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Category: Securities Fraud

Circuit Reinstates Securities Fraud and Wire Fraud Conspiracy Conviction In Case Of RMBS Trader

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.

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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.

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Circuit Upholds Forfeiture Based on Appreciation

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).

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Circuit Upholds Rajaratnam SEC Civil Penalty

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.

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Gupta Summary Order Republished As Opinion

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.

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Rajat Gupta’s Insider Trading Conviction Affirmed

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.

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Notable Insider Trading Decision Affirmed, Despite Asserted “Personal Benefit” Error

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.

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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.

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Takeaways From 2nd Circ. Reversal Of Litvak Conviction

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.

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