NEW JERSEY– September 28, 2018 – Today, a team of white collar attorneys at global law firm Greenberg Traurig, LLP received a favorable outcome when the U.S. District Court for the District of New Jersey granted its motion to dismiss claims of insider trading against multiple unnamed clients and ordered the Securities and Exchange Commission to explain why the accounts shouldn't be unfrozen. [Case 2:17-cv-01287-CCC-MF UNITED STATES SECURITIES AND EXCHANGE COMMISSION v. ONE OR MORE UNKNOWN TRADERS IN THE SECURITIES OF FORTRESS INVESTMENT GROUP, LLC].
The decision, dated September 27, comes after the first amended complaint, filed in April 2017 by the SEC, alleged that the Defendants amassed large positions in an investment management firm’s stock through derivative securities known as contracts for difference. These allow traders to speculate in the movement of an equity security on margin and thus require only a small outlay of cash to take large positions betting on the movement of the underlying security. However, if the underlying security moves in the direction opposite to the position taken by the contract for difference trader, the trader must have sufficient funds to pay the entire amount of the losses on the bet.
The Court agreed with the Greenberg Traurig attorneys’ argument on behalf of their clients that the SEC did not sufficiently allege tippee liability.
The Court ultimately held that, under the heightened pleading standard for claims of fraud, the government failed to allege that Greenberg Traurig’s clients traded on inside information or that they had scienter. The opinion stated, “calling these trades highly suspicious is tantamount to saying that the trades strongly support an inference of insider trading—that is a legal conclusion, not a fact, and it is a conclusion that is not supported by facts alleged in the [first amended complaint].”
The Court also held that the SEC could not satisfy the pleading standard by merely alleging that there was inside information and alleging a “limited pool” of potential tippees because, in fact, the SEC alleged a vast pool of potential tippees without any further detail. Accordingly, the Court held that the complaint should be dismissed because the SEC failed to meet the required pleading standard.
“This is a significant defense win in the financial investment industry because the SEC was being aggressive in pursuing these insider trading claims based merely on suspicious circumstances,” said Daniel P. Filor, a Litigation shareholder in the firm’s New York office. “From what we know, the SEC didn't have evidence that any person gave material, non-public tips to anyone, but the SEC filed a complaint for a temporary injunction freezing investors’ trading accounts. This dismissal impacts the SEC’s ability to ramp up such enforcement activities based on mere suspicious trading activity.”
According to Filor, the SEC utilizes big data culling to pursue the claims.
“They are now looking at billions of lines of trade activity to find large profitable trades in short time periods,” Filor said. “They don't have evidence of any improper trading, but they essentially assume it, and then try to shift the burden to defendants to disprove it. Most defendants just pay to settle instead. In my opinion, that's the new overzealous government prosecuting that our win is beating back.”
In addition to Filor, the Greenberg Traurig, LLP team representing the unnamed traders against the SEC includes Nathan J. Muyskens, a Litigation shareholder in the firm’s Washington, D.C. office. Filor and Muyskens were assisted by Of Counsel Eric D. Wong and Associate Kedar S. Bhatia.
About Greenberg Traurig: Greenberg Traurig, LLP (GT) has more than 2,000 attorneys in 38 offices in the United States, Latin America, Europe, Asia and the Middle East. GT has been recognized for its philanthropic giving, was named the largest firm in the U.S. by Law360 in 2017, and is among the Top 20 on the 2018 Am Law Global 100. Web: www.gtlaw.com Twitter: @GT_Law.