Gag Me With An . . . Order? Massey Mine Case Starts With Broad Gag Order

The federal case against former Massey CEO Donald Blankenship has taken a rather unexpected turn—a sweeping gag and sealing order that effectively prevents anyone from following the case.

I was hoping to cover this case in some detail by analyzing the motions, orders and various parts of the docket over time. But the judge is not making that easy.

I say the “judge” is not making it easy because neither the government nor the defense asked for the order. It was entered sua sponte.

The good news is that news organizations are upset about the order and seeking to have it removed. Fourth Circuit precedent may be on their side.

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Second Circuit to Preet Bharara: Quit Using “Doctrinal Novelty” to Prosecute Insider Trading Cases

The Second Circuit today issued a landmark decision reversing the convictions of the defendants in United States v. Newman, an insider trading case.

It held that the government has to prove that the defendant knew that the tipper of inside information was providing confidential information in exchange for some personal benefit.

During the trial of Anthony Chiasson and Todd Newman, the trial judge refused to instruct the jury that the government had to prove this element. The Second Circuit unanimously rejected that view.

We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.

The court went on to reject the government’s argument:

We find no support for the government’s contention that knowledge of a breach of the duty of confidentiality without knowledge of the personal benefit is sufficient to impose criminal liability. . . . Although the government might like the law to be different, nothing in the law requires a symmetry of information in the nation’s securities markets.

The personal benefit must be something more than mere friendship. The benefit must be a

meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature

The Second Circuit also offered a backhanded slap at recent SDNY insider trading prosecutions, saying that they were increasingly based on a “doctrinal novelty”–and aimed at tippees who were “many levels removed from corporate insiders.”

Generally, the more the government has to prove, the better for defendants. And the more knowledge or intent the government has to prove, the better for defendants.

By requiring this level of knowledge, the Second Circuit effectively prevents most insider trader cases against individuals who are remote to the tipper and not the direct recipient of the leaked information. It’s still possible to bring that kind of attenuated case, but it will be much harder to prove. (In this case, the court explained that neither Mr. Chiasson nor Mr. Newman knew the identity of the tippers.)

DealBook has a great article about the implications of this decision on pending SDNY insider trading cases. It calls the decision the start of a possible “unraveling” of Preet Bharara’s campaign to win insider trading cases at any cost.

I’ve written previously about this case; this is a particularly gratifying follow-up post.

Notably, the NACDL filed an amicus brief in support of the defendants.

Congratulations to all!

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A Tremendous White Collar Victory in Eli Lilly Trade Secrets Case

A few months ago, I wrote about a trade secrets case in Indianapolis. It looked like the case was going well for the defense. As any trial lawyer knows, momentum is key.

Momentum just swung in the biggest way for the defense. The government filed—and the judge granted—a motion to dismiss all charges.

You read that right. All charges. Every last damn one of them.

The motion is short and sweet:

The government, upon its on-going evaluation and assessment of this case, moves to dismiss the Second Superseding Indictment as to both defendants in the interests of justice. The victim in this case has been notified of the government’s intention to move to dismiss all charges against both defendants. The defendants have no objection.

In the interests of justice. That’s a phrase that gets thrown around so much that it is sometimes hard to remember that it means something.

Justice.

Congratulations to the defense and to Mr. Cao and Mr. Li. I don’t congratulate prosecutors too much but it is gratifying to see a few drop a case if it’s not a good one. (Of course, I’m sure the defendants would have preferred to avoid the indictment in the first place.)

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The Opening Statement for this Prosecution Writes Itself: The Indictment of Massey Energy CEO

MasseyAs a general rule, the government does not indict CEOs of big companies. No one really wants to say that out loud—at least on the government’s side of the aisle—but it’s true.

It is usually difficult for the government to prove a link between a CEO and the illegal conduct, given the many layers of corporate bureaucracy that are between a C-suite executive and the worker bees.

That makes the recent indictment of Don Blankenship, former CEO of Massey Energy Company, all the more interesting. The four-count indictment depicts Mr. Blankenship as an extreme micro-manager whose only concern was Massey’s bottom line and not the safety of its workers.

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Posted in Conspiracy, Obstruction, Securities fraud, Uncategorized | Tagged | 1 Comment

A Trial Victory in a Federal White-Collar Case!

not-guilty-roadsig_450It’s a dreary Monday morning in D.C., but I saw this article on Law360 (subscription required, sorry) that brought a little cheer to the day.

Last Thursday, a jury in Fort Myers, Florida, acquitted the former division president of Health Management Associates, Inc. (HMA) of an obstruction of justice charge.

According to the superseding indictment (which is light on facts), Joshua Putter allegedly made a “false entry” in a letter to the CEO of a company called Carlisle Regional Medical Center. The supposed purpose of the false entry was to throw off federal investigators.

HMA is being investigated by the SEC, as well as DOJ and the Inspector General of the Department of Health and Human Services.

The jury did not take long to find Mr. Putter not guilty. The trial was two weeks long. The deliberations lasted just 90 minutes.

Most juries take that long to select a foreperson, get the exhibits and figure out what they want for lunch. There can’t have been much to the government’s case if the jury only needed 90 minutes to reach a verdict after hearing two weeks of evidence.

Perhaps the saddest part of the story is that Mr. Putter had left HMA at least two years before the superseding indictment. He then was the COO of Steward Health Care System in Boston from sometime in 2011 until June 2013, when he went on personal leave.

A local news story explained:

As he waited for trial, [Mr. Putter’s lawyer] said, Putter became an Orange Leaf Frozen Yogurt franchisee, opening a store in the South Florida city of Hollywood.

Mr. Putter has been under indictment for a year, essentially lost his high-powered job and had to open a yogurt store. I wonder if the prosecutors are even the slightest bit remorseful for bringing what appears to be an extremely weak case against him. Did they consider the havoc it would wreak on his life?

Congratulations to Mr. Putter’s lawyers, Christopher Brown and Lee Hollander! And, congratulations as well to Mr. Putter–who fought the good fight here.

P.S. Feel free to send me other federal court trial victories in white-collar cases. I’d be happy to post some good news here, rather than only about indictments, investigations and sentences. A little hope is a good thing for all of us.

 

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Don’t Mess With . . . the FDIC? A “Real Housewife” and Bank Executives Find Out the Hard Way

FDICYou may think of the Federal Deposit Insurance Corporation’s (FDIC) as the friendly folks who insure your money at the bank.

Or you may think of the FDIC as the regulator that deals with failed banks.

You probably do not think of the FDIC as an agency to fear.

The criminal prosecutions of Craig On and Michael Davis are a sobering reminder that the FDIC’s Office of the Inspector General (OIG) should not be dismissed out of hand. The FDIC’s OIG has been expanding its reach in recent years.

These days, your clients should be prepared for the very real possibility that a criminal prosecution may follow an FDIC investigation.

A few recent cases demonstrate this trend, including one against a “Real Housewife” of New Jersey.

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The First-Ever Prosecution for “Spoofing”

Definition: Spoof

Noun

  1. a mocking imitation of someone or something, usually light and good-humored; lampoon or parody; 2. a hoax; prank.

Verb

  1. to mock (something or someone) lightly and good-humoredly; kid; 4. to fool by a hoax; play a trick on, especially one intended to deceive; 5. to scoff at something lightly and good-humoredly; kid.

The Department of Justice has brought the first-ever indictment for spoofing. Contrary to the definitions above, spoofing is no joke.

Michael Coscia, former manager and owner of Panther Energy Trading LLC, has been indicted for spoofing and commodities fraud. The 12-count indictment alleges that Mr. Coscia used two custom-built trading programs to manipulate two futures markets in 2011.

His programs would supposedly fool other market participants into shifting prices in his favor.

For all that, Mr. Coscia now faces six counts of commodities fraud in violation of 18 U.S.C. § 1348 and six counts of “spoofing” in violation of 7 U.S.C. §§ 6c(a)(5)(C) and 13(a)(2).

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How Much Cooperation Is Enough to Avoid Prison?

How much cooperation with the government does your client have to provide to avoid prison?

If portfolio manager Reema Shah is any example, the answer is…over a year.

On May 21, 2014, Ms. Shah pleaded guilty to conspiracy to commit securities fraud and insider trading. However, since 2009, Ms. Shah had been working as a government cooperator.

For about a year, she activley gathered information on co-workers and friends, and turned that information over to federal investigators as part of their investigation into SAC Capital Advisors LP and other targets.

In return, she was sentenced to probation.

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Posted in Insider Trading, Securities fraud, Sentencing | Tagged | Leave a comment

A Look-Back Review Gone Wrong – SEC Charges Wells Fargo Compliance Consultant with Altering Records Related to Insider Trading

The SEC has charged Judy Wolf, a former compliance consultant for Wells Fargo Advisors, with falsifying records that were submitted to the SEC during the investigation of a registered Wells Fargo representative. Ms. Wolf allegedly falsified her internal investigation logs so she would appear to have been a more competent and thorough compliance investigator.

As a result, Ms. Wolf is now the subject of her own SEC investigation for aiding and abetting Wells Fargo’s securities violations.

Because Wells Fargo was a registered broker-dealer and investment advisor, Section 15(g) of the Exchange Act and Section 204A of the Advisors Act require it to have written policies and procedures that are reasonably designed to prevent the misuse of material nonpublic information.

Ms. Wolf was part of Wells Fargo’s efforts to comply with Section 15(g) and Section 204A. According to the SEC, she may have been part of the problem rather than part of the solution.

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When an FBI Agent is the Bad Guy

On September 30, 2014, Robert Lustyik entered a guilty plea in connection with alleged grand jury tampering and obstruction of justice. Mr. Lustyik has been charged with interfering with the investigation of his alleged business partner, Michael Taylor.

In return for this help, Mr. Taylor promised Mr. Lustyik a large sum of money and a stream of lucrative future business contracts. Before completing the alleged scheme, however, Mr. Lustyik was arrested. Mr. Lustyik pleaded guilty to an 11-count indictment charging conspiracy, honest services wire fraud, obstruction of a grand jury proceeding, and obstruction of an agency proceeding.

Sounds pretty hum-drum until you hear what Mr. Lustyik does for a living.

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