Supreme Court Declines to Resolve Circuit Split Over Liability in Tender Offer Suits

Section 14(e) of the Securities Exchange Act prohibits deceptive conduct when making a tender offer to shareholders. Recently, in Emulex Corp. v. Varjabedian, the United States Supreme Court declined to resolve a split among the circuit courts about what a plaintiff alleging a violation of Section 14(e) must prove. As a result, the Ninth Circuit is currently the only circuit allowing Section 14(e) claims based on negligent (as opposed to intentional) misrepresentations or omissions of material facts. This development may result in an uptick in tender offer lawsuits in that jurisdiction.

The Emulex case stemmed from the company’s merger with Avago. As part of that merger, Avago initiated a tender offer for Emulex’s outstanding shares. In accordance with SEC rules, Emulex filed a public statement with the SEC in which it supported Avago’s tender offer and recommended that Emulex shareholders tender their shares. Among other things, the statement observed that Emulex shareholders would receive a premium on their stock and described financial analyses that had been undertaken to reach this conclusion. However, Emulex’s statement omitted reference to a portion of its financial analysis that concluded the takeover premium offered for Emulex’s outstanding shares was below average for mergers involving similar companies. A putative class of shareholders brought suit, alleging that Emulex’s statement file with the SEC violated Section 14(e) of the Securities Exchange Act by failing to include the more lackluster price analysis. Continue Reading

The Romaine Risk—Highlights from the 2019 ACI “Food Law” Summit

By Beth Erin Palmer on May 6, 2019 Posted in FDA, Food and Beverage Industry

Imported food contaminants, potential criminal liability for allergen-related deaths, and a growing demand for hemp seed and cannabidiol (CBD) products amidst regulatory uncertainty were all topics of discussion at this year’s American Conference Institute (ACI) Advanced Summit on Food Law Regulation, Compliance, and Litigation, held in Chicago. Representatives from the country’s largest food manufacturers, food and beverage agency regulators, and food litigation experts gathered in April to discuss recent product trends and regulatory developments in the food and beverage space. A few highlights from the conference are discussed below. Continue Reading

DOJ Abandons “Secondary” Spoofing Case

By Christopher P. Eby on April 25, 2019 Posted in Dodd-Frank Act, DOJ

After software developer Jitesh Thakkar’s criminal trial on “spoofing”-related charges ended in a mistrial two weeks ago, the Government determined it will not seek to retry the case. Thakkar was originally charged with conspiracy to commit spoofing and with two counts of spoofing arising out of his company’s development of software that enabled a London-based trader to more efficiently spoof the market for E-Mini S&P 500 futures contracts. The trial judge granted Thakkar’s mid-trial motion for a judgment of acquittal on the conspiracy charge based on the lack of evidence of any agreement between Thakkar and the London trader, but the judge allowed the spoofing counts to proceed to the jury. The jury deadlocked 10-2 in favor of Thakkar on those charges.

On April 23, 2019, the U.S. Department of Justice (DOJ) filed a motion to dismiss the indictment—two days before the parties were to appear for a status conference to discuss whether DOJ would seek to try Thakkar again. The trial judge granted the motion, effectively ending the case.

This result adds to DOJ’s mixed track record in spoofing cases. Despite the landmark conviction of Michael Coscia for spoofing, DOJ has now lost the other two spoofing cases it has taken to trial. In 2018, a Connecticut jury acquitted Andre Flotron of conspiracy to commit commodities fraud by spoofing after prosecutorial missteps left only that charge remaining against him. The difficulty of proving an agreement to spoof or specific knowledge of wrongdoing in cases involving spoofing suggests that DOJ may reassess its burden of proof before trying cases against secondary actors.

Novel Spoofing Case Against Software Developer Ends in Mistrial

By Christopher P. Eby, Gina LaMonica and Caryn Trombino on April 10, 2019 Posted in CFTC, DOJ, Financial Fraud, Individual Liability

Following a week of trial proceedings in the case of defendant Jittesh Thakkar—a software programmer indicted in February 2018 on conspiracy and aiding and abetting charges related to a spoof trading scheme—the government’s case against Thakkar ended in a mistrial. The jurors could not reach a unanimous verdict on the two aiding-and-abetting spoofing counts charged in his indictment, after spending more than a day on deliberations. It was reported that ten out of the twelve jurors were in favor of acquittal.

At the heart of the aiding-and-abetting case was whether Thakkar knew that software he designed for London-based “flash crash” trader Navinder Sarao would be used to spoof or otherwise manipulate the market for E-mini S&P 500 futures contracts. As reported here last week, the government alleged that Thakkar’s software allowed Sarao to trigger a “back-of-the-book” function that kept large bids or orders he placed on one side of the market last-in-line for filling, making it easier for Sarao to cancel them once he had executed smaller, favorable trades based on the artificial price movement induced by his large orders. Sarao made over $1 million on “spoofed” trades using the customized software, for which he had paid Thakkar’s company $24,200.

The trial judge previously acquitted Thakkar mid-trial on the charge that he conspired with Sarao to spoof the market. During closing statements on the aiding and abetting charges, the government noted that Thakkar was a self-proclaimed trading technology “expert” who worked closely with Sarao to refine the software. However, Thakkar countered that as a computer programmer and businessman, he should not be held criminally responsible for Sarao’s illegal trading practices.

Forward at Your Own Risk – U.S. Supreme Court Expands the Scope of Rule 10(b)-5 Liability

By Hillary Levun and Lou R. Mejia on April 8, 2019 Posted in Financial Fraud, SEC

The U.S. Supreme Court recently handed down a win for the SEC and private securities litigants, significantly broadening the scope of primary liability under Rule 10b-(5). In Lorenzo v. SEC, the Court held that liability under Rules 10b-5(a) and (c)—which make it unlawful to employ a scheme to defraud or engage in any practice that operates as a fraud—is not limited only to those who make false or misleading statements as contemplated under sister-section Rule 10b-(5)(b), but may also extend to those who disseminate such statements made by others knowing they are false or misleading.

Background

This case arose from an SEC enforcement action brought against Francis Lorenzo, Director of Investment Banking for a New York broker-dealer. The SEC alleged that, in connection with a $15 million debt offering, Lorenzo sent emails to prospective investors that significantly overstated the value of the investment. It was undisputed that the emails were sent at the direction of Lorenzo’s boss, who supplied all the content and “approved” the messages. It was also undisputed that Lorenzo knew that statements regarding the value of the investment were false or misleading.

The SEC concluded that, by knowingly sending false statements from his email account, Lorenzo directly violated SEC Rule 10b–5 and related provisions of the securities law, including Sections 10(b) of the Exchange Act of 1934 and Section 17(a)(1) of the Securities Act of 1933. Rule 10b-5 makes it unlawful to: (a) employ a device, scheme, or artifice to defraud, (b) make an untrue statement of a material fact, or (c) engage in an act, practice, or course of business which does or would operate as a fraud or deceit in connection with the purchase or sale of securities.

Lorenzo appealed, contending he had no liability under Rule 10b–5 because under the Supreme Court’s ruling in Janus Capital Group, Inc. v. First Derivative Traders, liability for false statements was limited only to the “makers” of those statements as contemplated by Rule 10b–5(b), defined only as those with “ultimate authority” over the statements’ content and communication. One who simply prepares or publishes a statement on behalf of another, as Lorenzo saw his role, fell outside of the scope of primary liability under Janus. The D.C. Circuit agreed that since Lorenzo’s boss directed him to send the emails, supplied their content, and approved them for distribution, Lorenzo did not “make” the statements, and thus could not be held primarily liable for a Rule 10b-5(b) violation. But, the D.C. Circuit sustained the SEC’s finding of primary liability under Rules 10b-5(a) and (c) for knowingly disseminating statements he knew to be false, even though he did not “make” the statements himself.

The Supreme Court’s Ruling

On appeal to the Supreme Court, Lorenzo advanced two main theories, both of which the Supreme Court flatly rejected. Continue Reading

Bellwether Spoofing Case Goes to Trial in Chicago

By Christopher P. Eby, Gina LaMonica and Caryn Trombino on April 4, 2019 Posted in Dodd-Frank Act, DOJ

Can a software programmer be held criminally responsible for designing a program that a trader uses to “spoof” the commodity futures market? This is the question posed to the jury in U.S. v. Thakkar, 18-cr-36 (N.D. Ill.), which trial began this week in federal court. The case grew out of the manipulative trading activities of Navinder Sarao, a London-based commodities trader who “spoofed” (i.e., placed bids or offers with the intention of canceling them before execution) futures on the Chicago Mercantile Exchange (CME). Sarao’s activity allegedly contributed to the May 6, 2010, “Flash Crash” in which the Dow Jones Industrial Average dropped nearly 1,000 points within minutes. Sarao pleaded guilty to fraud and spoofing charges in November 2016.

Jittesh Thakkar, the software programmer currently on trial, was indicted in February 2018 on charges that he conspired with Sarao to commit spoofing and that he aided and abetted Sarao’s spoofing by developing a customized software program that Sarao used to execute manipulative trades. The indictment against Thakkar marks the first time the U.S. Department of Justice (DOJ) has prosecuted an individual other than a trader with a spoofing-based crime.

Higher Ed: Admissions Scandal Wake Up Call

By Kevin Feldis, Caryn Trombino and Markus Funk on March 25, 2019 Posted in Higher Education, Internal Investigations, Public Corruption

The arrests in the college admissions bribery scandal may have ushered in a new era of scrutiny by federal law enforcement. Perkins Coie attorneys anticipate questions that prosecutors, civil litigants and the public may ask in the weeks and months ahead, and offer six key foundational steps all institutions of higher learning should take immediately to evaluate their own admissions process.

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CFTC Dips Its Toe into Anti-Corruption Space

By Matthew R. Koerner on March 11, 2019 Posted in CFTC

On March 6, 2019, the Division of Enforcement of the U.S. Commodity Futures Trading Commission (“CFTC”) issued a new Enforcement Advisory on self-reporting violations of the Commodity Exchange Act (“CEA”) involving foreign corrupt practices. Under the Advisory, the Division provided guidance that it might recommend no civil monetary penalties for certain non-registrants that voluntarily and timely self-report, fully cooperate, and appropriately remediate. The Advisory’s release was accompanied by formal remarks from CFTC Enforcement Director James McDonald at the American Bar Association’s National Institute on White Collar Crime.

Financial Crisis—Six Lessons Learned for Legal Counsel

By Adam H. Schuman on February 14, 2019 Posted in Compliance

During the financial crisis, government enforcement agencies started taking a hard look at Wall Street institutions, and these days a company must respond proactively and dynamically when addressing the challenges of government investigations and litigation. Perkins Coie’s Adam H. Schuman and Kraft Heinz’s Prasanth R. Akkapeddi detail some key takeaways for both in-house and outside counsel.

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