The Securities and Exchange Commission (SEC) has run into a rough patch at trial recently.

For the three years ending November 2013, the SEC was successful at trial 80 percent of the time. But since then, the number is closer to 50 percent.

What’s going on?

Take the case of Manouch Moshayedi.

The Securities and Exchange Commission (SEC) alleged that Moshayedi engaged in insider trading and violated the federal securities laws in connection with a secondary offering of approximately $267 million worth of sTec stock owned by Moshayedi and members of his family.

The SEC sought a final judgment ordering Moshayedi to relinquish any trading profits and to pay prejudgment interest and financial penalties.

The SEC also sought to permanently bar Moshayedi from acting as an officer and director of any registered public company.

Confirmed by the Bitcoin Era app, on June 6, 2014, following an 11-day trial in federal court in Santa Ana, California, a jury deliberated for just four hours before delivering a complete defense victory for Moshayedi.

The defense team was led by Patrick Gibbs, a partner at Latham & Watkins in Menlo Park, California.

“The SEC has been taking a greater number of cases to trial. And over the year to year and a half, they have lost a pretty significant percentage of the cases they have taken to trial. Different people have different views about what has led to that result,” Gibbs told Corporate Crime Reporter in an interview last week. “My own view is that they are bringing cases they shouldn’t be bringing because the evidence doesn’t support them.”

“Part of it is that defendants are insisting on going to trial. That is increasingly true. As the SEC racks up trial losses, defendants are looking at that record and thinking — rather than settling, I’d rather take the case and litigate it to judgement. That’s part of what is going on.”

“There are also some institutional dynamics and institutional pressures that are resulting in the SEC taking cases to trial rather than settling. Once the SEC has filed a case and pursued it into the litigation process, there is a lot of pressure on the SEC to take it to trial or to get a significant settlement. It’s very difficult for the SEC to back down and either dismiss a case or enter into a settlement that reflects the fact that the case doesn’t have any merit.”

“As best as I can tell, once the SEC files a case, it’s very rare for them to conclude that the case doesn’t have any merit and then dismiss it or settle for a modest amount. The SEC would rather take a case to trial and lose than have someone stand up and say — we shouldn’t have brought the case in the first place.”

Gibbs says there is an institutional problem at the SEC.

“The basic institutional problem is that the SEC’s process involves this investigation period where they get to bring in witnesses and have them testify under oath and it’s transcribed,” Gibbs said.

“And that becomes part of the evidentiary record. They get to do that without anybody representing the person they are investigating. They bring in these third party witnesses and they ask questions, show them documents.

But there is nobody there representing my client for example, to cross examine them.”

“In this case, for example, they brought in a key witness of the customer, and they showed him a very limited set of documents and they got him to give testimony that described several events happening in July before the secondary offering, which the documents actually showed didn’t happen until October. So, they got from this witness extremely misleading, incorrect testimony on this crucial point of whether this thing happened in July before the offering or in August, well after the offering. They got locked into their view of the facts and didn’t adjust.”

“In discovery in this case, we cross-examined that same witness and he admitted that he had gotten a number of those dates wrong because they had not showed him the full set of documents.”

“At trial, the SEC got up and tried to use some of that investigative testimony to try and show that things happened in July, even though the witness had already told them he had gotten his dates wrong because he wasn’t shown all of the documents. So, I got up and reminded him that he had told the SEC he had gotten those dates wrong.”

“That to me illustrates the institutional problem. They have this institutional process where there is no adversary there to cross-examine the witnesses. And they get locked into their version of the facts. And that can be extremely misleading because you don’t have someone coming in to cross-examine the witnesses to tell the other side of the story.”

“Once they file the case, it’s very difficult for them to back down, even if, as in this case, the evidence falls apart. They just keep plowing ahead.”

“The sad thing is there is a process where the SEC is supposed to go to the other side and hear them out. It’s called the Wells process. The SEC sends a letter that outlines its proposed claims against your client and you have the right to submit written responses, which we did here.”

They actually followed the Wells process?

“Yes,” Gibbs said. “But they didn’t listen. They blocked out the evidence that was inconsistent with their theory of the case. I’m not sure there is an institutional or a process fix. They have to follow that process by law. But they don’t have to listen. There is no way to force them to listen to you.”

Is there any indication that given this string of defeats that the SEC is looking at trying to take the Wells process more seriously?

“I don’t see any indication that they are,” Gibbs said. “And in fact, the only indication I’ve seen is precisely the opposite.”

“The SEC standard public response to these jury defeats is to say — we respect the jury’s decision, but we are going to continue to prosecute these cases aggressively where we think the evidence shows there was a violation. That doesn’t give you much confidence that they are doing much soul searching on their end.”

“Second, less than a week after our verdict, Andrew Ceresney, who is the head of enforcement at the SEC, spoke to a bar association meeting in Washington, D.C. The gist of his comments were that the SEC thinks that juries aren’t getting these cases because they are applying a criminal standard of proof to the SEC because it’s the government and the jurors are confused into thinking these are criminal cases. And two, he thinks the SEC is at a disadvantage because they are not able to bring in so-called victims. People get confused he says, because they think insider trading is a victimless crime because you can’t parade in victims who were swindled.”

“Mr. Ceresney thinks those factors are driving the SEC’s losses. He announced at this bar association event that the SEC intends to start bringing these insider trading cases in administrative proceedings internal to the SEC as opposed to in court. In the administrative process, they don’t have to go through a jury. The facts are decided by an administrative judge who works for the SEC.”

Do they have that choice?

“They do,” Gibbs said. “They used to have that ability in fairly limited circumstances, usually people or entities directly regulated by the SEC, like public auditing firms. But the Dodd-Frank legislation greatly expanded the scope of litigation that the SEC is allowed to bring administratively. And they have announced that they intend to start doing that.”

[For the complete q/a format Interview with Patrick Gibbs, see 28 Corporate Crime Reporter 26(11), June 30, 2014, print edition only.]