Thursday, June 9, 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.
Sunday, May 15, 2011
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)
Wednesday, May 11, 2011
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.
Friday, May 6, 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
Thursday, May 5, 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.
Thursday, April 28, 2011
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?
Wednesday, April 13, 2011
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?
Tuesday, April 12, 2011
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.
Sunday, February 20, 2011
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.
Friday, January 7, 2011
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.
Wednesday, December 1, 2010
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.
Thursday, November 4, 2010
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.
Wednesday, November 3, 2010
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
Monday, October 4, 2010
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.
Thursday, July 22, 2010
Tuesday, July 20, 2010
Fabrice Tourre's Answer has been filed in SEC v. Goldman, Sachs & Co. and Fabrice Tourre. Among other things, Tourre contends that neither he nor Goldman "had a duty to disclose any allegedly omitted information" and that the ABACUS 2007-AC1 offering materials "expressly disclosed that no one was purchasing notes in the equity tranche of the transaction."
Saturday, July 17, 2010
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.
Thursday, July 15, 2010
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."
Saturday, July 10, 2010
I wrote here last week about the Second Circuit's opinion in United States v. Kaiser, which overturned a long line of Second Circuit precedent establishing that willfulness in the context of criminal Exchange Act prosecutions requires the government to prove a defendant's awareness of the general unlawfulness of his/her conduct under the securities laws. I pledged to post again and focus a little more on the specifics of the opinion.
The Kaiser Court states that "[m]ore recently, we seemed to endorse a higher standard for willfulness in insider trading cases." This is misleading on several counts.
First, the higher standard for willfulness in criminal cases brought under the Exchange Act was established 40 years ago in United States v. Peltz, 433 F.2d 48 (2nd Cir. 1970). Since when is an opinion from 40 years ago considered recent? Peltz is older that any of the opinions cited by the Court in support of the lower standard of proof.
Second, not one of the higher standard cases cited by the Court explicitly confines the higher standard of proof to insider trading cases. Indeed, Peltz itself was not an insider trading case.
Third, the Court ignored published and unpublished Second Circuit case law that unequivocally applies the higher standard outside of the insider trading context. See United States v. Becker, 502 F.3d 122 (2nd. Cir. 2007); United States v. Schlisser, 168 Fed. Appx. 483 (2nd Cir. 2006) (unpublished).
The Kaiser Court states that "Unlike securities fraud, insider trading does not necessarily involve deception, and it is easy to imagine an insider trader who receives a tip and is unaware that his conduct was illegal and therefore wrongful." (emphasis added).
First, insider trading is quintessentially a species of securities fraud. Most insider trading cases are brought under Section 10(b) of the Exchange Act and SEC Rule 10b-5. These are securities fraud provisions by definition and Rule 10b-5 is well known as the classic catch-all securities fraud regulation. As the Supreme Court stated in Chiarella v. United States, "Section 10(b) is aptly described as a catch-all provision, but what it catches must be fraud." 445 U.S.222, 234-35 (1980).
Second, the essence of insider trading is fraudulent deception through failure to disclose. What Section 10(b) of the Exchange Act outlaws on its face is a "manipulative or deceptive device or contrivance." The Supreme Court in designating insider trading a "manipulative device" has stated that inside traders "deal in deception." See United States v. O'Hagan, 521 U.S. 642, 653 (1997). In fact, all insider trading prohibited by the criminal law involves deception of some party or parties by the inside trader.
The Kaiser Court also at numerous points conflates, deliberately or negligently, case law discussing Exchange Act Section 32(a)'s willfulness requirement with case law discussing Section 32(a)'s provision that "no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation." As noted in my prior post, the Second Circuit precedent does not hold that the government must establish the defendant's knowledge of the particular rule, regulation, or statute that he/she has allegedly violated in order to prove willfulness under Section 32(a) the Exchange Act. But the government must prove the defendant's knowledge that his/her conduct was illegal in general or "wrongful under the securities laws."
As a general proposition in the Second Circuit, one panel cannot overturn another panel's recent precedent. Here, the Kaiser panel appears to have overturned recent and longstanding precedent of myriad other panels. Maybe the higher willfulness standard under Section 32(a) should go. Clearly, the case law on this issue has not always been clear or entirely consistent. But the bench and bar deserved better here.
Saturday, July 3, 2010
GUEST BLOGGER-SOLOMON L. WISENBERG
Former U.S. FoodService ("USF") purchasing and marketing chief Mark Kaiser's convictions on charges of conspiracy and securities fraud were reversed on Thursday, and the case was remanded for a new trial. The Second Circuit's opinion is here. The reversal was based on Judge Griesa's faulty charge on conscious avoidance which was held to constitute plain error. Judge Griesa's conscious avoidance jury instruction did not contain two elements that the Second Circuit has repeatedly stated are necessary: "that knowledge of the existence of a particular fact is established (1) if a person is aware of a high probability of its existence, (2) unless he actually believes that it does not exist." When Judge Griesa suggested sua sponte that a conscious avoidance charge was appropriate, the government reminded him that the two elements must be included, but they did not make their way into the final instruction. Although the defense did not object to the conscious avoidance charge in its final form, the law is so settled on this point that the Second Circuit had little difficulty finding plain error. Failure to include these two limiting elements in a conscious avoidance charge is a longstanding pet peeve of the Second Circuit.
Kaiser also complained that Judge Griesa's instruction on willfulness did not inform the jury that willfulness required knowledge of illegality. Under 15 U.S.C. Section 78ff(a), a/k/a Section 32(a) of the Exchange Act, "[a]ny person who willfully violates any provision of this chapter...or any rule or regulation thereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter, or any person who willfully and knowingly makes, or causes to be made, any statement in any application, report, or document required to be filed under this chapter or any rule or regulation thereunder...which statement was false or misleading with respect to any material fact, shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both."
A long line of Second Circuit precedent, going back at least to United States v. Dixon and reconfirmed in United States v. Cassese, has established that willfulness in the context of criminal Exchange Act prosecutions requires the government to prove a defendant's awareness of the general unlawfulness of his conduct under the securities laws. To paraphrase Senator McCarthy, virtually every schoolboy knows this, and the standard jury instruction to this effect is included in Judge Sand's widely used treatise, Modern Federal Jury Instructions-Criminal. The government does not have to prove the defendant's knowledge of the particular Exchange Act provision or SEC regulation or rule that he is charged with violating. (This would be inconsistent with Section 32(a)'s language that "no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation." If a defendant can be convicted, although not imprisoned, under Section 32(a), even if he had no knowledge of the specific SEC rule he was violating, it stands to reason that the willfulness required to convict under the statute does not encompass knowledge of these same specific rules and regulations.)
The standard Second Circuit Exchange Act criminal willfulness instruction sets a high scienter requirement for the government and can literally make the difference between a verdict of guilty or not guilty. The Kaiser Court examined Judge Griesa's willfulness instruction under plain error analysis. Although both the government and the defense submitted the standard Second Circuit charge requiring the government to prove Kaiser's knowledge that his conduct was illegal, Judge Griesa "did not give the proposed instructions, and did not rule on the proposed instructions before giving the charge, calling the practice 'a waste of time.'" In other words, Judge Griesa appeared to disregard the clear mandate of Federal Rule of Criminal Procedure 30(b). But neither party objected to the final charge, thereby bringing plain error review into play.
It is hard to read the Court's opinion on the willfulness issue as anything other than a fundamental misinterpretation of Second Circuit precedent in this area, complete with importation of contrary precedent from other circuits. (I will have more to say on the specifics of the opinion in a future post.) The really unfortunate thing about this decision is that it is unlikely to be taken up and reconsidered en banc. Why? The defendant already has his new trial. The government now has a ruling that significantly lessens its burden of proof in future criminal Exchange Act prosecutions.
P.S. - This case, reversing the conviction, was handled by Dan Brown of the law firm of Murphy & McGonigle. See also here. As noted by a comment to the blog - the case was argued, on behalf of Mr. Kaiser, by Alexandra A.E. Shapiro of Macht, Shapiro, Arato & Isserles LLP.