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Entries by Kevin Watson (2)


Acosta v. Wedbush: Motion to Dismiss Claim of Violations of ERISA Denied

In Acosta v. Wedbush Secs., C.D. Cal., No. 2:17-cv-02471-SVW-KS, (C.D. Cal Aug. 15, 2017), the United States District Court for the Central District of California denied Wedbush Securities, Inc., Edward Wedbush, Gary Wedbush, Wedbush Securities In. Employees’ PS Retirement Plan, and the Wedbush Securities Inc. Commissioned Employees’ PS Retirement plan (collectively “Defendants”) motion to dismiss a complaint filed by the Department of Labor (“Plaintiff”) alleging violations of the Employee Retirement Income Security Act of 1974 (“ERISA”), finding that the issues raised in the motion were fact-intensive and therefore more appropriately resolved at trial.

Plaintiff alleged Defendants violated their fiduciary duties with respect to two retirement plans it maintained for its employees. Plaintiff alleged the Defendants: (1) violated ERISA by engaging in self-dealing by receiving commissions for executing transactions on behalf of participants in their employees’ retirement plans; and (2) breached their fiduciary duties by allowing Defendants and their subsidiaries to receive compensation, including fees and brokerage commissions paid from the plans’ assets, in exchange for services rendered relating to investment in two hedge funds associated with Defendants.

To succeed on a Rule 12(b)(6) motion to dismiss, a plaintiff’s complaint must contain sufficient factual matter, that when accepted as true, states a claim to relief that is plausible on its face. Rule 12(b)(6) allows a party to assert a statute of limitations defense on a motion to dismiss. A motion based on the statute of limitations, however, can only be granted if the assertions in the complaint would not allow the plaintiff to prove that the statute was tolled.

The court found the question of whether disclosure forms filed by Defendants provided the Plaintiff with notice of potential ERISA violations relating to the retirement funds was sufficiently factual and could not be resolved in a motion to dismiss. Similarly, the court found a careful analysis of the context and nature of the transactions and how they relate to the disclosures was required to determine whether the disclosures in the necessary forms were sufficient to notify the Plaintiff of potential ERISA violations. The court distinguished this case from another case in which there was only a single breach by the repetition of the prohibited transactions here. The court determined that Plaintiff asserted sufficient facts in the complaint to demonstrate the suit may not be time barred.

For the above reasons, the court denied Defendants motion to dismiss.

Primary materials are available on the DU Corporate Governance Website


First Circuit Found Sufficient Evidence to Affirm Insider Trading Conviction

In United States v. Bray, 853 F.3d 18 (1st Cir. 2017), defendant Robert Bray (”Defendant”) appealed his conviction for insider trading. The First Circuit affirmed the jury’s guilty verdict for criminal securities fraud, finding that sufficient evidence supported the jury’s findings and that an error in the jury instructions was inconsequential.

The prosecution alleged Defendant asked for, and received, nonpublic information from Chris O’Neill (“O’Neill”) after stating he needed to make a “big score” to fund a real estate project and asking for any “bank stock tips”. O’Neill, who worked for Eastern Bank (“Eastern”), was performing due diligence on a local bank, Wainwright Bank & Trust Co. (“Wainwright”), a possible acquisition target. After O’Neill provided Wainwright’s name on a napkin, Defendant allegedly purchased a large amount of shares. After Eastern announced the acquisition, Defendant offered O’Neill an opportunity to invest in his real estate project. He ultimately sold the shares, netting approximately $300,000.

Defendant challenged the sufficiency of the prosecution’s evidence that he knew O’Neill breached a fiduciary duty by providing the tip. Specifically, Defendant asserted that O’Neill did not receive a “personal benefit” for providing the information. He also claimed the trial court erred by instructing the jury that it could convict him if he “should have known” O’Neill had an obligation to keep the information confidential. 

The unlawful trading of securities based on material, nonpublic information, or illegal insider trading, violates both Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Individuals trusted with confidential information about a corporation cannot secretly use that information for their personal advantage and must either abstain from trading in that corporation’s securities or disclose the information ahead of time. In “tipping” situations, the person receiving the misappropriated information “inherits” the tipper’s duty to abstain or disclose “’if the tippee knows the information was disclosed in breach of the tipper’s duty’ and ‘may commit securities fraud by trading in disregard of that knowledge.’” To breach a duty, however, the tipper must receive a “personal benefit” as a result of the disclosure. 

With respect to jury instructions, failure to object results in an application of the “plain error” standard. “In order to establish plain error, [Defendant] must show ‘(1) that an error occurred; (2) that the error was clear or obvious; (3) that the error affected his substantial rights; and (4) that the error also seriously impaired the fairness, integrity, or public reputation of judicial proceedings.’”

The court held there was sufficient evidence for a reasonable jury to conclude that Defendant “knew O'Neill tipped him in expectation of a personal benefit.” As the court determined: 

O'Neill and [Defendant’s] close relationship is our starting point: though Bray may not have known the exact benefit O'Neill sought in exchange for the tip, a reasonable jury could have readily inferred O'Neill's intent to benefit [Defendant]. [Defendant’s] actions after Eastern announced the Wainwright acquisition bolster this conclusion. He thanked O'Neill for the tip and, unprompted, offered him an opportunity to invest in the Watertown Project on two separate occasions, the same project for which he requested the tip in the first place. Before this, [Defendant] had never offered O'Neill a similar opportunity and had rarely (if ever) made such offers to anyone else at Oakley. Consequently, the jury was entitled to conclude that [Defendant] knew O'Neill sought a personal benefit in exchange for the tip. (citation omitted) 

The evidence was, therefore, sufficient for a jury to conclude that O’Neill “anticipated a benefit and breached a fiduciary duty to his employer.” 

With respect to the jury instruction, the court found that the lower court “clearly erred.” Nonetheless, “the government presented ample evidence that [Defendant] knew O'Neill had breached a duty of confidentiality by tipping, or at least possessed the requisite ‘culpable intent.’” As a result, “different jury instructions ‘would have been of little help’” to Defendant and, his allegations feel “short of the ‘rather steep’ road to success under the ‘exacting’ plain-error standard.” For the reasons above, the court affirmed the Defendant’s guilty conviction.

The primary materials for this case may be found on the DU Corporate Governance website.