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.

21 Oct
2014

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
2014

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
2014

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
2014

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
2014

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.

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