On October 25, 2018, the Second Circuit rejected Silicon Valley hedge fund founder Doug Whitman’s second appeal of his insider trading conviction in Whitman v. U.S. In 2012, Whitman was convicted for his role as a tippee in an insider trading scheme regarding stock in Google, Inc. On direct appeal, Whitman challenged the district court’s evidentiary rulings and jury instructions, but did not specifically challenge the court’s instruction defining “personal benefit,” although his counsel had previously raised the issue during trial. Following a decision denying Whitman’s appeal, the Second Circuit issued its opinion in U.S. v. Newman, which narrowed the definition of “personal benefit” that trial courts should use in instructing the jury on insider trading cases. Whitman then filed a motion under 28 U.S.C. § 2255, claiming that the court’s decision in Newman rendered his jury instructions erroneous, entitling him to a new trial. The district court denied that motion, finding that it was procedurally defaulted because Whitman had failed to raise the issue on direct appeal. Whitman then appealed the denial of his habeas petition, arguing that procedural default should not apply because arguments concerning “personal benefit” were so novel at the time of his direct appeal that this legal argument was not reasonably available to counsel. The Second Circuit disagreed. While the court found that Whitman’s jury instruction would be unlawful under its recent narrowed definition of “personal benefit” as articulated in U.S. v. Martoma, which followed the Supreme Court’s decision in Salman v. United States, the court found that Whitman’s procedural default was not excused. The court pointed to the fact that two defendants made the argument on direct appeal that the definition of “personal benefit” was too expansive and that Whitman’s own trial counsel made a similar argument before the district court, reasoning that if these counsel were able to raise the issue, it cannot be said that the argument was unavailable to Whitman’s appellate counsel. The court declined, however, to find that failing to make a “personal benefit” argument on direct appeal rendered Whitman’s appellate counsel ineffective, reasoning that such an argument was not “significant and obvious,” given the long-standing prior definition. This decision underscores the court’s discretion in finding a procedural default in the event that available arguments are not raised on direct appeal, even when the jurisprudence expands significantly following the defendants’ initial appeal.
Ninth Circuit Upholds $35 Million Penalty Against Couple for EB-5 Fraud
On October 26, 2018, the Ninth Circuit upheld a $35 million judgment against a married couple who allegedly cheated investors out of millions of dollars in an EB-5 Immigrant Investor Program fraud in Securities and Exchange Commission v. Charles Liu et al. The EB-5 program provides a method for eligible immigrant investors to become lawful permanent residents of the United States by investing at least $1,000,000 to finance a business that will employ at least 10 American workers. Charles Liu and his wife, Xin Wang, allegedly took approximately $27 million from visa-seeking Chinese investors, promising that the proceeds from the investments would go towards a cancer treatment center that was never built. Liu instead transferred almost $12.9 million to three marketing firms in China, one of which he heads as CEO and Chairman, and also transferred more than $7 million to the couple’s personal accounts. The district court entered a preliminary injunction against the couple in October 2016 and granted the SEC’s motion for summary judgment and a permanent injunction against the couple in April 2017, barring them from any further involvement in EB-5 solicitations. On appeal, the couple argued that the limited partnership interests they offered to investors were not securities as defined under the Securities Act of 1933, and that they did not act with a “high degree of scienter.” The Ninth Circuit rejected these arguments, confirming that the couple must repay the $27 million and pay $8.2 million in civil penalties. This case provides one example of a trend in fraud cases recently brought by the SEC arising out of the EB-5 Immigrant Investor Program.
Northern District of California Dismisses Commodities Exchange Act Claim Against Coinbase, Inc. With Prejudice
On October 23, 2018, the United States District Court for the Northern District of California in Berk v. Coinbase, Inc., et al. dismissed a proposed investor class action alleging unfair competition and negligence against Coinbase, Inc., a cryptocurrency exchange, as well as its CEO Brian Armstrong and communications director, David Farmer, for failure to state a claim. Plaintiff Investor Jeffrey Berk alleged that Coinbase artificially inflated bitcoin cash prices by announcing the opening of the market to trade only an hour before it opened, and then closing the market minutes after opening after the price of the bitcoin cash skyrocketed 200% to over $8,499. While the judge noted that it “intuitively seems that this was something that was bungled,” he concluded that one reading the complaint would be “left wondering what Coinbase should have done differently.” The court therefore dismissed Berk’s negligence and unfair competition claims without prejudice, finding that the allegations failed to “describe the scope or content of Coinbase’s duty in anything more than broad generalities,” giving plaintiffs three weeks to amend their pleadings. The court, however, dismissed with prejudice plaintiff’s claim under the Commodity Exchange Act, finding that Berk’s bitcoin cash purchase was not a “futures contract” as defined in the statute. In this regard, this case is in tension with other recent federal court decisions holding that all virtual currencies could be considered commodities under the CEA subject to CFTC jurisdiction.