A jury ruled against SEC charges of fraud against former pro football player Willie Gault, another in a string of embarrassing high-profile litigation losses in cases tried by the SEC. The jury found Gault liable for lesser charges of false SOX certifications and circumventing internal controls. Director of the Division of Enforcement Andrew Ceresney gave a faux victory statement that he was “pleased with the jury’s verdict holding Willie Gault accountable for securities law violations.” And perhaps the jury’s findings represent somewhat more than the defense counsel’s post-trial description of “the equivalent of a traffic ticket.” But make no mistake, this is another troubling trial loss for the SEC because the fraud charges are what these cases are all about. It is highly likely the case could have been settled a long time ago on the lesser charges (and at much less expense for both the Government and the defense).
The SEC’s use of major resources in the effort to “get” Gault on the fraud charges should be seriously re-examined by Ceresney and other key enforcement managers. Instead, Ceresney may well chalk this up as another example of a flawed jury being unable to understand the evidence, or unwilling to see the case as the SEC staff does, and therefore representing another reason why such cases should be directed to the SEC’s administrative court to avoid independent fact-finding.
The case involved an alleged “pump and dump” of Heart Tronics, Inc. stock, orchestrated by the company’s former outside counsel, Mitchell Stein. Stein was previously convicted of criminal securities fraud and is in prison. The SEC contended that Stein “installed” Gault “as a figurehead co-CEO . . . in order to generate publicity for the company and foster investor confidence,” and “orchestrat[ed] a campaign of misinformation designed to inflate the price of Heart Tronics stock” before selling some of his wife’s stock in the company. She owned 85% of the company’s stock.
The SEC’s complaint described in detail the steps of an elaborate scheme by Stein, but says precious little about Gault’s supposed role in the scheme. In fact, the SEC’s theory against Gault with regard to the alleged pump and dump scheme seemed to be no more than the contention that he “rarely questioned Stein’s direction,” “abdicated [his] fiduciary responsibilities to Heart Tronics shareholders, ” and “signed, or unlawfully authorized to be signed, public Commission filings containing false statements about the Company’s purported sales.” It appears that the only serious fraud theory against Gault was not participation in Stein’s extensive stock scheme, but that Gault allegedly assisted in an effort to induce a single investor to loan money to the company based on misrepresentations, and then diverted some of those funds for personal use. Pre-trial motions to exclude these separate transactions from the case as not involving securities were denied by the district court. A copy of the complaint can be found here: Complaint in SEC v. Heart Tronics et al.
One might question the wisdom of pursuing a fraud case against someone who could easily be argued to be a victim of the fraud, not one of its perpetrators. If the SEC lacked any real evidence that Gault participated in the pump and dump fraud scheme, no case should have been brought on that theory. Arguing to the jury that Gault was a fraudster without real evidence to support that charge could easily cause the jury to distrust the SEC and its trial counsel. This may be another example of the SEC overcharging its case by imprudently focusing on fraud charges. See SEC’s Single-Minded Focus on Fraud Theory Results in Loss on Appeal. In any event, we know from our own experience that the SEC will move to trial on fraud cases with scant evidence that the defendant actually participated in a fraud, based on the personal views (or even pique) of enforcement lawyers, rather than a serious, disinterested evaluation of the evidence a jury will see.
Hopefully, we will learn over time more about why the jury didn’t buy the SEC’s case. Often, an effort to prove fraud based solely on neglect and breach of fiduciary duty (neither of which constitutes “fraud”), based on an expansive theory of “recklessness,” will, and should, be unsuccessful. And the specifics of Gault’s role in the one investor’s loan to the company may well have been less important than the SEC alleged, or the jury may just have questioned its significance in the context of a case focused on a broader alleged scheme in which Gault was not even alleged to be a meaningful participant.
Whatever the reason, the loss, along with other recent losses, should cause management in the SEC’s Division of Enforcement to engage in serious self-examination about the cases the Division brings to trial, and its process for deciding whether they are truly trial-worthy. That would be a much more sensible reaction than simply trying to shift more cases to the administrative court in order to avoid the annoyance of independent juries.
March 19, 2015
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