Tuesday, July 20, 2010

Tourre's Answer

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 20, 2010 in Civil Enforcement, Current Affairs, SEC, Securities, Statutes | Permalink | Comments (0) | TrackBack (0)

Saturday, 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 17, 2010 in Civil Enforcement, Civil Litigation, Current Affairs, Fraud, Investigations, SEC, Securities, Settlement | Permalink | Comments (1) | TrackBack (0)

Thursday, 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 15, 2010 in SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Saturday, 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. Kaiserwhich 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 10, 2010 in Current Affairs, Fraud, Insider Trading, Judicial Opinions, News, Prosecutions, SEC, Securities, Statutes | Permalink | Comments (0) | TrackBack (0)

Saturday, July 3, 2010

Quality Control at the Second Circuit: 38 Years of Willfulness Jurisprudence Thrown Out in Kaiser?


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.


July 3, 2010 in Current Affairs, Fraud, Judicial Opinions, News, Prosecutions, SEC, Securities | Permalink | Comments (1) | TrackBack (0)

Tuesday, June 29, 2010

Ouch, That Hurts! Judge Koeltl Pulverizes SEC in Rorech Case


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 29, 2010 in Civil Enforcement, Civil Litigation, Current Affairs, Fraud, Insider Trading, Judicial Opinions, News, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Thursday, June 24, 2010

NACDL President Comments on Honest Services Trilogy


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." 


June 24, 2010 in Current Affairs, Enron, Insider Trading, Judicial Opinions, Media, News, Obstruction, Prosecutions, SEC, Securities, Statutes | Permalink | Comments (1) | TrackBack (0)

More on Honest Services and Skilling


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.

Once more, here are the slip opions in Skilling, Black, and Weyhrauch.


June 24, 2010 in Current Affairs, Enron, Fraud, Judicial Opinions, News, Prosecutions, SEC, Securities, Statutes | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 23, 2010

SDNY Goes After Bongiorno and Crupi Assets


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 23, 2010 in Civil Enforcement, Civil Litigation, Forfeiture, Fraud, Investigations, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Friday, June 18, 2010

Farkas Indictment


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 18, 2010 in Current Affairs, Fraud, Mortgage Fraud, Prosecutions, SEC, Securities, Statutes | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 16, 2010

Ninth Circuit Affirms Brokers' Duty To Disclose Material Commissions


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.


June 16, 2010 in Judicial Opinions, SEC, Securities, Statutes | Permalink | Comments (0) | TrackBack (0)

Thursday, June 10, 2010

The SEC's Stat Scam


Zachary Goldfarb has an interesting story in today's Washington Post about past turmoil and alleged retaliation in the SEC's Fort Worth District Office. The story highlights the difficulties facing the new SEC regime as it tries to kick-start an agency that rather miserably failed to spot the Madoff and Stanford frauds.

You may recall the name of Julie Preuitt. She is the Fort Worth Examination Branch official who sounded the alarm bell for years about R. Allen Stanford's alleged activities, only to see her complaints ignored or quashed by supervisors in the Fort Worth Enforcement Branch. All of this is detailed in SEC Inspector General H. David Kotz's excellent and shocking Report of Investigation of the SEC's Response to Concerns Regarding Robert Allen Stanford's Alleged Ponzi Scheme.

In 2007, according to Goldfarb, Preuitt's Examination Branch boss, Kimberly Garber, instituted a new super-short method, known as a rave, of examining certain brokerage firms. The exams lasted half a day. Only management personnel were interviewed during the raves, and the examiners did not actually examine any records, although company policies were reviewed. The raves were instituted by Garber, purportedly to boost Fort Worth's exam stats. Preuitt complained vociferously about the raves, and was rewarded with reassignment and demotion. This same management focus on stats over substance was what led to the Fort Worth Enforcement Branch's failure to publicize and halt Stanford's alleged activities in a timely fashion, according to Kotz's Report.

The story also reveals that Garber is alleged to have violated the SEC's ethics rules by using her office for the private gain of relatives. During an official trip to Kansas, Garber arranged for her staff to stay at a bed and breakfast owned by her brother and sister-in-law.

The SEC has discontinued the raves, but hard feelings between management and staff persist in Fort Worth.

This is all interesting stuff, and it points toward a larger and endemic problem within federal regulatory and law enforcement--that is, the obsession with statistics as a sign of progress in the war against white collar crime. Too much of a focus on stats leads management to favor the quick hit and the easy, often small, target. Think about that every time you see an FBI press release touting the latest mortgage fraud guilty plea. My guess is that most of the mortgage fraud convictions in the last two years involved small fries.


June 10, 2010 in Investigations, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Friday, February 12, 2010

Another Backdating Case Bites the Dust

United States District Judge Jean C. Hamilton today dismissed an options backdating case brought by the SEC, "finding that the SEC had presented no evidence to support the complaint." Attorneys representing Mike Shanahan Jr. were Stuart L.Gasner (Keker & Van Nest) and James Martin (Armstrong Teasdale).

See also Robert Patrick, St. Louis Post-Dispatch, Judge Tosses SEC Suit Against Shanahan


February 12, 2010 in Judicial Opinions, SEC | Permalink | Comments (0) | TrackBack (0)

Thursday, January 14, 2010

New SEC Rules - Commentary

The SEC has instituted a new initiative to provide for greater cooperation in hopes of encouraging individuals to assist in bringing to light improper activities. (see SEC Press Release)  And cooperators may obtain a benefit of immunity in return for their cooperation (see Marketplace here).  The framework for this cooperation can be found here.  Some concerns  -

  • What if you are the last person in the chain and there is no one left to offer cooperation against - is it fair for cooperation to be a race to the SEC office?   Will individuals with more resources be the ones to receive the most benefits, while poorer folks are left to suffer the consequences of others cooperating?
  •  It is clear that the SEC gives itself enormous discretion in deciding the value of the individual's cooperation.  The four factors listed as the outline for determining "whether, how much, and in what manner to credit cooperation by individuals" sound wonderful, but the outline is clearly subject to many different interpretations.  For example, will everyone be in agreement as to "[w]hether the individual's cooperation resulted in substantial assistance to the Investigation?" Also, the SEC will be determining if the person acted with scienter.  Will those who could suffer consequences of an SEC action agree with the determination that is made?
  • And what if the individual disagrees with the level of cooperation determined by the SEC, is there any place to obtain review?  The rules explicitly state that it does not "create[] or recognize[] any legally enforceable rights for any person."
  • Does this really go beyond the powers that the SEC presently has now?  If cooperation is offered, couldn't they now decide not proceed against someone?  Is this new initiative offered for a symbolic purpose?
  • If there is a real incentive offered will it result in the possibility of misinformation being relayed to the SEC by those who desire to obtain immunity.  How will the SEC handle cooperators who lie to save themselves from the consequences that they can face for their illegal activities?
  • Until such time as a neutral third party enters this picture to evaluate the cooperation, it certainly seems like this "new"  approach is vague and perhaps just more of the same. 
  • The real question is not whether the SEC will receive information on improprieties, but rather will they do something about it when the information is received. Would this situation have brought the Madoff case to light sooner, or was Madoff brought to their attention but they failed to follow up.

For more commentary on other aspects of the SEC announcement, like the use of deferred prosecution agreements, see  Mike Koehler, FCPA Blog, Game-Changing" Day at the SEC


January 14, 2010 in Deferred Prosecution Agreements, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Monday, October 19, 2009

Wall Street Meets "The Wire"

Guest Blogger - Gail Shifman

In the 2009 sequel to the 1987 movie, Wall Street, one expects to see Michael Douglas’ Gekko talking on his cell phone on his way to a meeting in Baltimore where technology superstar and investor hottie, Tweetz, has its headquarters. The phone conversation is worth millions. Those on the phone know that to win you have to risk loss.

Welcome to the new reality: Wall Street meets The Wire.

The arrest and charging of Hedge Fund Managers, Fortune 500 Executives and a Management Consulting Director in the $20 Million Insider Trading case, the largest ever charged criminally, is just the beginning, says U.S. Attorney Preet Bharara. The arrests followed more than two years of investigation involving informants, cooperating witnesses, consensual monitoring and wiretaps on at least four phone lines. It is believed to be the first time that prosecutors have used a wiretap in an insider trading case. Bloomberg reports that federal investigators are now poised to file charges against a wider array of insider-trading networks, some linked to the criminal allegations against Rajaratnam and the other defendants. They report that some probes, like the one that focused on Rajaratnam, rely on wiretaps and that others stem from a secret Securities and Exchange Commission data-mining project set up to pinpoint clusters of people who make similar well-timed stock investments.

Beyond the initial issue of whether investigating Wall Street insiders with law enforcement tactics typically reserved for the Mob, gangs and terrorists is a wise use of resources, it also raises many legal issues quite distinct from those traditionally litigated in white collar cases. Wiretap litigation is a complex, multi-layered process. Questions arise early in the case regarding the discovery production obligations of the government. Following a review of the many months of electronic interceptions, questions will arise regarding whether the government properly sought, minimized, maintained and sealed the recordings. Did they seek proper extensions for the continued interception of the electronic recordings? And, of course, was there probable cause to seek the interceptions?

In this case, however, the legal issue regarding the use of wiretaps that immediately jump to the surface is the question about whether The Federal Wiretap Act specifically authorizes the interception of electronic recordings for alleged security fraud violations (Title 15 U.S.C. §§ 78j(b) & 78ff and Title 17 C.F.R. §§ 240.10b-5 & 240.10b5-2) as charged in the criminal complaint. These statutes are not specifically enumerated in Title III, 18 U.S.C. § 2516, which provides the authorization for electronic interception. Wire and mail fraud (18 U.S.C. §§ 1341 & 1343) anti-trust violations, money laundering and numerous other offenses are listed, but not securities fraud. Chances are good that the government could have charged these defendants with wire fraud but were they scared away by the fact that the Skilling, Weyrauch, and Black cases are on review before the Supreme Court? One would think (hope?) that the government has preliminarily determined that section 2516 provides them with the authorization they need lest they find themselves licking self-inflicted wounds.

Assuming they overcome this hurdle, the wiretap issue that likely will be the most heavily litigated, and potentially the most fruitful for the defendants, will be a motion to suppress the wiretaps because the government lacked ‘requisite necessity’ for the lawful use of electronic recordings . Electronic surveillance is one of the most intrusive means of investigation. Indeed, the inherent intrusiveness of wiretapping is the cornerstone of the so-called "necessity requirement." As the Supreme Court stated in its landmark case which led to the enactment of the current wiretapping statutes, "[f]ew threats to liberty exist which are greater than that posed by the use of eavesdropping devices." Berger v. United States, 388 U.S. 41, 63 (1967). The Court in Berger went on to recognize that although wiretapping is a more expedient form of investigation, expediency in law enforcement must ultimately yield to the requirements of the Fourth Amendment "before the innermost secrets of one's home or office are invaded." Id.

In response to the concerns and standards enunciated in Berger, Congress enacted the electronic surveillance statutes, Title III, 18 U.S.C. § 2510 et seq. Congress mandated that the government make their wiretap applications upon oath, accompanied by [A] full and complete statement as to whether or not other investigative procedures have been tried and failed or why they reasonably appear to be unlikely to succeed if tried or to be too dangerous. 18 U.S.C. § 2518(1)(c).

Title 18 U.S.C. § 2518(3)(c) provides that a court issuing a wiretap authorization order must determine whether normal investigative procedures have been tried and have failed or reasonably appear to be unlikely to succeed if tried or to be too dangerous. This "necessity requirement" obligates the government to set forth a full and complete statement of specific circumstances explaining why traditional investigative techniques were insufficient or the application must be denied. In determining the sufficiency of an affidavit, a reviewing court must ensure that the issuing court properly performed [its] function and did not 'serve merely as a rubber stamp for the police'. The government is not under an obligation to exhaust all alternative means of investigation in satisfying the necessity requirement but, neither should it be able to ignore avenues of investigation that appear both fruitful and cost-effective.

Given that the government had three co-conspirators, including one as early as January 2006, acting as informants and cooperating witnesses, and that these individuals had unfettered access to Rajaratnam and others involved in the alleged conspiracies, the question arises whether the government deliberately stalled this investigation and actively resisted utilizing normal investigative techniques, hoping to induce the court into believing that only a wiretap could succeed. Were deliberate decisions made by the government not to pursue avenues which would have been fruitful, in its effort to persuade the court that it had no alternative but to seek a wiretap? Given my experience in wiretap litigation, I suspect that the government had the means through traditional, cost effective, and innovative methods to uncover the alleged conspiracies. Through the use of their informants and cooperating witnesses, data mining and analysis, trap and trace and pen register analysis and sometimes even through trash covers (yes, combing through the garbage), it is likely that the conspiracies could have been revealed and prosecuted.


October 19, 2009 in Prosecutions, SEC, Securities | Permalink | Comments (1) | TrackBack (0)

Friday, October 16, 2009

Fourth Annual National Institute on Securities Fraud - Day Two

The opening session of the second day of the ABA's Securities Fraud Conference is a plenary session pertaining to the Foreign Corrupt Practices Act (FCPA) - clearly a "hot" topic these days.  A panel moderated by Phillip H. Hilder, started with Mark F. Mendelsohn, deputy chief of DOJ's fraud section -criminal division, answering a question regarding how many individuals he has working on FCPA cases and which areas are most vulnerable to FCPA matters.  I didn't quite catch the final count of individuals handling these cases but it was clear that there were  at least three folks exclusively handling FCPA cases and a good few many more working on them.  Although he listed some areas that have seen prosecutions--  it was expressed more as "targeting is the wrong word."   He said that its more like "following up on leads from existing cases." Peter Clark and CE Rhodes, Jr.(US Operations & Compliance Counsel - Baker Huges, Incorporated) spoke to the representation of individuals and both talked about the use of independent/separate counsel to represent individuals. 

As my panel was next, I did not get to hear the remainder of the FCPA panel, which clearly was an important one. My panel on blogging was moderated by David Z. Seide and included Bruce Carton (Securities Docket), Thomas O. Gorman, (SECActions.com) and myself.  It was wonderful to see and hear about the wonderful blogs and sites by my fellow panelists and to hear about what Bruce Carton was doing with Twitter and Thomas Gorman's thoughts on making resources accessible to attorneys. 

One of the final breakouts of the day pertained to sentencing. The panel, moderated by Professor Steve Chanenson, (Villinova) had panelists Hon. Amy St. Eve, Christine Ewell (AUSA, Chief, Criminal Division - USAttorneys Office Central District of California), James Mutchnik, Gil Soffer, and Brian Sun. The hot topic here was a discussion about the disparity in sentencing. And as Brian Sun brought out - it is not just disparity between cases, it is also the disparity within the same case - such as disparity between those who are cooperating and your client.  The Hon. Amy St. Eve noted that it's the obligation of the attorneys to bring the issues of disparity to the attention of the judge.

Risk can be a key factor in sentencing, as noted by James Mutchnik. The uncertainly and not knowing is difficult for the client, and reaching a deal with the prosecutor provides some certainty to the situation. But this won't always work, as Christine Ewell, noted the "limited circumstances when they do binding pleas." In some cases they do a range of sentence, such as in corporate "fines" cases. Hon. Amy St. Eve reminded attorneys that they need to think about pleas that might be out of line with later defendants within the same case.  Atorney Mutchnik noted that so much rests on the "risk" that your client can take.

Christine Ewell noted how the guidelines can be "off the charts" in some cases.  But the guidelines shouldn't be discarded in these circumstances, she said.  It is more that this should be an indicator that the offense is so egregious that it merits a longer sentence. She spoke about "message sentences"  when a sentence comes in at an amount that exceeds the person's life (Madoff, and a sentence in her district that was 100 years were used as examples).

Mutchnik noted that we should move away from "loss" by looking at what  the client gained. Gil Soffer said that its appropriate to recognize the policy behind the guidelines, but the guidelines are just one factor. And Brian Sun reminded listeners of the sentences in cases years back (e.g., Boesky). He also noted how sentencing today can differ - it can be like doing a "murder case versus a DUI" because of the high sentences that white collar offenders are subject to. One example offered by Gil Soffer to bring to life your defendant's cause is to use a video, for example using video to show a day in the life of a doctor who was about to be sentenced.

An interesting question examined was whether "the 20 years in the middle of a person's life is more valuable than the the 20 years at the end of [his or her] life?" This was clearly a thoughtful panel that presented material to those present for the last set of breakouts.


October 16, 2009 in Conferences, SEC, Securities, Sentencing | Permalink | Comments (0) | TrackBack (0)

Friday, October 2, 2009

NACDL's 5th Annual Defending the White Collar Case Seminar - "Financial Fiasco - Prosecutions & Lawsuits Stemming from the Securities Market Meltdown," Friday, October 2, 2009

Guest Blogger:  Ashish S. Joshi, Lorandos & Associates (Ann Arbor, MI / Washington, DC)

Moderator:  Gerald B. Lefcourt

Panelists:  Susan Brune, Hon. Lewis Kaplan, Walter Ricciardi, Ira Sorkin

This was one of the most anticipated panels of the program as the panelists included Hon. Lewis Kaplan who has been roundly applauded by the white-collar defense bar for his insightful and game-changing KPMG decision, Ira Sorkin, the attorney for Bernard Madoff, Susan Brune, who is shortly going to trial to defend Bear Stearns hedge fund managers Cioffi and Tannin, who have been accused of securities fraud, and former SEC Enforcement Director Walter Ricciardi to provide perspective on the major developments taking place at the SEC.
Walter Ricciardi talked about the recent changes in the SEC. With the appointment of Mary Shapiro as the Chair of the Commission, the SEC has sent out a signal that it’s the “tough cop on the beat.” The Commission has strengthened its enforcement division. The new subpoena power given to its enforcement division has also given the SEC more bite. Contrary to its earlier culture where “everybody does everything,” now the SEC has created Specialized Units. These Units – such as the Asset Management Unit – will have a unit head and staff who will focus their attention on the unit’s activities, full time. Ricciardi also mentioned that while the SEC earlier used to go after the entities and left out the individuals who had been accused of wrongdoing, going forward, this will not be the case.

After Ricciardi, it was Ira Sorkin’s turn to speak. Sorkin acknowledged that there has been a major change in white-collar investigation and/or prosecution since his early days at the SEC. Now, the SEC is increasingly reaching out and cooperating with the U.S. Attorneys’ office. The approach appears to be: “Talk to us about case A, we will talk to you about case B.”

Sorkin remarked that in the last 15-20 years, parallel proceedings in a white-collar prosecution have mushroomed. Every regulator, criminal or civil, now wants a piece of these white-collar cases. It’s prestigious, it’s sexy and it garners media attention. As a result, “co-operation agreements” have increased. Agencies and departments are cooperating with each other like never before.

Sorkin also commented on FINRA – a self-regulatory organization. FINRA, during its investigation apparently does not recognize the 5th Amendment privilege against self-incrimination. Your client calls you and tells you that FINRA wants to talk to your client. Basically, you tell your client that you have bad news and worse news in this situation. Bad news: if your client doesn’t testify before FINRA, it can bring a 82(10) proceeding and take your client’s license away. Worse news: if your client does testify, FINRA can then take the transcript and share it with the DOJ or district attorney’s office and your client may end up with a much worse problem.

Sorkin also commented on the SEC and DOJ’s “queen for a day” proffer agreements. These offers are meaningless. They provide nothing to the clients but a lot to the government – and, they are quite dangerous. If you believe that a proffer is necessary, it would be better to go down the road with Rule 410 protections in place.

Sorkin ended his discussion by stating that it was quite alarming that more and more defense lawyers are acting as “junior G-men” for the government to do internal investigations.

After Ira Sorkin, it was the turn of Susan Brune. Brune commented that in this economy, there’s a common perception: why haven’t been people been charged for the collapse of stock market? There is an assumption that just because the stock market went down, there has to be underlying criminality behind this.

Brune also acknowledged that a typical white-collar case is a “resource problem.” It requires tremendous resources. Emails, documents, reports, papers - millions of documents are involved in defending a white-collar criminal case. Just the resources needed to review emails alone are, at times, overwhelming.

Judge Lewis Kaplan stated that maybe the current debate concerning the attorney-client privilege should be re-focused. Judge Kaplan commented that the incessant talk about the Holder-Thompson-McNulty-Filip memorandums might be irrelevant. Instead, the focus should be on the underlying corporate criminal liability. When would a criminal investigation and/or prosecution of a corporate entity be appropriate? If a CFO commits fraud, there should be no issue when the company is made civilly liable for the CFO’s acts. But when the DOJ launches a criminal investigation, it raises other issues. The government often is in a place where it can make the corporations do things to the individual employees that the government otherwise is not in a position to do directly. Be it indemnification, attorney fees, advancement of defense costs… the list is endless.

Judge Kaplan stated that some legal commentators have justified the government’s actions by taking the position that: the society should not be made to expand its finite resources to root out criminal behavior when this burden could easily be shifted to the companies where the alleged criminal behavior has said to have occurred. But, the Judge stated, this was an empirical question.


October 2, 2009 in Civil Enforcement, Conferences, Insider Trading, Investigations, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Monday, September 14, 2009

New Scholarship - Should the SEC Spin Off the Enforcment Division

Professor Peter Henning (Wayne State, visiting at Indiana U- Indianapolis) posted a new piece on SSRN titled, Should the SEC Spin Off the Enforcement Division -

The abstract describes it as:

The current environment is highly supportive of increased government regulation, particularly in the financial field. One of the beneficiaries of this push for greater oversight of the markets appears to be the Securities & Exchange Commission, despite some recent high profile enforcement failures, most particularly the massive Ponzi scheme undertaken by Bernie Madoff. In this essay, I raise the question whether the SEC should retain its enforcement authority over fraud cases, or whether it would be better served if that function were shifted to the Department of Justice. The SEC’s recent push to take on a more prosecutorial air gives the clear impression that an adversarial approach to enforcement of the securities laws is in order. However, the Commission must continue to solicit the views of Wall Street to fulfill its regulatory function, much like Madoff was included in the SEC’s deliberations on rules related to the stock market. At some point in the future, the push for greater regulation is likely to pass from the scene as the pendulum swings back toward a less intrusive approach to oversight. Whether the Commission can resist renewed entreaties to go easier on enforcing the law to free the capital markets from strict regulation is an open question. To allow the SEC to regulate Wall Street properly, splitting off at least a portion of the enforcement function to an agency with expertise in prosecutions - the United States Department of Justice - is at least worthy of consideration as the government looks to increase regulation.


September 14, 2009 in Scholarship, SEC | Permalink | Comments (0) | TrackBack (0)

Thursday, September 3, 2009

Madoff Report - No Corruption, Just Incompetence

The investigation into what happened that allowed a Bernie Madoff fraud to exist is now complete and the bottom line is that there was no corruption on the part of SEC personnel.  But the sad fact is that the ball was dropped on more than one occasion. The Executive Summary of the report states:

"The OIG investigation did not find evidence that any SEC personnel who worked on an SEC exmination or investigation of Bernard L. Madoff Investment Securities, LLC (BMIS) had any financial or other inappropriate connection with Bernard Madoff or the Madoff family that influenced the conduct of their examination or investigatory work." ....

"The OIG investigation did find, however, that the SEC received more than ample information in the form of detailed and substantive complaints over the years to warrant a thorough and comprehensive examination and/or investigation of Bernard Madoff and BMIS for operating a Ponzi scheme, and that despite three examinations and two investigations being conducted, a thorough and competent investigation or examination was never performed."

Chair Mary L. Schapiro (to my chagrin, the SEC continues to list her as chairman) issued a press release that acknowledges "that the agency missed numerous opportunities to discover the fraud." It is impressive that the agency is recognizing the importance of transparency here, recognizing the importance of learning from past mistakes, and recognizing the importance of putting into place a set of controls that will keep this from happening again.

This is indeed a sad chapter, and one that hopefully will never be repeated.  It probably serves little to assist those who were the victims of this fraud, but it does represent the importance of presenting to this country and the outside world that the US is going to crack down and regulate fraud with sufficient scrutiny.


Addendum - Amir Efrati, WSJ Blog, A First Look at the Big Ol’ Madoff SEC Report

September 3, 2009 in Fraud, Investigations, SEC, Think Tank Reports | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 28, 2009

Two Interesting Discussions on the Web

Over at PointofLaw.com, Professor Mike Seigel (Florida) and Professor John Hasnas (Georgetown Business) are part of a Manhattan Institute exchange  on "Criminalizing Corporate Conduct: How Far Is Too Far?" It is a fascinating discussion with two very divergent views.  But I  find it particularly interesting to see both professors focusing on whether there should be corporate criminal liability and the value or lack of value that it serves. As usual the word "punishment" is under consideration. This is an important discussion, but it also needs to be considered from another angle.  Wouldn't it be a more positive approach for the government to expend more resources on "educating compliance" then on a reactive model that punishes misconduct. My next essay will explain more in this regard.

Over at ProfessorBainbridge.com, Professor Stephen Bainbridge takes on Professor Henning's Wall St Jrl blog entry regarding the SEC v. Mark Cuban opinion.  The WallSt Jrl blog does post a correction on one point.  But I guess I am still fascinated at how computerization raises new legal considerations.  In this regard I am speaking about the second case Professor Henning discusses - SEC v. Dorozhko.


July 28, 2009 in Computer Crime, Judicial Opinions, SEC, Think Tank Reports | Permalink | Comments (0) | TrackBack (0)