Broker-Dealer Litigation - Greenberg Traurig LLP

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U.S. v. Gushlak, 2011 WL 3159170 (E.D.N.Y. July 26, 2011).
Defendant pleaded guilty to conspiracy to commit securities fraud and conspiracy to
commit money laundering in relation to a scheme to manipulate the price of GlobalNet common
stock. After sentencing, the court received submissions from the government regarding
restitution to victims pursuant to the Mandatory Victim Restitution Act. The government
initially submitted a letter indicating that victims lost approximately $20 million, but did not
provide its methodology or a list of the victims. Based on that submission, the court found that
the government had yet to prove any victim losses and ordered the government to explain its
methodology, provide the trading records on which it relied for in camera review, and provide a
list of victims and the amount each had lost. The government then submitted additional
evidence, but the court found that it still failed to establish that the full amount of losses suffered
by the victims were attributable to Gushlak’s offense. The government’s third submission
analyzed the S&P 500, Nasdaq Composite, and Russell 2000 indices, found that these indices
declined by 20% during the relevant period, and thus discounted the victim loss calculations by
20% to reflect the portion of the victims’ losses that were caused by market movement rather
than fraud. The court again rejected the government’s analysis, finding that while index
performance may be of some relevance in a case where fraud is publicly revealed and a stock’s
price subsequently declines, it was not relevant here, where the public remained unaware of the
fraud. The court found that Gushlak’s expert’s comparisons of GlobalNet’s performance to
telecommunications stocks such as Level 3 were more useful than the government’s comparison
to broad indices. The court allowed the government to provide additional submissions as to the
amount of restitution, and provided several examples of potentially relevant evidence, including
evidence showing the percentage of the daily trading volume for GlobalNet shares that was
attributable to the conspiracy, a detailed factual explanation of how the conspiracy was carried
out, evidence related to the value of GlobalNet shares in the absence of manipulation (such as
prices of the shares when the conspirators initially acquired them), and evidence of the
performance of comparable companies.
New Jersey Carpenters Health Fund v. Novastar Mortgage, Inc., 2011 WL 1338195 (S.D.N.Y.
Mar. 31, 2011).
Plaintiff brought a putative class action based on defendant’s lending practices in
originating subprime home mortgages and sale of securities backed by the mortgages. Plaintiff
alleged that its injury was a 93% loss of market value in the securities since its initial value in the
offering. Defendant sought to dismiss plaintiff’s claim on the grounds that market value loss
should not apply in the mortgage-backed securities context, because the purchasers could not
have reasonably relied on the opportunity to sell the securities in the market, and instead could
only reasonably expect to receive the cash flow from the securities. The court held that
defendant’s position was without support under Section 11(e) of the Securities Act of 1933. The
text of Section 11(e) itself did not support defendant’s argument or single out fixed-income debt
securities for special treatment. Furthermore, the lack of a secondary market for the securities
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