Category: Securities Fraud
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 The Second Circuit, without explanation, has withdrawn the summary order and published the same decision as a per curiam opinion.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.