Federal Securities Law Blog : Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

In a February 10, 2012 Memorandum Opinion and Order, Chief Judge Sidney Fitzwater ruled on the motions to compel pending in the SEC's lawsuit against Mark Cuban. Although these disputes in the insider trading case are largely procedural, they are significant in that the Court considered whether the SEC would be required to produce certain materials from its investigative files. Judge Fitzwater ruled that the SEC would be required to produce non-privileged documents from a related investigation into Mamma.com and documents relating to the relationship between the Mamma.com and Mark Cuban investigations. The Court denied Mr. Cuban's request for documents relating to the involvement of another group of witnesses, as well as the request for the SEC's notes and summaries of witness interviews. Finally, the Court ordered both sides to produce certain privilege logs.

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On Friday, February 10, 2012, the U.S. Attorney for the Southern District of New York and the SEC announced charges against Douglas F. Whitman, the head portfolio manager at Whitman Capital, LLC, related to alleged insider trading. It is claimed that Mr. Whitman's friend and neighbor, Roomy Khan, provided Mr. Whitman with the same information that she provided Raj Rajaratnam of Galleon Management, who was convicted of insider trading in May 2011, sentenced to twelve years in prison and had a $92 million civil judgment imposed upon him.

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On Monday, January 23, 2012, the SEC announced that Diamondback Capital Management LLC ("Diamondback"), the Stamford, Connecticut-based hedge fund named as a defendant in the SEC's insider trading case last week (as discussed here), has agreed to settle charges with the Commission. Diamondback will pay more than $9 million as part of the settlement, which must be approved by Judge Paul G. Gardephe, a federal judge in New York. Diamondback has also entered a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York.

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Today, federal prosecutors and the SEC named seven fund managers and analysts as defendants in an insider trading scheme based on nonpublic information about Dell’s quarterly earnings and similar inside information regarding Nvidia Corporation. The U.S. Attorney called the trading in Dell shares the "largest insider trading scheme involving single stock charged to date." Three of the individuals pled guilty and are cooperating with the Government. The SEC's lawsuit also named two Connecticut-based hedge fund firms as defendants.

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Two unique insider trading cases have received a bit of attention recently. One case, brought on December 12, 2011 against a company and its former CEO, alleged that they defrauded shareholders by buying back stock at severely undervalued stock prices – at a time when the company was privately held. The second, brought on January 9, 2012 against the former CEO of company and his friend, alleged that the former tipped the latter about the upcoming acquisition of his company and resulted in a report in the Atlanta Business Chronicle that the CEO took and passed a polygraph test and was then asked by the SEC to take a second polygraph test.

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Today, the Federal Securities Litigation Blog continues its with its larger-than-usual blog entry examining the Top 10 securities litigation stories that were the most intriguing in 2011. As mentioned yesterday, like any sort of Top 10 list, not everyone will agree. Other bloggers will have their own lists with different stories. But on a personal basis, these stories that fascinated me – like a good book, I look forward to the next "chapter" in these stories in 2012.

Here's a quick headline look at the Top 5:

5. The SEC's Inspector General Reports on the Conduct of the Commission Staff.

4. Insider Trading at Galleon Management: Record-Setting Results.

3. The New Whistleblower Rules: Do I Tell Management Before I Tell The SEC?

2. The Lindsey Manufacturing Saga: The Verdict DOJ was "Fiercely Committed" to Obtaining is Vacated.

1. The Citigroup Case: Judge Rakoff's Decision and the Potential Impact on How SEC Cases Proceed.

These five stories are discussed in greater detail after the jump.

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In legal briefs filed in the last week, Mark Cuban and the SEC continued to attack each other for their conduct in discovery. On December 13, 2011, Mr. Cuban responded to the Commission's November 22 Motion to Compel (which asked the Court to order Mr. Cuban to produce a privilege log of documents) by arguing that: (1) he had already produced a log for the years 2004 to 2006; and (2) the Commission was asking for a log of documents for the 2007 to 2011 time-frame, long after the events in dispute took place. The SEC filed its own motion on December 16, 2011, asking that Mr. Cuban be ordered to appear for his deposition at some point in December or January (as opposed to the day before the February 17, 2012 discovery cut-off, which was the only date Mr. Cuban had proposed). While the on-going disputes are over procedural issues, they relate to documents from the investigation from the period long-after the events in the case and provide an interesting look at the strategy of both the SEC and the defense in litigating this matter.

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The Director of the SEC's Division of Enforcement appeared before two Congressional Committees in the last week to testify about the Commission's recent work in the area of insider trading. The testimony raised two interesting topics: (1) a review of the "new initiatives" instituted by the SEC to combat insider trading; and (2) information on how the current law of insider trading applies to securities trading by members of Congress and their staffs.

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On Tuesday, November 22, 2011, the SEC struck the latest blow in its long-standing dispute with Mark Cuban by filing a Motion to Compel, asking the Court to order Mr. Cuban to produce a privilege log of documents (from the period the SEC was investigating him) which were withheld on privilege grounds. According to the Commission, he has refused to do so because it "it would be burdensome to log a large number of plainly privileged communications." Mr. Cuban has previously filed a Motion to Compel against the SEC seeking, among other things a voluminous log of what the Commission also calls "plainly privileged documents." As previously noted, Mr. Cuban is one of the rare individual defendants who has the financial ability to mount a defense in such litigation against the SEC, making the developments in this case worth watching. Moreover, one of the central issues in the SEC's motion and Mr. Cuban's prior motion focus on the events and information from the period of the SEC's investigation and the now on-going litigation – not during the events in dispute.

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On Tuesday, November 8, 2011, Judge Jed Rakoff issued an Opinion and Order and entered a final Judgment against Raj Rajaratnam, bringing a close to the SEC's first civil case against the former head of Galleon Management. Mr. Rajaratnam, who was previously convicted of insider trading charges (as discussed here) and sentenced to twelve years in prison (as discussed here), now has a $92 million civil judgment against him.

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The Federal Securities Law Blog is pleased to announce its second e-Book: "Insider Trading: A Look At Some Of The Key Civil And Criminal Cases In 2011."

The last few years have seen a remarkable number of insider trading cases brought by both the SEC and federal prosecutors. In the criminal cases, many Wall Street professionals and lawyers who have been very successful will now spend years in prison. On the civil side, the SEC has pursued defendants very aggressively, although in some cases, where the defendants have had the ability to fight back, they have vigorously defended themselves. This eBook will focus on several of these cases, the events in 2011 and discuss some of the trends that have developed.

First, we will look at the criminal cases by focusing on some of the Galleon Management and the "Expert Network" cases as examples where the prosecutors pursued, tried and convicted significant Wall Street players. We also will consider the cases involving Rajat Gupta (who was also part of the Galleon Management circle) including the administrative case against him, his suit against the SEC in federal court, the dismissal of both of those actions and the subsequent indictment and civil suit against him. Finally, we will examine the recent events in the SEC's case against Mark Cuban, which is worth watching closely because he has fought the SEC every step of the way, raising a number of theories and utilizing different tactics.

The e-book is available here.

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On Wednesday, October 26, 2011, both the SEC and the U.S. Attorney's Office for the Southern District of New York filed charges against Rajat Gupta, the former Managing Director of McKinsey & Company and board member at Goldman Sachs and Procter & Gamble. Mr. Gupta, who previously argued that an Administrative Proceeding brought by the SEC against him was unfair because he denied a trial before a jury will now have two opportunities to challenge the charges against him in Court.

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A pair of articles appeared this week that traced trends in particular areas of securities enforcement. The Wall Street Journal presented data showing an increase in the length of sentences in insider trading cases over the last eighteen years. A second article which appeared in Corporate Counsel suggested that the SEC's settlement of a case involving back-dated options "may have symbolized the end of an era."

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Today, in a case closely watched on Wall Street, Judge Richard Holwell sentenced Raj Rajaratnam, the Managing Member of Galleon Management, LLC, to Eleven years in prison. Although the sentence is the longest to date for anyone involved in the Galleon Group, it fell considerably short of the lengthy sentence sought by the Government.

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In a report released last week, the SEC's Office of Inspector General ("OIG") stated that it "did not find sufficient evidence to substantiate any allegations of misconduct" by the SEC Division of Enforcement during its investigation of Mark Cuban. The OIG's Report (which is dated August 22, 2011, but not available until last week and is available here) is one of several investigations that were underway (as previously discussed here).

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On Wednesday, September 21, two defendants who were convicted of conspiracy and insider trading charges in separate trials earlier this year were sentenced in federal court in New York. Zvi Goffer, who formerly worked at with the Schottenfeld Group LLC (part of Raj Rajaratnam's Galleon Group), was sentenced to ten years in prison, while Winifred Jiau, a consultant at Primary Global Research LLC (an expert networking firm), received a four year sentence. Like many of the recent high-profile insider trading cases, the Government's evidence included wiretapped telephone conversations between the participants in both cases. DOJ and the SEC continue to vigorously pursue and punish those participating in insider trading cases.

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On Wednesday, August 24, the SEC announced its latest result in its case relating to Galleon Management, this time obtaining a default judgment against Deep Shah, a former lodging industry analyst at Moody's. The Court entered a permanent injunction from future violations of Section 10(b) and Rules 10b-5, and disgorgement, prejudgment interest and civil penalty totaling over $34.5 million. The events involving Galleon Management, which had previously resulted in the criminal convictions of Raj Rajaratnam (discussed here) and Zvi Goffer (here), has also led to a number of settlements with the SEC.

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The SEC and Rajat Gupta have agreed to settle their dispute regarding the forum in which they should litigate the allegations of insider trading by the former Goldman Sachs director by dismissing the pending actions against each other. Specifically, the SEC has dismissed its Administrative Proceeding against Mr. Gupta alleging insider trading and the parties have advised Judge Jed Rakoff (who is presiding over the lawsuit filed in federal court in New York by Mr. Gutpa against the Commission) that they will be entering a Joint Stipulation of Dismissal. In doing so, the parties agreed that, if the SEC elects to bring action against Mr. Gupta, it will do so in federal court in New York and designate it as related to the other Galleon cases pending before Judge Rakoff.

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On Monday, August 1, 2011, the SEC filed suit against eight defendants for making false statements in public filings regarding the status of the human clinical trials for the drug SF-1019 by Argyll Biotechnologies LLC. The statements did not disclose that the Food and Drug Administration had issued clinical holds on testing for the drug, which is derived from goat blood and was Argyll's sole product. In addition, three executives were charged with insider trading for selling shares of Immunosyn Corporation (the company which made the false filings) for $20 million during the same period. SEC v. Ferrone, No. 11-cv-05223 (N.D. Ill. Filed Aug. 1, 2011).

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On Monday, July 18, 2011, a Federal Judge in Texas, Sidney Fitzwater, granted a Motion to Strike by the SEC in its case against Mark Cuban, the owner of the Dallas Mavericks, eliminating his affirmative defense of "unclean hands" in the Commission's case against him. Notably, although it did strike the defense in Mr. Cuban's case, the Court rejected the SEC's argument that the defense is barred in SEC enforcement actions as a matter of law, and held that it is available, but "only in strictly limited circumstances."

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On Monday, July 11, 2011, New York federal Judge Jed Rakoff denied the SEC's Motion to Dismiss in Gupta v. SEC, No. 11-cv-1900 (S.D.N.Y.). The Plaintiff, Rajat Gupta, a former director at Goldman Sachs, has been accused by the SEC of having provided material nonpublic information to Raj Rajaratnam of Galleon Management, who was recently convicted of insider trading (discussed here). Unlike the 28 other defendants named in lawsuits relating to Galleon, the SEC commenced an Administrative Proceeding against Mr. Gupta. Mr. Gupta's complaint in federal court (discussed here) alleged that the SEC unconstitutionally deprived him to a jury trial in federal court and that it was necessary to have the question of whether the Dodd-Frank Act provisions could be applied retroactively (which the SEC seeks to do in the Administrative Proceeding) decided in federal court. By denying the SEC's motion to dismiss, Judge Rakoff allowed Mr. Gupta's case to proceed, but ruled that "the theory of the Complaint is narrowed to one of equal protection."

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On Monday, a federal jury convicted a consultant at an expert networking firm, Winifred Jiau, of one count of conspiracy and one count of securities fraud for selling inside information she obtained through social relationships with sources from the finance departments at publicly traded companies. According to the U.S. Attorney, "Wini Jiau gave new meaning to the concept of social networking. She used and exploited friends at public companies for the purpose of obtaining, and then selling, inside information."

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Less than five weeks after the insider trading conviction of Raj Rajaratnam, prosecutors in New York, again using wiretapped telephone conversations, obtained a second significant conviction for insider trading, this time against Zvi Goffer and two other Wall Street professionals, who were found guilty on Monday of conspiracy and securities fraud charges.

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Today, in a case closely watched on Wall Street, a federal Jury in New York convicted Raj Rajaratnam, the Managing Member of Galleon Management, LLC, of five counts of conspiracy to commit securities fraud and nine counts of securities fraud, stemming from what prosecutors called "his involvement in the largest hedge fund insider trading scheme in history."

Prosecutors stated that Mr. Rajaratnam received non-public, material insider information through overlapping conspiracies from insiders and others at hedge funds, public companies, and investor relations firms, such as Goldman Sachs, Intel, IBM, McKinsey and others. Prosecutors argued that he then executed trades in the stock of public companies, including Goldman Sachs, Clearwire, Akamai, AMD, Intel, Polycom, and PeopleSupport. The evidence in the eight-week trial included numerous recordings of wiretapped phone calls between Mr. Rajaratnam and co-conspirators (many of whom pled guilty). According to media reports, defense counsel, who argued that Mr. Rajaratnam pieced together information from a variety of sources to reach a decision on investing, plans to appeal.

Each conspiracy conviction carries a maximum penalty of five years, while each insider trading charge carries a maximum of twenty years. Mr. Rajaratnam is scheduled to be sentenced on July 29, 2011.

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On Wednesday, April 6, 2011, authorities arrested Matthew Kluger (a former associate at Wilson Sonsini Goodrich and Rosati) and Garrett Bauer (a Wall Street trader) and charged them with conspiracy, insider trading and obstruction of justice in connection a years-long scheme to capitalize on material nonpublic information obtained from Mr. Kluger's law firm. The two men were also named in a case brought by the SEC based on the same events. The authorities allege that a unnamed third co-conspirator (or "the Middleman" as the SEC called him) participated in the scheme by receiving information from Mr. Kluger and passing it along to Mr. Bauer. Both Mr. Bauer and the Middleman conducted trading based on that information. In eleven transactions between 2006 and 2011, the men invested $109 million and made over $32 million in profits. Although the men had detailed plans to avoid being detected by authorities, Mr. Kluger and Mr. Bauer were after arrested telephone conversations between them and the Middleman discussing the scheme were recorded in March 2011.

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In March 2011, an individual accused of participating in an insider trading scheme filed a Complaint against the SEC in federal court in New York, arguing, among other things, that the SEC should be enjoined from retroactively applying the provisions of the Dodd-Frank Act in an administrative proceeding against him. On Friday April 1, 2011, the SEC filed a brief requesting that the Court dismiss that complaint for lack of subject matter jurisdiction, arguing, in part, that the retroactivity claim was not "ripe" and the individual had not exhausted his administrative remedies. In short, the Commission argued that the federal court cannot consider this issue until the administrative proceeding is completed and the SEC decides whether or not to impose civil penalties under the Act.

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