In what was maybe just a gosh-darn crazy coincidence, a handful of foreign traders last year snapped up about 2 million shares of Fortress Investment Group right before news broke that it was being acquired by Japan's SoftBank Group Corp. —at a 30 percent premium per share.

Those lucky investors, who promptly sold their shares, walked away with about $3.8 million in profits.

To the U.S. Securities and Exchange Commission, it looked a lot like insider trading. But last week, a federal judge in New Jersey dismissed the SEC's complaint, deeming the trades “at most mildly suspicious.”

It's one of those cases where you can appreciate the lawyering by defense counsel from Greenberg Traurig and Mintz & Gold without necessarily applauding the outcome. Because come on, really? Mildly suspicious? Did I mention I've got a bridge in Brooklyn for sale?

The problem was, the SEC simply didn't have enough evidence to make the charges stick.

“This is an insider trading case in which the SEC does not allege the identity of the alleged tipper, when or how the defendants were allegedly tipped with inside information, why defendants knew or should have known that the alleged tip was passed in breach of a fiduciary duty, or what personal benefit the tipper, if in fact there was a tipper, received,” wrote Mintz & Gold's Ira Sorkin, who is best known for representing Bernie Madoff.

Of course, another possibility is that these guys were really skilled at insider trading.

But SEC investigators couldn't crack the case—assuming there was a case, and not just, you know, investors blessed with super-fortuitous timing.

For one thing, the SEC was unable to identify a limited pool of people who plausibly might have been the tipper.

It could have been someone from Fortress or Softbank. But quite a few other people also knew about the merger before it was announced, including employees from nine firms that worked on the deal—Davis, Polk & Wardwell; Paul, Weiss, Rifkind, Wharton & Garrison; Debevoise & Plimpton; Skadden Arps Slate Meagher & Flom; Willkie Farr & Gallagher; Kirkland & Ellis; Linklaters; Morrison & Foerster; and Weil, Gotshal & Manges.

Aside from the small army of lawyers, employees of Ernst & Young and KPMG also knew about the transaction, and so did those from various investment banks and PR agencies.

(Anyone want to confess?)

“Although the court does not opine on what 'size pool' constitutes a limited pool of potential tippers, the court cannot find that '[t]he SEC has…identified a person or a limited group of people who might have been the tipper' in this matter,” wrote U.S. District Judge Claire Cecchi in Newark on Sept. 27 in tossing the case.

The SEC got interested in the trades almost immediately after the Fortress/ SoftBank deal was announced on February 14, 2017.

According to the agency, between February 10 and February 14, 2017, foreign traders using foreign accounts “amassed large, speculative positions in Fortress stock through derivative securities known as contracts for difference.”

The SEC said the defendants “timed their trading around the Fortress Announcement perfectly and made lottery-like profits virtually overnight. The timing, size and profitability of defendants' Fortress trades are highly suspicious.”

On Feb. 24, 2017—the same day that the SEC's first complaint was filed—Judge Cecchi signed an ex parte order freezing the accounts that containing proceeds from the trades.

But defense lawyers pushed back hard, stressing the “fatal shortcomings” of the SEC's case.

“[T]he courts in this circuit and elsewhere have held that insider trading claims must satisfy the heightened pleading standard under Federal Rule of Civil Procedure,” wrote Daniel Filor and Eric Wong from Greenberg Traurig.

They argued that the SEC “fails to allege a tipper that provided improper information to either defendant or even any relationship that either defendant had with any of the long list of individuals with inside information who could have theoretically passed any improper information to them. Additionally, the [first amended complaint] fails to establish the necessary scienter.”

The Greenberg Traurig team also argued that there was nothing suspicious about their clients' Fortress investment. They said it was “typical” for them to make such investments “relating to stocks and holding the investments for a relatively short time during a period of high volatility and thereby attempting to occasionally reap large short-term profits that outweigh other losses.”

Cecchi was persuaded, dismissing the case without prejudice and ordering the SEC on Friday to justify keeping the accounts frozen.

Filor in an emailed statement called the decision 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.”

The SEC, he continued, is utilizing big data culling to build its cases. “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, this is overzealous government prosecuting that our win is beating back.”

 

Shout-Out: Orrick  Team Wins Kentucky Abortion Challenge

A pro bono team from Orrick, Herrington & Sutcliffe successfully challenged a state regulation in Kentucky that would have essentially closed the last abortion services in the state.

On Friday, a federal judge in Louisville found the statute—which requires abortion facilities to maintain transfer agreements with local hospitals and transport agreements with ambulance services—was unconstitutional.

“The evidence presented here establishes clearly that the scant medical benefits from transfer and transport agreements are far outweighed by the burden imposed on Kentucky women seeking abortions,” wrote U.S. District Judge Greg Stivers in a 60-page decision.

The Orrick team representing Planned Parenthood was led by partners Karen Johnson-McKewan and Lisa Simpson. Donald Cox of Lynch, Cox, Gilman & Goodman and the ACLU represented co-plaintiff EMW Women's Surgical Center, the only licensed abortion clinic in Kentucky.

EMW is located less than a mile away from two hospitals, and had been operating since the 1980s. But in 2017, it was unable to obtain a transfer agreement with any Louisville hospital. Planned Parenthood, which wants to open an abortion clinic in Louisville, also could not get a transfer agreement with a nearby hospital.

“Overall, the court finds that neither type of agreement improves the safety of abortion procedures in Kentucky,” Stivers ruled. “[I]n the rare circumstances in which a patient suffers abortion-related complications, the complications usually arise after the patient has returned home, rendering meaningless any transfer or transport agreement between the abortion clinic and another entity.”

 

 

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