28 Jul
2014

SEC Turns to Section 20(b) of the Exchange Act to Pursue Defendant Who Drafted Press Release for Third Party

Last month, we reported on SEC Chair Mary Jo White’s remarks suggesting the agency may turn increasingly to Section 20(b) of the Securities Exchange Act of 1934 when pursuing individuals for alleged securities fraud. Although the section has rarely been invoked or interpreted, it allows the government to pursue defendants who use an innocent intermediary to engage in conduct that runs afoul of the Act. As we explained, Section 20(b) may hold particular appeal for regulators who must now pass higher hurdles to establish primary liability under Section 10(b) following the Supreme Court’s decision in Janus Capital Group v. First Derivative Traders, 121 S. Ct. 2295 (2011).

In what appears to be evidence of Ms. White’s plan being put into action, the SEC recently filed a complaint against Christopher Plummer, the purported operator of a retail electricity provider named Franklin Power & Light LLC. The complaint alleges that Plummer orchestrated a multi-part scam in which one of his corporate partners issued a series of press releases containing fraudulent misstatements, including that it was “developing solar energy farms through a joint venture with Plummer’s companies.” The SEC contends at the time the unnamed company “was in dire financial straights and lacked the financial or logistical capability . . . to develop the solar energy farms. . . . In fact, Company A had no operating business, no customers, and no revenue at all.”

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21 Jul
2014

Court Grants Broad Search Warrant for Individual’s Gmail Account As Part of Criminal Investigation

In a decision that diverges from other recent orders, Magistrate Judge Gabriel Gorenstein of the Southern District of New York has granted the government’s application for a broad search warrant allowing the government access to all records related to an individual’s Gmail account hosted by Google, including all emails and account information. The government sought access because it believes the individual has been using the account to engage in criminal activity. The warrant grants the government sweeping authority to review the entire account without any restrictions on the length or nature of the review. Recognizing that other courts have denied search warrants in similar circumstances, including the United States District Court for the District of Columbia and the District of Kansas, on Friday, Judge Gorenstein issued a lengthy opinion explaining the reasoning underlying his decision.

Judge Gorenstein’s opinion examines two central issues courts have faced when considering similar warrant requests: 1) “is it appropriate to issue a search warrant that allows the Government to obtain all emails in an account even though there is no probable cause to believe that the email account consists exclusively of emails that are within the categories of items to be seized under the search warrant?”; and 2) if delivery of the entire email account is permitted, “should the Court require that the Government follow certain protocols – whether as to length of search, manner of search, or length of retention of the emails- as a condition of obtaining the search warrant?”

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18 Jul
2014

Court Extends Stay of SEC Enforcement Action Against Rengan Rajaratnam Following Acquittal

Judge John Koeltl of the Southern District of New York has acted swiftly and granted the joint request of the SEC and Rengan Rajaratnam to extend the stay of the SEC’s enforcement action against Rajaratnam in light of the jury’s recent acquittal of Rajaratnam on criminal insider trading charges. The parties requested an extension of the stay, which was to expire yesterday, to see if they could resolve the parallel SEC matter. The court continued the stay for another sixty days, until September 15, 2014.

14 Jul
2014

Sam Wyly Defeats SEC Insider Trading Claim But Still Faces Penalties on Other Charges

Texas investor Sam Wyly and the estate of his deceased brother, Charles, have scored a victory in their long-running battle with the SEC. In May, a jury ruled in favor of the SEC on nine claims tied to the brothers’ use of offshore trusts to hide their ownership and trading in the securities of several publicly-held companies for which the Wylys sat on the boards of directors. One insider trading claim, however, had been severed from the trial after Judge Shira Scheindlin ruled that the SEC’s action for penalties on that claim were time barred and only potential equitable relief remained. Based on facts presented at the jury trial, Judge Scheindlin has now dismissed the remaining insider trading claim.

According to the SEC, the Wylys violated Section 10(b) of the Securities Exchange Act and Rule 10b-5 when several Isle of Man trusts they controlled took a long position in Sterling Software through certain equity swaps in October 1999. The SEC contends at the time of the swap agreements, the Wylys were in possession of material, non-public information – namely “that they – as Chairman and Vic-Chairman of Sterling Software – had agreed and resolved that the sale of Sterling Software to an external buyer should be pursued.” But Judge Scheindlin concluded “this information is not material as a matter of law and cannot be the basis for insider trading liability.”

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03 Jul
2014

Eleventh Circuit Limits Janus to Misstatement Cases Under SEC Rule 10b-5(b)

In Janus Capital Group v. First Derivative Traders, 131 S. Ct. 2296 (2011), the Supreme Court limited potential fraudulent statement liability under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 to defendants who actually made the statement – namely “the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” Since Janus was decided in 2011, lower courts have faced a number of questions about the breadth of the Court’s decision. These questions include whether or not Janus applies to criminal cases – the Fourth Circuit recently held that it does not – and whether it governs cases brought under Section 17(a) of the Securities Act of 1933, which is largely analogous to Section 10(b) but has different language than Rule 10b-5 and does not require proof of intent in certain circumstances.

Presumably trying to capitalize on favorable precedent, the SEC recently asked the Court of Appeals for the Eleventh Circuit to publish an opinion in SEC v. Monterosso that the appellate court originally issued in unpublished form back in March. On Monday, the court agreed, adding to the precedential jurisprudence that has been chipping away at Janus.

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02 Jul
2014

Regnan Rajaratnam Scores Major Defense Victory as Court Dismisses Insider Trading Counts; Only Conspiracy Count Remains

In a major defense victory, Judge Naomi Reice Buchwald dismissed the two remaining insider trading counts against Rengan Rajaratnam after more than two weeks of trial. Only one conspiracy count remains, and Rajaratnam contends that the government’s proof concerning that count should be limited too.

As Reuters reports, Judge Buchwald dismissed the two substantive securities fraud counts yesterday, both of which concerned trades in Clearwire Corp. that Rengan allegedly made on the basis of inside information obtained by his brother Raj. According to Judge Buchwald, the government failed to prove that “Rengan received confidential inside information from Raj, that Rengan traded on the basis of confidential information, or that Rengan had knowledge of any personal benefit bestowed upon [the tipper] in exchange for that information.” Although the Second Circuit has yet to decide whether the defendant’s knowledge of the tipper’s benefit is, in fact, a required element of the crime, “in an excess of caution” and to “avoid unnecessary litigation,” the government had asked the court to instruct the jury pursuant to the more onerous standard.

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19 Jun
2014

Judge Marrero Approves SAC Settlement But Suggests in Future SEC May Want to Wait and See Results of Parallel Criminal Cases Before Settling Enforcement Actions

Following the Second Circuit’s recent decision in SEC v. Citigroup, which clarified the standard district courts should use to review proposed consent judgments involving an enforcement agency, Judge Victor Marrero of the Southern District of New York has granted final approval of the SEC’s $600 million settlement with SAC Capital Advisors and affiliated entities. Judge Marrero had tentatively approved the settlement back in April 2013. The SEC’s case paralleled criminal actions brought against SAC and former portfolio manager Mathew Martoma in connection with insider trading in shares of Elan Corporation, plc and Wyeth. Both of those cases resulted in convictions.

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16 Jun
2014

Was Rengan Rajaratnam in Custody When He Flew with the FBI From Rio To New York?

What did Rengan Rajaratnam tell the FBI attaché who escorted him back from Brazil to face insider trading charges and under what circumstances did he talk? Defense counsel and prosecutors previewed their differing views on those subjects last week when Rajaratnam moved to preclude the government from offering his statements at trial. The controversy has arisen following Judge Naomi Reice Buchwald’s order permitting Rajaratnam to introduce evidence of his post-indictment return from Brazil “to demonstrate his consciousness of innocence.”

Rajaratnam was in Rio when he was indicted in March 2013. Rather than pursuing extradition, the government worked with his lawyers to arrange for his prompt return to the U.S. Before meeting the agent who would escort him on the flight, Rajaratnam signed a consent form expressing his desire to return to the U.S. “in the company of agents from the Federal Bureau of Investigation.” In the same form, he invoked his Fifth Amendment right not to speak to the agent accompanying him or to any other law enforcement personnel about the facts of the case, although he acknowledge that they could speak about travel logistics and other incidentals. He also waived his right to have his counsel present for purposes of such limited discussions. Accompanied by friends, Rajaratnam met a FBI legal attaché at the airport, who recorded the friends’ names and secured a seat next to Rajaratnam on the plane. After arriving at JFK, Rajaratnam was arrested.

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11 Jun
2014

Prosecutors Cannot Introduce Evidence About Unrelated Trades to Prove Insider Trading Case Against Rengan Rajaratnam

Rengan Rajaratnam is a week away from trial on charges that he conspired to commit securities fraud by trading on inside information about two corporations, AMD and Clearwire. Yesterday, Judge Naomi Reice Buchwald denied the government’s request to introduce evidence about Rajaratnam’s trading in shares of a third company, Akamai Technologies. The government wanted to use the Akamai trading either as direct evidence of the charged conspiracy or as “other act” evidence under Federal Rule of Evidence 404(b). Although Judge Buchwald stated it was “clear” Raj Rajaratnam – Rengan’s brother – “possessed and traded on the Akamai inside information,” she concluded “the Government’s theory that [Rengan] did so as well is based on circumstantial and speculative evidence.” In denying the government’s motion, she also granted Rengan’s motion to exclude evidence of the trading.

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