Swiss Investigating Magistrate Entitled to U.S. Documents

On December 12th, the Second Circuit addressed an issue of first impression for that court, whether 28 U.S.C. Section 1782, which authorizes federal courts to order document production for use in certain foreign proceedings, permits discovery for use in a criminal investigation conducted by a foreign investigating  magistrate. A Swiss criminal complainant seeks the deposition transcript of the former chief risk officer of a fund which invested with Bernard Madoff. Although conducted in London, the deposition was part of a U.S. Madoff feeder fund case. Because the Court concluded that the Swiss investigating magistrate is a “foreign or international tribunal” for purposes of the statute, it affirms the district court’s discovery order. In re Application for an Order.

Second Circuit Adopts New Insider Trading Standard

On December 10th, the Second Circuit reversed the insider trading convictions of Todd Newman and Anthony Chiasson, portfolio managers at two different firms. Prosecutors alleged that Newman and Chiasson were downstream tippees in an insider trading scheme. A jury agreed and convicted the two men. But the Second Circuit did not, reversing the convictions and ordering the dismissal of the indictment. To sustain an insider trading conviction against a tippee, the Court held, the Government must prove beyond a reasonable doubt that:

(1) the corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached his fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for a personal benefit; (3) the tippee knew of the tipper’s breach, that is, he knew the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit. Here, however, prosecutors presented no evidence that defendants knew they were trading on information obtained from insiders or knew that those insiders received a benefit in exchange for the disclosures. U.S. v. Newman and Chiasson.

Dodd-Frank Whistleblower Suit Must Be Arbitrated

On December 8th, the Third Circuit affirmed, on different grounds, the district court’s order dismissing plaintiff’s Dodd-Frank whistleblower retaliation lawsuit and compelling arbitration. Plaintiff alleged his employer violated the Dodd-Frank Act’s whistleblower protection provisions when it allegedly fired him for having reported a securities law violation. The employer sought to compel arbitration based on an arbitration provision present in the employment contract. Plaintiff claimed that an anti-arbitration provision present in the Dodd-Frank Act negated the employment contract’s arbitration requirement. The Third Circuit held that the Dodd-Frank Act’s anti-arbitration provision applied only to whistleblowers asserting claims under the Sarbanes-Oxley Act, the Commodity Exchange Act and the Consumer Financial Protection Act. The anti-arbitration provision did not apply to whistleblower claims brought under the Dodd-Frank Act. Khazin v. TD Ameritrade Holding Corp.

Stockbrokerage’s Ponzi Scheme Payments Protected by Bankruptcy Code

On December 8th, the Second Circuit affirmed the district court’s order dismissing the claims brought by the trustee for debtor Bernard L. Madoff Investment Securities (“BLMIS”) which sought to avoid fictitious profits paid by BLMIS to hundreds of customers over the life of the Madoff Ponzi scheme. The defendant customers moved to dismiss the trustee’s claims citing Section 546(e) of the Bankruptcy Code, which shields securities  related payments made by a stockbroker. The trustee argued that Bankruptcy Code provision did not apply here because BLMIS never bought or sold securities and because the account documents between BLMIS and its customers did not describe a securities transaction. Rejecting that argument, the Second Circuit held whether BLMIS actually transacted in securities is not determinative of whether Section 546(e) applied. Section 546(e) only requires that a covered transfer from a stockbroker be broadly related to a “securities contract”, not that it be connected to an actual securities transaction. In re: Bernard L. Madoff Investment Securities, LLC.