by T. GormanPosted on Posted in SECActions

The Commission’s Enforcement Division had interesting results in insider trading cases this week. In one the agency prevailed in a jury trial after two co-defendants settled. In a second the defendant fled the country after taking the Fifth Amendment during an internal corporate investigation.

In SEC v. Avent, Civil Action No. 1:16 – cv-02459 (N.D. Ga.). a jury found in favor of the Commission. The action centered on three different acquisitions. Named as defendants are Thomas W. Avent, Jr., a partner in an international accounting firm, Raymond J. Pirrello, Jr., a registered representative at a brokerage firm, and Lawrence J. Penna, a client of Mr. Pirrello who has been barred from the securities business by the Commission. Messrs. Avent and Penna settled with the Commission prior to trial.

In 2011 and 2012 Mr. Avent learned about three different then pending merger transactions. Specifically, Mr. Avent lead a practice group during the period which conducted due diligence on corporate acquisitions. During the period he told his long-time friend and former co-worker at another brokerage firm, the transactions.

In certain instances, the two men discussed their insider trading activities in text messages. For example, the two men exchanged texts during one deal discussing the number of shares “we” acquired and the amount of money made. During another transaction they discussed if more shares should be acquired. Mr. Pirrello paid his friend $50, 000 in cash. In addition, he provided investment advice and serviced his brokerage account.

Mr. Pirrello also passed the information to Defendant Penna, a client and friend. Mr. Penna in turn paid for the information. For example, in one instance he paid $7,000 toward the broker’s American Express bill. On another occassion he paid $14,500 toward the bill. Following trial the jury found in favor of the Commission, concluding that Mr. Pirrello was liable for violations of Exchange Act Sections 10(b) and 14(e). The Court will consider remedies at a later date. See Lit. Rel. No. 24554 (August 7, 2019).

The results were different, at least for now, in SEC v. Nahata, Civil Action No. 1:19-cv-03628 (N.D. Ga. Filed August 12, 2019). The complaint names as defendants Harsh Nahata, a manager in the corporate development group at WestRock Corporation and a person he calls his “mentor,” Ajay Bhandari. The case centers on the acquisition by WestRock of KapStone Paper and Packaging Corporation, announced on January 29, 2019.

The transaction traces to June 2017 when the CEO of WestRock directed a group to prepare an independent valuation of the potential deal. From the beginning Mr. Nahata was a member of the deal team. He was instructed to prepare a written evaluation of KapStone’s value. The project was code named “Project Kola” to preserve confidentiality in accord with firm policies. By October 27th the WestRock board authorized directed management to engage KapStone regarding a possible merger. The same day Mr. Nahata purchased 100 shares of KapStone stock.

As the deal negotiations moved forward, Mr. Nahata continued to perform as a key member of the deal team. For example, he drafted due diligence requests for additional information, participated in meetings about the deal with the CEO and worked with WestRock’s outside financial advisers. Indeed, by late December he had access to a virtual data room for the deal.

In early January Defendant Nahata asked his broker about the manner in which purchased shares were held — would the company know if he owned the shares? The broker told him the shares would be in “street name” and forwarded materials. Subsequently, Mr. Nahata opened a second brokerage account and continued to purchase additional shares.

As the deal progressed Mr. Nahata met the man he would later call his “mentor,” Ajay Bhandari. In January, during a family vacation to India, the two men had lunch. On the first trading day after his return to the U.S. Mr. Bhandari purchased shares of KapSrtone. He continued to acquire shares of the company prior to the deal announcement using borrowed funds at one point.

Following the deal announcement WestRock conducted an internal investigation. Mr. Nahata was questioned. While he answered questions regarding his role on the deal team, he invoked his Fifth Amendment privilege as to all questions regarding purchases of the stock. Following the meeting he fled to India. The complaint alleges violations of Exchange Act Section 10(b). The case is pending as to Mr. Nahata. Mr. Bhandari settled with the Commission, consenting to the entry of a permanent injunction based on the section cited in the complaint. He also agreed to pay disgorgement of $22,426, prejudgment interest of $1,233 and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 24562 (August 14, 2019).

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by T. GormanPosted on Posted in SECActions

The bribery provisions of Exchange Act Section 30A are one of the three critical components of the Foreign Corrupt Practices Act. The other two are the books and records and the internal control requirements. While the latter two sections have frequently been litigated in SEC and other securities cases over the years since they apply to all issuers, the FCPA bribery sections have not. A key question in the wake of the Supreme Court’s decision in McDonnell v. U.S., 136 S. Ct. 2355 (2016) which overturned the bribery based conviction of the former Governor of Virginia, is whether the approach used in that case applies to the FCPA bribery provision. The Second Circuit joined two other circuits in rejecting efforts to delimit the reach of Section 30A by applying McDonald. U.S. v. Seng, No. 18-1725 (2nd Cir August 9, 2019).

The decision

Defendant Ng Lap Seng paid two United Nations ambassadors over $1 million to obtain a commitment by the international organization to use his Macau real estate development as the site for its annual convention. Following a jury trial, Mr. Seng was convicted of paying and conspiring to pay bribes and gratuities in violation of a number of statutes including the FCPA. He was ordered to serve 48 months in prison, concurrently, on each of the six counts, to forfeit $1.5 million, pay a $1 million fine and make restitution to the U.N. of $302,977.20. The Circuit Court affirmed.

Mr. Seng claimed that the each of the FCPA bribery provisions was delimited by Section 201(a)(3)’s definition of the phrase “official act,” the predicate McDonald. The District Court errored by refusing to give an instruction on the point Mr. Seng argued.

In McDonald the former governor was convicted of honest services fraud based on his acceptance of bribes. The parties agreed that bribery would be defined for the jury according to the general federal bribery statute. It requires in part proof that the person “committed or agreed to commit an ‘official act’ in exchange for” undisputed loans and gifts. Central to the ruling was the question of whether arranging a meeting, contacting another public official or hosting an event concerning a subject was an official act. To establish this standard the Government was required to prove that there was a question, matter, cause, suit or controversy that was then pending and involved a formal exercise of governmental power and that the official made a decision or acted on it.

Under this standard a jury charge defining “official Act” in McDonald was over inclusive because: a) it failed identify the question, matter, cause , suit or proceeding; b) require that it was specific, focused and pending or may by law be brought before a public official; and c) that the Governor made a decision or took an action on the identified question, matter, cause suit or proceeding. The absence of such an instruction could not be deemed harmless error.

In examining the question of bribery, the quid pro quo element has always been key. Congress can define the particular quid and quo prohibited as it did in the FCPA. There the statute “addresses certain foreign trade practices, makes it a crime corruptly to give a foreign official anything of value . . .” to influence a decision of a foreign official or secure an improper advantage or have the foreign official use his influence” for the purpose of assisting “the giver in obtaining, retaining or directing business.” A comparison of the specific quos defined by Congress in the FCPA demonstrates that they differ from those included in Section 201(a)(3). That section thus cannot be used to cabin the reach of the FCPA bribery provisions. Accordingly, the District Court did not error by declining to give a McDonell instruction.

Comment

The Supreme Court in McDonald rejected the broad application of bribery which was the predicate for the conviction of the former Virginia Governor. In contrast, the Second Circuit rejected the effort of Mr. Seng to cabin the reach of the FCPA. To the contrary, the Court’s reading of bribery provisions of that statute permits the kind of expansive reading McDonald rejected. Interestingly, Seng is based largely on reading the text of the section with no reference to the legislative materials or the overall focus and purpose of the statute. While this approach may be consistent with the so-called conservative approach to statutory construction, it presents significant questions about the Court’s conclusion.

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