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Speaker 1: This is Bloomberg Law with June Brasso from Bloomberg Radio.

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Speaker 1: For the first time in more than twenty years, the

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Speaker 1: Justice Department is suing to stop the merger of two airlines.

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Speaker 1: Attorney General Merrick Garland announced on Tuesday that the US

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Speaker 1: is filing an antitrust lawsuit to block Jet Blue Airways

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Speaker 1: from purchasing Spirit Airlines for three point eight billion dollars.

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Speaker 1: We alleged that, if allowed to proceed, this merger will

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Speaker 1: limit choices and drive up ticket prices for passengers across

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Speaker 1: the country, and we further alleged that the impact of

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Speaker 1: this merger will be particularly harmful for travelers who rely

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Speaker 1: on what are known as ultra low cost carriers in

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Speaker 1: order to fly. This is the second lawsuit against Jet

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Speaker 1: Blue by the Biden Justice Department, which is also seeking

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Speaker 1: to unwind its alliance in the Northeast with the American Airlines,

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Speaker 1: and the Attorney General had a warning for companies in

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Speaker 1: other industries. Companies in every industry should understand by now

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Speaker 1: that this Justice Department will not hesitate to enforce and

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Speaker 1: I trust laws and protect American consumers. Joining me is

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Speaker 1: Bloomberg Intelligence Senior Litigation analyst Jennifer Ree. This deal would

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Speaker 1: make JetBlue the fifth largest US carrier based on domestic

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Speaker 1: passenger traffic. What would the deal do for Jet Blue? Well,

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Speaker 1: I mean, for one reason, because it would make it

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Speaker 1: the fifth largest, but also because it says it needs

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Speaker 1: to do this deal to better compete with the legacy

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Speaker 1: carriers like Delta and United and even Southwest. You know,

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Speaker 1: those air carriers combined have about an eighty percent share,

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Speaker 1: including American in there, and JetBlue wants to be able

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Speaker 1: to better compete. That's one of their main arguments for

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Speaker 1: the deal. JetBlue says the combination would create quote the

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Speaker 1: most compelling national lowfare challenger to the dominant US carriers.

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Speaker 1: Yet the Justice Department is challenging because they're afraid to

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Speaker 1: emerge will drive up the cost of airline tickets for

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Speaker 1: low cost carriers. You know, the thing about it is

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Speaker 1: they're both right really at the end of the day,

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Speaker 1: because they're kind of three tiers right affairs. You Like

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Speaker 1: I said, the legacy carriers that tend to have the

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Speaker 1: highest fares, and then you have an airline like Jet

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Speaker 1: Blue that's considered a low cost carrier. The fares are

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Speaker 1: a little bit lower, but then you have Spirit, which

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Speaker 1: is considered an ultralow cost carrier, so the fares are

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Speaker 1: a little bit lower. Now, jet Blue does exert a

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Speaker 1: competitive pressure on the legacy airlines. There's no doubt that

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Speaker 1: when Jet Blue enters a route, the fares all tend

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Speaker 1: to go down. But Spirit does the same thing. So

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Speaker 1: Spirit is now pulling down the fares of all of

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Speaker 1: those legacy carriers in addition to Jet Blue, and the

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Speaker 1: Department of Justice's concern is that when Jet Blue takes

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Speaker 1: over all the routes that Spirit flies and transforms it

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Speaker 1: into sort of the Jet Blue model, it turns from

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Speaker 1: an ultralow cost carrier to a low cost carrier, and

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Speaker 1: it means the fares do go up. So you are

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Speaker 1: losing a choice for people who want that rock bottom

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Speaker 1: fare and don't necessarily care about quality or amended these

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Speaker 1: or even space. They lose that choice is the cost

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Speaker 1: of the ticket. The only reason why the Justice Department

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Speaker 1: is challenging this merger, well it's really the main reason why.

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Speaker 1: I mean, you know, mergers get challenged because they can

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Speaker 1: reduce output, and they can increase price, and they can

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Speaker 1: reduce quality. Now a reduction and quality isn't really an

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Speaker 1: issue here because Jet Blue would probably increase the quality

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Speaker 1: of the Spirit flights. But the other two are the issues,

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Speaker 1: and they're linked. Right. It would decrease output because jet

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Speaker 1: Blue would take those Spirit planes and put fewer seats

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Speaker 1: that are bigger, and that reduces output and reduction and

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Speaker 1: output ends up increasing price. But jet Blue would also

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Speaker 1: likely increase price because it would increase the amenities and

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Speaker 1: the quality. So it would do those two things, and

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Speaker 1: those are both concerns of the Department of Justice. So

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Speaker 1: tell me what the legal argument is the antitrust argument

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Speaker 1: that the Department of Justice is going to make. So

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Speaker 1: they're making a couple arguments here, and they're honestly very

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Speaker 1: traditional antitrust arguments. I think we've been hearing about other

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Speaker 1: challenges that the FTC and the DOJ have waged that

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Speaker 1: have been kind of a unique and novel and may

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Speaker 1: not have such a chance in court, But this is

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Speaker 1: really traditional. They say, first, they overlap on certain routes,

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Speaker 1: and for the routes they overlap, you're going to lose

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Speaker 1: that competition. And we already have a consolidated industry. The

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Speaker 1: concentration is too high, and it's presumptively harmful in those

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Speaker 1: routes where they overlap. Now, second, they say that both

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Speaker 1: airlines have plans that they've seen to expand, and so

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Speaker 1: there's this potential competition in the future in these routes

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Speaker 1: where they might expand and compete. That will be lost

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Speaker 1: because that expansion won't happen by one or the other

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Speaker 1: when they become one airline. And then the last part

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Speaker 1: of it is what I've talked about that for those

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Speaker 1: routes where they don't overlap, jet Blue would effectively be

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Speaker 1: taking out this really ultra low cost carrier. It would

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Speaker 1: take over those flights, take out this really low fared provider,

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Speaker 1: and people who want to fly those routes at the

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Speaker 1: lowest price would lose an option. So it has basically

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Speaker 1: three tiers of arguments, and what's the likely argument that

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Speaker 1: Jet Blue is going to make in return. So in

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Speaker 1: these cases, what the judge is tasked with is asking

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Speaker 1: whether they're harm and then balancing that harm. If there

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Speaker 1: is harm, and I think there is here against any

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Speaker 1: kind of pro competitive aspects of the deal. And here

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Speaker 1: what Jet Blue will argue is that there's this Jet

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Speaker 1: Blue effect that when it enters a route that it

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Speaker 1: does exert competitive pressure on all the other airlines and

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Speaker 1: that fares across the board generally go down for the route.

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Speaker 1: Now that's been shown to be true, actually, so what

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Speaker 1: a judge is going to have to do is weigh

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Speaker 1: those against each other. And to me, at the end

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Speaker 1: of the day, the Department of Justice's evidence is strong

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Speaker 1: in this regard what you think of as a pro

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Speaker 1: competitive efficiency. This is this Jet Blue effect rarely wins

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Speaker 1: out when there's actually harm from the deal, and the

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Speaker 1: Jet Blue effect doesn't help the companies again in those

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Speaker 1: routes that Jet Blue is going to take over from Spirit.

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Speaker 1: So this is sort of a non legal question. But

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Speaker 1: the four largest US airlines control eighty percent of the market,

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Speaker 1: so on its face, it seems unfair not to allow

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Speaker 1: Jet Blue to get bigger to compete with them. That

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Speaker 1: kind of argument is an argument that's often aid in mergers,

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Speaker 1: and it never works where that merger is going to

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Speaker 1: otherwise cause harm. And I think the other important thing

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Speaker 1: is the way you dissect this case and the way

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Speaker 1: the DOJ will present it and the judge will evaluate

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Speaker 1: it is they ask what is the relevant market where

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Speaker 1: competition takes place, so that eighty percent is talking about

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Speaker 1: the nation and the airlines don't compete with each other

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Speaker 1: in that respect. They compete for certain routes. So what

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Speaker 1: happens is the DOJ will say this route, this route,

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Speaker 1: will lay out the different routes in which they compete

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Speaker 1: from an origin to a destination, and that's what the

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Speaker 1: judge is going to look at, not this eighty percent

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Speaker 1: share nationwide. And for some routes, Jet Blue might itself

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Speaker 1: have eighty percent share for that route. So that's how

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Speaker 1: it'll look at it. And it's not going to be

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Speaker 1: about that nationwide eighty percent share that the others have.

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Speaker 1: Jet Blue and Spirit offered to divest overlapping routes to

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Speaker 1: try to address the Justice Department's antitrust concerns. And that's

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Speaker 1: a remedy that the Justice Department apparently has accepted in

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Speaker 1: previous airline mergers. But and I did here, Well, do

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Speaker 1: you think that will be held against the Justice Department?

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Speaker 1: You did it before, you know why you're now changing

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Speaker 1: the way you're approaching these I don't think it'll be

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Speaker 1: held against the Justice Department because each merger stands on

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Speaker 1: its own facts. They're all different, and they all have

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Speaker 1: a different competitive impact. So what might have fixed a

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Speaker 1: deal before if divestitures may not necessarily fix this one

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Speaker 1: because the facts and the competitive dynamics are different now.

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Speaker 1: No doubt this is a more aggressive DOJ. And this

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Speaker 1: DOJ has said, when we have a problematic deal, we

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Speaker 1: no longer want to accept a remedy like divestitures to

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Speaker 1: clear the deal. And the judge could think about that

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Speaker 1: and could consider that, but it doesn't mean that there

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Speaker 1: aren't other issues than that the deal isn't anti competitive.

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Speaker 1: So again, I think that the DOJ has some good

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Speaker 1: arguments here, and I think that those divestitures, while they

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Speaker 1: could fix some routes where the companies compete, they don't

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Speaker 1: fix the other problem I was talking about with Jet

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Speaker 1: Blue taking out this ultra low cost carrier from those

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Speaker 1: routes that Spirit flies and JetBlue doesn't. Today, do you

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Speaker 1: think at this point there's anything that JetBlue could do

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Speaker 1: to get the Justice Department to back down and approve

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Speaker 1: the merger. I do not. I think this is a

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Speaker 1: really aggressive Justice Department that they're already was concerned about

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Speaker 1: consolidation and the concentration in the airline industry before this

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Speaker 1: merger was even announced, And I think that they're going

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Speaker 1: to make it difficult on any other airlines that want

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Speaker 1: to merge in the future as well. Jan give us

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Speaker 1: a little history about how the airline industry became so

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Speaker 1: consolidated over the years. There were a lot of mergers

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Speaker 1: over let's say, the last twenty five years, and today

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Speaker 1: right there's this sort of new antitrust movement, and part

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Speaker 1: of that movement is this realization that one by one

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Speaker 1: over the years, too many mergers, not just in the

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Speaker 1: airline industry, but in other industries as well, got cleared

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Speaker 1: with remedies or without remedies by the Department of Justice

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Speaker 1: or Federal Trade Commission. And we suddenly woke up today

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Speaker 1: with a lot of industries that are too consolidated, and

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Speaker 1: because of that, there are problems in those industries, like

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Speaker 1: high fares, like low quality, and I think a lot

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Speaker 1: of people would agree that that's something that's going on

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Speaker 1: in the airline industry today. So the Department of Justice

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Speaker 1: and the Federal Trade Commission are kind of trying to

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Speaker 1: make up for that today. And the airline industry is

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Speaker 1: the poster child for those people that think that there's

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Speaker 1: been lacks enforcement. I mean, it's one of the first

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Speaker 1: ones agriculture, the beer industry, pharmaceutical many, but the airline

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Speaker 1: industry is the very first one that proponents of stronger

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Speaker 1: anti trust enforcement bring up when they talk about too

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Speaker 1: many mergers over the last twenty years being approved. This

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Speaker 1: is the second time, the second lawsuit against Jet Blue

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Speaker 1: by the Biden Justice Department. So tell us about the

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Speaker 1: other one where that is right. So the other one

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Speaker 1: is a challenge to an alliance between Jet Blue and

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Speaker 1: American in the Northeast. It really just deals with Boston

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Speaker 1: and New York airports mostly, and it's really one of

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Speaker 1: these code sharing alliances that we know about where you

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Speaker 1: can swap frequent flyer miles and you can book American

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Speaker 1: but you fly Jet Blue and vice versa. But the

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Speaker 1: problem the DJ had with it is that the companies

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Speaker 1: are sharing capacity information and they're also sharing revenue as

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Speaker 1: part of that alliance. So the DOJ really actually kind

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Speaker 1: of sees it as a merger in that area, and

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Speaker 1: they have some of the same problems with it they

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Speaker 1: have with this. There was already a trial it completed

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Speaker 1: months ago, and I think actually last year it completed,

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Speaker 1: and I think it's likely that we'll get a decision

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Speaker 1: in the first half of this year. I mean, it

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Speaker 1: could come anytime. There's no specific timing constraints on the judges,

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Speaker 1: but I do think we'll get a decision in the

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Speaker 1: first half. So tell us about what the timing on

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Speaker 1: this looks like. I mean, has the dj already filed

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Speaker 1: the complaint, Yes, they filed it yesterday, and what they're

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Speaker 1: seeking as a permanent injunction, and that could kind of

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Speaker 1: run from filing to decision anywhere from about six to

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Speaker 1: nine months, So I think, you know, seven to eight

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Speaker 1: months here we could actually get a decision, and then

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Speaker 1: if the losing party, whichever one it is, ends up appealing,

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Speaker 1: that could tack on another five to six months. But

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Speaker 1: the thing that's interesting here is that Jet Blue obviously

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Speaker 1: expected this kind of litigation because the end date in

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Speaker 1: their purchase agreement isn't until July of twenty twenty four,

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Speaker 1: and that actually almost gives them time both for this

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Speaker 1: first ruling and an appeal. You seem to indicate that

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Speaker 1: DOJ's case is very strong. So why do you think

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Speaker 1: Jet Blue is willing to go to trial and an appeal?

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Speaker 1: You know, I think that they're willing to do that

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Speaker 1: because again, as I said, the way a judge evaluates

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Speaker 1: these cases is looking at whether there's harm and then

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Speaker 1: balancing the pro competitive aspects against it. And they have

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Speaker 1: a legitimate argument right about pro competitive effects here, the

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Speaker 1: fact that they could actually exert greater competitive pressure on

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Speaker 1: the Deltas and the Uniteds and Americans of the world.

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Speaker 1: And they may be hoping because weighing those though two

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Speaker 1: things is kind of subjective, so they may be hoping

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Speaker 1: they get a judge that puts more emphasis on that

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Speaker 1: than on the fact that they'll take out an ultra

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Speaker 1: low cost carrier. There's some possibility there that that could happen.

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Speaker 1: And the other thing is that we're beginning to see

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Speaker 1: a bit of a trend where the DOJ and the

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Speaker 1: FTC are rejecting remedy offers, but the judges are a

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Speaker 1: little bit more open to those offers. Now, I don't

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Speaker 1: actually think that's going to be the case here, but

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Speaker 1: they also may be banking on that that they have

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Speaker 1: this remedy offer, they'll present it to the judge, they'll

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Speaker 1: present the pro competitive aspects. They may be able to

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Speaker 1: pull the judge over to their side. We talked before

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Speaker 1: about the DOJ using novel arguments the Antitrust Department. But

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Speaker 1: this argument here, it's not a novel argument. This is

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Speaker 1: just a tried and true argument. Yeah, this is tried

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Speaker 1: and true. This is two competitors compete with each other,

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Speaker 1: one taking another competitor out of the market. And that's

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Speaker 1: really the very traditional concern about mergers, and that's the

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Speaker 1: kind of case that the DOJ and the FTC usually

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Speaker 1: would bring. You've mentioned today how aggressive on antitrust issues

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Speaker 1: this Justice Department is. Have they accomplished anything or is

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Speaker 1: it too early to tell? So I think there's a

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Speaker 1: lot of talk about a pretty bad track record so far.

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Speaker 1: Now I don't necessarily agree with that, because what they

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Speaker 1: have accomplished, a particularly the FTC with this pressure, is

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Speaker 1: causing deals to get abandoned, and they view that as

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Speaker 1: a win. You know, they're trying to stop a merger.

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Speaker 1: The merger got stopped because companies want to deal with

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Speaker 1: litigation or a challenge and walked away. So they do

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Speaker 1: view that as a win. And the FTC has had

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Speaker 1: quite a few abandonments in the last year and a

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Speaker 1: half now where they've gone to trial. It's correct that

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Speaker 1: the track record hasn't been great. The DOJ has won

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Speaker 1: one case. They managed to block and trial the merger

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Speaker 1: between Simon and Schuster and Penguin Random House. But like

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Speaker 1: the Jet Blue Spirit deal, that again was traditional. It

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Speaker 1: wasn't really a novel theory. These are two head to

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Speaker 1: head competitors that were in a concentrated market, so it

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Speaker 1: was a traditional theory. They won on a fairly traditional theory,

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Speaker 1: even though it was about the impact on writers and

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Speaker 1: labor rather than the price of books, which is a

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Speaker 1: little bit different. But the others where the theories have

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Speaker 1: been more novel, the agencies, when it's litigated through haven't

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Speaker 1: had as much luck. The judges have been really siding

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Speaker 1: with the companies. Thanks so much, Jen. That's Bloomberg Intelligence

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Speaker 1: senior litigation analyst Jennifer Ree. The SEC rarely loses an

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Speaker 1: insider trading case, and now it's convinced the Fourth Circuit

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Speaker 1: to reverse one of those rare losses. A judge had

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Speaker 1: abruptly ended the trial of mortgage broker Christopher Clark after

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Speaker 1: the SEC had presented its evidence and before the case

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Speaker 1: was sent to the jury. Judge Claude Hilton said that

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Speaker 1: the agency was simply speculating that Clark received insider information

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Speaker 1: because he was a little too successful in trading. But

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Speaker 1: the Fourth Circuit Court of Appeals reversed the judge's decision,

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Speaker 1: ruling that a jury should have decided the case. My

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Speaker 1: guest is corporate law expert James Park, a professor at

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Speaker 1: UCLA Law School. What were the charges against Christopher Clark.

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Speaker 1: He was charged with trading on inside information. He traded

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Speaker 1: in the stock of a company called Corporate Executive Board,

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Speaker 1: and Corporate Executive Board received a merger offer, an offered

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Speaker 1: to merge from another company. And typically when a company

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Speaker 1: is purchased by another company, the stock price goes up

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Speaker 1: because the stock of the acquired company is purchased at

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Speaker 1: a premium. And so if you know that in advance,

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Speaker 1: you're going to be able to buy the stock at

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Speaker 1: a lower price with the hope maybe the knowledge that

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Speaker 1: the stock will go up in price, and then you

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Speaker 1: sell the stock at an easy profit. Christopher Clark and

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Speaker 1: his son purchased significant numbers of call options, which give

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Speaker 1: you the right to buy stock at a particular price,

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Speaker 1: right before the merger was announced. And the allegation is

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Speaker 1: that he got information that the merger was going to

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Speaker 1: happen from his brother in law who worked at Corporate

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Speaker 1: Executive Board. His brother in law's name is William Wright.

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Speaker 1: So why did the judge dismiss the charges against Clark

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Speaker 1: before the case was sent to the jury. The District

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Speaker 1: Court dismissed the charges because the judge I believe that

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Speaker 1: there was not sufficient direct evidence for a reasonable jury

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Speaker 1: to conclude that Christopher Clark had received insight information from

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Speaker 1: William Wright. There was no direct evidence that Wright ever

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Speaker 1: spoke to Christopher Clark about the merger, and the defendant

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Speaker 1: argued that Right didn't even know about the merger until

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Speaker 1: after the decision to merge had already been made. That

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Speaker 1: was the basic argument that the defendants made and the judge.

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Speaker 1: The District court judge agreed and said that the case

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Speaker 1: should not go to a jury, but the Fourth Circuit

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Speaker 1: disagreed and reversed that decision to dismiss the case. Is

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Speaker 1: it difficult to get evidence direct evidence of insider trading

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Speaker 1: unless you flip a witness or get a wire tap.

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Speaker 1: It's very difficult because typically the defendant is getting inside

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Speaker 1: and information from somebody they have a close relationship to,

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Speaker 1: someone who they trust very much, somebody who in this

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Speaker 1: case was a relative, and so that person is very

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Speaker 1: unlikely to testify against you. That person is unlikely to

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Speaker 1: wear a wirecap to record communications conveying inside information. I mean,

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Speaker 1: so it's very difficult to establish these cases through direct evidence.

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Speaker 1: Let's talk a little bit about the kind of evidence

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Speaker 1: that the SEC had. They have surveillance tools and a

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Speaker 1: special market abuse unit that sort of broadens the way

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Speaker 1: they can find insider trading. That's right. The SEC has

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Speaker 1: a market abuse the unit which monitors markets for unusual trading,

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Speaker 1: especially around merger announcements. And so they will examine activity

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Speaker 1: in the stock market, the option market, and they will

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Speaker 1: look for unusual amounts of trading. And they find unusual

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Speaker 1: amounts of trading right before the merger, then they might

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Speaker 1: do a further investigation. And so I suspect that the

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Speaker 1: SEC was tipped off by the fact that Clark bought

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Speaker 1: significant amounts of call options right around the time the

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Speaker 1: merger was announced, right before the merger was announced, and

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Speaker 1: then they followed us and did an investigation which uncovered

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Speaker 1: some additional evidence. It was not just the unusual trading

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Speaker 1: that led the SEC to file the case, but Clark

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Speaker 1: liquidated his wife's retirement account, he borrowed a significant amount

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Speaker 1: of money at a nine percent interest rate in order

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Speaker 1: to buy additional call options. His son bought a significant

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Speaker 1: amount of call options as well, and so there was

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Speaker 1: additional activity that would indicate something suspicious. And I'm sure

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Speaker 1: that through the investigation, the SEC learned that Christopher Clark

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Speaker 1: had a brother in law who worked for the company

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Speaker 1: that had issued the stock that he was trading in,

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Speaker 1: and so that additional piece of information would have led

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Speaker 1: the SEC to suspect that he's getting inside information from

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Speaker 1: within the company. Is it rare for a judge to

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Speaker 1: dismiss a case after all the evidence has come in,

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Speaker 1: so the witnesses have testified, but the jury is not

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Speaker 1: allowed to reach a verdict. It is rare. Judgments as

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Speaker 1: a matter of law typically are not granted before the

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Speaker 1: jury deliberates, and I think part of the reason for

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Speaker 1: this is that we typically allow juries to resolve factual issue.

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Speaker 1: That's something that is part of our system. And the

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Speaker 1: jury is the body that is given the power to

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Speaker 1: decide whether or not it believes there are sufficient facts

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Speaker 1: for the case to succeed, and not the judge. The

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Speaker 1: judge also, you know, has invested a lot of time

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Speaker 1: in the case, and the jury has been assembled, and

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Speaker 1: so to take the case away from the jury is unusual.

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Speaker 1: It does happen from time to time, but it is

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Speaker 1: an unusual event because if the judge had let this

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Speaker 1: case go to the jury, there'd be a verdict in place,

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Speaker 1: and now when he's reversed, there wouldn't have to be

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Speaker 1: a whole new trial, right, that's correct, that's correct, And

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Speaker 1: you know, it's possible the jury would have agreed with

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Speaker 1: the judge and concluded that the sec had not made

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Speaker 1: its case. And so typically judges will, even if they

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Speaker 1: have some doubts about the evidence, they'll allow the case

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Speaker 1: to go to trial. They'll see what the jury does,

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Speaker 1: and they have the option acid the jury has entered

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Speaker 1: its verdict to reverse the jury verdict if they believe

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Speaker 1: that the jury's decision was unreasonable, and so now we

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Speaker 1: have to reassemble a jury and go through a trial.

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Speaker 1: So that's another reason why judges typically don't grant judgments

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Speaker 1: as a matter of law before the jury hears the case.

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Speaker 1: Do you have any insight as to why the judge here,

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Speaker 1: you know, didn't think that there was enough evidence. I

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Speaker 1: mean they did have circumstantial evidence. It was circumstantial, and

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Speaker 1: I think that you know, he may have credited some

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Speaker 1: of the testimony by the chief accounting officer of the company.

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Speaker 1: So apparently William Wright, who was the brother in law,

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Speaker 1: didn't get the information about the merger directly because he

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Speaker 1: was not included in the deliberations about the merger, and

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Speaker 1: so he only learned about the merger relatively laid in

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Speaker 1: the process from the chief accounting officer who was his

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Speaker 1: good friend. And the chief accounting officer basically claimed that

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Speaker 1: he did not tell mister Wright about the merger until

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Speaker 1: after the decision to agree to the merger offer, and

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Speaker 1: so that could be seen as powerful evidence that the

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Speaker 1: brother in law actually didn't have inside information. And if

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Speaker 1: he didn't have inside information, he could not have passed

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Speaker 1: it on to the defendant. So the judge, I think,

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Speaker 1: might have credited that particular testimony and said that there's

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Speaker 1: no basis for determining that Wright had the information to

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Speaker 1: pass on the Clark. Now. The error here, though, is

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Speaker 1: that judges are not supposed to weigh the credibility of evidence.

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Speaker 1: It's possible that the chief accounting officer was not telling

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Speaker 1: the truth, and there is some circumstantial evidence that mister Wright,

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Speaker 1: the brother in law, knew of the merger before the

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Speaker 1: trading took place, and so you know, those are facts

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Speaker 1: that the jury could have weighed against the testimony that

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Speaker 1: Right did not have inside information about the merger. We're

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Speaker 1: defense lawyers looking at the judges dismissal of the case

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Speaker 1: and sort of making an argument that the SEC needed

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Speaker 1: to have direct evidence of insider trading. I think so.

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Speaker 1: I think that is the basic argument. They were making

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Speaker 1: a higher standard for insider trading charges that you have

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Speaker 1: to have direct evidence of the transfer of inside information

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Speaker 1: from an insider to the person who is training. I

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Speaker 1: think that was their basic theme, and that's very difficult

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Speaker 1: to prove. That's very difficult for the SEC to prove,

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Speaker 1: especially when you have a case where the SEC is

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Speaker 1: proceeding civil right. The SEC can only bring civil charges

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Speaker 1: and it's speaking monetary penalties against the defendant. In those circumstances,

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Speaker 1: you don't have the high criminal standard of beyond a

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Speaker 1: reasonable doubt. In civil cases, circumstantial evidence, in my view,

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Speaker 1: should be sufficient to establish insider training violation. So, Jim,

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Speaker 1: what does this decision by the fourth circuits stand for,

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Speaker 1: is there anything beyond this case? I think it stands

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Speaker 1: for the proposition that you can establish that an insider

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Speaker 1: trading defendant had inside information through circumstantial evidence, and that

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Speaker 1: those are jury questions typically, rather than decisions that should

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Speaker 1: be made by a judge. And so I think it's

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Speaker 1: a fairly narrow proposition. I don't think it's a very

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Speaker 1: broad legal proposition. I think, though, it is an instructive

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Speaker 1: decision for district courts, not only in the Fourth Circuit

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Speaker 1: but across the country that when there is disputed circumstantial

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Speaker 1: evidence as to whether an insider trading defendant had insight

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Speaker 1: information that typically should be decided by a jury rather

437
00:24:49,760 --> 00:24:52,919
Speaker 1: than a judge. Are the circuits in agreement on this?

438
00:24:53,040 --> 00:24:58,840
Speaker 1: Are there any circuits that have contrary decisions? Not, to

439
00:24:58,960 --> 00:25:04,399
Speaker 1: my knowledge, it's always possible. But I think that this

440
00:25:04,640 --> 00:25:08,879
Speaker 1: is a sensible decision, and I think it's one where

441
00:25:09,720 --> 00:25:12,720
Speaker 1: I think other circuits would most likely agree that this

442
00:25:12,800 --> 00:25:15,720
Speaker 1: should be the rule. And then the reason why it

443
00:25:15,800 --> 00:25:18,960
Speaker 1: might be a somewhat unusual decision is that most of

444
00:25:19,000 --> 00:25:22,240
Speaker 1: the time defendants in the situation are going to settle

445
00:25:22,480 --> 00:25:25,280
Speaker 1: the case. They're going to agree to a settlement and

446
00:25:25,359 --> 00:25:27,720
Speaker 1: so the case doesn't go to trial. There are very

447
00:25:27,720 --> 00:25:30,800
Speaker 1: few cases that actually go to trial relative to the

448
00:25:30,920 --> 00:25:34,800
Speaker 1: number of insider trading cases that are brought. And you know,

449
00:25:34,840 --> 00:25:37,919
Speaker 1: it's interesting that William Wright, the brother in law, he

450
00:25:37,960 --> 00:25:41,720
Speaker 1: actually settled with the SEC and pay two hundred and

451
00:25:41,800 --> 00:25:44,760
Speaker 1: forty thousand dollars to the SEC to settle the case.

452
00:25:45,680 --> 00:25:49,160
Speaker 1: Christopher Clarks, though, decided to fight the charges. And that's

453
00:25:49,200 --> 00:25:53,240
Speaker 1: why we have this decision, which looks very carefully at

454
00:25:53,800 --> 00:25:57,000
Speaker 1: all of the relevant facts. That doesn't happen every day,

455
00:25:57,240 --> 00:25:59,680
Speaker 1: and so I think that it's I think if other

456
00:25:59,720 --> 00:26:01,720
Speaker 1: certain it's looked at the same fact, they would come

457
00:26:01,720 --> 00:26:05,840
Speaker 1: to the same conclusion. But there there probably are not

458
00:26:06,080 --> 00:26:09,040
Speaker 1: a whole lot of other pieces that have had the

459
00:26:09,040 --> 00:26:14,960
Speaker 1: opportunity to examine this particular type of situation. And what

460
00:26:15,040 --> 00:26:18,560
Speaker 1: kind of testimony did the FEC have a trial? You know,

461
00:26:18,600 --> 00:26:21,080
Speaker 1: that's a that's a good question. Actually it's not a

462
00:26:21,200 --> 00:26:26,240
Speaker 1: parent from the Fourth Circuit's opinion, because um, it's only

463
00:26:27,000 --> 00:26:33,560
Speaker 1: reviewing the record as opposed to the sort of what

464
00:26:33,760 --> 00:26:35,919
Speaker 1: might have happened to trial since the trial did not

465
00:26:36,040 --> 00:26:40,960
Speaker 1: actually occur. And so you know, I'm sure, um, you

466
00:26:41,000 --> 00:26:42,400
Speaker 1: know that it is a good quite you know. My

467
00:26:42,640 --> 00:26:45,960
Speaker 1: guess is that William Wright might have testified actually because

468
00:26:45,960 --> 00:26:48,919
Speaker 1: he settled with the SEC, and so the brother in

469
00:26:49,000 --> 00:26:51,359
Speaker 1: law might have been the person that they might have

470
00:26:51,480 --> 00:26:54,800
Speaker 1: called as a as a witness. Um. They also had

471
00:26:54,880 --> 00:27:01,640
Speaker 1: some evidence in email, various emails that indicated that right

472
00:27:02,040 --> 00:27:07,399
Speaker 1: knew about the merger discussions before the trading occurred, and

473
00:27:07,480 --> 00:27:12,520
Speaker 1: so they might have introduced the testimony of the people

474
00:27:12,600 --> 00:27:16,680
Speaker 1: who got those emails. So that might be another option.

475
00:27:17,560 --> 00:27:19,680
Speaker 1: But you're right there. That might have been a reason

476
00:27:19,760 --> 00:27:23,399
Speaker 1: why the district court may have felt like it wanted

477
00:27:23,760 --> 00:27:29,240
Speaker 1: it should have should dismiss the case, because you know,

478
00:27:29,280 --> 00:27:32,000
Speaker 1: the number of witnesses who would have testified would have

479
00:27:32,000 --> 00:27:36,800
Speaker 1: been fairly small in support of the SEC's case. So

480
00:27:36,920 --> 00:27:41,040
Speaker 1: on retrial, the defense attorney said, quote, the witnesses who

481
00:27:41,119 --> 00:27:45,919
Speaker 1: testified the trial overwhelmingly demonstrated mister Clark's innocence, and we

482
00:27:46,000 --> 00:27:49,719
Speaker 1: look forward to the retrial because the evidence will not change.

483
00:27:50,280 --> 00:27:54,600
Speaker 1: But my question is the evidence might not change, but

484
00:27:55,080 --> 00:28:00,640
Speaker 1: will the SEC lawyers perhaps shore up their presentation address

485
00:28:00,720 --> 00:28:04,400
Speaker 1: the weaknesses that the judge saw on the first trial

486
00:28:04,640 --> 00:28:08,240
Speaker 1: in a retrial. I think they will you always learn

487
00:28:09,000 --> 00:28:12,640
Speaker 1: from a first trial, and I think that they will

488
00:28:13,000 --> 00:28:16,639
Speaker 1: take the opportunity to put on a clearer case, the

489
00:28:16,800 --> 00:28:21,200
Speaker 1: stronger case. And you never know how a jury is

490
00:28:21,240 --> 00:28:22,960
Speaker 1: going to look at the evidence. We don't know how

491
00:28:23,000 --> 00:28:25,800
Speaker 1: this jury would have looked at the evidence, and so

492
00:28:25,840 --> 00:28:27,919
Speaker 1: I think that they will have learned from what happened

493
00:28:27,960 --> 00:28:32,040
Speaker 1: in the first case, and there's a very good possibility

494
00:28:32,080 --> 00:28:35,080
Speaker 1: that could be a conviction in this trial. For years,

495
00:28:35,359 --> 00:28:39,240
Speaker 1: these insider trading cases keep popping up where you know

496
00:28:39,280 --> 00:28:43,200
Speaker 1: the standard is questioned. It seems like that area of

497
00:28:43,240 --> 00:28:47,360
Speaker 1: the law is always in flux. It's very much influx.

498
00:28:47,480 --> 00:28:51,440
Speaker 1: It is very unclear, and that's why insider trading cases

499
00:28:51,520 --> 00:28:56,240
Speaker 1: can be controversial, especially when criminal charges have been brought.

500
00:28:56,960 --> 00:28:59,479
Speaker 1: I think in this case, though, that if the facts

501
00:28:59,480 --> 00:29:04,520
Speaker 1: are true, then it's very clear that Clark would be

502
00:29:04,560 --> 00:29:07,360
Speaker 1: guilty of insider trading. If it's true that he had

503
00:29:07,400 --> 00:29:10,880
Speaker 1: inside information from a close relative, his brother in law,

504
00:29:11,520 --> 00:29:15,440
Speaker 1: that typically is sufficient. I'm given that William Wright was

505
00:29:15,480 --> 00:29:19,280
Speaker 1: an insider of the company with various fiduciary duties not

506
00:29:19,360 --> 00:29:24,240
Speaker 1: to disclose that information to outsiders, and so I think

507
00:29:24,240 --> 00:29:28,360
Speaker 1: in this case we see that they're not only ambiguities

508
00:29:28,400 --> 00:29:31,560
Speaker 1: about what the law is on insider trading, they're also

509
00:29:32,080 --> 00:29:35,640
Speaker 1: ambiguities as to the fact and whether or not somebody

510
00:29:35,680 --> 00:29:40,840
Speaker 1: actually has inside information. So the defense attorneys made reference

511
00:29:40,880 --> 00:29:44,440
Speaker 1: to the fact that the Department of Justice declined to

512
00:29:44,560 --> 00:29:49,160
Speaker 1: prosecute here. Does that say anything. It's a good point,

513
00:29:49,680 --> 00:29:52,320
Speaker 1: but as I said before, that there may not have

514
00:29:52,360 --> 00:29:55,520
Speaker 1: been enough to stublish criminal charges. It may not be

515
00:29:55,760 --> 00:29:59,320
Speaker 1: that we can conclude beyond a reasonable doubt that Christopher

516
00:29:59,360 --> 00:30:03,120
Speaker 1: Clark had inside information from William Wright, but we might

517
00:30:03,200 --> 00:30:07,440
Speaker 1: be able to conclude, based upon a lower preponderance of

518
00:30:07,480 --> 00:30:12,160
Speaker 1: the evidence standard, that he did have that inside information.

519
00:30:12,760 --> 00:30:16,120
Speaker 1: And so I think that the defense attorney's argument here

520
00:30:16,680 --> 00:30:19,080
Speaker 1: is not a strong one. I think the fact that

521
00:30:19,120 --> 00:30:22,840
Speaker 1: we didn't have criminal charges does not necessarily mean that

522
00:30:22,960 --> 00:30:27,120
Speaker 1: civil charges are not appropriate. It's an interesting case because

523
00:30:27,120 --> 00:30:31,880
Speaker 1: of the way the SEC found it through their monitoring activities.

524
00:30:31,960 --> 00:30:35,560
Speaker 1: It's also interesting that the SEC lost at the lower

525
00:30:35,600 --> 00:30:40,320
Speaker 1: court because the SEC typically wins cases like this, and

526
00:30:40,360 --> 00:30:44,880
Speaker 1: so it's an unusual and interesting case and it'll be

527
00:30:44,920 --> 00:30:47,440
Speaker 1: interesting to see what actually happens at trial. Thanks so

528
00:30:47,520 --> 00:30:50,240
Speaker 1: much for being on the show, Jim. That's Professor James

529
00:30:50,280 --> 00:30:53,440
Speaker 1: Park of UCLA Law School. And that's it for this

530
00:30:53,640 --> 00:30:56,360
Speaker 1: edition of The Bloomberg Law Show. Remember you can always

531
00:30:56,360 --> 00:30:59,640
Speaker 1: get the latest legal news Honor Bloomberg Law Podcast. You

532
00:30:59,640 --> 00:31:03,760
Speaker 1: can find them on Apple Podcasts, Spotify, and at www

533
00:31:03,920 --> 00:31:08,160
Speaker 1: Dot Bloomberg dot com, slash podcast Slash Law, and remember

534
00:31:08,240 --> 00:31:11,120
Speaker 1: to tune into The Bloomberg Law Show every weeknight at

535
00:31:11,200 --> 00:31:14,720
Speaker 1: ten pm Wall Street Time. I'm June Grosso and you're

536
00:31:14,800 --> 00:31:16,000
Speaker 1: listening to Bloomberg