Re: 11/2/04 - [Elgindy] White Collar Crime Prof Blog
White Collar Crime Prof Blog
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Peter J. Henning
Professor of Law
Wayne State Univ. Law School
Ellen S. Podgor
Professor of Law
Georgia State Univ. College of Law
November 2, 2004
Market Manipulation Trial
The conspiracy trial of Amr (Anthony) Elgindy, who ran a well-known website for short sellers, and Jeffrey A. Royer, a former FBI agent, began in U.S. District Court in Brooklyn yesterday. The indictment in the case describes a scheme that included Royer leaking confidential information about government investigations of corporate misconduct to Elgindy so that he could sell short the company’s stock and then leak the information to the market, including subscribers to his newsletter and website. An article in the New York Times (Nov. 2) describes the opening statements of the two sides. Elgindy’s defense is that he tried to stop fraudulent companies from continuing to harm investors, and he worked with the government to stop fraud.
There are two interesting aspects of the case (beyond the potential involvement of an FBI agent in leaking confidential information). First, there has been mention that Elgindy, whose family moved to the United States from Egypt when he was 3, may have had advanced notice of the September 11 terrorist attacks because on September 10 he sold stocks to avoid what he allegedly said was a likely substantial drop in the market in the near future. At this point, the trial judge has not permitted the government to mention this theory to the jury, but will revisit it during trial. Needless to say, such an accusation would be explosive, and given how prejudicial it would be, it seems unlikely the judge would allow the government to raise it. The indictment does not mention this conduct, and its probative value seems hardly sufficient to outweigh the prejudice.
A second aspect of the case is the question regarding the relevance of the truthfulness of the information Elgindy released after the short sales for the market manipulation charge. The indictment states:
"Often, after short selling the stock of a Targeted Company, the defendants AMR I. ELGINDY, TROY PETERS and DERRICK W. CLEVELAND, together with others, coordinated the release of negative, and sometimes false, information with short selling in a manner designed to exaggerate the negative market sentiment for the stock. ELGINDY’s paid subscribers received the information and recommendations first, so that they could position themselves to profit if the broader market reacted to the exaggerated negative market sentiment for the stocks. The subscribers, including subscribers in the Eastern District of New York, passed a portion of their profits back to ELGINDY in the form of subscription fees."
Note that the indictment says only that the information was “sometimes false.” While it may appear odd that the release of truthful information can be a crime, market manipulation cases brought under Section 10(b) and Rule 10b-5 do not require that false information be released, only that there be an omission of material information. The government’s claim is that Elgindy did not disclose his trading in the stock when he released the information, so that he engaged in “scalping.” The two main scalping cases are SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963), which involved a violation of § 206 of the Investment Advisers Act of 1940, and Zweig v. Hearst Corp., 594 F.2d 1261 (9th Cir. 1979). Neither case involved a criminal prosecution, and it will be interesting to see if the U.S. Attorney can establish a market manipulation case based on use of truthful information. The government also alleges that Elgindy and the other defendants engaged in insider trading based on the nonpublic information received from Royer, and that may be a stronger case of securities fraud. Insider trading only really works with truthful information. (ph)
November 2, 2004 in Prosecutions, Securities | Permalink
Comments
Do you have any thoughts as to the why the government did not bring any bribery charges against the defendants? Example: 18 USC 201.
Do you know if either FBI Agent (there were two, according to WaPo) is cooperating?
Posted by: Carpundit | November 3, 2004 08:34 AM
Regarding a 201 charge, it certainly could be brought, but it appears from the indictment that the government charged only conspiracies for the various substantive violations, plus an obstruction of justice charge. By my count there are 4 separate conspiracies: RICO, 2 securities frauds, and obstruction (which draws in the second FBI agent, Wingate). I suspect that the conspiracy charges allow for such a wide range of evidence that the USAO went with them rather than the narrower 201 charge. Also, I found that some offices don't like to bring corruption charges because of the proof problems involved in them, i.e. the quid pro quo requirement. From the allegations, it appears that only Royer got money.
Regarding cooperation, Royer is not cooperating and is on trial with Elgindy. Wingate's trial was severed, and I don't know whether she is cooperating. A review of the docket sheet does not indicate that she entered a plea.
peter henning
Posted by: Peter Henning | November 3, 2004 11:03 AM
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