02 Jul
2015

Hoskins Moves to Dismiss FCPA Conspiracy Charge

Former Alstom executive Lawrence Hoskins is continuing his efforts to chip away at FCPA charges filed against him by the U.S. Attorney’s Office in the District of Connecticut. As explained in prior posts, Hoskins has tried to defeat the government’s case by arguing that he is not the proper subject of a Foreign Corrupt Practices Act prosecution because he was not an “agent of a domestic concern” under the statute. Instead, he was employed by the domestic concern’s French parent company.

Last month, Hoskins moved to dismiss Count One of the third superseding indictment against him, which charges Hoskins with conspiring to violate the FCPA “together with a domestic concern” rather than, as pleaded in the second superseding indictment, “while ‘being’ an agent of a domestic concern.” Hoskins argues that the conspiracy charge is an impermissible end run around the government’s inability to prove agency, and that under Gebardi v. United States, 287 U.S. 112, (1932), “where Congress has crafted a criminal statute to effect an affirmative legislative policy to exclude certain classes of persons from liability, as does the FCPA, the government cannot nullify that intent by charging such individual with conspiracy to violate that statute.”

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01 Jul
2015

SEC Uses New Data-Driven Techniques to Identify Alleged Cherry-Picking

The SEC announced securities fraud charges this week against Mark P. Welhouse and investment adviser Welhouse & Associates, Inc. According to the SEC, the respondents engaged in a multi-year cherry-picking scheme whereby Mr. Welhouse used a master account to trade options in an S&P 500 ETF called SPY. He then delayed allocating the trades until later in the day when he “disproportionately allocated those trades that had appreciated in value during the course of the day to his personal and business accounts, while allocating trades that had depreciated in value during the day to the accounts of his advisory clients.” Notably, the SEC reports that this is the first enforcement action to result from a new data-driven initiative seeking “to identify potentially fraudulent trade allocations” which have historically been particularly difficult to detect “without an investor astutely noticing that something may be amiss” and reporting the investor’s suspicions to the SEC.

01 Jul
2015

CFTC and “Flash Crash” Trader Agree on Preliminary Injunction to Preserve Status Quo

“Flash Crash” trader Navinder Singh Sarao has reached an agreement with the CFTC that preliminarily enjoins him from engaging in various forms of legitimate and illegitimate commodoties trading and modifies an asset freeze order that was put in place after the CFTC filed suit against him in April. The CFTC’s enforcement action parallels criminal charges filed against Sarao, who remains in England. At the heart of the allegations is the contention that Sarao’s manipulative trading contributed to a dramatic plunge in the U.S. stock markets on May 6, 2010.  Our earlier report on the charges can be read here.

This week’s consent order, approved by U.S. District Judge Andrea R. Wood and intended to preserve the statuts quo pending a full resolution of the case, requires Sarao to consolidate assets into an escrow account that will be overseen by a third-party monitor. Once the liquid assets are deposited, the monitor can use the money to pay up to $2.5 million in Sarao’s criminal defense fees, as well as Sarao’s UK bail. If the balance of the account exceeds $30 million, the monitor can pay additional attorney’s fees associated with the criminal case, as well as fees for the defense of the civil enforcement action and Sarao’s reasonable living expenses.

25 Jun
2015

SEC Seeks Stay Pending Appeal of Preliminary Injunction Halting Administrative Proceeding in Hill v. SEC

The SEC has asked Judge Leigh Martin May for a stay pending appeal of the preliminary injunction she entered on June 8 that halted the SEC’s administrative enforcement action against Charles Hill. Judge May granted injunctive relief after finding that Hill was likely to succeed on his claim that the ALJ presiding over his case “is an inferior officer who was not appointed in accordance with Article II of the Constitution.”

The SEC argues that a stay should be granted because it is likely to prevail on its appeal to the Eleventh Circuit due to three legal errors by the court.

First, the SEC claims that Judge May wrongly concluded that she had jurisdiction to enjoin the administrative proceeding. Instead, the SEC says that the Exchange Act “requires that challenges to such proceedings first be heard by the Commission and then in an appropriate federal court of appeals.

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18 Jun
2015

U.S. Chamber of Commerce Says SEC Should Have Considered Investor Sophistication and Access to Information When Assessing Materiality in State Street Case

The Chamber of Commerce of the United States has filed an amicus brief in support of John Flannery’s and James Hopkins’ petitions for review of the Securities and Exchange Commission’s order against them. Last December, the Commission found that the former State Street employees misled investors about the degree to which a State Street bond fund was invested in subprime securities. That decision overruled an initial decision by the SEC’s own Chief ALJ who had found in favor of the respondents.

The Chamber of Commerce argues that the Commission applied the wrong legal standard when it determined that alleged misstatements and omissions in a PowerPoint presentation and two investor letters were material. The Chamber contends that “[u]nder circumstances like these—involving face-to-face transactions and sophisticated investors—courts have properly recognized what the Commission did not: because a ‘reasonable investor’ in this type of transaction has more information than someone who transacts on the open market, the government must satisfy a higher threshold of materiality to demonstrate that the alleged misstatement or omission would ‘significantly alter’ the ‘total mix’ of information.” In other words, in a case like this where the fund’s “investors could have requested detailed information from their relationship managers . . . they typically have access to more information, making it more difficult for a misstatement or omission to ‘significantly alter’ the ‘total mix’ of information available.” As a result, “courts expect investors with direct access to do more with the information they have and to gather more information when appropriate, [so] the materiality of information in the hands of such investors is subject to more searching inquiry.”

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17 Jun
2015

Raj Rajaratnam Argues that Newman and Cooperator Perjury Require Court to Revisit His 11-Year Sentence

Galleon founder Raj Rajaratnam, who was convicted of fourteen counts of securities fraud and conspiracy to commit securities fraud in what he characterizes as “the showpiece” of the government’s “pursuit of insider trading claims against hedge fund managers,” has filed a motion for a writ of habeas corpus. Currently serving an eleven-year prison term, Rajaratnam argues that under U.S. v. Newman, 773 F.3d 438 (2d Cir. 2014), five of those securities fraud counts should be vacated and he should be resentenced. He also asks for a new trial on two more counts because, he says, the government’s main witness perjured himself at trial.

Rajaratnam has already failed to get his conviction overturned on appeal or to convince the Supreme Court to grant certiorari review. Nonetheless, he argues that Newman announced a “new substantive rule of law” that applies retroactively to his case. Under this new rule, Rajaratnam contends that he is “factually innocent . . . of the crimes alleged in five of the 14 Counts of conviction” because in those counts “the government failed to adduce any proof that Mr. Rajaratnam,” a remote tippee, knew of a benefit received by the corporate insider. He also claims that his counsel provided ineffective assistance because although the lawyers anticipated Newman and unsuccessfully requested a jury charge that complied with its standard on knowledge, counsel did not pursue the argument in post-trial briefing or on appeal. As to the alleged perjury, Rajaratnam claims that the government’s main cooperating witness incriminated Rajaratnam at trial but later reversed course and gave irreconcilable, exonerating testimony about the facts underlying the two counts for which he seeks to be retried. That allegedly irreconcilable testimony came out when Rajaratnam’s brother, Rengan Rajaratnam, went to trial on his own insider trading charges for which he was acquitted.

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12 Jun
2015

Court Finds Newman Did Not Change Pleading Standard Under FRCP 8 and 9

Southern District of New York Judge J. Paul Oetken has denied a motion to reconsider his earlier decision declining to dismiss insider trading charges against Dhia Jafar and Omar Nabulsi. As we explained more fully here, the SEC contends that Jafar and Nabulsi traded on inside information about two biotech deals in 2013. Both times, the defendants bought securities before a Canadian journalist, appearing to rely on inside information, published articles that sent the relevant share prices up. The SEC does not know “the identity of the tipper nor how the tip was relayed to Defendants,” and accordingly it has not pleaded those facts. The defendants argue that the complaint should be dismissed for failure to satisfy US v. Newman, the Second Circuit’s intervening decision requiring proof that a tippee knew the tipper provided inside information in exchange for a personal benefit.

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11 Jun
2015

Second Circuit Rejects Argument that it Should Review Evidence in Government’s Favor After Government Lost Motion to Suppress

Last week in U.S. v. Bershchansky, the Second Circuit Court of Appeals affirmed an order suppressing physical evidence and statements obtained during the execution of a search warrant after agents exceeded the warrant’s scope by searching the wrong apartment. The court determined that the warrantless search violated the defendant’s Fourth Amendment rights and that the good faith exception to the exclusionary rule did not save the evidence from suppression. Before reaching those conclusions, however, the court had to decide what standard of review to apply to the district court’s factual findings on the underlying motion. The court rejected the government’s proposed standard but left the question of the correct standard open for another day.

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10 Jun
2015

State Street’s Flannery and Hopkins Appeal to the First Circuit

When the SEC issued an opinion last December partially reversing its Chief Administrative Law Judge’s exoneration of two former State Street Global Advisors employees, the Commission expressed its intent to “resolve the ambiguities in the meaning of Rule 10b-5 and Section 17(a) that have produced confusion in the courts and inconsistencies across jurisdictions” following the Supreme Court’s decision in Janus Capital Group v. First Derivative Traders, 131 S. Ct. 2296 (2011). Janus held that to “make” a misstatement under Rule 10b-5(b) one must have “ultimate authority” over the statement. In the aftermath of Janus, courts grappled with questions including whether regulators could sidestep this limitation on their ability to pursue misstatement cases by bringing “scheme liability” claims under Rules 10b-5(a) and (c), and whether liability under Section 17(a)(2) of the Securities Act should be similarly limited to those who “make” a misstatement. That section had often been interpreted in lockstep with Rule 10b-5 although it does not itself contain the word “make.” In its decision, the Commission answered the former question in the affirmative and the latter in the negative as part of a lengthy discussion of the effects of Janus on the securities laws.

The former State Street employees, John P. Flannery and James D. Hopkins, have now appealed to the First Circuit, although the Commission’s in-depth treatment of Janus is not echoed in the appellants’ briefs. Hopkins does not mention Janus and argues, in part, that the Division of Enforcement failed to prove that he “actually presented” a slide containing alleged misstatements “to an investor or potential investor.” Hopkins says that the Division must prove he presented the material in order to prevail under Rule 10b-5 and Section 17(a)(1) but that, instead, the Commission impermissibly shifted the burden to him to present “compelling evidence” that he did not do so.

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09 Jun
2015

Federal Judge Preliminarily Enjoins SEC Insider Trading Case Brought In Administrative Forum

A federal district court judge in Georgia has preliminarily enjoined the SEC from proceeding with administrative charges against Charles L. Hill, Jr. The SEC claims that Hill, a self-employed real-estate developer who is not registered with the SEC, engaged in insider trading. After the SEC filed an Order Instituting Proceedings against him, Hill unsuccessfully challenged the agency’s authority to do so before the administrative law judge presiding over his case. Then he brought suit in the Northern District of Georgia, arguing, among other things, “that the [administrative] proceeding violates Article II of the Constitution because ALJs are protected by two layers of tenure protection” and that “the SEC ALJ’s appointment violated the Appointments Clause of Article II as the ALJ is allegedly an inferior officer and he was not appointed by the President, the courts of law, or a department head.” Hill wants the court to declare the SEC administrative proceeding unconstitutional and sought to enjoin the proceeding against him until his declaratory judgment action is decided.

As we have reported, several individuals have brought similar challenges in the wake of Dodd-Frank, which granted the SEC the ability to seek penalties from unregistered individuals for violations of the securities laws through administrative proceedings or in federal court. Previously those actions could only be brought in the latter forum, but now the Division of Enforcement can pick where it wants to proceed.

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