What’s The Opposite of Rubber Stamping a Settlement? Meet Judge Kane in SEC v. Van Gilder

Judge John L. Kane of the United States District Court for the District of Colorado is uninterested in oxymoronic gimmicks, that much is clear.  In a fiery April 24, 2014 opinion, Judge Kane rejected settlements between the SEC and two individual defendants in an insider trading case.  Judge Kane evoked—both in style and via explicit citation—Judge Jed Rakoff’s well-known rejection of the proposed settlement in SEC v. Citigroup Global Markets and similarly rejected the proposed settlements because they included numerous “provisions and recitations that [he would] not endorse.”

Judge Kane’s ire was focused on the SEC’s proposed settlement with Michael Van Gilder, the individual who allegedly traded based on inside information in advance of a high-stakes acquisition and tipped friends and family in an email titled “Xmas present.”  The SEC’s proposed settlement with Van Gilder included a permanent injunction prohibiting future violations of Section 10(b) or Rule 10b-5, a $109,265 disgorgement payment (credited in part by a payment already made in a parallel criminal proceeding), and another $109,265 in civil penalties.  The proposal included a number of standard provisions for SEC settlements, including a waiver of the entry of findings of fact and conclusions of law, a waiver of the right to appeal from the entry of final judgment, “a statement that Van Gilder neither admits nor denies the allegations of the Complaint,” and enjoining Van Gilder from future violations of existing statutory law.  Judge Kane decisively rejected each of these in turn. Read More

Trading on Tips: SEC May Seek Disgorgement from Trader for Gains in Investment Fund

A trader who uses material nonpublic information to execute trades but does not personally benefit from the resulting gains may nonetheless face disgorgement of all profits, according to a recent Second Circuit opinion.  In Securities Exchange Commission v. Contorinis, No. 12-1723, the Second Circuit affirmed a judgment from the Southern District of New York requiring defendant Joseph Contorinis, a former hedge fund manager at Jeffries & Co., to disgorge nearly $7.3 million in profits realized through an investment fund he had managed.  The court rejected the argument a person can only disgorge profits that are personally enjoyed and instead found that disgorgement may also apply unlawful gains that flow to third parties.  Relying on a principle that the limit for disgorgement is the total amount of gain flowing from illegal action, the Second Circuit concluded that district courts may impose disgorgement liability for gains that flow to third parties. Read More

SAC Pleads Guilty to Five Counts of Securities Fraud; Agrees to Pay Largest Fine in History for Insider Trading Offenses

SAC Capital Advisors pleaded guilty last Friday to securities fraud claims brought by the U.S. Attorney in Manhattan.  If approved, the deal would require SAC to pay a $1.2 billion penalty, including a $900 million criminal fine and $284 million civil forfeiture, and to cease operation of its outside investment business.  Appearing on behalf of SAC, Peter Nussbaum, general counsel for the hedge fund, offered the plea of five counts of securities and wire fraud charges based on the allegations that the company allowed rampant insider trading among its employees.  More than merely turning a blind eye, SAC allegedly went out of its way to hire portfolio managers and analysts who had contacts at corporations and failed to monitor and prevent trades based on their inside knowledge.

Mr. Nussbaum expressed “deep remorse” for each individual at SAC who broke the law, taking responsibility for the misconduct which occurred under SAC’s watch.  He also noted that “even one person crossing the line into illegal behavior is too many,” but emphasized that despite the six former employees that SAC admitted engaged in insider trading, “SAC is proud of the thousands of people who have worked at our firm for more than 20 years with integrity and excellence.”  The six former employees, Noah Freeman, Richard Lee, Donald Longueuil, Jon Horvath, Wesley Wang and Richard C.B. Lee, had already pled guilty to insider trading-related claims.  Critics have called for the judge to reject the plea, arguing that SAC has not taken enough responsibility.  Prosecutors have indicated that had the case gone to trial, evidence would have shown that far more than six people were involved in the insider trading there. Read More

Record SEC Settlement in S.A.C. Capital Investigation. Well….Kind Of.

On April 16, 2013, Judge Victor Marrero conditionally approved a $600 million consent judgment between the SEC and CR Intrinsic Investors LLC (“CR”) where CR “neither admitted nor denied” the allegations brought against it. The settlement was on the heels of a highly publicized investigation and lawsuit regarding CR’s purported insider trading scheme involving S.A.C. Capital Advisors and former S.A.C. trader Mathew Martoma. Despite finding the proposed injunctive and monetary relief “fair, adequate, and reasonable, and in the public interest,” Judge Marrero questioned the appropriateness of the “neither admit nor deny” provisions because of the extraordinary public and private harm caused by CR’s alleged wrongful conduct.

Approval of the CR settlement was conditioned upon the outcome of the pending Second Circuit appeal in S.E.C. v. Citigroup Global Markets, Inc., 11-cv-5227 (2d Cir.). In Citigroup, Judge Rakoff (of the Southern District of New York) denied approval of the SEC’s proposed settlement of fraud charges against Citigroup. Rakoff’s opinion harshly critiqued the agency’s use of “no admission” settlements as imposing “substantial relief on the basis of mere allegations.” He questioned whether “no admission” settlements could be properly judged when the Court did not know the relevant facts and therefore “lack[ed] a framework for determining adequacy.” Both Citigroup and the SEC appealed Rakoff’s decision to the Second Circuit, where the decision remains pending. Read More

The Revolving Door Spins Again

On January 24, President Obama announced his nominee for Chairman of the Securities Exchange Commission – Mary Jo White, a former United States Attorney for the Southern District of New York.

By selecting White, the President is signaling an interest in seeing a more forceful approach at the Commission. Indeed, if confirmed, White will be the first former criminal prosecutor to head the SEC. Previous SEC chairs, by contrast, had established careers in private legal practice, in academia, in business, and in government, either as legislators or, in the case of Harvey Pitt, as general counsel to the SEC (before his long career in private legal practice) — but not as criminal prosecutors. Although White has little regulatory or policymaking experience, she brings to the table a wealth of experience in enforcement, which has been a top priority for the SEC in recent years.

As the United States Attorney for the Southern District of New York from 1993 to 2002, White is best known for winning convictions for the 1993 World Trade Center bombing and for the 1998 bombings of two U.S. embassies in Africa as well as for winning the conviction of mobster John Gotti. The President emphasized, “Today . . . there are rules to end taxpayer-funded Wall Street bailouts once and for all. But it’s not enough to change the law. We also need cops on the beat to enforce the law.” Read More

Pick Your Poison: Regulators Find Overvalued Assets, Securities Fraud, and Insider Trading at Failed Thrift

In a case involving all of the hallmarks of the housing and economic crisis, on September 25, 2012 the SEC announced that it had charged three Nebraska bank executives and the CEO’s son with violations of securities fraud and insider trading laws stemming from subprime lending, undercapitalization, and the ultimate demise of TierOne Bank.

TierOne Bank was a century-old thrift that had traditionally focused on loans to the agricultural and residential sectors in Midwestern states, but like many banks caught up in the housing boom, in 2004 TierOne expanded into riskier loans in then-exploding markets such as Nevada, Florida, and Arizona. All of these markets would collapse just a few years later, leaving banks like TierOne with significant losses on their books. As a result, in June 2008, the Office of Thrift Supervision gave TierOne a choice: maintain elevated core and risk-based capital ratios or face enforcement action—the top leaders at TierOne allegedly chose neither.

Rather than increase capital ratios or accept an OTS enforcement action, CEO Gilbert Lundstrom, COO James Laphen, and Chief Credit Officer Don Langford allegedly materially understated TierOne’s loan and OREO losses. Not to be confused with the cookie, “OREO” in the banking context refers to “other real estate owned”—in this case real estate that TierOne had repossessed. Though TierOne was left holding real estate from failed markets around the country, its executives allegedly ignored the fact that the value of these assets was based on stale and inadequately discounted appraisals, and consequently made misstatements in its 2008 10-K and a number of other filings. Read More

The Tip Is In the Mail: Court Tries to Make Sense of Dodd-Frank’s Whistleblower and Retaliation Provisions and Asks Whether It’s Enough Just to Send a Letter

In what may be one of the first Dodd-Frank retaliation claims to make it past a motion to dismiss, a federal court on September 25, 2012 issued a ruling attempting to harmonize the definition of “whistleblower” under the landmark statute with its protections against employer retaliation for engaging in whistleblower activities. Acting in accord with the SEC’s final rule on the statute as well as opinions from the few federal courts to have weighed in on the subject, the court sided with the alleged whistleblower.

For some eighteen years, Richard Kramer had served as the vice president of human resources and administration at Trans-Lux Corporation. In that role, he had a number of responsibilities related to Trans-Lux’s ERISA-governed pension plan. Concerned with what he saw as conflicts of interest and deficiencies in the pension plan committee’s composition and reporting, Kramer went to Trans-Lux’s leadership and later the board’s audit committee to sound the alarm. Kramer eventually sent a letter to the SEC the old-fashioned way—by regular mail—a choice that would later have significance in the case.

Within hours of Kramer reaching out to Trans-Lux’s audit committee with his concerns, Trans-Lux’s CEO and another Trans-Lux employee reprimanded Kramer, and went downhill from there: Kramer’s staff was reassigned, an investigation into him was launched by Trans-Lux’s in-house counsel, his responsibilities were diminished, and he was eventually terminated. Kramer later sued Trans-Lux, claiming among other things that the Company had retaliated against him in violation of Dodd-Frank. Trans-Lux moved to dismiss. Read More

GAO Tells the SEC Its FINRA Oversight is B-A-D

A recent report released by the Government Accountability Office (“GAO”) last week concluded that the SEC can improve its oversight of the Financial Industry Regulatory Authority (“FINRA”), a self-regulatory organization charged with policing securities broker-dealers. The GAO’s criticism of the SEC is a politically hot issue because Congress is currently considering whether to shift authority for overseeing investment advisors from the SEC to FINRA—the subordinate organization the SEC is purportedly doing a poor job of overseeing.

The GAO report was a product of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which required the GAO to study the SEC’s oversight of FINRA. In particular, the report examined (1) how the SEC has conducted its oversight of FINRA in the past; including FINRA rule proposals and the effectiveness of its rules; and (2) how the SEC plans to enhance its oversight of FINRA.

The report concluded that that while the SEC routinely inspects many of FINRA’s programs, it does not conduct any retrospective review, i.e., it does not review whether FINRA’s rules are actually effective.  In fact, the report concluded that the SEC does not even have a process for retrospective review.

Significantly, the GAO report also concluded that the SEC had conducted virtually no review of FINRA operations aimed at executive compensation and corporate governance issues. The SEC claimed it had purposefully overlooked compensation and governance operations because of competing priorities and resource constraints, and instead had focused its resources on FINRA’s regulatory departments, which the SEC perceived as programs with the greatest impact on investors.

Given these and other conclusions, the GAO recommended that the SEC “encourage FINRA to conduct retrospective reviews of its rules” as well as establish its own process for examining FINRA reviews. It further recommended that the SEC utilize a risk-management framework in developing its future oversight plans.