Why it matters: It is time once again to survey the recent noteworthy opinions and rulings in the courts at all levels in the areas of white collar crime and securities fraud. In a case alleging federal healthcare offenses, the Supreme Court issued an opinion barring the government from freezing a criminal defendant's legitimate, untainted assets needed to hire defense counsel. The D.C. Circuit made clear the government's absolute authority to enter into deferred prosecution agreements with criminal defendants without interference or second-guessing by the courts, while the Second Circuit considered the question of what makes an opinion in a registration statement materially false or misleading for the first time since, and in light of, the Supreme Court's 2015 seminal Omnicare decision. Finally, a Tennessee district court ruled that the SEC's records from an FCPA investigation are protected from Freedom of Information Act requests, and a S.D.N.Y. court allowed to go forward a lawsuit brought by the former manager of a now defunct hedge fund against Southern District of New York U.S. attorney Preet Bharara in connection with a "misleading" affidavit Bharara filed in an insider trading investigation. Read on for a recap.
Detailed discussion: What do untainted assets, "anemic" DPAs, registration statement opinions, FOIA requests for SEC records and Manhattan U.S. Attorney Preet Bharara have in common? All figured prominently in recent court opinions, actions and rulings of note. We recap it here.
March 30, 2016—Luis v. U.S.: In the majority opinion written by Justice Stephen Breyer, the Supreme Court held that the pretrial restraint by the government of legitimate, untainted assets owned by a criminal defendant that are needed to retain defense counsel of choice violates the Sixth Amendment. First, a brief summary of the facts and procedural history that got us to this point: In 2012, the government charged petitioner Sila Luis (Luis) with fraudulently obtaining nearly $45 million via "paying kickbacks, conspiring to commit fraud, and engaging in other crimes all related to health care." In order to preserve the $2 million remaining in Luis's possession for payment of restitution and other criminal penalties, the government secured a pretrial order freezing Luis's assets, including her assets unrelated to, or "untainted by," her alleged crimes (there appears to have been no dispute that the assets at issue were, in fact, "untainted"). The district court recognized that the order could prevent Luis from obtaining counsel of her choice; nevertheless, it held that the Sixth Amendment did not give Luis the right to use her own untainted funds for that purpose, and the Eleventh Circuit affirmed. The Supreme Court vacated and remanded.
The Court began by reviewing the relevant language from the statute (18 U.S.C. Sec. 1345) that allows the government to freeze pretrial the assets of criminal defendants specifically charged with federal healthcare offenses or banking law violations. The Court noted that, under Section 1345(a)(2), the criminal defendant's assets that may be frozen fall into three categories: (1) if they were "obtained as a result of" the alleged violations, (2) if they are "traceable to" the alleged violations, or (3) if they are other "property of equivalent value" to the first two categories of assets. In this case, Luis argued that her "untainted" assets "of equivalent value" that were frozen under the third category left her with no funds with which to hire defense counsel of her choosing in violation of her Sixth Amendment right to assistance of counsel. The Court agreed, holding that "the pretrial restraint of legitimate, untainted assets needed to retain counsel of choice violates the Sixth Amendment. The nature and importance of the constitutional right taken together with the nature of the assets lead us to this conclusion."
April 5, 2016—U.S. v. Fokker Services, BV: The D.C. Circuit, in an opinion written by Judge Sri Srinivasan, vacated D.C. District Court Judge Richard Leon's February 2015 ruling that had rejected, as within the valid exercise of his supervisory powers, the deferred prosecution agreement (DPA) entered into between the government and Dutch aerospace services provider Fokker Services, B.V. (Fokker). We covered Judge Leon's ruling in our May 2015 newsletter under "Judge Leon, Meet theFokker: Court Shoots Down DPA."
To briefly summarize the facts, the DOJ had entered into the proposed 18-month DPA with Fokker in connection with alleged U.S. sanctions violations for facilitating, over the course of a five-year period commencing in 2005, more than 1100 shipments of aircraft and naval vehicle parts (manufactured in the U.S.) to embargoed countries Iran, Sudan and Burma. In addition to imposing reporting requirements on its sanctions compliance program efforts, the proposed DPA called for Fokker to forfeit $10.5 million and pay a civil fine of $10.5 million. In his February 2015 ruling, Judge Leon rejected the proposed DPA as, among other things, "anemic" and "grossly disproportionate to the gravity of Fokker Services' conduct in a post-9/11 world." The government filed a petition for writ of mandamus with the D.C. Circuit in March 2015, which the court granted a little over a year later on April 5, 2016.
In finding that Judge Leon legally erred and exceeded his authority in rejecting the proposed DPA, the court made clear that it was in no way commenting on the reasoning behind Judge Leon's objections, but "[r]ather, the fundamental point is that those determinations are for the Executive [Branch]—not the courts—to make." The court said that Judge Leon's rejection of the DPA was inappropriate because prosecutors and not judges are authorized to make charging decisions with respect to criminal defendants, including the decision to defer prosecution under a DPA: "The Constitution allocates primacy in criminal charging decisions to the Executive Branch…It has long been settled that the Judiciary generally lacks authority to second-guess those Executive determinations, much less to impose its own charging preferences." Furthermore, the court held that the language in the Speedy Trial Act that excludes deferred prosecutions from the exercise of statutorily imposed time periods "with the approval of the court" does not "empower the district court to disapprove the DPA based on the court's view that the prosecution had been too lenient." The court went on to explain that "[w]hile the exclusion of time is subject to 'the approval of the court,' there is no ground for reading that provision to confer free-ranging authority in district courts to scrutinize the prosecution's discretionary charging decisions. Rather, we read the statute against the background of settled constitutional understandings under which authority over criminal charging decisions resides fundamentally with the Executive, without the involvement of—and without oversight power in—the Judiciary."
March 4, 2016—In re Sanofi Securities Litigation: In its first published opinion since the Supreme Court's 2015 Omnicare decision, the Second Circuit narrowly applied the Omnicare holding to affirm the dismissal by the district court of consolidated class action complaints that had alleged that the defendant pharmaceutical company and drug developer it acquired (defendants) made materially false or misleading statements or omissions in offering materials regarding the development progress and clinical testing of the defendants' "breakthrough" drug used to treat multiple sclerosis. Specifically, the plaintiffs alleged that, in their consistent optimistic projections about the drug's development and progress toward FDA approval, the defendants omitted to disclose that the FDA had expressed concerns regarding the use of single‐blind (as opposed to double-blind) clinical studies for the drug, a fact that could (and ultimately did) slow the drug's approval progress. The plaintiffs alleged that these omissions misled investors and artificially inflated the value of the plaintiffs' specialized financial instruments known as contingent value rights (CVRs), whose value is tied to the achievement of certain milestones in drug development such as FDA approval. The Second Circuit stated at the outset of its opinion that "[w]e see no reason to disturb the conclusions of the district court. However, after the district court's opinion, the Supreme Court decided Omnicare, which refined the standard for analyzing whether a statement of opinion is materially misleading. Plaintiffs have urged us to reconsider the district court's ruling in light of Omnicare. We do so here, but conclude that even underOmnicare's standard, Plaintiffs have failed to allege that Defendants made materially misleading statements of opinion."
The Second Circuit began by reviewing the Supreme Court's opinion inOmnicare, which we wrote about in our April 2015 newsletter. To briefly recap, at issue in Omnicare was whether Section 11 of the '33 Act applies to statements of opinion contained in a registration statement. In a two-pronged analysis, the Supreme Court found that a sincerely held statement of opinion will not create liability as an "untrue statement of material fact" under the first part of Section 11, even if the opinion later proves to be wrong. However, the statement of opinion can create liability under the second part of Section 11 if it omits facts that, if included, would demonstrate to a reasonable investor that the issuer lacked the basis for making that statement of opinion.
In its review, the Second Circuit placed great weight on language in the Supreme Court's opinion that seemingly "tempered" the new standard it put in place, which the Supreme Court admitted was "no small task for an investor" to meet. For example, the Second Circuit pointed out that the Supreme Court "cautioned against an overly expansive reading of this standard, noting that '[r]easonable investors understand that opinions sometimes rest on a weighing of competing facts,' and adding that '[a] reasonable investor does not expect that every fact known to an issuer supports its opinion statement'…[and] that a statement of opinion 'is not necessarily misleading when an issuer knows, but fails to disclose, some fact cutting the other way.' " Moreover, the Supreme Court noted that " 'the investor takes into account the customs and practices of the relevant industry,' and instructed that 'an omission that renders misleading a statement of opinion when viewed in a vacuum may not do so once that statement is considered, as is appropriate, in a broader frame.' "
The Second Circuit then looked at the three categories of "statements of opinion" at issue in the case—all relating to the defendants' optimistic projections about the development, FDA approval and launch of the drug, and found that the Omnicare decision did not affect the district court's dismissal of the case. The court concluded that "[i]ssuers must be forthright with their investors, but securities law does not impose on them an obligation to disclose every piece of information in their possession. AsOmnicare instructs, issuers need not disclose a piece of information merely because it cuts against their projections. Given the sophistication of the investors here, the FDA's public preference for double‐blind studies, and the absence of a conflict between Defendants' statements and the FDA's comments, we conclude that no reasonable investor would have been misled by Defendants' optimistic statements regarding the approval and launch of [the drug.] The judgment of the District Court is affirmed."
March 12, 2016—Robbins, Geller, Rudman & Dowd, LLP v. SEC: A Middle District of Tennessee judge granted the SEC's motion for summary judgment and ruled that records prepared by the SEC in connection with an FCPA probe involving accusations that Walmart bribed Mexican officials were exempted from Freedom of Information Act (FOIA) requests. The plaintiff law firm had filed an FOIA request for the SEC records in 2013. The judge ruled that the SEC records were protected by Section 7(a) of the FOIA, which exempts records from FOIA requests if they meet a two-prong test that demonstrates (1) they were "compiled for law enforcement purposes" and (2) their release "could reasonably be expected to interfere" with a "pending or prospective" enforcement proceeding. The judge ruled that both prongs had been satisfied in this case and that the SEC had "appropriately walked the Exemption 7(a) tightrope."
March 10, 2016—Ganek v. Liebowitz, et al.: S.D.N.Y. Judge William H. Pauley III denied a motion to dismiss and allowed portions of a lawsuit brought by former hedge fund manager David Ganek against U.S. Attorney Preet Bharara and Bharara's deputies and FBI agents and supervisors named in the lawsuit to go forward and enter the discovery phase. Ganek had alleged that Bharara and the named others violated his civil, Fourth and Fifth Amendment rights when they "fabricated" an affidavit falsely naming him as a target in an insider trading probe that "killed" his once $4 billion fund, Level Global Investors. The case was brought in connection with a 2010 raid on the hedge fund by the DOJ and FBI in response to information received from an analyst that insiders at the hedge fund had improperly traded in Dell Computer's stock. The analyst allegedly specifically told the government that Ganek was not aware of or involved in the insider trading, but in an affidavit to get a search warrant that was made public, Ganek was named as a target. The government failed after repeated requests from Ganek—some made to Bharara personally—to publicly clarify that he was not a target. The fund collapsed in 2011, and Ganek was never charged. In allowing the case to go forward, Judge Pauley said that "[d]iscovery is now appropriate to ascertain whether this case is about a simple misunderstanding or whether something more troubling is afoot." Ganek's partner, Anthony Chiasson, was convicted of insider trading in 2012 but his conviction was overturned in 2014 as part of the Second Circuit's Newman decision.
See here to read the Supreme Court's 3/30/16 opinion in Luis v. U.S.
See here to read the D.C. Circuit's 4/5/16 opinion in U.S. v. Fokker Services B.V.
See here to read the Second Circuit's 3/4/16 opinion in In re Sanofi Securities Litigation.
See here to read the S.D.N.Y. court's 3/10/16 opinion in Ganek v. Liebowitz, et al.