30 Jul
2015

Government Brings Newman to the Supreme Court

Two days shy of its August 1 deadline, the government has petitioned the Supreme Court for review of US v. Newman, the landmark case in which the Second Circuit held that tippees cannot be held liable for insider trading absent proof that they knew the tipper disclosed confidential information in exchange for a personal benefit. The Newman court also held that the requisite benefit cannot be inferred without “proof of a meaningful close personal relationship [between the tippee and the tipper] that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”

The government contends that this “unprecedented” ruling conflicts with the Supreme Court’s decision in Dirks v. SEC, 463 U.S. 646 (1983), “which did not require an ‘exchange’ to find liability for a gift of inside information and did not impose amorphous standards for the relationships that can support liability.” Instead, under Dirks “an insider personally benefits when he ‘makes a gift of confidential information to a trading relative or friend.’” According to the government, Newman’s “‘exchange’ formulation erases a form of personal benefit that [the Supreme] Court has specifically identified,” and “the entire ‘gift’ discussion in Dirks becomes superfluous.”

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17 Jul
2015

Duka Cites Lack of Commission Review as Evidence of ALJs’ Significant Authority

In the ongoing federal court case between Barbara Duka and the SEC in which Duka is trying to stop an administrative enforcement action against her, Duka filed a brief this week opposing the SEC’s motion to dismiss her complaint and in further support of a preliminary injunction. One issue in dispute is whether SEC ALJs are inferior officers who must be properly appointed. In Duka’s opposition, she argues that they “are indeed inferior officers, given their ‘significant authority.’” The SEC contends otherwise, citing the fact that ALJs cannot issue “final” decisions, a form of authority that Duka claims is not determinative. Regardless, she says, the “effective finality” of their decisions demonstrates their true authority – “[i]n practice, the SEC ALJ’s initial decision is often the final word.” According to Duka’s counsel, they found 167 initial decisions on Westlaw from 2014 in which the Commission endorsed an ALJ’s decision as final without reviewing it.

Our prior reporting on the case can be read here. Brune & Richard represents the plaintiff in an action making similar claims.

17 Jul
2015

DC Circuit Finds SEC’s Failure to Act in 180 Days Does Not Require Dismissal of Enforcement Action

Section 4E of the Securities Exchange Act gives the SEC 180 days to file an enforcement action after the Division of Enforcement issues a Wells notice. According to the D.C. Circuit, the SEC’s failure to act within that timeframe is not fatal to its claims, because the 180-day limit is an internal deadline and not a jurisdictional bar under the Commission’s reasonable interpretation of the statute.

In Montford & Co., Inc. v. SEC, petitioners asked the D.C. Circuit to review a final SEC order against them for violations of the Investment Advisors Act. Petitioners argued that the enforcement action was untimely because the SEC instituted proceedings 187 days after giving them a Wells notice. The extra seven days required dismissal, they claimed, because Section 4E of the Securities Exchange Act provides that “[n]ot later than 180 days after the date on which Commission staff provides a written Wells notification to any person, the Commission staff shall either file an action against such person or provide notice . . . of its intent not to file an action.” Petitioners had argued unsuccessfully to the ALJ presiding over their case that the Division of Enforcement’s delay divested the agency of jurisdiction. When the Commission reviewed the ALJ’s decision against them, the Commission found that “dismissal of an action is not the appropriate remedy when the time periods set forth in Section 4E are exceeded.”

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16 Jul
2015

SEC Contests Flannery’s and Hopkins’ First Circuit Appeals

The SEC has filed a brief opposing John Flannery’s and James Hopkins’ appeals of the administrative orders against them. Flannery and Hopkins are the former State Street employees who allegedly made misrepresentations and omissions to investors in a State Street bond fund. Our earlier reporting on the case can be read here.

In its opposition, the SEC contends that Flannery misconstrued the basis for the Commission’s finding that he engaged in a ‘course of business’ that defrauded investors in violation of Section 17(a)(3) of the Securities Act. Flannery argued that, under the Commission’s own interpretation of the statute, liability attaches “only to those ‘who repeatedly make[] or draft[] [material] misstatements’ and, he asserts, he “did not ‘make’ or ‘draft’ the risk reduction language” in one of the two letters at issue in the case. Thus, he essentially did not make or draft enough language to be found liable under the provision.

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09 Jul
2015

Sarao Answers CFTC’s “Flash Crash” Complaint

Navinder Singh Sarao filed an answer denying the CFTC’s allegations against him. In an enforcement action that parallels the Justice Department’s criminal case, the CFTC contends that Sarao engaged in a “massive effort” to manipulate the price of E-Mini S&P 500 futures contracts on the Chicago Mercantile Exchange through various spoofing tactics whereby Sarao placed and canceled orders with no intention of actually executing them. In denying the allegations, Sarao also asserted several affirmative defenses, including that a finding against him would violate due process because he “lacked reasonable notice . . . that his trading activity – which was indistinguishable from widely-accepted and permissible practices – would be deemed to violate the” Commodity Exchange Act.

Our earlier reporting on the criminal and civil enforcement actions against Sarao can be read here.

06 Jul
2015

Calling it “Too Late and Too Little,” Judge Rakoff Rejects Rajat Gupta’s Motion to Vacate Conviction

Judge Jed Rakoff rejected Rajat Gupta’s motion to vacate his conviction on insider trading charges last week. Gupta had argued that the court improperly instructed the jury that it could find Gupta guilty without proof that he received a consequential benefit for tipping Galleon founder Raj Rajaratnam.  Gupta claimed that such evidence was required by the Second Circuit’s intervening decision in U.S. v. Newman.  In denying Gupta’s motion, Judge Rakoff found that Newman focused on the proof required to establish tippee liability.  For tippers like Gupta, proof of the defendant’s intention to benefit the tippee is sufficient “so far as the tipper is concerned, and no quid pro quo is required.”

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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