October 26, 2011
Rajat Gupta Charged and Arrested for Insider Trading
Here is the Reuters story. Nothing posted yet on PACER. WSJ Law Blog also has coverage. This will be a much tougher case than Rajaratnam was for the government to prove. This morning's WSJ has a decent background piece (subscription required) on the case.
September 27, 2011
SEC Counsel Criticized for Conflict of Interest
One would expect that the SEC, which brings actions against individuals or corporations based on their failure to disclose a material conflict of interest to the public, would be sensitive to conflicts of interest of its own employees. Nonetheless, as a report released last week by SEC Inspector General H. David Kotz reveals, former SEC general counsel David M. Becker participated significantly in decisions relating to the distribution of SIPC funds relating to the Bernard Madoff case although he had a significant personal financial interest in the decisions.
Becker and two brothers in 2004 inherited and in 2009 liquidated $2 million in Madoff investment funds, $1.5 million of which were purported profits from the original investment. Later in 2009, Becker was prominently involved in two substantial questions in which the SEC recommendations to the bankruptcy court, while not conclusive, would be expected to carry significant weight in the court, given the deference courts pay to administrative agency decisions.
One issue concerned what position the SEC would take as to what should be considered "net equity," the amount that customers can claim in a brokerage liquidation. That question was essentially the same as what should be considered the "net equity" figure in a "clawback" action by the bankruptcy trustee, a decision in which Becker had a significant potential personal monetary interest, even though he and his family had not yet been sued (they were later). Becker initially argued against the "money-in/money-out method" under which an investor could recover only the amount he invested and for the "last account statement method" under which an investor could recover the amount of the last - and fictitious - statement from Madoff. The "last account statement method" would obviously have been beneficial to Becker in that it would have protected him in a "clawback" action by the Madoff bankruptcy trustee for the $1.5 million he and his brothers had received in Madoff "profits."
After consideration, Becker concluded that the last account statement method was unsupportable. His position was in accord with that of the SEC, SIPC, the bankruptcy trustee, and ultimately the Second Circuit, In re Bernard Madoff Investment Securities, LLC, ___ F.3d ___ (2d Cir., August 16, 2011). Becker argued, however, contrary to the position of SIPC, for the "constant dollar approach" in which the recovery under the money-in/money-out method would be adjusted upward for inflation and lost real economic gain. Under this approach, the bankruptcy trustee's potential clawback recovery from the Beckers would have been reduced by $138,500.
It is apparent, as any law student who has taken an ethics course would realize, and as the Inspector General determined, that Becker had a conflict of interest in the resolution of these questions. Yet, the SEC's "ethics" officer, who reported to and was evaluated by Becker, saw no conflict. The ethics officer, revealing a narrow view of conflict of interest, and an apparent misunderstanding of relevant securities law, found no conflict in part because there was "no direct and predictable effect" between the SEC's position and the trustee's clawback decision.
SEC Chairwoman Mary L. Schapiro was aware, to some extent, of Becker's Madoff financial interest, but she did not suggest he recuse himself. She and Becker both contended before Congress last week that he had acted properly by reporting the conflict to her and others. That defense, however, is limited and misplaced.
Reporting a conflict - especially if only to underlings and colleagues - is not sufficient. Even public disclosure of Becker's personal interest - and it was not disclosed to the public, Congress, the courts, or four of the SEC's five commissioners - would not have cured the conflict. Becker simply should have recused himself and not have participated at all in decisions as to the formulation of SEC policy relating to recovery of Madoff assets.
Schapiro was no doubt swayed by her respect for Becker's legal ability and integrity. Becker, who has written that he did "not remember giving any consideration to how the various proposed outcomes would affect me," may well have believed that his personal interest would not affect his professional judgment. In any case, his decision not to recuse himself and Schapiro's at least implicit condonation of this decision, demonstrate that the agency which polices conflicts of interest in the marketplace fails to appreciate them when they occur in its own house.
The Inspector General referred this matter to DOJ for consideration for criminal prosecution. I do not suggest that Becker acted criminally with respect to 18 U.S.C. 208, the statute proscribing acts affecting a personal financial interest, or any other law. He may well have lacked whatever scienter is required under the law based on his reporting to others or other acts or circumstances. Not every improper act is criminal.
September 15, 2011
"Rogue Trader" - OUCH
UBS is having another "ouch" moment as the media is reporting on a rogue trader. The typical questions are - how could this have happened; why was it not discovered sooner; who should be held liable; and should there be criminal liability? It is too soon to answer many of these questions. But here are some points of interest -
UBS has a corporate responsibility policy that states:
"UBS is firmly committed to corporate responsibility and actively strives to understand, assess, weigh and address the concerns and expectations of the firm's stakeholders. This process supports UBS in its efforts to safeguard and advance the firm’s reputation for responsible corporate conduct. In very direct ways, responsible corporate conduct helps create sustainable value for the company."
Its policies include a host of different preventative measures, such as money laundering prevention here. It takes pride in employees and notes that "[o]ur employees have the breadth of our businesses, global career opportunities and a collaborative, performance-oriented culture as a platform for individual success."
Rogue employees are not a new development for the corporate arena. No matter how many controls are in place and no matter how much oversight there might be, it is a problem to have full compliance. Knowing this, it seems important to provide companies with a "good faith" defense when a rogue employee commits acts that might be considered criminal. Unfortunately, to date, courts have only seen fit to insert such as defense in the civil area and not the criminal sphere. (See Podgor, A New Corporate World Mandates a Good Faith Affirmative Defense) But corporate criminality in the federal system is premised on respondeat superior and the acts of a rogue employee are hardly for the benefit of the company.
See also -
Frank Jordans & Paisley Dodds, Houston Chronicle, Rogue trader suspected in $2 billion UBS loss
Nathan Vardi, Forbes, Rogue Trader Deals Big Blow To UBS
Victoria Howley & Emma Thomasson, Reuters, UBS $2 billion rogue trade suspect held in London
The Telepgraph, UBS rogue trader: statement to employees in full
August 12, 2011
SEC's Dodd-Frank Whistleblower Regulations Take Effect Today. Corporate America Expects More FCPA Woes.
Politico has a story about it here. The new regs implement Section 21F of the Dodd-Frank Act, which authorizes the SEC to award 10 to 30 percent of the monetary sanctions it recovers in a given case to a qualified whistleblower. What seems to most annoy the business community about the implementing regs is the SEC's insistence that whistleblowers are under no obligation to make use of a company's internal complaint procedures before running to the SEC. But the regs do say that an employee who goes through internal company whistleblower protocols is eligible for a Dodd-Frank whistleblower award if his/her employer subsequently self-reports to the SEC, based on the whistleblower's complaint, and a recovery is had. Further, an employee has a 120-day grace period after whistleblowing to his/her company, within which to bring his/her complaint to the SEC. Finally, in determining the amount of a whistleblower reward, the SEC will consider whether the whistleblower made use of his/her internal company procedures. The new regs contain enhanced anti-retaliation provisions as well, which prohibit direct or indirect retaliation for making whistleblower complaints to the SEC and other government entities.
There is an inherent tension between the anti-retaliation provisions and the SEC's and DOJ's often-emphasized warnings to companies that they should have vigorous and authentic internal whistleblower procedures. What if a company's pre-existing compliance policy requires the prompt internal reporting of whistleblower complaints? Can a company punish an employee who ignores such a provision and goes straight to the SEC? What if the employee declines to internally report, even after going to the SEC, because he/she feels that the company procedure is a sham? My guess is that such punishments will occur and that they will be deemed to run afoul of the anti-retaliation provisions. The retaliatory response is an instinctiual, persistent, and virtually universal impulse. It is really hard to eradicate.
August 10, 2011
Family Week for Insider Trading Actions
Last week was Family Week for insider trading actions. Two highly-publicized cases concerned the disclosure and misuse of inside information received from a close relative -- one a spouse, the other a parent.
Both cases implicate the question of whether disclosure of confidential information to a close relative should form the basis of a criminal or regulatory proceeding. While the law provides no safe haven from prosecution for unlawful disclosure to a spouse or child (although the marital privilege may provide some protection to a spouse), respect for family relations may in some cases militate against such a prosecution. Here, however, the facts and circumstances of each case – one justifying prosecution, the other working against it – seem to make that issue moot.
In one, SEC v. William A. Marovitz, 1:11-CV-05259 (N.D. Ill. August 3, 2011), the husband of former Playboy Enterprises CEO Christy Hefner agreed (with the usual non-admission and non-denial of wrongdoing) to pay approximately $170,000 to settle a civil action. The husband, William Marovitz, according to the SEC, traded and made profits on sales of Playboy stock based on information he received from his wife concerning, among other things, a sale of the company. According to the SEC, Hefner had talked with her husband about her concerns with his trading and had the company counsel also speak with him. The counsel sent Marovitz a memo warning of the "serious implications" of his trading Playboy shares and asked him to consult counsel before he did. According to the complaint, Marovitz never did.
Hefner was not charged. Not only was she uninvolved in his trading, she took precautions, however unsuccessful, to prevent her husband’s purported misuse of the information. Of course, she could have prevented any misappropriation of insider information by him by simply not disclosing it.
The settlement amount includes civil penalties. One wonders what, if any, additional penalties Hefner will inflict upon her husband for his apparent betrayal of marital trust.
In another case, U.S. v. H. Clayton Peterson, 11 Crim. 665 (S.D.N.Y.) (see also SEC v. H. Clayton Peterson, etc. al., 11-CV-5448 (S.D.N.Y.)), a father and son both pleaded guilty to criminal securities fraud and conspiracy violations in connection with providing, using, and disseminating inside information concerning the 2010 takeover of Mariner Energy in Denver by the Apache Corporation. H. Clayton Peterson, a Mariner director, pleaded guilty to tipping off his son, Drew Peterson, who traded for himself, clients and a friend for a $150,000 profit and tipped off another friend, reportedly Bo K. Brownstein, a hedge fund executive, who traded for his fund and relatives and friends for profits of more than $5 million.
Peterson Sr. apparently took an active role in the wrongdoing, not only on several occasions providing confidential information to his son, but also directing him on two occasions to purchase Mariner stock for his sister. His conduct, thus, was apparently far more culpable than Hefner’s.
Drew Peterson is reportedly cooperating against Brownstein and others, as, to the extent he can, most likely is his father. Often, the family that steals together squeals together.
July 28, 2011
Chiesi Sentenced to 30 Months
Danielle Chiesi, the former beauty queen, hedge fund trader, and fount of inside information to Raj Rajaratnam, was sentenced last week to 30 months in prison. We had blogged about her earlier. (see here)
Ms. Chiesi, who had extracted information from lovers and passed it on to Rajaratnam, was described by United States Attorney Preet Bharara in interesting imagery as "the vital artery through which inside information flowed between captains of industry and billionaire hedge fund managers."
The 30-month sentence was three months greater than that imposed on her former lover and boss, Mark Kurland, whom she blamed for involving her in criminality. Ms. Chiesi had specifically asked for a sentence equal to or lesser than Mr. Kurland’s. The government sought a sentence within the advisory guideline range of 37 to 46 months.
Retaining her sense of style to the end, Ms.Chiesi wore an atypical outfit for a defendant about to be sentenced, a sleeveless pink dress and matching pumps. And, after the sentence, alluding to her early morning arrest, she told the FBI agents at the prosecution table that the next time they knocked on her door they should do it in the afternoon. I suspect that she’ll be up early for the next 30 months.
June 09, 2011
The United Jewish Appeal-Federation of New York has a Criminal Law Group. Wow. I never knew. SEC Enforcement Director Robert Khuzami recently spoke to its members about questionable tactics routinely engaged in by white collar lawyers (and their clients) during SEC Enforcement Division proceedings. Khuzami's Speech is troubling as it reveals clearly unethical and potentially illegal behavior, including: improper signalling to witnesses regarding substantive testimonial responses, representation of multiple witnesses with clearly adverse interests, representation of multiple witnesses who adopt virtually identical and implausible explanations of events, witnesses who "don't recall" dozens of basic and uncontroverted facts documented in their own writings, scorched earth document production, suspect recantation of damaging testimony after deposition breaks, and window-dressing internal investigations that scapegoat mid-level employees. Khuzami laments these tactics and notes that they often backfire by increasing Enforcement Division skepticism of the entity or person under investigation and by damaging the future credibility of counsel who encourage such behavior. But employment of at least some of these brazen tactics should do more. The people and entities who engage in them should go straight to secondary, as they say at the border. If this had been done in Bernard Madoff's case, after he was caught red-handed lying during a regulatory examination, his fraud would have been uncovered years ago. The message from the SEC should be clear. You don't get to lie or obstruct justice during Enforcement Division investigations or SEC exams. Hat tip to Jonathan Hardt of Wilmer Hale for bringing this speech to my attention.
May 15, 2011
Commentary on Raj Rajaratnam Case
As noted here by Sol Wisenberg, Raj Rajaratnam was found guilty on all counts. Many have been commenting on the case, see here, here, here, here, and here for example. Some predict that this decision will be the stepping stone for future insider trading cases (see here, here , and here) After all the government might say - the wiretaps seemed to work in this case, perhaps they can work in other insider trading cases.
Hopefully, the government will think this through rationally. The wiretaps were clearly questionable (see here) (Professor Dershowitz takes a different view here). It remains to be seen whether a higher court will find their use acceptable. If there are more prosecutions using these types of wires, and it turns out that a higher court finds them unacceptable - a lot of time and money will have been wasted by the government.
A second issue is with respect to what constitutes insider trading and when is the conduct illegal. The fuzzy nature of this question makes many of these prosecutions questionable. The question I always wonder is if the person knew that the conduct was illegal, would they have committed the act. If they knew that a heavy jail sentence would be following, would they engage in this activity. The concern here being that perhaps more time needs to be spent on making criminal offenses clearer and educating folks on what is legal and what is not.
(esp)(blogging from San Francisco)
May 11, 2011
Dog Bites Man. Rajaratnam Guilty On All Counts.
Read all about it. Here is Katya Wachtel's report for businessinsider.com. Carrie Johnson of NPR's All Things Considered discusses the deterrent effect of Wall Street wiretaps in Wiretaps: Not Just For Mob Bosses Anymore, with a quote thrown in from yours truly.
May 06, 2011
Nathan Koppel, WSJ Blog, Sick Juror Deals Major Setback to Rajaratnam trial
San Francisco Chronicle (Bloomberg), Rajaratnam Jurors Listen to Chiesi Wiretaps in Insider Case
May 05, 2011
20th Annual National Seminar on Federal Sentencing Guidelines - Sentencing Issues in Securities Cases
This was an extremely high-powered panel, with Hon. Frederic Block (E.D. N.Y.) serving as the moderator.
Giving background on securities fraud sentencing was Alexandra Walsh (Baker & Botts). She noted that the biggest driver is "loss" with as many as 30 points added, and with first offenders being eligible for extraordinary sentences. As long as "loss" has such a huge influence and as long as there are judges who will look at the circumstances - there will be disparity. She asked what will be the Commission's response - will they scale back these sentences? Judge Block noted how easy it is to get life for a securities fraud sentence.
Judge Block noted how Dura Pharmaceutical set the standard of "loss" in civil cases. Speaking about post- Dura, Hank Asbill (Jones Day) noted how the 5th Circuit looked at "loss" and how it was developed in civil cases. But the 9th Circuit in Berger took a different position as noted by Judge Block. They chose not to use the civil fraud standard. Hank Asbill showed a flaw here when he asked - how do you determine the harm to society? He noted how the court gave Berger himself a break. But other cases in the 9th Circuit may not be agreeing with Berger. As noted by Judge Block - "we are dealing with fuzzy stuff." Judge Block then mentioned the Dodd-Frank Act which seems to have language more like Berger, as opposed to Dura.
Michael Horowitz (Cadwalader Wickersham & Taft, LLP) was asked whether the Sentencing Commission has to scratch Dura. It sounded like the Commission will address this issue this coming summer. But where should the Commission go - on one hand there is a view to raise the guidelines (tough on crime), yet another view is to think beyond incarceration. Judge Block questioned whether the Commission was giving judges real guidance here.
The Department of Justice (DOJ) person on this panel was Daniel Braun, Assistant U.S. Attorney in the Southern District of NY (starting of course with the typical DOJ disclaimer that he was not speaking for the dept.). He noted that with increased discretion you get broader differences in sentences. He spoke to the letter of Jonathan Wroblewski, Dir. of Policy and Legislation, DOJ. He stated that this letter was not focused on individualized cases but rather on the broad differences in sentences. (There had been criticism that the letter singled out some specific cases)
Michael Horowitz noted how in the Adelson sentencing, the judge (Judge Rakoff) specifically asked the AUSA if life was an appropriate sentence. Which of course the AUSA could not answer. (Background on Adelson - see here)
Judge Jed Rakoff, speaking next, noted that the guidelines don't capture - what kind of human being do you have in front of you. He said that bad guys who make serious mistakes deserve to rot in prison, but he felt different about good guys who make serious mistakes.
Hank Asbill looked at what should a defense attorney do - he looked at issues of change of venue (are you leaving a more favorable judge?). He mentioned the Pepper case (see background here) as to whether the court could consider post-arrest variances. Things that were banned from the guidelines, now come back into the game. The panel ended on a somewhat humorous note - with the telling about an Israeli study that showed that favorable sentences were after the judge had eaten.
Bottom line - this was an incredible lineup of speakers, an incredible panel - hats off again to Kevin Napper (Carlton Fields) for putting this one together.
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?
April 13, 2011
The Raj Rajaratnam Trial
Contributing Blogger Sol Wisenberg posted here on the Raj Rajaratnam Trial. See also Floyd Norris, NYTimes, Why Is This Trial Happening? and David Stout, Main Justice, The Raj Watch: The Defense Wins One. Should We Care?
April 12, 2011
Why I Don't Care Too Much About Raj Rajaratnam's Trial
1. The case is not complex, legally or factually. It isn't even interesting, except for John Dowd's Charles Laughton routine. Nor are the issues novel. The evidence against the defendant is overwhelming. The resources spent on the prosecution are wildly out of proportion to the harm caused by insider trading.
2. Contrary to popular myth, fueled by the press, insider trading is not notoriously difficult to prosecute. It is notoriously easy to detect and prosecute. Most people caught at it plead guilty.
3. Nineteen of the 26 charged defendants pled guilty. Tape-recorded conversations establish both insider trading and co-conspirator awareness that insider trading is illegal. This is hardly surprising. There has long been acute awareness of insider trading's illegality within the financial community. That's why people whisper on the telephone, erase emails, hammer up laptops, and go out at 2:00 in the morning to throw away hard drives.
4. The case will not be won because the prosecutors pulled all-nighters in the war room. The case will be won because the prosecutors got a Title III Order and secretly recorded the hell out of everybody.
5. If the government loses this case, the prosecutors should rend their garments and put on sackcloth and ashes. Really. Acquittal will only come through jury nullification or confusion.
6. John Dowd is in the catbird seat. If Rajaratnam is found guilty, it's no big deal, because everyone in the defense bar expects it. If Rajaratnam is acquitted, Dowd is a magician. Meanwhile, Dowd gets to order around seven Akin Gump colleagues and perfect that Charles Laughton imitation. Not a bad gig.
February 20, 2011
A Tale of Two Plea Agreements
Thursday's Wall Street Journal has a fascinating piece here by Steve Eder, Michael Rothfeld, and Jenny Strasburg on the friendship, between Donald Longueuil and Noah Freeman, that was shattered by the SDNY's insider trading probe. As the white collar world now knows, Freeman secretly recorded Longueuil. Longueuil's damaging admissions were captured, quoted in the criminal complaint against Longueuil and Samir Barai, and splashed across the headlines. Freeman has pled guilty and his plea agreement is publicly available.
I thought it might be interesting to compare Freeman's plea agreement to that of Danielle Chiesi, who recently pled guilty in the Raj Rajaratnam case. Chiesi has not agreed to cooperate against Rajaratnam as part of her deal, but Freeman has agreed to cooperate with the government against Longueuil. The Noah Freeman Plea Agreement is a classic, bare bones, SDNY white collar plea deal. Unlike the vast majority of federal criminal plea agreements in other jurisdictions, the Freeman agreement contains no Sentencing Guidelines calculations or stipulations. Freeman agrees to plead to two felony counts--securities fraud and conspiracy to commit wire and securities fraud. The maximum statutory term for those two counts combined is 25 years. Freeman agrees to pay restitution and to forfeit proceeds traceable to the charged offenses. The government agrees not to prosecute him further, except for tax crimes, and to recommend a Section 5K1.1 downward departure if he continues to truthfully cooperate. And that's about it.
Why is the agreement structured this way? Because SDNY prosecutors do not want want to put anything into the agreement which would indicate to a jury what actual sentence Freeman might get. If hard Guidelines numbers were put into the agreement, even as non-binding stipulations, Longueuil's attorney could compare those numbers, during Freeman's cross-examination, to the stratospherically higher Guidelines sentence Freeman would have received sans cooperation. Now, when Freeman takes the stand against his former friend, he can truthfully tell the jury that he has no idea what sentence he will ultimately receive. Sure, he wants a light sentence or probation, but all he knows is that he is looking at a statutory max of 25 years and some kind of 5K1.1 motion if he tells the truth.
And what is Freeman's attorney told by the prosecutors, or what does the attorney already know without being told if he or she has practiced long enough in the SDNY? "Trust us. We are not going to promise your guy anything other than a 5K1.1, but if you look at what past white collar targets have received when they came in early and cooperated, you will see that we treated them fairly. Many of them received probation or light sentences. By the way--if you come in on the eve of trial, don't expect to be treated as well." The defense attorney relays this information in some form or another to the client and tells the client that there is no guarantee. He also tells the client that the people who came in early and cut plea deals in the World Com case got probation or light sentences. That fellow who came in right before trial got five years. The guy who went to trial and lost got hit with 25. The client ususally takes the deal. (Who wants to roll the dice with those odds?) It all makes for a much cleaner trial and cross-examination in the government's view.
Contrast this with Chiesi whom the government does not need and who litigated her case like crazy almost until the eve of trial. The Danielle Chiesi Plea Agreement is highly structured and much more like those you will see in other parts of the country. Chiesi pled to three conspiracy counts, each carrying a five year max. The government and Chiesi stipulated as to the appropriate version of the Guidelines, the Guidelines section applicable to her conduct, the base offense level, the adjusted offense level based on an agreed-upon amount of gain, and Chiesi's acceptance of responsibility. The parties stipulated that Chiesi's Guidelines offense level is 21, her criminal history category is I, and her Guidelines sentencing range is 37-46 months. Either side is free to argue for a Booker downward variance, but neither side can argue for an upward or downward Guidelines departure or adjustment unless it is specifically called for in the agreement. Because the prosecutors do not particularly need Chiesi, they are not worried about how her 37-46 month range compares to what her range would have been sans cooperation.
In one of those delightful traditions peculiar to the SDNY, neither of these plea agreements has been publicly filed with the appropriate district court, although neither agreement is under seal. This is insane. Jason Pflaum's plea agreement is virtually identical to Freeman's. Pflaum consensually monitored the conversations/messages of Sam Barai and is expected to testify against Barai and others.
January 07, 2011
Bill Black Sounds The Toscin: Whatever Happened To Prosecuting Real Fraud?
Okay, let me take off my white collar defense attorney hat and put on my former prosecutor hat for a minute. Call it my citizenship hat. Don't most of us want real, unadulterated big-time crooks to be investigated and, where appropriate, charged? Where are all the investigations and prosecutions of the accounting control fraud that caused one of the greatest recessions in U.S. history? You know, the current recession.
Back in the late 1980s, when the S&L Crisis hit and the Dallas-based S&L Task Force was formed, federal law enforcement officials quickly realized that, in many instances, colossal fraud had been committed by the very players who controlled the S&Ls. The S&L fraud was overwhelmingly based on sham transactions and sham accounting for those transactions. Massive resources were committed to investigating and prosecuting the S&L fraud. It was understood that the crooked players had hijacked their S&Ls and defrauded depositors and/or the FSLIC. This rather elementary distinction between the savings and loan as an institution and the fraudsters who controlled it was grasped by AUSAs and effectively conveyed to juries across the land.
Nothing like this is happening today with respect to the federal government’s investigation of the housing bubble, liars’ loans, and Wall Street's subprime lending scandal. The overwhelming number of investigations and prosecutions seem to be focused on piker fraudsters—corrupt individual borrowers or mortgage brokers. These cases are easy pickings, but do not get to the massive fraud that clearly permeated the entire financial system.
Professor William Black, of Keating Five fame, has written a scathing piece all about this for the Huffington Post. Here it is. Among Black's revelations? "During the current crisis the OCC and the OTS - combined - made zero criminal referrals." Astounding. These two agencies accounted for thousands of criminal referrals per year during the S&L Task Force years. More fundamentally, Black argues that today's federal prosecutorial authorities do not comprehend that individuals in control of an institution can have an incentive to engage in short-term fraud that enriches them individually while destroying the long-term prospects of the institution and the larger economy.
Nobody should be charged with a white collar crime unless the crime is serious and the prosecution believes in good faith that a jury will find guilt beyond a reasonable doubt. But how about a substantive investigative effort, including commitment of appropriate resources? Why are such huge resources being spent on dubious endeavors like insider trading and FCPA enforcement, while elite financial control fraud goes largely unaddressed? Professor Black's piece is highly recommended reading.
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 04, 2010
What Is Insider Trading?
A Fifth Circuit Court of Appeals decision in the case of Securities Exchange Commission v. Mark Cuban ("a well known entrepreneur and current owner of the Dallas Mavericks and Landmark theaters) offers an interesting discussion of the scope of liability under the misappropriation theory, Unlike the district court that had dismissed the case, the fifth circuit elected to vacate and remand the case for further proceedings. Cuban was alleged to have "received confidential information from the CEO of Mamma.com, a Canadian search engine company in which Cuban was a large minority stakeholder. The court looking at the allegations from only the perspective of the SEC said that Cuban allegedly had "agreed to keep the information confidential, and acknowledged he could not trade on the information." The issue for the court was whether "a simple confidentiality agreement [was sufficient] to create a duty to disclose or abstain from trading under the securities laws?"
The Fifth Circuit stated that "[t]he allegations, taken in their entirety, provide more than a plausible basis to find that the understanding between the CEO and Cuban was that he was not to trade, that it was more than a simple confidentiality agreement." The court noted that "[g]iven the paucity of jurisprudence on the question of what constitutes a relationship of 'trust and confidence' and the inherently fact-bound nature of determining whether such a duty exists, we decline to first determine or place our thumb on the scale in the district court’s determination of its presence or to now draw the contours of any liability that it might bring, including the force of Rule 10b5-2(b)(1)." (citations omitted). So, the bottom line is that we have a lot more to learn about what constitutes insider trading.