21 Nov
2014

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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18 Nov
2014

Judge Gardephe Orders Mathew Martoma to Begin Serving Sentence

Last week, the Court of Appeals for the Second Circuit denied Mathew Martoma’s emergency motion for bail pending appeal. Martoma had argued he was likely to get his insider trading conviction reversed or receive a new trial because of several alleged errors Judge Paul G. Gardephe made while presiding over Martoma’s trial. Those alleged errors included the district judge’s refusal to admit sworn statements of SAC founder Steven A. Cohen concerning the reasons why sold his Elan and Wyeth holdings. But Martoma failed to persuade the Second Circuit, which ruled that his motion did not present a substantial question of law or fact. Although Martoma can still appeal his conviction, he will have to surrender to the Bureau of Prisons in the meantime. Yesterday, the Second Circuit sent the case back to Judge Gardephe, who ordered Martoma to surrender by Thursday.

10 Nov
2014

SDNY Prosecutors Bring First-Ever Bitcoin Ponzi Scheme Case

In what prosecutors in the Southern District of New York are calling the first-ever prosecution of a Bitcoin Ponzi scheme, the government filed a criminal complaint last week against Trendon Shavers. Shavers operated Bitcoin Savings & Trust (“BCS&T”), “which offered and sold Bitcoin-related securities” and “promised investors who invested their Bitcoin in BCS&T up to seven percent interest per week in Bitcoin – an annualized interest rate of 3,641% per year – based on BCS&T’s purported Bitcoin market arbitrage strategy.”  But according the government, there was no such strategy. Instead, Shavers used new investors’ money to pay back prior investors and misappropriated Bitcoin for his own use.  “In the end,” according to the complaint, “at least 48 of approximately 100 investors lost all or part of their investment in BCS&T.”

Shavers and BCS&T have already been ordered to pay over $40 million in penalties and disgorgement in a related SEC action.

We will continue to follow the criminal case.

05 Nov
2014

Second Circuit Grants Martoma Brief Reprieve, Extends Surrender Date and Orders Expedited Briefing on Motion for Bail Pending Appeal

After losing his bid before Judge Gardephe to remain free pending appeal of his February 2014 conviction on insider trading charges, Mathew Martoma won a small victory before the Court of Appeals for the Second Circuit. Yesterday, the Second Circuit postponed Martoma’s November 10 surrender date and referred Martoma’s request for emergency relief to a three-judge motion panel that will decide “as soon as possible” whether Martoma can stay out of jail until his appeal is decided.

In support of the motion, Martoma’s lawyers argue he is not a flight risk and is entitled to remain free because his appeal “raises a substantial question of law or fact likely to result in . . . reversal [or] an order for a new trial.” Martoma’s counsel raise three potential errors that could result in a new trial or reversal. First, they argue Judge Gardephe committed clear legal error by excluding expert defense testimony that publicly available material showed Elan was overvalued in July 2008. They contend this testimony should have been admitted as relevant to Martoma’s defense that the information at issue was public and the alleged inside information he received from Dr. Sidney Gilman did not affect his trading decisions. Second, Martoma’s lawyers contend Judge Gardephe erred by excluding sworn statements of SAC Capital’s Steven A. Cohen in a parallel SEC investigation. Cohen testified that his decision to sell the firm’s Elan and Wyeth holdings was based on advice from other advisors and not from inside information he received from Martoma. Third, Martoma’s lawyers argue the government failed to prove Dr. Gilman received a personal benefit in exchange for his alleged tips

The government has until Sunday to file an opposition to Martoma’s request.  Our earlier posts on the district court case can be read here.

31 Oct
2014

BP’s David Rainey Attacks Obstruction Charge and Moves to Dismiss Second Superseding Indictment in Deepwater Horizon Prosecution

Former BP executive David Rainey unleashed a series of pretrial motions this week following the issuance of a two-count Second Superseding Indictment against him. Rainey is charged with obstruction of Congress and making false statements in connection with his work responding to the April 2010 explosion on the Deepwater Horizon. In earlier posts we explained that charges against Rainey have already been dismissed, reinstated, and superseded in prior proceedings before the district court and the Fifth Circuit Court of Appeals. The Fifth Circuit recently held that the relevant obstruction statute, 18 U.S.C. § 1505, may apply to investigations conducted by congressional subcommittees and is not limited to committee-level proceedings. Rainey’s petition for certiorari review of that decision remains pending.

In one of the motions he filed on Monday, Rainey continues to attack the validity of the obstruction charge. Rainey argues that even if Section 1505 encompasses a subcommittee’s investigation, the statute criminalizes only the obstruction of “the due and proper exercise of the power of inquiry under which any inquiry or investigation is being held.” Yet according to Rainey, “there is no House resolution authorizing the [Committee on Energy and Commerce (the “Committee”)], let alone the [Subcommittee on Energy and Environment (the “Subcommittee”)],” which he allegedly obstructed, “to investigate the Deepwater Horizon oil flow rate or spill response.” Absent an appropriate designation of investigatory authority, Rainey contends there was no “due and proper exercise of the power of inquiry” and Count One must be dismissed.

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24 Oct
2014

Calling Process “Rigged,” Herbalife Trader Attacks SEC’s Administrative Insider Trading Case Against Him

The legitimacy of the SEC’s administrative proceedings came under continued attack in the Southern District of New York this week when Jordan Peixoto filed a complaint to stop the agency’s administrative case against him. Last month, the SEC served Peixoto with an Order Instituting Cease-and-Desist Proceedings (“OIP”) alleging Peixoto engaged in insider trading by purchasing put options in Herbalife before the hedge fund Pershing Square Management publicly presented its negative view of the company. According to the OIP, Peixoto heard about the fund’s opinion – the material nonpublic information at issue – from a friend who lived with a Pershing analyst.

In addition to seeking to enjoin the SEC’s case, Peixoto asks for a declaration that “the statutory and regulatory provisions for the position and tenure protections of SEC [administrative law judges] are unconstitutional.” His arguments are similar to those Joseph Stillwell made in his S.D.N.Y. action filed earlier this month challenging the constitutionality of the SEC’s administrative proceedings.

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24 Oct
2014

Second Circuit Affirms Conviction of Former Refco Outside Counsel Joseph Collins

In a summary order issued Wednesday, the Court of Appeals for the Second Circuit affirmed the conviction of Joseph Collins, the former outside counsel for the commodities brokerage firm Refco. Collins was convicted in 2013 on charges related to his role “supporting Refco executives’ scheme to conceal large amounts of intercompany debt” by preparing documents that effected the underlying transactions. Collins was previously convicted on related charges in 2009, but that conviction was subsequently reversed.

In his appeal, Collins argued the district court erred by delivering a conscious avoidance charge. According to the Second Circuit, evidence of conscious avoidance (also known as willful blindness) can substitute for proof of actual knowledge of wrongdoing “if ‘the evidence would permit a rational juror to conclude beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact.’” Collins argued at length that under the Supreme Court’s decision in Global-Tech Appliances Inc. v. SEB S.A., 131 S. Ct. 2060 (2011), the government failed to establish a sufficient predicate for giving the instruction because Global-Tech requires proof that the defendant made “active efforts” to avoid learning the truth. According to Collins, “there is no evidence in the record that [he] took any affirmative action to avoid knowledge” of the fraud. Collins claims he was completely unaware of the fraud. The government, however, asserted that Global-Tech ushered in no sea change and “aquiescence . . . is a perfectly deliberate action” that satisfies the applicable standard.

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23 Oct
2014

Rengan Rajaratnam and the SEC Agree to Settle Insider Trading Case

Rengan Rajaratnam has preliminarily resolved the SEC’s civil insider trading claims against him. In a proposed settlement submitted to Judge John G. Koeltl, Rajaratnam agreed to the entry of an order requiring him to pay over $840,000 in disgorgement, penalties, and prejudgment interest; to be barred from the securities industry; and to be enjoined from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Rajaratnam does not have to admit or deny the allegations in the SEC’s complaint, which alleged that he engaged in repeated insider trading between January 2006 and August 2008.

Last July, Rajaratnam beat related criminal charges. In that case, Judge Naomi Reice Buchwald dismissed most of the counts against him before the jury found him not guilty of conspiring to engage in insider trading. Judge Koeltl must now decide whether to enter the proposed Final Judgment.

Our earlier posts on the civil and criminal cases against Rajaratnam can be read here and here.

23 Oct
2014

Sam Wyly Argues Bankruptcy Filing Automatically Stays SEC’s Proposed Asset Freeze

Facing a “staggering” disgorgement order, Sam Wyly filed for bankruptcy last week. Judge Shira Scheindlin issued the disgorgement order after a jury found that Wyly and his deceased brother Charles had committed civil securities fraud. Now, Judge Scheindlin must grapple with how Wyly’s Chapter 11 petition affects the case that remains before her, including whether or not the petition automatically stays the SEC’s proposed asset-freeze motion covering property within the bankruptcy estate.

Wyly argues the Chapter 11 case “alleviates any need” for a freeze “because the Debtor and all conceivable property of the bankruptcy estate will be under the control and supervision of the bankruptcy judge” who is presiding over his case in Texas. He also contends a freeze would violate the Bankruptcy Code. Although the Code permits regulatory actions to proceed despite the automatic stay that occurs upon a bankruptcy filing, Wyly says the government “may not enforce a money judgment or seize or seek control over property of the estate without first obtaining relief from the stay.”

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21 Oct
2014

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.