22 Dec

Judge Scheindlin Agrees to Stay SEC’s Case Against Michael Steinberg

Judge Shira Scheindlin has granted Michael Steinberg’s unopposed request to stay the SEC’s civil case against him. Steinberg told the court that in the wake of the Second Circuit’s recent decision in U.S. v. Newman & Chiasson, he has asked the court of appeals to hold his case in abeyance while the U.S. Attorney’s Office decides whether to seek reconsideration, en banc, or certiorari review of that opinion, which reversed the insider trading convictions of Todd Newman and Anthony Chiasson. Earlier today, Steinberg asked Judge Scheindlin to keep the SEC case against him on hold until the criminal appeals in Newman/Chiasson and in his case are fully resolved.  She immediately agreed.


18 Dec

SEC Opinion Takes Narrow View of Janus and Expands the Scope of Rule 10b-5

Earlier this week, the Securities and Exchange Commission issued a decision sharply limiting the applicability of the Supreme Court’s decision in Janus Capital Group v. First Derivative Traders, 131 S. Ct. 2296 (2011). Janus narrowly confined primary liability for making false and misleading statements under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 to those with “ultimate authority” over the statements. Because the Supreme Court’s decision in Janus turned on a textual analysis of the term “make” in Rule 10b-5(b), which renders it unlawful to “make any untrue statement of material fact or to omit to state a material fact,” the effect on claims brought under other subsections of Rule 10b-5 and under Rule 17(a) of the Securities Act of 1933, has been the subject of debate and divergent judicial decisions. Now, the SEC has articulated its own narrow view of the applicability of Janus to those provisions.

In re Flannery and Hopkins is the Division of Enforcement’s administrative action against two former employees of State Street Bank and Trust Company. The Division alleges Flannery and Hopkins violated Section 10(b), Rule 10b-5, and Section 17(a) by making or being responsible for a series of statements that misled investors in a State Street bond fund about the degree to which the fund was invested in subprime securities. An administrative law judge cleared both of all charges, but on appeal, the Commission has now found Flannery and Hopkins liable under some of the provisions and suspended them from the industry for a year, among other things. In its decision, the Commission confined the effect of Janus very narrowly to misstatements cases brought under Rule 10b-5(b), while broadening the scope of cases that can be brought under subsections 10b-5(a) and (c).

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18 Dec

Judge Pauley Agrees to Stay Peixoto Case Challenging Legitimacy of SEC Enforcement Action

Yesterday, Judge William H. Pauley granted the parties’ request to stay Jordan Peixoto’s suit challenging the SEC’s administrative case against him. In an Order Instituting Administrative Proceedings, the SEC alleged that Peixoto engaged in insider trading when he bought put options in Herbalife before hedge fund Pershing Square publicly announced its negative view of the company. Peixoto then filed a federal court lawsuit to enjoin the administrative action in which he argued that such administriave proceedings are unconstitutional for reasons we explained more fully here.

Now, however, the Division of Enforcement has asked the Commission to dismiss the administrative case against Peixoto because of its “inability to procure critical witnesses.” The motion prompted the ALJ handling the case to cancel the hearing scheduled for March 2015 because the Commission will mostly likely grant Enforcement’s motion.  Assuming the Commission does dismiss the case, Peixoto’s federal court claims would be moot. Judge Pauley therefore stayed the case before him and scheduled a status conference for January 15, 2015.

17 Dec

High-Frequency Trader Moves to Dismiss Criminal Charges for “Spoofing” Commodities Futures Markets Challenging Law as Unconstitutionally Vague

Michael Coscia, a high-frequency trader facing the first criminal charges for allegedly “spoofing” the commodities futures markets, has moved to dismiss the charges arguing that a conviction would violate his due process rights because the anti-spoofing provision is unconstitutionally vague. Congress added the provision to the Commodity Exchange Act through the Dodd-Frank Act, but it was never used to support criminal charges until the United States Attorney for the Northern District of Illinois indicted Coscia in October. As we reported, prosecutors allege Coscia’s use of computer programs to place quickly and then cancel trades to manipulate market prices constituted criminal spoofing. Coscia was charged with six counts of commodity fraud based on his conduct.

In moving to dismiss, Coscia argues that criminal enforcement of the anti-spoofing provision would violate his due process rights because it is not clear what the provision prohibits. Coscia contends Supreme Court precedent requires all criminal statutes to provide “ascertainable standards of guilt” and the anti-spoofing provision fails to meet this standard because it “prohibits a wide range of trading activity without” making sufficiently clear the distinction between permissible and impermissible conduct. Coscia acknowledges Congress defined unlawful spoofing in Section 6c(a)(5)(C) of the Commodity Exchange Act as “bidding or offering with the intent to cancel the bid or offer before execution.” But according to Coscia, this definition is problematic because the term spoofing is not used in the futures markets and a literal reading of the definition would prohibit many common practices accepted by market participants, commodity exchanges, and even the Commodity Futures Trading Commission. Because the anti-spoofing provisions does not provide fair notice of what trading activity constitutes spoofing, Coscia contends criminal enforcement of the statute would violate his due process rights.

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12 Dec

Second Circuit Gives Go Ahead for Steinberg Appeal

A day after reversing the insider trading convictions of Todd Newman and Anthony Chiasson and declaring a stricter standard for proving tippee liability, the Second Circuit lifted the stay of SAC Capital portfolio manager Michael Steinberg’s appeal. As we explained the other day, Steinberg’s case had been stayed because it turns on the same question of law at issue in the Newman and Chiasson case – namely, whether to convict a tippee of insider trading, the government must prove the defendant knew the tipper received a personal benefit in exchange for providing material nonpublic information. Now that the Second Circuit has made clear that the government must make such a showing, the door is open for Steinberg’s lawyers to argue that Steinberg’s conviction – in which Judge Richard Sullivan declined to instruct the jury that such knowledge is required – must also be reversed and the indictment against him dismissed.

10 Dec

Second Circuit Sharply Rebukes Prosecutors in Newman and Chiasson Appeal, Reversing Convictions and Setting Clear Standard for Tippee Liability

In a striking opinion issued this morning, the Court of Appeals for the Second Circuit reversed the insider trading convictions of Anthony Chiasson and Todd Newman and articulated a clear standard of tippee liability that requires the government to prove “that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.” Because Judge Richard Sullivan had accepted the government’s incorrect formulation of the law and did not instruct the jury that they had to find the defendants knew the tippers received such a benefit, the charge was fatally flawed. The appellate court also held the evidence at trial was “simply too thin” to support a conviction.

Several notable points emerged from the opinion.

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08 Dec

SEC Charges Silicon Valley Man With Securities Fraud for Purporting to Sell Tech Stock That Belonged to Others and Pocketing the Proceeds

The SEC has brought suit against Bay Area resident Vinay Kumar Nevatia in connection with his purported sale of $900,000 worth of stock in a privately-held information technology company called CSS Corp. Technologies. Kumar represented to several venture capitalists and private equity executives in 2011 and 2012 that the shares were his to sell. In fact, eight other investors with whom Kumar had formed an LLC to buy CSS stock owned the securities. Kumar hid the existence of the other investors from the purchasers.

In furtherance of the fraudulent scheme, the SEC alleges that Kumar made a series of material misstatements and omissions “in increasingly desperate attempts to conceal his illicit stock sales from the original investors.” These included falsely telling one investor that the investment was performing well and that CSS was on the cusp of a potentially lucrative IPO when, in fact, Kumar had already fraudulently sold the investor’s shares and kept the proceeds for himself. Kumar also allegedly told two investors who wanted to sell their shares that he would try to find them buyers even though he had already sold their shares, too. Eventually, some of the original investors contacted CSS directly “and learned that Kumar had fraudulently sold nearly all of their CSS shares without obtaining their approval, distributing the proceeds, or even providing notice of the sales” as the LLC’s operating agreement required.

The SEC alleges that Kumar’s conduct violated Section 10(b) of the Securities Exchange Act and Rule 10b-5, as well as Section 17(a) of the Securities Act. The SEC seeks an injunction, disgorgement, and penalties.

05 Dec

Second Circuit Decision Demonstrates Importance of Attention to Jury Instructions

The Court of Appeals for the Second Circuit reminded us this week of the importance of paying attention to jury instructions and how they can determine the outcome of a case.  The court partially vacated the convictions of Dominick Mazza and Mazza & Sons based on a fatally-flawed interested witness instruction. The Court of Appeals ruled that the district court’s instruction – which said that Mazza’s interest in the outcome of the trial “creates a motive to testify falsely” – violated the court’s mandate in United States v. Brutus, 505 F.3d 80 (2d Cir. 2007).  Brutus “expressly held that ‘an instruction that the defendant’s interest in the outcome of the case creates a motive to testify falsely impermissibly undermines the presumption of innocence because it presupposed the defendant’s guilt.’”

Counsel for the defendants had failed to object to the instruction during the 2012 trial, so the Court of Appeals reviewed the case for plain error. To succeed, the defendants had to show that there was an error, that was “clear and obvious,” that “affected the appellant’s substantial rights” and “seriously affects the fairness, integrity or public reputation of judicial proceedings.” Even under that stringent standard, the court reversed the defendants’ convictions for conspiring to violate CERCLA and making false statements to the FBI, which “hinge[d] heavily on Mazza’s credibility.”

The defendants’ victory, however, was only partial.  Based on the considerable evidence presented in support of the substantive CERCLA count and the obstruction of justice count, the court concluded that “it is improbable that the erroneous instruction affected the outcome of the trial” with respect to those charges.

01 Dec

Supreme Court Review Sought of 4th Circuit Ruling that Janus Does Not Apply to Criminal Cases

Thomas Prousalis, an attorney who pleaded guilty to securities fraud in connection with his work on an initial public offering for internet startup Busybox, has asked the Supreme Court to review the Court of Appeals for the Fourth Circuit’s recent decision that Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), does not apply to criminal prosecutions. Janus analyzed the text of SEC Rule 10b-5 and limited primary liability for false and misleading statements under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 to those with “ultimate authority” over the statements. As we reported earlier this year, that ruling prompted Prousalis, who had pleaded guilty several years before Janus, to bring a habeas petition asserting that, following Janus, the conduct underlying his conviction was no longer criminal. The Fourth Circuit rejected his petition holding that Janus does not apply to criminal actions.

In seeking Supreme Court review of the Fourth Circuit’s decision, Prousalis argues the Fourth Circuit’s ruling ”improperly cabined” Janus to private civil actions and that its reading of Janus “impermissibly gives different meanings to precisely the same text in Rule 10b-5 . . . depending on whether the rule is invoked in a criminal or civil case.” Prousalis contends that prior Supreme Court precedent, Leocal v. Ashcroft, 543 U.S. 1, 11 n.8 (2008), holds that where a statute ”has both criminal and noncriminal applications,” courts “must interpret the statute consistently” in both contexts. He also asserts that the Court of Appeal’s decision, which relies on reasoning that would limit Janus solely to private civil actions, is inconsistent with district court decisions and SEC acknowledgments that Janus applies to SEC civil enforcement actions. Finally, Prousalis contends the Fourth Circuit’s decision threatens to return litigants to a pre-Janus state where in the criminal context, the language of Rule 10b-5 is unclear and there are no clean lines between primary and secondary liability for false and misleading statements.

We will report on whether the Supreme Court grants Prousalis’ petition and also on further developments in this area.




21 Nov

Government Defends Validity of Congressional Investigation Into Deepwater Horizon Spill

The government has opposed David Rainey’s motion to dismiss the obstruction of Congress charge filed against him in the Eastern District of Louisiana and Rainey’s request that prosecutors disclose portions of their grand jury presentation. Prosecutors argue that whether a congressional “inquiry or investigation is duly authorized depends not on formalities, but upon careful examination of all of the surrounding circumstances.” Rainey was BP’s second highest-ranking representative at “Unified Command,” where representatives from the government and industry took charge of responding to the April 2010 blowout on the Deepwater Horizon. Rainey has been charged with obstructing a congressional inquiry into the incident and making false statements to federal agents.

Rainey moved to dismiss the obstruction charge last month on the ground that, in essence, there was no valid congressional investigation for him to obstruct. According to Rainey, Congress never properly authorized the Committee on Energy and Commerce or its Subcommittee on Energy and Environment to investigate the spill. Hence, there could be no violation of 18 U.S.C. § 1505, which makes it a crime to obstruct “the due and proper exercise of the power of inquiry under which any inquiry or investigation is being held.”

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