09 Dec

First Circuit Vacates SEC’s Order Against State Street Bond Fund Execs

The First Circuit Court of Appeals has reversed a Securities and Exchange Commission decision holding two former State Street executives liable for misleading investors about a State Street bond fund’s investment in subprime.  Holding that the Commission’s findings were not supported by substantial evidence, the Circuit Court vacated the Commission’s order, which had itself reversed an SEC administrative law judge’s decision that found in favor of the respondents.

With respect to State Street VP James Hopkins, who showed a slide to investors about “Typical Portfolio Exposures and Characteristics,” even assuming the slide was misleading, “evidence supporting the Commission’s finding of materiality was marginal.”  Writing that “context makes a difference,” the court said that the pre-prepared slide of clearly-labeled “typical” information “‘was not intended to present a complete picture of the fund,’ but rather [to] serve as ‘starting points,’ after which due diligence is performed.”  While the court declined to decide whether the level of sophistication of the fund’s investors “would have made any misrepresentation immaterial,” the court highlighted the fact that only one Commission witness supported the assertion that a reasonable investor would have viewed the undisclosed information as altering the total mix of information available to them.  Moreover, that witness was an investment consultant, and the Commission pointed “to no actual investors to support a finding of materiality.”

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06 Nov

Seventh Circuit Won’t Revisit Dismissal of Bebo’s Challenge to SEC Administrative Proceedings

The Seventh Circuit is standing by its decision affirming the dismissal of Laurie Bebo’s challenge to the SEC’s use of administrative courts on the ground that federal district courts lack subject matter jurisdiction to hear her claims.  Yesterday, the Seventh Circuit refused to grant rehearing or rehearing en banc of an August 2015 decision in which a panel of that court found that Bebo must let the administrative case against her play out before taking any appeal to the Court of Appeals rathering than going to the district court now in search of injunctive relief.

Our earlier posts on Bebo’s case can be read here.

22 Oct

SDNY USAO Drops Insider Trading Charges Against Michael Steinberg And Six Others

The U.S. Attorney’s Office for the Southern District of New York announced today that it plans to drop charges against Michael Steinberg and six cooperators who were caught up in an alleged insider trading scheme.  Steinberg’s 2014 conviction was already in danger of being overturned after the Second Circuit’s ruling on the requirements for tippee liability in U.S. v. Newman.  In a press release, U.S. Attorney Preet Bharara noted that “the decision to dismiss these charges follows the Second Circuit’s Newman decision, and also reflects determinations, after careful consideration of all of our prior insider trading prosecutions, that insisting on maintaining guilty pleas in the case would not be in the interests of justice.”

To see what the nolle prosequi papers look like dropping the case against Steinberg’s analyst, Jon Horvath, click here.  You can follow this link to read our earlier reporting on Steinberg’s legal battles.

22 Oct

Government Pursuit of Newman and Chiasson Comes to an End

Judge Shira Scheindlin granted summary judgment in favor of Todd Newman and Anthony Chiasson yesterday, closing the final door on the government’s unsuccessful pursuit of criminal and civil insider trading charges against the two hedge fund managers. Since we reported on Newman and Chiasson’s motion for summary judgment last week, the SEC wrote to Judge Scheindlin and said the Commission did not oppose the motion “[i]n light of the particular circumstance of this matter” although the SEC also stated that it did not agree with “all of the arguments contained in the Defendants’ memorandum of law.”

Our earlier reporting on the cases against Newman and Chiasson can be read here.

15 Oct

Newman and Chiasson Push for Quick Resolution of Parallel SEC Action

Now that the Supreme Court has declined to grant certiorari review of the Second Circuit’s decision dismissing criminal insider trading charges against them, Todd Newman and Anthony Chiasson want the SEC to drop its civil claims, too. The SEC’s complaint is based on the same allegations underlying the criminal action, namely that the defendants traded on material nonpublic information that made its way from two corporate insiders to the defendants after passing through a chain of other individuals. In seeking summary judgment, Newman and Chiasson contend that the Second Circuit found the government’s theory of the case insufficient as a matter of law and that Judge Scheindlin, who is presiding over the enforcement case, should do the same.

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09 Oct

Laurie Bebo Asks Seventh Circuit for Rehearing En Banc

Laurie Bebo wants the entire Seventh Circuit to grapple with the question of whether the judiciary or the executive branch should take the first look at her challenge to the constitutionality of SEC administrative proceedings.  In August, a panel of the court found that the SEC has exclusive jurisdiction over Bebo’s claim.  (In the interim, the SEC ALJ overseeing her case issued an initial decision fining Bebo $4.2 million for violations of the securities laws and imposing an officer and director bar.)  According to Bebo, the panel improperly focused on the fact that the SEC had already initiated proceedings against her by the time she filed her complaint.  That fact, she argues, “does not cause subject matter jurisdiction over a constitutional challenge to the existence of the entire administrative proceeding apparatus suddenly to vanish.” 

Bebo’s petition can be read here, along with our prior posts on her case.

Brune & Richard LLP represents a plaintiff making related arguments in a separate action.


05 Oct

Government Fails to Convince Supreme Court to Review Newman

The Supreme Court denied review today of U.S. v. Newman, the Second Circuit’s December 2014 decision throwing out insider trading charges against hedge fund managers Todd Newman and Anthony Chiasson.  That decision also called into question a number of other insider trading prosecutions in the Southern District of New York.

In declining to grant certiorari, the Supreme Court let stand the Second Circuit’s holding that in order to convict a remote tippee of insider trading, the government must prove that the tipper received a fairly robust “personal benefit” in exchange for the tip and that the tippee knew it.  According to the Second Circuit, the jury charge in Newman did not meet this standard.  The Court of Appeals also found that the government failed to present any evidence that Newman and Chiasson knew of any benefit provided to the insiders.

We’ll continue to report on what happens now that the Second Circuit’s decision is final.  Former SAC Capital portfolio manager Michael Steinberg, for example, is another remote tippee who was convicted pursuant to jury instructions that didn’t comport with Newman.  Steinberg’s own appeal has been held in abeyance by the Second Circuit since April, pending word on the issue from the Supreme Court.



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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