Stockbroker Securities Roundup: Criminal Convictions Vacated Against Six Charged in Front Running Scam and Citigroup Broker Cleared in $1B CDO Deal SEC Case

The U.S. Court of Appeals for the Second has vacated the convictions of six brokers who were criminally charged in a front-running scam to give day traders privileged information via brokerage firms’ squawk boxes. The case is United States v. Mahaffy.

Judge Barrington Parker said that confidence in the jury’s verdict was undermined because the government did not disclose a number of SEC deposition transcripts “pursuant to Brady v. Maryland, 373 U.S. 83 (1963).” Also, noting that there were flaws in the instructions that the jury was given, the second circuit vacated the honest-services fraud convictions that they had issued against the defendant.

The brokers, who were employed by different brokerage firms, had been charged for conspiring to provide A.B. Watley day traders confidential data about securities transactions. This entailed putting phone receivers close to the broker-dealers internal speaker systems so that the traders could make trades in the securities that were squawked before the customer orders were executed.

The defendants were acquitted on 38 of the 39 criminal counts, with the jury hung on the count of securities fraud conspiracy in 2007. A mistrial was declared. In 2009, the last count of conspiracy involving property fraud and honest services fraud was retried and the defendants wee convicted. However, after defendant Kenneth Mahaffy was pursued by the SEC via administrative proceedings that involved transcripts of investigative dispositions going as far back as the end of 2004, the defendants pushed for a new trial because they said these papers had exculpatory Brady material that undermined or were in contradiction to government witnesses ‘testimony regarding whether “allegedly misappropriated information” had in fact been “confidential” under Carpenter v. United States, 484 U.S. 19 (1987).

The district court said that even if the prosecution had shared this testimony, the jury would not have reached another conclusion. Now, however, the appeals court is disagreeing and has vacated the part of the conspiracy convictions related to confidential data being misappropriated.

Another broker who was recently cleared of wrongdoing is former Citigroup Global Markets Inc. (ASBXL) executive Brian Stoker. He was accused of making material misrepresentations related to the $1 billion collateralized debt obligation that resulted in the $285 billion settlement between the financial firm and the SEC that US District Judge Jed Rakoff rejected last year.

The SEC said that Stoker, who was the main structurer on the Class V Funding III CDO and in charge of making sure the offering circular was accurate, allegedly did not disclose that the financial firm was employing the CDO as a proprietary trade and that it planned on shorting a specific assets set in its investment portfolio to benefit itself at investors’ expense. (Class V III and other CDO squareds create leveraged housing market exposure, which can increase investors losses should the market collapse.) However, jurors in federal court in Manhattan have decided that Stoker was not liable for misleading investors.

Reuters reports that the outcome of SEC v. Stoker could be a boon to the SEC in the case involving Rakoff’s rejected settlement. The 2nd circuit had ruled that the district judge acted improperly when he turned the settlement down. The appeals court said it was up to the Commission and not a federal judge to decide whether such a settlement benefits the public. A separate panel will now consider a joint appeal filed by Citi and the SEC against Rakoff’s decision. Should Citi’s legal representatives argue that the Commissions evidence was completely revealed during the Stoker trial, this would undermine Rakoff’s contention that he and the public didn’t see the SEC’s case and so could not understand why merely a $285 million settlement was reached when investor lost close to $700 million in the bank’s mortgage-backed securities sale.

Stockbroker fraud can lead to massive losses for investors. You want to retain the services of a securities law firm that can help you recover your lost investment whether through arbitration or litigation.

United States v. Mahaffy (PDF)

SEC Loses Lawsuit Against Ex-Citigroup Official Stoker, Bloomberg, July 31, 2012

More Blog Posts:
Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2011

SEC Looks Likely to Win Appeal in $285M Securities Settlement that Judge Rakoff Rejected, Institutional Investor Securities Blog, March 15, 2012
While Former Merrill Lynch & Co. Stockbroker is Found Guilty of Witness Tampering, Seven Other Defendants are Acquitted in “Squawk Box” Securities Fraud Case Involving A.B. Watley Employees, Stockbroker Fraud Blog, July 7 2007