United Kingdom Supreme Court Limits The Serious Fraud Office’s Extra-Territorial Reach
On February 5, 2021, the U.K. Supreme Court unanimously ruled that the Serious Fraud Office (the “SFO”), the U.K.’s top anti-fraud agency, lacks authority to compel a foreign company to produce documents to the regulator that are held outside of the U.K. While this ruling on its face suggests the SFO’s power to investigate foreign entities has been stymied, the decision may not have much effect in practice in light of the other cross-border tools that remain available to the SFO, including the mutual legal assistance (“MLA”) process.
Second Circuit Upholds Jury Conviction Of Two Officials In FIFA For Honest Services Fraud, Rejecting Extraterritoriality Challenge
On June 22, 2020, the Second Circuit Court of Appeals upheld the jury conviction of two former officials of the Federation Internationale de Football Association (FIFA) —the international sports organization based in Zurich, Switzerland—for committing multiple counts of conspiracy to commit honest services wire fraud. United States v. Napout, Case No. 18-2750, (2d Cir. 2020). Defendants, two Paraguayan employees of a Paraguayan company, were convicted by a jury in the United States District Court for the Eastern District of New York for their involvement in an alleged scheme to sell broadcasting and marketing rights to FIFA games in exchange for kickbacks transmitted through U.S. bank accounts and wires. And on appeal, the Second Circuit held that the government permissibly applied the honest services wire fraud statute, 18 U.S.C. § 1346, rejecting defendants’ claim that it was an impermissible extraterritorial overreach.
CFTC Settlement In Kraft Unwound Due To Ineffectuality Of Confidentiality Provisions, Setting Up Possible Key Legal Rulings On Market Manipulation
On October 23, 2019, Judge John Robert Blakey of the United States District Court for the Northern District of Illinois vacated the $16 million settlement consent order between the U.S. Commodity Futures Trading Commission (“CFTC”) and Kraft Foods Group Inc. (“Kraft”) that would have resolved allegations that Kraft improperly traded wheat futures and manipulated the commodity’s market price. The Court reasoned that a prior Seventh Circuit ruling on the same case rendered certain confidentiality provisions within the settlement agreement “ineffectual,” and further concluded that these provisions, which were highly unusual within a regulatory settlement, were a material aspect of the parties’ decision to settle. The decision reopens a closely watched case that, if it continues to dispositive motions or trial, could have significant implications for the CFTC’s interpretation of what constitutes market manipulation.
Reargument Sought On Whether Shareholders Can Be Victims Of FCPA Violation For Purposes Of Criminal Restitution
On August 28, 2019, Judge Garaufis of the United States District Court for the Eastern District of New York held that investors in a mining company, Africo Resources Ltd. (“Africo”), could seek restitution from a defendant under the Mandatory Victims Restitution Act (“MVRA”) for harm caused by the corporation’s bribery scheme.The defendant is a subsidiary operating in Africa (“African Subsidiary”) of an asset manager.The African Subsidiary recently moved for reargument of the Order.
Second Circuit Limits The Application Of McDonnell v. United States And Declines To Extend The Potential Scope Of Liability In FCPA Cases
On August 9, 2019, the United States Court of Appeals for the Second Circuit denied the appeal by a Chinese real estate developer of his 2017 conviction arising from the alleged bribery of United Nations (“UN”) officials. U.S. v. Ng Lap Seng, No. 18-1725 (2d Cir. 2019). In affirming the conviction, the Second Circuit ruled that the holding in McDonnell v. United States—in which the Supreme Court held that prosecutors must prove that a bribe is paid in exchange for an “official act” in cases involving the federal anti-bribery statute (18 U.S.C. § 201)—does not apply to prosecutions under the Foreign Corrupt Practices Act (“FCPA”). The Second Circuit clarified in its ruling that the FCPA and the anti-corruption law aimed at protecting federal funding, known as Section 666, are written differently and target a broader set of bribery goals than the federal anti-bribery statute that was at issue in McDonnell.
D.C. Circuit Clarifies “Willfulness” Requirement For Investment Advisers Act Violations, In Decision With Possible Ramifications For SEC Sanction Authority
On April 30, 2019, the United States Court of Appeals for the District of Columbia Circuit vacated an aggregate $150,000 in fines that the U.S. Securities and Exchange Commission (“SEC”) had levied against an investment advisory firm (the “Firm”) and its three owners. The fines were brought over alleged failures to disclose conflicts of interest to Firm clients related to its fee arrangements. Although the D.C. Circuit agreed with the SEC that the Firm acted negligently in failing to properly disclose certain fee arrangements, it held that such negligent conduct could not as a matter of law constitute “willful” conduct within the meaning of the Investment Advisers Act of 1940 (“Advisers Act”). See The Robare Group, Ltd., et al. v. SEC, No. 16-1453, (D.C. Cir. April 30, 2019). Accordingly, the D.C. Circuit remanded the case for reconsideration of the appropriate sanctions in a decision that could prompt the SEC to alter charging language for certain cases given that so much of its sanction authority requires a finding of “willful” conduct.
Tenth Circuit Holds That Dodd-Frank Act Granted SEC Extraterritorial Authority
On January 24, 2019, the United States Court of Appeals for the Tenth Circuit affirmed a decision by the United States District Court for the District of Utah holding that the Dodd-Frank Act of 2010 grants the Securities and Exchange Commission (“SEC”) authority to enforce extraterritorially the antifraud provisions of the federal Securities Act of 1933 and the Securities Exchange Act of 1934. SEC v. Scoville, No. 17-CV-4059 (10th Cir. 2019). Months before the Dodd-Frank Act was passed, the Supreme Court in Morrison v. National Australia Bank, 561 U.S. 247, 265 (2010), held that, given the general presumption against extraterritorial application of U.S. laws and the lack of clear indicia of congressional intent to the contrary, the federal securities laws did not apply extraterritorially. But the Tenth Circuit concluded in Scoville that the Dodd-Frank Act “affirmatively and unmistakably” evidenced Congress’s intent to allow the SEC and the U.S. to enforce the federal securities laws whenever the “conducts-and-effects” test is met, effectively rendering Morrison inapplicable to SEC and other government enforcement actions while not disturbing its impact on private securities actions.
Second Circuit Re-Affirms Insider Trading Conviction Of Rajat Gupta
On January 7, 2019, the United States Court of Appeals for the Second Circuit affirmed — for the second time — the insider trading conviction of Rajat Gupta. Gupta v. United States, No. 15-2707 (2d Cir. Jan. 7, 2019). In a collateral attack to his conviction, Gupta argued that the jury instructions in his case were infirm given the Circuit’s decision in United States v. Newman (since abrogated). There, the Circuit held that to the extent a personal benefit may be inferred through a personal relationship between a tipper and tippee, there must be a “meaningfully close personal relationship.”1 The Second Circuit denied Gupta’s appeal on two grounds — that his failure to preserve his objection to the jury instructions was not excused, and that the instructions did not prejudice Gupta.
Following Bench Trial, Southern District Of New York Finds That CFTC Failed To Prove Artificiality And Enters Judgment For Defendants In Market Manipulation Action
On November 30, 2018, Judge Richard J. Sullivan of the United States Court of Appeals for the Second Circuit, sitting by designation on the United States District Court for the Southern District of New York, issued a decision following a 2016 bench trial presided over by Judge Sullivan before his elevation to the Second Circuit in an action brought by the United States Commodity Futures Trading Commission (“CFTC”) against DRW Investments LLC (“DRW”) alleging that DRW had manipulated the price of a certain swap future in violation of the Commodities Exchange Act (“CEA”). U.S. Commodity Futures Trading Commission v. Donald R. Wilson, et al., No. 1:13-cv-07884 (S.D.N.Y. Nov. 30, 2018). The Court entered judgment for DRW on all claims, finding that the CFTC failed to prove that DRW’s challenged bids were at artificial prices.
Second Circuit Affirms Insider Trading Conviction And Vacates Restitution Order Of Sports Gambler Billy Walters
On December 4, 2018, the United States Court of Appeals for the Second Circuit affirmed the insider trading conviction, judgment, and order of forfeiture of professional sports gambler Billy Walters, while simultaneously vacating and remanding the $8.89 million restitution order that had been entered against him in light of the Supreme Court’s decision in Lagos v. United States, 138 S. Ct. 1684 (2018). U.S. v. Walters, et al., No. 17-2373 (2d Cir. Dec. 4, 2018).
Second Circuit Court Of Appeals Reverses Investment Banker’s Insider Trading Conviction
On November 5, 2018, the Second Circuit Court of Appeals in a split decision vacated the insider trading conviction of a former Wall Street analyst and remanded the case back to the district court for a new trial. United States v. Stewart, 2018 U.S. App. LEXIS 31207 (2d Cir. Nov. 5, 2018). The analyst was charged with nine counts, including one count of conspiracy to commit securities fraud and tender offer fraud, one count of conspiracy to commit wire fraud, one count of tender offer fraud, and six counts of securities fraud. The trial took place in the U.S. District Court for the Southern District of New York from July 27, 2016, to August 9, 2016, and the analyst was convicted of all nine counts on August 17, 2016. On appeal, the Second Circuit held that the district court erred by excluding key impeachment evidence the defense had sought to introduce.
District Of Massachusetts Denies Motion To Dismiss, Finds Virtual Currency “My Big Coin” Is A Commodity Under Commodity Exchange Act
On September 26, 2018, Judge Rya W. Zobel of the United States District Court for the District of Massachusetts denied a motion to dismiss a complaint filed by the Commodity Futures Trading Commission (“CFTC”) that alleged fraud in violation of the Commodity Exchange Act (“CEA”) arising out of the “My Big Coin” virtual currency. See CFTC v. My Big Coin Pay, Inc., Case No. 1:18-cv-10077 (D. Mass. Sept. 26, 2018) (Memorandum of Decision). The motion to dismiss, filed by various individual defendants, argued principally that My Big Coin is not a “commodity” within the meaning of the CEA, making the CEA’s prohibitions on fraud and market manipulation inapplicable.
Significant Judicial And Enforcement Developments In The Cryptocurrency Space
This past week saw important developments in the cryptocurrency space with two new regulatory actions, and a significant and much-anticipated decision in a criminal securities fraud action relating to an initial coin offering.
Second Circuit Limits Extraterritorial Application of FCPA
On August 27, 2018, a three-judge panel of the Second Circuit limited the extraterritorial application of the Foreign Corrupt Practices Act (“FCPA”), holding the statute does not apply to foreign nationals who commit crimes outside the U.S. and who lack sufficient ties to U.S. entities. U.S. v. Hoskins, No. 16-1010 (2d Cir. Aug. 24, 2018). The panel largely upheld a decision by the United States District Court for the District of Connecticut, which concluded that the government could not evade the statute’s requirement that a foreign person had to act “while in the United States” by charging a retired British executive of a French multinational company with conspiring with persons in the United States to violate the FCPA. The Court noted, however, that the government could still proceed on an alternative theory that the foreign person acted as an agent of those U.S. persons.
Former Forex Trader Successfully Avoids Extradition From The UK Through Appeal To UK’s High Court Of Justice
On July 31, 2018, the High Court of Justice of England and Wales, Queen’s Bench Division, rejected the United States (“U.S.”) government’s request to extradite a former FX trader and the former head of a bank’s foreign exchange (“forex”) cash trading for Europe, reversing a lower court ruling that had granted the request. Scott v. Government of the United States of America  EWHC 2021 (Admin). The U.S. Department of Justice (“DOJ”) sought to extradite the trader to face ten counts of wire fraud and one count of conspiracy in the U.S. District Court for the Eastern District of New York for alleged forex-rigging. The High Court found that extradition was not in the interest of justice, because most of the harm from the alleged crimes was felt in the United Kingdom (“UK”) and because of the trader’s strong connection with the UK.
SEC’s FCPA Charges Against Executives Dismissed As Time-Barred
On July 12, 2018, Judge Nicholas G. Garaufis of the United States District Court for the Eastern District of New York dismissed the Securities and Exchange Commission’s charges against two former executives of a hedge-fund management firm on statute of limitations grounds. SEC v. Cohen & Baros
, No. 1:17-CV-00430 (E.D.N.Y. July 12, 2018). The SEC originally filed the charges before the Supreme Court’s ruling in Kokesh v. SEC
, 137 S. Ct. 1635 (2017), in which the Court held that disgorgement is a penalty subject to the five-year statute of limitations under 28 U.S.C. § 2462. United States Supreme Court Holds SEC Disgorgement Orders Subject to Five-Year Statute of Limitations
, Shearman & Sterling (Jun. 6, 2017). Relying on Kokesh
, the district court held that the SEC’s claims for monetary and injunctive relief were time-barred. In so holding, the district court contributed to a circuit split regarding the applicability of Section 2462 to certain types of equitable relief.
Supreme Court Requires Law Enforcement To Obtain Search Warrants Before Accessing Certain Cell Phone Location Data
On June 22, 2018, in a 5-4 ruling, the United States Supreme Court held that the government’s acquisition of certain cell-site location information (“CSLI”) kept by third parties constitutes a search under the Fourth Amendment that is generally subject to the search warrant requirement. Carpenter v. United States, No. 16-402, 585 U.S. __ (2018). Chief Justice Roberts authored the majority opinion, while Justices Kennedy, Alito, Thomas, and Gorsuch filed separate dissents.
Second Circuit Amends Martoma And Reaffirms, But Arguably Still Weakens, Newman’s “Meaningfully Close Personal Relationship” Test In Insider Trading Cases Involving Tips
On June 25, 2018, a divided three-judge panel of the Second Circuit amended its decision in United States v. Martoma. We previously reported on the facts of Martoma and the panel’s original decision, which held that the Supreme Court abrogated the “meaningfully close personal relationship” test articulated in United States v. Newman. See Shearman & Sterling LLP: Government/Regulatory Enforcement, Divided Second Circuit Panel Abandons Relationship Test From Landmark Newman Decision in Upholding Insider Trading Conviction (Aug. 29, 2017). The panel’s amended opinion, in contrast, holds that Newman’s “meaningfully close personal relationship” test is still valid for determining whether an insider tipper received a personal benefit (and thus breached a fiduciary duty), but also holds that the test will be satisfied upon a showing that (1) the “tipper and tippee shared a relationship suggesting a quid pro quo” or (2) “the tipper gifted confidential information with the intention to benefit the tippee.” United States v. Martoma, No. 14-3599, Dkt. No. 226 (2d Cir. June 25, 2018), at 5-6.
Second Circuit Once Again Vacates Bond Trader Jesse Litvak’s Conviction For Securities Fraud
On May 3, 2018, a three-judge panel on the Second Circuit Court of Appeals (“Second Circuit”) vacated former bond trader Jesse Litvak’s conviction on one count of securities fraud, holding that the district court erred in admitting testimony from a counterparty concerning that counterparty’s mistaken understanding of Litvak’s role in the sale of residential mortgage-backed securities (“RMBS”) to it. United States v. Litvak
, No. 17-1464-cr (2d. Cir. May 3, 2018). Litvak appealed his 2017 jury trial conviction on one count of securities fraud, arguing that his misstatements to the counterparty—which concerned the price at which Litvak had purchased the RMBS he subsequently sold to the counterparty—were immaterial to a reasonable investor. Further, Litvak contended that the district court erred in admitting portions of testimony from the counterparty’s trader, who erroneously believed that Litvak was acting as the counterparty’s agent in the sale of the RMBS, rather than acting as principal. While the Second Circuit held that a reasonable jury could have found that Litvak’s misstatements were material, it ruled that the district court materially erred in admitting testimony that suggested Litvak owed a fiduciary duty to his counterparty, and that the error was not harmless. Accordingly, the panel vacated the conviction and remanded the case, yet again, to the district court.
Eastern District Of New York Grants Preliminary Injunction In Opinion Backing CFTC’s Authority To Regulate Cryptocurrency
On March 6, 2018, Judge Jack B. Weinstein of the United States District Court for the Eastern District of New York entered a preliminary injunction against a virtual currency company and its owner in connection with an alleged fraudulent virtual currency scheme. CFTC v. McDonnell, et al.
, No. 1:18-cv-00361 (E.D.N.Y. Mar. 6, 2018). Judge Weinstein found that the Commodity Futures Trading Commission (“CFTC”) had shown a reasonable likelihood that defendants would continue to violate the Commodity Exchange Act (“CEA”). In so ruling, Judge Weinstein became the latest judge to recognize the CFTC’s authority to regulate cryptocurrencies as commodities.
The Supreme Court Hears Oral Arguments In United States v. Microsoft
On February 27, 2018, the U.S. Supreme Court heard oral arguments in United States v. Microsoft
, No. 17-2. The case presents the question whether a U.S.-based entity (Microsoft) must comply with a judicially-authorized search warrant that was issued under Section 2703 of the Stored Communications Act by providing overseas data to the U.S. Department of Justice (“DOJ”).
Third Circuit Vacates Insider Trading Sentence Based In Part On Third-Party’s Trading
On February 14, 2018, the United States Court of Appeals for the Third Circuit vacated Steven Metro’s 46-month prison sentence for insider trading and remanded the case to the district court for resentencing. United States v. Metro
, No. 16-3813 (3d Cir. Feb. 14, 2018). The Third Circuit held that a sentencing court cannot attribute illicit financial gains to an insider trading defendant for purposes of the United States Sentencing Guidelines (the “Sentencing Guidelines”) when the gains are “actually attributable to someone with whom he was not acting in concert and to whom he did not provide inside information.”
U.S. Supreme Court To Review Ex-CEO’s Appeal Regarding Restitution Of Legal Fees Associated With An Internal Investigation
On January 12, 2018, the Supreme Court granted certiorari
to hear an appeal from a two-judge, Fifth Circuit panel decision regarding whether federal law permits restitution orders in criminal cases to cover the costs of internal investigations that are “neither required nor requested” by the government. Lagos v. United States
, Petition for Writ of Certiorari, p. 8, filed June 15, 2017. Joining six other circuits, the Fifth Circuit held that the Mandatory Victims Restitution Act (“MVRA”) authorizes recovery of the fees incurred during an internal investigation, if such fees were “directly caused by the defendants’” criminal offense. United States v. Lagos
, 864 F.3d 320, 323 (5th Cir. Mar. 17, 2017). This holding conflicts with a 2011 decision issued by the D.C. Circuit, holding that such costs were not recoverable, if the investigation was “neither required nor requested by criminal investigators or prosecutors.” United States v. Papagno
, 639 F.3d 1093, 1095 (D.C. Cir. 2011). The Fifth Circuit affirmed the district court’s order requiring former CEO Sergio Lagos of USA Dry Van Logistics to cover $5 million in fees GE Capital incurred during its internal investigation related to USA Dry Van’s bankruptcy petition.
D.C. District Court Compels Former Lawyer To President Trump’s Campaign Manager To Answer Special Counsel’s Questions Regarding Aspects Of Her Prior Representation—Finding That Scope Of Special Counsel’s Inquiry Falls Within “Crime-Fraud” And Other Exceptions To Applicable Privileges
On October 30, 2017, Chief Judge Beryl A. Howell of the United States District Court for the District of Columbia unsealed an order granting the Office of the Special Counsel’s (“SCO”) motion to compel the former counsel (“Counsel”) of Paul J. Manafort, Jr. (President Trump’s former campaign manager) and Richard W. Gates (a former campaign adviser to President Trump) to testify before a grand jury regarding certain aspects of her prior representations of these clients. In re Grand Jury Investigation
, No. 17-ms-2336 (D.D.C. 2017). The Court rejected Counsel’s assertions of attorney-client privilege and attorney work product protection, finding that the information sought by the SCO fell within the “crime-fraud” exception to the attorney-client privilege and that any applicable privilege had been waived.
D.C. Circuit Applies Janus To Set Aside SEC Sanctions Against Investment Banker
On September 29, 2017, a three-judge panel of the United States Court of Appeals for the D.C. Circuit (“D.C. Circuit”) overturned the Securities and Exchange Commission’s (“SEC”) determination that investment banker Frank Lorenzo had violated Rule 10b-5(b) under the Securities Exchange Act of 1934 (“Exchange Act”) by sending emails that allegedly contained material misrepresentations about a debenture offering that were drafted by his employer. See Lorenzo v. SEC
, No. 15-1202, slip op. at 2 (D.C. Cir. Sept. 29, 2017). The panel held that, per the Supreme Court’s decision in Janus Capital Group, Inc. v. First Derivative Traders
, 564 U.S. 135 (2011), Lorenzo was not the “maker” of the alleged misrepresentations in the emails because he had only cut-and-pasted content over which his employer retained “ultimate authority.” After reversing the SEC’s Rule 10b-5(b) determination, however, a split panel affirmed the SEC’s determination that, by recklessly making use of misleading statements over which he did not have ultimate authority, Lorenzo had violated Rules 10b-5(a) and 10b-5(c), as well as Section 17(a)(1) of the Securities Act of 1933 (“Securities Act”). The panel then set aside the lifetime industry bar and $15,000 civil monetary penalty that had been imposed on Lorenzo and directed the SEC to reassess the appropriate penalties in light of the panel’s holding that Lorenzo had not violated Rule 10b-5(b).
Second Circuit Overturns Convictions Of Former Senate Majority Leader Dean Skelos And His Son Based On Supreme Court’s McDonnell Decision
On September 26, 2017, the United States Court of Appeals for the Second Circuit overturned the political corruption conviction of the former majority leader of the New York State Senate, Dean G. Skelos, and his son, Adam B. Skelos. United States v. Skelos, et al.
, No. 16-1618 (2d Cir. 2017). The Second Circuit’s decision was based on the district court’s erroneous jury instruction. Though the instruction was consistent with precedent at the time of trial, the Circuit Court found that the instruction was infirm given the Supreme Court’s intervening decision in McDonnell v. United States
, 136 S. Ct. 2355 (2016). The latter decision limited the scope of what can be construed as an “official act,” and the Second Circuit concluded that the trial court’s instructions were too broad. The Court further found that the error was not harmless beyond a reasonable doubt, since the prosecution in Skelos
had rested its argument in part on conduct now considered lawful after McDonnell
, and the jury reasonably could have based its decision on that evidence. The basis for this decision was similar to the Circuit’s reversal of the conviction of Sheldon Silver (former Speaker of the New York State Assembly), as previously reported on July 18, 2017. Shearman & Sterling LLP: Government/Regulatory Enforcement, Second Circuit Overturns Watershed Conviction Of Sheldon Silver Based On Recent Supreme Court Decision
(July 18, 2017).
Divided Second Circuit Panel Abandons Relationship Test From Landmark Newman Decision In Upholding Insider Trading Conviction
On August 23, 2017, a divided three-judge panel of the United States Court of Appeals for the Second Circuit upheld the insider trading conviction of SAC Capital Advisors, LLC (“SAC”) portfolio manager Mathew Martoma. United States v. Martoma
, No. 14-3599 (2d Cir. Aug. 23, 2017). The decision represented the Second Circuit’s first occasion to consider its landmark decision in United States v. Newman
in light of the Supreme Court’s recent decision in Salman v. United States
. Over a strong dissent, the majority found that the logic underpinning the Salman
decision abrogated Newman
’s requirement that a “meaningfully close personal relationship” exist between a tipper and tippee before allowing a jury to infer the personal benefit necessary to establish insider trading liability merely from a tip of inside information. The majority held “that an insider or tipper personally benefits from a disclosure of inside information whenever the information was disclosed with the expectation that the recipient would trade on it and the disclosure resembles trading by the insider followed by a gift of the profits to the recipient, whether or not there was a meaningfully close relationship between the tipper and tippee.” Martoma
, slip op. at 27-28 (internal quotation marks and citations omitted). In so doing, it shifted the focus from the relationship between a tipper and tippee to the tipper’s subjective intent in making the tip, and seemingly did away with the limiting principle that Newman
had established. However, while clearly a win for prosecutors, this new standard will still require a highly fact-intensive inquiry into the purpose of any tip, meaning that precisely how much of a shift in law it portends remains to be seen.
Seventh Circuit Upholds First Spoofing Conviction Against High-Frequency Trader
On August 7, 2017, the Seventh Circuit upheld the conviction of Michael Coscia, founder of Panther Energy Trading LLC, for a market manipulation tactic known as “spoofing,” under Section 6c(a)(5)(C) and 13(a)(2) of the Commodity Exchange Act. United States v. Coscia
, No. 16-cr-3017 (7th Cir. Aug. 7, 2017). Coscia’s conviction is the first of its kind under this statute, which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 and prohibits “bidding or offering with the intent to cancel the bid or offer before execution.” The Seventh Circuit rejected Coscia’s claim that the statute was unconstitutionally vague and found that Coscia’s conviction was supported by sufficient evidence.
Government Dismisses All Charges In Benjamin Wey Securities Fraud Case After U.S. District Judge Suppresses All Evidence Obtained Pursuant To Search Warrant
On August 8, 2017, the Government moved to dismiss all charges against Benjamin Wey, the CEO of New York Global Group charged with securities fraud, wire fraud, conspiracy, and money laundering. United States District Court Judge Alison Nathan of the Southern District of New York accepted the government’s motion the same day, and all charges against Wey were accordingly dismissed. United States v. Wey
, No. 1:15-cr-00611 (S.D.N.Y. Aug. 8, 2017) (nolle prosequi
). The Government’s decision was expected after Judge Nathan suppressed all of the evidence obtained during the government’s execution of court-ordered search warrants, United States v. Wey
, No. 1:15-cr-00611 (S.D.N.Y. June 13, 2017) (“Opinion”), which is discussed in detail below. Judge Nathan’s suppression opinion is notable for its judicial findings – which could have broader ramifications in motion practice related to searches in white collar cases – and for the drastic remedy ordered by the court. Further, the Government’s decision to accept the sweeping suppression, instead of challenging the landmark decision on appeal, is strong support for the belief that Judge Nathan’s opinion represents a critical shift in search warrant application requirements.
Second Circuit Overturns Convictions, Dismisses Indictments In LIBOR Case Due To Taint Of Testimony Compelled By Foreign Government
On July 19, 2017, the United States Court of Appeals for the Second Circuit overturned the convictions of Anthony Allen and Anthony Conti, former traders at Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (“Rabobank”) who played roles in Rabobank’s London Interbank Offered Rate (“LIBOR”) submission process. United States v. Allen, et al.
, No. 16-939. The Second Circuit held that each defendant’s Fifth Amendment right against self-incrimination had been violated because the indictments and convictions were obtained in part based on their own testimony, which had been obtained involuntarily (though lawfully) when they were compelled to testify in a separate investigation conducted by the financial regulator in the United Kingdom. Id.
at 80. Even though the government did not use Allen’s and Conti’s compelled testimony directly against them, either in the grand jury testimony or at trial, one of the government’s key witnesses had seen their compelled testimony; and the Second Circuit concluded that the government could not demonstrate, under Kastigar v. United States
, 406 U.S. 441 (1972), that his testimony was not tainted or that the use of his testimony was harmless. The Second Circuit’s decision in Allen
will create numerous and wide-ranging potential pitfalls for U.S. prosecutors, who increasingly find themselves investigating potential crimes across borders and in conjunction with foreign criminal and regulatory authorities, many of whom allow for compulsory witness statements.
Second Circuit Finds That HSBC Monitor’s Reports Need Not Be Publicly Disclosed
On July 12, 2017, the U.S. Court of Appeals for the Second Circuit overturned the district court’s decision to unseal the report of a special monitor charged with supervising HSBC Holdings plc and HSBC Bank, USA, N.A. (together, “HSBC”) pursuant to a deferred prosecution agreement (“DPA”). In so holding, the Second Circuit provided clarification in the district court’s oversight of DPAs, including the scope of their supervisory authority relating to judicial documents.
The Second Circuit Overturns Watershed Conviction Of Sheldon Silver Based On Recent Supreme Court Decision
On July 13, 2017, the U.S. Court of Appeals for the Second Circuit overturned the high-profile, political corruption conviction of one of the most powerful politicians in New York State— former Speaker of the New York State Assembly, Sheldon Silver. United States v. Silver
, 2017 WL 2978386, at *17 (2d Cir. July 13, 2017). The Second Circuit grounded its decision on erroneous jury instructions, which it believed tainted all counts of conviction. Though the instructions were consistent with Second Circuit law at the time they were provided to the jury, the Second Circuit held that they did not comport with the Supreme Court’s recent interpretation of what constitutes an “official act” for purposes of the “honest services fraud” and extortion statutes, as set forth in McDonnell v. United States
, 136 S. Ct. 2355 (2016). The Court further held that this error was not harmless, and vacated all counts of Silver’s conviction.
Eighth Circuit Vacates Disgorgement Order As Time-Barred Under Kokesh But Leaves Injunction Undisturbed
On June 29, 2017, the United States Court of Appeals for the Eighth Circuit vacated a disgorgement order against Crawford Capital Corporation, a venture capital firm, and its owner, Paul D. Crawford, citing the U.S. Supreme Court’s recent ruling in Kokesh v. SEC
, which held that disgorgement collected by the Securities and Exchange Commission (“SEC”) is subject to a five-year statute of limitations. United States Sec. & Exch. Comm’n v. Collyard
, No. 16-1405 (8th Cir. June 29, 2017). At the same time, however, the court ruled that Kokesh
does not preclude the SEC from obtaining injunctive relief for five-year-old conduct.
Supreme Court Of The United States Finds Criminal Forfeiture Statute Does Not Provide For Joint And Several Liability
On June 5, 2017, the Supreme Court of the United States unanimously reversed a forfeiture judgment under Section 303 of the Comprehensive Forfeiture Act of 1984, 21 U.S.C. § 853(a)(1) (“Section 853(a)”), holding that forfeiture under Section 853(a) is limited to specific property that has been derived from, or used in, criminal activity by a given defendant. Honeycutt v. United States
, No. 16-142 (June 5, 2017). This holding resolved a circuit split on the issue and rejected the prevailing majority approach, which had applied joint and several liability to forfeiture under Section 853(a), regardless of whether a party had personally benefited from the subject of the forfeiture.
Former Bond Trader Jesse Litvak Sentenced To Two Years’ Imprisonment After High-Profile Re-Trial In Securities Fraud Case
On April 26, 2017, Judge Janet C. Hall of the United States District Court for the District of Connecticut sentenced Jesse Litvak, a former bond trader, to two years’ imprisonment, a $2 million fine, and three years’ probation after he was convicted in January 2017 of one count of securities fraud. United States v. Litvak
, D. Conn., 3:13-Cr-19, Sentencing Minutes (Apr. 26, 2017). This sentence is the latest chapter in a multi-year saga for Jesse Litvak. (See
Shearman & Sterling LLP, Bond Trader Acquitted Of All But One Securities Fraud Charges In Retrial
, Need-to-Know Litigation Weekly, January 1, 2017).
Utah District Court Limits Reach Of Morrison By Holding That Section 10(b) Of The Exchange Act And Section 17(a) Of The Securities Act Can Be Applied Extraterritorially In Actions Brought By The SEC And The United States
On March 28, 2017, the U.S. District Court for the District of Utah granted the Securities and Exchange Commission’s (“SEC”) motion for a preliminary injunction in a securities fraud case against Traffic Monsoon, LLC, an advertising services company which allegedly ran a Ponzi scheme involving a pay-per-click advertisement program. SEC v. Traffic Monsoon, LLC
, No. 2:16-CV-00832-JNP, (D. Utah Mar. 28, 2017) (order granting preliminary injunction) (“Order”). The injunction hinged, in part, on the district court’s conclusion that the SEC can bring securities fraud enforcement actions under Section 10(b) of the Exchange Act of 1934 (“Exchange Act”) and Sections 17(a)(1) and (3) of the Securities Act of 1933 (“Securities Act”) in connection with foreign transactions. In so ruling, the District Court limited the holding of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank
, 561 U.S. 247 (2010), in which the Supreme Court held that Section 10(b) applied only to transactions in securities listed on domestic exchanges and domestic transactions in other securities.
District Court Rules That Trader Can Be Liable For Insider Trading On Misappropriation Grounds Even When Information Was Not Shared In Confidence If A Duty Of Trust And Confidence Later Emerged
On March 20, 2017, Judge Juan Sanchez of the U.S. District Court for the Eastern District of Pennsylvania denied Defendant Leon Cooperman’s motion to dismiss an insider trading claim brought by the Securities and Exchange Commission (“SEC”). Memorandum, SEC v. Cooperman
, No. 16-cv-05043 (E.D. Pa. Mar. 20, 2017). Judge Sanchez’s opinion may be the first time a court has squarely considered whether, to be liable under the “misappropriation theory” of insider trading, the trader must have a duty of trust and confidence to the source of the “misappropriated” confidential information at the time the source discloses the confidential information to the trader—and not just sometime prior to executing the challenged trade. The Court ruled that as long as the SEC alleged that there was a duty of trust and confidence prior to the challenged trade, using the information in breach of that duty could be an actionable misappropriation.
SEC’s Securities Fraud Lawsuit Against Texas Attorney General Dismissed For Second Time Over Lack Of Duty To Investors
On March 2, 2017, Judge Amos Mazzant III of the United States District Court for the Eastern District of Texas dismissed an amended complaint filed by the United States Securities and Exchange Commission (“SEC”) against the Attorney General of Texas, Warren Paxton, Jr., for alleged securities fraud. The SEC alleged that Paxton defrauded investors in Servergy, Inc., by touting the company in the absence of any disclosure that Paxton would earn commissions from the investments he solicited. But the SEC’s amended complaint was dismissed with prejudice on the grounds that, among other things, the SEC did not plead facts sufficient to establish that Paxton had any duty to disclose his commissions to the investors in Servergy. SEC v. William E. Mapp, III, et al.
, No. 4:16-cv-00246 (E.D. Tex. Mar. 2, 2017), ECF No. 96. The SEC’s original complaint had been dismissed on October 7, 2016 for substantially the same reasons, and the Court found that the SEC’s attempted cures were insufficient.
Southern District Of New York Finds That Government Leaks Do Not Warrant Dismissal Of Insider Trading Charges Against Billy Walters
On March 1, 2017, Judge P. Kevin Castel of the United States District Court for the Southern District of New York denied professional gambler William “Billy” Walters’ motion to dismiss his indictment on charges of insider trading. Walters’ motion came after the U.S. Attorney’s Office for the Southern District of New York (“USAO”) disclosed that one of the lead case agents from the Federal Bureau of Investigation (“FBI”) had leaked sensitive information to the press during the course of the investigation. Walters claimed that those leaks were part of a calculated effort to prejudice his case by jumpstarting a dormant investigation and that they were part of a broader pattern of outrageous government conduct by the USAO and the FBI playing “fast and loose” with obligations of grand jury secrecy in an effort to prejudice defendants. While being highly critical of the FBI agent who leaked the information in question, Judge Castel nevertheless ruled that Walters could not demonstrate substantial prejudice, or that the government’s conduct reached a “demonstrable level of outrageousness” that warranted dismissal of the indictment. Accordingly, Walters must now face trial. United States v. Walters
, No. 16-cr-00338-PKC, slip op. at 18 (S.D.N.Y. Mar. 1, 2017).
Bond Trader Acquitted Of All But One Securities Fraud Charges In Retrial
On January 27, 2017, a federal jury in New Haven, Connecticut found former bond trader Jesse Litvak not guilty on all but one of ten charged securities fraud counts. United States v. Litvak
, D. Conn., 3:13-Cr-19, Jury Verdict (Jan. 27, 2017). This case was a re-trial, after a jury’s earlier verdict—finding Litvak guilty of all counts—was reversed and vacated. United States v. Litvak
, 30 F. Supp. 3d 143 (D. Conn. 2014), rev’d in part, vacated in part, 808 F.3d 160 (2d Cir. 2015). As discussed below, the verdict was a sound defeat for the Government’s particular theory of fraud in the retail bond markets, which the defense vigorously challenged at both trials.
Supreme Court Grants Certiorari To Resolve Circuit Split Relating To Timing Of SEC Disgorgement Actions
On January 13, 2017, the United States Supreme Court granted certiorari
in the case Kokesh v. SEC
, 834 F.3d 1158 (10th Cir. 2016), cert. granted sub nom. Kokesh v. SEC
(U.S. Jan. 13, 2017) (Kokesh II
), to resolve a circuit split relating to the time in which the SEC must file disgorgement actions. Kokesh
, No. 16-529, 2017 WL 125673 (U.S. Jan. 13, 2017).
The Supreme Court Affirms Expansive Reading Of The Bank Fraud Act
On December 12, 2016, the Supreme Court of the United States unanimously affirmed the conviction of Lawrence Shaw under Section 1 of the Bank Fraud Act of 1984, 18 U.S.C. § 1344(1), holding that a defendant can be guilty of bank fraud even where the defendant intends only to defraud a bank’s customer, and not the bank itself. Shaw v. United States
, No. 15-5991, 580 U.S. __ (Dec. 12, 2016). While the holding was an entirely unsurprising result, it reaffirmed that the bank fraud statute (like the mail and wire fraud statutes) is interpreted broadly — a position also supported by the Ninth Circuit’s previous decision in Shaw’s case. United States v. Shaw
, 781 F.3d 1130 (9th Cir. 2015), cert. granted
, 136 S. Ct. 1711, 194 L. Ed. 2d 809 (2016), and vacated
, No. 15-5991, 2016 WL 7182235 (U.S. Dec. 12, 2016).
Supreme Court Affirms Pecuniary Benefit Not Required For Family Member Tips, Declines To Address What Constitutes A Benefit In Other Contexts
On December 6, 2016, the United States Supreme Court issued a unanimous, but narrow, ruling in Salman v. United States,
No. 15-628, 578 U.S. ___ (Dec. 6, 2016), regarding criminal tipper/tippee liability for insider trading, which the Supreme Court had not significantly addressed since its decision in Dirks v. S.E.C.,
463 U.S. 646 (1983), in 1983. Following Dirks
’ holding that a tippee cannot be held liable for insider trading unless the tipper receives a “personal benefit,” the Supreme Court ruled in Salman
that a jury can infer that an insider receives an inherent personal benefit when making a gift of confidential information to a relative who trades on that information. The Court declined to adopt the Government’s argument that “a gift of confidential information to anyone, not just a ‘trading relative or friend,’ is enough” to establish liability, Salman
, slip op. at 7, and noted that ultimately the question of whether a benefit was received will be a factual one for the jury. The Court also expressly left intact the Second Circuit’s crucial ruling in United States v. Newman,
773 F.3d 438 (2d. Cir. 2014), that a remote tippee who receives information second or third hand must know of the personal benefit received by the insider in order to be liable.
Southern District Of New York Denies Motion To Dismiss Indictment In High-Profile Sanctions Prosecution
On Monday, October 17, 2016, Judge Richard M. Berman of the United States District Court for the Southern District of New York denied a motion to dismiss criminal charges against a Turkish businessman, who allegedly violated U.S. sanctions against Iran by directing foreign companies to conduct U.S. dollar transactions on behalf of, and for the benefit of, Iranian entities and individuals. United States v. Zarrab, Case No. 1:15-cr-00867 (S.D.N.Y. October 17, 2016). Judicial decisions interpreting the scope of criminal violations of U.S. sanctions laws are rare, as corporate defendants have recently opted to settle allegations. This decision offers valuable insight into the application of U.S. sanctions laws to foreign actors, operating on foreign soil.
D.C. Circuit Finds CFPB Structure Unconstitutional
On October 11, 2016, Judge Brett Kavanaugh, writing for the United States Court of Appeals for the D.C. Circuit, vacated an administrative enforcement order brought by the Consumer Financial Protection Bureau (“CFPB”) against PHH Corp. (“PHH”) for violations of Section 8 of the Real Estate Settlement Procedures Act (“RESPA”). PHH Corp. v. CFPB
, No. 15-1177 (D.C. Cir. Oct. 11, 2016). The Court held, in relevant part, that the structure of the CFPB—an independent agency with power concentrated in a single director who is unaccountable to the President of the United States—represented an unconstitutional delegation of unchecked executive authority. As a remedy, the Court held that the President must have the power to remove, direct, and supervise CFPB’s director, but otherwise permitted the CFPB to continue its work. Accordingly, the immediate practical impact of the decision will be limited, but over the long term the CFPB may begin to answer more directly to the political leanings of the Executive Branch, rather than Congress.
Ninth Circuit Supports Expansive Interpretation Of SOX 304
On August 31, 2016, the United States Court of Appeals for the Ninth Circuit vacated a judgment in favor of Peter Jensen and Thomas Tekulve, Jr., former officers of Basin Water, Inc., and remanded for a jury trial. SEC v. Jensen
, No. 14-55221 (9th Cir. Aug. 31, 2016). The Court held, in relevant part, that the officers could be subject to the disgorgement provisions of Section 304 of the Sarbanes-Oxley Act (“SOX 304”) following the company’s accounting restatements as long as the restatements were issued due to misconduct, even if that misconduct was not on the part of the defendants.
Tenth Circuit Holds That Disgorgement Is Not Subject to A Five-Year Limitations Period
On August 23, 2016, the United States Court of Appeals for the Tenth Circuit rejected an appeal by Charles Kokesh that contested, among other things, an order that he pay $34.9 million in disgorgement on statute of limitations grounds. S.E.C. v. Kokesh
, No. 15-2087, slip op. at 2 (10th Cir. Aug. 23, 2016). Kokesh had claimed that the disgorgement order should have been barred by the five-year limitations period in 28 U.S.C. § 2462, citing the recent Eleventh Circuit decision S.E.C. v. Graham
, 823 F.3d 1357 (11th Cir. 2016), which held that § 2462 applied to disgorgement. The Tenth Circuit, however, rejected the Eleventh Circuit’s analysis and held that the disgorgement order was not subject to § 2462 because it was neither a penalty nor forfeiture.
In Reinstating Conviction, Second Circuit Expands Federal Prosecutors’ Ability to Prosecute Fraud Claims in New York
On August 15, 2016, the United States Court of Appeals for the Second Circuit reversed the district court’s judgment of acquittal for Kristofor Lange on venue grounds. See U.S. v. Lange
, No. 14-2442-cr, slip op.
at 2 (2d Cir. Aug. 15, 2016). Lange had been convicted of securities fraud and conspiracy to commit wire fraud after a jury trial. The Court held that venue was in fact proper in the Eastern District of New York because individuals targeted by Lange’s scheme had received phone calls in the district and because it was foreseeable to Lange that calls would be made to individuals located there.
U.S. Supreme Court Limits The Scope Of What Constitutes An “Official Act” And Overturns The Conviction Of Former Virginia Governor Robert McDonnell
On June 27, 2016, the Supreme Court unanimously overturned the 2014 conviction of former Virginia Governor Robert McDonnell. McDonnell v. United States
, No. 15-474, 2016 WL 3461561 (June 27, 2016). A jury had convicted McDonnell on charges related to accepting things of value in exchange for performing “official acts,” but the Court defined “official act” narrowly and required that such an act “involve a formal exercise of governmental power.” Since the district court’s jury instruction appeared to define an official act more broadly, the Court held that the jury may have convicted McDonnell without finding that he had committed an official act, and vacated McDonnell’s conviction.
D.C. Circuit Upholds The Securities And Exchange Commission’s Newly Promulgated Regulation A-Plus
On June 14, 2016, the United States Court of Appeals for the D.C. Circuit denied consolidated petitions brought by the chief securities regulators for Massachusetts and Montana seeking to vacate a recently-enacted Securities and Exchange Commission (the “Commission”) registration exemption known as Regulation A-Plus. —F.3d—, 2016 WL 3254610 (D.C. Cir. 2016). The Court held that Regulation A-Plus withstood scrutiny under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984), and that the Commission had provided a satisfactory basis for the regulation.