DOJ Closes Its Senator Insider Trading Investigation, Except for Burr

As we posted last week, the FBI was apparently investigating Senators Loeffler, Feinstein, Inhofe and Burr for possible insider trading. Yesterday it announced that it was closing the investigation of all except Burr.

It is important to note that there were probably two investigations going on, one by the FBI and one by the SEC. The SEC's investigations are private, so we won't know about them.

The FBI investigation would be part of a criminal investigation, and given the claims that have been reported in the press by the Senators, it is not much of a surprise that the criminal investigations are closed. There is no word on a pending, or closed SEC investigation.

Feinstein claims her account is in a blind trust, Loeffler claims that her husband was involved in the trades with no involvement by her. Inhofe's trades were reportedly sales of tech companies, not directly coronavirus related, and he claims that he gave instructions in 2018 to his broker to move his portfolio entirely out of stocks and into mutual funds in December 2018. He stated that his adviser has been doing so since then, and he was not aware of or consulted about any transactions.

While Feinstein and Inhofe may have valid defenses, Loeffler's trades are more problematic given the allegation that she sold the same day White House officials briefed her and her Health, Education, Labor and Pensions Committee colleagues about the coronavirus. Her sales, and purchases were coronavirus related, according to press reports.


The fact that the DOJ has shut down a criminal investigation does not mean that the SEC is not investigating. Given the fact that penalties for insider trading from the SEC can be up to three times the profit gained, or loss avoided, that is a significant penalty.

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Mark Astarita is a nationally recognized securities fraud attorney representing investors and financial professionals in a wide variety of arbitration, litigation and investigative matters. He can be reached at 212-509-6544 or by email at mja@sallahlaw.com

FBI Search Warrant Served on Stock Trading Senator

According to multiple press reports, the FBI seized the cellphone of Senator Richard Burr, as part of an investigation into insider trading.

Burr allegedly sold massive amounts of stock and tipped off donors in March after receiving an intelligence briefing on the looming coronavirus pandemic.

The search warrant is unusual. In fact, the involvement of the FBI in an instider trading investigation is unusual. While that may be simply because they are dealing with a United States Senator, it is usually a sign that a criminal investigation is underway.

Were Elon's Tesla Tweets Illegal?

Musk tweeted, and Tesla crashed, but was it securities fraud?

Some background from The Verge:

Musk tweeted he’d sell “almost all” his physical possessions. Well, all right. Then, he tweeted that Tesla’s share price was too high, sending its shares down. Then he tweeted part of “The Star Spangled Banner,” America’s difficult-to-sing national anthem. He encouraged us all to “rage, rage against the dying of the light of consciousness,” which somewhat mangles the meter of Dylan Thomas’ best-known poem. He announced his girlfriend, the musician Grimes, was mad at him.

https://www.theverge.com/2020/5/1/21244747/elon-musk-tesla-tweets-shares-sec-settlement-stock

Tesla's stock crashed after these events, but did Musk act illegally?

The answer is probably no, based on these facts. Basic securities fraud by market manipulation requires an intent to impact the market by a false or misleading statement. So, first the SEC, or a private investor would have to prove that Musk acted with "scienter", that is that he acted with the knowledge that what he was doing was wrong. That is harder to prove unless Musk had some motivation to depress the price of the stock, like owning puts, or planning a stock buyback.

At the same time, is it illegal for an executive to state that his company's stock price is too high? Again, unless he is going to profit from it, probably not, and one could argue that he has an obligation to speak out.

One additional  twist. In his settlement with the SEC last year Musk agreed to have his tweets pre-approved by a company lawyer. If he did not, he may be in violation of the settlement, leading to a host of different problems.

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Mark Astarita is a nationally recognized securities lawyer. He and his partners in his law firm, Sallah Astarita & Cox, LLC, are former SEC and brokerage firm attorneys, representing investors, corporate executives and financial professionals in securities fraud matters across the  country.

SEC Troubles No Bar to Small Business Relief Funds

From Bloomberglaw: 

A penny-stock company under investigation by the Securities and Exchange Commission for market manipulation in connection with a 300% jump in its shares two years ago got a $3.1 million loan from the government’s coronavirus relief fund for small businesses.

Cool Holdings Inc., which sells electronics equipment, is one of at least three companies whose run-ins with the SEC didn’t prevent them from tapping the $349 billion first round of the Small Business Administration’s Paycheck Protection Program.

Two other recipients of PPP funds, MiMedx Group Inc. and CV Sciences Inc., have paid fines to settle SEC investigations. In early April, MiMedx, a Marietta, Georgia-based maker of skin grafts and other biomaterials, also agreed to pay $6.5 million to end a Justice Department probe into claims it defrauded the federal government. The companies neither admitted nor denied wrongdoing.

 https://news.bloombergtax.com/financial-accounting/sec-troubles-are-no-bar-to-getting-small-business-relief-funds

Lorenzo: A Win for the SEC and All Plaintiffs

The SEC's win at the Supreme Court in Lorenzo v. Securities and Exchange Commission, No. 17-1077 (March 27, 2019) will provide a significant benefit to the SEC in its enforcement program, but more importantly to class action participants.

The web is full of legal analysis of the opinion, but the impact can be summarized in two sentences from the opinion- “dissemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b-5, as well as the relevant statutory provisions. In our view, that is so even if the disseminator did not ‘make’ the statements and consequently falls outside subsection (b) of the Rule.” 

In other words, while you cannot be charged for aiding and abetting, you can be charged for distributing someone else's false or misleading statement.

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Mark J. Astarita, Esq. has represented investors and brokers in SEC enforcement proceedings as well as in class action litigation, and investors who decide to opt-out of class action cases. To discuss a potential case with him, email him at mja@sallahlaw.com