an unspecified number of the 31 counts.
Henry T.C. Hu, a professor of corporate and securities law at the University of Texas, said the recent cases demonstrate the challenges prosecutors face proving beyond a reasonable doubt that defendants in complex fraud cases acted with criminal intent.
"What society is doing is saying we as a democratic society in a criminal trial worry much more about the possibility of a false positive than a false negative," Hu said.
Hu said the Sihpol verdict could serve as a warning to prosecutors bringing the fraud case against former Enron Corp. chief executive Kenneth L. Lay, Lay's former protege Jeffrey K. Skilling and accountant Richard A. Causey. "Prosecutors have got to really worry about the complexity issue there," he said.
Sihpol was the only criminal defendant in a high-profile fraud case to force Spitzer to prove his charges at a trial. Other defendants in investigations of fraudulent stock research on Wall Street, abuses in the mutual fund industry and alleged bid-rigging and questionable accounting in the insurance industry resolved charges against them with guilty pleas or civil settlements.
"Ted's very happy; he's relaxing," Sihpol's lawyer, C. Evan Stewart, said in a telephone interview from the Odeon restaurant in Lower Manhattan, where he and his client were celebrating. "It's a vindication for Ted. It took great courage. . . . He stood up and said, 'I'm not guilty.' "
Darren Dopp, a spokesman for Spitzer, said the verdict should be seen in the context of the attorney general's investigation into the mutual fund industry. The probe yielded six guilty pleas, $3 billion in restitution, fines and fee reductions, and "sweeping change" to industry business practices, he said.
"We lost this case, and it's disappointing," Dopp said. "But this was our seventh case."
Other observers cautioned against drawing many conclusions from a single acquittal. "I would resist connecting those dots," said Daniel C. Richman, a professor at Fordham University law school and a former federal prosecutor. "One hung jury really should be thought of in the context of the facts of the case as it was tried, rather than as indicative of some larger pattern."
Spitzer charged that Sihpol should have known that a client at hedge fund Canary Capital Partners LLC, Edward J. Stern, was breaking the law by putting in same-day orders after 4 p.m. Spitzer said the arrangement allowed Stern to profit from news announced after the markets closed.
Sihpol's lawyers argued that the trades weren't illegal, that SEC rules on the 4 p.m. cutoff were far from clear and that Sihpol had no criminal intent.
Stern resolved a civil investigation with a civil settlement. He paid $40 million, but didn't admit wrongdoing.
Richman said the Sihpol verdict might embolden potential defendants in other white-collar investigations, including the ongoing probe of accounting and business practices in the insurance industry by Spitzer and other state and federal regulators. He added, though, that "defendants have learned that another person's acquittal really doesn't indicate much as to them."
Dopp said the acquittal wouldn't slow the attorney general's investigations. "For us, every case rises and falls on the specific facts and merits of that case," he said.
The Sihpol jury deadlocked on four of 33 counts. A hearing at the end of the month will determine whether those charges will be retried, settled or dismissed.