Holding: The U.S. Securities and Exchange Commission ("SEC") lost an insider trading suit against a former hedge fund salesman, John F. Mangan, Jr., in the U.S. District Court for the Western District of North Carolina. The SEC had accused Mangan of directing short sales of stock of CompuDyne Corp.("CDCY") under the expectation that Private Investment in Public Equity ("PIPE") transactions of CDCY stocks would hedge those sales. PIPE transactions are private sales of unregistered stock in public companies. Mangan at that time was employed by a broker-dealer (Friedman, Billings, Ramsey, “FBR”) assigned to be the financial advisor of CDCY’s PIPE sales, and learned of the PIPE prior to the company’s public announcement of the transaction. The SEC asserted that the short sale of CDCY by Mangan prior to the public announcement was made in an effort to fraudulently take advantage of his knowledge of the PIPE. Contrary however to the SEC’s allegation that the information concerning the PIPE was materially negative, the district court found that the market did not devalue CDCY stock price after the trade at issue. Given that the materiality of the information about the PIPE was to be determined as of the time of the trade, there was no materially negative movement in CDCY’s share price between the time of trade and the close of the market on the date the CDCY shares were traded. And because the SEC failed to otherwise raise a genuine issue of fact as to materiality, the district court therefore ruled that summary judgment in favor of defendant Mangan was appropriate. More...

Holding: In a 2-1 ruling, the U.S. Court of Appeals for the District of Columbia Circuit ("DC Circuit") upheld the constitutionality of Title I of the Sarbanes-Oxley Act of 2002 ("Act") creating the Public Company Accounting Oversight Board ("Board"). The Board's function is to oversee auditors, while its five members are appointed by the Securities and Exchange Commission ("SEC"). Appellants Free Enterprise Fund ("Fund") and Beckstead and Watts, LLP had earlier challenged the creation of the Board, alleging violation of the Appointments Clause, separation powers and non-delegation principles of the U.S. Constitution. The U.S. District Court for the District of Columbia dismissed the Fund's suit. On appeal, the DC Circuit affirmed the grant of summary judgment to the Board. The DC Circuit specifically held, first, that the Act does not encroach upon the Appointment power. Second, the DC Circuit held that the for-cause limitations on the SEC’s power to remove Board members and the President’s power to remove SEC Commissioners do not strip the President of sufficient power to influence the Board and thus do not contravene separation of powers. In his lone dissent, Judge Brett Kavanaugh wrote that the Board's structure unconstitutionally restricts the U.S. President's appointment and removal powers. More...

Holding: The U.S. Court of Appeals for the DC Circuit affirmed the dismissal of a shareholder lawsuit against directors of Fannie Mae over accounting irregularities and the $31 million in severance packages for the company's former Chief Executive Officer ("CEO"), Franklin D. Raines, and Chief Finance Officer ("CFO"), J. Timothy Howard. The DC Circuit held that the shareholders, led by the Wayne County Employees' Retirement System in Michigan and Pirelli Armstrong Tire Corp. Retiree Medical Benefits Trust, can sue on behalf of the corporation only after first making a demand on the board of directors to pursue the compensation claims itself. The DC Circuit rejected the shareholders' argument that they could not make such prior demand because a majority of the 13 directors could not render a disinterested and independent decision. Allegations of missed "red flags'' and claims that Raines controlled a majority of the board were not supported by the evidence and dif not create a reasonable doubt about the board's independence to consider a demand. On the basis of the foregoing, the DC Circuit affirmed the judgment of dismissal by the US District Court for the District of Columbia. More...

Holding: Taking the cue from its own decision two weeks ago in U.S. v. Michael Finnerty where a market specialist was acquitted of securities fraud, the U.S. Court of Appeals for the Second Circuit reversed the convictions of two former managers of Van der Moolen Specialists USA LLC, who were found guilty of trading stocks on the firm's account before filling clients' orders. Citing Finnerty, the Second Court held that deception required some act that gives the victim a false impression, but the prosecution failed to demonstrate any way in which defendant Michael Hayward and Michael Stern communicated anything to their customers, let alone anything false. Here, just like in Finnerty, evidence was insufficient to prove deception. Hence, defendants' convictions must be reversed. More...