SEC v. Obus - Gibson Dunn

SEC v. Obus: A Case Study on Taking the Government to Trial and

Winning

Presentation By: Joel M. Cohen & Mary Kay Dunning

July 22, 2014

SEC v. Obus: A Case Study On Taking The Government To Trial And Winning

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One of the Longest Insider Trading Cases in SEC History

• SEC pursued case from 2002 through 2014

• Brought charges against:

• Nelson Obus

• Peter Black

• Brad Strickland

• Wynnefield Funds (as Relief Defendants)


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SEC Strategy Revealed

• Investigation Tactics

• Wells and Charging Process

• Use of and Response to Media Scrutiny

• Reaction to Congressional Oversight

• Strategy of Investigating with Eye Toward Settlement


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Recommended Defense Strategies

• Develop Offensive Themes

• Build Full Factual Record

• Anticipate and Neutralize Expected Juror Bias

• Prepare for Use of SEC Investigative Testimony

• Anticipate and Counter SEC Trial Tactics

SEC v. Obus – Trial Highlights

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CASE BACKGROUND– THE ALLEGATIONS


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Penalties Sought by SEC

• Injunctive Relief

• Disgorgement

• Civil Monetary Penalties

• Order Prohibiting Each Defendant from Acting as an Officer or Director of Any Issuer of Securities


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TIMELINE OF CASE• 2002 – 2004: SEC Conducts Investigation

• May 2004: Defendants Make Wells Submissions to SEC

• April 25, 2006: SEC Sues Defendants

• Early 2007: Defendants Lose Motion to Dismiss; Discovery Ensues

• July 2009: Defendants Move for Summary Judgment

• Sept. 2010: Judge Daniels Grants Summary Judgment for Defendants; SEC Appeals Ruling to Second Circuit

• Sept. 2012: Second Circuit Reverses and Remands Case to Judge Daniels

• Jan. – May 2014: Defendants Prepare for Trial

• May 2014: Trial (and Victory!)


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Case Background

“He took off his dark blue tie and put on a bright red ‘victory tie.’”

Matt Levine, Levine on Wall Street: Victory Ties and Soccer Betting, Bloomberg View, Jun. 2, 2014.


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Classical Theory of Insider Trading

Corporate Insider /

Temporary Insider

Unlawful TipUnlawful Tip Tippee

Chiarella v. United States, 445 U.S. 222 (1980)Dirks v. SEC, 463 U.S. 646 (1983)

TradeTrade


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Misappropriation Theory of Insider Trading

Source of MNPI

Corporate Outsider Unlawful TipUnlawful Tip Tippee

United States v. O’Hagan, 521 U.S. 642 (1997)


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Evolution of SEC’s Theory of Liability: A Moving Target


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SEC Investigative Stage

• Opening an Investigation

• Debevoise Parallel Investigation

• SEC Is Entitled to One-Sided Discovery

• Document Requests: Produce to Defend

• Testimony Under Subpoena

• Wells Submissions


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SEC Investigative Stage – Opening an Investigation• Investigations can be formal investigations initiated by the Commission, or

informal investigations initiated by staff of Enforcement Division• Triggers:

• Market surveillance activities; • Review of SEC filings;• Inspections & examinations by Office of Compliance Inspections and Examinations

(“OCIE”), including industry “sweeps” • Referrals from other Commission offices or government agencies and from self-

regulatory organizations (“SROs”), such as FINRA or NYSE• Media stories • Investor complaints • Whistleblower

• SunSource investigation arose from referral of suspicious trading activity from NASD


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SEC Investigative Stage – Debevoise Parallel Investigation

• GE Capital hired Debevoise to conduct internal investigation into the conduct of its employees related to the SunSource-Allied acquisition

• Overseen by Mary Jo White

• Directly managed by Lorin Reisner


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SEC Investigative Stage – Debevoise Parallel Investigation


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SEC Investigative Stage – One-Sided “Discovery”

• Discovery in an SEC investigation vs. discovery in civil litigation

• SEC’s broad subpoena power

• One-sided nature of discovery

• SEC can gather documents and take testimony without having to turn any of that evidence over to the investigated party unless and until a complaint is filed against that party

SEC Investigative Stage: Document Requests – Produce to Defend

The SunSource Research File

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SEC Investigative Stage – Testimony Under Subpoena

SEC “OTR” Investigative Testimony – What Is It?• Dangerous hybrid between recorded deposition testimony and law

enforcement interrogation

• Protections afforded to a defendant in a deposition taken pursuant to the Federal Rules of Civil Procedure are absent during OTR testimony

• The SEC controls the record

• There is no time limit

• Defense counsel is not permitted to object

• The witness is not permitted to submit errata after reviewing the transcript; the SEC can even deny a request for the transcript for “good cause”

• Can be very hostile and aggressive


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SEC Investigative Stage – Testimony Under Subpoena

“You saw Mr. Obus change his story during trial. Was he happy? Was he unhappy? Was he happy then unhappy? I'm not saying that's a critical, critical issue, but it's indicative of the way the stories have changed and the way their stories aren't credible.

You have seen [the defendants] claim on the stand today to recall details of calls and events that happened 13 years [ago], and claim to recall those events and details 13 years ago when they didn't recall them at all in 2001 and 2002.”

Trial Tr. 1696:18 – 1697:1.


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SEC Investigative Stage – Wells Submissions• Use of Wells submissions in SEC v. Obus

• Opportunity to develop affirmative arguments and present the SEC with a compelling theory of the case.

• Opportunity to persuade the SEC to decline enforcement, drop certain charges, or offer a favorable settlement.

• Balancing benefits against inherent risks

• SEC often treats Wells submissions as party admissions

• May be discoverable by private litigants– See In re Initial Public Offering Sec. Litig., 21 MC 92 (SAS) (S.D.N.Y. Dec. 24,

2003); In re Steinhardt Partners, L.P., 9 F.3d 230, 234-35 (2d Cir. 1993); but see Securities Act Release No. 44,969 (Oct. 23, 2001).


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SEC Investigative Stage – Greenlight Capital


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SEC Investigative Stage – Greenlight Capital


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Erroneous Settlement Announcement

“In a settled insider trading action against a hedge fund I mentioned earlier today, the fund manager allegedly directed the purchase of shares in a merger target after receiving a tip from an insider through an intermediary, realizing illegal profits of over $1.3 million.”

‒ Linda Chatman Thomsen, Director, Division of Enforcement, September 26, 2006 Testimony Concerning Insider Trading Before the U.S. Senate Committee on the Judiciary.


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Erroneous Settlement Announcement – Demand for Retraction


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Erroneous Settlement Announcement – Retracted


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Litigation Discovery

The same offensive strategies used during SEC investigations should be carried forward into civil discovery

• Continue to develop offensive narrative

• Take a broad view of potential sources of evidence

• Develop evidence through both document requests and third-party depositions


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Litigation Discovery: Importance of Videotaped Depositions

Maurice Andrien – Trial TestimonyQ. Okay. Sir, you have problems remembering things, correct?

A. No, sir. Some things, yes; some things, no. This has been 14 years ago. Some things I remember quite clearly and some things I don't. They weren't particularly important.

Q. Your wife has told you that medications you take effect your memory?

A. I said that in my deposition tongue in cheek. You asked me a question, whether the medication I take effects my memory, and I said -- I said my wife thinks it does, but no one else, is what I answered you. So I was just sort of joking.

Trial Tr. 469:9-18.


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Deposition Testimony – Maurice AndrienLitigation Discovery: Importance of Videotaped Depositions


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Motions in Limine• Defendants prevented the SEC from presenting testimony from five

witnesses, and evidence to support three irrelevant and prejudicial arguments.

• SEC’s motions revealed that it was on the defensive, arguing to the judge that they needed evidence that was ultimately precluded in order to “answer,” “rebut,” or “defend against” the Defendants’ arguments.

• SEC also revealed how self-conscious it was about its own case – moving to exclude evidence and arguments that were nowhere present in the case.

• We made clear that we would focus on the age of the case, the fact that the evidence was 13 years old, and that we would present facts about the Defendants’ backgrounds and character.

• Even though the Staff said they would not do it, the SEC attacked the Defendants as liars throughout the trial, and especially during its closing argument.


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Jury Testing

• Tested both SEC and Defense Theories in 2-Day Mock Trial Exercise

• 3 Different Panels of Jurors then Deliberated

• Panel 1: Unanimous for Defendants

• Panel 2: Unanimous for Defendants

• Panel 3: Hung Jury (8 jurors found in favor of the Defendants; 4 jurors found in favor of

the SEC)

• Developed Juror Profiles Based on Results and Analysis of Jury Testing


Selection Process• Requirement for civil trials – at least 6 and no more than 12 jurors (Fed. R. Civ. P. 48)• Verdict must be unanimous (Fed. R. Civ. P. 48)

Our Jury• SEC’s use of preemptory strikes

• Revealed strategy to remove sophisticated people• Our use of preemptory strikes

• Strategy to keep the “haves,” remove the “have nots”• Ultimately, we were left with a jury of 5 men and 5 women• From a wide range of backgrounds (e.g., a graphic designer, a musician, a bartender,

a psycho-historian)

Jury Selection


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Jury Selection – Juries Can Have an Open Mind

Trial Tr. 98:13-25 (Opening -- J. Cohen) Trial Tr. 1641:6-17 (Summation – J. Cohen)


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Jury Selection – Juries Can Have an Open Mind


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Aggressive SEC Trial Tactics to Deal with Circumstantial Evidence


• “Later Douchey!”

• “Later d-bag!”

• “I need someone else to set the July Cristal speed drinking record with me.”• “If the weather is nice you could take her to a place w/ a nice garden. like Raoul's or something like that. If there is ever any uncomfortable silence ... talk about balls!”

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Aggressive SEC Trial Tactics – Use of Personal Emails


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Aggressive SEC Trial Tactics – Use of Investigative Testimony

“The SEC makes much of minor differences in recollection; whether Mr. Black stood up or jumped up to get Mr. Obus’s attention during the phone call, whether the divider in Wynnefield Capital’s office was two feet high or three feet high; whether Baron Bruno said buying large blocks of stock was Wynnefield’s MO, modus operandi. . . . That Mr. Obus told you that he was happy to get $1.3 million but not happy with the overall deal.”

Trial Tr. 1631:2-10 (Summation – J. Cohen)

“You saw Mr. Obus change his story during trial. Was he happy? Was he unhappy? Was he happy then happy? I’m not saying that’s a critical, critical issue, but it’s indicative of the way the stories have changed and the way their stories aren’t credible. You have seen a claim on the stand today to recall details of calls and events that happened 13 years [ago] . . . when they didn’t recall them at all in 2001 and 2002. You have seen them change their stories on minor points, like the height of the partition in their offices, two feet, was it four feet, again, minor point but they have changed their stor[ies] . . . .”

Trial Tr. 1696:18-1697:4 (Summation – SEC)


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Aggressive SEC Trial Tactics – Closing Arguments• Third party witnesses, like Andrien and Russell, weren’t “trying to do us [the SEC] any favors.”

Tr. 1666:11-12.

• “Now the SEC, we're not here to call people names, I'm not here to tell you that Strickland is a liar or tell you Black is a liar or tell you Obus is a liar. I'm certainly not here to tell you they're bad people, that they don't have good things and don't do good things and they're not good people. But I am here to tell you that they have not told the truth in this case. The evidence has shown that they have not told the truth in this case.” Tr. 1695:19 – 1696:1.

• The integrity of the stock market is at stake in this case, where “hard-working people save for their retirement and save for their kids’ college and save for a rainy day.” Tr. 1698:7-9.

• SEC to Jury: “Tell [the Defendants] that even though [they] may have more money than most people and be more sophisticated than most people and be able to get the CEO of a company on the phone at a drop of a hat, they still have to follow the same rules as everybody else.” Tr. 1698:7-9.


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Legacy of SEC v. Obus Decision• Tippee Liability – Personal Benefit Test

• The term “personal benefit” has a “broad definition,” and the SEC’s burden of proof as to the “personal benefit” element is “not a high one.” SEC v. Obus, 693 F.3d 276, 289 (2d Cir. 2012).

• The Second Circuit in Obus made no mention of any requirement that a tippee have knowledge of a personal benefit to the tipper.

• United States v. Newman & United States v. Whitman• In United States v. Whitman, Judge Rakoff held that, in order to be liable, a tippee must know that the

tipper received some type of personal benefit. 904 F. Supp. 2d 363, 370 (S.D.N.Y. 2012).• In contrast, the court in United States v. Newman reached the opposite conclusion. There, Judge

Sullivan interpreted Obus as “mak[ing] clear that the tipper’s breach of fiduciary duty and receipt of a personal benefit are separate elements and that the tippee need know only of the former.” No. 12 Cr. 121 (RJS) (S.D.N.Y. May 7, 2013).

• United States v. Rengan Rajaratnam• On July 1st, Judge Buchwald dismissed two of the government’s three counts on the ground that a

reasonable jury could not find that Rajaratnam had knowledge that the tipper received a personal benefit.


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SEC’s Anticipated Use of Administrative Proceedings in the Future

• “I do think we will bring insider-trading cases as administrative

proceedings in appropriate cases. . . . We have in the past. It has been

pretty rare. I think there will be more going forward.”

– Andrew Ceresney, Director, SEC Division of Enforcement, June 11, 2014

• “The Securities and Exchange Commission today announced that two new

judges and three new attorneys will join the Office of Administrative Law

Judges this summer.”

– June 30, 2014 SEC Press Release: “SEC Announces New Hires in the Office of Administrative Law Judges.”


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SEC’s Anticipated Use of Administrative Proceedings in the Future• SEC’s Home Court Advantage in Administrative Proceedings

• Tried by Administrative Law Judge, not a jury

• Accelerated Deadlines

• Limited Discovery Rules

• Lenient Evidentiary Rules

• SEC General Counsel Anne K. Small recently acknowledged that the rules governing SEC administrative proceedings may well be out of date and in need of revision.

– Q&A Session with members of District of Columbia Bar, June 17, 2014.


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Conclusion: Proven Defense Strategies

• Develop Offensive Themes

• Build Full Factual Record

• Anticipate and Neutralize Expected Juror Bias

• Prepare for Use of SEC Investigative Testimony

• Anticipate and Counter SEC Trial Tactics


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Q&A


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Panelists

Joel M. Cohen

Mary Kay Dunning

Joel M. Cohen, a partner in the New York office of Gibson, Dunn & Crutcher is a trial lawyer and former federal prosecutor. From 1992 to 1999, he served as Assistant United States Attorney in the Eastern District of New York, supervising the Business/Securities Fraud Unit, where he received numerous awards from the Department of Justice and law enforcement agencies. Mr. Cohen has led or participated in 24 civil and criminal trials in federal and state courts. He is equally comfortable leading confidential investigations, managing crises, or advocating in court proceedings. His experience includes all aspects of FCPA/anticorruption issues, insider trading, securities and financial institution litigation, class actions, sanctions, money laundering and asset recovery, with a particular focus on international disputes and discovery. While in government service, he was the prosecutor of the so-called "Wolf of Wall Street," was the first U.S. Legal Advisor to the French Ministry to Justice and was an advisor to the OECD in connection with its anti-corruption convention.

Mary Kay Dunning, an associate in the New York office of Gibson, Dunn & Crutcher is a member of the Firm's Litigation Practice. Ms. Dunning's practice includes securities and complex commercial litigation, white collar defense and investigations, and global anti-corruption matters. She has represented financial institutions and individuals in insider trading investigations and regularly counsels clients regarding compliance with the securities laws. Her practice also includes representing multinational companies in government and internal investigations pursuant to the U.S. Foreign Corrupt Practices Act, and she assists clients in drafting FCPA policies and strengthening their anti-bribery compliance programs. Ms. Dunning also has experience in counseling boards of directors of public companies on corporate governance issues, and she has worked on teams that have conducted confidential investigations for boards of directors and privately held companies.


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Documents

SEC v. Obus - Gibson Dunn