On February 19, 2019, the Eastern District of Virginia, in Teamsters Local 210 Affiliated Pension Trust Fund v. Neustar Inc., et al., dismissed a putative class action brought against technology and telecommunications company Neustar, Inc., and certain members of its senior management, alleging that the defendants made misleading statements and omissions regarding a proposed merger with Golden Gate Capital. Under a contract awarded by the Federal Communications Commission, Neustar had served as the Local Number Portability Administrator and ran the Number Portability Administration Center, which allows telecom carriers across the United States and Canada to route phone calls and transfer customer phone numbers among carriers. In March 2016, the FCC awarded the contract, which had constituted more than half of Neustar’s business income, to Neustar’s competitor Telcordia, requiring a transition of the NPAC. As a result, Neustar began considering restructuring alternatives including splitting into two companies and a potential acquisition. Neustar abandoned plans to split into two companies after it received several acquisition offers and ultimately decided to pursue a transaction with Golden Gate. Neustar’s approval of the merger with Golden Gate was largely based on a fairness opinion issued by its financial advisor and a comparison with another party’s offer, which contained both cash and a contingent value right. Both the fairness opinion and the other party’s offer assumed that the NPAC transition would be completed by September 30, 2018. Neustar’s proxy statement presenting the merger agreement to shareholders also adopted the September 30, 2018 estimated transition date and emphasized the date’s importance in the board’s decision to accept Golden Gate’s offer. Following the issuance of the proxy statement, but before the shareholders voted on the merger, Neustar’s outside counsel provided a report to the FCC which detailed significant concerns Neustar had with the transition process and expressed doubt that the transition would be completed by the Transition Oversight Manager’s estimated May 2018 date “without significant changes” to the process. The proxy statement did not contain any reference to this report, which the plaintiff alleged was a material omission resulting in the transaction being based on a significantly undervalued share price.
In dismissing the complaint, the court held that the statements referencing the September 30, 2018 estimated transition date were opinions that “purportedly represented management’s working assumption as to the timeline of the transition.” Applying the test set forth in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, the court found that the complaint failed to allege any facts showing that the defendants could not have reasonably held the opinion regarding the estimated transition date when the proxy statement was issued. The court highlighted the reasonableness of management’s opinion, pointing to (1) the “admittedly ... incomplete information” of the report to the FCC; (2) the fact that the estimated transition date in the proxy statement was over four months after the Transition Oversight Manager’s estimated date, which provided some time for the transition to still be completed despite the obstacles outlined in the report; and (3) several warnings in the proxy statement regarding potential sources of delay that “would have put a reasonable investor on notice that the estimated transition date was far from certain in Defendants’ minds.” The court found that the omission of the report, “within the full context” of the proxy statement, did not show shareholders were not adequately warned of the risks surrounding the transition date.
This decision highlights that a plaintiff’s reliance on opinions, without pleading facts showing the unreasonableness of those opinions within the entire picture of the allegedly misleading statement, are insufficient to maintain a securities class action claim. Goodwin represented Neustar and the other defendants in this litigation.
CFTC Adopts “Cooperation Model” In Spoofing Administrative Actions
On February 25, 2019, the Commodity Futures Trading Commission settled spoofing claims it had brought in a civil action against trader Krishna Mohan, ending administrative proceedings in which the CFTC had alleged Mohan engaged in a spoofing scheme between September 2012 and March 2014 while working at an unnamed trading firm. Specifically, the CFTC alleged that Mohan simulated demand and supply by placing thousands of “iceberg” buy and sell orders in the E-Mini S&P 500 and E-Mini Nasdaq 100 futures contracts on the Chicago Mercantile Exchange and E-Mini Dow futures contracts on the Chicago Board of Trade, then capitalized on the self-manufactured price swings. In return for dismissal of the civil case, Mohan agreed to a three-year trading ban and to cooperate with the CFTC. The CFTC agreed to defer its decision on whether to impose any monetary sanctions. Mohan pled guilty in November 2018 and is awaiting sentencing on criminal charges of commodities fraud, spoofing, and conspiracy to commit fraud. This “cooperation model” highlights the CFTC’s growing efforts to mirror the Department of Justice in offering incentives to cooperate and self-report in related to spoofing activities, an increasingly active area of trading misconduct.
Second Circuit Holds Bankruptcy Avoidance And Recovery Statutes Apply To Madoff Funds Transferred To Foreign Investors
On February 25, 2019, the Second Circuit held in In re: Irving Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, that the trustee tasked with liquidating Bernard Madoff Investment Securities (“Madoff Securities”), the center of Madoff’s Ponzi scheme, could recover billions in Ponzi scheme proceeds from foreign investors of foreign “feeder funds” under section 550(a)(2) of the Bankruptcy Code. Section 550(a)(2) permits a trustee to recover property transferred to a subsequent transferee by the debtor’s initial transferee. The feeder funds had pooled money from hundreds of foreign investors and placed that money in “master funds” managed by Madoff Securities. Before the appointment of the trustee, Madoff Securities had transferred funds from the master funds to the feeder funds, which in turn transferred the funds to the foreign investors. The Southern District of New York held that U.S. bankruptcy laws did not allow the trustee to avoid these transfers for two reasons. First, it held that the presumption against extraterritoriality limits the scope of section 550(a)(2), such that a trustee may not use it to recover property that one foreign entity received from another foreign entity. Second, it held in the alternative that international comity principles limit the scope of section 550(a)(2). The Second Circuit, however, disagreed with the district court and held that neither the presumption against extraterritoriality nor international comity principles put the transfers out of the reach of the trustee.
First, the Second Circuit held that the district court had incorrectly focused on the location of the secondary transfer from the feeder funds to the foreign investor to determine that U.S. bankruptcy laws would have to apply extraterritorially to reach them. Because the initial transfer from the master funds to the feeder funds was (1) from a domestic entity debtor and (2) from U.S. bank accounts, the Second Circuit held that section 550(a)(2) was being applied domestically and that the trustee could recover the funds “regardless of where any initial or subsequent transferee is located.” The Second Circuit noted any finding to the contrary would open an enormous loophole, making funds “recovery-proof” and allowing fraudsters to secret away funds by making multiple foreign transfers to put the money beyond reach of U.S. law.
Second, the Second Circuit held that the district court erroneously dismissed the trustee’s actions on international comity grounds. The Second Circuit outlined two separate but related legal doctrines of international comity, which had distinct standards of review: (1) “prescriptive comity” in which the court engages in statutory interpretation and presumes Congress limited the reach of domestic law for a specific fact pattern out of respect for a foreign sovereign and, (2) “adjudicative comity” in which the court exercises discretion in refusing to exercise jurisdiction so that a foreign judicial forum may more appropriately resolve the matter. Holding that prescriptive comity applied in this instance and reviewing the district court’s decision de novo, the Second Circuit applied a choice-of-law test, weighing (1) the interests of the United States, (2) the interests of the foreign state and (3) the mutual interests of the states in having “just and efficiently functioning rules of international law.” The Second Circuit found that the United States’ interest in “allowing domestic estates to recover fraudulently transferred property” was compelling and outweighed any foreign state interests because there were no parallel liquidation proceedings involving Madoff Securities, only liquidation proceedings for the feeder funds. As to the third factor, the Second Circuit held that “consolidating the [Madoff] Trustee’s claims in federal court [was] more ‘equitable and orderly’ than forcing him to litigate different claims in different countries.”
This decision represents a practical expansion of the reach of U.S. bankruptcy laws and reflects just one more step towards resolution in the now-decades long process of untangling the Madoff Ponzi scheme.
Judge Grants Acquittal To Ex-Barclays Forex Chief
On March 4, 2019, the Northern District of California, in United States vs. Bogucki, acquitted defendant Robert Bogucki on all counts pursuant to Federal Rule of Criminal Procedure 29, holding no reasonable jury could have found beyond a reasonable doubt that Bogucki committed wire fraud in connection with his handling of foreign currency option trades for Hewlett Packard in 2011.
The court evaluated two potential government theories of liability: that (1) the defendant misappropriated HP’s information about its upcoming trades, in violation of duties of trust and confidentiality and (2) the defendant obtained money from HP through material misrepresentations about how Barclays handled the transaction. The court held that the evidence showed the existence of an arms-length relationship, not a duty of trust and confidentiality. The court also held that Bogucki’s allegedly false statements were not material as they did not have the ability to influence HP.
The court highlighted two factors in its decision. First, the governing International Swaps Dealers Association agreement between HP and Barclays explicitly stated that such trades were arms-length deals where Barclays acted as a principal. In testimony, HP’s primary point of contact with Barclays on the transaction confirmed that the ISDA matched his understanding of the Barclays-HP relationship. Second, the government’s expert described a “generally-understood industry practice of ‘pre-positioning,’” so that it was expected that Barclays would position itself to manage a transaction with HP by trading ahead of an order. The Court also noted testimony that industry participants, including HP, postured and bluffed in these arms-length interactions, so that no objective person who have found the allegedly false statements material to a decision.
Steel Connect Inc. Shareholder Unable To Intervene And Halt Derivative Suit
On March 5, 2019, the Court of Chancery of the State of Delaware denied a motion to intervene in Reith v. Lichtenstein, a derivative action pending against the directors of logistics company Steel Connect Inc. The motion to intervene was filed by a putative Steel Connect shareholder—Mohammad Ladjevarian—who sought to stay the derivative action until he finished prosecuting a books and records suit he had filed against Steel Connect under section 220 of the Delaware General Corporate Law in January 2019. The Court of Chancery held that by waiting until after motions to dismiss in the derivative action had been fully briefed, Ladjevarian had delayed too long in filing his motion to intervene.
Although Donald Reith—the shareholder who filed the derivative action—and Ladjevarian had sent Steel Connect books and records demands in January 2018, only Reith timely pursued his demand and eventually received documents from Steel Connect in March 2018. Ladjevarian, however, waited until August 2018 to send a second books and records demand to Steel Connect, by which time motion to dismiss briefing had already been completed in Reith v. Lichtenstein. Ladjevarian then waited several more months—until January 2019—to file his section 220 action against Steel Connect and a motion to intervene. Ladjevarian argued that his delay was justified because he was unaware of Reith’s suit and because he was awaiting ruling in another similar intervention case. The Court of Chancery disagreed, noting that although Ladjevarian was concerned about having his claims precluded should the Court of Chancery grant the motions to dismiss in Reith v. Lichtenstein, Court of Chancery Rule 15(aaa) prevented a dismissal from applying to any but the named plaintiffs and that concerns about preclusion alone will “not excuse the need for timeliness.”
This decision will likely encourage shareholders to pursue books and records demands more aggressively to ensure they can intervene in derivative actions brought earlier by other shareholders.
Mobile Telesystems To Pay DOJ Nearly $1 Billion In Settlement Of Uzbekistan Bribery Charges
On March 7, 2019, Moscow-based Mobile TeleSystems PJSC—the largest mobile telecommunications company in Russia, which is also publicly traded on the New York Stock Exchange—and its wholly-owned Uzbek subsidiary, KolorIt Dizayn Ink LLC, entered into resolutions with the Department of Justice and Securities and Exchange Commission, agreeing to pay a combined total penalty of $850 million to resolve Foreign Corrupt Practices Act charges arising out of a scheme in Uzbekistan involving more than $865 million in bribes to a former Uzbek government official to secure her assistance in entering and maintaining operations in the Uzbek market. Charges were also unsealed against the recipient of those bribes, former Uzbek official Gulnara Karimova, who was the daughter of the former president of Uzbekistan and the former CEO of Uzdunrobita LLC, another MTS subsidiary. Karimova allegedly had influence over the Uzbek governmental body that regulated the telecom industry. This settlement is the third in a series of related cases stemming from an Uzbekistan-centered bribery scheme totaling nearly $1 billion and spanning nearly two decades.
MTS entered into a deferred prosecution agreement with the DOJ, while KolorIt pleaded guilty. In addition to the $850 million penalty, MTS also agreed to the imposition of an independent compliance monitor for a term of three years, to implement rigorous internal controls, and to cooperate fully with the DOJ’s ongoing investigation, including its investigation of individuals. MTS also settled with the SEC in related proceedings, agreeing to pay a $100 million civil penalty, applied as a credit to the penalty owed to the DOJ.
According to the DOJ, the severity of the fine was due to a number of factors, including (1) lack of voluntary disclosure; (2) reactive and insufficient cooperation and remediation; and (3) the nature and seriousness of the offense. The most significant mitigating factor in the case was that the Uzbek government expropriated the companies’ telecommunications assets in Uzbekistan, resulting in no realized pecuniary gain to the companies as a result of the misconduct. This indictment and resolution demonstrates the DOJ’s aggressive and comprehensive approach to foreign corruption, holding both companies and individuals accountable. It further demonstrates the government’s commitment to prosecute violations of the FCPA, in particular with respect to companies who fail to proactively and wholly cooperate with the DOJ.