Category Archives: Securities Fraud

Trump v. Obama: U.S. SEC Anti-Corruption Enforcement Actions Scorecard

by Stephen Choi and Mitu Gulati

Sometimes, a graph says it better than words.

Below, is a graph by month of new Securities and Exchange Commission (SEC) enforcement actions under the Foreign Corrupt Practices Act (FCPA) against public companies and subsidiaries.  Using data from the Securities Enforcement Empirical Database (SEED), a collaboration between NYU and Cornerstone Research, we track SEC FCPA actions from January 2016 through the end of the SEC fiscal year on September 30, 2017.  SEED defines a public company as a company with stock that trades on the NYSE, NYSE MKT LLC, NASDAQ, or NYSE Arca stock exchanges at the start date of the SEC enforcement action.  We divide our months based on whether the action was initiated under the Obama Administration (blue) or the Trump Administration (red). Continue reading

Sentencing Fraud

by Mihailis E. Diamantis

Imagine a class of criminals that is growing year over year, whose members have higher than average recidivism rates, and for whom the public has very little sympathy.[1]  They would seem an unlikely group for judges and scholars to think are punished too severely.  This, though, is the fortunate position of the white-collar fraudster.

To be sure, federal penalties for fraud can be quite burdensome.[2]  The base offense level for most frauds is 6, but this can climb as the loss caused by the fraud increases from $6,501 (add 2 levels) up to $550,000,001 (add 30 levels).  The number of victims can also have a significant impact, ranging from an additional 2 levels if there are at least ten victims to an additional 6 levels if there are more than twenty-five.  A first-time fraudster who causes more than $550,000,001 in losses to at least twenty-five victims is looking at a recommended sentence of thirty years to life.[3]  For most judges and scholars, that kind of punishment sounds disproportionate.[4] Continue reading

Other People’s Money: SEC Disgorgement After Kokesh

by Daniel R. Walfish

Should individuals sued by the Securities and Exchange Commission (SEC) have to give up, or “disgorge,” corporate gains resulting from a fraud, or just their own direct gains? In an August 29 summary order, SEC v. Metter,[1] the Second Circuit avoided wrestling with this question, but it may be one of the next major battles in the wake of the Supreme Court’s June 5, 2017 decision in Kokesh v. SEC, 137 S. Ct. 1635. Kokesh held that the disgorgement remedy in SEC enforcement actions is a “penalty” for purposes of the five-year limitations period for the “enforcement of any civil fine, penalty, or forfeiture.” 28 U.S.C. § 2462. Many have assumed, on the basis of a footnote in Kokesh, that courts will soon be considering whether they have authority to order disgorgement at all in SEC enforcement actions. That issue certainly lurks, but I suspect that courts first will revisit the proper scope of the remedy, including whether a court may force a defendant to “disgorge” ill-gotten gains that the defendant did not personally receive but that went to third parties, such as individuals and entities associated with the defendant. Continue reading

Martoma: The Second Circuit’s Unnecessary Mess

by Gregory Morvillo

In a previous post I noted that United States v. Martoma can be read as an attempt to eliminate the personal benefit standard.  By holding “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,’ Salman, 137 S. Ct. at 428, and the disclosure ‘resemble[s] trading by the insider followed by a gift of the profits to the recipient,’ id. at 427 (quoting Dirks, 463 U.S. at 664), whether or not there was a ‘meaningfully close personal relationship’ between the tipper and tippee” the Second Circuit potentially changed the face of insider trading.  The aforementioned can be said to cover all intentional transmission of material nonpublic information because what is a gift other than giving something of value to another person.  Thus, the Second Circuit has effectively replaced personal benefit with the tipper’s expectation that a recipient will trade.  This is a huge change to the insider trading landscape.  If true, it arguably reads fraud out of law that sounds in fraud. Continue reading

U.S. v. Martoma: The End of the Newman Personal Benefit Test

by Antonia M. Apps

Less than three years after the U.S. Court of Appeals for the Second Circuit instituted a new test for the personal benefit element of insider trading violations in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), the Court of Appeals in United States v. Martoma , No. 14-3599 (2d Cir. Aug. 23, 2017), expressly overruled the remaining vestiges of that test, which had already been narrowed by the Supreme Court in Salman v. United States, 137 S. Ct. 420 (2016).  The recent cases all addressed the Supreme Court’s seminal decision in Dirks v. SEC, 463 U.S. 646 (1983), which held that liability for insider trading under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder requires the insider disclosing material nonpublic information to have received or expected a personal benefit in exchange for disclosing the information.  Dirks provided a broad definition of personal benefit, holding that it could be satisfied by (among other things) “a gift of confidential information to a trading relative or friend.”  463 U.S. at 664.  In a 2-to-1 decision, the Court of Appeals in Martoma held that Newman’s gloss of a “meaningfully close personal relationship” as part of the personal benefit test was “no longer good law.”  Slip Op. at 24.  Instead, the majority ruled, liability requires the government to prove that the tipper expected the tippee would trade on the information and the tip “resembled trading by the insider followed by a gift of the profits” to the tippee.  Id. at 26. Continue reading

Martoma: Taking the Personal out of Personal Benefit

by Gregory Morvillo

Since the Second Circuit came out with its decision in United States v. Martoma I have been asked many questions about it.  I am sorry to say that the answer to pretty much all of them is:  “I don’t know.”  I hate that answer, by the way, but it is what it is.

People have asked:  Why did the Second Circuit do this?  Did the panel mean to go as far as it seems they went?  Does this mean there is no such thing as personal benefit?  Was Newman really just a personal shot at the over reach of former US Attorney Preet Bharara?  Will the Second Circuit take this en banc?  Will SCOTUS hear another insider trading case so soon after United States v. Salman?  Answer:  I don’t know. Continue reading

Materiality and Scandal

by Adam C. Pritchard

Media reports recently revealed that the U.S. Attorney’s office for the Southern District of New York was investigating 21st Century Fox Inc., trying to determine whether Fox had adequately disclosed settlements of sexual harassment claims brought against former against Fox News Chairman and Chief Executive Roger Ailes. Ailes resigned last summer after former Fox News anchor Gretchen Carlson sued him and Fox for sexual harassment; Carlson’s suit encouraged a number of additional women to come forward also alleging sexual harassment at Fox. Carlson and Fox ultimately settled her claims for a reported $20 million. It was also reported that other women had settled claims for smaller amounts, which apparently led to the current federal investigation. News of the SDNY investigation came out when a lawyer for one of the women currently suing Fox News for harassment disclosed that his client had received a subpoena to testify before a grand jury.

The reported investigation reflects the “when it rains, it pours” quality of securities enforcement. Any time a public company reveals a problem with its business, it has to worry that the disclosure will prompt an investigation by the SEC or a prosecutor (federal or state). Continue reading

The Extent and Intensity of Insider Trading Enforcement – an International Comparison

by Lev Bromberg, George Gilligan, and Ian Ramsay

Insider trading, a form of misconduct criminalized in many countries, was again in the headlines recently with the U.S. Federal Bureau of Investigation’s “Operation Perfect Hedge”, an investigation relating to hedge funds which uncovered interweaving webs of trading networks spanning several industries. Indeed, the operation at one point provided the U.S. authorities with a perfect record of 85 convictions for insider traders. The convictions of those involved – including Galleon founder Raj Rajaratnam and former S.A.C Capital Advisors portfolio manager Mathew Martoma – resulted in record prison sentences and monetary fines for insider trading. But how do these significant insider trading penalties compare with those imposed in other countries?

Our recent article, The Extent and Intensity of Insider Trading Enforcement – an International Comparison, presents the results of a detailed comparative empirical study of sanctions imposed for insider trading in Australia, Canada (Ontario), Hong Kong, Singapore, the United Kingdom, and the United States over a seven year period to 2015. Continue reading

Securities Litigation Update: Circuit Court Split over the Constitutionality of SEC Administrative Law Judges Tees Up Issue for the Supreme Court

courtesy of Greg D. Andres and Martine M. Beamon

The Tenth and D.C. Circuit Courts of Appeal have come to opposite conclusions in response to constitutional challenges to the Securities Exchange Commission’s (the “SEC’s”) appointment of Administrative Law Judges (“ALJs”). As detailed in our prior client alert, securities defendants across the country have contended that ALJs are inferior officers who were not appointed according to the Appointments Clause in Article II of the Constitution. The issue initially appeared settled when the D.C. Circuit held in Lucia v. SEC,[1] that ALJs were not officers subject to the requirements of the Appointments Clause.  But, on December 27, 2016, the Tenth Circuit decided in Bandimere v. SEC[2] that ALJs were indeed inferior officers and therefore were in violation of the Appointments Clause. The Tenth Circuit’s ruling, if ultimately upheld, has implications for pending and prior SEC actions, and may lead to similar questions about other agencies’ administrative law judges. Given the circuit split, the constitutionality of the SEC’s ALJ appointment process may be headed to the Supreme Court. Continue reading

A New Model for SEC Enforcement: Producing Bold and Unrelenting Results

by Chair Mary Jo White


Good morning and thank you, Dean [Trevor] Morrison for that very kind introduction. It is a pleasure to be here today and I want to thank the NYU Program on Corporate Compliance and Enforcement and the NYU Pollack Center for Law and Business for co-sponsoring this program. These programs provide important forums for sophisticated dialogue on critical white collar enforcement issues, which have an increased prominence post-financial crisis. I am honored to join your list of distinguished speakers.

Consistent with the core missions of these programs, I will talk to you today primarily about the SEC’s enforcement program, but also more broadly, about how best to punish and deter white-collar wrongdoing.As you know, the SEC is the primary regulator and enforcer of the federal securities laws. How we go about our job is thus critical to the protection of investors and the integrity of our capital markets. After nearly four years as Chair of the SEC, following almost nine years as U.S. Attorney for the Southern District of New York, where the criminal prosecution of white collar wrongdoing was – and still is – a major priority, this seemed like the right time to speak here about this important topic. And, as you might guess, after spending much of my career in law enforcement, I have strong views about the importance of strong enforcement in the white collar space and what it takes to achieve that. Continue reading