29 Aug
2014

Dr. Farid Fata Moves to Suppress Evidence Gathered from Search of Email Account

Dr. Farid Fata, who was indicted in the Eastern District of Michigan after he allegedly billed Medicare for patients’ medically unnecessary cancer treatments, has moved to suppress evidence gathered from his personal email account. Fata argues that a search warrant issued to Microsoft seeking “[a]ll stored electronic mail” and certain associated data from his Hotmail account was overbroad. Although Fata concedes that “[a]rguably, the allegations of the [affidavit in support of the warrant application] do provide probable cause to believe that at least some evidence of some criminal conduct would be contained in the emails sought,” he says the “difficulty with the affidavit, and with the warrant predicated on its allegations, is the breadth of the search they contemplate.”

Fata’s motion is based on the Fourth Amendment requirement that a warrant “particularly describe[e] the . . . things to be seized,” preventing the government from engaging in the type of “wide-ranging rummaging searches” that violate “the Constitution’s proscription against unreasonable searches and seizures.” Fata argues the search authorized here, one through all of his emails, is analogous to the type of “all records” searches of a business “that are ordinarily understood to be constitutionally overbroad and infirm unless ‘the government establishes probable cause to believe that the entire business is merely a scheme to defraud or that all of the business’s records are likely to evidence criminal activity.’” According to Fata, no facts alleged in the affidavit support such a wide-ranging search. Instead, it “would not have been a difficult task to limit the scope of the e-mail search to match the limited scope of the showing of probable cause. Easily searchable, filterable subject line and ‘header’ information would have allowed the searchers to retrieve only communications which pertain to particularly pertinent matters, came from or were sent to particular persons or places, and otherwise to narrow the scope of the intrusion.” Absent any such limitations, Fata claims the warrant violates the Fourth Amendment’s particularity requirement and the fruits of the search must be suppressed.

22 Aug
2014

Esquenazi and Rodriguez Ask Supreme Court to Review “We-Know-It-When-We-See-It” Approach to FCPA Interpretation

Two owners of a Miami-based telecomm company who were convicted of violating the Foreign Corrupt Practices Act for paying kickbacks to employees of a Haitian telecomm company have asked the Supreme Court to reverse their convictions. Joel Esquenazi and Carlos Rodriguez argue the Court of Appeals for the Eleventh Circuit got it wrong when it upheld the government’s “excessively broad . . . interpretation of who is considered to be a ‘foreign official’” for purposes of outlawing certain payments under the anti-bribery provisions of the FCPA. According to Esquenazi and Rodriguez the Act was intended to criminalize payments only “to a narrow recipient category of traditional government officials performing official or government functions.”

The FCPA “prohibits individuals and companies from corruptly paying anything of value to a ‘foreign official’ in order to obtain or retain business.” The Act, in turn, defines a “foreign official” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The Act, however, does not define “instrumentality.” In Esquenazi and Rodriguez’s case, the alleged instrumentality was a company that “‘belonged to’ the Bank of the Republic of Haiti,” which, according to a declaration filed by the Haitian Minister of Justice in the trial court, is “an institution of the Haitian state.”

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21 Aug
2014

Anthony Chiasson Wants SEC to Postpone Any Industry Bar Pending Outcome of Criminal Appeal

Anthony Chiasson is one of many people anxiously awaiting the Second Circuit’s decision on the validity of his 2012 insider trading conviction in United States v. Chiasson and Newman. Chiasson, a co-founder of Level Global, and his co-defendant Todd Newman, both downstream tippees, have argued that United States District Court Judge Richard Sullivan erred by failing to require the government to prove they knew that the corporate insiders who provided material non-public information did so in exchange for a personal benefit. In addition to his criminal conviction, Chiasson is also facing a permanent bar from the securities industry. Just days before the Second Circuit heard oral argument on the “knowledge of personal benefit” issue, an SEC administrative law judge recommended the bar based on Chiasson’s criminal conviction. Chiasson has now asked the SEC to reverse the recommendation with instructions to stay the administrative case until the criminal appeal is resolved.

Although it may not be uncommon for an appeal to be pending at the same time an industry bar is imposed in a parallel administrative action, Chiasson argues his case is unique because “the landscape of [his] matter changed in the days following the ALJ’s ill-timed Initial Decision.” First, “the Second Circuit sharply questioned the government’s interpretation of the law governing insider trading” at oral argument. Then, “the legal community reacted [to the argument] in a manner that supports deferring” any bar. Chiasson points to the SEC’s Division of Enforcement’s agreement to stay its case against SAC Capital portfolio manager Michael Steinberg pending the outcome of the Chiasson appeal because “the panel’s questions appeared to express skepticism as to the sufficiency of Judge Sullivan’s jury instructions regarding downstream tippees” and similar instructions were given in Steinberg’s criminal case. The U.S. Attorney’s Office also sought to stay the SEC’s administrative action against SAC Capital founder Steven A. Cohen, whom the SEC charged with failing to supervise Steinberg and fellow portfolio manager Mathew Martoma.

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20 Aug
2014

Mathew Martoma Claims Prosecutors “Infected the Proceedings and Prevented a Fair Trial”

Former SAC Capital portfolio manager Mathew Martoma continues to press his case to overturn the jury’s insider trading verdict against him or to get a new trial. In a recent letter to Judge Paul G. Gardephe, Martoma argues, among other things, that prosecutors deprived him “of his right to a fair trial through pre-trial statements that broadcast evidence ultimately excluded from the trial, perpetuated factual inaccuracies, and used emotionally and politically charged language to set Mr. Martoma apart from other finance professionals as the poster-child of the privileged Wall Street investor who stopped at nothing to line his pockets.” Martoma also asserts the “Government’s (largely false) rhetoric chilled and intimidated potential witnesses who could have testified on Mr. Martoma’s behalf.”

Martoma cites the experience of Rene Shen, a healthcare investor and defense witness “who testified that Dr. Gilman shared with him information about the Phase II bapi trial that was substantially similar (if not identical) to information that Dr. Gilman supposedly shared with Mr. Martoma.” Such testimony supported Martoma’s theory that information he allegedly received from Gilman was not material or non-public. The government’s response to Shen’s testimony “was to suggest that Mr. Shen also may have received inside information.” According to Martoma, other potential defense witnesses “particularly investors who consulted with Dr. Gilman (or Dr. Ross) – likely were scared off by the fear that they would be subject to similar accusations and innuendo by the Government, as well as the fear of the reputational consequences of testifying on behalf of a defendant who had been so thoroughly and publicly maligned” by prosecutors.

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12 Aug
2014

Brokerage Firm Founder Faces Criminal and Civil Charges for Falsifying Records and Obstruction

The SEC and the United States Attorney’s Office have filed parallel administrative and criminal proceedings against Charles Moore, the president of registered broker-dealer Crucible Capital Group, for falsely reporting Crucible’s net capital to the SEC, falsifying records to hide Crucible’s true financial position, and obstructing the SEC’s examination of Crucible’s books and records. The SEC has also brought charges against Crucible Capital.

As a registered broker-dealer, Crucible risks losing its registration if it fails to file a monthly report with the SEC indicating it has a minimum amount of net capital. The SEC and the USAO allege that from December 2012 to September 2013, Crucible had negative net capital but each month falsely reported it had more than the $5,000 necessary to maintain its registration. Crucible allegedly omitted from its net capital calculation liabilities it attempted to shift onto a shell corporation Moore also owned. The SEC contends Crucible entered into an agreement with Angelic and directed vendors who performed work for Crucible to send their bills to Angelic. Angelic, however, lacked adequate resources to pay the invoices. If Crucible had recognized these invoices as its own liabilities, it would have reported negative net capital.

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06 Aug
2014

SEC Brings Section 20(b) Charges for Using Marketing Firm and Others to Spread Alleged Misstatements

On Monday, the SEC instituted an administrative proceeding that includes a charge under Section 20(b) of the Securities Exchange Act of 1934, which allows the government to pursue individuals and entities that use an innocent intermediary to engage in conduct that runs afoul of the Act. Although Section 20(b) has been part of the Exchange Act since its adoption, until recently, the SEC has rarely used it. In June, we reported that SEC Chair Mary Jo White had pledged to bring more Section 20(b) charges, and last week, we posted that the SEC had charged an individual in federal court with violating Section 20(b) for drafting a press release with allegedly misleading statements. This week, the SEC is continuing to make good on Ms. White’s promise by bringing a Section 20(b) charge in an administrative proceeding. Section 20(b) is appealing to the SEC because it provides an alternative to establishing primary liability under Section 10(b), which became more difficult to do following the Supreme Court’s decision in Janus Capital Group v. First Derivative Traders, 121 S. Ct. 2295 (2011).

The SEC has charged oil company Houston American Energy Corp. and its CEO John Terwilliger with misstating the value of the company’s right to extract oil from land in Colombia. The SEC alleges that Houston American and Terwilliger falsely claimed to investors that the land contained 1 to 4 billion barrels of oil, each worth between $20 and $25 dollars. According to the SEC, Terwilliger later admitted that these estimates lacked any reasonable basis in fact and a detailed technical analysis had indicated the land held only 300 million to 1 billion barrels. Based on these alleged misstatements, the SEC charged Houston American and Terwilliger with fraudulent conduct in connection with the sale of a security in violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5.

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01 Aug
2014

FedEx Pleads Not Guilty to Conspiring with Online Pharmacies to Distribute Drugs Without Valid Prescriptions

On Tuesday, FedEx Corporation and two of its subsidiaries pleaded not guilty to a 15-count indictment filed in the United States District Court for the Northern District of California charging FedEx with conspiring with online pharmacies to ship and deliver drugs to customers it knew lacked a valid prescription. FedEx is charged with violating the Controlled Substances Act, among other statutes. The government is seeking penalties based on the $820,000,000 it alleges FedEx earned by making these shipments.

The government has been cracking down on online pharmacies for over a decade. The government alleges that online pharmacies typically allow customers to order controlled substances regardless of their medical need, requiring only that they fill out a brief questionnaire and provide payment and shipping information. Because distributing these drugs without a valid prescription is illegal, law enforcement agencies have forced many online pharmacies to close. In addition to targeting online pharmacies, the government has begun to target companies on which they rely. NPR reports that last year UPS settled charges based on its shipments for online pharmacies by forfeiting $40,000,000 it allegedly made from those shipments.

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30 Jul
2014

Judge Scheindlin Rejects SEC’s “Total Profits” Theory of Disgorgement in Wyly Case

With the penalty phase of the SEC’s enforcement action against Sam Wyly and the estate of his deceased brother Charles set to begin next week, Judge Shira Scheindlin has precluded the SEC from pursuing its “total profit” theory of disgorgement. She did give, however, give the SEC “one final opportunity” “to propose a reasonable approximation of profits causally connected to the violations,” while warning that “the SEC must provide a credible explanation as to how its new figure is reasonable.”

Back in May, a jury found the Wylys liable for nine securities violations arising from a scheme to establish a series of offshore trusts to trade shares of four public companies for which the Wylys served as directors. Key to the scheme was the Wylys’ failure to disclose their beneficial ownership of the securities. In June, the SEC revealed for the first time that it intended to seek disgorgement of “all profits Sam [and Charles] Wyly earned through their [o]ffshore Issuer securities transactions” – totaling $488 million dollars.

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30 Jul
2014

Judge Pauley Sentences Frederic Cilins to 24 Months for Obstruction

Judge William H. Pauley has sentenced Frederic Cilins to 24 months in prison and imposed a $75,000 fine after Cilins pleaded guilty in March to obstructing a federal investigation. Prosecutors in the Southern District of New York tried out several different theories in their case against Cilins, who attempted to induce a cooperating witness to destroy documents evidencing bribes to officials for mining rights in Guinea’s Simandou region. Cilins ultimately pleaded guilty to one count of obstructing a federal grand jury’s investigation into alleged money laundering and FCPA violations, but the other obstruction counts were dropped, as were the conspiracy and witness tampering charges.

You can read our prior reporting on the case here.

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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