As Anyone Who Knows Securities Law Knows, Barry Ritholtz Does Not Know Securities Law ...

When I opened The AmLaw Litigation Daily today, I saw a link to an article about the Fabrice Tourre trial, which I have written about earlier.  The article brought to my attention a post by Barry Ritholtz about the lawsuit, which I found to be a remarkable combination of arrogance and ignorance about the legal issues therein discussed.  Ritholtz's website describes him as a cum laude graduate of Cardozo Law School and a member of its Law Review, who left the practice of law after a few years to go into "finance" by which I think he means managing money in the stock market. He is now the "CEO and Director of .. an online quantitative research firm" and writes about the market and financial issues on his blog and elsewhere.  He may be good at that line of business, I don't know.  As for his legal insights or lack thereof, well, the Model Rules of Professional Conduct and the ABA call on attorneys to "consider it part of his or her fundamental professional responsibility to further the public’s understanding of the rule of law and the American system of justice."  This post is intended to fulfill that responsibility by correcting the public record as to what the applicable law is.

Ritholtz's post is a screed about supposed errors in a column by Andrew Ross Sorkin in the New York Times' "DealBook" that identified numerous instances of the SEC seeking to exclude information from Tourre's jury, and noted the irony of an exclusionary agenda in a suit about full disclosure.  Ritholtz describes the article as "terrible media coverage"; "the awful media story of the day"; ""botched ... coverage"; "reek[ing]of defense attorney spin, expertly flacked"; "paydirt in ... gullibility"; "laughabl[e]"; "completely erroneous"; "nonsense"; "slipshod"; and "one-sided and erroneous in the extreme". I wonder if this is how they teach legal writing at Cardozo -- the highest possible ratio of epithets and adjectives to substantive analysis as possible?  You can see why someone who writes like that would have grown frustrated with the practice of law, where you have to back up claims like that with, you know, evidence and authority.

Ritholtz explains Sorkin's column with the following: "As anyone who understands security law knows, prosecutors are extemely [sic] limited about what they can say in public about an active litigation (Rights of the accused and all that). This allows clever defense lawyers to find gullible journalists to dupe with a one sided set of ridiculous accusations, knowing full well that the SEC cannot respond."

Well, as anyone who understands criminal law knows, there is no "prosecutor" in a civil case and the "rights of the accused and all that" (in, I think, the Bill of Rights?) aren't available in a civil case where there is no "accused".  And SEC v. Tourre is a civil case.

Also, as anyone who reads media coverage of judicial proceedings knows, the prosecution is by far more likely to leak details about the case to the media at the pretrial stage, in the hope of pressuring defendants or sometimes just to embellish the prosecutor's image for future career or electoral accomplishments. As one such example, counsel to the parents of Jon Benet Ramsey wrote: "Outrageous falsehoods were leaked to the media by authorities in an effort to break the Ramseys and force their prosecution. Compelling evidence of the Ramseys’ innocence was, by contrast, kept under wraps by the authorities."

But, in any case, Sorkin's column isn't about "a one-sided set of ridiculous accusations" and the SEC isn't "limited about what it can say publicly" concerning them; Sorkin just reports what the two sides are disputing in court - "in public"!.

Claiming that Sorkin "does not understand Security law of 10b-5 [sic]", Ritholtz states "there is a rich history of 10b-5 prosecution, the statute is specific, the case law well settled, and the evidentiary standards are well known." Drawing on, apparently, his understanding of that well-settled case law, Ritholtz informs us that "The prosecution doesn’t even have to show the salesman knew (or should have known) he was being deceptive. There is no mens rea (guilty mind) component; there is no need to prove actual deception on the buyer; what the buyer knew or should have known is irrelevant."  He goes on to assert (his bold and italics): "All a prosecutor has to demonstrate is that the sales pitch was deceptive, and that deception was material."  Although Ritholtz contends, "When ever I wrote something up, I try to show how I reach my conclusion.", Ritholtz actually does not analyze any particular dispute mentioned in Sorkin's column or explain how his legal insights would lead to a victory for the SEC.  He just quotes 10b-5 and declares "End of story, next case please."

Well, Ritholtz is obviously wrong "as anyone who understands security law knows".  Beyond materiality and deception, the SEC has to show "scienter", which is generally held to be satisfied by a showing of recklessness about the disclosure or lack thereof.  See, Aaron v. SEC, 446 U.S. 680, 691 (1980); see also Allan Horwich, "An Inquiry Into The Perception of Materiality as an Element of Scienter Under SEC Rule 10b-5" (2011) at n.3.  Tourre's state of mind is actually at the heart of the case. So when Sorkin recounts that "The government has argued that Mr. Tourre is part of a 'scheme' to defraud investors, but the government has not charged anyone else. The S.E.C. insists that jurors not be told that."  that is relevant to the scienter requirement:  the SEC (apparently) doesn't have a great deal of direct evidence of scienter, so they (apparently) are trying to establish scienter-by-association, by painting him as part of a "scheme"; so it's relevant for the defense to point out to the jury that, three years after the suit against Tourre was filed, no other members of the "scheme" have been identified, and that may be something the jury would like to know when evaluating the allegation of a "scheme".  It just goes to the strength of the allegation the government chose to make.

Other items Sorkin says the SEC is trying to exclude are generally relevant to the materiality of the alleged deception. In an action under Rule 10b-5, a fact is material if “there is a substantial likelihood that a reasonable [investor] would consider it important” in making its investment decision. An
omitted fact is material if there is “a substantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable investor as having significantly altered the ‘total mix’
of information made available.” (Quotes from Basic, Inc. v. Levinson, 485 U.S. 224, 231-2 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).  So, when Sorkin writes: "The S.E.C., for example, has sought to block any mention of news reports that Mr. Paulson was betting against the subprime mortgage market. The defense argues that the news reports are necessary to demonstrate that the institutional investors, who arguably read the news as part of their jobs, were not duped into thinking that Mr. Paulson was betting that the value of Abacus would rise, undercutting the S.E.C.’s contention that the investors were misled victims."  that information goes to materiality, because published news reports about an asset class are part of the "total mix of information" the investors are exposed to concerning that asset class.

Sorkin also reports that the parties battled over the defense's ability to introduce evidence that the SEC's star witness was the subject of an SEC investigation in an unrelated matter which the SEC dropped just a couple weeks before trial.  The evidence goes to a star witness's bias and credibility when she alleged she was deceived, as the SEC wanted, so sneering (inaccurately) about the elements of a 10b-5 action is irrelevant to the admissibility of evidence about a witness's bias and credibility on an issue even Ritholtz puts at the heart of the case.

In some respects, the SEC's positions smack of desperation.  Their decision to target a relatively junior deal guy has always seemed perverse to me.  There seems to be no "smoking gun" and Tourre is a relatively young person who hasn't made tens of millions of dollars and thus cuts an even more sympathetic figure than the senior people at other firms who prevailed against the SEC in other enforcement actions. And the SEC already collected $550,000,000 from Goldman on the same lawsuit.  They really ought to have dropped the case against Tourre and declared victory. By not doing so, they painted themselves into a "win-or-die" corner and are pulling out all the stops not to be embarrassed again.  I feel sorry for Tourre and hope he prevails at trial.

That concludes my public service announcement which has hopefully added to the public understanding of the law.  As Barry Ritholtz once wrote, "End of story, next case please".