17 Sep
2014

Amaranth Trader Brian Hunter Settles CFTC Energy Market Manipulation Charges Shortly Before Trial

With the parties headed for an early October trial, Judge Ronnie Abrams of the Southern District of New York District signed a consent order on Monday resolving the Commodity Futures Trading Commission’s case against former Amaranth Advisors’ senior energy trader Brian Hunter. The Federal Energy Regulatory Commission had also pursued Hunter. But the CFTC and Hunter argued before the U.S. Court of Appeals for the District of Columbia that the CFTC, not FERC, was the only agency with jurisdiction over the commodity futures markets. Luckily for Hunter, the D.C. Circuit agreed with him and the CFTC and Hunter was able to escape FERC’s attempt to extract a $30 million penalty. The D.C. Circuit’s ruling left Hunter to fight the CFTC’s action alleging he attempted to manipulate the price of natural gas futures contracts on the New York Mercantile Exchange on two days in 2006.

Under NYMEX Rules, the settlement price of the contracts “is determined by the volume weighted average of trades executed between 2:00-2:30 p.m. (“closing range”) on the last day of trading of such contracts (“expiration day”).” According to the CFTC, Hunter and Amaranth, which already settled the case against it, tried to create artificial natural gas futures prices by going on a “selling spree” during the closing range on the expiration date for certain March 2006 futures contracts. This selling spree allegedly benefited Amaranth’s significant short natural gas swap positions on other exchanges. In the second instance of alleged misconduct two months later, the CFTC contended Hunter purposefully held sell orders until the final minutes of the closing range on the expiration date of Amaranth’s May 2006 futures contracts without any legitimate commercial justification to affect the sale price.

Earlier this summer, Reuters noted the case against Hunter was expected to test the CFTC’s trial might. But that test will have to wait in light of Hunter’s agreement to pay a $750,000 penalty to settle the charges. He is also prohibited from trading in any CFTC-regulated products during the settlement period of the last trading day for the product and from trading any natural gas product regulated by the CFTC in the closing period for the product. In addition, the Consent Order permanently bars Hunter from registering with the CFTC or from claiming an exemption from registration.

11 Sep
2014

DOJ and SEC Charges Against Robert Bandfield and Others in Alleged Offshore Stock Scheme Raise More Questions Than Answers

On Tuesday, the Department of Justice unsealed an indictment in the United States District Court for the Eastern District of New York against six corporate entities and six financial professionals. The DOJ’s press release says the entities and individuals were indicted for orchestrating an alleged $500 million offshore asset protection, securities fraud, tax fraud, and money laundering scheme, but curiously, the indictment contains no substantive securities fraud, tax evasion, or money laundering charges. The indictment charges the defendants only with conspiracy to commit securities fraud, conspiracy to defraud the United States, and a money laundering conspiracy. Also, although the defendants allegedly assisted about 100 clients who were U.S. citizens or residents in concealing profits from securities trading and avoiding taxes, no clients have been charged.

The conspiracy to commit securities fraud centers on the indictment’s allegations that defendant Robert Bandfield and his co-conspirators created shell companies in Belize and Nevis, West Indies to help U.S. clients conceal their ownership of certain thinly-traded microcap stocks and manipulate the share price of those U.S. publicly traded companies. Among the small company stock that defendants allegedly manipulated were shares of Cannabis-RX, a microcap company supposedly in the business of providing medical marijuana. Although not mentioned in the complaint, the press has speculated that the defendants may also have had a role in this summer’s price surge of the social networking stock Cynk Technology Inc., which is located on the same floor of a Belize office building as several of the charged corporate defendants. But given that the government has not charged defendants with substantive securities fraud, it is not clear whether the defendants’ actions actually resulted in the manipulation of stock prices.

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08 Sep
2014

Judge Sentences Martoma to 9 Years After Finding Him Accountable for $276 Million in Illicit SAC Trading

The Wall Street Journal and The New York Times report that Judge Paul G. Gardephe has sentenced Mathew Martoma to nine years in prison, following Martoma’s February 2014 conviction on insider trading charges. Judge Gardephe also ordered Martoma to forfeit $9.38 million – the equivalent of his pre-tax 2008 bonus. Martoma’s lawyers had requested a “lenient” sentence far lower than the 188-235 months the Probation Department had calculated as the Sentencing Guidelines range, which the lawyers called “absurd.” The government advocated for a sentence longer than the 96 months Probation recommended, saying that Martoma should serve a term of imprisonment at the high end of insider trading sentences that have been imposed in the Southern District of New York.

In an opinion issued earlier today, Judge Gardephe rejected Martoma’s argument about the Guidelines calculation, ruling that Probation had correctly applied a 28-point enhancement when calculating the Guidelines range based on the amount of illicit gain attributable to Martoma. According to Judge Gardephe, that gain properly included the $276 million in profits SAC Capital made and losses avoided. Martoma had argued the number should be $6.3 million – his post-tax bonus for 2008 – or, at worst, $49.4 million, which accounted for the Wyeth and Elan trading only in the portfolio he managed. But Judge Gardephe found that Martoma’s accountability was not limited to his personal profit. In so ruling, he rejected Martoma’s argument that the government failed to prove Steven Cohen acted in concert with Martoma or received inside information from him before placing trades on behalf of SAC. Instead, Judge Gardephe wrote, “it is much more likely than not that Cohen did, in fact, receive material non-public information from Martoma on July 20, 2008,” shortly after Martoma received the information from Dr. Sidney Gilman and shortly before SAC began a “secret sale of its positions in Elan and Wyeth.”

04 Sep
2014

Judge Gardephe Denies Mathew Martoma’s Motion to Reverse Insider Trading Conviction

Earlier today, Judge Paul G. Gardephe denied Mathew Martoma’s last chance to reverse his insider conviction prior to sentencing. Judge Gardephe declined to set aside the jury’s February 2014 verdict, finding the “evidence at trial overwhelmingly demonstrated [Martoma's] guilt,” and a reasonable jury could have found him guilty of securities fraud and conspiracy to commit securities fraud. He also denied Martoma’s request for a new trial.

Judge Gardephe rejected Martoma’s argument that the final efficacy data Martoma received from Dr. Sidney Gilman was not material non-public information because it was very similar to information already published in an Elan press release about the bapi study for the treatment of Alzheimer’s. Noting this argument “was not persuasive to the jury and is not persuasive to this Court,” Judge Gardephe cited the investor community’s “swift” and “pronounced” reaction to the negative study results when they were made public at a medical conference shortly after Martoma learned of the results and after SAC Capital sold off much of its position.

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03 Sep
2014

Administrative Action Against Cohen Remains Stayed Pending Resolution of Related Criminal Cases

At the request of the U.S. Attorney’s Office for the Southern District of New York, Chief Administrative Law Judge Brenda P. Murray has continued the stay of the SEC’s administrative action against SAC founder Steven A. Cohen. The SEC has charged Cohen with failing to supervise Michael Steinberg and Mathew Martoma, both of whom were convicted of insider trading. Steinberg’s conviction is currently on appeal, while Martoma is set to be sentenced on September 8. ALJ Murray previously stayed the administrative case pending resolution of those criminal proceedings. Given their ongoing status, ALJ Murray agreed to continue the stay and ordered the goverment to provide an update by November 28, 2014.

02 Sep
2014

Steinberg Says Admin Case Against Him Should be Stayed; SEC Claims ALJ Has No Choice But to Proceed

Continuing its push to bar quickly individuals convicted of insider trading from the securities industry, the SEC’s Division of Enforcement wants an administrative law judge to grant summary disposition on its order instituting administrative proceedings that would impose such a bar against Michael Steinberg. Steinberg opposes the SEC’s request and, like Anthony Chiasson, asks the ALJ handling his case to defer ruling on the Division’s motion until the Second Circuit determines whether a downstream tippee must have knowledge of the benefit received by the tipper to be guilty of securities fraud. That question is to be decided soon in United States v. Newman and Chiasson. Steinberg argues that a deferral is warranted given “the tenuous nature of [his] conviction” and that a pre-appeal bar is not in the public interest where a favorable ruling from the Court of Appeals “would directly repudiate the Division’s allegations concerning the degree of scienter” in his case.

The Division of Enforcement sees things quite differently, arguing there is no basis for a deferral and that the ALJ lacks discretion to grant one because “[d]eferral is only proper if a party, ‘for good cause shown,’ cannot present by affidavit prior to the hearing facts essential to justify opposition to the motion.” The Division says that “much of Steinberg’s opposition brief consists of his reading tea leaves in an attempt to justify his belief that Newman and Chiasson, and therefore he himself, will win their appeals.” But the “fact of Steinberg’s appeal, and even the likelihood of its success, are simply not factors that allow deferral of a decision on the Division’s motion,” according to the agency.

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02 Sep
2014

Investor Relations Executive Faces Criminal and Civil Insider Trading Charges

Continuing their crusade against insider trading, the United States Attorney’s Office for the Southern District of New York and the SEC have brought parallel criminal and civil insider trading charges against Michael Lucarelli, the Director of Market Intelligence at investor relations firm Lippert/Heilshorn & Associates, Inc. The USAO and the SEC allege Lucarelli took advantage of his advance knowledge of nonpublic information about Lippert’s clients, trading on that information and earning hundreds of thousands of dollars.

Lippert assists companies in announcing important news such as their quarterly earnings and has access to draft press releases with material nonpublic information. The USAO and SEC allege Lucarelli profited from this information by accessing drafts of announcements before they were published and using the information to place trades. When the announcements became public, Lucarelli sold his positions for a profit. The USAO and SEC also contend that to place the trades Lucarelli used brokerage accounts he opened without disclosing his connection to Lippert and that he violated a Lippert code of conduct that strictly prohibits employees from trading in securities issued by Lippert clients.

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29 Aug
2014

Dr. Farid Fata Moves to Suppress Evidence Gathered from Search of Email Account

Dr. Farid Fata, who was indicted in the Eastern District of Michigan after he allegedly billed Medicare for patients’ medically unnecessary cancer treatments, has moved to suppress evidence gathered from his personal email account. Fata argues that a search warrant issued to Microsoft seeking “[a]ll stored electronic mail” and certain associated data from his Hotmail account was overbroad. Although Fata concedes that “[a]rguably, the allegations of the [affidavit in support of the warrant application] do provide probable cause to believe that at least some evidence of some criminal conduct would be contained in the emails sought,” he says the “difficulty with the affidavit, and with the warrant predicated on its allegations, is the breadth of the search they contemplate.”

Fata’s motion is based on the Fourth Amendment requirement that a warrant “particularly describe[e] the . . . things to be seized,” preventing the government from engaging in the type of “wide-ranging rummaging searches” that violate “the Constitution’s proscription against unreasonable searches and seizures.” Fata argues the search authorized here, one through all of his emails, is analogous to the type of “all records” searches of a business “that are ordinarily understood to be constitutionally overbroad and infirm unless ‘the government establishes probable cause to believe that the entire business is merely a scheme to defraud or that all of the business’s records are likely to evidence criminal activity.’” According to Fata, no facts alleged in the affidavit support such a wide-ranging search. Instead, it “would not have been a difficult task to limit the scope of the e-mail search to match the limited scope of the showing of probable cause. Easily searchable, filterable subject line and ‘header’ information would have allowed the searchers to retrieve only communications which pertain to particularly pertinent matters, came from or were sent to particular persons or places, and otherwise to narrow the scope of the intrusion.” Absent any such limitations, Fata claims the warrant violates the Fourth Amendment’s particularity requirement and the fruits of the search must be suppressed.

22 Aug
2014

Esquenazi and Rodriguez Ask Supreme Court to Review “We-Know-It-When-We-See-It” Approach to FCPA Interpretation

Two owners of a Miami-based telecomm company who were convicted of violating the Foreign Corrupt Practices Act for paying kickbacks to employees of a Haitian telecomm company have asked the Supreme Court to reverse their convictions. Joel Esquenazi and Carlos Rodriguez argue the Court of Appeals for the Eleventh Circuit got it wrong when it upheld the government’s “excessively broad . . . interpretation of who is considered to be a ‘foreign official’” for purposes of outlawing certain payments under the anti-bribery provisions of the FCPA. According to Esquenazi and Rodriguez the Act was intended to criminalize payments only “to a narrow recipient category of traditional government officials performing official or government functions.”

The FCPA “prohibits individuals and companies from corruptly paying anything of value to a ‘foreign official’ in order to obtain or retain business.” The Act, in turn, defines a “foreign official” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The Act, however, does not define “instrumentality.” In Esquenazi and Rodriguez’s case, the alleged instrumentality was a company that “‘belonged to’ the Bank of the Republic of Haiti,” which, according to a declaration filed by the Haitian Minister of Justice in the trial court, is “an institution of the Haitian state.”

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21 Aug
2014

Anthony Chiasson Wants SEC to Postpone Any Industry Bar Pending Outcome of Criminal Appeal

Anthony Chiasson is one of many people anxiously awaiting the Second Circuit’s decision on the validity of his 2012 insider trading conviction in United States v. Chiasson and Newman. Chiasson, a co-founder of Level Global, and his co-defendant Todd Newman, both downstream tippees, have argued that United States District Court Judge Richard Sullivan erred by failing to require the government to prove they knew that the corporate insiders who provided material non-public information did so in exchange for a personal benefit. In addition to his criminal conviction, Chiasson is also facing a permanent bar from the securities industry. Just days before the Second Circuit heard oral argument on the “knowledge of personal benefit” issue, an SEC administrative law judge recommended the bar based on Chiasson’s criminal conviction. Chiasson has now asked the SEC to reverse the recommendation with instructions to stay the administrative case until the criminal appeal is resolved.

Although it may not be uncommon for an appeal to be pending at the same time an industry bar is imposed in a parallel administrative action, Chiasson argues his case is unique because “the landscape of [his] matter changed in the days following the ALJ’s ill-timed Initial Decision.” First, “the Second Circuit sharply questioned the government’s interpretation of the law governing insider trading” at oral argument. Then, “the legal community reacted [to the argument] in a manner that supports deferring” any bar. Chiasson points to the SEC’s Division of Enforcement’s agreement to stay its case against SAC Capital portfolio manager Michael Steinberg pending the outcome of the Chiasson appeal because “the panel’s questions appeared to express skepticism as to the sufficiency of Judge Sullivan’s jury instructions regarding downstream tippees” and similar instructions were given in Steinberg’s criminal case. The U.S. Attorney’s Office also sought to stay the SEC’s administrative action against SAC Capital founder Steven A. Cohen, whom the SEC charged with failing to supervise Steinberg and fellow portfolio manager Mathew Martoma.

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