SEC v. Obus:
A Case Study on Taking the Government to Trial and
Winning
Presentation By: Joel M. Cohen & Mary Kay Dunning
July 22, 2014
SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
One of the Longest Insider Trading Cases in SEC History
• SEC pursued case from 2002 through 2014
• Brought charges against:
• Nelson Obus
• Peter Black
• Brad Strickland
• Wynnefield Funds (as Relief Defendants)
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
SEC Strategy Revealed
• Investigation Tactics
• Wells and Charging Process
• Use of and Response to Media Scrutiny
• Reaction to Congressional Oversight
• Strategy of Investigating with Eye Toward Settlement
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Recommended Defense Strategies
• Develop Offensive Themes
• Build Full Factual Record
• Anticipate and Neutralize Expected Juror Bias
• Prepare for Use of SEC Investigative Testimony
• Anticipate and Counter SEC Trial Tactics
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SEC v. Obus – Trial Highlights
CASE BACKGROUND– THE ALLEGATIONS
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Penalties Sought by SEC
• Injunctive Relief
• Disgorgement
• Civil Monetary Penalties
• Order Prohibiting Each Defendant from Acting as an
Officer or Director of Any Issuer of Securities
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
TIMELINE OF CASE
• 2002 – 2004: SEC Conducts Investigation
• May 2004: Defendants Make Wells Submissions to SEC
• April 25, 2006: SEC Sues Defendants
• Early 2007: Defendants Lose Motion to Dismiss; Discovery Ensues
• July 2009: Defendants Move for Summary Judgment
• Sept. 2010: Judge Daniels Grants Summary Judgment for Defendants; SEC Appeals
Ruling to Second Circuit
• Sept. 2012: Second Circuit Reverses and Remands Case to Judge Daniels
• Jan. – May 2014: Defendants Prepare for Trial
• May 2014: Trial (and Victory!)
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Case Background
“He took off his dark blue tie and
put on a bright red ‘victory tie.’”
Matt Levine, Levine on Wall Street: Victory Ties and Soccer
Betting, Bloomberg View, Jun. 2, 2014.
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Classical Theory of Insider Trading
Corporate
Insider /
Temporary
Insider
Unlawful Tip
Tippee
Trade
Chiarella v. United States, 445 U.S. 222
(1980)
Dirks v. SEC, 463 U.S. 646 (1983)
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Misappropriation Theory of Insider Trading
Source of
MNPI
Corporate
Outsider
Unlawful Tip
Tippee
United States v. O’Hagan, 521 U.S. 642 (1997)
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Evolution of SEC’s Theory of Liability: A Moving Target
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
SEC Investigative Stage
• Opening an Investigation
• Debevoise Parallel Investigation
• SEC Is Entitled to One-Sided Discovery
• Document Requests: Produce to Defend
• Testimony Under Subpoena
• Wells Submissions
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
SEC Investigative Stage – Opening an Investigation
• Investigations can be formal investigations initiated by the Commission, or
informal investigations initiated by staff of Enforcement Division
• Triggers:
• Market surveillance activities;
• Review of SEC filings;
• Inspections & examinations by Office of Compliance Inspections and Examinations
(“OCIE”), including industry “sweeps”
• Referrals from other Commission offices or government agencies and from selfregulatory organizations (“SROs”), such as FINRA or NYSE
• Media stories
• Investor complaints
• Whistleblower
•
SunSource investigation arose from referral of suspicious trading activity
from NASD
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
SEC Investigative Stage – Debevoise Parallel Investigation
• GE Capital hired Debevoise to conduct internal investigation
into the conduct of its employees related to the SunSourceAllied acquisition
• Overseen by Mary Jo White
• Directly managed by Lorin Reisner
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
SEC Investigative Stage – Debevoise Parallel Investigation
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
SEC Investigative Stage – One-Sided “Discovery”
• Discovery in an SEC investigation vs. discovery in civil litigation
•
SEC’s broad subpoena power
•
One-sided nature of discovery
•
SEC can gather documents and take testimony without having to turn
any of that evidence over to the investigated party unless and until a
complaint is filed against that party
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SEC Investigative Stage: Document Requests – Produce to Defend
The SunSource Research File
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
SEC Investigative Stage – Testimony Under Subpoena
SEC “OTR” Investigative Testimony – What Is It?
• Dangerous hybrid between recorded deposition testimony and law
enforcement interrogation
• Protections afforded to a defendant in a deposition taken pursuant to the
Federal Rules of Civil Procedure are absent during OTR testimony
• The SEC controls the record
• There is no time limit
• Defense counsel is not permitted to object
• The witness is not permitted to submit errata after reviewing the transcript; the SEC can
even deny a request for the transcript for “good cause”
• Can be very hostile and aggressive
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
SEC Investigative Stage – Testimony Under Subpoena
“You saw Mr. Obus change his story during trial. Was he
happy? Was he unhappy? Was he happy then unhappy? I'm not
saying that's a critical, critical issue, but it's indicative of the way
the stories have changed and the way their stories aren't credible.
You have seen [the defendants] claim on the stand today to
recall details of calls and events that happened 13 years [ago],
and claim to recall those events and details 13 years ago when
they didn't recall them at all in 2001 and 2002.”
Trial Tr. 1696:18 – 1697:1.
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
SEC Investigative Stage – Wells Submissions
• Use of Wells submissions in SEC v. Obus
• Opportunity to develop affirmative arguments and present the SEC
with a compelling theory of the case.
• Opportunity to persuade the SEC to decline enforcement, drop certain
charges, or offer a favorable settlement.
• Balancing benefits against inherent risks
• SEC often treats Wells submissions as party admissions
• May be discoverable by private litigants
– See In re Initial Public Offering Sec. Litig., 21 MC 92 (SAS) (S.D.N.Y. Dec. 24,
2003); In re Steinhardt Partners, L.P., 9 F.3d 230, 234-35 (2d Cir. 1993); but see
Securities Act Release No. 44,969 (Oct. 23, 2001).
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
SEC Investigative Stage – Greenlight Capital
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
SEC Investigative Stage – Greenlight Capital
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Erroneous Settlement Announcement
“In a settled insider trading action against a hedge
fund I mentioned earlier today, the fund manager
allegedly directed the purchase of shares in a merger
target after receiving a tip from an insider through an
intermediary, realizing illegal profits of over $1.3
million.”
‒ Linda Chatman Thomsen, Director, Division of Enforcement,
September 26, 2006 Testimony Concerning Insider Trading
Before the U.S. Senate Committee on the Judiciary.
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Erroneous Settlement Announcement – Demand for Retraction
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Erroneous Settlement Announcement – Retracted
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Litigation Discovery
The same offensive strategies used during SEC investigations should be
carried forward into civil discovery
• Continue to develop offensive narrative
• Take a broad view of potential sources of evidence
• Develop evidence through both document requests and third-party
depositions
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Litigation Discovery: Importance of Videotaped Depositions
Maurice Andrien – Trial Testimony
Q. Okay. Sir, you have problems remembering things, correct?
A. No, sir. Some things, yes; some things, no. This has been 14 years
ago. Some things I remember quite clearly and some things I don't. They
weren't particularly important.
Q. Your wife has told you that medications you take effect your memory?
A. I said that in my deposition tongue in cheek. You asked me a question,
whether the medication I take effects my memory, and I said -- I said my
wife thinks it does, but no one else, is what I answered you. So I was just
sort of joking.
Trial Tr. 469:9-18.
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Litigation Discovery: Importance of Videotaped Depositions
Deposition Testimony – Maurice Andrien
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Motions in Limine
• Defendants prevented the SEC from presenting testimony from five
witnesses, and evidence to support three irrelevant and prejudicial
arguments.
• SEC’s motions revealed that it was on the defensive, arguing to the judge
that they needed evidence that was ultimately precluded in order to
“answer,” “rebut,” or “defend against” the Defendants’ arguments.
• SEC also revealed how self-conscious it was about its own case – moving
to exclude evidence and arguments that were nowhere present in the case.
• We made clear that we would focus on the age of the case, the fact that the
evidence was 13 years old, and that we would present facts about the
Defendants’ backgrounds and character.
• Even though the Staff said they would not do it, the SEC attacked the
Defendants as liars throughout the trial, and especially during its closing
argument.
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Jury Testing
• Tested both SEC and Defense Theories in 2-Day Mock Trial Exercise
• 3 Different Panels of Jurors then Deliberated
• Panel 1: Unanimous for Defendants
• Panel 2: Unanimous for Defendants
• Panel 3: Hung Jury (8 jurors found in favor of the Defendants; 4 jurors found in favor of
the SEC)
• Developed Juror Profiles Based on Results and Analysis of Jury Testing
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Jury Selection
Selection Process
• Requirement for civil trials – at least 6 and no more than 12 jurors (Fed. R. Civ. P. 48)
• Verdict must be unanimous (Fed. R. Civ. P. 48)
Our Jury
• SEC’s use of preemptory strikes
• Revealed strategy to remove sophisticated people
• Our use of preemptory strikes
• Strategy to keep the “haves,” remove the “have nots”
• Ultimately, we were left with a jury of 5 men and 5 women
• From a wide range of backgrounds (e.g., a graphic designer, a musician, a bartender,
a psycho-historian)
SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Jury Selection – Juries Can Have an Open Mind
Trial Tr. 98:13-25 (Opening -- J. Cohen)
Trial Tr. 1641:6-17 (Summation – J. Cohen)
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Jury Selection – Juries Can Have an Open Mind
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Aggressive SEC Trial Tactics to Deal with Circumstantial Evidence
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Aggressive SEC Trial Tactics – Use of Personal Emails
• “Later Douchey!”
• “Later d-bag!”
• “I need someone else to set the July Cristal speed drinking record with me.”
• “If the weather is nice you could take her to a place w/ a nice garden. like Raoul's or
something like that. If there is ever any uncomfortable silence ... talk about balls!”
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Aggressive SEC Trial Tactics – Use of Investigative Testimony
“The SEC makes much of minor differences
in recollection; whether Mr. Black stood up
or jumped up to get Mr. Obus’s attention
during the phone call, whether the divider in
Wynnefield Capital’s office was two feet high
or three feet high; whether Baron Bruno said
buying large blocks of stock was
Wynnefield’s MO, modus operandi. . . . That
Mr. Obus told you that he was happy to get
$1.3 million but not happy with the overall
deal.”
Trial Tr. 1631:2-10 (Summation – J. Cohen)
“You saw Mr. Obus change his story during
trial. Was he happy? Was he unhappy? Was
he happy then happy? I’m not saying that’s a
critical, critical issue, but it’s indicative of the
way the stories have changed and the way their
stories aren’t credible.
You have seen a claim on the stand today to
recall details of calls and events that happened
13 years [ago] . . . when they didn’t recall them
at all in 2001 and 2002. You have seen them
change their stories on minor points, like the
height of the partition in their offices, two feet,
was it four feet, again, minor point but they
have changed their stor[ies] . . . .”
Trial Tr. 1696:18-1697:4 (Summation – SEC)
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Aggressive SEC Trial Tactics – Closing Arguments
• Third party witnesses, like Andrien and Russell, weren’t “trying to do us [the SEC] any favors.”
Tr. 1666:11-12.
• “Now the SEC, we're not here to call people names, I'm not here to tell you that Strickland is a
liar or tell you Black is a liar or tell you Obus is a liar. I'm certainly not here to tell you they're
bad people, that they don't have good things and don't do good things and they're not good people.
But I am here to tell you that they have not told the truth in this case. The evidence has
shown that they have not told the truth in this case.” Tr. 1695:19 – 1696:1.
• The integrity of the stock market is at stake in this case, where “hard-working people save
for their retirement and save for their kids’ college and save for a rainy day.” Tr. 1698:7-9.
• SEC to Jury: “Tell [the Defendants] that even though [they] may have more money than most
people and be more sophisticated than most people and be able to get the CEO of a company on
the phone at a drop of a hat, they still have to follow the same rules as everybody else.”
Tr. 1698:7-9.
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Legacy of SEC v. Obus Decision
• Tippee Liability – Personal Benefit Test
• The term “personal benefit” has a “broad definition,” and the SEC’s burden of proof as to the
“personal benefit” element is “not a high one.” SEC v. Obus, 693 F.3d 276, 289 (2d Cir. 2012).
• The Second Circuit in Obus made no mention of any requirement that a tippee have knowledge of a
personal benefit to the tipper.
• United States v. Newman & United States v. Whitman
• In United States v. Whitman, Judge Rakoff held that, in order to be liable, a tippee must know that the
tipper received some type of personal benefit. 904 F. Supp. 2d 363, 370 (S.D.N.Y. 2012).
• In contrast, the court in United States v. Newman reached the opposite conclusion. There, Judge
Sullivan interpreted Obus as “mak[ing] clear that the tipper’s breach of fiduciary duty and receipt of a
personal benefit are separate elements and that the tippee need know only of the former.” No. 12 Cr.
121 (RJS) (S.D.N.Y. May 7, 2013).
• United States v. Rengan Rajaratnam
• On July 1st, Judge Buchwald dismissed two of the government’s three counts on the ground that a
reasonable jury could not find that Rajaratnam had knowledge that the tipper received a personal
benefit.
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
SEC’s Anticipated Use of Administrative Proceedings in the Future
• “I do think we will bring insider-trading cases as administrative
proceedings in appropriate cases. . . . We have in the past. It has been
pretty rare. I think there will be more going forward.”
– Andrew Ceresney, Director, SEC Division of Enforcement, June 11, 2014
• “The Securities and Exchange Commission today announced that two new
judges and three new attorneys will join the Office of Administrative Law
Judges this summer.”
– June 30, 2014 SEC Press Release: “SEC Announces New Hires in the Office of
Administrative Law Judges.”
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
SEC’s Anticipated Use of Administrative Proceedings in the Future
• SEC’s Home Court Advantage in Administrative Proceedings
• Tried by Administrative Law Judge, not a jury
• Accelerated Deadlines
• Limited Discovery Rules
• Lenient Evidentiary Rules
•
SEC General Counsel Anne K. Small recently acknowledged that the
rules governing SEC administrative proceedings may well be out of date
and in need of revision.
– Q&A Session with members of District of Columbia Bar, June 17, 2014.
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Conclusion: Proven Defense Strategies
• Develop Offensive Themes
• Build Full Factual Record
• Anticipate and Neutralize Expected Juror Bias
• Prepare for Use of SEC Investigative Testimony
• Anticipate and Counter SEC Trial Tactics
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Q&A
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
Panelists
Joel M. Cohen
Mary Kay Dunning
Joel M. Cohen, a partner in the New York office of Gibson, Dunn & Crutcher is a trial lawyer and former federal
prosecutor. From 1992 to 1999, he served as Assistant United States Attorney in the Eastern District of New York,
supervising the Business/Securities Fraud Unit, where he received numerous awards from the Department of Justice
and law enforcement agencies. Mr. Cohen has led or participated in 24 civil and criminal trials in federal and state
courts. He is equally comfortable leading confidential investigations, managing crises, or advocating in court
proceedings. His experience includes all aspects of FCPA/anticorruption issues, insider trading, securities and financial
institution litigation, class actions, sanctions, money laundering and asset recovery, with a particular focus on
international disputes and discovery. While in government service, he was the prosecutor of the so-called "Wolf of
Wall Street," was the first U.S. Legal Advisor to the French Ministry to Justice and was an advisor to the OECD in
connection with its anti-corruption convention.
Mary Kay Dunning, an associate in the New York office of Gibson, Dunn & Crutcher is a member of the Firm's
Litigation Practice. Ms. Dunning's practice includes securities and complex commercial litigation, white collar
defense and investigations, and global anti-corruption matters. She has represented financial institutions and
individuals in insider trading investigations and regularly counsels clients regarding compliance with the
securities laws. Her practice also includes representing multinational companies in government and internal
investigations pursuant to the U.S. Foreign Corrupt Practices Act, and she assists clients in drafting FCPA policies
and strengthening their anti-bribery compliance programs. Ms. Dunning also has experience in counseling boards
of directors of public companies on corporate governance issues, and she has worked on teams that have
conducted confidential investigations for boards of directors and privately held companies.
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SEC v. Obus: A Case Study On Taking The Government To Trial And Winning
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