Law360, New York (July 26, 2013, 4:45 PM ET) — A former Prudential Securities Inc. broker who beat civil fraud allegations tied to market timing asked the Second Circuit on Thursday to vacate a lower court’s related negligence findings, arguing that the U.S. Securities and Exchange Commission failed to show any evidence that the broker acted improperly.
The SEC concentrated on fraud allegations in its prosecution of Frederick O’Meally, but “cobbled” together its negligence case, according to Thursday’s brief. Though the jury cleared the ex-broker of fraud charges connected to market timing on behalf of his hedge fund clients against their wishes, it mistakenly found him liable for negligence — despite the SEC’s lack of any evidence necessary for such a claim, the brief alleges.
“The problem here is that this case was not charged, proven or argued as a negligence case,” the brief states. “The only two rational verdicts here were one of willful violation or no violation whatsoever. It was scienter or bust.”
What was missing was testimony showing the appropriate course of action for a “broker in O’Meally’s shoes,” according to the brief. The SEC alleged that he continued market timing — a trading strategy in which investors, often hedge funds, quickly buy and sell mutual fund shares to take advantage of perceived inefficiencies in their pricing — even after mutual funds asked him to stop.
But the regulator failed to take in the “nexus of circumstances,” discounting that O’Meally also had obligations to his bosses at Prudential and his clients, who encouraged the trading, and that some of the mutual funds also promoted market timing, an attorney for O’Meally, Jonathan Andrew Harris told Law360. No evidence suggested that O’Meally acted counter to standard practices, according to Harris.
Harris said that the case is an example of the SEC using a “midlevel guy” as a scapegoat for a practice it didn’t like.
“Fred O’Meally was not in some dark cave market timing,” he told Law360 on Friday. “He wasn’t running the show at Prudential.”
In the brief, O’Meally also seeks to pare down his ordered $444,000 disgorgement to $86,314, and to vacate the district court’s award of prejudgment interest. He alleges that the court miscalculated the amounts, which are identical to those that would have been applied under the fraud charges, according to the brief.
The ex-broker was accused along with several of his colleagues for securities fraud in connection with his market timing. He was the only one to go to trial. Three of O’Meally’s colleagues settled similar suits against them over the alleged wrongdoing, which the SEC said took place from 2001 to 2003.
SEC lawyers said at the time that O’Meally was not on trial for market timing, but said that as head of a Prudential specialized market timing group, O’Meally tried to dodge mutual funds’ efforts to stop him.
When mutual funds suspended certain trading in the accounts he managed, he would open new accounts, for example. He also allegedly traded using more than one broker identification number, in order to get around restrictions that mutual funds had imposed, the SEC said.
In December 2011, a jury rejected the SEC’s fraud claims but did find O’Meally liable for negligence with respect to six of the 60 mutual funds he traded in.
Representatives for the SEC did not immediately return requests for comment.
O’Meally is represented by Andrew J. Frisch and Jonathan Andrew Harris of Harris Cutler & Houghteling LLP.
The case is Securities and Exchange Commission v. O’Meally et al., case number 13-1116-cv, in U.S. Court of Appeals for the Second Circuit.