27 Aug
2015

Seventh Circuit Says District Court Lacks Subject Matter Jurisdiction to Hear Bebo’s Challenge to SEC Administrative Action Against Her

The Court of Appeals for the Seventh Circuit has affirmed a district court decision dismissing Laurie Bebo’s case against the SEC for lack of subject matter jurisdiction. Bebo is now waiting for an SEC administrative law judge to issue an initial decision in the agency’s enforcement action against her. If the ALJ finds for the Division of Enforcement, Bebo can petition the SEC for review. After that, if the Commission issues a final order in favor of the the Division, 15 U.S.C. § 78y allows Bebo to seek review from a federal appellate court.

Rather than waiting for the administrative case and potential appeal to play out, Bebo sought injunctive relief in the Eastern District of Wisconsin. Bebo argued that Section 929P(a) of the Dodd-Frank Act was unconstitutional because it gave the SEC “unguided authority” to decide whether to pursue respondents administratively or in federal court, which provides greater procedural protections. She also argued that the agency’s administrative proceedings violate Article II of the U.S. Constitution because the SEC’s ALJs are “protected from removal by multiple layers of for-cause protection,” which “interferes with the President’s obligation to ensure the faithful execution of the laws.”

Read On
26 Aug
2015

Rajat Gupta Asks Second Circuit to Review Denial of Habeas Relief

Rajat Gupta filed a notice of appeal yesterday with the Second Circuit.  Gupta wants the appellate court to overturn Judge Jed Rakoff’s decision denying Gupta’s application for habeas relief from his 2012 conviction on insider trading charges. Gupta believes that Judge Rakoff failed to instruct the jury properly on the personal benefit requirement as articulated in U.S. v. Newman, an argument that the court rejected.  Newman, wrote Judge Rakoff, held “that a tippee, to be criminally liable, must know that the information provided to him by the tipper was a product of a fiduciary breach by the tipper. Such tippee knowledge is irrelevant to Gupta, a tipper.”

We will follow the appeal and report back on what effects, if any, Newman may have on individuals charged with providing tips rather than with trading on them. Our prior posts on the case can be read here.

20 Aug
2015

Judge Berman Enters Preliminary Injunction Halting Administrative Case Against Duka

After amending her complaint to allege that the SEC’s administrative case against her violates the Appointments Clause of the Constitution because the SEC’s administrative law judges were not appointed by SEC Commissioners, Barbara Duka has succeeded in stopping the enforcement action against her, at least for now. Last spring, Judge Richard Berman had declined to grant injunctive relief after finding that Duka was unlikely to succeed on the merits of her claim, which at the time was premised on the argument that SEC administrative proceedings are unconstitutional because the agency’s ALJs enjoy too many layers tenure protection. But as the Appointments Clause argument gained traction in Georgia in Hill v. SEC, Duka filed an amended complaint incorporating that attack.

Read On
19 Aug
2015

Government Can’t Prove Hoskins Conspired to Violate FCPA Unless it Proves He Was Agent of Domestic Concern

Former Alstom executive Lawrence Hoskins has succeeded in precluding the government from prosecuting him under a theory of FCPA liability that would “be de-linked from proof that he was an agent of a domestic concern.” Hoskins moved to dismiss the first count of the third superseding indictment against him on the basis that the government charged a legally invalid theory, namely that “he could be criminally liable for conspiracy to violate the Foreign Corrupt Practices Act . . . even if the evidence does not establish that he was subject to criminal liability as a principal.” Hoskins has argued throughout the case that he is not covered by the statute because he was not an agent of the Connecticut-based Alstom subsidiary for which he allegedly arranged overseas bribes and hence was not an agent of a domestic concern.

Judge Janet Bond Arterton has now agreed with Hoskins, in part. Judge Arterton examined the text and structure of the FCPA, as well as the legislative history of the Act, and concluded that non-resident foreign nationals who are not agents of a domestic concern and do not commit acts while present in the United States cannot be found liable for violating the statute through a theory of accomplice liability. So, for example, the government cannot argue that Hoskins “could be liable for conspiracy even if he is not proved to [be] an agent of a domestic concern.” Since the government did allege agency in the third superseding indictment before arguing that it did not actually need to prove the relationship, Judge Arterton did not dismiss the count in its entirety. Instead, the count survives but the government’s more expansive interpretation was rejected.

Our prior reporting on the case can be read here.

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.”

Read On
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.”

Read On
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.

Read On
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.”