Events have led us back to our continuing series of oversight into the goings on of all-too-rare Wall Street prosecutions, and the terrible media coverage that accompanies them. The awful media story of the day is Andrew Ross Sorkin’s botched NYT coverage of the fabulous Fabrice Tourre prosecution for Rule 10B-5.
The punditry did a terrible job on initial go round with Goldman Sachs Abacus case; this is an inauspicious start with the Fabulous Fab Tourre case from NYT. The column reeks of defense attorney spin, expertly flacked. As anyone who understands security law knows, prosecutors are extemely limited about what they can say in public about an active litigation (Rights of the accused and all that). This allows clever defense lawyers to find gullible journalists to dupe with a one sided set of ridiculous accusations, knowing full well that the SEC cannot respond. The goal may be to help sway potential jurors; it could also pressure the case outside of the court room.
The defense hit paydirt in legal gullibility with Sorkin: Conspiratorially headlined “Trader’s Day in Court May Lack Some Details,” the article goes on to explain in painstaking details what is being kept from the jury. It also laughably makes claim this minor individual case is a stand in for all the other cases not brought to suit by the SEC:
“The trial is seen within the S.E.C. and on Wall Street as a referendum on Goldman Sachs and the government’s case, which was never argued in front of a jury.
But the jury may never hear the full account if the S.E.C. gets its way.”
Sadly, no: I cannot begin to explain how completely erroneous the above statements are. No, this is not a referendum on Goldman Sachs. I do not believe ANYONE at the SEC believes this simple 10b-5 case is about anything other material misrepresentations in the sale of a security.
On the other hand, this is what a defense attorney says — My client is being made a scapegoat for the entire financial collapse! – not what the SEC thinks.
And no, this is not about keeping the jury in the dark about the facts of the case. The facts, as we first discussed in these pages three years ago, this is a simple Rule 10b-5 case. The Security and Exchange laws, first passed in 1934 (see 17 C.F.R. 240.10b-5). It explicitly outlaws all practices that are” Manipulative and Deceptive.”
“Rule 10b-5: Employment of Manipulative and Deceptive Practices”:
- It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
- (a) To employ any device, scheme, or artifice to defraud,
- (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
- (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
- in connection with the purchase or sale of any security.”
There is a rich history of 10b-5 prosecution, the statute is specific, the case law well settled, and the evidentiary standards are well known. You don’t have to show the clients were actively misled, or they should have known better, ot yhey wer or were not sophisticated investors. The prosecution doesn’t even have to show the salesman knew (or should have known) he was being deceptive. There is no mens rea (guilty mind) component; there is no need to prove actual deception on the buyer; what the buyer knew or should have known is irrelevant.
All a prosecutor has to demonstrate is that the sales pitch was deceptive, and that deception was material.
The laundry list of insinuated hints in Sorkin’s article about what the SEC is hiding from the jury is just so much nonsense. He either does not understand Security law of 10b-5 or simply prefers to carry the defense’s water. I cannot explain how the NYT let such a slipshod article slip through its editorial processes, but there you have it. Further I am astonished that there is not a single quote from a lawyer to give any context. The standard operating procedure is for the journalist to grab a quote from a former prosecutor to provide 2 sided context. This allows someone to speak for the prosecutor, who cannot discuss the active case in public. This was a noticeable omission and defines the article as not only one-sided, but erroneous in the extreme.
What about ACA not being declared “a victim of the fraud” by the SEC? The answer, quite simply, is that unlike TRUE victims (in an SEC legal sense) ACA Capital has redress — ACA can file a civil suit against Goldman Sachs to recover their losses. And indeed, that is precisely what they did in 2011. Earlier this year, they won the right to add John Paulson to the litigation as well.
End of story, next case please.
Rule 10b-5: Manipulative and Deceptive Practices (April 20th, 2010)
Fabrice Tourre/Goldman Emails (April 25th, 2010)
Its the Law, Bitches! (July 19th, 2010)
Who Steered You Wrong About the GS Case? (July 16th, 2010)
Trader’s Day in Court May Lack Some Details
ANDREW ROSS SORKIN
NYT, July 8, 2013
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