THE WHARF (HOLDINGS) LTD. et al. v. UNITED

Please also read this case.

THE WHARF (HOLDINGS) LTD. et al. v. UNITED
INTERNATIONAL HOLDINGS, INC., et al.

DIRKS v. SEC, 463 U.S. 646 (1983)

Additional reading on insider trading. Required reading.

DIRKS v. SEC, 463 U.S. 646 (1983)

STRONG v. REPIDE, 213 U.S. 419 (1909)

Of course, we are obligated to read this: The Philippines's contribution to insider trading legal literature of the US. It's still good law. Required reading.

STRONG v. REPIDE, 213 U.S. 419 (1909)

The Case of James T. Sherwin

Additional reading for next meeting. This case shows price manipulation does not have to be as grand as the BW Scam.

The Case of James T. Sherwin

ERNST & ERNST v. HOCHFELDER, 425 U.S. 185 (1976)

Please study this case:

ERNST & ERNST v. HOCHFELDER, 425 U.S. 185 (1976)

US. V. HALL

Please read the following case and be ready to discuss it next meeting.

FOR EDUCATIONAL USE ONLY
48 F.Supp.2d 386, 1999 WL 292624 (S.D.N.Y.), Fed. Sec.
L. Rep. P 90,492
United States District Court,
S.D. New York.
UNITED STATES of America
v.
Gordon HALL and Michael Motsykulashvili, a/k/a "Mike
the Russian," Defendants.
No. S1 97 CR. 1215(DC).
May 4, 1999.

In Racketeer Influenced Corrupt Organization (RICO)
and securities fraud case, the District Court, Chin,
J., held that defense counsel could not argue to the
jury that there could be no unlawful manipulation
unless the stock was trading above its actual value or
true worth.
Order in accordance with opinion.

A defendant may be guilty of manipulation even if he
believes a stock is underpriced or even if in fact a
stock is trading below its actual value; whether the
price of a stock is "artificial" does not turn on
whether the stock is trading above or below its "true
worth," rather, the trading price of a stock is
determined by available information and market forces,
and a stock is trading at an "artificial level" when
it is trading at a level above what market forces
would otherwise dictate. Securities Exchange Act of
1934, § 10(b), 15 U.S.C.A. § 78j(b).
*386 Mary Jo White, United States Attorney for the
Southern District of New York by Celeste Koeleveld,
Douglas Lankler, Jason Sabot, Assistant United States
Attorneys, New York, for the United States.
White & Case LLP by James J. McGuire, Thomas M.
Mullaney, New York City, for Defendant Gordon Hall.
Barry S. Turner, New York City, for Defendant Michael
Motsykulashvili.

MEMORANDUM DECISION

CHIN, District Judge.
**1 In this RICO and securities fraud case, defendant
Gordon Hall argues that there can be no unlawful
manipulation unless the stock is at an artificially
high price, that is, above its actual value or true
worth. In his testimony at trial yesterday in response
to my questions, Hall's expert used what he referred
to as an "economic definition of 'manipulation' " (Tr.
2960), contending that if a stock is not trading above
its real value, by definition there can be no
manipulation. The flip side of this argument is that
if a stock is underpriced, that is, trading below its
actual value, a defendant cannot be guilty of
manipulation merely because he tries to bring the
price up to where he believes it ought to be.
These arguments are rejected. I hold that a defendant
may be guilty of manipulation even if he believes a
stock is underpriced or even if in fact a stock is
trading below its actual value. I reach this
conclusion for the following reasons.
First, there is nothing in the securities laws to
suggest that a defendant cannot be guilty of
manipulation unless a stock is trading above its "true
worth." To the contrary, section 10(b) makes unlawful
the use of "any manipulative or deceptive device or
contrivance in contravention" of SEC rules and
regulations. 15 U.S.C. § 78j(b) (emphasis added); see
generally Ernst & Ernst v. Hochfelder, 425 U.S. 185,
199, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). There is no
requirement that the manipulative device result in a
price above a stock's "true worth," nor does the law
provide that a defendant is free to use a manipulative
device to bring a stock's price up to where the
defendant believes the stock should be. A defendant
may not use any fraudulent means to manipulate the
price of a stock, and a fraudulent scheme to
manipulate price is unlawful even if the *387 goal is
to get the stock to a price more reflective of its
"true worth."
Second, Hall relies on an incorrect understanding of
"artificial." Whether the price of a stock is
"artificial" does not turn on whether the stock is
trading above or below its "true worth." Rather, the
trading price of a stock is determined by available
information and market forces, and a stock is trading
at an "artificial level" when it is trading at a level
above what market forces would otherwise dictate.
United States v. Russo, 74 F.3d 1383, 1394 (2d Cir.),
cert. denied, 519 U.S. 927, 117 S.Ct. 293, 136 L.Ed.2d
213 (1996). A company may lawfully seek to
"manipulate" the market by hiring legitimate stock
promoters who disseminate information about the
company to the public. As a consequence, the price of
the stock may be driven up, but the new level is not
an artificial one because it is the result of a better
educated public. A company may not unlawfully seek to
"manipulate" the market, however, by hiring
illegitimate stock promoters who seek to drive the
price up by generating trading by making undisclosed
payments to brokers to push the stock with their
customers.
Third, the "true worth" of a stock is something that
is often difficult to determine. Ross yesterday
referred to the process as an "estimate," and Hall's
valuation expert described three methods for valuing a
stock. Clearly, the process is, to some extent, a
subjective one requiring the use of opinions and
judgments. A defendant's liability for violating the
securities laws surely cannot turn on the vagaries of
valuing a stock.
**2 Finally, Hall's argument simply does not make
sense. A fraudulent scheme to manipulate is unlawful,
even if the defendant is trying in his mind to correct
the market. Even assuming Hall was genuinely trying to
bring the price of HealthTech stock up to where he
believed it should be, the ends do not justify the
means and he could not seek to do so through unlawful
means.
Hall relies on the Russo case. While there is some
language in the decision that arguably supports Hall's
position, in the end the case does not stand for the
proposition that there cannot be manipulation unless a
stock is trading at a price above its "true worth."
There, the district court instructed the jury as
follows:
[T]o find an intent to manipulate the price of ...
stock, you must find that the defendant you are
considering intended to raise the price of the stock
to, or maintain the price of the stock at an
artificial level, that is, to a level above the
investment value of the stock as determined by
available information and market forces ....
Russo, 74 F.3d at 1394. The last clause in the
sentence is particularly significant to the issue at
hand, as it explains that an "artificial" level is one
"above the investment value of the stock as determined
by available information and market forces." The key
is not what a stock is actually worth, but what the
investment value is "as determined by available
information and market forces."
In fact, the defendants in Russo made an argument
remarkably similar to that advanced by Hall here.
There, the defendants objected to the quoted
instruction, requesting instead an instruction
requiring the jury to find that the defendants
believed that the stock was really worth less than the
price at which they traded it. The district court
overruled the objection and refused to give the
requested instruction. The Second Circuit affirmed,
rejecting the argument that the defendants' subjective
valuation of the stock, i.e., what they believed to be
the stock's "true worth," should have been the sole
determinant of whether the prices that resulted from
the defendants' fraudulent activities were
"artificial." 74 F.3d at 1394.
In short, defense counsel may not argue to the jury
that there can be no unlawful *388 manipulation unless
the stock was trading above its actual value or true
worth.
SO ORDERED.
S.D.N.Y.,1999.
U.S. v. Hall
48 F.Supp.2d 386, 1999 WL 292624 (S.D.N.Y.), Fed. Sec.
L. Rep. P 90,492
END OF DOCUMENT

No class today. I have to attend to my wife and new born kid. Please expect additional case assignments by Sunday, Aug. 15, 2004.

INSIDER TRADING AND PRICE MANIPULATION

Unless otherwise announced, we will have classes on August 12, 2004.

In addition to the codal provisions assigned, please study these cases:

UNITED STATES v. JAMES HERMAN O'HAGAN Click here.
CARPENTER v. UNITED STATES Click here (Link updated)