The U.S. Securities and Exchange Commission lost another insider trading case Friday—the agency’s second trial defeat in a week. The back-to-back losses have amplified concerns by some former SEC officials that it’s done a poor job picking its battles, but they also show the inherent challenges the agencies faces in these cases.
A federal jury in Santa Ana, Calif., returned a verdict that Manouchehr Moshayedi, the former CEO of the computer hardware company sTec Inc., didn’t sell company stock using insider information. Jurors also cleared Moshayedi on claims that he made false and misleading statements to investors. A Latham & Watkins team led by Patrick Gibbs represented by Moshayedi alongside co-counsel Thomas Zaccaro of Paul Hastings.
Since October 2013, the SEC has lost three of the five insider trading cases it’s tried to verdict, including its high-profile case against Mark Cuban. (See our prior coverage here, here, here and here.) The U.S. attorney’s office in Manhattan, on the other hand, is undefeated in insider trading trials in recent years.
“We’re proud of our long record of trial success in challenging cases, and we’ll continue to bring aggressive actions to protect investors when we believe there is evidence of wrongdoing,” said SEC enforcement director Andrew Ceresney.
In some ways, SEC lawyers have a tougher job than criminal prosecutors when it comes to proving insider trading. Unlike the Justice Department, the SEC can’t use wiretaps or secure testimony by threatening witnesses with criminal charges. “When you can’t turn witnesses or get traders on tape, it makes it cases less straightforward for juries,” said Buckley Sandler partner Thomas Sporkin, a former attorney in the SEC’s enforcement division.
The SEC’s mixed record also reflects the fact that it hands over strong cases to the DOJ, said Peter Henning, a former SEC attorney and a law professor at Wayne State University. “It’s not that the SEC gets the droppings,” he said. “But in the stronger cases, you are more likely to see a criminal prosecution.”
In the Moshayedi case, the SEC relied heavily on circumstantial evidence. STec’s stock price soared in the first half of 2009 after it announced an increase in demand from its largest customer, EMC Corporation. In August 2009 Moshayedi and his brother, who served as COO, sold 9 million of their shares, netting about $134 million in profit each. In early November 2009, sTec disclosed that EMC was scaling back purchases, and the company’s stock dropped 38 percent. The SEC alleged in a 2012 complaint that Moshayedi knew about EMC’s diminishing interest when he sold off his family’s shares, and that he kept this information from investors.
Moshayedi’s lawyers at Latham and Paul Hastings told jurors that he disclosed the information related to EMC as soon as it was specific enough to warrant disclosure, and Moshayedi took the stand over the course of three days during the three-week trial. “There was a lot of evidence that EMC didn’t think it had inventory issues until October 2009,” Gibbs said in an interview.
Exactly a week earlier, the SEC lost an insider trading case against hedge fund manager Nelson Obus and two other defendants. Again, this case was largely based on circumstantial evidence involving the timing of trades.
“In my view, this argues for a more careful review of the evidence by the staff,” says Baker Botts partner Seth Taube, the former chief of enforcement at the SEC’s New York regional office. “You can’t send the message you want by losing.” But Henning believes the SEC can be forgiven for losing cases. If the SEC never lost, that would mean it’s not an aggressive watchdog, he said. “From a broader policy perspective, you don’t want any agency that only brings cases it wins,” he said.
Editor’s note: This story has been updated to reflect that Paul Hastings’ Thomas Zaccaro was co-counsel for Moshayedi at trial.