April 28, 2011
Insider Trading - Hot Topic in NYC
Earlier this week we saw that Craig Drimal entered a plea to insider trading (see here). Today a second plea to insider trading comes out of the Manhattan US Attorneys Office. An FBI Press Release reports that Donald Langueuil is pleading guilty to insider trading. According to the most recent press release:
"Between 2006 and 2010, LONGUEUIL, along with [another], a former portfolio manager at two hedge funds, JASON PFLAUM, a former research analyst for [this other person], and NOAH FREEMAN, a research analyst at a hedge fund and then a portfolio manager at another fund, and their co-conspirators participated in a conspiracy to obtain nonpublic information ("Inside Information"), including detailed financial earnings, about numerous public companies. These companies included Marvell Technology Group, Ltd. ("Marvell"), NVIDIA Corporation ("NVIDIA"), Fairchild Semiconductor Corporation ("Fairchild"), Advanced Micro Devices, Inc. ("AMD"), Actel Corporation ("Actel"), and Cypress Semiconductor Corporation ("Cypress"). LONGUEUIL obtained Inside Information both from employees who worked at these and other public companies, as well as from independent research consultants who communicated with employees at public companies. Often, the defendant and/or his coconspirators used an "expert networking" firm to communicate with and pay their sources of Inside Information. In addition, although LONGUEUIL and his co-conspirators worked at separate hedge funds, they had regular conference calls during which they shared the Inside Information they learned with each other." (name omitted of individual who has pending charges)
So, what is insider trading? The definition may prove problematic and at some point the Court may provide better guidance. But for those facing charges it is difficult to risk a trial as the cost of being found guilty at trial presents huge consequences. But in the back of my mind I have to wonder if a clearer definition and an understanding that one who engaged in this conduct faced jail time, would have precluded this conduct. Are we using our resources wisely to prosecute those who can be educated not to engage in this conduct?
December 20, 2010
SEC Agrees to First Non-Prosecution Agreement in Fraud and Insider Trading
Guest Blogger - Michael Volkov (Mayer Brown)
The SEC announced that it has entered a non-prosecution agreement with Carter's Inc. under which the Atlanta-based company will not be charged with any violations of the federal securities laws relating to its Executive Vice President’s (Joseph M. Elle’s) alleged role in insider trading and financial fraud. The non-prosecution agreement reflects the first use of the SEC’s cooperation policy announced earlier this year which seeks to incentivize cooperation in SEC investigations.
In support of its decision, the SEC cited the relatively isolated nature of the unlawful conduct, Carter's prompt and complete self-reporting of the misconduct to the SEC, its exemplary and extensive cooperation in the investigation, including undertaking a thorough and comprehensive internal investigation, and Carter's extensive and substantial remedial actions.
According to the SEC's complaint filed in U.S. District Court for the Northern District of Georgia, Elles allegedly conducted his scheme from 2004 to 2009 while serving as Carter's Executive Vice President of Sales. The SEC alleges that Elles fraudulently manipulated the dollar amount of discounts that Carter's granted to its largest wholesale customer — a large national department store — in order to induce that customer to purchase greater quantities of Carter's clothing for resale. Elles then allegedly concealed his misconduct by persuading the customer to defer subtracting the discounts from payments until later financial reporting periods. He allegedly created and signed false documents that misrepresented to Carter's accounting personnel the timing and amount of those discounts.
The SEC further alleges that Elles realized sizeable gains from insider trading in shares of Carter's common stock during the fraud. Between May 2005 and March 2009, Elles realized a profit before tax of approximately $4,739,862 from the exercises of options granted to him by Carter's and sales of the resulting shares. Each of these stock sales occurred prior to the company's initial disclosure relating to the fraud on Oct. 27, 2009, immediately after which the company's common stock share price dropped 23.8 percent.
After discovering Elles's actions and conducting its own internal investigation, Carter's was required to issue restated financial results for the affected periods.
Under the terms of the non-prosecution agreement, Carter's agreed to cooperate fully and truthfully in action filed against any further investigation conducted by the SEC staff as well as in the enforcement Elles.
December 01, 2010
Will WikiLeaks Spur the Government to More Aggressively Promote Dodd-Frank’s Bounty Provisions?
Guest Blogger - Victor Vital
Much has been written about the new bounty-provisions in the Dodd-Frank bill passed this summer. SEC-regulated companies are bracing themselves for an uptick in enforcement actions stemming from whistle-blowers. Also legal commentators and the compliance community are very concerned about the new bounty provisions that they fear will incentivize whistle-blowers to bypass compliance programs that companies have spent considerable sums of money and effort creating, partly in response to government regulation.
Now enter WikiLeaks. WikiLeaks is the topic de jour, with its market-moving impact demonstrated by Bank of America’s 3% stock decline in response to speculation that it is an imminent target of WikiLeaks. (see WSJ story - here). Of interest to readers of this blog is whether WikiLeaks will cause the SEC and the CFTC to become even more aggressive than they may have previously planned to be in encouraging whistle-blowers to come forward and in rewarding those whistle-blowers. Given the government’s great consternation at WikiLeaks’ disclosures, it seems natural that the government might step up its efforts to encourage whistle-blowers to disclose original information of corporate misconduct through government-sanctioned channels. Just something to ponder. Victor Vital is partner at Baker Botts L.L.P. whose practices focuses on white collar criminal defense and complext litigation matters.
Now enter WikiLeaks. WikiLeaks is the topic de jour, with its market-moving impact demonstrated by Bank of America’s 3% stock decline in response to speculation that it is an imminent target of WikiLeaks. (see WSJ story - here). Of interest to readers of this blog is whether WikiLeaks will cause the SEC and the CFTC to become even more aggressive than they may have previously planned to be in encouraging whistle-blowers to come forward and in rewarding those whistle-blowers. Given the government’s great consternation at WikiLeaks’ disclosures, it seems natural that the government might step up its efforts to encourage whistle-blowers to disclose original information of corporate misconduct through government-sanctioned channels. Just something to ponder.
Victor Vital is partner at Baker Botts L.L.P. whose practices focuses on white collar criminal defense and complext litigation matters.
November 04, 2010
SEC Weighs In With Proposed Dodd-Frank Whistleblower Rules
The SEC has issued SEC Proposed Dodd-Frank Whistleblower Rules in order to implement Section 21F of the Exchange Act. Section 21F, entitled Securities Whistleblower Incentives and Protection, was enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC is seeking public comments on the proposed rules, which comments are due by December 17. Some commentators believe that the generous bounty provisions of Dodd-Frank will undermine the many corporate compliance programs put in place or strengthened in the wake of Sarbanes-Oxley.
November 03, 2010
Albuferon Insider Trading Criminal Complaint
Here is the Yves Benhamou Criminal Complaint, out of SDNY, alleging insider trading violations (under Rule 10b-5 and 15 U.S.C. Section 78ff) by a French doctor. Doctor Benhamou purportedly tipped off a hedge fund employee about negative results from the Albuferon clinical trial. The WSJ story, by Jenny Strasburg and Jean Eaglesham, is here. The SEC's civil complaint, via the WSJ, is here
October 15, 2010
Civil Settlement for Players in Countrywide Case
The Securities Exchange Commission is reporting here that Former Countrywide CEO Angelo Mozilo will pay the SEC $22.5 million to settle SEC charges "that he and two other former Countrywide executives misled investors as the subprime mortgage crisis emerged. The settlement also permanently bars Mozilo from ever again serving as an officer or director of a publicly traded company." The SEC notice also states:
"Former Countrywide chief operating officer David Sambol agreed to a settlement in which he is liable for $5 million in disgorgement and a $520,000 penalty, and a three-year officer and director bar. Former chief financial officer Eric Sieracki agreed to pay a $130,000 penalty and a one-year bar from practicing before the Commission. In settling the SEC’s charges, the former executives neither admit nor deny the allegations against them."
Some may ask - what about a criminal action?
1. Just because a civil case is proceeding with a resolution doesn’t mean that a criminal case might not be forthcoming. When the civil and criminal case are ongoing at the same time we call them parallel proceedings. But it doesn’t always mean that they have to start at the same time. In some instances, the criminal case will proceed after the civil has been ongoing for some time.
2.White collar criminal cases take a long time to investigate - they are document driven cases and as such require expertise that one doesn’t find when investigating a simple burglary or robbery case.
3. Civil cases have a different standard of proof - a much lower standard than criminal cases which require that prosecutors prove the case beyond a reasonable doubt. It is a more difficult burden and prosecutors need to assess whether they have accomplished what is needed with a civil enforcement action or if a criminal prosecution is needed. They also need to assess whether there is any criminal activity to warrant a criminal action.
4. The government needs to also determine if any conduct violates the law - or were the decisions that were made business decisions that may be wrong -- but ones that do not meet a level of criminality.
5. Hopefully prosecutors will also consider how best to spend our tax dollars.
Addendum, Gretchen Morgenson, NYTimes, How Countrywide Covered the Cracks
October 01, 2010
NACDL's 6th Annual Defending the White Collar Case Seminar – “An SEC Makeover: Restructured, Refocused, and … Back in the Game?,” Friday, October 1, 2010
Moderator: Gerald B. Lefcourt
What a panel. Susan Brune kicked off the discussion with thoughts on whether the SEC’s new cooperation policy will work. In her view, Bob Khuzami, as the SEC enforcement chief, will have to figure out how to make the SEC a bit more like a federal prosecutor’s office. One of his new big weapons, however, gives her pause. The SEC’s new cooperation scheme differs from the federal prosecution process, and some of the differences will impact the SEC’s effectiveness. AUSAs, in her experience, have much more autonomy than SEC staff attorneys. While they have to get supervisory approval to grant immunity or decline prosecution, the front office rarely reverses a line Assistant’s recommendation. With the SEC, in contrast, you never know until the staff attorney completes a long, formal, and inscrutable process that ends with the Commission itself weighing in, and often with political factors at play. And even then you don’t know. The SEC’s practice of including lengthy recitations of alleged conduct in its Consent Orders—facts to which the defendant does not agree—risks inflaming the judge, inciting Article III activism, and prompting Courts to reject carefully crafted agreements. This contrasts markedly with a sentencing hearing with a 5K motion by a USAO, where the federal prosecutor stands with your client shoulder to shoulder.
Rich Strassberg took the baton at that point and addressed the pitfalls of representing a client who has exposure to both the SEC and DOJ. Most clients who work in the securities industry cannot, as a practical matter, assert their 5th Amendment right and also keep their jobs. Clients may feel compelled to give testimony and effectively provide both the SEC and DOJ a roadmap for their investigations. Rich also touched on the public’s clamor for enforcement action in the wake of the Commission’s failure to anticipate the perils from credit default swaps and derivatives. The SEC’s perceived need to respond to the public’s furor with immediate action presents huge risks to clients. Wall Street has moved way beyond the stock market. The SEC needs to take the time to understand new markets, in Rich’s view, and to reflect on how complex industry norms inform the issue of criminal intent. A rush to respond to perceived enforcement lapses will deprive market participants of the benefit of a fair investigation that reveals the true context in which market participants worked. In short, the SEC has to work hard not to act too slowly, or too quickly, but to strike the balance just right.
Pam Rogers Chepiga then took the audience on a tour of the Dodd-Frank Act’s whistleblower provisions, the SEC’s prior rewards program--$159,000 paid out over 20 years—and the rulemaking process for the new rewards process on which the Commission will now embark. She then posed the following big questions for the audience: do securities fraud allegations lend themselves to whistleblower programs due to the heightened intent requirement that applies? Will the time and energy it takes to filter through leads drain agency resources from more important enforcement programs? Will the financial incentives undermine well thought out corporate compliance programs? And finally, how will defense attorneys counsel clients who have a choice between laying low and seeking a financial windfall?
Bob Khuzami attempted to address the concerns raised by the other panelists. Judicial scrutiny is what it is. The SEC, in his view, should be prepared to defend its charging decisions. While he doesn’t relish headlines, and is concerned a bit sometimes that judges don’t fully understand how a case evolved, he calmly accepts the scrutiny as part of the job.
Cooperation and whistleblowers offer fundamental intelligence that brings forward higher quality information sooner. The entire Commission supports these new initiatives and will not bog down approvals. They have already agreed on the basic parameters: wrongdoers won’t continue to work in industry; they also won’t keep the financial benefits they have wrought. As to interactions with DOJ, he expects better communication at an earlier stage between the two agencies.
Fear not, moreover. There will be no shortage of process; no rush to judgment under his watch. Bob also credited the talented and sector-focused divisions within the SEC; they all will weigh in with their expertise on cooperation agreements and whistleblower rewards.
The whistleblower program will not drain resources; it will serve as corollary to the SEC’s established office of market intelligence. The program will also not undercut the need to encourage employees to “report up” via their in-house compliance programs. The SEC will fashion financial incentives in a way that supports this valuable corporate compliance function, though Bob did not explain why (we will have to wait for the rules).
Eliot Spitzer then grabbed the microphone. Wall Street is rife with conflicts of interest, he noted. The SEC cannot and should not wait for information to come in. The Commission instead should anticipate. The recent financial collapse, in his view, reflects an intellectual failure by regulators. The solution? Smart people at the SEC should think about problems before the public suffers. Eliot cited mutual fund fees as a perfect example. We know that these fees—suggested to amount to billions of dollars each year--hurt the middle class. We have democratized investing through these funds; now the regulators have to make them transparent and fair.
No shortage of practical insight and forward looking thoughts from this group!
September 20, 2010
Dodd-Frank FCPA Whistleblowers: The Coming Wave
Take the FCPA, add in expansive new whistleblower protections, start employing the willful blindness doctrine with abandon, and presto! You've got a real growth industry on your hands.
The new whistleblower provisions in the Dodd-Frank Act should significantly increase federal civil and criminal fraud enforcement actions in the coming years. Whistleblowers will now be able to reap potentially huge monetary rewards for the timely reporting of corporate fraud to the SEC and CFTC, if recoveries of over a million dollars are made by those entities, the DOJ, or other regulators. Under Dodd-Frank, the pool of qualified whistleblowers has been enlarged and there is no requirement that whistleblowers file qui tam actions in order to be compensated for their information.
Expect to see exponential growth in the already burgeoning area of FCPA enforcement, fueled by new whistleblower activity. Recall that the FCPA is a creature of the securities fraud statutes, and is therefore within the SEC's purview.
All of this and more is detailed in my friend Michael E. Clark's excellent new article in the September issue of ABA Health eSource, Publicly Traded Health Care Entities at Risk from New SEC Whistleblower Incentives and Protections in Dodd-Frank Act. Clark is with Duane Morris's Houston office. As with all ABA publications, Mike's article may not be copied or disseminated, in whole or in part, in any form or by any means, or downloaded or stored in an electronic database or retrieval system, without the express written consent of the American Bar Association.
July 22, 2010
Dodd-Frank Criminal Provisions
Here are NACDL's updated materials on the new criminal provisions found in Dodd-Frank. Hat tip to NACDL's white-collar guru, Shana Regon.
July 20, 2010
Fabrice Tourre's Answer has been filed in SEC v. Goldman, Sachs & Co. and Fabrice Tourre. Among other things, Tourre contends that neither he nor Goldman "had a duty to disclose any allegedly omitted information" and that the ABACUS 2007-AC1 offering materials "expressly disclosed that no one was purchasing notes in the equity tranche of the transaction."
July 17, 2010
Chicken Feed: Goldman's Nuisance Payment
I was thinking last night about the criminal law implications of the Goldman-SEC settlement. The settlement only confirms what has been fairly apparent from the get-go--this was never a strong fraud case. The SEC extorted a nuisance payment from Goldman and simultaneously sent a signal to the markets that it is serious about its new proactive role.
If the SEC thought that it had a winner, it never would have settled on these terms. Goldman essentially pays 14 days in first quarter profits, admits to a mistake, and agrees to strengthen some aspects of its corporate governance. Goldman avoids lengthy, costly, profit-threatening, and Pandora's Box-opening litigation. And no big shots are forced to resign. When you have to caution your employees not to whoop, holler and smirk in the wake of such a settlement, you know you have made a good deal.
Oh yeah. Goldman agrees to cooperate in the SEC's probe of Fabrice Tourre. All this means is that Goldman's people will come in and talk to SEC attorneys. Tourre has already done plenty of talking himself to Congress, in public and under oath. This was foolish, in my view, for somebody in his position. But it is unlikely that any prosecutor will go after Tourre alone. Goldman was a market-maker here, the parties were sophisticated, and Tourre was hardly off the reservation. Some player's misunderstanding of John Paulson's position, even if caused by a Goldman mistake, is not the same thing as an intentional effort to deceive and defraud.
A key early sign that this was not going to be some slam-dunk fraud action was the SEC's press conference statement, on the day it filed suit, effectively clearing Paulson & Co. of wrongdoing. The SEC, unlike private litigants, can sue, under Rule 10b-5, based on aider and abettor liability. According to the public record, Paulson & Co. took part in several key discussions between Goldman and ACA Capital Management during the time period that the Abacus 2007-ACI CDO deal was being structured. If the SEC seriously believed that big-time fraud was afoot in the Abacus 2007-ACI CDO transaction, it is hard to believe that Paulson & Co. would have been treated in this fashion. If I were a government attorney and thought I had the fraud of the century on my hands, I would want to rope in every potential aider and abettor, and would think very carefully before giving a significant player in an allegedly fraudulent transaction a publicly announced clean bill of health. This is not to say that Paulson & Co. engaged in any wrongdoing. It is instead to suggest exactly the opposite.
So, I do not expect any criminal cases to come out of Abacus 2007-ACI. Of course I have been wrong before. In 1972 I thought McGovern would kick Nixon's ass. But here I will go out on the limb.
July 15, 2010
Goldman Sachs to Pay $550 Million to Settle SEC Charges
The SEC website is calling this the "largest-ever penalty paid by a Wall Street firm." (see here) This record penalty of $550 million and agreement to "reform its business practices" will likely be the talk of Wall Street. The SEC Press Release notes that the acknowledgment, "in the settlement papers" by Goldman, is to providing incomplete information. That being:
"Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was "selected by" ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure."
But it is also noted that "Goldman agreed to settle the SEC's charges without admitting or denying the allegations by consenting to the entry of a final judgment that provides for a permanent injunction from violations of the antifraud provisions of the Securities Act of 1933." Not all the money will go to the U.S. treasury as the settlement provides that "$250 million would be returned to harmed investors through a Fair Fund distribution." The settlement is subject to court approval,
The final judgment calls for the company to "expand the role of its Firmwide Capital Committee" in certain respects, and it also calls for some internal legal and compliance measures, and education and training. If you take a position in the mortgage securities offerings it sounds like you will be going through a "training program that includes, among other matters, instruction on the disclosure requirements under the Federal securities laws and that specifically addresses the application of those requirements to offerings of mortgage securities."
July 10, 2010
Quality Control at the Second Circuit II: United States v. Kaiser and Historical Truth
I wrote here last week about the Second Circuit's opinion in United States v. Kaiser, which overturned a long line of Second Circuit precedent establishing that willfulness in the context of criminal Exchange Act prosecutions requires the government to prove a defendant's awareness of the general unlawfulness of his/her conduct under the securities laws. I pledged to post again and focus a little more on the specifics of the opinion.
The Kaiser Court states that "[m]ore recently, we seemed to endorse a higher standard for willfulness in insider trading cases." This is misleading on several counts.
First, the higher standard for willfulness in criminal cases brought under the Exchange Act was established 40 years ago in United States v. Peltz, 433 F.2d 48 (2nd Cir. 1970). Since when is an opinion from 40 years ago considered recent? Peltz is older that any of the opinions cited by the Court in support of the lower standard of proof.
Second, not one of the higher standard cases cited by the Court explicitly confines the higher standard of proof to insider trading cases. Indeed, Peltz itself was not an insider trading case.
Third, the Court ignored published and unpublished Second Circuit case law that unequivocally applies the higher standard outside of the insider trading context. See United States v. Becker, 502 F.3d 122 (2nd. Cir. 2007); United States v. Schlisser, 168 Fed. Appx. 483 (2nd Cir. 2006) (unpublished).
The Kaiser Court states that "Unlike securities fraud, insider trading does not necessarily involve deception, and it is easy to imagine an insider trader who receives a tip and is unaware that his conduct was illegal and therefore wrongful." (emphasis added).
First, insider trading is quintessentially a species of securities fraud. Most insider trading cases are brought under Section 10(b) of the Exchange Act and SEC Rule 10b-5. These are securities fraud provisions by definition and Rule 10b-5 is well known as the classic catch-all securities fraud regulation. As the Supreme Court stated in Chiarella v. United States, "Section 10(b) is aptly described as a catch-all provision, but what it catches must be fraud." 445 U.S.222, 234-35 (1980).
Second, the essence of insider trading is fraudulent deception through failure to disclose. What Section 10(b) of the Exchange Act outlaws on its face is a "manipulative or deceptive device or contrivance." The Supreme Court in designating insider trading a "manipulative device" has stated that inside traders "deal in deception." See United States v. O'Hagan, 521 U.S. 642, 653 (1997). In fact, all insider trading prohibited by the criminal law involves deception of some party or parties by the inside trader.
The Kaiser Court also at numerous points conflates, deliberately or negligently, case law discussing Exchange Act Section 32(a)'s willfulness requirement with case law discussing Section 32(a)'s provision that "no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation." As noted in my prior post, the Second Circuit precedent does not hold that the government must establish the defendant's knowledge of the particular rule, regulation, or statute that he/she has allegedly violated in order to prove willfulness under Section 32(a) the Exchange Act. But the government must prove the defendant's knowledge that his/her conduct was illegal in general or "wrongful under the securities laws."
As a general proposition in the Second Circuit, one panel cannot overturn another panel's recent precedent. Here, the Kaiser panel appears to have overturned recent and longstanding precedent of myriad other panels. Maybe the higher willfulness standard under Section 32(a) should go. Clearly, the case law on this issue has not always been clear or entirely consistent. But the bench and bar deserved better here.
July 03, 2010
Quality Control at the Second Circuit: 38 Years of Willfulness Jurisprudence Thrown Out in Kaiser?
GUEST BLOGGER-SOLOMON L. WISENBERG
Former U.S. FoodService ("USF") purchasing and marketing chief Mark Kaiser's convictions on charges of conspiracy and securities fraud were reversed on Thursday, and the case was remanded for a new trial. The Second Circuit's opinion is here. The reversal was based on Judge Griesa's faulty charge on conscious avoidance which was held to constitute plain error. Judge Griesa's conscious avoidance jury instruction did not contain two elements that the Second Circuit has repeatedly stated are necessary: "that knowledge of the existence of a particular fact is established (1) if a person is aware of a high probability of its existence, (2) unless he actually believes that it does not exist." When Judge Griesa suggested sua sponte that a conscious avoidance charge was appropriate, the government reminded him that the two elements must be included, but they did not make their way into the final instruction. Although the defense did not object to the conscious avoidance charge in its final form, the law is so settled on this point that the Second Circuit had little difficulty finding plain error. Failure to include these two limiting elements in a conscious avoidance charge is a longstanding pet peeve of the Second Circuit.
Kaiser also complained that Judge Griesa's instruction on willfulness did not inform the jury that willfulness required knowledge of illegality. Under 15 U.S.C. Section 78ff(a), a/k/a Section 32(a) of the Exchange Act, "[a]ny person who willfully violates any provision of this chapter...or any rule or regulation thereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter, or any person who willfully and knowingly makes, or causes to be made, any statement in any application, report, or document required to be filed under this chapter or any rule or regulation thereunder...which statement was false or misleading with respect to any material fact, shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both."
A long line of Second Circuit precedent, going back at least to United States v. Dixon and reconfirmed in United States v. Cassese, has established that willfulness in the context of criminal Exchange Act prosecutions requires the government to prove a defendant's awareness of the general unlawfulness of his conduct under the securities laws. To paraphrase Senator McCarthy, virtually every schoolboy knows this, and the standard jury instruction to this effect is included in Judge Sand's widely used treatise, Modern Federal Jury Instructions-Criminal. The government does not have to prove the defendant's knowledge of the particular Exchange Act provision or SEC regulation or rule that he is charged with violating. (This would be inconsistent with Section 32(a)'s language that "no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation." If a defendant can be convicted, although not imprisoned, under Section 32(a), even if he had no knowledge of the specific SEC rule he was violating, it stands to reason that the willfulness required to convict under the statute does not encompass knowledge of these same specific rules and regulations.)
The standard Second Circuit Exchange Act criminal willfulness instruction sets a high scienter requirement for the government and can literally make the difference between a verdict of guilty or not guilty. The Kaiser Court examined Judge Griesa's willfulness instruction under plain error analysis. Although both the government and the defense submitted the standard Second Circuit charge requiring the government to prove Kaiser's knowledge that his conduct was illegal, Judge Griesa "did not give the proposed instructions, and did not rule on the proposed instructions before giving the charge, calling the practice 'a waste of time.'" In other words, Judge Griesa appeared to disregard the clear mandate of Federal Rule of Criminal Procedure 30(b). But neither party objected to the final charge, thereby bringing plain error review into play.
It is hard to read the Court's opinion on the willfulness issue as anything other than a fundamental misinterpretation of Second Circuit precedent in this area, complete with importation of contrary precedent from other circuits. (I will have more to say on the specifics of the opinion in a future post.) The really unfortunate thing about this decision is that it is unlikely to be taken up and reconsidered en banc. Why? The defendant already has his new trial. The government now has a ruling that significantly lessens its burden of proof in future criminal Exchange Act prosecutions.
P.S. - This case, reversing the conviction, was handled by Dan Brown of the law firm of Murphy & McGonigle. See also here. As noted by a comment to the blog - the case was argued, on behalf of Mr. Kaiser, by Alexandra A.E. Shapiro of Macht, Shapiro, Arato & Isserles LLP.
June 29, 2010
Ouch, That Hurts! Judge Koeltl Pulverizes SEC in Rorech Case
GUEST BLOGGER-SOLOMON L. WISENBERG
Attached is SDNY U.S. District Judge John G. Koeltl's Opinion and Order in SEC v. Jon-Paul Rorech and Renato Negrin, issued last Thursday. With the exception of Koeltl's ruling that the VNU credit default swaps at issue are covered under Section 10(b) of the Exchange Act and Rule 10b-5, the holding was a total defeat for the SEC. For those not wanting to read the entire 122-page opinion, here is the SEC v. Rorech-Introduction and Conclusions of Law portion.
The case centered around Negrin's purchase of VNU credit default swaps from Deutsche Bank's high-yield bond salesman Rorech. Negrin was a portfolio manager for Millennium Partners hedge fund. The case was brought under the misappropriation theory of insider trading. The SEC alleged that Rorech misappropriated confidential information from his employer Deutsche Bank and provided it, during two cell phone calls, to Negrin. The allegedly confidential information was that VNU, a Dutch media holding company, was going to restructure a bond offering and that another Deutsche Bank customer had placed a $100 million indication of interest in such an offering. The restructured bond offering would provide "deliverable instruments" for VNU credit default swaps that were being traded at the time.
Judge Koeltl concluded that:
1. The inside information about the restructured bond offering did not yet exist when Rorech allegedly passed it to Negrin.
2. The information that Rorech did possess at the time of the calls was not material. Rorech's knowledge about a potential restructuring of the bond offering was speculative in nature and already widely shared in the marketplace. Rorech's knowledge regarding another customer's indication of interest was not materially different from information already in the market regarding substantial investor demand for deliverable VNU bonds, through a restructured bond offering.
3. Rorech did not breach any duty of confidentially owed to Deutsche Bank because Deutsche Bank did not consider Rorech's ideas or opinions or, any general information, about a possible VNU bond offer restructuring to be confidential. Rorech was expected by Deutsche Bank to share such information with prospective customers and this was standard practice in the high-yield bond market. The same went for sharing information regarding other customers' indications of interest.
4. Courts cannot infer that inside information was passed from phone calls followed by trading, without something more. Additionally, Negrin's trades were consistent with his past investment practices.
5. There was no evidence of scienter. Rorech and Negrin had no prior personal relationship, there was no quantifiable or direct personal benefit to Rorech from any tip, and there was no deception by Rorech of Deutsche Bank. (This lack of deception is also relevant to the "disclose or refrain from trade" principle of insider trading. Judge Koeltl found that Rorech had in fact disclosed his interactions with Negrin to Deutsche Bank supervisors.) Moreover, Negrin did nothing to hide his dealings with Deutsche Bank.
There is considerably more in the Opinion and Order. The decision is worth reading alone for Judge Koeltl's succinct recapitulation of governing Rule 10b-5 case law, and for his analysis of why the credit default swaps at issue here fall under the purview of Rule 10b-5. Rule 10b-5 often forms the basis of criminal securities fraud charges brought under the Exchange Act (through 15 U.S.C. Section 78ff), and the civil case law, although not identical to the criminal case law, can be highly relevant.
The facts were obviously important here. The SEC didn't have any.
June 24, 2010
NACDL President Comments on Honest Services Trilogy
GUEST BLOGGER-SOLOMON L. WISENBERG
Here is a press release from the National Association of Criminal Defense Lawyers ("NACDL") containing NACDL President Cynthia Orr's comments on today's U.S. Supreme Court honest services opinions. Orr is “heartened that the Court has unambiguously rejected government arguments that the ‘honest services’ fraud statute can be properly used across as broad a range of conduct as the government has sought to do in recent years.” Nonetheless she is"disappointed that the Court has held that there remains a place in our criminal justice system for a statute on whose meaning few can agree.” (In various friend of the court briefs, NACDL has taken the position, now shared by Justices Scalia, Thomas, and Kennedy, that 18 U.S.C. Section 1346 is unconstitutionally vague.)
Orr expects “to see future litigation surrounding efforts by prosecutors to wedge their cases into the ‘bribe or kickback’ paradigm to which the Court has now limited this statute.” Of this we can be sure.
The NACDL press release also bemoans the portion of the Skilling opinion which "shockingly found that pre-trial publicity and community prejudice did not prevent Mr. Skilling from obtaining a fair trial. In fact, though, there has not been a more poisoned jury pool since the notorious first robbery and murder trial of Wilbert Rideau in Louisiana."
More on Honest Services and Skilling
GUEST BLOGGER-SOLOMON L. WISENBERG
The breakdown is as follows. All nine justices agree that the judgments in the three honest services fraud cases must be vacated and remanded. The majority rules that Section 1346 honest services fraud encompasses only bribery and kickback schemes, and would be unconstitutionally vague if interpreted more broadly. The majority opinion in Skilling (and Black) is written by Justice Ginsburg, who is joined by five other justices. Justice Scalia (joined by Justices Thomas and Kennedy) concurs, but would simply hold Section 1346 unconstitutionally vague under the Due Process Clause and would not seek to salvage it through a narrowing interpretation.
The jury instructions in all of the cases allowed for conviction under the now-discredited broad view of honest services. The lower courts must decide whether the instructional errors were harmless.
Jefffrey Skilling's fair trial arguments were rejected 6-3, with Justice Sotomayor, joined by Justices Stevens and Breyer, dissenting.
Conrad Black and co-defendants properly preserved their objections to the jury charge.
All of this is based on my quick skim. More detailed analysis will come later.
June 23, 2010
SDNY Goes After Bongiorno and Crupi Assets
GUEST BLOGGER-SOLOMON L. WISENBERG
Here is the SDNY's press release regarding the civil forfeiture complaints filed yesterday against property "traceable" to Bernard Madoff's Ponzi scheme "and paid to or on behalf of" former Bernard L. Madoff Investment Securities LLC ("BLMIS") employees, Annette Bongiorno and Joann Crupi. Here is the Bongiorno-related complaint and here is the Crupi-related complaint.
It is clear from the complaints that the government believes Bongiorno and Crupi were knowing participants in Madoff's fraud. They each allegedly "knowingly perpetuated the fraud" by, among other things, overseeing, preparing, or assisting in the preparation of fabricated account statements and other documents.
By proceeding civilly against the properties at this time, the government lowers its burden of proof and puts the longtime, back-office BLMIS employees in the unenviable position of possibly incriminating themselves if they seek to retain their assets through the in rem forfeiture litigation. Hat tip to forfeiture expert David B. Smith of English and Smith for pointing out to me that invocation of the Fifth Amendment in the context of a civil forfeiture proceeding may not automatically result in the drawing of an adverse interest.
June 18, 2010
GUEST BLOGGER-SOLOMON L. WISENBERG
Here is the Lee Bentley Farkas Indictment, unsealed this week in the EDVA. Farkas is charged with conspiracy, bank fraud, wire fraud, and securities fraud. I'm surprised they didn't throw in dancing with a mailman or impersonating Smoky the Bear. The government alleged securities fraud under 18 U.S.C. Section 1348, which, surprisingly, has seen very limited use since it was enacted as part of Sarbanes-Oxley. It will be interesting to see if this is part of a new trend. There are three securities fraud counts (Counts 14-16) based upon three separate reports (10-K, 8-K, and 10-Q) filed with the SEC, each one charged as an execution of the securities fraud scheme.
June 16, 2010
Ninth Circuit Affirms Brokers' Duty To Disclose Material Commissions
GUEST BLOGGER-SOLOMON L. WISENBERG
Last week, in a significant decision construing SEC Rule 10b-5 in the context of criminal prosecutions, the Ninth Circuit held that "if a broker and a client have a trust relationship...then the broker has an obligation to disclose all facts material to that relationship." The case is United States v. Laurienti and can be accessed here. Laurienti involved a pump and dump scheme in which brokers failed to disclose commissions they received equal to 5% of the purchase price of certain "house stocks" sold to clients. The defendant brokers argued that they had no legal duty whatsoever to disclose the 5% commissions to their clients. The Ninth Circuit disagreed, and noted that the 5% commissions were clearly material under the facts developed at trial, since "every former client who testified said that he or she would not have bought the house stocks had he or she known about the bonus commissions." The case was brought under all three subsections of Rule 10b-5. The Court noted in dictum that "[u]nder subsection (b) of Rule 10b-5, even in the absence of a trust relationship, a broker cannot affirmatively tell a misleading half-truth about a material fact to a potential investor." The Court also held that the defendants could have been found guilty of conspiracy in the pump and dump scheme even if the disclosure of bonus commissions had not been required by law, because "a reasonable juror...could have concluded that Defendants intentionally acted contrary to the interests of their clients by pushing house stocks as part of a fraudulent scheme to line Defendants' pockets without regard for the interest of their clients." The undisclosed bonus commissions were "circumstantial evidence of Defendants' agreement to join the conspiracy." The Court relied heavily on the Supreme Court's opinion in Chiarella v. United States, and on Second Circuit precedent, in reaching its decision.