It’s been more than six months since the Cleveland Browns released linebacker Mychal Kendricks at the end of training camp for his involvement in a conspiracy to commit insider trading, and his sentencing is currently scheduled for early April. In spite of that uncertainty, Wednesday the Seattle Seahawks signed Kendricks to a contract, and while his sentencing has been rescheduled multiple times already, and could obviously be rescheduled yet again, let’s take a look at some of the facts of the case.
The first thing to address is the idea of whether or not Kendricks has some sort of cooperation agreement with the feds. Now, he could certainly be providing the government with information about criminal activity in an unrelated case, but there is no indication that the feds need his testimony for anything involving this matter. Both parties involved in the case entered guilty pleas to the exact same charges back in September, and that is one count of securities fraud (insider trading) and one count of conspiracy to commit securities fraud.
Based on the facts available publicly, there is absolutely no need for Kendricks’ testimony. In fact, based on reading the court filing, it would appear that it is an unnamed third person involved in the case who provided the information the government needed. This unnamed individual appears to have provided plenty of testimony against both Kendricks and his co-defendant, Damilare Sonoiki, and that brings us to looking at the actual facts of the case.
Everybody is aware of the basic premise that Kendricks and Sonoiki were convicted of insider trading, but somehow the idea that Kendricks was a victim of the scheme has spread. That is not the case, and there is an ample amount of evidence against both parties. This includes text messages, a recorded phone call to a financial firm’s customer service department and the testimony of the unnamed middleman. For some fun, let’s look at some of the facts of the case from the Securities and Exchange Commission’s civil suit against the two, a case which remains open and is in addition to the criminal charges to which both parties have already entered guilty pleas.
The whole thing started when the two met in late 2013, as laid out in the SEC case against them.
So, basically the two were friends, or at least acquaintances for around six months before they hatched their plan to get rich quick on insider trading. And then it came to happen, in the summer of 2014, just days before Kendricks would report to training camp, things got rolling.
According to the SEC filing, Sonoiki allegedly texted Kendricks that he has something and Kendricks immediately hops a train to New York. Once arriving, Kendricks presumably made his way from Penn Station down to lower Manhattan where the two met outside Sonoiki’s office to discuss “something”. That was Monday evening/Tuesday morning, and later that week, the following is alleged to have transpired.
So, according to the allegations they hung out and partied on Friday night, and then on Saturday morning opened a brokerage account in which they could trade on the inside information. From there, Kendricks apparently made a note in his phone of the ticker symbol of the company on which they had inside information and the next week Kendricks, through a very circuitous manner, put money into that brokerage account.
Now, at this point I’m going to sidetrack just a bit, because we just saw Kendricks pay $850 for Sonoiki to take a car service from New York to Philly, which strikes me as ridiculous. Anyone who has ever tried to make that drive, especially on a Friday, especially during the summer, knows that that is a drive that is not worth making and probably took three times as long as hopping on an Amtrak. In any case, that didn’t stop Kendricks from noting his financial situation to Sonoiki just a few weeks later.
“I’m at a messed up place as far as my money is concerned.” Huh? Kendricks at that point was about to enter the third year of his rookie deal, which included a base salary of $794,040, or $46,708 and some change every week during the football season. However, he was “at a messed up place as far as my money is concerned”.
Here’s the thing, people who complain about being in a messed up place as far as their money is concerned shouldn’t be dropping $850 on a car service for their info guy to get from New York to Philadelphia, especially when Greyhound is about $30 round trip and Amtrak is a few hundred. Getting back to the case, however, they both knew what they were doing was wrong, and Kendricks even put that into a text message.
Basically, Sonoiki entered the first trade in Kendricks’ account from his apartment in New York, so the brokerage firm put the account on lockdown for security purposes. Kendricks had to call to get the account unlocked, and that call was recorded for “quality assurance purposes”. Kendricks was able to get the account unlocked by promising that he would be the only person accessing the account, however, that created an issue since Kendricks would be practicing and involved with his duties with the Philadelphia Eagles. That might not be available to place trades in the account.
To overcome this obstacle, Kendricks enlisted a third party to handle putting the trades in so that they could be entered in Philadelphia, rather than New York. This individual is unnamed in court filings, but appears to not have been charged in the case. In any situation, this individual apparently trusted Kendricks, but not Sonoiki initially, which caused a minor issue in the execution of the plan.
Basically, the trio appears to have worked together in order to try to make as much money as they could off of insider trading while taking basic steps to avoid getting caught. That, of course, leads to the question of which party was the beneficiary of the large amount of insider trading proceeds, and that answer is Kendricks. Through their scheme Kendricks and Sonoiki made four trades and are alleged to have generated a profit in the neighborhood of $1.2M. Of that $1.2M, roughly $1.19M went to Kendricks, with the remaining $10,000 given to Sonoiki in the form of cash kickbacks. Sonoiki also allegedly received tickets to Eagles games and other items of value, such as the aforementioned $850 car ride from New York to Philly.
Those are the most interesting facts of the case from my perspective, but anyone who wishes to read the full SEC filing in the civil suit may do so. Thus, the next step would seem to be to evaluate the judge in this case. Earlier this spring I took a look at what the sentencing guidelines recommend for crimes such as those that Kendricks plead guilty, however, this case is failry simple. Kendricks plead guilty to one count of securities fraud (insider trading) and one count of conspiracy to commit securities fraud.
The specifics of the guilty plea are important because while Kendricks only plead guilty to a single charge of securities fraud, the conspiracy charge is likely what constituted the vital piece of the plea for the government. Under federal sentencing guidelines, conspiracy to commit fraud is a crime for which the federal guidelines call for the harshest category of sentence. In addition, the guilty plea to conspiracy puts the sentencing guidelines for the plea at 15 to 21 months.
Obviously judges are given leeway to sentence a defendant to more or less time than what the guidelines call for, so let’s see if we can get any clues from the judge in the Kendricks case. For both the civil and criminal cases in which Kendricks is a defendant the judge is Gene E.K. Pratter. Pratter is no pushover, having done her undergraduate work at Stanford before going to law school at UPenn. From there she worked at Duane Morris, where she worked her way up to General Counsel for the firm before being appointed to her federal judgeship by President George W. Bush in 2004.
In looking at some of the cases over which she has presided, it quickly becomes apparent that she believes in law and order. In performing a very basic review of some of the cases in which she handed down sentences, and trying to focus solely on white collar crimes such as embezzlement or fraud. She obviously handles all types of cases, and luckily for Kendricks this case did not involve taking advantage of the underage or disabled. Defendants who took advantage of those who could not defend themselves were regularly dealt with extremely harshly by Judge Pratter. Kendricks, obviously, plead to more simple white collar crimes, and Judge Pratter was more lenient in at least a couple of those cases.
For example, in 2017 Judge Pratter sentenced Sonja McQuillar to 30 months in prison after embezzling $607,067 from her employer over a twelve year period. The federal sentencing guidelines in the case called for a sentence of 37 to 46 months, but defense attorneys argued McQuillar needed to be able to take care of her 14 year old son. In another fraud case Judge Pratter sentenced Mark Levin to 366 days in prison following a guilty plea for defrauding an insurance company of just under $400,000, while sentencing his co-defendant to six months. Levin’s attorney had argued for leniency based on him being 65 years old and suffering from a myriad of physical issues, including diabetes heart disease and sarcoidosis.
However, outside of those cases, most of Judge Pratter’s sentences for white collar crime appear to fall within the federal sentencing guidelines. That would seem to put a sentence in the 15 to 21 month range as discussed previously. That, however, assumes the sentences for the two charges would run concurrently as opposed to consecutively. Obviously, however, judges hold significant leeway to depart from sentencing guidelines as they see fit.
What will be interesting will be to compare the sentences of the two defendants in the case. Kendricks, as we know, is set to be sentenced on April 4, while Sonoiki’s sentencing is currently scheduled for the Friday of the following week, April 12. That means the criminal case should be resolved for all parties within the next month.
That, however, is only the criminal side of things. As noted above, the civil case the SEC brought against Kendricks and Sonoiki is still open against both, and that means the government is still looking for damages from both parties. Obviously, the civil case does not involve the possibility of prison time, however, it will certainly be interesting to see how the court handles the civil suit and what kind of penalties the judge awards. The SEC has asked for civil penalties pursuant to Section 21A of the Securities and Exchange Act of 1934, which is the portion of federal law that lays out the penalties for insider trading.
Amount of penalty for person who committed violation. The amount of the penalty which may be imposed on the person who committed such violation shall be determined by the court in light of the facts and circumstances, but shall not exceed three times the profit gained or loss avoided as a result of such unlawful purchase, sale, or communication.
So, basically, even though Kendricks is reported to have paid back all of the money he made through the scheme, and even though he is facing prison next month, he is also facing the prospect of punitive damages of three times what the scheme netted. Now, because the scheme made around $1.2M, that means that he could be facing punitive damages of around three and a half million dollars. Obviously, it would seem likely that his counsel would be in communication with the SEC regarding reaching a settlement of this matter, but this is something that I’ll certainly be watching going forward.
Thus, wrapping everything up, Kendricks is facing a sentence of 15 to 21 months under federal sentencing guidelines and potentially a multimillion dollar judgment in the civil case. However, his defense counsel will likely argue that he should receive a shorter sentence, while the prosecutor is likely to argue for a heavier sentence. The judge in the case has a habit of handing down sentences that appears largely in line with federal guidelines, and