Category: Securities Fraud
Second Circuit Affirms Judgment Against S.E.C. Broker, Holds that Statute of Limitations for S.E.C. Actions is Not Jurisdictional
In Securities and Exchange Commission v. Fowler, the Second Circuit (Lohier, Nardini, and Cronan, sitting by designation) affirmed the imposition of civil penalties and disgorgement against a financial broker. In so doing, the Second Circuit addressed whether the statute of limitations for the commencement of S.E.C. proceedings is jurisdictional, an issue of first impression in the Circuit, and concluded that it is not. The Court also rejected Fowler’s other arguments, including that the district court permitted the S.E.C. to improperly recharacterize its theory of Fowler’s liability, that the jury improperly found unauthorized trading in customer accounts, and that the district court erroneously imposed financial penalties as to each victim of Fowler’s conduct.
Second Circuit Affirms Convictions of Defendants Who Traded On Press Releases Hacked From Major Newswires
In United States v. Korchevsky, the Second Circuit (Walker, Parker, Carney) affirmed two defendants’ conspiracy and securities fraud convictions over defendants’ myriad claims of error, which included challenges to the sufficiency of the evidence, including as to venue; and contentions that the government constructively amended the indictment, that the district court improperly instructed the jury on conscious avoidance, and responded to a jury note in impermissible fashion. Despite a number of close calls, the Court rejected all of these arguments, as discussed below.
In United States v. Chow, the Second Circuit (Kearse, Carney, Bianco), affirmed the defendant’s 2018 conviction for insider trading (among other offenses). The case arose out of a failed 2016 merger spearheaded by Defendant Benjamin Chow, who passed along key details regarding merger negotiations to a business associate, who then traded based on this information. The Court reiterated its rule, recently expressed in its 2020 Kosinski decision, that corporate outsiders assume a fiduciary duty to a corporation when they sign a confidentiality agreement.
In United States v. Archer, the Second Circuit (Walker, Sullivan and Nathan, sitting by designation) reversed the grant of a Rule 33 motion for new trial in the Southern District of New York to Defendant Devon Archer, following his conviction for securities fraud and conspiracy to commit securities fraud. The Circuit reinstated the jury verdict and remanded the case for sentencing. Its decision emphasized that a successful Rule 33 motion based on the weight of the evidence requires a showing that the evidence “preponderates heavily” against the verdict. The decision seems to harmonize prior law in the Circuit that offered somewhat different formulations of the relevant standard. It is a reminder of the limited nature of post-verdict relief that is available to a trial defendant.
On Friday, the Second Circuit (Livingston, Carney, Sullivan) reinstated the conviction of a former Nomura Securities International, Inc. (“Nomura”) bond trader, Michael Gramins, in United States v. Gramins, No. 18-2007-cr, finding the lower court’s decision to grant Gramins a new trial pursuant to Rule 33 was based on an “overbroad” reading of the Circuit’s 2018 ruling in United States v. Litvak (“Litvak II”) that “cannot be located within the range of permissible decisions.” Litvak II was a major decision and the Gramins decision implicitly limits the reach of Litvak II to cases in which the government or its witnesses expressly described a broker as an agent when he or she is not, in fact, an agent. Future decisions will no doubt revisit these cases, looking for the dividing line between the two.
Circuit Denies “Pharma Bro” Martin Shkreli’s Appeal of His Conviction and District Court’s Forfeiture Order
On July 18, 2019, the Second Circuit issued a summary order in United States v. Shkreli (Jacobs, Livingston, Bianco) affirming the conviction and sentence of Martin Shkreli after his highly publicized 2017 trial in which he was convicted on two counts of securities fraud and one count of conspiracy to commit securities fraud. Shkreli was often known as the “Pharma Bro” because of his public statements about his drug company’s price increases in the pharmaceutical industry. On appeal, Shkreli challenged the district court’s “no ultimate harm” (“NUH”) jury instruction and its order requiring him to forfeit approximately $6.5 million that had been invested in his hedge funds.
The Second Circuit (Pooler, Jacobs, Wesley) issued an opinion holding that a criminal forfeiture order in an insider trading case is not limited to the amount of funds acquired through illegal activity but may extend to the appreciation of those funds. In the case United States v. Afriyie, 17-cr-2444 and 17-cr-4045, the Court upheld a conviction for securities fraud and wire fraud, and upheld an almost $2.8 million forfeiture order, but vacated and remanded a restitution order in light of the Supreme Court’s recent decision in Lagos v. United States, 138 S. Ct. 1684 (2018).
In an appeal arising in the aftermath of Raj Rajaratnam’s criminal conviction for insider trading, the Second Circuit (Lynch, Raggi, Droney) issued an opinion upholding an almost $93 million Securities and Exchange Commission (“SEC”) civil penalty that was imposed based on the same conduct that served as the basis for Rajaratnam’s conviction. The case, Securities and Exchange Commission v. Raj Rajaratnam, No. 11-5124-cv, demonstrates that an individual convicted of insider trading may be required to pay a sizable fine under Section 21A of the Securities Exchange Act, despite having already paid a significant criminal penalty. Despite some provocative comments by the district court about the defendant, the Circuit held that the imposition of the maximum possible fine under the statute was supported by law.
Earlier this week, we discussed the Second Circuit’s summary order in the insider trading appeal by Rajat Gupta. Gupta was convicted in SDNY as part of the string of successful prosecutions brought during the tenure of U.S. Attorney Preet Bharara. The summary order affirmed the denial of Gupta’s 2255 petition, thereby leaving in place his conviction. The Second Circuit, without explanation, has withdrawn the summary order and published the same decision as a per curiam opinion. Other than the correction of minor typos, there appear to be no changes in the Court’s ruling. A link to the published opinion is here.
In a brief summary order issued yesterday, the Second Circuit denied Rajat Gupta’s collateral attack on his insider trading conviction in Gupta v. United States, Nos. 15-2707(L), 15-2712(C). In a decision reminiscent of the recent summary order in Whitman v. United States, the panel (Kearse, Wesley, Droney) passed on the opportunity to develop the law on the “personal benefit” element of insider trading and instead denied Gupta’s habeas petition on the primary ground that he procedurally defaulted by failing to raise the issue on direct appeal.
In a short summary order issued on October 25, 2018, the Second Circuit (Newman, Lynch, Droney) affirmed the denial of a habeas petition in the case of Whitman v. United States. This case could have given the Second Circuit an opportunity to address again a complicated area of insider trading law, but the Court instead rejected the appeal based on procedural grounds, holding that procedural default prevented the district court from granting the petition.
What Was Decided Before Has Been Decided Again: The Amended Opinion in Martoma Cuts Back On The Initial Decision, But Still Affirms
On Monday a divided Second Circuit panel (Katzmann, Pooler, Chin) issued an amended decision upholding the conviction of former SAC Capital portfolio manager Mathew Martoma on one count of conspiracy to commit securities fraud and two substantive counts of securities fraud. The amended decision—like the original decision—is a major decision expounding on the common law of insider trading, from the leading Court on questions of federal securities law. The decision—both the majority and the dissent—requires close study not only of its 61 combined pages, but several prior Supreme Court and Second Circuit decisions upon which it is premised. In this regard, the decision reflects the continuing uncertainty that is created by the absence of a statute that specifically addresses insider trading. Both the majority and the dissent make compelling arguments, and the question of what should be permitted and prohibited would be resolved most constructively by the legislative branch.
In United States v. Litvak, the Second Circuit (Winter, Chin, Korman D.J.) reversed the conviction of Jesse Litvak, a securities trader at investment bank Jefferies & Co., for securities fraud premised on Litvak’s misrepresentations to trading counterparties about Jefferies’ profits on the transaction. The Court held that the district court improperly admitted testimony that Litvak’s counterparty believed that Litvak was acting as his fiduciary agent—even though in fact no such relation existed. The Court explained that the counterparty’s erroneous, subjective belief was irrelevant as to the objective materiality of the misstatement, but likely swayed the jury in convicting. The decision also raises interesting questions about expectations between traders and their customers, and the Government’s role in policing that relationship. For our discussion and commentary on this decision, please see our article on Law 360.