Latest / Bloomberg Law / Judge Tosses Cases Against Comey and James & Insider Trading Ring

Transcript

Judge Tosses Cases Against Comey and James & Insider Trading Ring · Bloomberg Law

0:02
Speaker 1: This is Bloomberg Law with June Grossel from Bloomberg Radio.
0:09
Speaker 2: I'm grateful that the court ended the case against me,
0:11
Speaker 2: which was a prosecution based on malevolence and incompetence, and
0:16
Speaker 2: a reflection of what the Department of Justice has become
0:19
Speaker 2: under Donald Trump, which is heartbreaking. But I was also
0:22
Speaker 2: inspired by the example of the career people who refuse
0:26
Speaker 2: to be part of this travesty. I know that Donald
0:30
Speaker 2: Trump will probably come after me again, and my attitude
0:33
Speaker 2: is going to be the same. I'm innocent, i am
0:36
Speaker 2: not afraid, and I believe in an independent federal judiciary.
0:41
Speaker 3: Former FBI Director James call Me took a victory lap
0:44
Speaker 3: of sorts after a federal judge throughout the criminal charges
0:49
Speaker 3: against him and New York Attorney General Letitia James, ruling
0:53
Speaker 3: that the prosecutor who brought the cases had been illegally appointed.
0:58
Speaker 3: Lindsay Halligan was abruptly installed as the US Attorney for
1:02
Speaker 3: the Eastern District of Virginia in September after her predecessor
1:07
Speaker 3: resigned under pressure to bring charges against Comy and James.
1:11
Speaker 3: Federal Judge Cameron McGowan Curry concluded that the attorney General's
1:16
Speaker 3: attempt to install Halligan as interim u S Attorney was invalid.
1:21
Speaker 3: She dismissed the charges against Comy and James without prejudice,
1:25
Speaker 3: meaning that prosecutors may be able to refile the cases.
1:29
Speaker 3: In a statement, James said, I am heartened by today's
1:33
Speaker 3: victory and grateful for the prayers and support I've received
1:36
Speaker 3: from around the country. I remain fearless in the face
1:40
Speaker 3: of these baseless charges as I continue fighting for New
1:43
Speaker 3: Yorkers every single day. The White House says it will
1:46
Speaker 3: appeal the decision. Here's Press Secretary Caroline Leavitt.
1:51
Speaker 4: I know there was a judge who is clearly trying
1:53
Speaker 4: to shield Letitia James and James Comy from receiving accountability,
1:59
Speaker 4: and that's why they this unprecedented action to throw away
2:02
Speaker 4: the indictments against these two individuals. But the Department of
2:06
Speaker 4: Justice will be appealing very soon. And it is our
2:09
Speaker 4: position that Lindsay Halligan is extremely qualified for this position,
2:12
Speaker 4: but more importantly, was legally appointed to it.
2:15
Speaker 3: Joining me is constitutional law Professor David Souper of Georgetown
2:18
Speaker 3: Law explain why this judge, and this is the judge
2:23
Speaker 3: from South Carolina who was just considering the Lindsay Halligan appointment,
2:27
Speaker 3: explain why she dismissed the cases.
2:30
Speaker 5: She dismissed the cases against mister Cromee and Mss James
2:34
Speaker 5: because she found that the US Attorney was not properly appointed.
2:40
Speaker 5: And since there was no one else in the room
2:43
Speaker 5: with the grand jury except Miss Halligan, if Miss Halligan
2:47
Speaker 5: had no powers, then no one presented the case to
2:49
Speaker 5: the grand jury and it has to be dismissed in
2:53
Speaker 5: the judges view.
2:55
Speaker 3: So Attorney generals have authority to name an interim US
2:58
Speaker 3: attorney who can serve for one hundred and twenty days.
3:01
Speaker 3: And the judge said that that one hundred and twenty
3:04
Speaker 3: days began when Halligan's predecessor, Eric Siebert was appointed on
3:09
Speaker 3: January twenty first, and when the clock expired on May
3:13
Speaker 3: twenty first, so did the Attorney general's appointment authority. Is
3:17
Speaker 3: that a controversial interpretation?
3:20
Speaker 5: It is controversial. The statute isn't terribly well written, but
3:25
Speaker 5: I think she follows most of the rules of statutory interpretation.
3:31
Speaker 5: And she says, if the Attorney General can just keep
3:35
Speaker 5: reappointing people for additional one hundred and twenty day slots,
3:39
Speaker 5: then why would the president ever bother to go to
3:42
Speaker 5: Congress for confirmations. And why has the statute even mentioned
3:47
Speaker 5: district courts, since presumably the Attorney General would take that
3:51
Speaker 5: power if it was there, we would never let it
3:53
Speaker 5: fall to the district court. That's part of her reasoning.
3:57
Speaker 5: The other part of it that I think is also
4:01
Speaker 5: is that Congress changed this rule for about a year
4:04
Speaker 5: and then went back. So Congress had an arrangement where
4:09
Speaker 5: the Attorney General could appoint people for as long as
4:12
Speaker 5: she wanted, and they thought about it for a year
4:15
Speaker 5: and they said, no, thanks, we don't want any more
4:18
Speaker 5: of that. So the judge asked, quite reasonably, if Congress
4:23
Speaker 5: had allowed the arrangement that the Justice Department applies today
4:27
Speaker 5: and they changed the law to end it, why aren't
4:30
Speaker 5: we honoring Congress's decision.
4:32
Speaker 3: So there have been judges in New Jersey and in
4:37
Speaker 3: Los Angeles who've come to the same conclusion about this
4:42
Speaker 3: one hundred and twenty day rule. And the Alina Haba
4:45
Speaker 3: appointment to lead the New Jersey US Attorney's Office is
4:50
Speaker 3: before the Third Circuit. If the Third Circuit comes down
4:53
Speaker 3: with a decision saying no, this is okay, you can
4:56
Speaker 3: do this does that have any effect on what happens
4:59
Speaker 3: here in the.
4:59
Speaker 5: Fourth The Third Circuit doesn't have jurisdiction over this court.
5:04
Speaker 5: This court's appeals go to the Fourth Circuit. Obviously a
5:09
Speaker 5: federal circuit court's views are influential. But the judge here
5:15
Speaker 5: does not seem to think this is a close case,
5:17
Speaker 5: and I tend to agree with her. So I think
5:22
Speaker 5: even if the administration wins Alina Hobbit case, they're still
5:26
Speaker 5: going to have a real challenge on appeal.
5:28
Speaker 3: In this case, the substantive issues about vindictive prosecution and
5:34
Speaker 3: about what was said in the grand jury room by
5:36
Speaker 3: Lindsay Halligan that are before Judge Neckmanoff. Does that go away?
5:41
Speaker 6: Now?
5:41
Speaker 3: Is that over?
5:42
Speaker 5: If the government agreed to drop the case, then that
5:47
Speaker 5: stuff might be over. And on the principle that discretion
5:51
Speaker 5: is the better part of valor, that would be the
5:53
Speaker 5: smart thing for the administration to do. But given that
5:57
Speaker 5: the President has been tweeting instructions to get these people
6:01
Speaker 5: now now, now, I have trouble believing that will happen.
6:05
Speaker 5: So I think that the vindictive prosecution matter is likely
6:10
Speaker 5: to go to decision because the government will appeal this thing.
6:15
Speaker 5: And if this decision is overturned, then whether it's a
6:19
Speaker 5: vindictive prosecution would come to the fore again.
6:22
Speaker 3: So now they are going to appeal, no surprise, The
6:26
Speaker 3: White House spokesperson said, the facts of the indictments against
6:29
Speaker 3: Comium James have not changed, and this will not be
6:33
Speaker 3: the final word on this matter. So let's say they
6:36
Speaker 3: take it to the Fourth Circuit and the Fourth Circuit
6:38
Speaker 3: could affirms what the judge ruled here, So then they
6:42
Speaker 3: would go to the Supreme Court.
6:44
Speaker 5: They would, And I'm sure this judge understands that and
6:49
Speaker 5: has peppered her opinion with citations to Justice Scalia, Justice Thomas,
6:55
Speaker 5: Justice cour such, all the lions of conservative status, to
7:00
Speaker 5: our interpretation. So the Supreme Court can reverse her only
7:05
Speaker 5: by reversing itself.
7:07
Speaker 3: And I believe she also cited what was a controversial
7:10
Speaker 3: decision by Florida Judge Eileen Cannon dismissing the classified documents
7:16
Speaker 3: case against President Trump.
7:18
Speaker 5: She did, she did. I think that's a little gratuitous
7:22
Speaker 5: and less central to us. But she's got some basic
7:24
Speaker 5: statue totory interpretation problems here, and she is hewing very
7:29
Speaker 5: closely to the procedures the Supreme Court has said, and
7:34
Speaker 5: hardly takes a move without citing a Supreme Court statutetory
7:37
Speaker 5: interpretation case. I teach statutory interpretation, and I will be
7:43
Speaker 5: likely assigning this case because it's such a nice summary
7:47
Speaker 5: of all the moves you're supposed to make.
7:50
Speaker 3: Next stop, fourth Circuit. I'm sure, Thanks so much, David.
7:54
Speaker 3: That's Professor David Super of Georgetown Law coming up nixt
7:58
Speaker 3: on the Bloomberg Law Show. A global insider trading case
8:02
Speaker 3: that sounds like a movie script. I'm June Grosso and
8:06
Speaker 3: you're listening to Bloomberg. The global insider trading ring allegedly
8:12
Speaker 3: started at a meal at a Paris restaurant owned by
8:15
Speaker 3: an ex Merrill Lynch investment banker, with members using burner phones,
8:20
Speaker 3: coded language, and encrypted messaging apps to conceal its activity
8:25
Speaker 3: and payments for insider tips being made using cash transfers,
8:29
Speaker 3: shell companies, fake invoices, and even a plastic bag stumped
8:34
Speaker 3: with one hundred thousand euros in a Vienna cafe. And
8:38
Speaker 3: prosecutors say the ring raked in more than seventeen million
8:42
Speaker 3: dollars from a staggering number of insider tips on more
8:46
Speaker 3: than fifteen deal targets. My guest is former federal prosecutor
8:51
Speaker 3: Stephen Frank, a partner at Quinn Emmanuel. This global insider
8:56
Speaker 3: trading ring sounds a little like a movie script. At
8:59
Speaker 3: some point, it does.
9:01
Speaker 1: Sound like a movie script, and that's because it is
9:03
Speaker 1: a lot like a movie script.
9:04
Speaker 2: What this case is.
9:05
Speaker 1: About really is an incredibly sophisticated, long running worldwide insider
9:13
Speaker 1: trading scheme involving insiders at a number of different companies,
9:19
Speaker 1: and they haven't actually been charged yet, along with a
9:23
Speaker 1: web of traders all around the world who are exchanging
9:28
Speaker 1: messages and exchanging inside information in incredibly difficult to detect ways,
9:33
Speaker 1: sometimes in person, sometimes over encrypted apps, often using burner
9:40
Speaker 1: phones with simcards that they are swapping regularly, and laundering
9:46
Speaker 1: the funds through complicated transactions, sometimes in cash, sometimes using
9:53
Speaker 1: a variety of bank accounts, sometimes sending cash through the
9:59
Speaker 1: mail off disguised as gifts or other types of things.
10:05
Speaker 1: And so it's been able to survive all these years
10:10
Speaker 1: in part because there are so many different traders involved.
10:14
Speaker 1: The information is being dispersed so far and wide that
10:18
Speaker 1: it's incredibly difficult to trace.
10:22
Speaker 3: Did it go for almost ten years?
10:24
Speaker 1: Nothing like that? I mean, it's been going for a
10:26
Speaker 1: number of years. I think it's hard to discern exactly
10:29
Speaker 1: how long it's been going on. We can sort of
10:31
Speaker 1: trace when the initial contact between certain of the players happened,
10:36
Speaker 1: but I don't think we know the initial origins of
10:39
Speaker 1: the entire scheme.
10:40
Speaker 3: Were there specific types of trades that they shared inside
10:45
Speaker 3: information on or was it a variety.
10:49
Speaker 1: It was a variety. It was in different industries, It
10:52
Speaker 1: was in all different types of companies, some that trade
10:55
Speaker 1: in the US, some that don't. And that's what also
10:58
Speaker 1: made it so difficult to TechEd, but also kind of
11:01
Speaker 1: what gives it away, right, It's clear that there is
11:04
Speaker 1: no one insider at any one company who's sharing this information.
11:09
Speaker 1: It's clear that there are insiders at a variety of
11:12
Speaker 1: different companies who are sharing information. That's almost unprecedented in
11:17
Speaker 1: these types of schemes. You know, insider trading traditionally was
11:21
Speaker 1: you know, a tip passed, you know, over a glass
11:24
Speaker 1: of wine or a beer at a country club or
11:27
Speaker 1: on a golf course in a single company at a
11:30
Speaker 1: single time. It's unusual to have cases that where there's
11:35
Speaker 1: different iterations of information being passed over time. It's still
11:38
Speaker 1: far more unusual to have so many different companies where
11:42
Speaker 1: information is being passed, and over such an extended period
11:46
Speaker 1: of time, with so many different traders involved. That's what's
11:49
Speaker 1: really quite fascinating about this scheme.
11:52
Speaker 3: Is there any indication how the authorities first got wind.
11:56
Speaker 1: Of this, Well, I should say I was involved in
11:58
Speaker 1: the original invest mitigation and then handed it off when
12:02
Speaker 1: I left the government to go into private practice. So
12:05
Speaker 1: the way that the authorities first got involved in this
12:09
Speaker 1: sort of first figured out that something was amiss is
12:12
Speaker 1: simply by seeing the repeated trading in certain companies. There
12:18
Speaker 1: was one company in particular where various subsidiaries of the
12:22
Speaker 1: company were involved in transactions over time, and there was
12:26
Speaker 1: trading ahead of those transactions that was suspicious. But really
12:30
Speaker 1: what happened was you had certain individuals who kept popping
12:34
Speaker 1: up on the radar of law enforcement and of international
12:39
Speaker 1: securities regulators, and law enforcement and regulators looked closely at
12:44
Speaker 1: those individuals, looked closely at their transactions, their financial transactions,
12:49
Speaker 1: and put this together over many years of investigation, through
12:53
Speaker 1: just painstaking investigative work. I mean, the amount of investigation
12:58
Speaker 1: that goes into an indictment like this is pretty incredible,
13:01
Speaker 1: and it involves sophisticated techniques like you know, search warrants
13:07
Speaker 1: for electronic accounts or email accounts, for Facebook accounts, for
13:13
Speaker 1: iCloud accounts, and then sifting through all of that information
13:18
Speaker 1: in a painstaking way, much of it not in English,
13:22
Speaker 1: and putting little little pieces together over time. But it
13:26
Speaker 1: was really the result of incredible collaboration between US law
13:30
Speaker 1: enforcement and regulators in the United States, as well as
13:34
Speaker 1: regulators in law enforcement in England, in France, and in
13:38
Speaker 1: other countries.
13:39
Speaker 3: So I was going to ask, you know, how much
13:41
Speaker 3: that complicates the investigation when you're dealing, you know, with
13:45
Speaker 3: other countries and with things happening abroad.
13:50
Speaker 1: It makes it incredibly complicated. And that's why these schemes
13:53
Speaker 1: are able to persist because they know that and they
13:56
Speaker 1: take advantage of that. No one country can put a
13:59
Speaker 1: case like this together all by itself. It really requires
14:02
Speaker 1: collaboration among different law enforcement and regulatory authorities with different mandates,
14:08
Speaker 1: different evidentiary rules, different procedural rules, and then figuring out
14:15
Speaker 1: how to share that information in ways that it can
14:17
Speaker 1: be used by different countries. I mean, even just the
14:21
Speaker 1: fact that there are different time zones involved makes things
14:24
Speaker 1: complicated and really requires people to work off hours, to
14:28
Speaker 1: work around the clock, to travel internationally just to gather
14:32
Speaker 1: the bits and pieces of evidence that's required to put
14:35
Speaker 1: a case like this together. It's extremely complicated.
14:38
Speaker 3: Is there competition I read that French investigators have been
14:42
Speaker 3: conducting a parallel investigation for years. Is there competition among
14:47
Speaker 3: the regulators of the different countries to bring the indictments first.
14:53
Speaker 1: That's a great question. There is some of that, and
14:56
Speaker 1: there's certainly a desire by regular in law enforcement in
15:00
Speaker 1: each country to be the first to put the biggest
15:03
Speaker 1: case together. But ultimately there's also a recognition that this
15:07
Speaker 1: is a big enough scheme, it's sprawling enough that there's
15:11
Speaker 1: something in it for everybody, and there's more than any
15:14
Speaker 1: one country can do on its own. So it's ultimately
15:18
Speaker 1: figuring out what makes the most sense in dividing up
15:21
Speaker 1: the pie. One of the things that US law enforcement
15:26
Speaker 1: has as an advantage is that sentencing here for these
15:31
Speaker 1: types of crimes is substantially greater than it is in
15:35
Speaker 1: most other countries, and in Europe in particular, and so
15:39
Speaker 1: ultimately what all regulators, whatever country they're in, want to
15:43
Speaker 1: do is take down these types of schemes that are
15:47
Speaker 1: really taking advantage of innocent investors and making markets an
15:53
Speaker 1: unlevel playing field, right, I mean, ultimately, if investors don't
15:56
Speaker 1: have confidence in the securities markets, they're not going to invest.
15:59
Speaker 1: And that's true in the United States, but it's also
16:02
Speaker 1: true in France, and it's also true in England. So ultimately,
16:05
Speaker 1: their regulators realize that if they're able to cooperate and
16:08
Speaker 1: come down with a heavy hand on schemes like this
16:11
Speaker 1: and make it clear that however much profit insider trading
16:15
Speaker 1: might generate in the short term, in the long run,
16:17
Speaker 1: it's going to put you behind bars for an extended
16:19
Speaker 1: period of time. That's in everybody's best interest because that
16:22
Speaker 1: protects markets here, but it also protects markets over there.
16:25
Speaker 3: When administrations change and priorities of administrations change in enforcement actions,
16:33
Speaker 3: do some investigations fall by the wayside? And why did
16:37
Speaker 3: this one not fall by the wayside?
16:40
Speaker 1: Well, a couple of things. I'll say this one was
16:42
Speaker 1: in a pretty advanced state by the time the administrations
16:47
Speaker 1: changed over. But also it's pretty clear that in this administration,
16:52
Speaker 1: as in past administrations, securities fraud and insider trading remains
16:57
Speaker 1: a point of focus. So if you look at the
17:00
Speaker 1: statistics over the past year of this administration. What you'll
17:05
Speaker 1: see is that while white collar crime enforcement in general
17:10
Speaker 1: is down, there are fewer cases being brought, and on
17:15
Speaker 1: the sec side as well, there are fewer enforcement actions
17:19
Speaker 1: being brought, particularly against corporate actors, securities fraud, and in particular,
17:25
Speaker 1: insider trading cases have held steady and perhaps even trended
17:28
Speaker 1: up a little bit. And that's because I think Chairman
17:31
Speaker 1: Atkins and others in the administration see crimes against the
17:36
Speaker 1: markets and crimes against individual investors as crimes they really
17:40
Speaker 1: need to pursue because of the reasons I just said,
17:43
Speaker 1: because it undermines confidence in the markets. And one thing
17:46
Speaker 1: that this administration has in common with prior administrations is
17:49
Speaker 1: they want the markets to remain strong in investors to
17:52
Speaker 1: have confidence in them. And that's why we've seen pretty
17:56
Speaker 1: rigorous enforcement and a number of cases being brought against
18:00
Speaker 1: insider trading schemes over the past year. And not every scheme, obviously,
18:04
Speaker 1: is as complicated as this one. This one is really
18:06
Speaker 1: unprecedented in its sweep and sophistication, but we've seen cases
18:12
Speaker 1: across the United States really against just ordinary insider trading schemes,
18:16
Speaker 1: the types of one off schemes. I was talking about
18:18
Speaker 1: a moment ago where information is being passed on a
18:22
Speaker 1: cocktail mapkin across the bar, or even insiders trading in
18:26
Speaker 1: their own companies, which is the least sophisticated kind of scheme.
18:30
Speaker 1: Finding out information that's not public that can move a
18:34
Speaker 1: stock in your own company and trading on it, either
18:37
Speaker 1: in your own account or in the account of a
18:38
Speaker 1: friend or a relative. Those are relatively easy to discover,
18:41
Speaker 1: and they're surprisingly commonplace.
18:43
Speaker 3: It sounds like this might be a tough case to
18:46
Speaker 3: try to put this all together for a jury. What
18:49
Speaker 3: do you think is the strongest evidence that the prosecution has.
18:54
Speaker 1: Well, if you read the superseding indictment in this case,
18:57
Speaker 1: the prosecution has really put together a pretty compelling case,
19:01
Speaker 1: replete with very devastating text messages, really text messages that
19:07
Speaker 1: are going to be difficult for the defendants to explain,
19:10
Speaker 1: in which they're speaking in code, but it's a barely
19:13
Speaker 1: disguised code. They're talking about swapping phones and sin cards
19:19
Speaker 1: as socks and shoes. They're talking about money as greens.
19:24
Speaker 1: They talk about financial transactions sometimes as meat put in
19:28
Speaker 1: a refrigerator. It's almost comical the way that they use
19:33
Speaker 1: this code. But ultimately, when you put all of these
19:36
Speaker 1: conversations together, it really becomes pretty compelling. And then when
19:40
Speaker 1: you combine those with the cash, the financial transactions, and
19:44
Speaker 1: the stock trading, it really becomes overwhelming. What's interesting about
19:47
Speaker 1: this indictment is it was unsealed even though many of
19:50
Speaker 1: these players have not yet been arrested. So one individual
19:54
Speaker 1: was arrested and extradited to the United States, and other
19:57
Speaker 1: individuals in Singapore and is fighting extra edition. Other individuals
20:01
Speaker 1: have been charged and named but not yet arrested or
20:06
Speaker 1: extradited into the United States. Now those individuals are going
20:08
Speaker 1: to find their ability to travel freely severely constrained, and
20:13
Speaker 1: many of them probably will be picked up over time.
20:16
Speaker 1: But that doesn't mean that the evidence about them doesn't
20:18
Speaker 1: come in. Because this is charged as a conspiracy, and
20:21
Speaker 1: in the US legal system, evidence of communications among conspirators
20:26
Speaker 1: in furtherance of a conspiratorial aim can all come in.
20:30
Speaker 1: So all of this evidence about all of the different
20:33
Speaker 1: players in this conspiracy is going to be admissible for
20:36
Speaker 1: prosecutors if and when this proceeds to trial.
20:38
Speaker 3: The prosecution has a cooperator. How important is his testimony.
20:43
Speaker 1: It's always important, particularly when you have these types of
20:46
Speaker 1: coded communications or a cooperating witness, to be able to
20:49
Speaker 1: get up on the stand and say, this is what
20:51
Speaker 1: we were talking about, this is the terminology that we used.
20:55
Speaker 1: These are the types of techniques that we used to
20:59
Speaker 1: hide our communmunications make them more difficult to discover. The
21:02
Speaker 1: most compelling thing, though, about any cooperating witness is the
21:05
Speaker 1: fact that he's going to get up there in all
21:07
Speaker 1: likelihood and say I committed this crime. I was a
21:10
Speaker 1: part of this scheme, this was a conspiracy, and the
21:14
Speaker 1: defendant was in it with me. That's really devastating evidence
21:17
Speaker 1: that's very difficult to undermine, particularly when that individual has
21:21
Speaker 1: accepted responsibility for their own collaps.
21:24
Speaker 3: Do you envision the prosecution sort of presenting this like
21:28
Speaker 3: a movie, like here we are at the French restaurant
21:31
Speaker 3: and blah blah, blah blah blah.
21:33
Speaker 1: It is pretty cinematic. So if they're smart about it,
21:36
Speaker 1: and they are, and I'm sure they'll do this, they
21:38
Speaker 1: will present it in that way. They will have First
21:41
Speaker 1: of all, these communications are so devastating, they're going to
21:43
Speaker 1: be put up on a screen and even though there's
21:45
Speaker 1: no audio in these communications, there wasn't a wiretap involved
21:48
Speaker 1: in this case, you'll nevertheless be able to see these
21:51
Speaker 1: communications and play out these transactions almost in real time,
21:56
Speaker 1: and then you'll have it narrated by somebody like this
21:59
Speaker 1: coper O breading witness who's going to be able to
22:01
Speaker 1: say I was there and I was passing this cash,
22:04
Speaker 1: you know, in a paper bag or whatever the case
22:06
Speaker 1: may be, and it's really captivating for jurors. I've been
22:10
Speaker 1: on cases similar to this before where jurors have said
22:15
Speaker 1: afterwards that they were really just so enthralled by the
22:18
Speaker 1: presentation of the evidence, because it really is even though
22:22
Speaker 1: these are just financial transactions, the level of greed involved
22:26
Speaker 1: and the lengths that people will go to to disguise
22:29
Speaker 1: these transactions is pretty incredible.
22:32
Speaker 3: You're a prosecutor for a long time. Now you're on
22:34
Speaker 3: the other side. I mean, do you see a possible
22:37
Speaker 3: defense here.
22:39
Speaker 1: It's going to be interesting. I mean, I think any
22:41
Speaker 1: defense attorney is going to, you know, do some basic things.
22:44
Speaker 1: One is you're going to try and keep out as
22:46
Speaker 1: much evidence as you possibly can, right go after the
22:49
Speaker 1: search warrants and try to figure out some way legal
22:52
Speaker 1: or otherwise that they are invalid. Another thing is, obviously,
22:57
Speaker 1: you know, a top the cooperating witness, try to undermine
22:59
Speaker 1: the cutibility of the cooperator and suggest that they're doing
23:03
Speaker 1: it really to obtain leniency in their own sentencing, but
23:06
Speaker 1: that they are really just telling a story that the
23:08
Speaker 1: prosecution wants them to tell. Another piece of it is
23:12
Speaker 1: to point to the empty chair right to say that
23:14
Speaker 1: there are all these other players involved, but where are
23:17
Speaker 1: they and try and undermine the case that way. But
23:20
Speaker 1: when you have a case that's been put together over
23:23
Speaker 1: years with as much evidence as it appears the prosecutors
23:27
Speaker 1: have in this case, it's tough. And sometimes defendants take
23:32
Speaker 1: their shot because they figure they have nothing to lose,
23:34
Speaker 1: But other times they try to work out a deal.
23:37
Speaker 1: And no doubt, given the number of people who still
23:40
Speaker 1: haven't been apprehended, and the number of others who are
23:42
Speaker 1: undoubtedly involved in the scheme and haven't even been charged,
23:45
Speaker 1: including the insiders at some of these companies, there's going
23:48
Speaker 1: to be a real incentive as the trial data approaches
23:51
Speaker 1: for some of these people to flip themselves and try
23:54
Speaker 1: and work out a deal for themselves.
23:56
Speaker 3: It seems like this would be a great trial to watch.
23:59
Speaker 1: It's a really cool case. It's a pretty unprecedented case.
24:02
Speaker 1: It's unusual for a case like this to be brought
24:04
Speaker 1: in a place like Boston, which isn't you know, as
24:07
Speaker 1: big a financial center as New York or even San Francisco.
24:11
Speaker 1: But it's really a testament to the work of you know,
24:14
Speaker 1: individual prosecutors and FBI agents and folks at the SEC
24:17
Speaker 1: to put a case like this together. I mean that
24:19
Speaker 1: the amount of work is really it's not apparent at
24:22
Speaker 1: the first glance, but it really it's literally years of work.
24:25
Speaker 3: It's been a fascinating conversation. Thanks so much. That's former
24:29
Speaker 3: federal prosecutor Stephen Frank, a partner at Quinn Emmanuel. The
24:34
Speaker 3: Securities and Exchange Commission is dropping its landmark lawsuit against
24:39
Speaker 3: Solar Winds that accuse the company of covering up internal
24:43
Speaker 3: problems ahead of a massive cyber attack. The agency said
24:48
Speaker 3: the decision to seek dismissal is quote in the exercise
24:52
Speaker 3: of its discretion and does not necessarily reflect the Commission's
24:56
Speaker 3: position on any other case. The move 's a controversial
25:01
Speaker 3: case for the SEC, which faced criticism from Wall Street
25:05
Speaker 3: and beyond that it's allegations against Solar Winds went far
25:09
Speaker 3: afield of the agency's typical enforcement remit. My guest is
25:14
Speaker 3: securities law expert James Park, a professor at UCLA Law School.
25:19
Speaker 3: Jim tell us about the SEC suit.
25:21
Speaker 7: This is a major cybersecurity disclosure case involving a company
25:28
Speaker 7: in Austin that developed network monitoring software, basically software that
25:34
Speaker 7: you use to monitor the performance of your network. And obviously,
25:41
Speaker 7: for software like this, you know, cybersecurity is very important
25:44
Speaker 7: because somebody could come in and see everything that's going
25:47
Speaker 7: on in your network. And they have a major cyber
25:52
Speaker 7: attack on something called the Orian software platform that generated
25:57
Speaker 7: almost half of their revenue. Their stock price goes down,
26:02
Speaker 7: and then the SEC brings a case saying that various
26:06
Speaker 7: disclosures they made with respect to their cybersecurity practices were
26:12
Speaker 7: materially misleading. That was litigated by the company, which does
26:18
Speaker 7: not always happen. A lot of defendants settle SEC cases
26:21
Speaker 7: rather than pursue dismissal, but they litigated in the Southern
26:26
Speaker 7: District of New York. Judge Engelmeyer dismissed part of the
26:30
Speaker 7: SEC's claims, not all of them, but some of them.
26:33
Speaker 7: I mean, this was about a year or so ago,
26:35
Speaker 7: and then we just got news last week that the
26:37
Speaker 7: SEC has chosen not to go forward with the case.
26:42
Speaker 3: I mean, did this case diverge in any way from
26:45
Speaker 3: a normal or the usual SEC enforcement actions.
26:50
Speaker 7: One way it diverged, I think is the defendant litigated
26:54
Speaker 7: the case. And you know, another is that you know,
26:57
Speaker 7: when you bring a major case like this, you usually
27:01
Speaker 7: pursue it to the end, and I think that's usually
27:03
Speaker 7: the practice with the SEC. Even when the administration changes,
27:09
Speaker 7: you have enforcement cases that often are left over from
27:13
Speaker 7: prior years because they take a long time to resolve,
27:16
Speaker 7: and then you know, the enforcement staff is they continue
27:19
Speaker 7: to litigate those cases, even if there might be some
27:23
Speaker 7: disagreement with the new commission.
27:25
Speaker 6: And so it is a bit unusual.
27:28
Speaker 7: They're not unprecedented for the SEC to stop pursuing a case.
27:33
Speaker 7: Of course, this did happen as well with the various
27:36
Speaker 7: crypto enforcement cases. So for this SEC, it's not unprecedented.
27:39
Speaker 7: For prior secs, I think it's unusual. I think that
27:42
Speaker 7: would be fair to say.
27:44
Speaker 3: And also, is it the first time they suit a
27:46
Speaker 3: computer security executive for a cybersecurity related issue? That companies
27:53
Speaker 3: said that they were trying to expand their turf.
27:56
Speaker 7: That is unusual, right the chief Information Security office, sir,
28:00
Speaker 7: who you know, it's not the CEO, it's not the
28:02
Speaker 7: chief financial officer. And I don't know if they've ever
28:07
Speaker 7: sued a chief information security officer before, but this is
28:10
Speaker 7: certainly something that was relatively new. And so that was
28:14
Speaker 7: another interesting aspect.
28:16
Speaker 6: Of the case.
28:18
Speaker 3: Why did the judge dismiss a lot of the case.
28:21
Speaker 7: You know, I think one reason was that the statements,
28:26
Speaker 7: some of the statements the SEC alleged were misleading. Were
28:31
Speaker 7: these broad statements about there's a risk of cybersecurity breach,
28:38
Speaker 7: and these are the types of disclosures.
28:40
Speaker 6: That are made by a lot of companies. And what
28:44
Speaker 6: the SEC was saying is that the reason.
28:46
Speaker 7: Those generic disclosures were misleading is that they were never
28:51
Speaker 7: really updated even when it became clear to the company
28:55
Speaker 7: that its cybersecurity was insufficient.
28:59
Speaker 6: And so the SEC was saying that you.
29:02
Speaker 7: Basically were putting out this generic disclosure to keep investors satisfied,
29:09
Speaker 7: but you are not updating it when new developments came
29:12
Speaker 7: along and investors would want you to update those risk disclosures.
29:17
Speaker 7: And really, what the judge said as well, the risk disclosures.
29:22
Speaker 7: They were enough to tell the investors that this was
29:25
Speaker 7: a type of risk, and investors they understand that companies
29:31
Speaker 7: talk in generalities like this. There's a doctrine called the
29:35
Speaker 7: Puffrey doctrine where everyone understands companies are always going to
29:40
Speaker 7: try to put a rosy tone on things, and they
29:44
Speaker 7: speak in a very optimistic way. So they do this,
29:47
Speaker 7: and investors know this, and they know that they shouldn't
29:49
Speaker 7: trust these broad statements on face value, and so that
29:54
Speaker 7: was the main reason a good chunk of the case
29:56
Speaker 7: was dismissed. Now, there were statements that were more pacific
30:00
Speaker 7: that were published on the company's website, which the judge
30:04
Speaker 7: said could proceed. The claims could proceed because they made
30:07
Speaker 7: much more specific statements that the company was using strong cybersecurity,
30:14
Speaker 7: that they had gone through a rigorous development process, that
30:17
Speaker 7: they were very sort of diligent in evaluating their internal
30:21
Speaker 7: cybersecurity controls, and those statements might have been misleading.
30:25
Speaker 6: According to Judge.
30:27
Speaker 3: Ingle Meyer, what do you think the SEC caved here?
30:30
Speaker 7: I think that cybersecurity has been controversial in terms of
30:36
Speaker 7: whether this is an area where the SEC should be
30:40
Speaker 7: significantly involved, and it's only been fairly recently that we
30:45
Speaker 7: think of cybersecurity as something that the high level managers
30:50
Speaker 7: of the company must be really vigilant about. You know,
30:55
Speaker 7: I think there was a time when we thought of
30:56
Speaker 7: cybersecurity issues as being you know, this is what the
30:59
Speaker 7: IT department is responsible for. It's not something that the
31:02
Speaker 7: board really should be knowledgeable about, because the board quite
31:06
Speaker 7: frankly doesn't have the expertise in evaluating a company cybersecurity.
31:10
Speaker 6: And so there's been a big shift.
31:12
Speaker 7: Though to require disclosure about cybersecurity and to require the
31:17
Speaker 7: board to evaluate the adequacy of cybersecurity. I think that's
31:22
Speaker 7: been controversial, although I think it still is an expectation.
31:27
Speaker 7: And you know, in addition to cybersecurity efforts being generally controversial,
31:32
Speaker 7: I think enforcement relating to cybersecurity disclosures might have been
31:37
Speaker 7: even more controversial because the critics would say, you know, basically,
31:42
Speaker 7: this is a company that was a victim of a
31:44
Speaker 7: cyber attack, and so they were victims, and now you're
31:48
Speaker 7: saying that they should also pay for misleading investors, and
31:52
Speaker 7: so there might be something off putting or problematic about
31:58
Speaker 7: saying that, well, you are the victim of the cyber attack,
32:01
Speaker 7: plus you also have to pay money to your investors
32:05
Speaker 7: because you didn't stop it. I think that's kind of
32:07
Speaker 7: the argument here, is that you know, it's almost punishing
32:10
Speaker 7: you twice for being the victim of a cyber attech. Now,
32:13
Speaker 7: on the other hand, you could say, well, this is
32:14
Speaker 7: a company with cyber security matters a lot, and so
32:17
Speaker 7: they should have made more timely disclosures. That's the argument
32:20
Speaker 7: on the other side. But I think that maybe what
32:23
Speaker 7: the SEC was thinking here is that we want to
32:26
Speaker 7: pull back a bit on cybersecurity enforcement.
32:29
Speaker 3: So officially, the SEC said that the decision to seek
32:33
Speaker 3: dismissal is in the exercise of its discretion, does not
32:37
Speaker 3: necessarily reflect the Commission's position on any other case. I mean,
32:41
Speaker 3: do you think the SEC intends to continue to focus
32:45
Speaker 3: on cybersecurity or this case says no.
32:50
Speaker 7: Well it's a powerful statement, but I think the SEC
32:54
Speaker 7: maybe leaving some room to change its mind. And you know,
32:59
Speaker 7: if they're maybe there are a better set of facts
33:01
Speaker 7: around that they might find. And so I think they
33:06
Speaker 7: are leaving open the option to bring enforcement cases and
33:10
Speaker 7: they're not saying that. You know that you can't sort
33:13
Speaker 7: of violate security sprout provisions through misstatements about cybersecurity. But
33:18
Speaker 7: I think they're saying, in this case, maybe the case
33:21
Speaker 7: was not as strong as it as it could have been.
33:23
Speaker 7: And I think it's a powerful signal with respect to
33:26
Speaker 7: this particular SEC.
33:29
Speaker 3: I guess chief information security officers are breathing a sigh
33:33
Speaker 3: of relief with this because it would have meant personal liability.
33:38
Speaker 7: Yeah, I think I think that's right. I think they're there.
33:41
Speaker 7: Definitely is potential for liability. You know, of course, if
33:45
Speaker 7: they settle the you know, the payment may be covered
33:48
Speaker 7: by an insurance policy. But it's never easy when you
33:53
Speaker 7: are specifically named in a complaint, and you know, I
33:58
Speaker 7: think if you're the CFO, you fully understand that this
34:02
Speaker 7: is something that could happen. Chief information security officer, maybe not,
34:06
Speaker 7: but you know. This also speaks though to the difficulty
34:09
Speaker 7: of bringing cases against individual corporate officers, which the SEC
34:14
Speaker 7: says it wants to do more of. But you know,
34:17
Speaker 7: when you single out a particular individual, there is sometimes
34:22
Speaker 7: a question of is it fair to put so much
34:25
Speaker 7: blame on a single person when you know it might
34:28
Speaker 7: have been more of a systematic problem at the corporation
34:33
Speaker 7: that the high level officer may not have really had
34:35
Speaker 7: complete control over. So I think that's an interesting point,
34:39
Speaker 7: is that in some ways this kind of acknowledges that
34:42
Speaker 7: it's actually really hard to build cases against individuals, and
34:46
Speaker 7: sometimes it may you may see them unfair.
34:48
Speaker 3: Any final thoughts, Jim, I.
34:50
Speaker 7: Think you might think of these cybersecurity cases as just
34:57
Speaker 7: another form of a type of case at commonly brought,
35:01
Speaker 7: which is that you know there's some business development that
35:04
Speaker 7: the company knows about some business failure. You know, we
35:08
Speaker 7: have a product we thought was going to be great,
35:10
Speaker 7: but we know it's going to be delayed a long time,
35:13
Speaker 7: it has a lot of flaws in it, and you
35:16
Speaker 7: know we we don't tell investors. I think it's fairly
35:19
Speaker 7: clear now, based on you know, thirty forty years of
35:23
Speaker 7: case law, that lying about business developments can violate securities
35:29
Speaker 7: fraud laws. And you know, there's an argument that if
35:32
Speaker 7: you are lying about the strength of your cybersecurity controls,
35:37
Speaker 7: that that's not all that different, right, because you know,
35:41
Speaker 7: it's not a business failure, but it is a failure
35:44
Speaker 7: in what you're supposed to be doing to protect your customers,
35:48
Speaker 7: to protect investors, And so these disclosures can be important.
35:53
Speaker 6: And I don't think.
35:54
Speaker 7: The SEC's direction in this was completely unfounded because I think,
35:59
Speaker 7: you know, just closures in business practices relating to treatment
36:03
Speaker 7: of customers and so forth are pretty relevant to what
36:06
Speaker 7: investors are looking at for companies like this. I do
36:10
Speaker 7: agree though, that, you know, it is difficult to sort
36:14
Speaker 7: of determine, you know, when exactly was it clear that
36:18
Speaker 7: they were engaging in really really risky behaviors that were
36:22
Speaker 7: so far below the industry norm that we would want
36:25
Speaker 7: them to be accountable for not saying more about their
36:29
Speaker 7: vulnerability to a cyber attech. I think that's a really
36:31
Speaker 7: difficult question to answer as well.
36:33
Speaker 3: Thanks so much, Jim. As always, that's Professor James Park
36:37
Speaker 3: of UCLA Law School. And that's it for this edition
36:40
Speaker 3: of The Bloomberg Law Show. Remember you can always get
36:42
Speaker 3: the latest legal news on our Bloomberg Law Podcast. You
36:45
Speaker 3: can find them on Apple Podcasts, Spotify, and at www
36:50
Speaker 3: dot Bloomberg dot com, slash podcast Slash Law, And remember
36:54
Speaker 3: to tune into The Bloomberg Law Show every weeknight at
36:57
Speaker 3: ten pm Wall Street Time. I'm Jamie Grosso, and you're
37:01
Speaker 3: listening to Bloomberg MHM.