First Circuit Upholds Grant Of Summary Judgment In Market Timing Case

The First Circuit Court of Appeals affirmed a grant of summary judgment in favor of the SEC in a fraud action based on market timing in SEC v. Ficken, Case No. 07-2532 (1st Cir. Oct. 20, 2008). The Commission’s complaint claimed that Justin Ficken, a registered representative in the Boston branch office of Prudential Securities, Inc., intentionally and fraudulently concealed his identity and that of his clients while trading in and out of mutual fund shares in order to mislead the fund companies so they would process trades that they otherwise would not have allowed under their established policies.

The District Court granted summary judgment in favor of the Commission. That ruling was based on the SEC’s evidence which demonstrated that Mr. Ficken sought to circumvent fund policies prohibiting market timing by using multiple financial advisor numbers which identify the broker placing the trade and multiple client numbers so that the funds would not discover his identity and would process the trades.

On appeal, Mr. Ficken did not dispute the fact that the SEC had substantial evidence. Rather, he argued that there was a dispute of material fact which precluded granting summary judgment under Fed. R. Civ. P. 56. The First Circuit rejected this argument and affirmed the district court.

The Court began its opinion by acknowledging that “[a]lthough it is unusual to grant summary judgment on scienter, summary judgment on this issue is sometimes appropriate.” Here, the Commission submitted substantial evidence to support its claim of scienter and deception, as defendant acknowledged. This evidence included e-mails from defendant to his clients which noted that he was trying to evade fund policies on market timing through the use of multiple FA and client numbers.

In considering Mr. Ficken’s evidence, the Court acknowledged that it “might raise a genuine issue as to scienter with respect to the FA numbers …,” but declined to consider it for two reasons. First, the Court rejected Mr. Ficken’s reliance on his testimony before the SEC during its investigation. In that testimony, he stated that multiple FA numbers were used to facilitate splitting commissions with other brokers. The court refused to consider this testimony in evaluating the merits of the summary judgment motion because in the district court it was only offered to explain the reason defendant declined to give a deposition in the district court, not to oppose summary judgment. Since Federal Rule 56(e) and Local Rule 56.1 require a party opposing summary judgment to refer to specific parts of the record to raise a genuine issue of material fact, the Court declined to consider the testimony.

The Court also declined to consider segments from defendant’s testimony before the NASD. In that testimony, Mr. Ficken answered some questions, but not others about blocked accounts, invoking his Fifth Amendment privilege. The Court concluded that this testimony could not be considered because it is inadmissible hearsay. Accordingly, it failed to meet the requirements of Fed. R. Civ. P. 56(a)(1) which requires that supporting affidavits set out facts which would be admissible in evidence. And, in any event, “Ficken’s testimony would not be admissible because his assertion of his Fifth Amendment privilege or his refusal to answer questions prevented development of his testimony on closely related issues.”

Foreign Regulators Share SEC’s Focus On Insider Trading But Not On Ending The Short Sale Ban

Foreign regulators seem to share the SEC’s focus on insider trading. At the same time, not all overseas regulators seem to agree with the SEC’s position on ending the emergency short ban initially instituted because of the market crisis.

Last year, the SEC took an aggressive posture toward insider trading enforcement, bringing 25% more such cases than the year before. Regulators in other jurisdictions also are taking an aggressive posture in this area. Consider, for example, the case brought last week by Okokrim, the economic crimes unit of the Norway police, which focuses on the current market crisis. There, Norway’s largest bank, DnB Nor, and two of its employees face insider trading allegations. According to a Reuters report, the bank sold 2.3 billion crowns’ ($329.1 million) worth of government bonds on October 9 and 10. These sales took place two days before the announcement by the government of a 350 billion crown banking rescue plain on October 12. That plan is based on allowing banks to swap their covered bonds for new government debt. The announcement of the plan apparently depressed bond prices.

Bank Chief Executive Rune Bjerke, a former leader of the ruling Labour party, released a statement claiming that he did not have any knowledge of the rescue plan at the time of the trades. According to the government however, prior to the announcement of the plan leading banks in the country were consulted about it. The chairman DnB Nor, which is 34% owned by he government, stated that if there was any wrong doing it was the fault of the bank and not that of any individual.

On Friday, the Ontario Securities Commission obtained a split verdict in an insider trading case. Two former executives of Agnico-Eagle Mines Ltd., a gold mining company, were tried on charges of insider trading based on allegations of illegal trading or tipping prior to a 2003 corporate announcement.

Once executive was convicted. However the other, Barry Landen, former vice president of corporate affairs, was found not guilty of illegally tipping an accountant. Mr. Landen reportedly had access to inside information through his position with the company.

Securities regulators in Quebec announced a series of insider trading prosecutions last week, according to the Montreal Gazette. In one case involving trading in the shares of Consolidated Thompson Iron Mines, Ltd., a Toronto Stock Exchange listed exploration company, insider trading charges were brought against the president of the company, Richard Quesnel along with two others. The charges are based on trading while in possession of a confidential feasibility study.

In a second action, the Quebec regulators brought an administrative proceeding against Claude Cajolet based on insider trading allegations. Mr. Cajolet is alleged to have traded in the shares of Engenuity Technologies, Inc. Mr. Cajolet is a former director of the company. These cases and two other significant cases brought by the agency last year follow new report which was highly critical of the agency’s efforts in this area.

Other foreign regulators are also focusing on insider trading. In Kenya, securities regulators are in the mists of a high profile, first of its kind, insider trading trial. The case is based on claims that Terry Davidson, traded while in possession of privileged information about Uchumi Supermarket shares which is in receivership. In South Korea, the Seoul Central Prosecutors’ Office is investigating whether a senior auditor of the Board of Audit used inside information for a company with which he had close ties to profit.

At the same time, other regulators do not share the SEC’s view that the emergency ban on short selling should be terminated. The SEC ended its temporary based earlier this month as discussed here. In the UK, in contrast, the FSA has taken a different view. After reviewing its ban and expressing concern about possible market abuse, the regulator decided to leave it in place to the mid-January as initially announced.

Similarly, last Tuesday Australia’s corporate regulator extended its ban on covered short selling. The Australian Securities and Investments Commission announced that in view of the fragile market conditions it was extending its ban on nonfinancial stocks until November 18. For financial stocks the short selling ban will remain in effect until January 27, 2009.