21 Oct

Judge Gardephe Denies Mathew Martoma’s Request for Bail Pending Appeal and His Request to Postpone Surrender Date

Characterizing the evidence at trial against Mathew Martoma as “overwhelming,” Judge Paul G. Gardephe has denied Martoma’s motion to remain free pending appeal. Judge Gardephe also denied Martoma’s alternative request to postpone his surrender date so that he could seek such relief directly from the Second Circuit. Last month, Judge Gardephe sentenced Martoma to nine years’ imprisonment following his February 2014 conviction on insider trading-related charges. Now, finding that Martoma failed to demonstrate that his appeal “is likely raise any substantial question of law or fact,” Judge Gardephe refused to grant Martoma reprieve from imprisonment while his lawyers argue his case to the Court of Appeals on the merits.

Martoma is due to surrender on November 10.

21 Oct

SEC Charges Former Wells Fargo Advisors Compliance Officer for Altering Document Produced to SEC During Investigation

The SEC has initiated an administrative proceeding against  Judy K. Wolf, a former Wells Fargo Advisors compliance officer, charging her with allegedly altering a compliance record Wells Fargo produced to the SEC during an insider trading investigation. As we previously reported, the underlying investigation resulted in insider trading charges against a former Wells Fargo Advisors broker, Waldyr Da Silva Prado Neto and a settled enforcement action in which Wells Fargo Advisors paid $5 million and admitted wrongdoing for failing to maintain adequate internal controls to prevent Prado from using a client’s material nonpublic information to commit insider trading. In its new action, the SEC alleges that Wolf, who reviewed Prado’s alleged insider trades, altered records after the SEC brought insider trading charges against Prado to make her review appear more thorough.

In its action against Prado, the SEC contended that Prado used a client’s material nonpublic information to profit from a private equity firm’s acquisition of Burger King in 2010. Wolf was the Wells Fargo Advisors compliance officer tasked with reviewing trades in Burger King securities around the time of its acquisition. According to the SEC, shortly after the acquisition, Wolf reviewed trades in Burger King securities and learned that Prado and three of his clients had the firm’s four largest positions in Burger King. She also allegedly discovered they had bought the securities within 10 days of the announcement of the acquisition and each made over $5,000 on their trades. Despite these facts, Wolf closed the review with no findings.

In 2012, after the Commission charged Prado with insider trading, Wolf allegedly retrieved documents concerning her earlier review, and altered the documents to make her original review appear more thorough than it had been. Wolf admitted in testimony before the Commission that she had altered the records in 2012.

Wells Fargo Advisors terminated Wolf’s employment in 2013. The SEC has now charged her with willfully aiding, abetting, and causing violations of the recordkeeping requirements of the Securities Exchange Act of 1934 and the record production requirements of the Investment Advisers Act of 1940.


17 Oct

SEC ALJ’s Initial Decision Bars Michael Steinberg From the Securities Industry

Siding with the SEC’s Division of Enforcement, Chief Administrative Law Judge Brenda P. Murray has issued an Initial Decision barring former SAC Capital portfolio manager Michael Steinberg from the securities industry following his December 2013 conviction on insider trading charges. Steinberg had argued the administrative action should be stayed because the verdict against him will likely be overturned. Steinberg’s contends his “conviction is tenuous” because he believes the Second Circuit will rule in United States v. Newman & Chiasson that the government must prove downstream tippees, like Steinberg, knew the tipper received a personal benefit in exchange for the tip. That is a more stringent standard than Judge Richard Sullivan applied at Steinberg’s trial despite Steinberg’s objection at the time.

ALJ Murray ruled the pendency of any appeal “is not a basis for delaying a ruling on an administrative proceeding.” While stating that “Steinberg might well be correct about the outcome of his appeal,” she said her “ruling has to be based on the facts as they exist at the time this Initial Decision is issued, not assumptions on what might happen.” Those facts include that the violations were “egregious” and “resulted in substantial unlawful profits;” Steinberg was found guilty of acting “willfully and knowingly;” and Steinberg’s agreement “not to participate in the industry until the litigation is resolved does not adequately protect the public as he could change his mind at any time.”

Steinberg has 21 days to file a petition for review. The Initial Decision becomes final only when the SEC issues an order of finality.

17 Oct

Supreme Court Declines Chance to Clarify Meaning of “Instrumentality” Under FCPA

The Supreme Court has denied Joel Esquenazi and Carlos Rodriguez’s petition for a writ of certiorari seeking clarification of what constitutes an “instrumentality” of a foreign state under the Foreign Corrupt Practices Act. As we previously reported, Esquenazi and Rodriguez were convicted of violating the FCPA by directing payments to officials at a Haitian telephone company. The Court of Appeals for the Eleventh Circuit concluded the company was an “instrumentality” of the Haitian government.

The FCPA makes it illegal to direct payments to “foreign officials,” which the Act defines to include employees of any “instrumentality” of a foreign government. The FCPA does not define the term “instrumentality,” and Esquenazi and Rodriguez argued the company whose officials they allegedly paid was not an “instrumentality” of the Haitian government. The Court of Appeals for the Eleventh Circuit rejected this argument and became the first federal appellate court to interpret the term “instrumentality” under the FCPA. In its decision, the Eleventh Circuit identified a large number of factors courts could consider in determining whether a company is an instrumentality for purposes of the FCPA. In seeking Supreme Court review, Esquenazi and Rodriguez asserted the Eleventh Circuit’s interpretation of the term was “excessively broad” and failed to offer “predictability” concerning whether any “given entity qualifies as an ‘instrumentality.’” Despite these arguments, the Supreme Court declined to review the case, leaving the Eleventh Circuit’s decision as the leading federal judicial guidance concerning the meaning of a key term in the FCPA.

16 Oct

High-Frequency Trader Faces First Criminal Prosecution For “Spoofing” Commodities Futures Markets

Earlier this month, the United States Attorney for the Northern District of Illinois filed criminal charges against high-frequency trader Michael Coscia for manipulating commodities futures prices. Coscia allegedly “spoofed” the market by placing and quickly canceling orders in commodities futures markets to manipulate prices. Coscia’s case is the first criminal prosecution under anti-spoofing rules added to the Commodities Exchange Act through the Dodd-Frank Act.

Coscia has been a registered commodities trader since 1988 and formerly owned and managed Panther Energy Trading LLC in New Jersey. Coscia became involved in high-speed trading, which requires the use of computer programs to respond to market conditions and place trades within milliseconds. According to the government, Coscia designed computer programs to manipulate prices for a wide variety of commodities, which he used to earn nearly $1.6 million from August to October 2011.

Prosecutors allege Coscia’s scheme relied on moving market prices by placing and then quickly canceling large orders even though it is illegal to place a commodities order with the intent to cancel. According to the indictment, Coscia first placed an order for a commodity either above or below the market price. He then used a computer program to place large orders to move the market toward his price. Once the market price moved and Coscia’s first order was filled, his computer program cancelled his large market-moving orders before they were filled. Coscia then repeated the process in the opposite direction, effectively allowing him to purchase positions below, and then sell positions above, what the market price would have been absent his large, canceled trades.

Coscia is facing six commodities fraud charges and six spoofing charges. Combined, these charges could lead to a maximum sentence of 210 years in prison and a fine of $7,500,000. We will monitor developments in this case.

15 Oct

Ex-UBS Global Wealth Management Executive Heads to Trial on Klein Conspiracy Charge

Raoul Weil, the former head of UBS’ global wealth management group, goes on trial this week in the Southern District of Florida where he has been charged with violating 18 U.S.C § 371. The statute, otherwise known as a Klein conspiracy, makes it illegal to conspire to defraud the U.S. government, in this case the IRS. The government alleges that Weil and his co-conspirators “increase[d] the profits of [UBS] by providing unlicensed banking services and investment advice in the United States and other activities intended to conceal from the IRS the identities of [UBS’s] United States clients, who willfully evaded their income tax obligations by, among other things, filing false income tax returns and failing to disclose the existence of their [UBS] accounts to the IRS.” UBS had entered into a Qualified Intermediary Agreement (“QIA”) with the IRS that required the bank to report income and other client information to the Agency for certain transactions. But according to the indictment, Weil and others knew that the bank’s cross-border business did not comply with the Agreement, contrary to the bank’s representations.

Weil has moved to preclude evidence and argument concerning alleged violations of the “deemed sales rule,” whereby sales effected by a broker outside the U.S. are nonetheless “deemed” to have occurred domestically if the customer regularly sends directions from the U.S. to a foreign broker. When applicable, the rule triggers certain reporting and tax-withholding requirements for the bank.

Read On
03 Oct

WellCare Executives Convicted of HealthCare Fraud Tell Eleventh Circuit Their Interpretation of Statute Was Reasonable “As a Matter of Common Sense” and Trial Court’s Willful Blindness Instruction was Erroneous

Four former executives of WellCare Health Plans, Inc. have appealed their June 2013 convictions on healthcare fraud and false statements charges, arguing that “the prosecution did not establish a breach of contract, much less criminal fraud.” At issue is their interpretation of Florida’s then-newly enacted “80/20 Statute” under which the state’s Agency for Health Care Administration (“AHCA”) Medicaid contracts require “80 percent of the capitation paid to the managed care plan . . . to be expended for the provision of behavioral health care services” or else “the difference shall be returned to the agency.” In purported accordance with the statute and in consultation with counsel, WellCare created Harmony Behavioral Health, Inc. to provide behavioral healthcare to WellCare plan participants. The government contends the defendants fraudulently claimed compliance with the 80/20 rule because the Plans were not allowed to “report their payments to Harmony for provision of the relevant services,” which is what they did. Instead, “the Plans had to report the amounts Harmony paid to downstream ‘direct providers’ for services.” As one trial witness put it, the case boiled down to “whether or not you can use Harmony for those calculations.”

The defendants attack their convictions on multiple grounds, including the prosecution’s failure to prove that Plan submissions filed in 2007 contained false statements. As defendant Paul Behrens argues at length in his appellate brief, the issue is purely a question of law – whether or not the Plans payments to Harmony for relevant behavioral services counted as 80/20 expenditures. And where the truth or falsity of those reports “centers on an interpretive question of law,” under United States v. Whiteside, 285 F.3d 1345 (11th Cir. 2002), “the government bears the burden of providing beyond a reasonable doubt that the defendant’s statement is not true under a reasonable interpretation of the law.”

Read On
02 Oct

Stilwell Takes Another Shot at Stopping SEC Action by Challenging Constitutionality of SEC Administrative Proceedings

After a federal district court judge ordered him to comply with an SEC administrative subpoena or risk contempt sanctions, Joseph Stilwell and his Stilwell Value fund filed a lawsuit yesterday to prevent the SEC from bringing administrative charges against them. As we recently reported, Judge Andrew L. Carter, Jr. granted the agency’s request for judicial enforcement of its testimonial subpoena in connection with certain inter-fund loans Stilwell allegedly failed to disclose properly. Stilwell unsuccessfully argued the subpoena was without the requisite investigatory purpose because the SEC had already decided to file charges against him. After providing the required testimony on Tuesday, Stilwell filed suit in the Southern District of New York to prevent “commencement of the enforcement action” that he believes is now “imminent.”

According to Stilwell’s complaint, an SEC administrative proceeding would compel him “to submit to an unconstitutional proceeding” and result in “irreparable reputational and financial harm.” To prevent such a suit, the complaint seeks a declaration “that the statutory and regulatory provisions providing for the position and tenure protections of SEC [administrative law judges (“ALJs”)] are unconstitutional.” More specifically, Stilwell alleges that “SEC administrative proceedings violate Article II of the U.S. Constitution” because SEC ALJs are executive branch officers under Article II who “may not be separated from Presidential supervision and removal by more than one layer of tenure protection.” The SEC ALJ removal scheme conflicts with this requirement Stilwell argues because the President cannot simply remove ALJs. Instead, the ALJs “are protected from removal by a statutory ‘good cause’ standard,” and the SEC Commissioners who can seek their removal subject to that constraint “are themselves protected from removal by an ‘inefficiency, neglect of duty, or malfeasance in office’” standard.

Read On
29 Sep

3rd Circuit Rejects Challenge to SEC Rule and Holds Fiduciary Duty Not Required for Insider Trading Based on Misappropriation Theory

Last month, the Third Circuit Court of Appeals affirmed the insider trading and perjury conviction of Timothy McGee, an Alcoholics Anonymous mentor who traded on inside information he learned from his AA mentee about the impending sale of Philadelphia Consolidated Holding Corp. (“PHLY”). McGee had mentored the man, a PHLY executive, for “the better part of a decade.” When McGee inquired about his recent frequent absences from AA meetings, the mentee, who was under work-related stress, “‘blurted out’ the inside information about PHLY’s imminent sale.” Before the news became public, McGee borrowed money and bought a significant number of PHLY shares, taking the security from 10% to 60% of his personal stock portfolio. He did not tell his mentee about the trades.

A jury convicted McGee of securities fraud under the misappropriation theory, which “focuses on deceptive trading by outsiders who owe no duty to shareholders.” Misappropriation “occurs when a person ‘misappropriates confidential information for securities trading purposes, in breach of a duty [to disclose] owed to the source of the information.’” If the trader tells the source that he intends to trade, there is no deception and hence no liability under Section 10(b) of the Exchange Act of 1934. “Deception through nondisclosure, therefore, is the crux of insider trading liability.”

Read On
26 Sep

Judge Scheindlin Orders “Staggering” Disgorgement From Wyly Brothers With Possibly More to Come

In an 83-page opinion, Judge Shira Scheindlin ordered Texas businessman Sam Wyly to disgorge almost $124 million after hearing the remedies phase of the SEC’s enforcement action against Wyly and the estate of his deceased brother Charles. The court ordered the estate to disgorge an additional $63 million. Judge Scheindlin also left open the possibility that the Wyly brothers could have to disgorge more.

In reaching her decision, Judge Scheindlin determined the SEC’s proposed disgorgement amount for the securities violations involving registered securities was appropriate – namely the taxes that would have been paid on the profits from the sale of securities of four public companies on whose boards the Wylys sat “had the Wylys accurately disclosed beneficial ownership of the securities.” According to the court, the unpaid taxes were causally connected to the securities violations because the Wylys’ ”motivation to preserve tax benefits was important to their decision to misrepresent their beneficial ownership” and the “securities fraud was intimately connected to protecting the tax benefits in other ways.” Judge Scheindlin also ordered the Wylys to disgorge twenty five percent of their total profits on the sale of unregistered securities, which is within the range of the average discount received on unregistered securities.

Judge Scheindlin also granted the SEC’s request for the Wylys to pay prejudgment interest, although she ordered the SEC to recalculate the amount due. When done, the defendants will likely owe $300 million to $400 million dollars. In light of the “staggering” amount of money due, Judge Scheindlin concluded that “disgorgement of this magnitude is more than sufficient to deter future violations” and declined to impose additional financial penalties. She did, however, impose injunctive relief despite noting the general “toothlessness” of “obey-the-law” injunctions, evident from this case given that Sam Wyly was already subject to an earlier injunction. Still, Judge Scheindlin found, “the extensiveness of this scheme, the brazenness of Wyly’s conduct, and his position of wealth and importance in the community warrants the imposition of a permanent injunction in this case.”

In an addendum to her opinion, Judge Scheindlin left open the possibility that the Wylys could end up having to disgorge even more. The SEC had proposed an alternative measure of disgorgement for the sale of the registered securities based on all trading profits made from those sales. Prior to the remedies trial, Judge Scheindlin granted defendants’ motion to preclude the SEC from seeking disgorgement based on all trading profits, but permitted the SEC to present a revised calculation based on those trading profits. The SEC submitted a proffer of its revised trading profit disgorgement theory and an expert report positing three different calculations of unlawful gains. The Wylys opposed the SEC’s request to leave the record open for the purpose of addressing this alternative theory of disgorgement, but Judge Scheindlin granted it and will hold a one-day hearing on November 17. The parties will be able cross-examine each other’s experts on an alternative theory of disgorgement based on the “difference between the Wylys’ gains from their offshore transactions in the Issuers’ securities, and the gains that an ordinary buy and hold equity investor would have earned in those securities.”

Our earlier reports on the SEC’s enforcement action can be read here, including our recent post about the parties’ dispute over the proper measure of disgorgement.