Securities Industry Commentator by Bill Singer Esq

BREAKING NEWS: Supreme Court vacates Second Circuit judgment and remands for reconsideration of whether ERISA imposes a duty on an ESOP fiduciary to act on inside information.

Retirement Plans Committee of IBM, et al., Petitioners, v. Larry W. Jander, et al. (Opinion, United States Supreme Court, 589 U. S. ____ (2020))

The End of the Bonus Culture Is Coming to Wall Street (Bloomberg.com)

JPMorgan Puts Senior Credit Trader on Leave Over WhatsApp Use (Bloomberg.com)

CFTC Orders South Korean Company to Pay $700,000 for Spoofing (CFTC Release)

Ameriprise Didn't Know When To Fold In Terminally Ill Customer Case (BrokeAndBroker.com Blog)

SEC Obtains Judgment Against Former CEO in Insider Trading Case (SEC Release)

Founder of Swiss Brokerage Firm Pleads Guilty in Connection with Global Securities Fraud Scheme (DOJ Release)

Orlando Man Sentenced To 10 Years In Federal Prison For Orchestrating Multi-Million Dollar Investment Fraud Scheme (DOJ Release)

Court Orders Technology Fund Adviser to Pay More Than $31 Million (SEC Release)

In Fifth Third Bancorp v. Dudenhoeffer, 573 U. S. 409 (2014), we held that "[t]o state a claim for breach of the duty of prudence" imposed on plan fiduciaries by the Employee Retirement Income Security Act of 1974 (ERISA) "on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it." Id., at 428. We then set out three considerations that "inform the requisite analysis." Ibid. 

First, we pointed out that the "duty of prudence, under ERISA as under the common law of trusts, does not require a fiduciary to break the law." Ibid. Accordingly, "ERISA's duty of prudence cannot require" the fiduciary of an Employee Stock Ownership Plan (ESOP) "to perform an action-such as divesting the fund's holdings of the employer's stock on the basis of inside information-that would violate the securities laws." Ibid. We then added that, where a complaint "faults fiduciaries for failing to decide, on the basis of the inside information, to refrain from making additional stock purchases or for failing to disclose that information to the public so that the stock would no longer be overvalued, additional considerations arise." Id., at 429. In such cases, "[t]he courts should consider the extent to which an ERISA-based obligation either to refrain on the basis of inside information from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws or with the objectives of those laws." Ibid. We noted that the "U. S. Securities and Exchange Commission ha[d] not advised us of its views on these matters, and we believe[d] those views may well be relevant." Ibid. 

Third, and finally, we said that "lower courts faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant's position could not have concluded that stopping purchases-which the market might take as a sign that insider fiduciaries viewed the employer's stock as a bad investment-or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund." Id., at 429-430. 

The question presented in this case concerned what it takes to plausibly allege an alternative action "that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it." Id., at 428. It asked whether Dudenhoeffer's "‘more harm than good' pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time." Pet. for Cert. i. 

In their briefing on the merits, however, the petitioners (fiduciaries of the ESOP at issue here) and the Government (presenting the views of the Securities and Exchange Commission as well as the Department of Labor), focused their arguments primarily upon other matters. The petitioners argued that ERISA imposes no duty on an ESOP fiduciary to act on inside information. And the Government argued that an ERISA-based duty to disclose inside information that is not otherwise required to be disclosed by the securities laws would "conflict" at least with "objectives of " the "complex insider trading and corporate disclosure requirements imposed by the federal securities laws . . . ." Dudenhoeffer, 573 U. S., at 429. 

The Second Circuit "did not address the[se] argument[s], and, for that reason, neither shall we." F. Hoffmann-La Roche Ltd. v. Empagran S. A., 542 U. S. 155, 175 (2004) (citation omitted); see Cutter v. Wilkinson, 544 U. S. 709, 718, n. 7 (2005) ("[W]e are a court of review, not of first view"). See also 910 F. 3d 620 (CA2 2018). Nevertheless, in light of our statement in Dudenhoeffer that the views of the "U. S. Securities and Exchange Commission" might "well be relevant" to discerning the content of ERISA's duty of prudence in this context, 573 U. S., at 429, we believe that the Court of Appeals should have an opportunity to decide whether to entertain these arguments in the first instance. For this reason we vacate the judgment below and remand the case, leaving it to the Second Circuit whether to determine their merits, taking such action as it deems appropriate. 

READ the Transcript of the November 6, 2019, Oral Argument

https://www.supremecourt.gov/oral_arguments/argument_transcripts/2019/18-1165_986b.pdf

LISTEN to the November 6, 2019, Oral Argument

https://www.supremecourt.gov/oral_arguments/audio/2019/18-1165

[F]rom December 2014 to April 2016, the Daewoo Securities trader placed numerous orders for the E-mini contract with the intent to cancel those orders before execution.  One strategy the trader employed involved three steps.  First, the trader entered one or more disproportionally large orders-which he intended to cancel-on one side of the market (the spoof orders).  The trader placed the spoof orders with the intention of giving a misleading impression of market depth and inducing other market participants to trade opposite the orders.  Second, capitalizing on the increased buying or selling interest that the spoof orders created, the trader placed a small order-which he intended to execute-on the opposite side of the market (the genuine order).  Third, within seconds of the genuine order being filled, the trader cancelled the spoof order before it was executed. 

[C]arr provided his longtime girlfriend, Katherine M. Hanratty, with confidential information about a potential acquisition of Heartland by another payment processing company. As alleged, in the weeks leading up to the merger announcement, Carr gave Hanratty $1 million to open a brokerage account, which she used to purchase Heartland stock. The complaint alleged that Hanratty opened the account with Carr's knowledge, made Carr the beneficiary of the account, and purchased more than 11,000 shares of Heartland stock. After the merger was announced, Heartland's stock price rose substantially, and Hanratty sought Carr's advice about when to sell the stock. Hanratty ultimately liquidated her entire position in a single day, for profits of more than $250,000.

Knox, with others, operated a purported asset management firm based in Switzerland called Silverton, and later renamed Wintercap. Through this business, Knox helped facilitate pump-and-dump, and other market manipulation schemes, by selling massive quantities of microcap securities on behalf of "control groups" who secretly owned the stock through nominee shareholders, and who simultaneously orchestrated promotional campaigns and other efforts to artificially inflate the price and trading volume of those shares. Knox then funneled the proceeds of the securities fraud-totaling an estimated $164 million over the last three years-to co-conspirators in the United States, and elsewhere, through a complex money transfer system that disguised the source and nature of the funds. 

One security that was traded through Knox's Silverton firm was a stock called Environmental Packaging Technologies, Inc. ("EPTI"). In June 2017, EPTI was subject to a pump-and-dump scheme using Knox's Silverton platform. Co-defendants Matthew Ledvina and Milan Patel, knowing that EPTI stock was controlled by another co-defendant, Morrie Tobin, helped create nominee entities to hold Tobin's stock so that it could be sold in a pump-and-dump in violation of United States securities laws. During the pump-and-dump, Knox's Silverton platform managed to sell approximately $1.5 million worth of EPTI stock before trading was halted by the Securities and Exchange Commission (SEC). 

Ledvina, Patel and Tobin have all pleaded guilty and await sentencing. 

[F}ernandez orchestrated an investment scheme that defrauded at least 81 victims out of millions of dollars. Fernandez solicited individuals to invest in concert events that he claimed were being produced by his companies - Kadaae Entertainment Corporation and Kadaae LLC. He told his victims that their investment would be used to fund specific concert events for artists including Julio Iglesias, Pitbull, Nicky Jam, Garth Brooks, Ana Gabriel, and Drake, and promised a return of up to 100 percent on the investments. As part of the scheme, Fernandez used fake contracts and other false documents to convince victims that he and his companies were under contract to produce the events. In fact, neither Fernandez nor his companies were involved in most of the events he had solicited to his victims.  

Fernandez used the funds sent by investors for his own personal use and to pay fraudulent investment returns to earlier investors. 

[R]othenberg marketed his advisory firm, Rothenberg Ventures LLC, as uniquely positioned to identify millennial entrepreneurs and invest in "frontier technology" companies. Rothenberg and his firm allegedly misappropriated millions of dollars from the firm's funds, which Rothenberg used to support personal business ventures he claimed were self-funded and to pay for private parties and events at high-end resorts and Bay Area sporting arenas.

• Securities Industry Commentator
• Bill Singer