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.
Full Tilt Poker, PokerStars, and the U.S. Department of Justice announced today that PokerStars will acquire Full Tilt Poker’s assets in a transaction that ends the DOJ’s civil forfeiture case against Full Tilt. Both Full Tilt and PokerStars ran online poker sites in the U.S., and in 2011 the DOJ charged both of them with violating U.S. anti-gambling laws.
Jeff Ifrah, founding partner of Ifrah Law, was instrumental in negotiating this unusual three-way transaction. The following is a set of questions and answers with Mr. Ifrah about the path-breaking deal:
Question: Would you describe this as a unique case?
Answer: As attorney for Full Tilt, I found this to be the case of a lifetime. I don’t know if John Grisham could have thought this one up. The problem was very complicated and required an understanding of the industry, the players and the U.S. government to help Full Tilt realize the best possible outcome under the circumstances. My firm and Full Tilt had the interests of the players and the future of online poker at heart — we knew that getting the players paid had to be a part of this transaction. A lot of people pulled together to make this a win-win for the players, Full Tilt, and PokerStars, and it was very exciting and gratifying to be involved in.
Question: What is this transaction all about?
Answer: In this transaction, Full Tilt has agreed to forfeit all of its assets to the United States in exchange for a full release from the government’s case against it. As the next step in the transaction, PokerStars will pay the U.S. government $547 million over three years. Part of this payment will be used by the U.S. government to repay former U.S. Full Tilt Poker players
Question: When the U.S. government stepped in and froze the assets of online poker operators on April 15, 2011, many people who were playing poker on the sites lost access to their funds. Will the people who played poker on Full Tilt be paid back as a result of this transaction?
Answer: April 15, 2011 has come to be known as “Black Friday” by online poker players because so many of them lost access to their funds. An integral part of today’s transaction is that Full Tilt’s new owner, PokerStars, will provide enough funds for U.S. players to be repaid in full. However, the funds will be administered and distributed by the Justice Department’s Asset Forfeiture Section in Washington, D.C. It is our hope and belief that Justice will reimburse all players 100% of their funds in the near future.
Question: In addition to the settlement of the government’s case and the repayment of the players, what does this transaction mean for the online poker industry?
Answer: As a major player in the industry, Full Tilt has a great deal of useful software, know-how, and a strong client base. However, many believed that the pending Justice Department case against Full Tilt would taint the assets and make them and the Full Tilt name essentially unusable. Now that the government has taken the assets and sold them to PokerStars, the Full Tilt name will get a new start – to the benefit of all poker players.
Question: Does this mean that PokerStars will now be free to market online poker to U.S. residents?
Answer: Not precisely at this point. In this transaction, neither PokerStars nor the U.S. government is expressing any view on the legality of online poker in the United States. However, as various U.S. states, especially Nevada and New Jersey, move closer to legalization of online poker within their borders, I am hopeful that PokerStars will be able to provide legal online gaming services using the Full Tilt assets that it acquired, among others.
Question: Does this clear up all legal charges pending against the CEO’s of Poker Stars and Full Tilt?
Answer: No, the charges against the heads of both companies will stand, but this deal removes all taint against the assets of Full Tilt.
Michelle Cohen recently joined Ifrah Law as a partner. Here is an edited transcript of a recent interview with Ms. Cohen.
Question: What are some of your legal experiences and strengths that you’d like to highlight?
Answer: I have many years of experience representing clients engaged in various industry sectors before state attorney generals, the FTC and the FCC, particularly in investigations and enforcement matters. I have a deep knowledge of marketing law and have counseled and defended clients in dozens of matters involving the Telephone Consumer Protection Act, the federal Can Spam Act, and state and federal telemarketing laws and regulations. I also sat for and passed the Certified Information Privacy Professional examination administered by the International Association of Privacy Professionals. This demonstrates my broad capabilities in the field of privacy law.
Some recent matters of note include managing a data loss incident for a client that entailed notifications to several state attorney generals’ offices, assisting the client with remediation and public relations management, and reviewing existing data retention policies, as well as a follow-up investigation at the state level. The client was able to move forward without any enforcement activity.
On the Telephone Consumer Protection Act side, I have supervised teams of attorneys in defending class and individual actions and resolved FCC enforcement matters (including without any penalties).
My training as both a litigator and a regulatory/corporate advisor allows me to offer a wide range of services to clients. I take great pride in knowing that my regulatory advice to clients in how to craft their business practices and establish meaningful policies has resulted in these clients avoiding enforcement actions and litigation.
Question: There has been a lot of publicity these days about data breaches that have caused serious harm to a number of retailers, credit card companies, banks, and others. Do you think there has been a real uptick in the number of such breaches, and if so, why has it occurred?
Answer: I think the increased publicity stems more from the growing awareness on the part of companies and the press that there are various types of data breaches and data losses that are covered by federal and state laws and that need to be reported and remediated. Some years back, if a laptop containing sensitive information was stolen from an employee’s car, the company might disable the account and report the theft, but the event did not necessarily trigger potentially thousands of notices to those affected, state attorney generals and consumer protection offices, publicity (via news reports and blogs that cover daily breaches) and possible lawsuits and enforcement activity. Today, that one event can result in all of those actions occurring.
Question: What is your advice to companies that may someday face a data breach?
Answer: A couple of months ago, I wrote an article regarding data breaches. The central point was that no organization should consider itself immune. Rather, a data breach (in the form of a bad actor) or a data loss (for instance, by negligent but unintentional employee action) WILL occur, no matter how many precautions a company takes. The key is to have policies in place regarding data security, to train employees in an effort to prevent negligent actions, and to be prepared for actions that will need to be taken when an event occurs. Organizations should have a team in place (human resources, legal, public relations, etc.) for dealing with these types of problems. Data loss events require swift, but considered action. In particular, some of the state breach laws have deadlines, and companies have found themselves under investigation (or involved in litigation) when their responses to a breach have been too slow or failed to meet the requirements of the law. These legal ramifications, combined with the negative publicity that WILL follow, can often be much worse than the actual data loss event.
Question: Are some companies failing to put the best safety provisions in place?
Answer: Most large companies have incorporated data safety policies; however, many medium size and smaller businesses have not done so. In addition, I think that many companies, both large and small, do not realize the scope and applicability of many of the laws. For example, consider a large company based in Texas, with most of its employees in that state. Its managers may not realize that if the company has three employees in Massachusetts, they are covered by Massachusetts’ data protection law. This statute has very specific requirements, including a requirement for a Massachusetts-specific information security plan. Let’s say the Texas company has a data loss and has to notify the Massachusetts employees and the Massachusetts Attorney General’s office along with all of its other employees. The company may get a follow-up inquiry from the Massachusetts AG asking for a copy of that company’s Massachusetts-compliant written information security policy. If the company does not have one, because it never realized it fell within that state’s law, it may find itself in some hot water there.
Accordingly, all organizations need to be proactive in their data security planning and must provide continuing updates to their policies, training, and understanding of what federal, state, and international laws may apply to their operations.
A current anti-piracy case demonstrates the U.S. government’s intent to enforce its copyright laws not just beyond national borders, but beyond the extent of logic. The U.S. Department of Justice has issued an arrest warrant and extradition order for a 24-year-old college student in England who ran a website that contained links to independent websites that hosted pirated television shows and movies. By holding a mere intermediary accountable for allegedly pirated content offered on other websites, the department has set an alarming precedent with major free speech implications.
Richard O’Dwyer, who has never left the United Kingdom, is at the center of a heated debate regarding U.S. laws related to copyright, free speech, and jurisdiction. O’Dwyer ‘s website, TvShack.net, is registered in the United States, thereby giving the U.S. government a claim to exert jurisdiction over it and its owner even though the servers hosting the website are not U.S.-based. The website allowed users to search for and link to other websites; the government alleges that some of those links led to pirated movies and television shows. The government seized the domain on June 30, 2010, for “violations of federal criminal copyright infringement laws.” O’Dwyer has been charged with conspiracy to commit copyright infringement and criminal infringement of copyright.
The government’s case against O’Dwyer raises a number of important issues. First, O’Dwyer himself did not host the allegedly infringing material. His website allowed users to run searches that returned links to both legal and allegedly illegal content on external websites. If O’Dwyer can be criminally prosecuted for the dissemination of copyrighted content that he did not host, where would the chain of liability for such content end? Would search engines linking to such websites bear responsibility for their content? Would anyone sending a link to that website face criminal prosecution, even someone who actually download or view the content? There is no telling how far the DOJ intends to push this issue, but O’Dwyer’s case is a good indication that the DOJ seeks to extend the limits as far as the courts will allow.
O’Dwyer’s status as a British subject raises less novel but no less compelling questions about the United States’ jurisdiction to extradite and prosecute individuals on copyright infringement charges. O’Dwyer’s extradition has been approved by the British courts as well as the British home secretary, but many still believe that any trial should take place in Britain since O’Dwyer has never set foot in the United States and the servers hosting the website were also not on our shores.
O’Dwyer is currently appealing the extradition. Last month, Wikipedia founder Jimmy Wales, in a rare political intervention, called upon British Home Secretary Theresa May to stop the extradition efforts.
The circumstances of this case are reminiscent of the high-profile Megaupload case, in which the U.S. government issued an extradition order for Kim Dotcom in New Zealand. Dotcom ran an internet “lockbox,” in which users could upload content, including video and music, to a website and then share access with other users. Factually, these cases differ in that Megaupload hosted the content that was uploaded by users, whereas O’Dwyer only provided links to other websites. New Zealand also appears less willing to approve extradition, having pushed a hearing on the matter to March 2013, while Dotcom remains free on bail.
In instances of intermediary liability, the need to protect copyrighted works is outweighed by an individual’s interest in remaining free from criminal prosecution for the acts of another. The remedy, if one is justified, is better addressed through civil penalties rather than criminal prosecution.
On July 2, 2012, the U.S. Court of Appeals for the 11th Circuit tackled an interesting question of statutory interpretation that centered on the precise usage by Congress of the word “knowingly” in a federal criminal law that prohibits luring people under 18 years old into prostitution.
In United States v. Daniels, the appeals court was reviewing the conviction of Robert Daniels, a pimp who had induced a 14-year-old girl to become a prostitute. One of Daniels’ arguments was that he didn’t know the girl was under 18 and thus could not be convicted under the wording of the statute.
The statute provides that anyone who “knowingly persuades, induces, entices, or coerces any individual who has not attained the age of 18 years, to engage in prostitution or any sexual activity for which any person can be charged with a criminal offense” can be convicted of a federal crime. The question before the court was whether the adverb “knowingly” applies to the age of the person lured into prostitution, or only to the persuading, inducing, enticing or coercing. In other words, in order for someone to be guilty of the crime, does he have to know that the prostitute was under age?
The court ruled that in order to sustain a conviction, the prosecution does not have to prove that the perpetrator knew the prostitute was under 18.
The court reasoned that although in general, criminal law applies a presumption that a knowledge requirement “applies to every element in a statute,” it is also the case that laws “concerned with the protection of minors are within a special context, where that presumption is rebutted.” The goal, the court wrote, is to honor “the congressional goal of protecting minors victimized by sexual crimes.”
Delicate issues relating to the meaning of a statute are not limited to questions relating to prostitutes and pimps, of course. In statutes defining white-collar crimes such as fraud or illegal gaming, or setting forth the punishments for such crimes, there are often ambiguous terms or complicated sentence structures.
One thing that we can learn from the Daniels opinion in the 11th Circuit is that appeals courts don’t always follow strict rules of interpretation based on the placement of an adverb or of a comma. They often look at the broad purpose of the statute and the goals that Congress sought to achieve in passing it and creating the crime. It will be interesting to see how the Daniels opinion and similar cases will be applied in the white-collar context.
Delaware is now poised to become the second state to legalize online gaming. On Wednesday, that state’s Senate passed a bill that would legalize web table games, including poker, video lottery games, and traditional lottery games to be offered online.
Democratic Governor Jack Markell supports the bill and is expected to sign it into law soon. Earlier in the month the bill passed the state’s house of representatives by a 29-8 vote.
The bill, known as the Delaware Gaming Competitiveness Act of 2012, would authorize the state lottery and the three racetrack casinos it regulates to offer various form of Internet gambling, including poker. The bill would also authorize NFL parlay betting and keno. Games likely would not be live until early 2013.
After the bill is signed into law, Delaware will become the second U.S. state, after Nevada, to legalize online gaming. Nevada recently issued its first licenses authorizing companies in the state to offer online poker.
After the Department of Justice issued a legal opinion last December that purely intrastate online gaming did not violate the Wire Act, several states have explored legalizing online gaming to generate revenue and create jobs. The Delaware bill was motivated in part by efforts to retain jobs at the state’s racetrack casinos and to generate revenue for the state. The State Department of Finance projects that the bill would generate $7.75 million in new state revenues.
The small population of Delaware makes it unclear if there will be enough people to support the games. The law allows the state to explore compacts with other states to share gamers. Rhode Island and West Virginia have been mentioned as states that would be interested in such a compact, but those states would need to pass similar legislation to put a compact into effect.
The state lottery will operate the online gambling sites and is required to use verification systems to ensure that gamers are within the state and minors are excluded.
We support Delaware’s efforts to legalize online gaming in the interests of bringing jobs and badly needed revenue to the state. We will see if this leads to other states passing similar laws.
We recently blogged about the recent decision of the U.S. Court of Appeals for the 11th Circuit in Securities and Exchange Commission v. Goble, 2012 WL 1918819 (11th Cir. May 29, 2012). There, we discussed the appeals court’s limitation on the reach of the concept of “securities fraud” under Section 10(b) of the Exchange Act and Rule 10b(5).
Another aspect of that case is also quite noteworthy and may have an impact on many corners of white-collar criminal law. In the Goble case, the court vacated an injunction that simply tracked the language of the securities laws in defining what the defendant was barred from doing. This kind of injunction is often termed an “obey-the-law” injunction.
The court wrote: “Goble correctly identifies these paragraphs as an “obey-the-law” injunction and is rightly skeptical of their validity. As the name implies, an obey-the-law injunction does little more than order the defendant to obey the law. We have repeatedly questioned the enforceability of obey-the-law injunctions not only in the context of securities cases but other cases as well.”
The appeals court pointed out that any federal court injunction must comply with the requirements of Rule 65 of the Federal Rules of Civil Procedure:
“Glaringly absent from the SEC’s brief is any discussion explaining why the district court’s injunction complied with the requirements of Rule 65. Rule 65(d)(1) states that ‘Every order granting an injunction and every restraining order must: (A) state the reasons why it issued; (B) state its terms specifically; and (C) describe in reasonable detail — and not by referring to the complaint or other document—the act or acts restrained or required.’ Fed. R. Civ. P. 65(d)(1). We have never said that a court may simply ignore these requirements because it is entering an injunction in a securities case.”
The key issue that the appeals court pointed out is that an injunction requires a certain amount of specificity, so that the defendant is fully on notice about what he can or cannot do under the order.
“Plainly,” the court wrote, “Goble would need to look beyond the four corners of the district court’s injunction in order to comply with its strictures. The mere cross-reference to provisions of the United States Code and Code of Federal Regulations does not specifically describe the acts addressed by the injunction. And, without a compendious knowledge of the codes, Goble has no way of understanding his obligations under the injunction.”
This decision may open up new lines of argument for defendants in white-collar cases, and not only in securities actions. Since broad injunctions that do little more than track a statutory prohibition can be subject to challenge, defense attorneys may be able to argue convincingly that an injunction should be more specific and more narrowly tailored to a defendant’s past conduct.
On June 20, 2012, President Barack Obama escalated a battle with the GOP-controlled House of Representatives by claiming executive privilege for 1300 executive-branch documents that relate to the White House and the Justice Department’s response to subpoenas about the botched Fast and Furious gun-trafficking operation.
The House Oversight and Government Reform Committee, chaired by Rep. Darrell Issa (R-Calif.) then voted immediately along party lines to approve a contempt of Congress finding against Attorney General Eric Holder Jr. That recommendation is expected to go to the full House next week.
The committee asserts that it needs the documents in its investigation of Fast and Furious and of a possible executive-branch cover-up of that operation. The White House replies that handing over the documents would hamper the ability of government officials to discuss policy matters frankly and without fear that their deliberations would become public.
Confrontations between the President and Congress over documents and over claims of executive privilege are not new. In fact, executive privilege has been claimed by every president since President John F. Kennedy, and the roots of the doctrine go back to actions by President George Washington in 1792.
The privilege to withhold documents from a congressional committee is not found in the Constitution. It is, however, based on the constitutional principle of separation of powers, which provides that the three branches operate independently of each other. Although the Supreme Court rejected the application of executive privilege in 1974 when President Richard Nixon claimed it in relation to a criminal subpoena for Watergate tapes, there is no question that the privilege exists and can be properly claimed under some circumstances.
The problem is that Obama and Holder are claiming the privilege broadly, for all 1300 pages of documents, without specifying why each document or group of documents is privileged.
As Todd Gaziano, a former attorney in the Justice Department’s Office of Legal Counsel, which advises on executive privilege, wrote in the Heritage Foundation’s blog:
Even if properly involved, the Supreme Court has made clear that executive privilege is not absolute. DOJ must provide an explanation why all those documents fit one of the recognized categories of executive privilege. It is questionable whether they all are legitimately subject to executive privilege, for several reasons. First, the Supreme Court in United States v. Nixon (1974) held that executive privilege cannot be invoked at all if the purpose is to shield wrongdoing. . . . Congress needs to get to the bottom of that question to prevent an illegal invocation of executive privilege and further abuses of power. That will require an index of the withheld documents and an explanation of why each of them is covered by executive privilege—and more. Second, even the “deliberative process” species of executive privilege, which is reasonably broad, does not shield the ultimate decisions from congressional inquiry. Congress is entitled to at least some documents and other information that indicate who the ultimate decision maker was for this disastrous program and why these decisions were made.
At the very least, the Administration owes Congress and the American people a better explanation of what it is doing and why.
Yet another shoe has dropped in the long-running investigation and the series of prosecutions arising from allegations of insider trading in the stocks of Goldman Sachs and other companies. In May 2011, Raj Rajaratnam was convicted of insider trading and ultimately sentenced to 11 years in prison. On June 15, 2012, Rajat Gupta, a former director at Goldman Sachs, was convicted in the U.S. District Court for the Southern District of New York on four of six counts of an indictment that charged him with a conspiracy that included feeding inside tips to Rajaratnam in September and October 2008 about developments at Goldman Sachs.
As with the trial of Rajaratnam, the key pieces of evidence against Gupta appear to have been wiretapped conversations. The four charges on which Gupta was convicted all related to trades in support of which the government presented recorded conversations as evidence (though the government played only three recordings in the Gupta trial). The jury acquitted Gupta of two charges arising from other trades for which the government presented no such evidence. The jury clearly was influenced by hearing Rajaratnam on the recordings referring to his source on the Goldman Sachs board – powerful evidence that gave increased persuasive power to the government’s reliance on phone records showing substantial contacts between the two men.
Rajaratnam has appealed his conviction to the U.S. Court of Appeals for the Second Circuit, and one significant issue he has raised is whether the government improperly sought authority to wiretap the conversations that were the cornerstone of his conviction. That ruling will be very significant, both because a decision in Rajaratnam’s favor is likely to result in a reversal of Gupta’s conviction as well, and because the Second Circuit’s ruling may have a major impact on the future ability of prosecutors to continue to use wiretaps against white-collar targets.
While Gupta is likely to receive a prison sentence for his conviction, it seems likely that he will receive a lower sentence that Rajaratnam, who engaged in the trades in question and reaped the benefits of those trades – estimated at trial to have generated $16 million in gains or in avoided losses from Rajaratnam’s fund. While prosecutors may seek a higher sentence based on acquitted conduct, Gupta’s advisory range calculated under the U.S. Sentencing Guidelines may be as much as eight years in prison. There is also a significant question whether Judge Jed Rakoff, who has expressed frustration with what he calls “the guidelines’ fetish with abstract arithmetic,” will sentence Gupta to a shorter term than the one calculated under the Guidelines.