Why it matters: From a white collar and securities fraud standpoint, there has been a lot of noteworthy activity in the courts of late. The Supreme Court granted certiorari in U.S. v. Salman, where it will take up the issue of downstream insider trading (something it declined to do in Newman). The Second Circuit made an important "first impression" ruling regarding sovereign immunity in a securities fraud context. Last but not least, district courts in the Eastern District of New York and the District of Minnesota made significant rulings in cases involving the confidentiality of a court-ordered compliance monitor's report and the individual accountability of compliance officers for their employer's anti-money laundering failures, respectively. Read on for the details.
Detailed discussion: What do downstream tippees, sovereign immunity, the First Amendment, and compliance officers have in common? All figured prominently in recent court opinions, actions and rulings of note. We recap it here.
U.S. Supreme Court:
January 19, 2016—U.S. Supreme Court granted certiorari in an insider trading downstream tippee case (no, not Newman … Salman): In our August 2015 newsletter, we discussed the July 6, 2015 case of U.S. v. Salman, in which the Ninth Circuit (in an opinion written by Southern District of New York Judge Jed S. Rakoff sitting by designation) declined to adopt the standard for establishing the "personal benefit" part of the breach of fiduciary duty element at the core of insider trading liability cases set by the Second Circuit in 2014 in U.S. v. Newman. Instead, the Ninth Circuit relied on the "personal benefit" test established in the 1983 Supreme Court case of Dirks v. SEC to uphold the conviction for insider trading of defendant Bassam Yacoub Salman (Salman) in connection with a complicated "downstream tippee" scheme involving members of Salman's extended family.
To briefly recap the tension between the Newman and Dirks tests, inNewman the Second Circuit cited to the controlling Supreme Court Dirkscase but held that, in order to establish the "personal benefit" to the insider necessary for an insider trading conviction, there must at a minimum be "an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature." The Second Circuit overturned the insider trading convictions of the downstream tippee defendants in that case. By contrast, the Ninth Circuit in Salman upheld Salman's conviction by relying on the broader "personal benefit" test established in Dirks, which was that a "personal benefit" can be established by " 'an insider mak[ing] a gift of confidential information to a trading relative or friend.' " In so doing, the Ninth Circuit specifically declined to follow the Newman test, which Salman had argued would overturn his conviction if applied.
The government in Newman filed a petition for writ of certiorari in late July 2015 with the Supreme Court, arguing that its review was necessary because, among other things, the Salman decision created a bona fide circuit split between the Second and Ninth Circuits regarding the proper test for establishing "personal benefit" in insider trading downstream tippee cases. In October 2015, the Supreme Court declined to reviewNewman and let the Second Circuit's decision stand. In November 2015, Salman filed a petition for writ of certiorari with the Supreme Court raising the same circuit split argument from the Newman petition, and this time the Court acknowledged the split and granted certiorari, limiting its review exclusively to the first question presented: "Does the personal benefit to the insider that is necessary to establish insider trading under Dirks v. SEC … require proof of 'an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,' as the Second Circuit held in United States v. Newman … or is it enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case?"
As of this writing, oral argument had not yet been scheduled in Salman. As always, we will be watching developments and report back.
See here to read the 11/10/15 Petition for Writ of Certiorari in Salman v. U.S.
For more on this issue, read the article in our 8/15 newsletter entitled "Are the Circuits A-Splitting? The Ninth Circuit Declines to Follow the Second Circuit's Insider Trading Decision in U.S. v. Newman."
February 3, 2016—Second Circuit ruled, in a matter of first impression, that sovereign immunity does not protect a foreign sovereign wealth fund from being sued in the United States if its misrepresentations had a "direct effect" on U.S. investors: On February 3, 2016, the Second Circuit held in the case of Atlantica Holdings, Inc. et al. v. Sovereign Wealth Fund Samruk-Kazyna JSC, a/k/a National Welfare Fund Samruk-Kazyna that a sovereign fund owned by the Republic of Kazakhstan can be sued in the Southern District of New York because it made misrepresentations that had a "direct effect" on investors in the United States.
To briefly summarize the relevant facts, in December 2012, a group of U.S. investors (Plaintiffs) filed a complaint in the Southern District of New York against Sovereign Wealth Fund Samruk-Kazyna JSC ("SK Fund"), a sovereign wealth fund owned by the Republic of Kazakhstan. The Plaintiffs alleged that SK Fund had violated the U.S. securities laws by misrepresenting the value of certain notes issued by nonparty BTA Bank JSC, a Kazakhstani corporation majority-owned by SK Fund, in connection with a 2010 restructuring of the bank's debt. SK Fund filed a motion to dismiss, arguing that it was protected from prosecution in the United States under the Foreign Sovereign Immunities Act of 1976 (FSIA), which the district court denied.
The Second Circuit agreed to hear the case on interlocutory appeal to address a "question of first impression," namely, "whether the Foreign Sovereign Immunities Act of 1976 (FSIA) … immunizes an instrumentality of a foreign sovereign against claims that it violated federal securities laws by making misrepresentations outside the United States concerning the value of securities purchased by investors within the United States." The Court began its analysis by reviewing the applicable provisions of the FSIA, finding that a U.S. court will lack subject matter jurisdiction over a sovereign entity unless one of the specific exceptions enumerated in the FSIA applies. In this case, the Second Circuit found the "commercial activity" exception to be applicable, specifically the third clause thereof known as the "direct-effect" clause, which provides that a foreign sovereign entity will not be immune from prosecution in the United States in any case in which "the action is based …  upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States." The Court specifically upheld the district court's ruling that SK Fund is not protected by the FSIA based on the "direct-effect" clause, finding upon a review of the facts that "the relationship between SK Fund's alleged misrepresentations and the resulting financial loss suffered in this country by United States investors … is sufficiently direct to overcome FSIA immunity."
See here to read the 2/3/16 Second Circuit opinion in Atlantica Holdings, Inc. et al. v. Sovereign Wealth Fund Samruk-Kazyna JSC, a/k/a National Welfare Fund Samruk-Kazyna.
January 28, 2016—Eastern District of New York judge ruled that compliance monitor's report filed in connection with the DOJ's 2012 Deferred Prosecution Agreement with HSBC must be unsealed on First Amendment grounds: In 2012 HSBC bank entities (HSBC) agreed to pay almost $2 billion in fines and penalties and enter into a deferred prosecution agreement (DPA) with the DOJ in connection with admitted large-scale money laundering and sanctions violations. Under the DPA, HSBC agreed to be overseen by an independent compliance monitor. On January 28, 2016, Judge John Gleeson ruled in U.S. v. HSBC Bank that the 1,000-page progress report submitted by HSBC's compliance monitor was a judicial record that the public has a First Amendment right to see. He rejected arguments by the DOJ and HSBC that the report should stay out of the public domain, but agreed that confidential and sensitive information could be redacted and gave the parties until late February to submit their proposed redactions. On February 4, 2016, the DOJ filed a motion for interlocutory appeal to the Second Circuit on the issue and requested a stay in the proceedings pending appeal.
See here to read Judge Gleeson's 1/28/16 Memorandum and Order inU.S. v. HSBC Bank.
January 13, 2016—District of Minnesota judge ruled that the anti-money laundering (AML) provisions in the Bank Secrecy Act (BSA) apply to individuals: On January 13, 2016, in U.S. Department of Treasury v. Haider, a District of Minnesota judge denied the motion brought by Thomas Haider (Haider) to dismiss the complaint filed in December 2014 by the DOJ on behalf of the U.S. Department of the Treasury to enforce a $1 million civil money penalty assessed by FinCEN against Haider. The complaint alleged that, during the time that Haider was employed by MoneyGram International, Inc. (MoneyGram) as its chief compliance officer from 2003 to 2008, Haider failed to ensure that MoneyGram implemented and maintained an effective AML program and complied with Suspicious Activity Report (SAR) filing obligations under the BSA. In denying Haider's motion to dismiss, the judge ruled that individuals can be held responsible for AML control failures under the BSA, stating that "the plain language of the statute provides that a civil penalty may be imposed on corporate officers and employees like Haider." The court also rejected or declined to consider at this time several other arguments made by Haider, including one related to FinCEN's alleged improper use of grand jury materials and one asserting a violation of his right to due process.
See here to read the 1/13/16 Order in U.S. Department of Treasury v. Haider.
For more on this case, see the article in Manatt's 2/4 Financial Services Law newsletter entitled "Raising the Stakes for AML Compliance Officers: Court Refuses to Rule Out Potential Liability for Role in Employer's BSA Compliance Shortcomings."