Securities Fraud

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

The “misappropriate theory” of securities fraud involves a corporate “outsider” who violates Rule 10b-5 by misappropriating confidential information for securities trading purposes, in breach of a fiduciary duty owed to the source of the information, rather than to the persons with whom he trades. In this case, the Court holds that this conduct amounts to a criminal violation of the securities laws.

United States v. Newman, 773 F.3d 438 (2d Cir. 2014)

The Second Circuit announced a new standard for insider trading cases, holding that in order to support an insider trading conviction under Section 10(b) of the 1934 Act (15 U.S.C. §78j(b)), the government must prove that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.

United States v. McKye, 734 F.3d 1104 (10th Cir. 2013)

Whether a particular transaction involves a “security” is a mixed question of fact and law that, pursuant to Gaudin, must be submitted to the jury to be decided under the reasonable doubt standard. In this case the judge instructed the jury that a “note” constitutes a security. This was reversible error. Not all notes are securities, so the instruction erroneously explained the law and removed from the jury’s consideration whether the notes in this case were securities.

United States v. Ferguson, 676 F.3d 260 (2d Cir. 2011)

The defendants were charged with securities fraud. In order to prove the materiality of the fraud, the government introduced evidence of charts that showed the fall in stock price on certain days when the fraud was revealed to the investing public. However, there were a number of other scandals and financial problems facing the company and no effort was made to prove what portion of the stock price decline was attributable to the defendants’ conduct. Admitting the charts was reversible error. The court noted that the company involved, AIG, was known to the public and it was possible that the jury would infer that the economic downturn in the country was caused by the defendant’s conduct.

United States v. Behrens, 644 F.3d 754 (8th Cir. 2011)

The provision in the securities law (§ 78ff(a)) that provides that a sentence of imprisonment may not be imposed if the defendant can show that he did not know about the regulation he was found to have violated, applies to any securities fraud violation, not just technical securities violations. Thus, a defendant who entered a guilty plea to a violation of § 78j(b) may attempt to prove at sentencing that he was not aware of the regulation he violated.

United States v. Goyal, 629 F.3d 912 (9th Cir. 2010)

The defendant was charged with securities fraud in connection with the method by which he accounted for certain sales. According to the government, the method violated GAAP. The proof at trial, however, failed to prove that materiality of the misrepresentations that were made on the financial statements. The court also reversed the counts of the indictment dealing with lying to auditors. The basis of the reversal on these counts, in part, was the failure to prove that the defendant had a culpable state of mind (i.e., willful and knowing deception).

United States v. Kaiser, 609 F.3d 556 (2d Cir. 2010)

The Second Circuit discusses the various interpretations of the term “wilfullness” in the context of several different securities fraud offenses, ultimately concluding that the term has different meanings for different violations.

United States v. Schiff, 602 F.3d 152 (3rd Cir. 2010)

The Third Circuit holds that the government could not rely on an “omissions liability” theory of securities fraud in this case. The government’s theory is that the corporate executive failed to disclose the “channel stuffing” practices that the company engaged in. The government’s theory was foreclosed by the fact that there was no allegation in the indictment of misstatements in the SEC filings, which is where the government now alleged the information should have been included.

United States v. Finnerty, 533 F.3d 143 (2d Cir. 2008)

The evidence was insufficient to prove that the defendant’s conduct violated the securities laws. The defendant may have violated certain stock exchange rules, but this does not equate to securities fraud.

United States v. Cassese, 428 F.3d 92 (2d Cir. 2005)

The Second Circuit affirmed the decision of the district court granting a judgment of acquittal in this securities fraud case. The evidence failed to show that the defendant willfully violated the law.

United States v. Langford, 946 F.2d 798 (11th Cir. 1991)

In connection with the fraudulent sale of stock, the defendant made numerous mailings. Each such mailing should not have been listed as separate counts of securities fraud. A separate count should only be set forth for each separate sale or purchase of securities.