Insider trading

Round two in SEC v. Dorozhko, Civil Action 07-cv-9606 (S.D.N.Y. October 29, 2008) took place this week as arguments were held before the Second Circuit Court of Appeals. Mr. Dorozhko is the Ukrainian resident the SEC claims hacked into a company’s computer files and stole inside information which he later used to trade (previously discussed here and here). Although the District Court initially granted a temporary freeze order over the $296,456 in trading profits, the court later refused to continue the order, finding that there was no insider trading because there was no breach of duty. While Mr. Dorozhko may have violated the law by stealing the information District Judge Buchwald concluded, it was not a violation of the insider trading laws.

Now the SEC has asked the Second Circuit to continue the freeze order over the alleged insider trading profits. In a recent argument before the Circuit Court, the SEC claimed that an emergency order continuing the freeze is necessary or its case will effectively be over because the trading profits will be gone. But the key question that remains is: where is the deception required to establish a violation of Exchange Act Section 10(b)? The SEC claims it came from the hacking, which reportedly lead one Judge to opine that perhaps a machine had been deceived. Without deception, which typically flows from the breach of duty in an insider trading case, there cannot be a violation of Section 10(b). Yet, in this case there is a significant question as to whether there is any deception within the meaning of Section 10(b). A ruling by the Second Circuit on the request for an emergency freeze order should be issued shortly.

Reforming SEC Enforcement Procedures

A letter from new SEC Inspector General David Kotz to Senator Charles Grassley states that the agency is working diligently to complete a new investigation of the claims raised by former SEC employee Gary Aguirre and to adopt new procedures in accord with the Senate report issued last year on the scandal which is discussed here. According to Mr. Kotz, a final report on the inquiry should be out in May of this year. At the same time, reforms, as recommended in the Senate report should be forthcoming. The Senate report called for the Enforcement Division to adopt standardized procedures and improve record keeping. See Rachelle Younglai, “SEC inspector general pledges changes” Reuters.com (Feb. 20, 2008).

In a recent speech, SEC Commissioner Atkins also called for reforms as discussed here. Commissioner Atkins recommended that the SEC prepare a Manual, such as the one used by the Justice Department, and adopt an open jacket policy, so those about to be accused of wrongdoing could review the evidence. Despite Mr. Kotz’s letter and Commissioner Atkin’s statements, to date, no reforms have been announced.

Refco

Last week, the latest chapter in the continuing Refco scandal unfolded when the SEC filed its latest enforcement action relating to the scandal. The SEC brought suit against former chief executive of the company, Phillip R. Bennett, discussed here.

The action against Mr. Bennett follows three others filed by the SEC. One suit was filed on December 18, 2007 against Refco’s former outside counsel Joseph Collins, a Mayer Brown partner, which is discussed here. A settled action was brought against Santo C. Maggio, a former Refco Senior Executive. SEC v. Maggio, 07 CV 11388 (S.D.N.Y. Filed December 19, 2007). Mr. Maggio settled the case by consenting to the entry of a statutory injunction prohibiting future violations of the antifraud and books and record provisions of the federal securities laws. Another settled action was filed against BAWAG P.S.K. Bank, a major Austrian Bank, for aiding and abetting the Refco fraud. In that case, the bank consented to the statutory injunction prohibiting future violations of Sections 10(b) and 15(d) of the Exchange Act. SEC v. BAWAG P.S.K. Bank, Civil Action No. 06 CV 04222 (S.D.N.Y. Filed June 5, 2006).

The SEC’s action against Mr. Bennett follows his guilty plea in the criminal case against him on February 15, 2008. Mr. Bennett pled guilty to securities fraud, wire fraud, bank fraud, money laundering and making false filings with the SEC.

Subsequently, Robert Trosten, former CFO of Refco, pled guilty to bank fraud, wire fraud, money laundering and conspiracy charges. Mr. Trosten is cooperating with prosecutors.

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Until recently, neither DOJ nor the SEC have focused their enforcement efforts on the Foreign Corrupt Practices Act (“FCPA”). Although the statutes were passed in 1977 and amended in 1988, for years enforcement did not appear to be a priority, while critics claimed that laws put U.S. business at a disadvantage – essentially the same claim many are currently asserting with regard to the Sarbanes-Oxley Act. By 1996, the world began to follow suit. Now many countries have adopted similar legislation.

Now, FCPA enforcement also appears to be the new DOJ and SEC enforcement priority. Last year, DOJ and the SEC brought 38 FCPA cases. That compares to only 15 enforcement cases in 2006. In addition there are currently reportedly 100 open FCPA law enforcement investigations. See, e.g., 39 Sec. Reg. L. R. 157 (Oct. 15, 2007).

This occasional series will examine the FCPA and recent SEC and DOJ enforcement efforts. In segments over the next few weeks, the series will::

1. cover the statutes;
2. review the recent court decisions interpreting key provisions;
3. identify penalty trends and discuss the large penalties imposed last year;
4. examine key case trends;
5. discuss significant cases which are heading to trial this year; and
6. provide an analysis of the trends in enforcement.

Next: The statutes: an overview of the bribery provisions and the books and records and internal control provisions.

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