Friday, April 23, 2010

Securities Fraud / Fiduciary Obligations / Omission Liability / Materiality Expert

In U.S. v. Schiff, --- F.3d ----, 2010 WL 1338141, April 07, 2010, defendants were "high-ranking corporate executives" at a pharmaceutical company, indicted for orchestrating a securities fraud scheme in violation of 15 U.S.C. § 78j(b) and SEC Rule 10b-5. The government filed an interlocutory appeal over a district court order addressing several contested theories of liability as well as expert witness issues under Daubert.

In a lengthy opinion only briefly summarized here, the Court first addressed, and rejected, the viability of the government's legal theory that defendant had a fiduciary duty to rectify codefendant's allegedly material misstatements in subsequent SEC filings. Absent a duty to disclose, silence is not fraudulent or misleading under Rule 10b-5. Pursuant to Oran v. Stafford, a duty to disclose under Rule 10b-5 may arise only in three circumstances: when there is [1] insider trading, [2] a statute requiring disclosure, or [3] an inaccurate, incomplete or misleading prior disclosure. The Court rejected the government’s theory that "high corporate executives" have any general fiduciary obligation to disclose under Rule 10b-5. To the extent the Government argued an alternative theory that this duty to disclose based on statements of another rests instead on prong three of Oran (misstatements), the issue was waived.
The Court next rejected the government’s three liability theories – "all of a piece," "duty to update," and "duty to correct," – with respect to defendant’s omissions from his own statements, which did fall under Oran’s third prong as the allegations failed to suffice under those theories.

With regard to exclusion of the government's proposed expert-who would have testified to Bristol's stock price drop as evidence of Rule 10b-5's materiality element- the Circuit found no abuse of discretion. The methodology of the government's expert, did not fit the issues and was not relevant to primary issue of materiality, as the methodology failed to control for unrelated adverse events that were simultaneously disclosed and that could have caused stock price drop.

Court Finds Inadvertent Out-of-jurisdiction Arrest Reasonable; Declines to Address Sentencing Entrapment and Manipulation Doctrines

In U.S. v. Sed, --- F.3d ----, 2010 WL 1292152 (Apr. 6, 2010), defendant, convicted of conspiracy to distribute and PWID, challenged (1) the validity of his arrest in Ohio by Pennsylvania state police and (2) the denial of a sentencing reduction based on sentencing entrapment and/or manipulation.

First addressing Sed’s arrest, the Circuit held it reasonable under Fourth Amendment despite the fact that Pennsylvania state police violated Ohio law by seizing him outside of their jurisdiction. The Court first rejected the notion that any violation of state law constituted an ipso facto violation of the Fourth Amendment, citing Virginia v. Moore, 553 U.S. 164 (2008). Next, the Court found the arrest reasonable under the totality analysis, based on the fact that defendant had committed a serious drug crime in Pennsylvania, was acting in furtherance of conspiracy to distribute drugs in Pennsylvania at time he was seized, was responsible for a last-minute change of plans such that the second controlled buy occurred close to the state line, and that the police intended to arrest Sed in Pennsylvania and believed that they had done so at the time.

Next the Court addressed Sed’s challenges to his sentence, claiming the police entrapped him into selling drugs in amounts beyond what he what he was predisposed to sell (sentencing entrapment) and that they unfairly strung out their investigation solely to increase the quantity of drugs he sold (sentencing factor manipulation). The Court noted a Circuit split, but declined to address the validity of the doctrines in this case. Instead, it found that Sed could not establish the requisite factual predicates for either, given the District Court found that Sed had perjured himself when he testified regarding his lack of predisposition to sell cocaine and also because the police were not required to arrest Sed after the first controlled purchase.

The District Court's indication of the sentence it would impose before the defendant allocuted was not reversible plain error.

              In United States v. Packer , 83 F.4th 193 (3d Cir. Sept. 26, 2023), , the ...