23 Feb
2015

SEC Says Newman Does Not Change Pleading Standard in Civil Cases

Trying to stop the spread of US v. Newman from affecting the pleading standard in civil insider trading actions, the SEC filed a brief last week opposing Dhia Jafar and Omar Nabulsi’s motion for reconsideration of Southern District of New York Judge J. Paul Oetken’s September 2014 denial of their motion to dismiss insider trading charges against them or, in the alternative, to modify the court’s asset freeze order. The defendants contend Newman constitutes a change in controlling law that calls for reconsideration of the court’s opinion. The SEC counters that Newman did not alter the standard for pleading tippee liability or freezing assets and “has no bearing on the Court’s September 2014 ruling.”

The SEC alleges Jafar and Nabulsi traded on inside information concerning two potential biotech deals in 2013, one involving Onyx Pharmaceuticals, Inc. and the other involving Life Technologies Corp. Both times, the defendants bought securities shortly before a Canadian journalist, appearing to rely on confidential information, published an article concerning the proposed transaction after which the price of the relevant security rose. “[A]lthough the SEC has not alleged the identity of the tipper or the specific content of the tip,” Judge Oetken wrote in his initial denial, the “two well-timed trades, in conjunction with [the journalist’s] well-timed articles . . . are a sufficient basis for the inference that [the journalist], or someone close to him, was feeding information to Jafar and Nabulsi.” The court also found that “[g]iven the strict confidentiality agreements in place, it is plausible to infer that any information leaked about the Life and Onyx negotiations was leaked in violation of a fiduciary duty” and the “nature of this information—a potential buyout that had not yet been reported in the news—strongly supports a plausible inference that Jafar and Nabulsi knew the information to be nonpublic and leaked in violation of a fiduciary duty.”

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17 Feb
2015

Martoma Attacks Numerous Aspects of His Conviction in Second Circuit Appeal

Mathew Martoma has appealed his insider trading conviction to the Second Circuit, joining the growing list of criminal defendants hoping the court’s decision in U.S. v. Newman defined the law on insider trading in a way that invalidates the charges against them. Martoma also raises a number of other arguments, including that the government’s decision to use a preemptory challenge to exclude the sole Indian-American venireperson from the jury after the court rejected the government’s for-cause challenge of the same man was impermissibly based on race and presents a basis for vacating the guilty verdict. He also argues Judge Gardephe erroneously included “gains of innocent investors” and trades by Steven A. Cohen when calculating the Guidelines sentencing range; resentencing would thus be required if Martoma’s conviction stands.

Martoma’s principal argument is that under the Second Circuit’s intervening decision in U.S. v. Newman, the evidence was not sufficient to convict him of tippee liability and the jury was incorrectly charged. According to Martoma, Newman altered the landscape of insider trading prosecutions by holding a tippee must know the tipper received a personal benefit in exchange for the inside information, and, more importantly for Martoma, “‘the personal benefit received in exchange for confidential information must be of some consequence’ to the tipper.” The mere fact of a casual friendship does not suffice where the government alleges only that the tipper acted improperly on account of a personal relationship with the tippee. Instead, the government must show a “‘meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.’”

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17 Feb
2015

Todd Newman Argues Second Circuit Should Not Revisit Decision Vacating His Conviction

Todd Newman filed a brief last week opposing the government’s request that a panel of the Second Circuit reconsider its decision to reverse his insider trading conviction or hold a rehearing en banc. The government, he says, makes a “critical concession” by failing to challenge the panel’s finding that a tippee must know that a tipper received a personal benefit in exchange for providing a tip. The government had argued throughout the trial and on appeal that such knowledge was not required, but it abandoned that position when seeking rehearing.

With the government having given up on that fight, Newman contends the panel’s determination the evidence was insufficient to find he knew the relevant insiders received a benefit in exchange for providing material non-public information is not appropriate for rehearing en banc “because there is no disputed legal issue that can form the basis of a Circuit conflict, nor is a fact-specific sufficiency determination an issue of exceptional importance.” Those are the two criteria the Federal Rules of Appellate Procedure require for en banc review. Newman argues the panel’s reconsideration of its decision would also be inappropriate because “when a conviction is reversed for insufficiency of the evidence, double jeopardy prohibits a retrial.” Although the government has argued that rehearing is permissible because of the panel’s “newly announced knowledge requirement,” Newman contends that “[t]here is nothing ‘new’ about the Panel’s knowledge of benefit holding; it is a straightforward application of the Supreme Court’s decision in Dirks.” According to Newman, the government is not entitled to a “do over” where it was on notice it could be required to prove knowledge after Newman argued the court should instruct the jury on such a requirement, recent case law required a finding of a personal benefit, and Judge Sullivan reserved decision on the issue earlier in the proceedings.

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09 Feb
2015

Seventh Circuit Condemns Government’s Entrapment of Pharma Exec James Barta

Last fall, immediately after hearing oral argument on James Barta’s appeal of his conviction for conspiracy to commit bribery, the Court of Appeals for the Seventh Circuit reversed the conviction and ordered his release from prison because the government had entrapped Barta. The court has now issued an opinion explaining the reasons behind its decision. It provides a cautionary tale for prosecutors and agents looking to shore up their evidence while pushing innocent individuals into criminal conduct.

James Barta is a founder and owner of Sav-Rx, which provides prescription benefit management services primarily to unions. Barta became a target of a FBI sting operation through his friend, Gustavo Buenrostro. An undercover FBI agent approached Buenrostro about paying a bribe to a corrupt Los Angeles County official – whom Buenrostro did not know was fictitious – in exchange for approval of a contract with the county. Barta was eventually drawn into the negotiations, although from the outset he expressed uncertainty about Sav-Rx’s participation. Nonetheless, Buenrostro assured the undercover agent “that Barta would commit to the deal in the end . . . because Barta ‘wants to help me get back on my feet.’” Eventually, after numerous calls and emails from the FBI agent to Barta went unanswered, Buenrostro and the agent traveled to Barta’s home state of Nebraska and ultimately secured a $6,500 check to pay the fictional official. “At this final meeting, Buenrostro joked with Barta (ironically, in [the Seventh Circuit’s] view of the case) that, ‘It took a lot to get you here.’”

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27 Jan
2015

Federal Court in California Denies Motion to Dismiss Insider Trading Charges Based on Newman

The Second Circuit’s decision in United States v. Newman continues to have a ripple effect. On Friday, a federal judge in California denied a motion to dismiss insider trading charges based on Newman. The California ruling came in the criminal prosecution of James Mazzo, the CEO and Chairman of the Board of a medical device company, for insider trading. Mazzo allegedly provided material non-public information about potential mergers to a friend, former Baltimore Orioles player Doug DeCinces, who traded on the information.

Mazzo moved to dismiss the charges arguing that prosecutors would not be able to prove he engaged in insider trading following Newman. Mazzo contended Newman forces prosecutors to establish that alleged tippers provided material non-public information to obtain a “personal benefit” greater than the “ephemeral benefit” of friendship. The indictment, Mazzo argued, alleges he and DeCinces were friends, but fails to allege facts suggesting he provided information to receive a “personal benefit” other than continued friendship.

Prosecutors opposed the motion on numerous grounds. Principally, they argued Newman did not apply to any of the charges against Mazzo because it concerned liability for downstream tippees, and he was charged as a tipper. The Supreme Court has established the elements of tipper liability, they asserted, and Newman did not alter or add to those elements. Prosecutors also argued that the indictment satisfied Newman, because its allegations, which must be accepted as true in evaluating a motion to dismiss, alleged that Mazzo provided information for a “personal benefit.”

The Court held a hearing on Mazzo’s motion and took it under submission before denying the motion without a written opinion. We will continue to monitor the effect of Newman.

26 Jan
2015

U.S. Attorney’s Office Says Second Circuit Got it Wrong in Newman

The U.S. Attorney’s Office for the Southern District of New York has decided to challenge the Second Circuit’s recent decision in U.S. v. Newman leading to the dismissal of insider trading charges against Todd Newman and Anthony Chiasson. Late Friday, prosecutors filed a motion asking the Newman panel to reconsider the case or for en banc review. Newman narrowed the scope of tippee liability for insider trading by requiring the government prove a defendant knew that the tipper provided the information in exchange for a personal benefit. At the same time, the Court of Appeals tightened the definition of a personal benefit, undermining cases where the government had relied on evidence of mere friendship or the exchange of career advice as proof the tipper provided information to the tippee illegally.

Notably, the government has chosen not to challenge directly the Second Circuit’s ruling that to establish tippee liability the government must prove “the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.” Instead, the government focuses its challenge on the court’s narrow definition of personal benefit. In Newman, the Second Circuit held the government “may not prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature,” but instead must show the disclosure of material non-public information was for pecuniary gain or was part of a “meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” According to the government, this ruling conflicts with the Supreme Court’s decision in Dirks v. SEC, 463 U.S. 646 (1983), and subsequent cases. The government says that under Dirks, the benefit required “need not be monetary or even tangible” and consistent with this standard, the Second Circuit “has repeatedly recognized that the definition of benefit is ‘broad’ and the ‘evidentiary bar is not a high one.’” The government argues that Newman’s more stringent standard “effectively upended Dirks” by “apparently eliminating Dirks’ express recognition that an improper but uncompensated gift of information by an insider suffices.”

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26 Jan
2015

Former S&P Employee Barbara Duka Wants to File TRO to Halt SEC Case

As we reported recently, former Standard & Poor’s employee Barbara Duka had sought to stave off SEC administrative charges by seeking an injunction in the Southern District of New York on the ground that the SEC’s administrative law judge regime is unconstitutional. But shortly after she filed her complaint, the SEC went ahead and brought its case. Having failed to prevent the SEC  from filing administrative securities fraud charges against her, Duka has asked Judge Richard M. Berman for permission to seek emergency relief “restraining and enjoining the SEC from continuing and prosecuting the [administrative case] during the pendency of this action.”

Judge Berman scheduled a conference for January 27 to discuss the motion.

22 Jan
2015

Judge Carter Tosses Four Insider Trading Guilty Pleas in Durant Case Finding Them Insufficient Post-Newman

The effects of the Second Circuit’s decision in U.S. v. Newman have begun to emerge in the Southern District of New York. Today, Judge Andrew L. Carter, Jr. vacated four guilty pleas in U.S. v. Durant, the insider trading case on which we reported last week. Judge Carter ruled that the Newman decision and its heightened standard for tippee liability applies to insider trading cases based on misappropriation cases, in addition to cases based on the classical theory of insider trading.

Under Newman, to establish tippee liability, the government must prove that the defendant knew the tipper received a personal benefit in exchange for the inside information. But in pleading guilty, the defendants had not admitted to such knowledge. Although prosecutors argued Newman did not undermine the validity of the pleas because Newman was decided under the classical theory of insider trading and Durant is a misappropriation case, Judge Carter rejected this argument. Quoting Newman, he ruled “the controlling rule of law in the Second Circuit is that ‘the elements of tipping liability are the same, regardless of whether the tipper’s duty arises under the ‘classical’ or the ‘misappropriation’ theory.” Judge Carter was not swayed by the government’s contention that the Second Circuit’s articulation of identical elements was at best dicta. Citing the Court of Appeals’ “meticulous and conscientious effort . . . to clarify the state of insider-trading law,” he concluded that “even assuming arguendo that the Government is correct that the cited language in Newman is dicta, it is not just any dicta, but emphatic dicta which must be given the utmost consideration.”

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21 Jan
2015

SEC Beats Former S&P Employee to the Punch with Administrative Proceeding

Former S&P employee Barbara Duka has failed to prevent the SEC from filing administrative charges against her. Last week, Duka asked Judge Richard M. Berman of the Southern District of New York to enjoin the SEC from bringing the anticipated administrative action, arguing like others before her that the “statutory and regulatory provisions providing for the position and tenure protection of the SEC ALJ” are unconstitutional. As we have explained, that argument is premised on the rule that as United States officers, “SEC ALJs may not be protected by more than one layer of tenure protection” because such a regime “contravenes the President’s ‘constitutional obligation to ensure the faithful execution of the laws.’”

But earlier today, before Judge Berman took any action on Duka’s application for declaratory and injunctive relief, the SEC filed its administrative case against Duka, who oversaw analytic groups at S&P that formulated ratings of CMBS new issuance transactions and performed ratings surveillance on previously-issued securities. The SEC alleges Duka committed securities fraud by, among other things, loosening the rating agency’s methodology for calculating debt service coverage ratio “to make S&P’s ratings more attractive to fee-paying CMBS issuers.” At the same time, Duka’s group published several reports that “failed to disclose its relaxed methodology for calculating DSCRs. The reports instead represented S&P used a more conservative methodology for calculating DSCRs when rating the transactions. Market participants were therefore misled into believing that the ratings at issue were more conservative than they actually were,” according to regulators.

Simultaneously with filing its action against Duka, the SEC announced today it had settled broader, related charges against S&P, which has agreed to pay $58 million, plus additional money to state regulators, without admitting or denying the allegations.

15 Jan
2015

SDNY Prosecutors Try to Preserve Pre-Newman Insider Trading Pleas

Following the Second Circuit’s recent insider trading decision in U.S. v. Newman, there was much speculation about its potential effect on pending insider trading cases and prior guilty pleas. Earlier this week, prosecutors in the Southern District of New York filed a brief in another insider trading case, U.S. v. Durant, asserting that Newman “dramatically . . . departs from thirty years of controlling Supreme Court authority and . . . legalizes manipulative and deceptive conduct that no court has ever sanctioned” and does not affect the Durant case. As soon as the Second Circuit reversed the convictions of Todd Newman and Anthony Chiasson, the parties in Durant notified Judge Andrew L. Carter, Jr. that the decision raised potential issues for Benjamin Durant’s upcoming trial. Those issues quickly grew to encompass whether the decision affected the validity of four guilty pleas already entered in the case.

Newman was brought under the classical theory of insider trading in which the fraudulent act “is the breach by an insider of a fiduciary duty owed to shareholders, namely the duty not take advantage of ‘information intended to be available only for a corporate purpose and not for the personal benefit of anyone.’” Durant, in contrast, is premised on the misappropriation theory, which applies where “the requisite fraud or deception is located in the breach of a duty owed to a different principal—a source of confidential information, most frequently an employer, but sometimes other individuals or entities to which a duty of trust and confidence is owed.” According to the government, Durant and three of his co-defendants were working as stockbrokers when another defendant, Trent Martin, told his roommate about IBM’s impending acquisition of SPPS, Inc. According to prosecutors, Martin learned about the takeover from his friend, “Attorney-I,” who was working on the acquisition at a New York-based law firm. All of the defendants then proceeded to trade on the nonpublic information, the government says, which Martin supplied in breach of the duty of trust and confidence that he owed to his friend.

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