25 Sep

SEC Proposes Amended Rules of Practice That Expand Procedural Protections for Respondents

The contention that SEC administrative proceedings deny respondents due process has been an underlying theme in many of the recent federal court cases challenging the constitutionality of SEC enforcement actions, although the argument hasn’t gained as much traction as challenges to the propriety of the SEC’s appointment of administrative law judges.  Nonetheless, the SEC yesterday took steps to address some of the due process concerns that have been raised in proposed amendments to its Rules of Practice.  Among other things, the proposed rules would slow down the pace of enforcement actions, allow both respondents and the Division of Enforcement to take a limited number of depositions, and “clarify that hearsay may be admitted if it is relevant, material, and bears satisfactory indicia of reliability so that its use is fair.”

The public now has a chance to comment on the proposed changes.

Brune & Richard LLP currently represents a plaintiff in an action raising a similar constitutional challenge.

21 Sep

SEC Will Answer, Then Duka’s District Court Case Will Wait

In the wake of Judge Richard Berman’s refusal to stay his decision preliminarily enjoining the SEC from pursuing administrative charges against Barbara Duka, Judge Berman issued a follow-up order on Friday staying the rest of the case before him pending appellate review. Before the stay goes into effect, however, Judge Berman ordered the SEC to answer Duka’s complaint. After that, the parties will wait to hear what the Second Circuit has to say about the SEC’s appeal of the court’s preliminary injunction order.

18 Sep

In New York, Two Federal Courts Weigh In On SEC ALJ Litigation

Two stays — one granted and the other denied — made yesterday a big day in the SEC ALJ litigation that is spreading across the federal courts. In this wave of cases, individuals are challenging the constitutionality of administrative proceedings that the SEC has brought against them (see, for example, here, here and here).

In the first decision that came out, Judge Richard Berman denied the SEC’s motion to stay a preliminary injunction that he issued this summer enjoining the SEC’s administrative case against Barbara Duka. Duka has argued that the ALJ overseeing her case was not appointed in accordance with the Appointments Clause, and in reaching his decision Judge Berman signaled his agreement with her position. Judge Berman found that the SEC is unlikely to succeed on the merits because it has conceded that its ALJs “were not appointed by the President or the Commission,” and “respectfully, the SEC will not, in the Court’s view, be able to persuade the appellate courts that ALJs are not ‘inferior officers,’” subject to such appointment requirements.

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16 Sep

Mark Cuban Weighs in on SEC ALJ Controversy

Calling himself a “first-hand witness to and victim of SEC overreach,” Mark Cuban has filed an amicus brief opposing the SEC’s appeal of Judge Leigh Martin May’s decision preliminary enjoining the SEC’s administrative action against Charles Hill. The SEC alleges that Hill engaged in insider trading, but Judge May put the Commission’s case on hold after finding that Hill was likely to prove that SEC ALJs are appointed in an unconstitutional manner, an issue now making its way through several district and appellate courts.

Cuban, who beat SEC insider trading charges before a Texas federal jury in 2013, contends that his own experience gave him “a front-row perspective on the practical importance of the legal and constitutional issues at stake” in Hill’s case. Cuban claims that “his success depended on the procedural rules available to him, the independence of the judge enforcing those rules, and the independent fact-finding by the jury.” He argues that SEC ALJs are, in effect, beholden to their employer, and that the motion practice, discovery, and time for preparation that he received in federal court were integral to getting a fair trial.

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11 Sep

Judge Berman Notes Irony of SEC’s Request for Stay in Duka

The SEC wants to put on the brakes in its ongoing litigation with Barbara Duka, and the “irony” of the agency’s position wasn’t lost on Judge Richard Berman in an Order issued today. In August, Judge Berman preliminarily enjoined the SEC’s administrative case against Duka while the parties litigate the constitutionality of those proceedings. The SEC now plans to move for a stay of the case before Judge Berman pending appeal (except for its motion to stay the preliminary injunction) and wrote to the court yesterday for permission to discuss that motion at a conference scheduled for next week. According to the SEC, “Permitting the Second Circuit to address whether Plaintiff is likely to prevail on the merits (including whether this Court has jurisdiction) before the parties litigate this case to final judgment would serve the interests of judicial economy.”

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27 Aug

Seventh Circuit Says District Court Lacks Subject Matter Jurisdiction to Hear Bebo’s Challenge to SEC Administrative Action Against Her

The Court of Appeals for the Seventh Circuit has affirmed a district court decision dismissing Laurie Bebo’s case against the SEC for lack of subject matter jurisdiction. Bebo is now waiting for an SEC administrative law judge to issue an initial decision in the agency’s enforcement action against her. If the ALJ finds for the Division of Enforcement, Bebo can petition the SEC for review. After that, if the Commission issues a final order in favor of the the Division, 15 U.S.C. § 78y allows Bebo to seek review from a federal appellate court.

Rather than waiting for the administrative case and potential appeal to play out, Bebo sought injunctive relief in the Eastern District of Wisconsin. Bebo argued that Section 929P(a) of the Dodd-Frank Act was unconstitutional because it gave the SEC “unguided authority” to decide whether to pursue respondents administratively or in federal court, which provides greater procedural protections. She also argued that the agency’s administrative proceedings violate Article II of the U.S. Constitution because the SEC’s ALJs are “protected from removal by multiple layers of for-cause protection,” which “interferes with the President’s obligation to ensure the faithful execution of the laws.”

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26 Aug

Rajat Gupta Asks Second Circuit to Review Denial of Habeas Relief

Rajat Gupta filed a notice of appeal yesterday with the Second Circuit.  Gupta wants the appellate court to overturn Judge Jed Rakoff’s decision denying Gupta’s application for habeas relief from his 2012 conviction on insider trading charges. Gupta believes that Judge Rakoff failed to instruct the jury properly on the personal benefit requirement as articulated in U.S. v. Newman, an argument that the court rejected.  Newman, wrote Judge Rakoff, held “that a tippee, to be criminally liable, must know that the information provided to him by the tipper was a product of a fiduciary breach by the tipper. Such tippee knowledge is irrelevant to Gupta, a tipper.”

We will follow the appeal and report back on what effects, if any, Newman may have on individuals charged with providing tips rather than with trading on them. Our prior posts on the case can be read here.

20 Aug

Judge Berman Enters Preliminary Injunction Halting Administrative Case Against Duka

After amending her complaint to allege that the SEC’s administrative case against her violates the Appointments Clause of the Constitution because the SEC’s administrative law judges were not appointed by SEC Commissioners, Barbara Duka has succeeded in stopping the enforcement action against her, at least for now. Last spring, Judge Richard Berman had declined to grant injunctive relief after finding that Duka was unlikely to succeed on the merits of her claim, which at the time was premised on the argument that SEC administrative proceedings are unconstitutional because the agency’s ALJs enjoy too many layers tenure protection. But as the Appointments Clause argument gained traction in Georgia in Hill v. SEC, Duka filed an amended complaint incorporating that attack.

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19 Aug

Government Can’t Prove Hoskins Conspired to Violate FCPA Unless it Proves He Was Agent of Domestic Concern

Former Alstom executive Lawrence Hoskins has succeeded in precluding the government from prosecuting him under a theory of FCPA liability that would “be de-linked from proof that he was an agent of a domestic concern.” Hoskins moved to dismiss the first count of the third superseding indictment against him on the basis that the government charged a legally invalid theory, namely that “he could be criminally liable for conspiracy to violate the Foreign Corrupt Practices Act . . . even if the evidence does not establish that he was subject to criminal liability as a principal.” Hoskins has argued throughout the case that he is not covered by the statute because he was not an agent of the Connecticut-based Alstom subsidiary for which he allegedly arranged overseas bribes and hence was not an agent of a domestic concern.

Judge Janet Bond Arterton has now agreed with Hoskins, in part. Judge Arterton examined the text and structure of the FCPA, as well as the legislative history of the Act, and concluded that non-resident foreign nationals who are not agents of a domestic concern and do not commit acts while present in the United States cannot be found liable for violating the statute through a theory of accomplice liability. So, for example, the government cannot argue that Hoskins “could be liable for conspiracy even if he is not proved to [be] an agent of a domestic concern.” Since the government did allege agency in the third superseding indictment before arguing that it did not actually need to prove the relationship, Judge Arterton did not dismiss the count in its entirety. Instead, the count survives but the government’s more expansive interpretation was rejected.

Our prior reporting on the case can be read here.

30 Jul

Government Brings Newman to the Supreme Court

Two days shy of its August 1 deadline, the government has petitioned the Supreme Court for review of US v. Newman, the landmark case in which the Second Circuit held that tippees cannot be held liable for insider trading absent proof that they knew the tipper disclosed confidential information in exchange for a personal benefit. The Newman court also held that the requisite benefit cannot be inferred without “proof of a meaningful close personal relationship [between the tippee and the tipper] that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”

The government contends that this “unprecedented” ruling conflicts with the Supreme Court’s decision in Dirks v. SEC, 463 U.S. 646 (1983), “which did not require an ‘exchange’ to find liability for a gift of inside information and did not impose amorphous standards for the relationships that can support liability.” Instead, under Dirks “an insider personally benefits when he ‘makes a gift of confidential information to a trading relative or friend.’” According to the government, Newman’s “‘exchange’ formulation erases a form of personal benefit that [the Supreme] Court has specifically identified,” and “the entire ‘gift’ discussion in Dirks becomes superfluous.”

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