24 Apr
2015

Former Alstom Exec Claims Government Owes Him Company Documents Under Brady and Rule 16

Former Alstom Holdings executive Lawrence Hoskins continues his effort to prove he was not an “agent” of a “domestic concern” and therefore could not have criminally violated the Foreign Corrupt Practices Act. He has moved to compel the government to produce numerous documents Hoskins claims are key to his defense. As we reported earlier this year, Hoskins, who was employed by Alstom’s French parent company, has been charged with money laundering and FCPA violations in connection with his alleged role in bribing Indonesian government officials to help Alstom’s Connecticut-based subsidiary win a contract.

Hoskins argues he is entitled to information — including e-mails, org charts, personnel files, and corporate policies — under Brady v. Maryland, 373 U.S. 83 (1963), which obligates the government to disclose material exculpatory or impeachment evidence to the defense. He also contends he is entitled to discover the same items under Federal Rule of Criminal Procedure 16, pursuant to which defendants can inspect certain items “within the government’s possession, custody, or control” that are material to the defense or will be used in the government’s case-in-chief. In opposition, the government says it has satisfied its obligations and that Hoskins is merely engaging in “eleventh hour civil-style discovery.”

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23 Apr
2015

Government Pursues UK Futures Trader Who Allegedly Contributed to “Flash Crash”

The Justice Department has brought criminal charges against Navinder Singh Sarao, a British futures trader who prosecutors allege used a modified automated trading program to manipulate the market for “E-Minis” between June 2009 and April 2014. E-Minis are a stock market index futures contract based on the Standard & Poor’s 500 Index that Sarao traded on the Chicago Mercantile Exchange. According to a criminal complaint filed in the Northern District of Illinois in February but unveiled this week, upon Sarao’s arrest, Sarao’s manipulative and fraudulent conduct allegedly contributed to a dramatic plunge in the U.S. stock markets on May 6, 2010 that came to be known as the “Flash Crash.”

Sarao’s manipulative conduct supposedly took multiple forms, including a type of spoofing called “layering,” whereby “a trader places multiple, bogus orders that the trader does not intend to have executed—for example, multiple orders to sell a financial product at different price points—and then quickly modifies or cancels those orders before they are executed.” The purpose is “to trick other market participants and manipulate the product’s price.” By creating a false impression of market depth, the trader can artificially move prices to his advantage. Sarao allegedly employed this technique by repeatedly placing, modifying, and ultimately cancelling large sell orders visible to others in the E-Mini market. Sarao supposedly placed the orders “in the middle of the order book on the sell side” and kept modifying the orders as the market moved down so that it was almost certain that his orders would not be filled before he cancelled them. He then took advantage of the downward pressure by selling futures contracts and buying them back at a reduced price. Sarao employed a similar scheme when moving the market in the other direction, too, according to the government.

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22 Apr
2015

Ninth Circuit Reverses Barry Bonds’ Conviction: “Wholly Irrelevant” “Verbal Detour” Not Obstructive

In a brief, unsigned opinion accompanied by several concurrences plus a dissent, the Court of Appeals for the Ninth Circuit today reversed Barry Bonds’ conviction for obstruction of justice under 18 U.S.C. § 1503, a statute that “was designed to proscribe all manner of corrupt methods of obstructing justice.” Bonds was found guilty of obstruction in 2011, although the jury was unable to reach a verdict on related false statements charges, all of which stemmed from grand jury testimony he gave concerning his suspected use of steroids while playing professional baseball. The statement on which the jury based Bonds’ obstruction conviction was Bonds’ response to a question about whether a friend ever gave him an injectable substance. Bonds testified: “That’s what keeps our friendship. You know, I am sorry, but that—you know, that—I was a celebrity child, not just in baseball by my own instincts. I became a celebrity child with a famous father. I just don’t get into other people’s business because of my father’s situation you see.” Bonds later answered the question directly during his grand jury testimony, but a three-judge panel of the Ninth Circuit upheld Bond’s conviction for obstruction, holding his “celebrity child” answer was “misleading or evasive” and impeded the grand jury’s investigation. After re-hearing Bonds’ appeal en banc, the Ninth Circuit’s opinion today vacates Bond’s conviction.

The principal concurrence, authored by Judge Alex Kozinski, concluded that although the obstruction statute’s “coverage is vast,” the government’s pursuit of Bonds for a non-responsive answer went too far. Criminalizing such conduct would make “everyone who participates in our justice system a potential criminal defendant for conduct that is nothing more than the ordinary tug and pull of litigation” like filing an ultimately unsuccessful motion or frivilously pursuing an appeal, “risks chilling zealous advocacy.” According to Judge Kozinski, Bonds’ statement was not material because it “communicates nothing of value or detriment to the investigation. . . . The most one can say about this statement is that it was non-responsive and thereby impeded the investigation to a small degree by wasting the grand jury’s time and trying the prosecutor’s patience. But real-life witness examinations, unlike those in movies and on television,” he noted, “invariably are littered with non-responsive and irrelevant answers.” Bonds’ non-responsive and irrelevant answer simply was not material, particularly when considered in the context of his three hours of testimony.

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16 Apr
2015

Another Federal District Judge Court Rejects Constitutional Challenge to SEC Administrative Proceedings

Another challenge to the SEC’s use of administrative proceedings to charge individuals has failed. Yesterday, Judge Richard Berman of the Southern District of New York rejected Barbara Duka’s attempt to enjoin the SEC’s in-house action against her. As we reported, Duka, formerly of Standard & Poors, argued the SEC’s action was unconstitutional because the administrative law judges who adjudicate such cases are too insulated from removal by the President. Judge Berman disagreed, ruling that Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010), did not establish “a categorical rule forbidding ‘two levels of good-cause’” tenure protection, and that under the applicable “functional test to determine whether and when statutory limitations on the President’s power to remove executive officers violate Article II,” the SEC’s ALJ position passes muster.

Notably, Duka had more success in getting the court to address the merits of her arguments than Laurie Bebo, whose similar challenge was recently dismissed after a federal district court judge in Wisconsin concluded the court lacked jurisdiction to hear Bebo’s case. Noting that courts are more likely to find jurisdiction over facial pre-enforcement challenges to agency actions than as-applied ones, Judge Berman ruled the three criteria for subject matter jurisdiction were met, paving the way for him to address the substance of Duka’s argument. First, according to Judge Berman, the absence of jurisdiction could foreclose meaningful judicial review of Duka’s claim for declaratory and injunctive relief, which would be moot if she could not pursue her case until the allegedly unconstitutional proceeding had taken place, at which time “there would be no proceeding to enjoin.” Second, her claim was “wholly collateral” to the administrative proceeding because, as Duka argued, she “asserts a facial challenge to the very ‘existence’ of the Administrative Proceeding.” And third, “the constitutional claim posed in this injunctive/declaratory judgment case is outside the SEC’s expertise.” Nonetheless, Judge Berman held Duka was unlikely to succeed on the merits of her claim that ALJs “enjoy two layers of tenure protection” that effectively shields them from removal by the president and rejected her attempt to enjoin the administrative proceedings.

Our sister blog’s report on the opinion can be read here. As the SDNY Blog notes, Brune & Richard LLP currently represents a plaintiff in an action asserting a similar constitutional challenge.

03 Apr
2015

Second Circuit Declines to Revisit Newman Decision on Tippee Liability

In a brief order issued today, the Court of Appeals for the Second Circuit denied the government’s request for rehearing of the court’s U.S. v. Newman decision.  The Second Circuit also denied the government’s request for rehearing of the decision en banc.  Newman is the Second Circuit’s landmark decision holding that to convict a tippee of insider trading, the government must prove the tippee knew the tipper provided inside information in exchange for a personal benefit. In that same decision, the court added teeth to the personal benefit requirement holding that evidence of mere friendship or the exchange of career advice does not suffice. In seeking rehearing, the government abandoned its argument that it need not prove knowledge of the benefit and instead asked the court only to reconsider its more stringent definition of the requisite benefit. The government’s remaining step to challenge the decision would be to seek Supreme Court review.

Our earlier posts on Newman can be read here.

10 Mar
2015

Court Dismisses Laurie Bebo’s “Compelling and Meritorious” Claims For Lack of Jurisdiction

Last Week, Judge Rudolph T. Randa of the Eastern District of Wisconsin dismissed the suit filed by former Assisted Living Concepts, Inc. CEO Laurie Bebo, challenging the SEC’s right to pursue administrative securities fraud charges against her. The court determined it lacked subject matter jurisdiction over the case.

Bebo had sought to enjoin the SEC’s administrative action against her, arguing Section 929(P) of the Dodd-Frank Act is unconstitutional “because it gives the SEC unfettered discretion through its choice of forum to provide (if federal) or withhold (if administrative) a citizen’s Seventh Amendment jury trial right for the same conduct and the same remedies.” She also contended the SEC’s decision to proceed against her administratively violated her procedural due process rights because certain key witnesses are Canadian citizens who are not subject to subpoena power in that forum while their testimony could have been compelled had the case proceeded in the Eastern District of Wisconsin. Rather than reaching the merits of Bebo’s arguments, Judge Randa concluded “Bebo’s claims are subject to the exhaustive remedial scheme set forth in the Securities Exchange Act,” which proscribes litigation “before the SEC and then, if necessary, on appeal to the Court of Appeals for the Seventh Circuit.” The district court therefore lacked jurisdiction to hear the case.

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09 Mar
2015

Newman Fallout Continues as Rajat Gupta Moves to Set Aside Judgment and Get Out of Jail

Former Goldman Sachs board member Rajat Gupta has filed a motion pursuant to 28 U.S.C. § 2255 to set aside his 2012 conviction on insider trading charges and to vacate the prison sentence he is serving. Gupta argues that under U.S. v. Newman, the personal benefit instruction Judge Rakoff gave during his trial “permitted the jury to convict Mr. Gupta without finding that his tips were part of an agreed upon exchange of tips for consequential benefits, resulting in his conviction for conduct that is not a crime.” Newman held the requisite personal benefit a tipper receives cannot be inferred from the existence of a relationship between the tipper and the tippee “in the absence of proof 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 Gupta, who was convicted of providing material non-public information to Galleon Group founder Raj Rajaratnam, the instruction given at trial allowed “the jury to convict Mr. Gupta based upon a now invalid pure relationship theory.” For example, “by telling the jury that it could convict on the basis of a finding that Mr. Gupta received ‘some modest benefit,’ the instruction failed to communicate that the benefit must be ‘consequential,’” as Newman requires. Similarly, he argues the jury charge was fatally flawed because Judge Rakoff told the jury the personal benefit requirement could be satisfied in either of two ways: “by proof of, ‘for example, maintaining a good relationship with a frequent business partner, or obtaining future financial benefits.’” Gupta contends the government repeatedly emphasized his relationship with Rajaratnam because it was unable to “adduce any evidence of a commitment between the two men to exchange tips for consequential benefits.” By doing so, the “government successfully aligned its relationship theory of benefit with a jury charge that communicated the government’s slender burden under then prevailing Second Circuit law,” resulting in Mr. Gupta’s conviction based on what we now know to be inadequate proof of benefit, under the Second Circuit’s decision in Newman.

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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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