More on the long strange trip – Martin Shkreli trial

August 2, 2017

More on the Martin Shkreli trial The jury has been deliberating for days now. Yesterday, they submitted a few questions to the judge. This is always exciting and cause for much speculation and pontificating in legal circles. One question was a request for the definition of “fraudulent intent.” According to the New York Times, the defense considered that a good sign given their position that everything Shkreli did was in good faith. How could they not take heart that the jury was wrestling with the issue of intent? Another question was a request for the definition of “assets under management” and clarification whether that includes just assets in the funds at issue or other funds. There was evidence that Shkreli told investors that he had $30 to $40 million of assets under management when he reported to the SEC that he only had $3 million under management. Shkreli may have been including assets of a wealthy investor who had withdrawn his funds. I see this as another positive for the defense. https://www.nytimes.com/2017/08/01/business/dealbook/martin-shkreli-fraud-trial.html?_r=0 See my earlier July 17, 2017 post for more on the Shkreli trial.

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SEC awards government employee $2.5 million for whistleblower tip

August 2, 2017

Government employees are eligible to recover awards under the SEC’s whistleblower program Generally speaking, if you are an employee of a federal, state, or local government agency, you may be eligible for an award under the SEC whistleblower program. But, you must satisfy two conditions. The first is that you not work for a banking or securities regulatory agency. The law prohibits paying a whistleblower award to an employee of “an appropriate regulatory agency.” Exchange Act § 21F(c)(2)(A)(i), 15 U.S.C. § 78u-6(c)(2)(A)(i). Exchange Act Rule 21F-4(f) defines an “appropriate regulatory agency” by reference to Section 3(a)(34), which in turn defines an “appropriate regulatory agency” as the Commission and any of the various banking agencies listed in the definition, including the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation. The second condition requires that you not work for the law enforcement section of your agency if your agency is considered “a law enforcement organization.” Exchange Act § 21F(c)(2)(A)(v), 15 U.S.C. § 78u-6(c)(2)(A)(v), and Exchange Act Rule 21F-8(c)(1), 17 C.F.R. § 240.21F-8(c)(1). Neither the Exchange Act nor the whistleblower rules define “law enforcement organization.” According to the SEC, the term is generally understood as having to do with the detection, investigation, or prosecution of potential violations of law. Exchange Act §24(f)(4)(B) and (C), 15 U.S.C. § 78x(f)(4)(B) and (C) (defining foreign and state law enforcement authorities as those that are “empowered … to detect, investigate, or prosecute potential violations of law”). This would probably bar anyone who works for the Department of Justice, FBI, etc. from being a whistleblower — since the entire organization would likely be deemed a “law enforcement organization.” But, you might be eligible if you worked for the Department of Education, HHS, CMS, or another regulatory agency that does law enforcement that is organizationally separate from where you work and that you have nothing to do with. The SEC is concerned about paying an award to a claimant who seeks to get around the potential responsibilities that the government agency (their employer) might have to investigate or otherwise take action for the misconduct. The SEC is not interested in making an award to someone who was just doing their job. Bottom line: If you are a government employee, don’t assume that you are not eligible to receive a whistleblower award. https://www.sec.gov/rules/other/2017/34-81200.pdf

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Using mom’s brokerage account for insider trading

July 21, 2017

The Securities and Exchange Commission announced insider trading charges against an MIT research scientist who allegedly searched the internet for “how sec detect unusual trade” before making a pre-acquisition trade that the SEC flagged as suspicious. https://www.sec.gov/news/press-release/2017-125 The SEC’s complaint alleges that Fei Yan purchased stocks and options based on material nonpublic information obtained from his wife, an associate at a law firm that worked on the acquisitions. According to the SEC’s complaint, Yan made approximately $120,000 in illicit profits by selling his holdings in two public companies following public announcements that they would be acquired by other companies.

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Presidential tweets – how to get them into evidence

July 20, 2017

How does one get the tweets of @realDonaldTrump into evidence? This is an interesting question raised by Kelly Twigger in Above the Law this week. Above the Law – Are Donald Trump’s Tweets Self-Authenticating  It is a question that litigators face in seeking to admit all kinds of social media but it is more fun to apply the rules to the President’s tweets. There are two hurdles that must be jumped to get the tweets into evidence. Kelly Twigger addresses whether the tweets are self-authenticating. I will address that hurdle as well as the hearsay hurdle. The Authentication Hurdle: To use the tweets, you need to show that they they are what they purport to be — statements of President Trump. According to Federal Rule of Evidence number 901, “[t]o satisfy the requirement of authenticating or identifying an item of evidence, the proponent must produce evidence sufficient to support a finding that the item is what the proponent claims it is.” How do you do that? (1) You could show that the statement is from a government office where items of this kind (presidential statements) are kept. FRE 901(b)(7). President Trump, Sean Spicer, and others have said that the statements of @realDonaldTrump are made by the President. This might be enough. OR (2) You could show that the tweets bear the distinctive characteristics of President Trump. Under FRE 901(4), you can prove authenticity through evidence of “[t]he appearance, contents, substance, internal patterns, or other distinctive characteristics of the item, taken together with all the circumstances.”  This would seem to be a winner for many @realDonaldTrump tweets. The Hearsay Hurdle:  While hearsay objections are a staple of all those police and law television series, that is not much of a problem here. Hearsay is an out of court statement offered to prove the truth of the matter asserted. FRE 801(c). A tweet may not be hearsay at all. Or it may fall within an exception to the hearsay rule. (1) Not hearsay: If you are not seeking to admit the tweet for the truth of the matter asserted, then it is, by definition, not hearsay. You may be seeking to admit a tweet to show that President Trump was watching a particular television broadcast or that he was aware of a particular fact addressed in the tweet — things that do not hinge on the truthfulness of the statements in the tweet. If you are seeking to use a tweet against President Trump, then the tweet is likely not hearsay. Statements of a party-opponent are not hearsay. Under FRE 801(d)(2), an out of court statement is not hearsay if the statement was made by the party-opponent, is one the party-opponent adopted, was made by a person whom the party authorized to make a statement on the subject, was made by the party’s agent or employee on a matter within the scope of that relationship and while it existed, or was made by a co-conspirator during and in furtherance of the conspiracy. (2) Exception to hearsay: There are a number of exceptions to hearsay that may apply to President Trump’s tweets. FRE 803. These […]

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Investor trust is important, but how important?

July 19, 2017

According to a Cornell University study of investments after the Bernie Madoff Ponzi scheme was revealed, people who knew Madoff’s victims or who lived in areas where victims were concentrated dramatically changed their investment behavior. According to the  study, investors withdrew $363 billion invested with financial advisors — even though many had nothing to do with Madoff. A significant portion of the withdrawals were put in safe assets like bank deposits. Even four years after the fraud was revealed, investors had not reinvested these funds in the markets. Financial advisory firms take note:  the $363 billion in investment withdrawals is nearly 20 times the $17 billion in restitution the courts ordered Madoff to pay his investors. According to one of the study’s authors Steve Yonker, “That’s a pretty big effect. The withdrawals were so hefty in some areas that some investment firms ended up shutting their doors and going out of business.”  Investment firms with clients in regions that were affected by the fraud were over 40 percent more likely to close than firms in a control group. “We show the importance of trust in investors’ allocation decisions,” Yonker said. “At the macro level, economic growth critically depends on the efficient allocation of capital.” “Capital flows stemming from distrust in intermediaries instead of the underlying investment opportunities can potentially lead to suboptimal allocations.” Fraud is bad for business. Investors fled when they lost trust in the markets. Perhaps the brokerage industry should work harder to maintain the trust of investors rather than opposing investor protection regulation. It’s good business. The Cornell study is published in The Review of Financial Studies. Thanks to BusinessInsider.com for its reporting on this study. http://markets.businessinsider.com/news/stocks/bernie-madoff-ponzi-scheme-363-billion-dollar-exodus-investment-funds-2017-7-1002183521 http://mediarelations.cornell.edu/2017/07/18/madoff-rip-off-shattered-trust-changed-investment-behavior/

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Fed employee nest eggs – less safe than you would think

July 18, 2017

When federal government employees recommend an investment adviser who steals employee retirement funds, “sovereign immunity” prevents recovery against government. In many ways the retirement savings of federal employees are safer than employees of private companies. The Thrift Savings Plan and other 401(k)-like plans offered by the federal government have fewer of the inappropriate investment options that are in many private employer retirement plans. But, as a recent Eleventh Circuit Court of Appeals decision reveals, federal employee retirement savings are still at risk. Alvarez v. U.S., Case No. 16-16479 (11th Cir. July 17, 2017), available at http://media.ca11.uscourts.gov/opinions/pub/files/201616479.pdf According to the Eleventh Circuit: In the late 1980s, Kenneth Wayne McLeod began contracting with various federal agencies to provide retirement advice to federal law enforcement employees in Florida. McLeod founded and ran the Federal Employee Benefits Group, Inc. (“FEBG”) Bond Fund. Most of the federal employee investors met McLeod at retirement seminars hosted by their agency employer, where McLeod spoke generally about finances and retirement and also pitched his fund. McLeod would sometimes follow up with individual employees, promising high, secure returns in the FEBG Bond Fund. Not surprisingly, federal employees invested in the FEBG Bond Fund.  In 2010, when investigators questioned McLeod, he admitted the FEBG Bond Fund was a Ponzi scheme and committed suicide. In an attempt to recover $30 million in losses, investors filed suit alleging that federal agency employees had failed to exercise reasonable care and made misrepresentations in recommending McLeod and the FEBG Bond Fund. So far, this is similar to many cases against private companies who recommend investment advisers to their employees. But, unlike private employers, the government must consent to be sued. It has discretion to invoke the defense of sovereign immunity — a doctrine that protects the government against lawsuits that it does not expressly authorize. Investors brought claims that the federal government was negligent in contracting with McLeod and that by doing so it gave the appearance of undue confidence in McLeod. They sought to fall within the Federal Tort Claims Act (“FTCA”), which authorizes certain tort claims against the federal government. But, as the Eleventh Circuit said, a court must strictly observe the ‘limitations and conditions upon which the Government consents to be sued’ and cannot imply exceptions not present within the terms of the waiver.” One such exception is the [FTCA] intentional tort exception, which bars: [a]ny claim arising out of assault, battery, false imprisonment, false arrest, malicious prosecution, abuse of process, libel, slander, misrepresentation, deceit, or interference with contract rights . . . The Eleventh Circuit ruled that that the alleged omissions during McLeod’s seminars, which gave investors “undue confidence in McLeod’s credibility,” constituted misrepresentations. The court found that all of the alleged negligent conduct of the agency employees from their failure to stop McLeod’s solicitation (non-communications) and their endorsement of McLeod was fundamentally based upon misrepresentations. As a result, the federal government is immune from liability for recommending this scoundrel to its own employees. Federal employees beware! http://law.justia.com/cases/federal/appellate-courts/ca11/16-16479/16-16479-2017-07-17.html

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The long strange trip that is the Martin Shkreli trial

July 17, 2017

It is a little weird that Martin Shkreli is being prosecuted for criminal securities fraud even though investors did not lose money. That is no bar to criminal prosecution, but unusual. The jury could decline to find guilt without losses. The New Yorker’s Sheelah Kolhatkar also notes this unusual prosecution of fraud with no investor losses. It is a gutsy move on the part of the prosecutors (these are not members of the Chickenshit Club). http://www.newyorker.com/sections/business/the-strange-defense-of-martin-shkreli. Kolhatkar also took notice of the unusual Benjamin Brafman defense strategy — calling client Shkreli “strange” and like “Rain Man.” This strategy make sense to me. Even if it were possible to have  Shkreli change his persona for trial, it would not be credible. This is making this most of the client you have — rather trying to make over the client. While we are on the subject, there is something even weirder that the LA Times reported. A Shkreli mentor sent an email about wanting to touch Shkreli’s “soft skin.” I did not make this up. You can verify it here:  http://www.latimes.com/business/la-fi-martin-shkreli-trial-20170713-story.html   http://www.latimes.com/business/la-fi-martin-shkreli-trial-20170705-story.html  Will a skin care line be next for Shkreli? Its been a long strange trip already.    

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It’s a family affair – offering fraud

July 13, 2017

Mother and son working together – it would be heartwarming but … it’s fraud The SEC filed a complaint in the U.S. District Court for the Central District of California alleging that Carol J. Wayland and her son, John C. Mueller, fraudulently offered and sold unregistered securities to investors using a boiler room operation, raising approximately $2.4 million from 41 investors nationwide. To solicit investors in “K-T 50 Wells”, Wayland and Mueller allegedly set up a boiler room under the fictitious name of “Sahara Wealth Advisors.” According to the SEC’s complaint, K-T 50 Wells was supposed to develop and operate oil wells, but had little legitimate business activity. Wayland and Mueller allegedly misappropriated K-T 50 Wells investor money for purposes not disclosed in the K-T 50 Wells private placement memorandum, taking at least $871,463, or 36%, to pay for their personal expenses, and using the money of some investors to make payments to other investors. The complaint also alleges that K-T 50 Wells made misrepresentations regarding Wayland and Mueller’s experience managing oil and gas investment projects. Not the best example of good parenting. https://www.sec.gov/litigation/litreleases/2017/lr23876.htm

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Measuring uncertainty about economic policy

July 12, 2017

Here is a shout out to Steven J. Davis from my alma mater — the University of Chicago– for his work creating the Economic Policy Uncertainty Index. While the VIX index measures volatility in the markets, the Economic Policy Uncertainty Index provides clues about how politics might be shaping the economy. Professor Davis developed the index with Scott Baker from the Kellogg School of Management at Northwestern University and Nicholas Bloom at Stanford University. The three saw a need for this kind of measure after the recent financial crisis. The index is used as the basis for research by economists and finance experts looking for connections between political economic uncertainty and different parts of the economy. You can listen to an NPR Marketplace story about the index here: http://<iframe src=”https://www.marketplace.org/2017/07/12/economy/government-policy-uncertainty-and-economy/popout” frameborder=”0″ width=”100%” height=”240px”></iframe>

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Chinese officials caught fudging numbers to meet targets

July 11, 2017

Chinese authorities recently reported that two government officials for two northern provinces had falsified financial performance data in order to meet targets. “Good times or bad, China always seems to post numbers that meet the targets set by central planners,” Arthur Dong, a professor of international relations at Columbia University specializing in Chinese economic affairs told Pacific Standard Magazine. According to Kevin Tsui, an economics professor at Clemson University specializing in the Chinese economy, “local government has incentives to manipulate their financial data because local leaders’ promotion opportunities are related to these statistics.” “Producing the numbers that Beijing likes will always lead to promotions and career advancement within the party apparatus,” Dong says. “There is a ‘get what you pay for’ element to the incentive system that encourages provincial leaders to game the numbers.” But some see this report in a positive light. William Hurst, a political science professor at Northwestern University, says “I actually look at the fact that the central authorities are trying to crack down on this as a positive sign that China’s leaders want a little bit more transparency and more accurate reporting in the economy … This can help preserve some trust among investors—foreign and domestic—and temper panics that can occur in times of crisis.” https://psmag.com/economics/china-has-been-cooking-the-books

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