White Collar Criminal Defense Group

Apple V. The DOJ: The Fight Over The Company’s Role In Law Enforcement

The U.S. District Court for the Eastern District of New York is the latest forum for the Department of Justice’s battle with Apple over the company’s obligations to help law enforcement investigate criminal matters. On February 29, a magistrate judge ordered that Apple was not required to use existing technology to bypass the lock screen of a defendant Jun Feng’s IPhone, extract the data, and provide it to law enforcement, who seized the phone pursuant to a valid search warrant. The government appealed the order to the district judge, arguing that the All Writs Act of 1789 authorized the Court to compel Apple’s participation in the execution of the search warrant. The All Writs Act, 28 U.S.C. § 1651, permits federal courts to “issue all writs necessary or appropriate in the aid of their respective jurisdictions and agreeable to the usages and principles of law.” Per the government, it is “necessary and appropriate” to compel Apple to help the government execute its warrant and conduct a search of Feng’s phone. Moreover, Apple has voluntarily assisted law enforcement in this manner many times before. Apple has yet to file its response to the appeal.

It is natural to draw a connection between this matter and the more publicized dispute over whether Apple should be compelled to build a special device to allow the government access into the IPhone of the San Bernadino (California) gunman, Syed Rizwan Farook, who, with his wife killed 14 people in a presumed terrorist attack. To be sure, both cases support the general notion that Apple is pushing back against efforts that it views as governmental intrusion into its customers’ privacy. But while the Farook case, for obvious reasons, has captured the public interest, the Feng matter holds more importance for criminal defendants. This is so for at least three reasons.

First, the government is not seeking access to Feng’s phone to investigate his participation in a criminal matter. Feng already pleaded guilty to conspiracy to distribute methamphetamine. During his plea hearing, he admitted to selling methamphetamine “with other people.” The government is seeking access to his phone in order to learn about those “other people” and, presumably, whatever other criminal activity it reveals. This posture dispels the popular notion that the government stops investigating once it obtains a guilty plea. It will continue to look for evidence of other offenses and offenders – and, if possible, compel private companies to participate in its search.

Second, the Feng matter has nothing to do with terrorism. As noted above, it is a drug case, which seems to pose no risk to national security – or at least no risk beyond that of an ordinary drug case. The advancement of national security through the gathering of intelligence related to terrorism is the government’s justification in attempting to compel Apple to infiltrate Farook’s IPhone. In the Feng matter, that justification is non-existent. The government seeks private assistance with run-of-the-mill law enforcement.

Third, and perhaps most significantly, Apple has chosen to litigate the matter despite the fact that it presumably could assist the government with little cost or effort. Farook’s phone has an encrypted passcode, which Apple would have to develop a mechanism to crack. Feng’s phone, on the other hand, features no special technology. Apple need only bypass the standard lock screen, which, according to the government, it can do with ease. Because Apple could comply with the government’s demand without expending significant resources – and without the concern that building a new device could lead create a “back door” for use by rogue governments, terrorists, or criminals – its refusal to participate in the execution of the search is a noteworthy development. Apple’s posture indicates that it will no longer be so complicit with law enforcement. The question whether tech companies are responsible for assisting in the execution of search warrants in ordinary criminal cases now rests with the courts.

Former Microsoft Finance Manager Settles Insider-Trading Charges Arising Out Of Nokia Acquisition

A former Microsoft senior finance manager agreed on Friday to settle charges that he traded on material nonpublic information about Microsoft’s acquisition of Nokia Corporation’s mobile phone business.  The insider-trading charges were outlined in a complaint filed on the same day in U.S. District Court in Seattle by the SEC.  The settlement, which includes a combination of disgorgement and civil penalties totaling nearly $380,000, is pending court approval.

According to the SEC’s complaint, John E. Hardy, III, was employed in Microsoft’s corporate financial planning and analysis group.  While employed there, Hardy purchased put options after learning from highly confidential internal Microsoft documents that the company’s fiscal-year 2013 financial results would not meet Wall Street analysts’ expectations.  On July 18, 2013, Microsoft issued an earnings release containing those financial results.  Following the issuance of that release, Microsoft’s stock price decreased by more than 11%.  Shortly after the announcement, Hardy sold the put options, realizing gains of approximately $9,000.  

The complaint also alleged that Hardy purchased Nokia call options in August of 2013 after learning in the course of his work in the financial planning and analysis group that Microsoft was planning to acquire Nokia’s mobile phone business.  The acquisition was announced publicly on September 2, 2013, resulting in the price of Nokia shares rising more than 30%.  Hardy sold is Nokia call options shortly thereafter, resulting in profits of approximately $175,000. 

The complaint asserted claims of violations of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Hardy consented to the entry of a judgment permanently enjoining him from violating those provisions of the securities laws.  In addition, he agreed to disgorge all of his ill – gotten gains of $184,132, pay a one-time civil penalty of $184,132, and pay prejudgment interest of $11,389, for a total payment of $379,653 to resolve charges.  He also agreed to a five-year bar from serving as an officer or director of a publicly-traded company.

On numerous occasions, Microsoft has publicly stated its “zero tolerance” of employees engaging in unauthorized insider trading.  In its complaint, the SEC made a series of allegations concluding that Hardy had breached his duties to Microsoft and its shareholders by violating the company’s insider trading policy, as set forth in the Microsoft Employee Handbook. 

As part of the settlement, Hardy neither admitted nor denied the SEC’s factual allegations.  A complete copy of the SEC’s complaint can be found here.