A federal judge in Washington today threw out a portion of a $50 million securities fraud case, saying the U.S. Justice Department was overreaching in part of the prosecution.
The indictment charged three people, Shelly Singhal, Loretta Bush and Dennis Pelino, with participating in a scheme to defraud the U.S. Securities and Exchange Commission through disguised transactions and insider trading that involved a foreign company.
But the indictment, Chief Judge Royce Lamberth of Washington's federal trial court said today, doesn't expressly charge any violation of federal securities laws. Prosecutors instead lodged mail and wire fraud allegations, in addition to false statement offenses.
"This case represents an attempt by the federal government to expand the legal duties owed to the United States Securities and Exchange Commission by a corporate entity that is organized under the laws of the Cayman Islands, headquartered in China, traded publicly in Japan, and exempt from SEC reporting requirements—by charging the defendants with false statements and mail fraud," Lamberth wrote in a lengthy ruling today. "On the face of the indictment, however, many of these counts do not pass constitutional muster."
Lamberth said the case, filed in Washington in May 2011, will proceed to trial on mail fraud charges. The judge dismissed false statement counts against each defendant. In those allegations, prosecutors said Bush, Singhal and Pelino made false statements about certain transactions in statements to the SEC.
The case is rooted in transactions that involved a company called Xinhua Finance Limited, which was organized under the laws of the Cayman Islands and based in Shanghai, China, and its wholly-owned affiliate, Xinhua Financial Network Limited. Xinhua Finance, Lamberth said, provided information products aboutChinese financial markets, including ratings, news and investor relations.
Bush co-founded Xinhua Finance and was its chief executive officer. Pelino, also a founding member, served as an independent member of the company's board of directors. Through his company, SBI USA, Singhal provided investment services to Xinhua Financial.
Lamberth said in his ruling that "the absence of allegations of affirmative false representations by defendants is fatal to the government’s false representations theory of the false statement charges in the indictment."
Still, the judge upheld mail fraud counts, which the defendants attacked from a variety of angles, including the argument that the charges go against a legal principle that prohibits applying U.S. laws abroad.
"We are pleased that the Chief Judge agreed with our position that four of the substantive counts, and a substantial part of the conspiracy charge, should be dismissed, and that other portions of the Indictment should be stricken," said Bush's attorney, Charles Leeper, a partner in the Washington office of Drinker Biddle & Reath.
Leeper said "we will assess the remaining allegations in light of the court's ruling."
Barbara "Biz" Van Gelder, a partner in the Washington office of Dickstein Shapiro who represents Singhal, said she was pleased with Lamberth's decision.
"Not only does it throw out the false statement counts but it also compels the government to strike prejudicial surplusage from the indictment and turn over some information we sought in discovery," Van Gelder said today.