Three states have joined a lawsuit to challenge the constitutionality of the Financial Stability Oversight Council (FSOC), a Dodd-Frank-created regulatory body headed by the Treasury secretary. The panel, composed of top financial regulators, is charged with overseeing broad threats to the financial system, and has the power to liquidate failing non-bank financial institutions it views as a threat to the that system. The attorneys general of Michigan, Oklahoma, and South Carolina are challenging the legality of the FSOC, arguing that the panel is too powerful and should be subject to additional checks and balances.
The states are bringing their claim as a subset of a larger suit filed by the Competitive Enterprise Institute, a conservative think tank that is also challenging the constitutionality of the power granted to the Consumer Financial Protection Bureau (CFPB). The states do not join the challenge to the CFPB but makes claims only against the FSOC. The state attorneys general argue that the FSOC’s liquidation power creates “death panels for American companies” with little outside oversight.
However, the AGs’ argument overlooks both the substance of the provision and the background against it was implemented. Far from lacking oversight, the FSOC must undergo a multi-level, multi-branch review in order to liquidate a financial institution. In order to initiate liquidation proceedings, first there must be a written recommendation for the Treasury Secretary to appoint the FDIC as a receiver for the failing company. The recommendation must contain a host of information including an evaluation of the likelihood of a private-sector alternative to prevent default. Then there must be a two-thirds vote of the Fed Board of Governors and a two-thirds vote of the FDIC or SEC, or the affirmative approval of the Director of the Office of Federal Insurance in order to appoint a receiver.
If the company does not consent to the appointment of the FDIC as a receiver, the matter goes to U.S. District Court for the District of Columbia, where a judge may strike the receivership if it determines that the secretary’s decision was arbitrary and capricious. Finally, the Government Accountability Office must review and report to Congress on any receivership appointment.
This liquidation power is not entirely new. For decades, the FDIC has had the ability to take over failing federally insured banks. The difference is that this new provision extends to non-bank financial companies. This provision was enacted in direct response to the recent financial crisis, in which the federal government had to step in to save financial institutions whose risky investments threatened to collapse the American economy. The role of the FSOC is to eliminate the expectation that the U.S. government will shield the institutions from losses in the event of a future failure, while simultaneously ensuring an orderly liquidation for failed companies.
At this time, the FSOC has not taken action to liquidate any financial institutions. It has, however, designated a number of nonbank financial institutions as “Systematically Important Financial Institutions” (SIFI). Institutions designated as SIFI are subject to more stringent oversight, including stress tests, higher capital levels and tougher liquidity requirements.
The FSOC began making SIFI designations in July of this year, with the fairly uncontroversial designation of eight financial market utilities. On Monday the FSOC announced that it is considering a number of additional non-banks for SIFI designation. AIG has confirmed that it is one of the institutions under consideration, a development that the company said it both expected and welcomes. Other non-banks rumored to be under consideration as SIFIs include MetLife, Prudential, and General Electric.
It appears that the state AG’s are contesting the FSOC’s liquidity authority out of fear that it gives too much power to federal regulators. However, history has shown how economically dangerous it is for financial institutions to be left to their own devices with little oversight or accountability. The FSOC’s powers are constitutional and within the bounds of the law. The states’ challenge should not survive judicial scrutiny, and the FSOC’s liquidation power should be upheld.
The Supreme Court will soon be considering whether to take up an interesting question involving when monetary sanctions may be imposed for prosecutorial misconduct. More than 50 former federal judges and U.S. attorneys are pushing to get an 11th Circuit Court of Appeals ruling from last year overturned. In early August, the former judges and prosecutors signed onto an amicus brief that urges the Supreme Court to grant certiorari in United States v. Shaygan. The defendant is appealing the appeals court’s overturning of a lower court’s award of more than $600,000 in attorneys’ fees to him after the unsuccessful prosecution of his case.
Shaygan, a Miami doctor, was charged with trafficking illegal drugs following the overdose death of a patient. Events leading up to his trial demonstrated serious ethical questions about the prosecutors’ handling of the case. For instance, after Shaygan’s counsel moved to suppress testimony that was illegally obtained, in an act of retaliation the prosecution filed a 141-count superseding indictment. The prosecution initiated a collateral witness-tampering investigation in what defendants saw as a bad-faith effort to disqualify petitioner’s counsel on the eve of trial. And, in a “knowing and intentional” violation of court orders and discovery obligations, the prosecution withheld material information from both the court and the defendant. These actions led the trial court to impose sanctions because the prosecutors’ misconduct constituted “conscious and deliberate wrongs that arose from the prosecutors’ moral obliquity and egregious departures from the ethical standards to which prosecutors are held.”
The government appealed to the 11th Circuit, where a sharply divided panel overturned the trial court. The circuit’s rationale was based upon its interpretation of the statute,the Hyde Amendment, that provides for the award of attorneys’ fees and other litigation expenses “where the court finds that the position of the United States was vexatious, frivolous, or in bad faith, unless the court finds that special circumstances make such an award unjust.”
The circuit ruled that sanctions were not appropriate because the superseding indictment was objectively valid. And if the underlying (or superseding) indictment could be deemed objectively reasonable, the prosecution could not be held vexatious or frivolous and thus attorneys’ fees were not merited. See our earlier discussion of this issue in this blog.
The court’s holding raised the eyebrows of many former federal judges and prosecutors as well as scholars. Their main contention appears to be the 11th Circuit’s reading of the clause “vexatious, frivolous, or in bad faith.” The amicus brief filed on behalf of the former judges and prosecutors raised two main arguments for why the 11th Circuit’s decision was wrong: (1) based upon the canons of statutory construction, sanctions under the Hyde Amendment are appropriate when prosecutors act in subjective bad faith, even if an indictment is supported by probable cause; (2) acknowledging a subjective standard helps judges control their courtrooms and provides a necessary tool to address prosecutorial misconduct.
The first argument focuses on the “or” in the Hyde Amendment’s provision for sanctions where a prosecutor’s position is found to be “vexatious, frivolous, or in bad faith.” The amici argue that the disjunctive “or” separates the “bad faith” prong from the “vexatious” and “frivolous” prongs, indicating that bad faith can serve as an alternative basis for relief under the Hyde Amendment. Their reading of the statute, they argue, “comports with our basic principles of criminal justice. Our system’s greatness rests, in part, on our insistence that the process be conducted in a principled, clean manner. Thus, for example, we permit the guilty to go free when the evidence against them was obtained in violation of their Fourth Amendment rights. We suppress coerced confessions, even when they bear every indicia of reliability. And we do not permit the prosecution even of a guilty person on the grounds of that person’s race. ”
The amici’s second argument emphasizes the need to provide judges with control over their courtrooms, and the need to impose appropriate sanctions for prosecutorial misconduct. To rein in the overzealous, overreaching, or rabid prosecutor, the Hyde Amendment sanctions provide an important mechanism to restore control. The amici note that other sanctions, such as complaints with bar associations, have proved ineffective over the years and that prosecutors are immune from most lawsuits relating to their official conduct.
It remains to be seen whether the Court will take up the Shaygan case — the chances of the Court ever granting certiorari are pretty slim. But a strongly-worded amicus brief from more than 50 former prosecutors and judges and a notably sharp divide in the 11th Circuit could persuade the Court.
In an interesting recent opinion, the U.S. District Court for the District of Columbia rebuffed the Libyan Government’s bid to obtain a transfer to it of the domain name registration for libyanembassy.com from a “legalization expeditor” – a company that certifies documents as one step in the process of international legalization of documents (such as foreign birth certificates).
The Libyan Government brought an action under the Anticybersquatting Consumer Protection Act (ACPA) against Ahmad Miski, who operates the Arab-American Chamber of Commerce, a document certification service. Miski redirected traffic to the domain name to his website promoting his certification services. Libya contended that Miski’s registration and use of the domain name infringed its trademark for “Libyan Embassy.”
The case raised two issues that are often misunderstood. First, the court dealt with a claim under an unregistered trademark – “Libyan Embassy” – and had to determine whether it could be enforced under the ACPA. Second, the court had to examine whether the term “Libyan Embassy” is descriptive or suggestive under trademark law. The determination of whether a trademark is descriptive or suggestive is crucial to determining whether trademark rights in the phrase are enforceable, as a merely “descriptive” phrase is enforceable as a trademark only if it acquires “secondary meaning.”
The court quickly dispensed with the issue surrounding the unregistered trademark. It correctly noted that while an unregistered trademark is not entitled to the presumption of validity enjoyed by a registered trademark, it can nonetheless be enforced. However, the Libyan Government’s claim then collapsed. Libya took the position that the phrase “Libyan Embassy” was suggestive under trademark law (meaning that the term itself tells a customer that it refers to a brand and immediately signals to a consumer a brand or product source), which would have entitled it to protection under trademark law.
Miski, conversely, took the position that the phrase was merely descriptive (meaning that it just describes a product’s features, qualities or ingredients, or describes the use to which a product is put), which would preclude its enforceability under trademark law, unless it acquired secondary meaning in the market (the classic example of a merely descriptive mark clothed with secondary meaning is “American Airlines”).
Ultimately, the court performed a cogent and concise analysis of the issues under trademark law, and determined that the term “Libyan Embassy” was merely descriptive, as little imagination is necessary to understand from the name what services (consular services) are being offered. A suggestive mark, on the other hand, requires that there be some element of imagination necessary to tie the mark to the goods or services offered (think Coppertone™ – for suntan products).
Libya could have overcome this ruling, however, by showing that the term “Libyan Embassy” had obtained secondary meaning – which occurs when in the minds of the public, the primary significance of the mark is to identify the source of the product rather than the product itself. It seems that Libya should have had little trouble making this showing. All it needed to do was present evidence – typically through use of a survey showing public perceptions of what is meant by “Libyan Embassy” and the services it provides – showing that the public associates “Libyan Embassy” with the services provided by the Embassy of Libya. This would seem to be an easy task. But Libya presented no such evidence. Therefore, the Court found that it failed to meet its burden to show secondary meaning.
Libya’s failure in this regard is a cautionary note to those who enter into trademark litigation without adequate preparation. Obtaining evidence through the use of surveys, economic analysis, and tracking down persons who have actually been confused by infringing behavior can be expensive, time-consuming, and difficult. But in the world of trademark litigation, it also can be indispensable. It seems likely that had Libya taken these steps before pursuing the registrant of, it would have had a reasonably strong chance of prevailing. Having not done so, its case was irretrievably compromised.
The Foreign Corrupt Practices Act (FCPA) prohibits the bribing of foreign officials. While that may seem like a straightforward concept, previous posts on this blog have shown that the precise definition of who constitutes a “foreign official” has long been the subject of much uncertainty, debate, and litigation.
The FCPA defines a “foreign official” as an “officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The Department of Justice takes a broad view of this definition, consistently using the FCPA to prosecute individuals who allegedly bribed employees of state-owned companies that act merely as commercial entities, such as utility companies, rather than those that act as a sovereign.
For the first time, a U.S. court of appeals is considering a case that tests this question. An appeal in the Terra Telecommunications case, previously discussed in a post on this blog, is currently pending before the U.S. Court of Appeals for the 11th Circuit. The defendants in that that case, Joel Esquenazi and Carlos Rodriguez, are former executives at Terra Telecommunications. They were convicted of bribing officials at the state-owned telecommunications company Haiti Teleco.
Prosecutors successfully persuaded the trial court that Haiti Teleco was an “instrumentality” of the Haitian government, thereby making its employees “foreign officials.” However, on appeal the defendants are asking the court to find the word “instrumentality” in the FCPA unconstitutionally vague and ambiguous. The Justice Department filed a brief on August 21, 2012, arguing for a broad reading of the term “foreign official.”
The defendants’ argument is not novel. For years, businesses and legal groups have been seeking guidance on the definitions of “foreign official” and “instrumentality” under the FCPA. In February, a coalition of businesses and organizations sent a letter to the DOJ seeking clarification of those terms. The letter highlighted the concerns that without proper guidance, businesses suffer uncertainty and risk when trying to comply with the FCPA because the authorities take a “highly fact-dependent and discretionary approach” in interpreting the terms.
Despite the DOJ’s long-standing position that the FCPA is not vague, it has announced that it will release new guidance this year on the act’s criminal and civil enforcement provisions. While the guidelines will provide clarification and guidance to businesses, they will almost surely perpetuate the DOJ’s absurd position that it can pursue employees of commercial entities merely because the companies are state-owned. This is clearly not what Congress intended in enacting the FCPA. Last year, FCPA expert Michael Koehler pointed out that the DOJ’s legal interpretation of “foreign official” is “the functional and substantive equivalent of the DOJ alleging that General Motors Co. or American International Group Inc. is an ‘instrumentality’ of the U.S. government (given its ownership interests in these companies) and that all GM and AIG employees are therefore U.S. ‘officials.’ ”
We hope that the appeals court will accept these arguments and will find that this case does not implicate the issues that the FCPA was designed to address. The courts need to keep the DOJ in check and prevent it from abusing its authority by prosecuting individuals under statutes that Congress did not intend to apply to them.
When online gaming is successful, Ifrah says, players participate in all aspects of the industry – including in the casinos. This is a great development for the gaming industry and great for business and for the nation’s economy.
Earlier this summer, a U.S. district judge in Denver rejected a plea bargain in a child pornography case because the defendant had agreed to waive his right to appeal. The decision sheds new light on the extent of prosecutorial power in the practice of negotiating plea agreements and the need for checks and balances to maintain a level of consistency in sentencing.
The concept of appellate waiver is simple. At the sentencing phase, the defendant gives up his right to appeal, simply because the prosecutors ask him to do so.
Timothy Vanderweff, the defendant in the Denver case, entered into such an agreement with the prosecutors. Facing up to 20 years in prison for the most serious of three charges against him, Vanderweff agreed to plead guilty to one of those charges and face no more than 10 years in prison. While agreeing in the deal not to ask for a sentence of less than five years, Vanderweff also agreed to waive his right to appeal, so long as the judge didn’t sentence him to more than the negotiated range.
It was this final detail of the plea agreement that gave Senior U.S. District Judge John Kane pause. Rejecting the plea deal — a rare occurrence in itself — Judge Kane noted that such waivers can do serious damage to the justice system.
Specifically, Judge Kane wrote: “Indiscriminate acceptance of appellate waivers undermines the ability of appellate courts to ensure the constitutional validity of convictions and to maintain consistency and reasonableness in sentencing decisions.”
Undeterred by the fact that other courts, including the 10th Circuit that includes his district court, have found appellate waivers acceptable, Judge Kane further noted: “[S]acrificing constitutional rights at the altar of efficiency is of dubious legality.”
Although Judge Kane viewed appellate waivers dimly, a 2005 study in the Duke Law Journal found that they are common across the country, occurring in as many as 90 percent of plea deals in some jurisdictions. The frequency of appellate waivers, however, is more likely a reflection of the degree of power that prosecutors wield in plea bargains than anything else. By almost any measure, prosecutors are the most powerful officials in the criminal justice system. They decide whether to institute criminal charges, what those charges should be, and whether to offer the defendant the option of pleading guilty to those charges, and they exercise virtually limitless discretion in reaching those decisions.
While charging is a quintessential prosecutorial or executive decision, that power should not encroach upon traditional judicial powers. Appellate waivers undermine the role of appellate courts to review sentences for fairness and consistency, which is especially important given the lack of transparency in closed-door plea negotiations in general. With such waivers, it is almost impossible to challenge differential treatment in the types of deals that similarly-situated defendants receive.
Moreover, certain rights should be beyond bargaining. A defendant cannot bargain away his right to counsel or his right to a jury trial, so too he should not be able to bargain away his right to appeal. Such waivers may result in judicial efficiency in the short term, but they perpetuate an unequal and unbalanced playing field in the long run.
If more judges emulate Judge Kane and reject prosecutors’ unfair tactics, prosecutors may get the hint and stop using tactics such as this one.
In electing to testify in his own defense at his federal criminal trial for insider trading, hedge fund operator Doug Whitman made a decision that no other defendants in similar recent prosecutions had chosen. He was still convicted on all counts by a jury, just as were the other defendants who did not take the stand in similar cases.
Whitman operated Whitman Capital, a hedge fund based in Menlo Park, Calif., with about $100 million in assets under management. Prosecutors in the Southern District of New York alleged that Whitman made about $1 million for the hedge fund based on tips from insiders at various technology companies, including Polycom, Marvell Technology Group, and Google.
Whitman was found guilty of two counts of securities fraud and two counts of conspiracy to commit securities fraud. He faces a maximum of 20 years in prison for each charge and sentencing is schedule for December 20.
Five years ago, the Federal Bureau of Investigation launched an initiative known as “Operation Perfect Hedge,” aimed at prosecuting insider trading. The initiative has led to over 65 convictions over the past three years in cases brought by federal prosecutors in New York City. All eight defendants who have taken their cases to trial have been convicted by juries.
Among those convicted was Raj Rajaratnam, a fund manager for Galleon Group LLC, who was found guilty by a jury last year of 14 counts of conspiracy and securities fraud and sentenced to 11 years in prison.
The defense used by Whitman was that all trades that he made were in good faith and were backed by legitimate research. It is a defense similar to the one used by Rajaratnam, though Rajaratnam elected not to testify.
Whitman’s trial was unique because he was the first defendant prosecuted for insider trading who chose to testify in his own defense. Whitman testified that he never intentionally traded on improper information. He contended that his trades were based on research that he did on the companies and were not based on any illegal information. Whitman testified that he did not think that any of his sources possessed secret information.
The government presented three witnesses who had all pleaded guilty to passing illegal information on to traders and agreed to testify in an effort to secure a more lenient sentence. Whitman testified that the three witnesses had falsely implicated him out of their own self-interest. The government also presented secretly recorded telephone conversations that prosecutors alleged proved that Whitman possessed confidential information.
The jury deliberated less than a day before deciding that Whitman was guilty. Some observers suggest that the quick deliberation suggests that the jury gave little credence to Whitman’s testimony.
Ultimately, Whitman was convicted just as other defendants who were charged with similar crimes who did not testify. Defense lawyers know that putting their client on the stand presents significant risks, but they also know that this tactic may also provide an opportunity to show the jury that the defendant did not possess the culpable mental state. We will see whether in the future more defendants charged in insider trading cases elect to testify.
The U.S. Securities and Exchange Commission has charged an executive at Bristol-Myers Squibb with insider trading, citing his Internet searches as support that he tried to cover up his illegal acts.
As a high-level executive in the treasury department at Bristol-Myers Squibb, Robert D. Ramnarine helped the company target, evaluate, and acquire other pharmaceutical companies. The SEC’s complaint, filed in U.S. District Court in New Jersey, alleges that Ramnarine used non-public information obtained in his professional capacity to buy and sell shares in the targeted pharmaceutical companies. According to the complaint, “Ramnarine traded in options of common stock of the soon to be acquired company. After the public announcement of each acquisition agreement, the price of the securities bought by Ramnarine went up and he sold at a profit.” These trades resulted in allegedly ill-gotten gains of at least $311,361.
In addition, Ramnarine was arrested and charged with three counts of securities fraud, each with a maximum sentence of 20 years in prison. He was released on a $250,000 bond.
This case is getting widespread attention not because of the nature of the crime or the amount of money involved, but because of the almost humorously transparent search terms that the SEC alleges Ramnarine entered into search engines regarding his activities, including “can stock option be traced to purchase inside trading,” “insider trading options trace illegal,” and “insider trading options.” According to the complaint, Ramnarine performed these searches the day before buying stock options in one of Bristol-Myers Squibb’s target companies.
Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit, explained these searches by saying, “Ramnarine tried to educate himself about how the SEC investigates insider trading so he could avoid detection, but apparently he ignored countless successful SEC enforcement actions against similarly ill-motivated individuals who paid a heavy price for their illegal trading.”
While we cannot jump to conclusions about why Ramnarine performed these searches, the timing in proximity to the trades is certainly suspect and will leave him with some explaining to do at trial. Ramnarine may not be the first person with an embarrassing search history, but he’s a reminder that it can come to light at any time. With that in mind, for the next time you’re researching a sensitive topic, here’s a link to encrypted Google to use on a public computer.
The U.S. Department of Justice’s recent boasts about rigorous enforcement of the securities laws ran into a significant obstacle this month when a federal judge in Washington, D.C., dismissed part of a $50 million securities fraud case and accused DOJ prosecutors of overreaching. In an increasingly global economy, the case is a good measure of the limits on the ability of the United States government to enforce U.S. law against foreign companies.
The case in question, United States v. Singhal et al., involves a company called Xinhua Finance Limited, which was organized under the laws of the Cayman Islands and is based in Shanghai, China, and its wholly owned affiliate, Xinhua Financial Network Limited. That affiliate provided information products about Chinese financial markets, including ratings, news and investor relations.
The indictment in the case charged three people, Shelly Singhal, Loretta Bush and Dennis Pelino, with participating in a scheme to defraud the U.S. Securities and Exchange Commission through a series of undisclosed and disguised related-party transactions and insider trading that generated proceeds exceeding $50 million. The indictment reads like a typical U.S. securities fraud case except for one thing: It does not expressly charge any violations of U.S. securities laws, including failure to report related-party transactions or insider trading. Rather, the indictment charges these individuals with mail fraud, in violation of 18 U.S.C. §§ 2 and 1341, and false statements, in violation of 18 U.S.C. §§ 2 and 1001 – a choice of charges that was undoubtedly driven by the foreign status of the company in question.
In considering motions to dismiss the false statement counts of the indictment, Chief Judge Royce Lamberth observed that the false statement statute encompasses two kinds of misconduct – affirmative misstatements and concealment.
After finding that the indictment only included allegations of concealment, Chief Judge Lamberth then noted that criminal liability for concealment under the false statement statute exists only if there is a duty to disclose. The court then noted the absence of any duty to disclose that applied to this foreign company under U.S. law. While SEC regulations require that foreign companies disclose to the SEC certain information required to be disclosed to foreign regulators, the Court noted the absence of any allegation in the indictment that foreign law imposed an obligation to disclose the particular information that formed the basis for the false statement charges in this indictment. Given the absence of a duty to disclose, the court dismissed the false statement counts of the indictment.
It is not clear from the court’s opinion whether the government may be able to resurrect the false statement charges by alleging more clearly the existence of a duty to disclose under foreign law that would trigger a concomitant duty for disclosure to U.S. authorities in this case. Certainly, the decision must be viewed as a caution for enforcement authorities about the boundaries of extraterritorial application of U.S. law. There is no question that U.S. enforcement can reach many foreign companies and transactions, but that power has its limits.
Jeff Ifrah Quoted on Historic Online Poker Deal in Wall Street Journal, USA Today, MSNBC, Other Venues
After the $731 milliion deal to resolve federal civil charges against Full Tilt Poker and Poker Stars was announced on July 31, 2012, Ifrah Law founding partner Jeff Ifrah was quoted on the subject in a wide variety of newspapers, magazines, and other sources. Here is a sampling of them.