| NEW YORK
NEW YORK May 19 Faulting the U.S. Securities
and Exchange Commission's trial strategy, a federal appeals
court on Monday overturned a jury's finding that a former
Prudential Securities broker committed civil fraud by rapidly
trading mutual funds.
The 2nd U.S. Circuit Court of Appeals in Manhattan said the
evidence did not support a December 2011 negligence verdict
against Frederick O'Meally, and that the case should be
Circuit Judge Dennis Jacobs wrote for a three-judge panel
that "the SEC ultimately succumbs to its strategic choice" to
have pursued an all-or-nothing strategy seeking to hold O'Meally
liable for intentional or reckless conduct, not mere negligence.
O'Meally, who worked for Prudential from 1994 to 2003, had
been accused of trying to exploit market inefficiencies by
conducting "market timing" trades in 60 mutual funds on behalf
of hedge fund clients. The practice is considered improper, but
not illegal, and can hurt long-term investors by boosting costs.
Some of the mutual funds, with Prudential's support, discouraged
The decision came as the SEC steps up enforcement efforts at
trial, a strategy that has led to some recent losses, including
an insider trading case against Dallas Mavericks owner Mark
Cuban. The SEC has also had courtroom
successes, including on May 12, when it won a fraud verdict
against wealthy Texas investor Samuel Wyly.
SEC spokesman John Nester said the regulator is reviewing
Jury selection began on Monday in another similar trial in
Manhattan, against hedge fund manager Nelson Obus.
Jurors found O'Meally not liable for intentional or reckless
conduct with respect to all 60 funds, but liable for negligence
as to six funds from the American, American Century, Goldman
Sachs, Hartford, PIMCO and Van Kampen fund families.
The resident of Bay Shore, New York, was ordered in March
2013 to pay $763,238, representing fees, interest and a fine.
However, the 2nd Circuit said no reasonable juror could find
O'Meally negligent, and that it was not unreasonable for him to
have believed that market timing was okay.
It said this was because some of the mutual funds made
exceptions to allow the practice, and that Prudential itself had
secured some exceptions.
The evidence "establishes without contradiction that the
funds were inconsistent in their proscriptions on market timing
and that Prudential supported O'Meally's practices," Jacobs
wrote. "The jury's findings could only have been the result of
sheer surmise and conjecture."
Three other former Prudential brokers previously settled
related SEC charges. O'Meally is the last defendant.
"Fred O'Meally invested 11 years of his life trying to prove
he did nothing wrong, and today he was vindicated," his lawyer
Andrew Frisch said. "Fred always believed that what he did was
appropriate and had been approved by management."
Prudential Securities eventually merged into Wachovia
Securities, which later became part of Wells Fargo & Co.
The appeal is O'Meally v SEC, 2nd U.S. Circuit Court of
Appeals, No. 13-1116.
(Reporting by Jonathan Stempel in New York. Editing by Andre