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SECURITES UPDATE

April 5, 2011

March 2011 was
a busy month with the start of the Raj Rajaratnam insider trading criminal case
in Manhattan; insider trading charges against an FDA scientist for allegedly
misappropriating confidential drug testing approval results for use in personal
securities trading; and the firestorm surrounding the resignation of David
Sokol from the Warren Buffett C-suite for trading in a stock later presented as
an acquisition candidate for the Berkshire Hathaway portfolio.  On the local front, federal prosecutors filed
a criminal information against Leslie Johnson, a sitting Council member and
wife of indicted former Prince George County Executive Jack Johnson, in a
public corruption case.  I am pleased to
share with you below select commentary from the past month on these topics, as
well as some upcoming speaking engagements.

television

Fri. Apr. 1, WTTG, Fox 5, Washington, DC “[Liang/FDA] Insider Trading Probe”
Discussing insider trading and
significance of allegations against FDA scientist charged with trading on
confidential drug testing results.

Thu. Mar. 31, CNBC Squawk on the Street “Sokol Affair SEC-Worthy?" 
Discussing whether David Sokol’s sudden resignation is worthy of an SEC investigation.

Wed. Mar. 9, Bloomberg Television’s “Fast Forward.” 
“Frenkel Interview About Galleon’s Rajaratnam Trial”.

Wed. Mar. 9, CNBC Worldwide Exchange, “Day Two of the Rajaratnam Trial”
"What we have is probably the most significant insider trading case in 25 years, largest insider trading case ever to hit the hedge fund industry, all eyes in the financial services industry are watching," Jacob Frenkel, partner at Shulman Rogers told CNBC on the trial of Galleon Group founder Raj Rajaratnam.  

Mon. Mar.7, Bloomberg Television’s “Bottom Line”
“Jacob Frenkel Interview About Raj Rajaratnam Trial”, talking about the insider trading case against Galleon Group LLC co-founder Raj Rajaratnam and the implications for financial markets.

Mon. Mar.7, CNBC Squawk on the Street, “Rajaratnam & Jury Selection”
Discussing impact of SEC case
against Gupta on Rajaratnam trial and jury selection.

Wire/print

Thu., Mar. 31, MARKETWATCH, by Ronald Orol, “Why SEC May not Bring Charges Against Sokol”
 “Based on the facts now in the public domain, any knowledgeable securities defense lawyer would love to try this case because there was no insider trading violation….” "There is no case under the existing insider trading law and based on the information we have."


 Thu., Mar. 31, ASSOCIATED PRESS, by Josh Funk and Jonathan Fahey, “Resignation Raises Tough Questions for Berkshire”  

Sokol’s actions likely did not constitute insider trading. Because Berkshire had not made an offer to buy Lubrizol at the time Sokol bought 96,000 shares, it appears Sokol was not using significant confidential information – the definition of illegal insider trading.

Wed., Mar. 30, BLOOMBERG, by Andrew Frye, “Sokol Denies Wrongdoing in Stock Purchases Before Berkshire’s Takeover Bid”
“There likely will be an investigation….If all we have here are purchases before making a recommendation, and the decision to pursue an acquisition doesn’t commence until after the transactions are completed, that wouldn’t satisfy the definition of insider trading.”

Wed., Mar. 30, WALL STREET JOURNAL Online, by Erik Holm and Serena Ng, “Berkshire’s Sokol Quits After Lubrizol Purchases”
A spokesman for the Securities and Exchange Commission declined to comment on whether the agency was investigating the matter. However, Jacob Frenkel, a partner with law firm Shulman Rogers and former SEC enforcement lawyer, said, "Anytime a corporate insider engages in trading activity in advance of [an acquisition] announcement there is fodder for inquiry" from the SEC.
"By no means does that suggest that there was a violation," Mr. Frenkel added. "In fact, I have had cases as a defense lawyer where the timing of trading appeared dubious but the facts clearly supported the absence of any violation."
Both Mr. Frenkel and Ron Geffner, another former SEC attorney, said Mr. Sokol’s stock purchases may have triggered an inquiry from regulators.
The resignation is a potential black eye for Mr. Buffett, who emphasizes character and integrity in his manager choices. The B shares of the conglomerate, one of the nation’s biggest companies, declined 3.2% in after-hours trading.
"Mr. Buffett always tries to maintain the image of ethical conduct beyond questioning and reproach," Mr. Frenkel said. Had Mr. Sokol not resigned and continued in his role, "it would give rise to question, and when there is the withholding of information, even if there is no wrongdoing, it creates some underlying questioning or distrust that can undermine the relationship."

Wed., Mar. 30, WASHINGTON POST, by David Hilzenrath, “FDA Chemist Charged with Insider Trading”
The Washington area is teeming with government workers who have access to financially sensitive information. The SEC has long suspected that federal employees exploit government secrets in the financial markets, but actual insider trading cases against government employees are rare….  
“It’s one thing for SEC enforcement to believe that this goes on,” Frenkel said. “It’s another to catch it.”

Sat., Mar. 26, WASHINGTON POST, by Maria Glod, “Step Toward Plea in Leslie Johnson Case”
The filing of a criminal information typically indicates that a plea agreement is expected. He said it appears that the prosecution of Jack Johnson is the government’s primary focus.
“In the way the government has put together this case, it has been about their effort to charge, prosecute and, they hope, convict Jack Johnson,” Frenkel said. “Once he was indicted and she was not, the handwriting was on the wall that her case would resolve with a plea.”

Thu., Mar. 17, BLOOMBERG, by David Glovin, Gupta Tapes Not Enough for Charges in Galleon Case, Lawyers Say
The government is unlikely to bring criminal charges against Gupta because the proof against him appears “circumstantial….”
The government has presented no evidence that Rajaratnam traded on Gupta’s wiretapped comments about the deliberations of the Goldman Sachs board, and there’s no evidence so far that Gupta knew Rajaratnam traded on other leaks, Frenkel said.  “The language on the recording is not clear,” said Frenkel, who isn’t involved in the case.

Thu. Mar. 17, BLOOMBERG, by Gavin Finch and Jon Menon, “Barclays, Citigroup Said to Be Subpoenaed in Libor Probe”
“The SEC’s focus is entirely about whether the banks’ disclosure to the market may have been misleading, and what impact did those disclosures have on their broader reporting….” “There are a lot of allegations in the market about conduct during the crisis.”
 The Justice Department is typically involved in inquiries related to the financial crisis and their involvement doesn’t indicate there will be a criminal probe, said Frenkel.
 “I think when you’re talking about Libor rates, which are open to legitimate interpretation and were the subject of considerable discussions in advance of disclosure, it is very unlikely that we will ever see a criminal case in this area,” Frenkel said.

Fri., Mar. 11, MARKETWATCH, by Alistair Barr, “Jabre Capital Staffer on Raj Trial Witness List”
But sometimes witness lists include people who may never actually be called to testify, according to white-collar defense lawyers and former federal prosecutors. “There is always a bluff factor….”
“By identifying a possible witness, the other side then must run down as much information as possible about that witness and the potential testimony,” Frenkel explained. “As long as there is a reasonable connection, the defense likely revels in identifying potential witnesses in countries in which the Justice Department may not be able to show up on the person’s doorstep and begin asking questions.”

Tue. Mar. 8, WALL STREET JOURNAL Law Blog, by Ashby Jones, “What Kind of Juror Does Raj Want on His Trial”
We checked in recently with Jacob Frenkel, a former federal prosecutor and SEC enforcement lawyer-turned-criminal defense lawyer, on the importance of the voir dire, who called jury selection one of the most important parts of a criminal trial. "I truly believe a case can be won or lost in jury selection," said Frenkel. "It’s a terribly overlooked component of the trial." 
So what type of juror are Rajaratnam and his lawyer, Akin Gump’s John Dowd, looking for? "It’s hard to say something specific like ‘it’s a Caucasian male who’s 35 who works on 7th ave. between 60th and 42nd,’’ says Frenkel. "But what they’re trying to do is root out potential jurors who have a chip on their shoulder against corporate executives, or jurors who blame market participants for the recession or who otherwise may have difficulty applying the law.”

Mon., Mar. 7, BLOOMBERG, by Bob Van Voris, Patricia Hurtado and David Glovin, “Rajaratnam Judge Condemned Insider Trading in Previous Cases”
The judge rejected a defense argument that the recordings had to be excluded because federal agents allegedly misled the judge who authorized the wiretaps.
The ruling could prove harmful to Rajaratnam, said Jacob Frenkel…. 
 “A defendant’s own words are the most powerful tool for the government,” Frenkel said in an interview. At the same time, he said, “there could be different interpretations to the tapes,” as Rajaratnam has argued.

presentations/Conferences

Wed., April 6, 2011: Toronto, Canada – Panelist, “Critical Impacts in Canada of U.S. Securities Reforms: How They Affect the Canadian Regulatory Landscape, Canadian and Cross-Listed Companies,” 21st Annual Securities Superconference, Securities Regulation & Compliance, Canadian Institute

Mon., April 13, 2011: Washington, DC – Panelist, “The FCPA: Practical Perspectives on Compliance,” American Bar Association Section of International Law

Thu., May 5, 2011: New York, NY – Moderator, “The Regulatory Environment: Ensuring Your Compliance Program is in Line with Current Changes and Reflects What’s Coming Down the Pike,” Regulatory Compliance and Risk Management for Financial Services, American Conference Institute

Fri., May 6, 2011: New York, NY – Panelist, “Alternative Routes to Accessing Capital,” 
2011 The Wall Street China Forum, China Entrepreneurs

Tue., May 10, 2011: Toronto, Canada – Panelist, “Domestic and Foreign Anti-Bribery/Anti-Corruption Statutes: What Do They Mean to Canadian Regulated Entities,” 10th Annual Forum on Anti-Money Laundering, Canadian Institute

Wed., May 11, 2011: Washington, DC – Instructor, “Foreign Corrupt Practices Act,”  Public Contracting Institute

For more
information about our securities enforcement defense, white-collar crime
defense, government investigations, international investigations, internal corporate investigations and
corporate governance practice expertise in representing corporations, boards of
directors, audit committees, officers, directors, and individuals, you may
contact Jacob Frenkel by phone at 301-230-5214 or by e-mail at jfrenkel@shulmanrogers.com.

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