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.

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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).

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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.

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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

In SEC v. Apuzzo, 2012 WL 3194303 (2d Cir. Aug. 8, 2012), the United States Court of Appeals for the Second Circuit clarified the standard for finding liability for aiding and abetting under Section 20(e) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78t(e). Under Section 20(e), the Second Circuit held, the Securities and Exchange Commission (“SEC”) need not show that an aider and abettor “proximately caused” the harm on which the primary violation was predicated. Instead, the SEC need only show that the aider and abettor “in some sort associated himself with the venture, that he participated in it as in something he wished to bring about, and that he sought by his action to make it succeed.” In Appuzo, the Second Circuit has clarified that the SEC need only plead this level of participation — and not proximate causation — to adequately allege that an aider and abettor meets the “substantial assistance” prong of Section 20(e).

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Continue Reading Second Circuit Holds That SEC Need Not Prove “Proximate Cause” for Aiders and Abettors Under Section 20(e) of the Securities Exchange Act of 1934

In Securities & Exchange Commission v. Goble, 2012 WL 1918819 (11th Cir. May 29, 2012), the United States Court of Appeals for the Eleventh Circuit held that the recording of a sham transaction in the corporate books did not constitute “securities fraud” in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Securities & Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5, because “a misrepresentation that would only influence an individual’s choice of broker-dealers cannot form the basis for § 10(b) securities fraud liability.” In so holding, the Eleventh Circuit declined “the SEC’s invitation to expand [the] definition of materiality” to capture the misrepresentation.

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Continue Reading Eleventh Circuit Reverses In Part Securities Fraud Judgment Against Clearing Broker in an Action Brought by the SEC