Guest Column: Top 10 Securities Enforcement and Litigation Stories of 2013

Brian Lehman

by Brian Lehman

10. Judge Rakoff Criticizes the Department of Justice for Not Prosecuting Any High-Level Executives After the Financial Crisis

“The Untouchables” is the heading that PBS’s Frontline gave two dozen investigative stories about the financial crisis this year.  Likewise, the Center for Public Integrity released a report in September entitled, “Ex-Wall Street Chieftains Living Large in Post-meltdown World.”

But even these stories didn’t raise an eyebrow the way Judge Jed Rakoff did when he gave a speech arguing that the position of Department of Justice officials in the aftermath of the financial crisis “has been to excuse their failure to prosecute high level individuals.” A sitting federal judge and former prosecutor, Judge Rakoff found that one of these excuses, the too-big-to-jail excuse, was “disturbing, frankly, in what it says about the Department’s apparent disregard for equality under the law.”

Judge Rakoff first gave this speech in Australia in May.  He then repeated it at a NYC bar event for securities lawyers in November and turned the speech into an article for the New York Review of Books.  Although the article is slated to be published in January 2014, the article is already available online and been widely discussed in the press.

Regardless of whether Judge Rakoff is correct, his speech does tap into public discontent that has served as the background for every big story of the year.  The SEC or DOJ didn’t just win or lose a trial (or even levy record fines)—they did so after doing almost “nothing” for years.

9.  SEC Awards Whistleblower More Than $14 Million

Ears of securities lawyers on both side of the bar perked up in October when the SEC awarded $14 million to an unidentified whistleblower.  It was just the second award under the 2010 Dodd Frank law, which provides that any whistleblower who provides “high-quality original information” will receive at least 10% of the monetary sanctions successfully levied by the SEC and related agencies.  The first award, announced in August 2012, was less than $50,000.

When the SEC issued its Whistleblower Report a month later, Sean McKessy, Chief of the SEC’s new whistleblower office, made it clear that the SEC hoped October’s eight-figure payment would “encourage individuals to come forward and assist the Commission in stopping securities fraud.”  There is already a large number of potential actions in the pipeline for the SEC to consider.  In the 2013 fiscal year alone, the SEC received 3,238 tips and complaints.

8.  Fabrice Tourre Found Civilly Liable for Securities Fraud

In August, a jury found Fabrice Tourre liable on six of seven civil charges related to securities fraud.  The fraud occurred in 2007 when Tourre, then a 28-year-old bond trader with Goldman Sachs, worked with hedge fund manager, John Paulson, to select subprime mortgages that Paulson believe had a high probability of defaulting.  The mortgages were bundled into a collateralized debt obligation (CDO) and sold as bonds.  Investors lost over $1 billion, which ended up being close to the amount Paulson made in profit after he shorted the bonds.

The SEC, which filed the charges against Tourre in 2010, was in a no-win position.  When he was found guilty, many people used it as a chance to castigate the SEC for not prosecuting any high-level executives.  As Dennis Kelleher, a former SEC litigator told the press, “They should be embarrassed. It’s worse than doing nothing. They are laughing in the executive suites of Wall Street.’”  Even the jurors expressed sympathy for Tourre:  “I could characterize him as somewhat of a scapegoat,” said one.

It probably would have helped the SEC had the trial been accompanied with an announcement that Goldman Sachs was settling the claims against it for $550 million dollars.  It was the largest penalty ever assessed against a financial services firm in the history of the SEC.  But that settlement happened three years ago and few people seem to remember.

7.   J.P. Morgan Chase Admits Its Handling of “London Whale” Trading Losses  Violated Securities Law

In September, J.P. Morgan Chase agreed to pay $920 million in fines to four U.S. and British agencies for mishandling a $6.2 billion trading loss that the press dubbed the “London Whale” trade.  But the fine wasn’t the big news.   Rather, the big news was that for one of first times in memory a corporate defendant admitted that “its conduct violated the federal securities laws.”

In fact, this was the second admission of the year since just a month earlier, Philip Falcone and Harbinger Capital Partners LLC, the hedge fund that Falcone founded in 2001, agreed to a settlement with the SEC that, in addition to an $18 million penalty, included an admission of wrongdoing rather than allowing them to “neither admit nor deny” claims or underlying.  But, naturally, J.P. Morgan’s admission produced a good deal more press.

Whether the SEC should have a policy of allowing defendants to “neither admit nor deny” was questioned two years ago when the SEC and Citigroup presented a $285 million settlement to Judge Jed Rakoff.  But the judge rejected the settlement, which involved claims over the quality of mortgage-backed security CDOs that Citigroup sold to investors.  In his decision, Judge Rakoff explained that because Citigroup did not admit to the underlying facts, he could not determine whether the punishment was “fair, reasonable, adequate, and in the public interest.”  Judge Rakoff’s opinion wasn’t too surprising: He had already said in a previous opinion that the policy “is a stew of confusion and hypocrisy unworthy of such a proud agency as the SEC.” 

Nor was it surprising that the Second Circuit stayed Judge Rakoff’s opinion, but by then it was too late.  After Rakoff’s opinion, multiple judges questioned the propriety of such settlements, and the issue served as background at SEC commissioner Mary Jo White’s confirmation hearing.  The public wants more accountability.  It was only a matter of time before someone had to admit wrongdoing.  

6.  Mark Cuban beats SEC charges

In October, a Texas jury cleared billionaire Mark Cuban of insider trading charges.  In 2004, after Cuban had bought 6.3% of stock in, he received a call from the CEO asking if Cuban wanted to buy more shares in a private placement at a discount price.  The company was planning to announce the sale the next day.  Cuban didn’t want to buy any more stock.  In fact, the company’s need for more money made him suspect so he promptly sold his shares after the conversation.  The crux of the SEC’s complaint was its allegation that Cuban orally agreed to keep the information confidential.

The case is noteworthy for two reasons.  First, it raised an important legal issue:  The SEC’s case rests on Cuban’s alleged oral agreement to keep the offer confidential, but does the SEC have the authority to turn a breach of a confidentiality agreement into insider trading?  Numerous people, including Former SEC General Counsel Ferrara and Professor Stephen Bainbridge, have argued that “a mere confidentiality agreement does not create a duty of trust and confidence,” as required by Supreme Court case law.  Rather, “it is simply a contract not to share information with others – not a prohibition against acting upon such information.” 

Second, Mark Cuban has tried to make this a public relations disaster for the SEC.  In an interview on CNBC, Cuban said about the SEC, “There is a culture of trying to win, not trying to find justice. There is a culture of looking to find their next job. I always say that SEC equals ‘Swiftly Enhanced Careers.’ There is no business sense that I can find.”  He immediately responded to emails sent by journalists with his complaints about the SEC. And Cuban just announced in an interview with the Wall Street Journal that “he became so frustrated with the SEC’s lawyers that he is now considering a new venture publicizing SEC transcripts . . . . His first step, he says, would be publishing trial transcripts on his blog and highlighting tactics he considers suspect.” 

SEC v. Cuban has ended.  Cuban v. SEC may not be over for some time.

5.           SEC Collects a Record $3.4 billion

On December 17, 2013, the SEC announced that it had collected a record $3.4 billion over the previous fiscal year (October 1 through September 30).  The sanctions were 10% higher than 2012, and 22% higher than 2011.  The increase was due in part to three fines:  a $600 million settlement with CR Intrinsic Investors for insider-trading (an affiliate of hedge fund SAC Capital), a $525 million fine of BP (formerly British Petroleum) for misrepresentations made after the Deepwater Horizon oil rig explosion, and a $200 million fine of JPMorgan Chase & Co. for its conduct related to the London Whale trade.

And 2014 promises to be interesting as well:  Among other things, the SEC has noted that the Enforcement Division is headed into the next year having opened 908 investigations (up 13%) and obtained 574 formal orders of investigation (up 20%).

4.           Five Years After Madoff’s Arrest and His Story is Everywhere

In 2008, Bernie Madoff was operating the largest Ponzi scheme in history – $17 billion in actual investments and paper losses of more than $64 billion – and yet relatively few people had heard of him (even people who had invested money with him through an advisor).  Five years later, his story is everywhere.

On October 7, the trial of five of Madoff’s employees – the secretary, the director of operations, the account manager, and two computer programmers – began on charges that they aided Madoff in this fraud. As a result of the trial, there have been dozens of stories about the inner workings of the office and the events that led up to Madoff’s arrest (including, for example, that Madoff kept a 4-foot sculpture of a screw on his desk with the title “The Soft Screw”).  There were also numerous articles about the five-year anniversary of the scandal including an interview with him in the Wall Street Journal.  (Interestingly, in the interview, Madoff  “insisted that none of his employees” with the exception of the government’s key witness, were involved in the fraud).”  Finally, as one writer noted, “2013 was the year of Madoff on stage and screen.”  The “thinly veiled fiction” about Madoff includes Woody Allen’s “Blue Jasmine.”  The movie features Cate Blanchett as Jasmine French, a high-society New Yorker whose world crumbles when her husband’s financial empire is revealed as a fraud.

The jury’s verdict in the employees’ trial, as well as the Blanchett’s Oscar nomination, are expected this Spring so expect even more articles about Madoff in 2014.

3.  Obama Picks Mary Jo White to Head the SEC

At the beginning of the year, President Obama nominated Mary Jo White as the 31st Chairperson of the SEC.  White is the first former prosecutor to head the SEC (White served as the U.S. Attorney for the Southern District of New York from 1993 to 2002).  In November, after she had been confirmed, the New Yorker profiled her in a lengthy “must-read” article entitled “Street Cop,” which gives plenty of background on the new head of the SEC.

A recent speech of White’s, “The Importance of Independence, merits a mention, however.  On October 3, White addressed what she believed the role of a court should be when reviewing a settlement proposed by the SEC (à la Judge Rakoff).  White explained, “A court reviewing a consent judgment in one of our cases has a narrower focus – making sure that the settlement is not ambiguous and that it does not affirmatively harm third parties or impose an undue burden on the court’s own resources.”   Notably missing from this standard is any determination from a court – as opposed to the SEC – that the settlement is in the public interest.

2.  SAC Capital Advisors Pleads Guilty and Pays Record Fines

In June 2013, Vanity Fair published an in-depth article entitled “The Hunt for Steve Cohen” that led with the sentence:  “With arrest after arrest in a massive, seven-year insider-trading investigation, U.S. Attorney Preet Bharara is getting closer to the biggest fish of them all:  Cohen, founder of SAC Capital, the $14 billion hedge fund, who some regard as the most successful stock picker of his time.”  Accompanying the article was an illustration of U.S. Attorney Preet Bharara as Ahab and Cohen as Moby Dick.  Five months later, Bharara announced that Cohen would pay a record $1.2 billion penalty to the federal government to settle civil and criminal charges against the firm as well as end his business of managing money for clients.  SAC Capital had already agreed to pay $616 million to the SEC earlier in March, bringing the total in fines to $1.8 billion for the year.

The more ominous news for Cohen is that the government has continued to focus on “flipping” two former SAC Capital employees against him.  On December 18, a jury convicted one of them, Michael Steinberg, on criminal charges of insider-trading.

The conviction of Steinberg has significantly turned up the heat on the other employee, Michael Martoma, to strike a deal with the government.  His trial begins on January 6, 2014, and some in the press have predicted that if a jury finds Martoma guilty, “prosecutors and a federal judge will look on Martoma as the guy who let Cohen get away” and Martoma will face a prison term of around 20 years.

1.  J.P. Morgan Chase Pays a Record $13 Billion

In November, Attorney General Eric Holder announced a settlement with J.P. Morgan Chase for the bank to pay a record $13 billion to settle federal and state claims related to the sale of troubled mortgages and residential mortgage backed securities.  Most of the claims were related to conduct J.P. Morgan is responsible for as a result of acquiring Bear Sterns and Washington Mutual in 2008.   In the broadest of terms, $9 billion will go to pay the government, and $4 billion will go to help homeowners struggling with their mortgages.

The eleven-figure settlement with JPMorgan is the largest sum a single company has ever paid to the government.  From one perspective, the money amounts to more than half of the bank’s annual profit.  At the same time, it is worth remembering that the government paid $188 billion to bailout Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies that bought many of the defective mortgages. 

Since graduating from from the University of Chicago Law School in 2000, Brian Lehman has primarily focused his practice on complex litigation and class actions. He may be contacted at