NEW YORK A U.S. appeals court upheld the 2008 fraud conviction of money manager and arts patron Alberto Vilar, but ordered that he be resentenced, in a decision that may set back some government efforts to fight insider trading and other securities fraud.
The 2nd U.S. Circuit Court of Appeals in New York said on Friday that resentencing is needed because a recent U.S. Supreme Court decision said a key federal law used to fight securities fraud did not cover investments made outside the country, and that such investments were used in setting Vilar's punishment.
Mathew Martoma, a former manager at Steven A. Cohen's hedge fund SAC Capital Advisors LP, has made a similar argument in defending against criminal insider trading charges, saying the law does not reach his trades in American depository receipts of Ireland's Elan Corp Plc. Prosecutors said those trades were based on illegal tips about an Alzheimer's drug trial.
Jennifer Queliz, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, declined to comment.
Prosecutors argued that Vilar and co-defendant Gary Tanaka promised clients at the now-defunct Amerindo Investment Advisors Inc high returns by investing in "Guaranteed Fixed Rate Deposit Accounts," but lost millions of dollars in technology stocks that plunged when the dot-com bubble burst starting in 2000.
The case was centered on and included testimony from Lily Cates, the mother of "Fast Times at Ridgemont High" actress Phoebe Cates, who said she was swindled out of $5 million.
A jury found Vilar guilty on 12 counts including securities fraud, wire fraud and money laundering, and Tanaka guilty on three counts. Vilar was sentenced to nine years in prison and Tanaka to five years, and the men were ordered to pay almost $35 million in restitution and forfeit more than $54 million.
Vilar, 72, and Tanaka, 70, were released from federal custody in October, federal prison records show.
In upholding the convictions, Circuit Judge Jose Cabranes wrote for a three-judge 2nd Circuit panel that the evidence demonstrated that Vilar and Tanaka engaged in fraud related to the domestic purchase or sale of securities.
But Cabranes said the men must be resentenced, and their restitution recalculated, because the punishment had in part been based on the purchases of securities abroad. He also said math errors required recalculating the forfeiture amount.
Cabranes said the punishment was improper under a 2010 U.S. Supreme Court decision, Morrison v. National Australia Bank, which said the fraud law known as Section 10(b) of the Securities Exchange Act of 1934 reached only purchases of securities in the United States or listed on U.S. exchanges.
Morrison was a civil case, but Cabranes said its reasoning, incorporating a presumption against applying U.S. law extraterritorially, applied to criminal cases.
He said this is because "Congress generally legislates with domestic concerns in mind," and the presumption shields against "unintended clashes" of laws that can cause "international discord."
Hannah Buxbaum, interim dean at Indiana University's Maurer School of Law, said, "Morrison diminished the government's ability to address many forms of cross-border misconduct, and we're now seeing that play out for the Department of Justice."
Nonetheless, while the trial predated Morrison and jurors were not instructed about any of this, Cabranes said "this error was not plain" and the convictions could stand.
He rejected the defendants' argument that because the accounts were "carefully structured" to occur abroad, it did not matter that some clients purchased securities domestically.
"We see no reason to rescue fraudsters when they complain that their perfect scheme to avoid getting caught has failed," Cabranes wrote.
The 2nd Circuit sent the case back to U.S. District Judge Richard Sullivan in Manhattan for resentencing.
SHOWING THE "TRUE PICTURE"
Vivian Shevitz, a lawyer for Vilar, said she was gratified by the Morrison analysis but disappointed with other rulings, and intends to "show the true picture" in further court proceedings. "We proclaim again that no Amerindo investor suffered any losses," she added.
Alan Dershowitz, the Harvard Law School professor and lawyer for Tanaka, did not respond to requests for comment.
Vilar's fall from grace began just over a decade ago when he reneged on promised donations to the Metropolitan Opera in New York, the Lyric Opera of Chicago, the Los Angeles Opera, the Washington National Opera and other organizations.
Martoma faces a November 4 trial over his trading in Elan, which agreed last month to be bought by U.S. drugmaker Perrigo Co, and Wyeth, which is now part of Pfizer Inc. SAC was criminally charged last month with insider trading. Both pleaded not guilty. Cohen has not been criminally charged.
Richard Strassberg, a lawyer for Martoma, declined to comment on the Vilar decision. He has argued that the Elan ADRs Martoma traded "simply repackaged" Elan stock traded abroad and were therefore outside the reach of Section 10(b).
Buxbaum said that argument may be tough to sustain. "There may be reasons that the American regulatory interest in these transactions is weaker than the interests of the issuer's home country," she said. "But the Morrison test is black-and-white, and I believe its plain language covers these transactions, because the ADRs were traded on an American exchange."
The case is U.S. v. Vilar et al, 2nd U.S. Circuit Court of Appeals, Nos. 10-521, 10-580 and 10-4639.
(Reporting by Jonathan Stempel in New York; Additional reporting by Emily Flitter; Editing by John Wallace and Andre Grenon)