D.C. Circuit Reins In District Court for Second-Guessing Government’s Deferred Prosecution Agreement

This guest post was authored by our colleague Jeremy A. Gunn, an associate in the firm’s Litigation Department.

In an unusual win for both the U.S. Department of Justice and corporate defendants, the D.C. Circuit last week reversed a district court’s refusal to pause the speedy-trial clock pursuant to a deferred prosecution agreement.  United States v. Fokker Servs. B.V., — F.3d —, No. 15-3016, slip op. at 1 (D.C. Cir. Apr. 5, 2016).  The district court’s action was the first time that any federal court had denied a motion to exclude time under the Speedy Trial Act based on a deferred prosecution agreement being too lenient on corporate defendants.  On appeal, the D.C. Circuit held that the Speedy Trial Act does not confer authority on a district court to withhold exclusion of time based upon a disagreement with the Department of Justice’s charging decisions.

In 2010, Fokker Services – a Dutch aerospace company that provides aircraft manufacturers with technical support and equipment – voluntarily notified the Government that it had potentially violated federal sanctions by engaging in illicit transactions with Iran, Sudan, and Burma.  United States v. Fokker Servs. B.V., 79 F. Supp. 3d 160, 161 (D.D.C. 2015), vacated and remanded, No. 15-3016 (D.C. Cir. Apr. 5, 2016).

Fokker fully cooperated with the Government’s investigation for more than four years. As a result of that investigation, the Government negotiated a global settlement with Fokker that provided an 18-month deferred prosecution agreement (“DPA”).  As part of the DPA, Fokker was required to pay $21 million in fines and accept responsibility for violating U.S. sanctions and export laws.  In return, the Government agreed to dismiss its charges upon Fokker’s compliance. Continue reading

Questions Linger: Is Fraud on Freddie and Fannie Fraud on the Government

 

This guest post was authored by our colleague Priya Roy, an associate in the firm’s Litigation Department and member of its Data Privacy and Cybersecurity practice group. Priya focuses her practice in the areas of higher education and white collar and government investigations. She also serves an editor of the firm’s Data Privacy Alert blog, which focuses on data privacy and cybersecurity issues.

In the wake of the mortgage crisis, there has been an uptick in False Claims Act (“FCA”) claims against banks, lenders, and mortgage servicers based on loans involving Government Sponsored Enterprises (“GSE”) such as Freddie Mac and Fannie Mae.  Yet on February 22, 2016, the Ninth Circuit rejected claims against certain financial institutions arising out of allegedly false representations and warranties made in seller / services contracts with Freddie Mac and Fannie Mae, holding that Fannie and Freddie were not governmental instrumentalities for purposes of the FCA.  United States ex rel. Adams v. Aurora Loan Servs., Inc., 2016 WL 697771 (9th Cir. Feb. 22, 2016).  The court, however, refused to take a bright line rule that GSEs could never be governmental instrumentalities.  The opinion nonetheless sheds light on the scope of the FCA in cases involving GSEs.

The FCA is the government’s primary tool to recover damages for fraud involving government funds. Importantly, the FCA has a qui tam mechanism that allows citizens who purport to have evidence of fraud against the government contracts and programs to sue on the government’s behalf. Such qui tam plaintiffs are called “Relators,” and stand to be awarded between fifteen to twenty-five percent of the ultimate recovery in the case.  The government has the right to intervene in the proceedings.  Even if the government declines intervention, the Relator may proceed with the action.

In Adams, the Relator asserted that servicer defendants violated the FCA when they falsely certified to the GSEs that they were in compliance with their seller/servicer agreements and representations when they were not.  Further, he alleges that servicers caused the GSEs to pay for certain homeowner association assessments and charges for which the GSEs are not liable.

Continue reading

Third Circuit confirms right of defendant not to be cross-examined during sentencing allocution

This guest post was authored by our colleague Michael C. Witsch, an associate in the firm’s Litigation Department in Philadelphia. Michael can be reached at mwitsch@mmwr.com or 215.772.7592. 

On Tuesday, January 5, the Third Circuit ordered resentencing in the case of a Pittsburgh-area appraiser who the Court found had been improperly cross-examined by the prosecutor at his sentencing hearing. In doing so, not only did the court find plain error in permitting cross-examination during the defendant’s allocution, but it specifically invoked its supervisory authority to permit a defendant to address the sentencing court – sworn or unsworn – without being subject to cross-examination.

Jason Moreno was convicted of five counts of wire fraud and two counts of conspiracy growing out of a mortgage-fraud scheme in which he was found to have, among other things, provided inflated appraisals to other members of the scheme in exchange for money. At sentencing, Moreno took the stand and provided the court with a summary of his personal characteristics and explained at length that he was prepared to accept responsibility for his actions. In response to this testimony, the prosecutor questioned Moreno at length about his criminal behavior, including actions that were not even raised at trial, and later argued that the “seriousness of the offense [had been] ratcheted up” by Moreno’s responses to that cross-examination. The district court relied on the contents of the cross-examination in imposing sentence, denying Moreno a sentencing variance based, at least in part, on his responses to the prosecutor’s questions.

In the Court’s precedential opinion granting Moreno resentencing, authored by Judge D. Michael Fisher, the Third Circuit held that the district court erred by permitting the prosecutor to examine Moreno in response to what even the government conceded was a “classic allocution.” Despite Moreno’s failure to preserve his claim at sentencing with an objection, the Court held that this error was plain in light of its prior decision in United States v. Ward, 732 F.3d 175 (3d Cir. 2013).

The Third Circuit had previously explained in Ward that allocution – an ancient right afforded to criminal defendants that dates back at least six centuries – is intended to allow persons convicted of crimes to present mitigating factors and personal circumstances to the trial court before their sentences are imposed, and to preserve the appearance of fairness in the criminal justice system. In reliance on Ward, the Moreno Court explained that the cross-examination after Moreno’s allocution was contrary to these objectives, since it bolstered the factual case against Moreno by drawing out admissions about the scope of the conspiracy—facts that the prosecutor then used in his sentencing argument, and upon which the district court relied.

The district court’s error in permitting cross-examination was plain in light of Ward, the Court reasoned, because: (i) such cross-examination subverts the policy goals of allocution; (ii) Moreno was prejudiced by the prosecutor’s questioning and the district court’s reliance on the results of that questioning in determining his sentence; and (iii) a trial court’s violation of the right of allocution clearly affects the fairness, integrity, or public reputation of the judicial proceedings.

While the Court could have stopped there, it went on to conclude that, even had it not found the error plain, it would nonetheless “not hesitate to invoke [its] supervisory authority” over the district courts to hold that the right of allocution is so fundamental, and the potential for cross-examination to subvert the goals of allocution so severe, that a criminal defendant may never be cross-examined during allocution. Moreno thus provides a criminal defendant with an absolute right to provide a statement of mitigating factors and personal characteristics to the court at allocution without fear that the government may attempt to cross-examine him about that statement to bolster its case against him and argue for a sentencing enhancement.

The decision does, however, leave open some interesting questions. We know from Moreno that the prosecutor may not cross-examine a defendant about his allocution, but is there any limitation on the trial judge’s discretion to ask questions of the defendant about that statement? An even closer question raised by a member of the panel at the September oral argument: What if the prosecutor, rather than asking questions himself, proposes that the judge ask the defendant certain questions? Moreno suggests in a closing footnote that it is not to be read as constraining the district courts’ discretion in determining what may or may not be presented at allocution. Nevertheless, whether the Third Circuit would countenance such closer cases, especially given the concern at argument about where the line should be drawn in this context, will remain a question for another day.

U.S. Government Appeals Landmark Insider Trading Decision to the Supreme Court

This guest post was authored by our colleague Rimma Tsvasman, an associate in the firm’s Litigation Department in New York. Rimma concentrates her practice on corporate and securities transactions, investment management and commercial litigation. She can be reached at rtsvasman@mmwr.com or 212-867-9500. 

In a highly anticipated move following a denied request for a rehearing, the Government has petitioned the Supreme Court for a writ of certiorari requesting the high court to overturn the Second Circuit’s landmark insider trading decision in U.S. v. Newman.

Although the Newman decision has not reached far beyond New York’s borders, as noted by MMWR partner Lathrop Nelson in this recent Bloomberg article, there is no denying that the decision is a prominent one coming from what Supreme Court Justice Harry Blackmun has called the “Mother Court” for securities law.  Indeed, if the Supreme Court decides not to hear the case or if the decision is left to stand, it would represent a big change to the securities law landscape – both in New York and in other jurisdictions which historically have deferred to the Second Circuit on securities law matters – and a blow to U.S. Attorney Preet Bharara’s legacy in aggressively policing Wall Street in the area of insider trading.

The Government itself has conceded that the Newman decision will dramatically limit its ability to prosecute some of the most common forms of insider trading which involves downstream tipping to individuals two or three steps removed from the so-called insider.  As noted by MMWR partner Mark Sheppard in an earlier post reporting on the Newman decision, many of the Government’s highest profile cases have been built upon the cooperation of those “downstream” traders who would be more empowered to resist the government’s efforts to secure that cooperation.  And although Newman is a criminal case, the Second Circuit did not limit its holding to such cases.  Therefore, civil enforcement cases stand to be impacted as well.

Already, the change caused by Newman is palpable as industry professionals hold their breath to see what the Supreme Court will do.  In just several months following the decision, defendants – including S.A.C. Capital Advisors’s Mathew Martoma and Michael Steinberg – have begun to file appeals to overturn their convictions in reliance on Newman.    And some defendants have already had their guilty pleas vacatedJust over a month after the Newman case was decided, the District Court for the Southern District of New York applied the case to vacate four guilty pleas in an insider trading action involving tips about a 2009 acquisition by IBM.  In that case, United States v. Conradt, No. 12 CR 887 (ALC), 2015 WL 480419 (S.D.N.Y. Jan. 22, 2015), the court expanded Newman’s application to cases based on the misappropriation theory, which imposes liability on third parties – such as lawyers – who are entrusted with confidential information as part of their work and break that trust by divulging the confidential information to others.

Decided on December 10, 2014, the Newman court put the brakes on aggressive insider trading prosecutions by holding that the Government must prove that the defendant knew the insiders disclosed confidential information in exchange for a personal benefit, and that the benefit was consequential and represented at least a potential gain of a pecuniary nature.  In other words, under Newman, friendly tips are no longer actionable.

In its petition to the Supreme Court, the Government argues that the Newman decision is at odds with the Supreme Court’s decision in Dirks v. SEC, which sets forth the personal-benefit standard, as well as other appeals court rulings, and has troubling implications for the Government’s ability to police insider trading.

The Supreme Court begins its new term in October, and will likely decide this Fall whether to consider the Government’s appeal.  We will be sure to keep you posted.

Seventh Circuit Upholds Non-Incarceration Sentence for Beanie Baby Creator

This guest post was authored by Mara Smith, a summer associate with Montgomery McCracken.

On Friday, the Seventh Circuit upheld what it determined to be a substantively reasonable sentence for billionaire Ty Warner, the creator of Beanie Babies. We previously blogged about Warner’s district court sentencing, during which Judge Kocoras found that Warner’s “very unique” circumstances warranted a non-incarceration sentence – well below the term of imprisonment recommended by the Sentencing Guidelines. Following this sentencing, the government appealed, arguing that Warner’s sentence was far too lenient.

As you may recall, Warner’s prosecution came out of the DOJ’s initiative to combat offshore tax evasion, which started in 2008 with a targeted investigation into the Swiss bank UBS, where Warner had an offshore account. In early 2009, UBS admitted wrongdoing and agreed to cooperate with the U.S. government investigation by handing over information about some U.S. offshore clients. Not long thereafter, Warner attempted to enroll in the offshore voluntary disclosure program (“OVDP”), but he was ineligible because the government had already acquired his account information and an investigation was pending. Ultimately, in 2013, the government charged Warner with one count of willful tax evasion. Less than a month later, Warner pled guilty to the charges and agreed to pay $56.3 million in penalties.

Although Warner’s Guidelines range was 46- to 57-months imprisonment, neither side proposed a sentence in that range in their pre-sentencing submissions. Rather, the government requested incarceration “in excess of a year and a day” while Warner argued that probation and community service were sufficient. In January 2014, Warner was sentenced to two years’ probation, at least 500 hours of community service, a $100,000 fine, and costs. The district court based this decision on, among other things, testimony revealing Warner’s consistently philanthropic character, his attempt to disclose the account through the offshore voluntary disclosure program, and his willingness to pay a penalty more than ten times the amount of the tax loss.

The government did not agree that this was a sentence “sufficient, but not greater than necessary” to achieve the purposes of sentencing. See 18 U.S.C. § 3553(a). But, thankfully for Warner, the Seventh Circuit did, concluding that the district court “fully explained and supported its decision and reached an outcome that is reasonable under the unique circumstances of this case.” See slip op., at 2. While upholding the sentence, Judge Kanne, who delivered the Seventh Circuit’s opinion, noted that “[i]n other cases, justice might demand a harsher sentence, but here it does not.” The Seventh Circuit made the following important points while reviewing the district court’s analysis of the 3553(a) factors:

  • The Appropriate Benchmark: “No one disputes that he deserved a below-guidelines sentence. … While the court was not strictly bound by the[] [parties’] recommendations, it was well within the court’s discretion to use that range as a benchmark,” meaning that the real choice before the district court was between probation and roughly a year in prison – not 46 to 57 months. Id. at 16.
  • Characteristics of the Defendant: According to the district court, the character letters submitted on Warner’s behalf showed that he consistently displayed concern for others and acted with “the purest of intentions” when making “overwhelming” charitable contributions, which he often did “quietly and privately.” at 2, 18. Indeed, Judge Kocoras – on the bench for 3 decades – had “[n]ever … had a defendant in any case – white collar crime or otherwise – demonstrate the level of humanity and concern for the welfare of others as has Mr. Warner.” Id. at 16. Such character is an appropriate mitigating factor and the district court did not err by placing as much weight on it as it did. Id. at 17-18
  • Seriousness of the Offense: While his offense was serious, his crime was isolated and uncharacteristic. Further, the district court properly took into account that Warner attempted to enroll in the OVDP and, after he could not be accepted, he cooperated with the government and paid full restitution, a $53.6 million FBAR penalty, and a $100,000 fine.
  • General Deterrence: The Seventh Circuit noted that, while incarcerating Warner would have sent a stronger message to the general public than probation, the message sent by his existing sentence – which included a penalty more than ten times the amount of the tax loss – was sufficient.
  • Disparity: Finally, the appellate court noted that, while most individuals receiving probation for offshore tax evasion had caused smaller tax losses, Warner’s unique situation meant that his sentence “did not cause any unwarranted disparities among similar Id. at 28 (emphasis in original).

In light of the above, the Seventh Circuit concluded that the district court’s decision was “reasoned” and “justified.” Id. at 31.

The district court’s careful and thoughtful analysis (as well as the Seventh Circuit’s affirmation thereof), also shows how courts are willing to fully consider the sentencing factors and to impose a sentence that is reasonable and appropriate for the person in front of them – even where that is wholly inconsistent with what the Sentencing Guidelines recommend. As we have blogged before in connection with the sentence of former Virginia Governor Bob McDonnell and Sentencing Guidelines reform proposals by both an ABA Task Force and United States Sentencing Commission, the fraud guidelines for white collar offenses have steadily increased over the years and may very well result in an unreasonable sentence. It is our job as white collar practitioners to ensure that the district court has all of the information it needs to make that careful and thoughtful analysis so that we may obtain the appropriate sentence for our clients.

Fourth Circuit’s “Official Act”: Former Virginia Governor McDonnell’s Appeal Rejected

This guest post was authored by Ernest Holtzheimer, a summer associate with Montgomery McCracken.

Earlier today, a three-judge panel of the 4th U.S. Circuit Court of Appeals unanimously upheld the conviction of former Virginia Governor Bob McDonnell on public corruption charges. We’ve previously blogged about how McDonnell’s public corruption conviction ended with a sentence of two years in prison for taking lavish gifts in return for helping a dietary supplement executive win business. On appeal, the former governor argued that the court’s jury instructions defined “official acts” too broadly such that “it would seem to encompass virtually any action a public official might take while in office.” McDonnell gained bipartisan support for this argument, with amici briefs signed by 44 former state attorneys general, two former U.S. attorneys general, attorneys for the past five presidents, the Republican Governors Association and prominent legal scholars. McDonnell also argued inter alia that the evidence against him was insufficient, that his trial should have been severed from his wife’s, and that the judge’s questioning of prospective jurors was insufficient given the pretrial publicity.The Court disagreed and found that the government evidence “demonstrated a close relationship between official acts and the money, loans, gifts and favors.” The court said that, “the jury could readily infer that there were multiple quid pro quo payments, and that (McDonnell) acted in the absence of good faith and with the necessary corrupt intent.” Judge Stephanie Thacker wrote the opinion for the court and stated that the former governor “failed to sustain his heavy burden of showing that the Government’s evidence was inadequate.” The Court concluded that McDonnell “received a fair trial and was duly convicted by a jury of his fellow Virginians.”

Given the prominence of former Governor McDonnell, the case has garnered significant media attention. The legal significance, however, may prove to be much more lasting, as the Court clarified – or, perhaps, expanded – the scope of what is an “official act” and the proper “quid pro quo” jury instruction.

 

Historic Takedown Shows Healthcare Fraud will Remain a Top DOJ Priority Under AG Lynch

This guest post was authored by Mara Smith, a  summer associate with Montgomery McCracken.

Last week, Federal agents arrested 243 individuals across the country for their alleged participation in Medicare fraud schemes that purportedly involved $712 million in false billings. The coordinated arrests, which occurred across 17 cities – including Houston, Dallas, Los Angeles, Miami, Tampa, Brooklyn, and New Orleans – are part of the largest criminal healthcare fraud takedown in U.S. Department of Justice history, both in number of arrests and amount of money allegedly lost.  More than 900 law enforcement agents were involved in the arrests which were coordinated by the Medicare Fraud Strike Force.

At the press conference, Attorney General Loretta Lynch stated:

The defendants charged include doctors, patient recruiters, home health care providers, pharmacy owners, and others.  They are accused of an array of serious crimes ranging from conspiracy to commit health care fraud to wire fraud to money laundering.  They billed for equipment that wasn’t provided, for care that wasn’t needed, and for services that weren’t rendered. 

Overall, 73 arrests were made in Miami for alleged offenses related to various health care fraud schemes involving more than $250 million in supposedly  false billings.  The administrators of one mental health clinic were charged for accruing nearly $64 million in allegedly false billings between 2006 and 2012 for “intensive care treatment” which actually only involved moving patients, some of whom had severe dementia, to different facilities.  The government has alleged that, as part of this particular scheme, the defendants paid kickbacks to both patient recruiters and assisted living facility owners.

In another case, the government has alleged that a Michigan-based physician prescribed unnecessary narcotics to patients in exchange for their identification information that was used by the physician for false billings.  The government has further alleged that although some patients tried to separate themselves from the scheme, the physician threatened to cut off the now-addicted patients from the unnecessary, prescribed narcotics.

The Medicare Fraud Strike Force operates as a part of the Health Care Fraud Prevention & Enforcement Action Team (HEAT), a joint initiative between the DOJ and HHS that the government introduced in May 2009.  Under Attorney General Eric Holder, who had promised to make health care fraud a top priority for the DOJ, the Strike Force and HEAT were particularly active.  A recently-released list of Holder’s accomplishments states:

Since announcing HEAT in May 2009, the Medicare Fraud Strike Forces have conducted seven nationwide takedowns resulting in charges against almost 700 individuals with schemes involving nearly $2.2 billion in fraudulent billings.  Strike Force operations since their inception in 2007 have charged more than 2,000 defendants who collectively have falsely billed the Medicare program for more than $6 billion.

Last week’s historic takedown certainly suggests that Lynch, who has an impressive history of fighting healthcare fraud as the U.S. Attorney for the Eastern District of New York, is picking up right where Holder left off and that combating healthcare fraud will remain a top federal priority.

SOTU: What Obama’s Mandate Means for Cybersecurity, Data Protection, and Enforcement

This guest post was co-authored by Stephen Grossman and Michael Hayes. Stephen and Michael are partners in Montgomery McCracken’s Litigation Department and co-chairs of the firm’s Electronic Discovery practice. Stephen can be reached at 856.488.7767 or at sgrossman@mmwr.com. Michael can be reached at 215.772.7211 or at mhayes@mmwr.com.

During his State of the Union address last evening, President Obama urged Congress to enact legislation to “better meet the evolving threat of cyber-attacks, combat identity theft, and protect our children’s information.” The President’s call to action comes on the heels of his remarks before the Federal Trade Commission in which he outlined his administration’s latest cybersecurity and data protection proposals. Prompt consideration of the President’s proposals appears to be a hopeful prospect, with the Subcommittee on Commerce, Manufacturing, and Trade set to hold its first related hearing next week (entitled “What are the Elements of Sound Data Breach Legislation?”). More effective data protections and uniform breach notification requirements stand to benefit individuals. But will the President’s proposals better protect and support American businesses? It may be too early to tell, but one outcome of any successful legislation is likely certain: broader regulatory and enforcement power for the FTC and DOJ.

What are the key proposals the President is advocating? First, the Administration wants to “promote better cybersecurity information sharing between [and amongst] the private sector and government” by encouraging the private sector to share cyber threat information with the Department of Homeland Security. The President has alluded to certain liability protections to incent businesses to report cyber threats to DHS, but we’ve yet to see any concrete details – so more to come. According to the White House, its proposal will enable DHS to more rapidly and effectively communicate emerging threats to the private sector through new industry collectives it coins “Information Sharing and Analysis Organizations.” We’ve yet to see a draft bill on this proposal, but we will keep you posted.

Next, the Administration wants passage of a unifying, federal data breach notification statute (the “Personal Data Notification and Protection Act”) to replace the patchwork of state laws that businesses have had to contend with to date. According to the White House, businesses will have a bright-line, 30 day notification period when they discover customers’ personal or financial information has been compromised. Notification methods authorized by the proposal include mailings, personal telephone calls, emails (if authorized by the individual), and even through media outlets. Notably, the White House proposal includes provisions for authorized delays and even exemptions for good cause such as national security and law enforcement purposes, to determine the scope of the breach, to complete risk assessments, and to prevent further intrusions. If passed, this proposal will vest significant new regulatory and enforcement authority in the FTC. While a federal notification standard is sorely needed for the benefit of business and consumers, we hope that any regulation provides a clear framework and incentives to businesses for compliance.

Another Administration proposal, the Student Digital Privacy Act, focuses on the protection of students’ personal information and data collected in the educational context. Modeled on a California statute, the bill “would prevent companies from selling student data to third parties for purposes unrelated to the educational mission” or from engaging in search-engine-style targeted advertising based on data collected in schools. This should be the least controversial and most easily passed of the Administration’s several cybersecurity proposals.

The Administration also wants to “modernize” the Computer Fraud and Abuse Act by at once increasing criminal and civil penalties (including forfeiture) for violations and “ensuring that insignificant conduct does not fall within the scope of the statute.” The former, according to the White House, will help deter cyber criminals, while the latter (we surmise) is intended to prevent abusive prosecutions such as the one that led to the suicide of Aaron Swartz. This proposal may not gain sufficient traction to ensure passage. Even if it does, we doubt the CFAA amendment will have an appreciable effect on the behavior of true bad actors, and the amendments could spawn further confusion regarding what types of behavior are or are not prohibited. Hopefully, “modernization” of the CFAA won’t just mean increasing enforcement powers and penalties, but also provide better clarity on prohibited conduct. For an in-depth discussion of the proposed amendments to the CFAA, check our Orin Kerr’s post on the subject here.

No matter what side of the political aisle suits your fancy, a commitment to combating the threat of cybercrime, improving cybersecurity, and better protecting the personal and financial information of Americans is vital in our digital world. Unfortunately, that likely will mean broader government enforcement powers and a focus on companies that fail to have what the government considers adequate policies in place to protect and safeguard personal information.

UPDATE: Second Circuit Reverses “Downstream Tippee” Convictions

This guest post was authored by our colleague Mark B. Sheppard, a partner in the firm’s Litigation Department. Mark focuses his practice on white collar criminal defense, SEC Enforcement and complex commercial civil litigation. He can be reached at msheppard@mmwr.com or 215.772.7235.

As we predicted back in April, the Second Circuit Court of Appeals has dealt a significant blow to the Government’s ongoing efforts to successfully prosecute insider trading cases involving “downstream traders” or “tippees.” (United States v. Newman, 2d Cir., No. 13-1837, 12/10/14). In the ruling, the Panel court not only overturned the guilty verdicts of two hedge fund managers who traded on inside information received from other Wall Street analysts, it also took a shot at U.S. Attorney Preet Bharara’s aggressive enforcement of remote tippees, criticizing the “doctrinal novelty of (the Government’s) recent insider trading prosecutions….” This does not bode well for future prosecutions of downstream traders and will also limit civil enforcement activity against those traders who are two or three levels removed from the original insider source and imperils several high profile convictions and numerous guilty pleas.

In this case the defendant hedge fund managers “were several steps removed from the corporate insiders.” The Court also noted that the Government had failed to adduce evidence that either was aware of the source of the inside information or the circumstances under which it was conveyed. Despite this, the Government charged that the managers were criminally liable for insider trading because, as sophisticated traders, they must have known that information was disclosed by insiders in breach of a fiduciary duty, and not for any legitimate corporate purpose.

The Second Circuit disagreed. “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.” (Emphasis in the original). Relying upon the Supreme Court’s decision in Dirks v. S.E.C., 463 U.S. 646 (1983), the Court explained “[t]he tippee’s duty to disclose or abstain is derivative from that of the insider’s duty.” Because the tipper’s breach of fiduciary duty requires that he “personally will benefit, directly or indirectly, from his disclosure a tippee may not be held liable in the absence of such benefit.” The jury instruction was therefore faulty because it permitted the jury to convict solely on a showing that the defendants knew that there had been a breach of fiduciary duty.

Having determined that the instruction was erroneous, the Court then turned to the evidence of personal benefit which it also found wanting.  It described the Government’s proof of personal benefit as “career advice” or the “ephemeral benefit… that one would expect to be derived from be derived from favors or friendship.” To accept such proof as sufficient would render the personal benefit requirement a nullity. Instead to maintain a conviction, the evidence of benefit must be “of some consequence” resembling “a relationship between the insider and the recipient that suggests a quid pro quo” or an intention to confer a future benefit. Finally and perhaps more significantly, even if the evidence of benefit were sufficient, the Government’s failure to prove the defendants’ knowledge of such benefit was fatal to the prosecution.

There is already debate as to the impact of this decision on efforts to regulate Wall Street professionals, with prosecutors downplaying it significance as limited to a “subset” of cases. This may be so but many of the Government’s highest profile cases have been built upon the cooperation of lower level “downstream” traders who will now be more embolden to resist the government’s efforts to secure that cooperation.

Of Dropbox and Data Breaches: Highlighting the need for increased cyber-security at home and in the workplace

This guest post is authored by Michael B. Hayes. Hayes’ practice concentrates on commercial litigation, government and corporate investigations. Hayes is frequently called upon by clients and colleagues to provide legal expertise and consultation concerning electronic discovery issues. He can be reached at mhayes@mmwr.com or 215.772.7211. Gareth Suddes, manager of Montgomery McCracken’s Legal Technology Support and Application Development also contributed to this blog post.

Reports of massive data breaches at trusted American retail businesses, banks, credit card companies and even governmental agencies have unfortunately become routine. So much so, in fact, that many of us have become desensitized to the serious personal privacy, identity protection and financial risks involved. That is especially unfortunate, because the costs to individuals, businesses and the government are very real and dramatically increasing.

We are falling prey to exploitation of the same consumer and other electronic technologies upon which we rely for our daily communications, purchases, banking, social networking and information storage. The most nefarious culprits are individual hackers (who may share loose affiliations with one another) and cyber agents in the service of foreign powers. The former seek personal profit at our expense, to embarrass some, to titillate others, to stick a cyber-thumb in the eye of business or the government, or just to show off. The latter are often thieves as well, but their overarching goals are strategic in nature. Foreign cyber agents seek to misappropriate sensitive information, to disrupt our economy, to shake public confidence in our government and systems, and to explore our cyber-vulnerabilities for potential use in the event of future hostilities.

In light of these threats, increased vigilance should be the order of the day – especially wherever significant volumes of personal, business and/or government information tend to intersect electronically. One such area is occupied by well-known consumer cloud-based data storage and file sharing services such as Dropbox, Google Drive, OneDrive, Box, Copy, and Amazon Cloud Drive. Continue reading