Thursday, August 13, 2015

SEC ALJs: An Enforcement Fast-Track is Hitting the Constitutional Skids

Guest Bloggers - Peter Hardy, Abe Rein and Carolyn Kendall

On Wednesday, Judge Berman of the Southern District of New York issued an order preliminarily enjoining the SEC from pursuing an administrative proceeding – an in-house trial before an SEC administrative law judge (“ALJ”) rather than an Article III judge – against Barbara Duka, a former Standard & Poor’s executive whom the SEC has accused of securities fraud.  The order finds that the SEC’s process for appointing its ALJs is “likely unconstitutional in violation of the Appointments Clause,” marking the third preliminary injunction issued by a federal district court that has come to the same conclusion in recent months – and the first such injunction issued from the SDNY, the putative center of the universe of securities enforcement.  The constitutionality of SEC ALJs’ appointments is apparently in grave doubt.  This issue has the potential to bring the SEC’s use of administrative proceedings (“APs”) to a halt; indeed, it could impact administrative proceedings in any number of agencies beyond the SEC as well.

The SEC publicly has trumpeted its increased reliance on its ALJ system as part of the agency’s overall goal of pumping up enforcement because of its perceived efficiency – at least from the perspective of the government.  For the past several years, the SEC has brought the vast majority of its enforcement actions before its ALJs. The SEC’s success rate in cases before ALJs has been a startling 90% over the past 4.5 years, compared with 69% in federal court over the same period.  This is perhaps unsurprising, given the procedural advantages the SEC enjoys in its APs: unlike in federal court, SEC APs involve no jury; discovery for respondents is seriously limited – contrasting sharply with the SEC’s ability to collect evidence, sometimes over the course of years, via subpoena; respondents are generally afforded no more than four months to review the case and prepare for trial; the Federal Rules of Evidence do not apply; and traditionally-inadmissible evidence routinely is considered: “[A]ll evidence that can conceivably throw any light upon the controversy at hand should normally be admitted.”  In the Matter of Jay Alan Ochanpaugh, Exchange Act Rel. No. 54363, 2006 SEC LEXIS 1926, *23 n.29 (Aug. 25, 2006) (citing In the Matter of Jesse Rosenblum, 47 S.E.C. 1065, 1072 (1984)).  The SEC has turned to its ALJ system to pursue complex cases, including insider trading cases, that historically had been reserved for resolution in federal district court.  Anecdotal reports also strongly suggest that the SEC has invoked its perceived advantages before ALJs during settlement negotiations with potential respondents.  Thus, the current ALJ system not only provides the SEC with concrete procedural advantages during actual litigation, but the mere threat of the current ALJ system bestows upon the SEC a less concrete but potentially extremely potent weapon to use, behind the scenes, to convince its targets to never litigate in the first place.

Against this backdrop, parties threatened with or subject to SEC administrative proceedings recently have argued, inter alia, that the SEC’s ALJ appointment process violates the Constitution’s Appointments Clause of Article II, which requires that “inferior officers” of the United States be appointed by the President, a Court of Law, or the Head of a Department.  This argument should prevail if both (1) SEC ALJs are indeed “inferior officers,” and (2) they are not appointed by the President, a Court, or the Head of a Department.  As to the second question, the SEC already has conceded that its ALJs are appointed via a selective service process, which “would be inconsistent with the terms of the Appointments Clause” if the ALJs are inferior officers.  And as to the first question – whether the SEC ALJs are inferior officers – the Northern District of Georgia, and now the Southern District of New York, have confirmed in separate cases that closely-analogous Supreme Court precedent “mandates a finding that the SEC ALJs . . . [are] inferior officers.”  Hill v. SEC, No. 15-cv-1801-LMM, 2015 U.S. Dist. LEXIS 74822, at *52 (N.D. Ga. June 8, 2015); Gray Financial Group v. SEC, No. 15-cv-492-LMM (N.D. Ga. Aug. 4, 2015); Duka v. SEC, No. 1:15-cv-357 (S.D.N.Y. Aug. 12, 2015).  The Supreme Court precedent at issue is Freytag v. Comm’r, 501 U.S. 868, 881 (1991), in which the Court held that special tax trial judges, due to their ability to “exercise significant discretion,” are inferior officers under Article II.  The legal conclusion by Judge Berman that SEC ALJs are inferior officers draws particular strength from Second Circuit precedent: in Samuels, Kramer & Co. v. Commissioner of Internal Revenue, 930 F.2d 975 (2d Cir. 1991), the Second Circuit anticipated the Supreme Court’s decision in Freytag, issued only three months later, when it addressed the same issue and reached an identical holding, through similar reasoning.

This legal conclusion is also entirely consistent with the actual powers enjoyed by ALJs, which are parallel to those of a trial court judge presiding over a bench trial:  he or she has the power and discretion to rule on any motions, including pre-trial motions for summary disposition;  conduct trials and take testimony;  order production of evidence  and rule on admissibility questions;  issue subpoenas and rule on applications to quash;  sanction parties if they are in contempt;  enter orders of default;  take notice, where appropriate, of facts not appearing in the record;  and grant extensions of time and dismiss for failure to meet deadlines. The SEC ALJ decides whether the respondent has violated the law.   That decision is appealable to the Commission itself, although in many cases the Commission can simply deny a petition for review.   If the decision is not appealed, or if the Commission declines to review the ALJ’s decision, the SEC enters an order that the ALJ’s decision has become final.  The respondent then may appeal to the federal Court of Appeals, albeit on a standard of review that is generally very favorable to the SEC, which so far has entirely handled the proceeding.

The issue is still working its way through the courts – no Court of Appeals has yet weighed in – but it is gaining traction.  What is the potential practical effect if the courts ultimately conclude that the SEC’s ALJs are unconstitutionally appointed? This is a complex question, on which we already have written at length.  In short, it appears that parties who have lost on appeal, or whose time to appeal has expired, likely will be unaffected.  However, parties whose adjudications are not yet final may be able to void their adjudications.  As to parties against whom the SEC may in the future bring APs, the SEC theoretically has available the easy fix of simply re-appointing its ALJs under a constitutionally-adequate process and proceeding as normal.  But this issue has been percolating for months, and the SEC – represented by the DOJ –has declined to exercise this option.  Indeed, in its response to an order in the Duka case which “allow[ed] the SEC the opportunity to notify the Court of its intention to cure any violation of the Appointments Clause,” the SEC was conspicuously silent as to any plan to address the issue.  Thus, it appears that the SEC will continue, at least for the foreseeable future, to employ an enforcement process that runs a significant risk of being declared entirely unconstitutional.

One potential explanation for the SEC’s reticence to cure its growing problem is that any such move could be perceived as a concession that past practices were improper.  Moreover, the government at large, including the DOJ, which often serves as the litigation arm for many different agencies and departments, may face a more global quandary because this issue is not necessarily limited to just SEC ALJs; rather, it may imperil the legitimacy of many ALJs across the government.  Until the SEC – and possibly other agencies and departments – resolve this problem, bringing enforcement actions in federal court may be the only way to ensure that resources are used effectively, rather than pursuing judgments that ultimately may be voided.

(ph, ar, & ck)

August 13, 2015 in SEC | Permalink | Comments (0)

Thursday, December 11, 2014

Two Views on Second Circuit's Insider Trading Decision

Here are two (ahem) differing views on yesterday's Second Circuit insider trading decision in United States v. Newman. The Wall Street Journal editorial writers are understandably happy at the ruling and contemptuous of Preet Bharara, dubbing him an Outside the Law Prosecutor. The Journal exaggerates the extent to which the case was an outlier under Second Circuit precedent and incorrectly states that "the prosecution is unlikely to be able to retry the case." The prosecution cannot retry the case, unless the full Second Circuit reverses the panel or the U.S. Supreme Court takes the case and overturns the Second Circuit.

Over at New Economic Perspectives, Professor Bill Black insists that the Second Circuit Makes Insider Trading the Perfect Crime. Black thinks Wall Street financial firms will enact sophisticated cut-out schemes in the wake of the opinion to give inside traders plausible deniability. He compares the fate of Newman and his co-defendant to that of Eric Garner and calls for a broken windows policing policy for Wall Street. Black's piece is outstanding, but in my view he underestimates the extent to which the Newman court was influenced by Supreme Court precedent and ignores the opinion's signals that the government needed to do a much better job of proving that the defendants knew about the tipper's fiduciary breach. As a matter of fact, in the typical insider trading case it is relatively easy to show such knowledge. That's what expert testimony and willful blindness instructions are for. 

(wisenberg)

December 11, 2014 in Fraud, Insider Trading, Investigations, Judicial Opinions, Prosecutions, Prosecutors, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 10, 2014

Second Circuit Reverses Insider Trading Convictions And Sets New Bar For Tippee Criminal Liability

The Second Circuit's decision in United States v. Newman is out. The jury instructions were erroneous and the evidence insufficient.  The convictions  of Todd Newman and Anthony Chiasso are reversed and their cases have been remanded with instructions to dismiss the indictment with prejudice. Here is the holding in a nutshell:

We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.

(wisenberg)

December 10, 2014 in Insider Trading, Judicial Opinions, Prosecutions, Prosecutors, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Friday, May 16, 2014

Too Big To Jail: Do Guilty Pleas Matter?

Here is an unusually sophisticated article about a white collar topic in today's NYTimes. The piece, by Floyd Norris, probes what are essentially debarment waivers obtained by many financial and brokerage institutions as part of their global deals with DOJ and SEC. A guilty plea or deferred prosecution agreement with DOJ, accompanied by an SEC fine and censure, in the past may have been a company's death knell. Now it is just another cost of doing business. Naturally, guilty pleas still look bad and companies want to avoid them. But there's a rather large difference between a short-term public relations nightmare (or even a long-term and expensive monitoring agreement) and a firm's demise. So when government officials say that no companies are too big to jail or too big to fail, it is important to understand the context of the particular global agreement in question. Because a company can't be jailed, and if the company is big and important enough, it won't be allowed to fail.

(wisenberg)

 

May 16, 2014 in Civil Enforcement, Current Affairs, Deferred Prosecution Agreements, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 8, 2014

NYU Conference - Deterring Corporate Crime: Effective Principles for Corporate Enforcement

I had the privilege of being at an NYU Conference titled, Deterring Corporate Crime: Effective Principles for Corporate Enforcement.  Hats off to Professor Jennifer Arlen for bringing together folks with some different perspectives on corporate crime. Individuals presented data, and I heard different positions presented (corporate, government, industry, judicial) on a host of topics.  The individual constituent (CEO, CFO, employee) within the corporation was not a key focus, unless it was a discussion of their wrongdoing or prosecution.   

From this conversation it was clear that deterring corporate wrongdoing is not easy.  Penalties have increased, yet we continute to see corporate criminality.  So the question is, how do we encourage corporations not to engage in corporate wrongdoing?

This is my top ten list of what I think exists and what needs to be changed -

1. Most companies try to abide by the law.

2.  Complying with the law is not always easy for corporations. In some instances the law and regulations are unclear, making it difficult to discern what is legal.  The array of different laws and regulations (e.g., state, federal, and international), as well as their complexity  makes corporate compliance problematic.

3.  Companies resort to internal investigations to get information of wrongdoing within the company. In some instances companies will threaten individuals with the possible loss of their jobs if they fail to cooperate with a corporate internal investigation. Individuals who provide information to their employers sometimes do not realize that the company may provide that information to the government and the information may then be used against them.

4.  If a company is criminally charged, it typically is financially beneficial for the company to fold, work with the government, and provide information to the government of alleged individual wrongdoing within the company.

5. DOJ's incentives to a corporation that causes it to fold and provide evidence to the government against alleged individual wrongdoers may be causing more harm because it pits corporations against its individual constituents.

6. We need a stronger regulatory system.  Our system is broken and one just can't blame agencies like the SEC.

7. If we expect agencies like the SEC to work, Congress needs to provide them with more money to engage in real regulatory enforcement.

8. There are many good folks in DOJ, including AG Holder, who look longterm at stopping corporate wrongdoing. But there are also individuals in DOJ who fail to see the ramifications of what may seem like short-term benefits.   

9. Corporate crime can be reduced if everyone - the corporation, government, and also the individual constituents would work together.

10. It would be beneficial in reducing corporate crime if there was more transparency.  We all need to hear what works - when there are declinations of prosecutions, or when an agency decides not to fine a company. We can learn from the good things companies do (anonymously) and when DOJ declines to proceed against the company.   

(esp)

April 8, 2014 in Conferences, FCPA, Prosecutions, Prosecutors, Qui Tam, SEC, Settlement | Permalink | Comments (0) | TrackBack (0)

Sunday, November 10, 2013

Non-GAAP Earnings: Isn't The Issue Disclosure?

Gretchen Morgenson has another one of her outstanding articles, Earnings, But Without The Bad Stuff, in today's NY Times. The piece explores some unintended effects of the SEC's Regulation G, which "allows companies to use non-traditional metrics in financial reports, but only if they present generally accepted accounting measures [GAAP] alongside so that investors can compare the two." According to Morgenson, and Jack Cieselski of Charm City's R.G. Associates, more companies are using Regulation G to put forward "[m]anagement's recommended measures." This in turn spurs other companies to do the same in order to stay competitive. My gut response is: "So what?" As long as the company is disclosing fully accurate figures according to GAAP, what do I care if they want to present alternative numbers alongside? After all, companies are still prohibited from presenting false or misleading non-GAAP figures, and the SEC has gone after companies who do this.

(wisenberg)

November 10, 2013 in SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Sunday, October 6, 2013

A Stacked Deck? The SEC's Administrative Route

The New York Times' Gretchen Morgenson should be declared a national treasure. She continues to write about the financial crisis, and legal and regulatory issues related to the crisis, at a level far above most of her contemporaries. In today's New York Times she explains the administrative law process through which the SEC brings many of its enforcement actions against individuals. The Administrative Law Judges deciding the cases are SEC employees and appellate reversals are rare. Dodd-Frank expanded the kinds of cases that can be heard by the ALJs. All of this is known to the securities bar, but not to otherwise intelligent and informed lay readers, because hardly anyone ever writes about it. Morgenstern's story is here.

(wisenberg)

October 6, 2013 in Media, News, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Monday, September 2, 2013

Second Circuit Rules 10(b) Does Not Apply Extraterritorially

In United States v. Vilar, the Second Circuit examined a post-Morrison decision with an issue of whether Section 10(b) of the Securities Exchange Act of 1934 applies to extraterritorial criminal conduct.  The government had argued that the Supreme Court's decision in Bowman allowed for an extraterritorial application and that civil and criminal conduct should be treated differently and thus Morrison should not apply. The Second Circuit  disagreed with the government saying that the Bowman decision was limited to conduct that was "aimed at protecting 'the right of the government to defend itself.'" In contrast, statutes such as 10(b) have as its "purpose [  ] to prohibit 'crimes against private individuals or their property,'"  and therefore "the presumption against extraterritoriality applies to criminal statutes, and Section 10(b) is no exception."

The court also noted that "[a] statute either applies extraterritorially or it does not, and once it is determined that a statute does not apply extraterritorially, the only question we must answer in the individual case is whether the relevant conduct occurred in the territory of a foreign sovereign." Despite this legal analysis and ruling, the court found that there was no plain error with respect to territoriality on the counts here and thus no need to reverse on this issue.

Other issues raised by the defendants, such as those relating to a search warrant, jury instructions, and the admission of statements were found not to be in error.  The court did, however, remand the sentence.

(esp) 

September 2, 2013 in International, Judicial Opinions, Prosecutions, SEC | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 2, 2013

Global-Tech? Can't Get No Respect!

by: Solomon L. Wisenberg

Yesterday, in United States v. Goffer, an insider trading/securities fraud criminal appeal, the Second Circuit again refused to alter a standard conscious avoidance jury instruction to comport more fully with the Supreme Court's opinion in Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060, 2068-72 (2011). According to Judge Wesley, Global-Tech was not "designed to alter the substantive law. Global-Tech simply describes existing case law." The instruction given by the trial court "properly imposed the two requirements imposed by the Global-Tech decision." Moreover, Appellant Kimelman's request "that the district court insert the word 'reckless' into a list of mental states that were insufficient" was unnecessary, because "Global-Tech makes clear that instructions (such as those in this case) that require a defendant to take 'deliberate actions to avoid confirming a high probability of wrongdoing' are inherently inconsistent 'with a reckless defendant...who merely knows of a substantial and unjustified risk of such wrongdoing."

I don't know. Sounds a little circular to me. According to Global-Tech, willful blindness has "an appropriately limited scope that surpasses recklessness and negligence." Why not just say it squarely in a jury instruction? The problem here is that district courts are generally afraid to alter standard jury instructions in light of emerging case law. And appellate courts are generally reluctant to vacate major securities fraud convictions unless the jury instructions are blatantly improper. The Goffer opinion can be found here.

(wisenberg)

July 2, 2013 in Fraud, Insider Trading, Judicial Opinions, Prosecutions, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 25, 2013

Second Circuit Affirms Rajaratnam Case - But Goes A Step Further in Supporting the Government

It's a relatively short opinion issued by the Second Circuit, and 24 of the 29 pages pertain to a summary of the holding, facts, and the wiretap order used in this case.  For background on the issues raised, the briefs (including amici briefs), see here. Judge Cabranes wrote the majority opinion, joined by judges Hon. Sack and Hon. Carney. A summary of the holding states:

In affirming his judgment of conviction, we conclude that: (1) the District Court properly analyzed the alleged misstatements and omissions in the government’s wiretap application under the analytical framework prescribed by the Supreme Court in Franks; (2) the alleged misstatements and omissions in the wiretap application did not require suppression, both because, contrary to the District Court’s conclusion, the government did not omit information about the SEC investigation of Rajaratnam with "reckless disregard for the truth," and because, as the District Court correctly concluded, all of the alleged misstatements and omissions were not "material"; and (3) the jury instructions on the use of inside information satisfy the "knowing possession" standard that is the law of this Circuit.

Some highlights and commentary:

1. The Second Circuit goes further than the district court in supporting the government's actions with respect to the wiretap order.

2.  The Second Circuit agrees with the lower court that a Franks hearing is the standard to be used with a wiretap order where there is a claim of misstatements and omissions in the government's wiretap application. The Second Circuit notes that the Supreme Court has "narrowed the circumstances in which ...[courts] apply the exclusionary rule."  But the question here is whether the Supreme Court has really addressed the wiretap question in this context and whether a cert petition will be forthcoming with this issue.

3. Although the Second Circuit uses the same basic test in reviewing the wiretap, it finds that "the District Court erred in applying the 'reckless disregard' standard because the court failed to consider the actual states of mind of the wiretap applicants."  The Second Circuit then goes a step further and finds that omission of evidence does not mean that the wiretap applicant acted with "reckless disregard for the truth."

4.  The court states that "the inference is particularly inappropriate where the government comes forward with evidence indicating that the omission resulted from nothing more than negligence, or that the omission was the result of considered and reasonable judgment that the information was not necessary to the wiretap application."  - This dicta provides the government with strong language in future cases when they just happen to negligently leave something out of a wiretap application.

5.  Does the CSX Transportation decision by the Supreme Court call into question Second Circuit precedent?  The Second Circuit is holding firm with its prior decisions.  But will the Supreme Court decide to take this on, and if so, will it take a different position.

Stay tuned.

(esp)

June 25, 2013 in Celebrities, Civil Enforcement, Judicial Opinions, Prosecutions, Prosecutors, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 19, 2013

New SEC Policy On Admissions Of Wrongdoing: Tangibles And Intangibles

by: Solomon L. Wisenberg

SEC Chair Mary Jo White has announced an end to the SEC's blanket "does not admit or deny" settlement agreement policy. In a select number of cases involving "widespread harm to investors" or "egregious intentional misconduct" the Commission will now insist on admissions of wrongdoing on the part of civil defendants who want to settle. The blanket policy was previously eroded, in January 2012, in cases where settling defendants had already pled guilty to related criminal charges. Yesterday's Reuters story is here. Todays Thomson Reuters News & Insight analysis is here.

I strongly suspect that the tangible impact of the policy shift will be minimal. Since almost no SEC civil defendants can afford to admit wrongdoing as a condition of settlement (except in cases where a guilty plea occurred or is anticipated), we can expect the instances in which the SEC will insist on such admissions to be extremely rare. And those very rare cases will result in trials.

But the intangible impact of annually insisting on admissions of wrongdoing in three or four cases may be greater over time. First, the trials, though few in number, should be well-covered by the media. Second, the SEC will regain some much needed respect for its toughness. Third, going to trial and airing the dirty laundry accumulated by malefactors of great wealth should have salutary educational and public policy benefits. Fourth, we may actually see some deterrent effect from all this, so that companies don't automatically view SEC settlements as a cost of doing business.

We will revisit this issue as the new policy is implemented.

(wisenberg)

June 19, 2013 in AIG, SEC, Securities, Settlement | Permalink | Comments (0) | TrackBack (0)

Sunday, February 10, 2013

New Scholarship - Scienter Pleading and Rule 10b-5

A recent publication in the Case Western Reserve Law Review by Dain C. Donelson and Robert A.
Prentice, Scienter Pleading and Rule 10b-5: Empirical Analysis and Behavioral Implications. From the abstract:

Pleading requirements are the keys to the courthouse. Nowhere is this more true than with rule 10b-5 class action securities fraud claims. Provisions of the Private Securities Litigation Reform Act of 1995 impose special pleading burdens upon plaintiffs regarding the scienter element and bar them from discovery when defendants file a motion to dismiss. This Article begins with a doctrinal history of the scienter element of a rule 10b-5 claim that indicates that many key legal questions remain unsettled and that application of legal rules to specific factual allegations regarding a particular type of defendant—external auditors—is extraordinarily muddled. To determine whether the impression arising from this extensive but nonsystematic examination of the case law is accurate, we also empirically examine rule 10b-5 claims against auditors and confirm that few facts are consistently viewed by the courts as indicating the presence (or absence) of scienter. This lack of clarity in the law and its application makes it difficult for either plaintiffs or defendants to evaluate the settlement value of claims. Furthermore, the law’s excessive vagueness affords judges virtually untrammeled discretion. The literature of behavioral psychology and related fields indicates that excessive discretion exacerbates problems that arise from unconscious judicial bias.

(esp)

February 10, 2013 in Scholarship, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 24, 2012

Rajat Gupta's Sentencing: Practice Notes

by: Solomon L. Wisenberg

The sentencing is today at 2:00 PM Southern District of New York Time. (And is there really any other time in the Universe?)

As I noted on Monday, Gupta's Guidelines Range, according to the Government and the Probation Office, is 97-121 months.That's a Level 30. Gupta's attorneys put Gupta's Guidelines Range at 41-51 months. That's a Level 22. The different calculations are based on different views of the gain and/or loss realized and/or caused by Gupta. Gupta's attorneys are seeking a downward variance and asking for probation, with rigorous community service in Rwanda. Serving a sentence in Rwanda is not as strange as it may sound on first hearing. After all, criminal defendants in Louisiana regularly do time in Angola.

But seriously, lawyers and germs, there is a practice pointer in here somewhere. Practitioners naturally strive to obtain the lowest possible Guidelines Range as a jumping off point for the downward variance. It is psychologically easier for a judge to impose a probationary sentence when the Guidelines Range is low to begin with. It is legally easier as well, because the greater the variance from the Guidelines, the greater the judicially articulated justification must be.

But too many lawyers push the envelope in their Guidelines arguments, thereby risking appellate reversal on procedural grounds. This is a particular danger when the judge is already favorably disposed toward the defendant and looking for ways to help him. Failure to correctly calculate the Guidelines is a clear procedural error. (Some of the federal circuits try to get around Booker, Gall, and Kimbrough by setting up rigorous procedural tests. The Fourth Circuit is the most notorious outlier in this regard.) Lawyers must be on guard against the possibly pyrrhic and costly victory of an incorrectly calculated Guideline range, followed by probation. One solution is to have the court rule on alternative theories. "This is the Guidelines Range. These are my reasons for downward variance. Even if the Guidelines Range was really at X, as the Government argues, I would still depart to Y for the same and/or these additional reasons." If the judge already likes your client, getting him or her to do this is often an easy task.

Of course, Judge Rakoff needs no instructions in this regard. One of our ablest and sharpest jurists, and a leading Guidelines critic, he will attempt to correctly calculate the Guidelines Range in an intellectually honest manner and will downwardly (or upwardly) vary as he damn well sees fit, with ample articulation.

(wisenberg)

October 24, 2012 in Fraud, Insider Trading, Prosecutions, SEC, Securities, Sentencing | Permalink | Comments (1) | TrackBack (0)

Thursday, September 6, 2012

Second Circuit Releases Magnum OBUS On Insider Trading

In SEC v. Obus (2d Cir. 2012), released yesterday, the Second Circuit provides a primer on insider trading law, with particular attention paid to tipper liability, tippee liability, and scienter. The Court also seeks to reconcile the supposed conflict between Dirks and Hochfelder with respect to the level of scienter that must be proved in tipping situations. Obus is required reading for anyone working in the white collar and securities fraud fields.

(wisenberg)

September 6, 2012 in Fraud, SEC, Securities | Permalink | Comments (1) | TrackBack (0)

Friday, June 15, 2012

Gupta Convicted On Some Counts & Acquitted On Others

Sunday, April 1, 2012

The Department of Justice and the Culture of Non-Disclosure

We don't need new legislation insuring that defendants receive the exculpatory information they are entitled to under the U.S. Constitution, because the DOJ has learned its lesson from the Ted Stevens case and will NEVER let something like that happen again.

For example, in the high-profile insider trading case of U.S. v. Rajat Gupta, the DOJ recently argued that its prosecutors did NOT have to review 44 SEC interview memos for Brady material, even though the memos summarized interview sessions jointly conducted by SEC and DOJ attorneys. According to SDNY prosecutors, the overall DOJ and SEC investigations were not technically "joint" in nature, so SDNY AUSAs had no Brady obligations with respect to the SEC memos. The SEC attorneys were capable of conducting the Brady review on their own. Yeah, right. Just like the FBI and IRS Special Agents were capable of conducting the Brady review in U.S. v. Stevens. I completely forgot about the Brady training that SEC attorneys receive on a regular basis. DOJ's position is not only contrary to SDNY and Second Circuit case law--it also violates the letter and spirit of the Ogden Memo, promulgated after Stevens to prevent future Brady debacles. I guess SDNY didn't get the memo. (They're special you know.)  Judge Jed Rakoff was having none of it. See his Gupta Brady Ruling, issued last week, for details. In truth, all of the SEC memos should be turned over in their entirety to the defense, just as all of the 302s and MOIs in Stevens should have been turned over. 

It is clear that the DOJ has learned almost nothing from the Ted Stevens case. Suppression of exculpatory and/or potentially exculpatory evidence is largely not an issue at the line level. The typical AUSA knows Brady/Giglio when he sees it, and knows to disclose it. The problems tend to arise in high profile cases, particularly those captained out of DC. The sickness extends to very high levels at the DOJ. The Stevens prosecution clearly showed this. The Bill Allen-Bambi Tyree subornation of perjury allegation, reported in 2004 to a federal judge by DOJ prosecutors in a sealed pleading, was classic Giglio material. It should have instantly been recognized as such by the Chief and Deputy Chief of the Public Integrity Unit and they should have ordered it turned over immediately to the defense. It wasn't and they didn't.

The DOJ has run out of scandals and excuses. Enough already. At long last, have they no shame?

(wisenberg)

April 1, 2012 in Insider Trading, Prosecutions, Prosecutors, SEC, Securities | Permalink | Comments (1) | TrackBack (0)

Monday, February 6, 2012

Will the SEC's Requiring Settling Parties to Admit Wrongdoing Increase the Number of Trials?

In criticizing Judge Jed Rakoff's refusal to rubber-stamp its proposed settlement agreement with Citibank, the SEC has claimed that if it has to require companies to admit wrongdoing as a condition of settlement, there will be far fewer settlements and more trials.  As a result, says the SEC, its resources would be so strained so that it would bring considerably fewer enforcement actions.  The New York Times on Friday, February 3, cited unnamed "legal experts" as endorsing that view, saying that companies will be less likely to admit facts which could be used against them in shareholder lawsuits.  See here.

There is a certain logic to that argument.  Companies that have committed misconduct now do choose to pay the SEC rather than admit or reveal their wrongdoing to the public (and to class action lawyers).  Companies that believe they have not committed misconduct sometimes decide it is less costly to pay the SEC than fight it.  Few SEC cases go to trial.  This settlement model works well for the SEC, which gets a check with less sweat, and for most defendants, which conceal their misconduct and/or save money.

But is that in the public good?  More trials should lead to more public knowledge, promote more curative government action, and add an additional deterrent to corporate misconduct.  Additionally, it should force the SEC to be more scrupulous in bringing marginal or questionable cases since they would more often be required to justify the charges in court.

I also question whether these "experts" are right in their expectation that there would be far more trials.  I am not so sure that many corporate executives want public airings of the factual details of the company's wrongdoing.  "Experts" predicted that the enactment of the Sentencing Guidelines would overwhelm the federal courts with trials since many more criminal defendants would exercise their right to trial because of the perceived (and actual) harshness and rigidity of the Guidelines upon a conviction.  That simply has not happened.  The percentage of cases settled by plea has remained relatively constant, if not increased, since the enactment of the Guidelines.

(goldman)

February 6, 2012 in Civil Enforcement, Fraud, SEC, Settlement | Permalink | Comments (0) | TrackBack (0)

Monday, January 30, 2012

New Financial Unit Raises Questions

Virtually every presidential State of the Union speech, or its gubernatorial equivalent, calls for tougher criminal laws and/or new investigative resources.  President Obama's address last week was no exception.  The President called for the establishment of a new unit "to crack down on large scale fraud and protect people's investments."  As blog editor Ellen S. Podgor wondered, see here, it was unclear how this unit would differ from the Financial Fraud Enforcement Task Force established in 2009.  I too asked whether this purportedly new unit was anything other than a repackaged version.

The announcement of a new prosecutorial unit also was perhaps an unintended implicit admission that existing federal law enforcement agencies had been less than successful in dealing with serious alleged crimes which some believed had caused the financial crisis.  Both Attorney General Eric Holder and SEC Enforcement Director Robert Khuzami defended their record, stating that not every mistake is a violation of law.  Holder said, "We also have learned that behavior that is reckless or unethical is not necessarily criminal," a statement which (aside from leading me to ask why it had taken him so long to realize it) should be painted on the walls of every prosecutorial office.

The principal apparent structural difference between this unit, entitled the Unit on Mortgage Origination and Security Abuses ("UMOSA"), and the prior one is, besides its more focused jurisdiction, that this is a joint task force of both federal and state officials.  One of its co-chairs -- albeit one of five, four being DOJ or SEC officials -- is New York State Attorney General Eric Schneiderman, who has shown his independence and aggressiveness toward Wall Street by pushing for stronger sanctions against financial institutions for robo-signing and other improprieties committed after the crisis arose.

Generally, joint federal-state task forces are a one-way street.  The feds take the best criminal cases and leave the dregs to the state.  One purported justification for such selection is that federal laws and rules of evidence make it easier for federal prosecutors to bring cases and win convictions.  Schneiderman has indicated somewhat to the contrary -- that New York and other state laws give state attorneys general greater means to bring both civil and criminal prosecutions.

The idea of combining federal and state resources is generally a good one.  Too often law enforcement agencies refuse to share information with other agencies, if at all, until they have determined the information was insufficient for them to act on, often too late for use by the other agencies.  On the other hand, I fear that some task force constituents might attempt to make an end run around constitutional and statutory laws and rules, specificially Fed.R.Crim.Pro. 6(e), which, generally, as relevant here, prohibits disclosure of grand jury information to non-federal officials.  Of particular concern is whether information secured by federal grand juries, much of which is through immunized testimony, will be provided for use by the states.  Both Attorneys General Holder and Schneiderman seem aware of this restriction, but both appear to view it as an obstacle to overcome rather than a right to ensure.  How scrupulous they will be in upholding the rule and spirit of grand jury secrecy will be seen.

(goldman)

January 30, 2012 in Current Affairs, Fraud, Grand Jury, Investigations, Mortgage Fraud, Prosecutors, SEC, Securities | Permalink | Comments (2) | TrackBack (0)

Monday, January 9, 2012

SEC Ends Orwellian Policy

Stop the presses. Hold the back page. Saturday's New York Times reports here on the SEC's decision to end its "does not admit or deny" policy, but only for SEC civil defendants who are also pleading guilty to criminal charges or admitting wrongdoing as part of a deferred criminal adjudication. In other words, the policy is similar in its immediate effect to Lincoln's Emancipation Proclamation, which (for the most part) merely freed slaves in rebel held territory. Why be so boastful about ending a policy that never made much sense in the first place, because it allowed individuals and entities to neither admit or deny civil allegations when they had already pled guilty to similar, and more serious, criminal charges? To hear the SEC tell it, the decision to abandon the old policy is NOT in response to Judge Rakoff's order rejecting the proposed Citigroup consent decree, as the new policy would not apply in the Citigroup case and the decision has been under consideration since Spring 2011. The decision itself may not be in response to Judge Rakoff, but it is hard to believe that its timing is not. Although Judge Rakoff should be commended for his thoughtful opinion, I am not without sympathy for Khuzami. He and the SEC are the only actors at the governmental level who appear to be systematically investigating and bringing actions against the elite financial entities largely responsible for our economic meltdown. (DOJ is on holiday.) Still, the SEC spends too much time on its public relations.

(wisenberg)

January 9, 2012 in SEC, Securities, Settlement | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 29, 2011

Speaking Truth To Power

Here is Judge Rakoff's Order Rejecting Proposed SEC-CITIGROUP GLOBAL MARKETS INC.Settlement. Here is the New York Times story. Judge Rakoff's Order repeatedly refers to Citigroup as a "recidivist." It is difficult to believe this Order would have ever seen the light of day had the Court truly believed that a comprehensive law enforcement effort was underway to investigate and hold accountable the persons and institutions whose actions "depressed our economy and debilitated our lives."

(wisenberg)

November 29, 2011 in Judicial Opinions, SEC, Securities | Permalink | Comments (0) | TrackBack (0)