The insider trading case against Leon Cooperman is eerily similar to the SEC’s loss to Mark Cuban, by relying on a “he-said, she-said” claim of an oral promise not to trade – but is bolstered by Cooperman asserting his right against self-incrimination during SEC testimony. The gravamen of the case is the same: that Cooperman made an oral agreement not to trade stock based on information from a company executive.1 But because Cooperman “took the Fifth” during his SEC investigative testimony, the SEC may have the upper hand this time.
The SEC is relying on Cooperman’s alleged oral promise not to trade because it has to prove that he had a “fiduciary or other similar relationship of trust and confidence” with Atlas Pipeline Partners, L.P. (“APL”) not to use its confidential information about a merger with Elk City for his personal gain.2 Cooperman was not an APL officer or employee, and thus he did not have a traditional fiduciary relationship with APL – he was merely a 9% stockholder. The alleged promise establishes a “similar relationship of trust and confidence” with APL under the “temporary insider” theory of liability.3 Thus, the SEC had to rely on the alleged oral promise to keep APL’s information about a pending merger confidential to prove liability.
SEC’s Cuban loss shows “he-said, she-said” allegations of an oral promise of confidentiality often do not hold up in court
The obvious problem with the SEC’s reliance on an alleged oral promise is that the SEC lost on the exact same theory in the Mark Cuban case. In Cuban, the SEC alleged that Cuban orally agreed on a June 28, 2004 phone call “that he would keep whatever information the CEO intended to share with him confidential,” but then sold Mamma.com stock right after the CEO told him about an upcoming PIPE offering.4 Mamma.com’s CEO testified at his deposition that Cuban orally agreed not to trade on information about the PIPE offering. But he did not show up for trial, because he was out of the country in Canada at the time, so the SEC had to rely on his deposition testimony. The Cuban jury rejected the CEO’s testimony, and ruled that Cuban never agreed not to trade on the information he learned on the phone call.5
As with the CEO in Cuban, the “APL Executive 1” the SEC relies on in the Cooperman case may suffer from credibility issues. Importantly, the Executive is apparently unable to pin down the specific date and phone conversation when Cooperman allegedly “explicitly agreed that he could not and would not use the confidential information APL Executive 1 told him to trade APL securities.”6 The SEC Complaint cites three phone calls on July 7, 19 and 20, 2010, but only vaguely alleges that Cooperman orally agreed not to trade “during one of these conversations.” Such vagueness and imprecision suggests that APL Executive 1 does not remember which call involved the alleged Cooperman oral agreement not to trade, and thus calls into question his memory of other details, such as whether there was any agreement not to trade. Similarly, the APL Executive has a motive to lie to avoid his own liability: he may have freely shared confidential information about the APL merger to induce Cooperman to hold onto APL stock (which was doing poorly) but is now making up the oral agreement to portray himself innocently to regulators.
In stark contrast, in Cuban, the SEC complaint identified the exact date of the call (June 28, 2004), and several internal Mamma.com memos and emails from that time period that explicitly referenced the call and Cuban’s alleged promise not to trade.7 Yet the jury still rejected the SEC’s allegation of an oral agreement. The Cuban jury verdict suggests that the SEC’s less detailed allegations in Cooperman may also be rejected by a jury.
SEC’s case is bolstered by Cooperman pleading the Fifth in SEC testimony and allegations that he tried to influence an APL executive’s testimony
The flaw in the SEC’s case may be offset, however, by the fact that Cooperman asserted his right against self-incrimination during his SEC investigative testimony when asked about his “trading in APL securities,”8 and by his alleged attempts to contact an APL Executive after receiving a subpoena by the SEC. Several courts have held that a person who asserts his Fifth Amendment right against self-incrimination during SEC investigative testimony will receive an adverse inference against him at trial on the issues about which he refused to testify.9 These courts have applied an adverse inference even though a person later waived the privilege and agreed to testify about all issues at deposition and at trial in a civil case. The reasoning of these decisions has been that (i) taking the Fifth is relevant as an admission that the witness believes criminal liability is reasonably possible; (ii) defendants should not be permitted to gain strategic advantage by selectively waiving their right against self-incrimination at trial; and (iii) the SEC gave notice it would seek an adverse inference during testimony.
On the other hand, there is a split of authority on the issue, and several courts have refused to apply an adverse inference for taking the Fifth during SEC investigative testimony, where the defendant later testifies about all issues during his civil deposition and at trial.10 These courts reason that there is no “strategic advantage” in litigation from taking theFifth during an SEC investigation, so long as the SEC has a full and fair opportunity to get testimony at a later civil deposition and at trial. Similarly, many criminal law practitioners have argued that an adverse inference should not apply to invoking the Fifth Amendment during SEC investigative testimony where, as was the case with Cooperman, there is a parallel criminal investigation pending at the time the SEC takes investigative testimony.11
This will be a key issue at trial, because it is clear Cooperman intends to mount a full defense on the merits against the SEC’s claims despite invoking the Fifth Amendment during SEC testimony. Notably, Cooperman has begun to defend himself publicly, including through a letter to investors circulated on Fortune.com.12 Cooperman’s letter argues that his trading pattern was not suspicious and was not designed for personal gain, including that he did not sell stock immediately after the APL merger was publicly announced. He also appears to argue trading based on a “mosaic”-type theory of relying on prior information for his trades. Whether Cooperman can prevail will likely depend on which side the court chooses as to whether to draw an adverse inference for taking the Fifth during the SEC investigation.
The SEC’s case is also bolstered by Cooperman allegedly contacting APL Executive 1 after receiving an SEC subpoena to get the Executive to assure him that no confidential information about the APL merger was shared during their July 2010 phone calls. Cooperman also allegedly contacted a different APL Executive and asked him to tell APL Executive 1 that Cooperman did not discuss any confidential information during the phone calls. The SEC will argue that Cooperman was attempting to fabricate a story for APL Executive 1 to tell if they were questioned by regulators – classic witness tampering. Cooperman will likely respond that he was only calling the APL Executive 1 to try and confirm the truth. Nevertheless, Cooperman’s phone calls are bad facts for his case, and almost certainly were done without prior advice of counsel. Clients who receive SEC subpoenas should not contact other witnesses without first consulting counsel.
In sum, the SEC’s Cooperman insider trading case is very similar to the Cuban case, since it relies on a “he-said, she-said” claim of an oral promise not to trade. Whether an adverse inference applies due to Cooperman taking the Fifth in SEC testimony may determine the outcome of the case. And testimony concerning his contacts with other witnesses may also play a significant role. That Cooperman’s post-subpoena conduct is a focus of the SEC Complaint proves that it is crucial for clients to immediately consult counsel at the first hint of an SEC investigation. A client’s reputation and career can depend on it.
1. Compl. ¶ 34, S.E.C. v. Cooperman, et al., No. 16-cv-05043-JS (E.D. Pa., filed Sept. 21, 2016).
2. U.S. v. O’Hagan, 521 U.S. 642, 671 (1997).
3. Dirks v. S.E.C., 463 U.S. 646, 655 n.14 (1983).
4. Compl. ¶ 14, S.E.C. v. Cuban, No. 3-08-cv-2050-D (N.D. Tex., filed Nov. 17, 2008).
5. S.E.C. v. Cuban, No. 3-08-cv-2050-D (N.D. Tex.),Jury Charge at 13, dkt. No. 278 (Oct. 16, 2013); “How Mark Cuban Defeated the SEC, (Bus. Insider, Oct.), available at http://www.businessinsider.com/how-mark-cuban-defeated-the-sec-2013-10; but see U.S. v. McGee, 763 F.3d 304, 308-09 (3d Cir. 2014) (upholding jury verdict finding relationship of trust and confidence arising out of Alcoholics Anonymous mentor relationship).
6. Cooperman Compl. ¶ 34.
7. Compl. ¶¶ 14-20, S.E.C. v. Cuban.
8. Cooperman Compl. ¶ 59.
9. See, e.g., S.E.C. v. Dibella, 2007 WL 1395105, at *3 (D. Conn. May 8, 2007) (instructing jury that it may draw adverse inference from invoking Fifth Amendment in S.E.C. investigative testimony); S.E.C. v. Herman, 2004 WL 964104, at *7 (S.D.N.Y. May 5, 2004) (applying “negative inferences that may be drawn from the invocation of the Fifth Amendment….during the course of the SEC’s investigation”); S.E.C. v. Cassano, 2000 WL 1512617, at *2 n.1 (S.D.N.Y. Oct. 11, 2000) (“The fact that this occurred some time ago and that these witnesses subsequently have waived the privilege in this action goes to the weight of the inference, not to the propriety of drawing it.”); S.E.C. v. PacketPort.Com, Inc., 2006 WL 2349452, at *6 (D. Conn. July 28, 2006) (admitting evidence of invoking the Fifth Amendment right against self-incrimination during S.E.C. investigative testimony).
10. S.E.C. v. BIH Corp., 5 F. Supp. 3d 1342, 1347 (M.D. Fla. 2014) (“The Court . . . declines to draw the requested adverse inference” because the defendant “was subsequently deposed and there is no indication in the record that he asserted the Fifth Amendment during his testimony”); S.E.C. v. Freiberg, 2007 WL 2692041, at *10 (D. Utah, Sept. 12, 2007) (adverse inference “unwarranted” where defendant invoked Fifth Amendment during investigation but later “fully responded to the SEC’s questions in his deposition and at trial”); cf. S.E.C. v. Glob. Telecom Servs., L.L.C., 325 F. Supp. 2d 94, 111 (D. Conn. 2004) (refusing to admit evidence of pleading the Fifth Amendment “during the SEC investigation” but permitting adverse inference based on refusing to testify during deposition); Fujisawa Pharm. Co. v. Kapoor, 1999 WL 543166, at *9 (N.D. Ill. July 21, 1999) (refusing to apply adverse inference based on invoking Fifth Amendment rights during “testimony before a congressional subcommittee investigating the generic drug approval process” prior to an separate from civil litigation).
11. See L. Bader, “Asserting the 5th During S.E.C. Investigations,” (Law360.com, Aug. 2, 2011) (arguing that “the pendulum should swing to the defendant’s side”).
12. See S. Gandel, “Here’s the Letter Accused Insider Trader Leon Cooperman Just Sent His Investors,” (Fortune.com, Sept. 21, 2016), available at http://fortune.com/2016/09/21/leon-cooperman-letter-insider-trading/ (Cooperman also acknowledges that the U.S. Attorney’s office has conducted a parallel criminal investigation but has “has determined not to pursue charges for the time being pending the U.S. Supreme Court’s decision” on tipper-tippee liability – a different theory than the one pled by the S.E.C.).