Investigations and Enforcement

In United States v. Newman, No. 13-1837 (2d Cir. Dec. 10, 2014), the United States Court of Appeals for the Second Circuit reversed the 2013 convictions of Anthony Chiasson and Todd Newman on charges of conspiracy to commit insider trading and insider trading under 18 U.S.C. § 371, Sections 10(b) and 32 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78ff, SEC Rules 10b-5 and 10b5-2, 17 C.F.R. § 240.10b-5, 10b5-2, and 18 U.S.C. § 2.  Both individuals were portfolio managers at hedge funds who were charged with and convicted of receiving material non-public information from analysts with whom they worked.  The Second Circuit’s decision greatly clarifies the elements required to prove “tippee” liability under the insider trading laws.
Continue Reading Second Circuit Limits “Tippee” Insider Trading Liability

In Regulatory Notice 14-40, FINRA reminds members that it is a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) to incorporate into a settlement agreement a confidentiality provision restricting or prohibiting a customer or other person from communicating with the Securities and Exchange Commission (SEC), FINRA, or any federal or state regulatory authority regarding a possible securities law violation.
Continue Reading FINRA Issues Guidance Notice on Confidentiality Provisions in Settlement Agreements and the Arbitration Discovery Process

In SEC v. Contorinis, 2014 U.S. App. LEXIS 2927 (2d Cir. Feb. 18, 2014), the United States Court of Appeals for the Second Circuit upheld the authority of the Securities and Exchange Commission (“SEC”) to obtain “disgorgement” from a money manager profits earned by another party from trades based material nonpublic information known to the money manager, even though the manager did not receive any of those profits.  Citing the intangible benefits received by the manager and the underlying misuse of inside information, the appellate panel’s decision upheld a broad view of insider trading liability in civil enforcement actions brought by the SEC.
Continue Reading Second Circuit Upholds SEC’s Authority to Obtain Disgorgement from Non-Trading Insider Profits Earned by Portfolio Fund from Insider Trading

In SEC v. Shields, No. 12-1438, 2014 U.S. App. LEXIS 3369 (10th Cir. Feb. 24, 2014), the United States Court of Appeals for the Tenth Circuit reversed the district court’s order granting defendants’ motion to dismiss, holding that the complaint alleged sufficient facts to (1) raise a plausible claim that the interests at issue involved are securities, and (2) rebut the presumption that an investment labeled as a “general partnership” is a “security.”  The Tenth Circuit’s holding reaffirms that although an investment may be labeled as a “general partnership” interest, courts must look beyond the labels to determine whether the investment constitutes a “security.”
Continue Reading Tenth Circuit Looks Past “General Partnership” Labels in Agreements to Determine Whether Certain Investments Constitute “Securities”

A CEO receives an anonymous call claiming that someone is stealing company trade secrets or that an employee is taking kickbacks from a vendor.  A GC gets a call from the HR director who has an employee accusing the company of submitting false bills to a government agency.  You are served by a government agency with a subpoena seeking records indicating a criminal investigation is underway for violations of environmental laws, insider trading, tax laws or fraud. Your company receives a credible threat of litigation.  These are all real scenarios that occur daily in companies of all sizes all over the world.  They trigger critical internal investigations that require substantial time and resources.  Regardless of the nature of the investigation, it is vital that it be conducted efficiently, with clear direction and attention to preservation of the attorney-client privilege.  This article sets out best practices for doing so.
Continue Reading Corporate Internal Investigations: Best Practices

On September 21, 2012, S.B. 323, the California Revised Uniform Limited Liability Company Act (known as the RULLCA), was signed into law by Governor Jerry Brown and is scheduled to take effect on January 1, 2014. As described in more detail in the prior March 22, 2013 post California’s Revised Uniform Limited Liability Company Act, the RULLCA entirely replaces the Beverly-Killea Limited Liability Company Act and revises certain rules for formation and operation of Limited Liability Companies (LLCs) in the state of California. There is a possibility, however, that the RULLCA will be modified prior to January 1, 2014 and thus the law governing LLCs may still be subject to change and clarification prior to its effective date.


Continue Reading Potential Challenges Associated With California’s Revised Uniform Limited Liability Company Act Scheduled to Take Effect on January 1, 2014

In United States v. Rajaratnam, No. 11-4416-CR, 2013 U.S. App. LEXIS 12885 (2d Cir. June 24, 2013), the United States Court of Appeals for the Second Circuit upheld the conviction of Raj Rajaratnam ("Rajaratnam") for insider trading, holding that a jury instruction that the non-public information obtained by Rajaratnam "was a factor, however small" in his decision to purchase stock was proper as a matter of controlling Second Circuit law. The unanimous three-judge panel rejected Rajaratnam’s argument that more of a "causal connection" between the inside information he possessed and the trades he executed was required. After discussing the separate issue of wiretapping evidence, the court analyzed and applied previous decisions to conclude that the district court’s instruction was proper — and, in fact, was more generous to Rajaratnam than the law required. This decision reaffirms that criminal liability for insider trading may lie simply for trading while in possession of material inside information, even if trade was not motivated by that inside information.

Continue Reading Second Circuit Reaffirms Continued Use of the “Knowing Possession” Causation Standard in Rajaratnam Insider Trading Case

In a recent Securities & Exchange Commission (“SEC”) investigation, the SEC interviewed three persons who had proffer agreements with the SEC and United States Attorney. In a subsequent SEC enforcement action, a defendant served interrogatories asking the SEC to identify the factual information disclosed in those proffer sessions. The SEC objected, and the defendant moved to compel. The SEC opposed the motion to compel, arguing that defendant sought information protected by the attorney work product doctrine, had not shown substantial need and unavailability, and had not deposed any of the witnesses, despite their identification in Rule 26 disclosures more than a year before. The magistrate judge granted defendant’s motion to compel, and the United States District Court for the Northern District of California confirmed the ruling. SEC v. Sells, No. C 11-4941 CW, 2013 WL 1411247 (N.D. Cal. Apr. 8, 2013).

Continue Reading District Court Grants Motion to Compel Against SEC, Holding that “Facts” Are Not Work Product In SEC Confidential Witness Interviews

The California Revised Uniform Limited Liability Company Act (RULLCA) was signed into law by Governor Jerry Brown in September 2012. Intended to come into effect on January 1, 2014, RULLCA replaces the Beverly-Killea Limited Liability Company Act, and significantly revises the rules for formation and operation of Limited Liability Companies (LLCs) in the state of California. Most importantly, RULLCA applies retroactively to existing LLCs. There is no ability for existing California LLCs to “opt out” of RULLCA; it will apply and potentially “rewrite” substantive provisions of existing California LLC operating agreements. It, therefore, is important that the operating agreements of existing California LLCs now be reviewed with RULLCA in mind to identify provisions that will either be out of compliance with RULLCA or which may need revision prior to 2014 if RULLCA is not revised or repealed prior to its implementation.
Continue Reading California’s Revised Uniform Limited Liability Company Act

In Gabelli v. Securities & Exchange Commission, No. 11-1274, 2013 WL 691002 (U.S. Feb. 27, 2013), the United States Supreme Court, in a unanimous opinion by Chief Justice Roberts, held that the five-year statute of limitations for the Securities & Exchange Commission (“SEC”) to bring a civil suit seeking penalties for securities fraud against investment advisers, codified in 28 U.S.C. § 2462 (“Section 2462”), begins to run when the alleged fraud occurs, not when it is discovered. In so holding, the Supreme Court refused to extend to Government civil penalty enforcement actions the “discovery rule,” which starts the clock on the statute of limitations for civil fraud actions when plaintiff should have reasonably discovered the fraud. The Supreme Court’s decision thus limits the authority of the SEC to seek civil penalties with respect to conduct that occurred more than five years before investigators took action.

Continue Reading United States Supreme Court Declines to Apply the “Discovery Rule” to Extend the Five-Year Statute of Limitations for SEC Punitive Fraud Enforcement Actions