Tag Archives: securities fraud

SEC Sues R.I. Agency and Wells Fargo Claiming They Misled Investors in Curt Schilling’s Video Game Company

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The SEC has sued the Rhode Island Economic Development Corporation (RIEDC) and bond underwriter Wells Fargo alleging that RIEDC and Wells Fargo misled bond investors in connection with their investments in Curt Schilling’s failed video game company, 38 Studios. RIEDC had lured 38 Studios to Rhode Island with significant incentives, including the bond deal, only for 38 Studios to fail.

According to the SEC, investors, who poured $75 million into 38 Studios, were not told that it needed substantially more money to produce a video game. In addition, Wells Fargo allegedly failed to disclose that it had a side deal with 38 Studios, which presented a potential conflict of interest. When the company went belly up, the investors were left with the bag. Although neither Schilling nor his company is accused of any wrongdoing in the SEC action, they have been sued civilly.

Municipal finance deals face increased SEC scrutiny. This applies to issuers and underwriters. As SEC Director of Enforcement Andrew Ceresney has stated, “[m]unicipal issuers and underwriters must provide investors with a clear-eyed view of the risks involved in an economic development project being financed through bond offerings.”

California DOJ Takes Advantage of “Lower” Insider Trading Standard

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The Los Angeles U.S. Attorney has brought charges against a former J.P. Morgan analyst and two of his friends alleging that the analyst tipped deal information he learned while at the bank to his friends.

Ashish Aggarwal, 27, of San Francisco, and two longtime friends surrendered to the FBI Tuesday, after being charged with a scheme that netted over $600,000 due to stock tips. While interesting in and of itself, this case is nationally significant because it appears to be the first use of the Ninth Circuit’s “lower” standard for remote tippee liability under the Salman decision issued on July 6, 2015.

One of the elements of tippee liability is that there be a “personal benefit” to the tipper (here, Aggarwal).   In Salman, the Court found that the personal benefit to the tipper can occur where an “insider makes a gift of confidential information to a trading relative or friend.” That is exactly what is alleged in the Aggarwal case: Aggarwal tipped his boyhood friends.

By contrast, the Second Circuit, in U.S. v. Newman (December 2014) found that the benefit must represent, “at least a potential gain of a pecuniary or similarly valuable nature.” The Court vacated the underlying convictions and the decision has spawned multiple challenges across the country.

Because of Newman’s significance to the Government’s entire insider trading campaign, the Solicitor General, on July 31, 2015, sought review by the Supreme Court. The Court will likely decide in October whether to hear the Newman appeal. Among other things, the Court will look at the Salman decision to determine whether there is a circuit split on these issues.

In the meantime, it is likely that the Aggarwal case will proceed in California, though there will likely be some motion practice seeking a stay pending the outcome in Newman. Here is an article summarizing the charges.

http://www.bloomberg.com/news/articles/2015-08-25/ex-j-p-morgan-securites-analyst-charged-with-insider-trading