October 16, 2009
Don't Lie to the Feds
OK, so here's some more unsolicited advice: don't lie to the Feds. If they're calling you and asking about your trades, there's a reason. That's especially true if you have been engaging in insider trading in connection with a merger that you're working on. The BLT has been faithfully following the story of lawyer Melissa Mahler. It was a civil case, but now comes the criminal complaint. Here is the relevant paragraph from the criminal complaint:
10. On or about November 29, 2004, two attorneys with the SEC’s Division of Enforcement in Washington, D.C. conducted a voluntary telephone interview of MAHLER. Prior to asking MAHLER questions, the SEC attorneys advised MAHLER that it was a federal crime to make false statements to the SEC. The SEC attorney asked MAHLER, among other things, whether MAHLER had placed an order to purchase 10,000 shares of TPCV stock on July 28, 2004, through the broker-dealer in Florida. MAHLER falsely denied that she had placed the order to purchase10,000 shares of TPCV on July 28, 2004, when, in truth and in fact, MAHLER knew that she had placed the order to purchase those shares. …
The false statements act (18 USC Sec. 1001) is very broad in its application, and that makes it relatively easy to prosecute. For example, it doesn't require scienter or all the complexities of whether there was inside information or not. All it requires is that the Fed prove you willfully (1) make a material (2), false statement (3) in a matter within the jurisdiction of the executive branch (4). For prosecutors looking to make a case, it's much easier to prove false statements to investigators than it is to prove insider trading. So, it's a go to charge in cases like this.
Martha Stewart learned this lesson the hard way. It appears that Ms. Mahler is about to as well.
If you are interested in the intricacies of the false statements act, take a look at Steven Morrison's When is Lying Illegal? When Should It Be? A Critical Analysis of the Federal False Statements Act, John Marshall Law Review (2009). Here's the abstract:
First, this article explores the element of section 1001 that requires a false statement. Other articles have accepted the meaning of this element. What is “false,” however, is open to debate. Second, this article explores section 1001 in light of how we communicate. It notes that lying is prevalent in society and especially within the criminal justice system, and also argues that even when we’re not lying, we engage in “purposive communication,” which is a form of deception necessary for effective communication. I also discuss what lies are, and what types of lies there are. I do so to show that the conduct that section 1001 prohibits in a black-and-white way is actually a multicolor phenomenon. Third, I discuss section 1001’s materiality element. No other article has discussed this element in detail, even though, as I show, it is the central controversial element of section 1001 and is the source of the statute’s problems as well as its potential solution. Furthermore, I discuss the varying interpretations of the materiality element among jurisdictions. For example, some circuits have adopted what amounts to an objective reasonable person standard, while others have adopted a subjective standard. As I show, this variation goes to the heart of what section 1001 prohibits. Fourth, I discuss two different versions of the definition of materiality applied by section 1001. One version requires that the false statement be capable of influencing a government agency “to which it is addressed,” and another version need only be capable of influencing some government agency. This is a meaningful difference that hasn’t been explored in other articles or resolved in the courts or Congress. Fifth, I discuss the materiality analysis established in United States v. Gaudin, which may solve the “to which it is addressed” split. Courts have largely ignored Gaudin’s analysis, as have other commentators.
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