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 dismissed.
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 practice.
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 the decision.
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 Grenon)