Podcast - Victories and "Losses" in the Courtroom
In this episode of "The Trial Lawyer's Handbook" podcast series, litigation attorney Dan Small continues the story of the U.S. Securities and Exchange Commission's (SEC) civil case against internet game company SG Limited, recounting how an initial courtroom win was undone when the U.S. Court of Appeals for the First Circuit reversed the lower court decision against a motion to dismiss. Mr. Small uses this moment to explain the critical difference between "losing" narrow legal rulings and prevailing in the broader narrative, showing how the appellate court's own words validated SG's central theme: no reasonable player could have believed the game's "stocks" were real or profits guaranteed. He then walks through how that story powered settlement negotiations, culminating in a very unlikely outcome: return of most of the frozen funds, a face-saving escrow proposal for any truly misled "victims."
Listen to more episodes of The Trial Lawyer's Handbook here.
This podcast episode was adapted from Mr. Small's book Lessons Learned from a Life on Trial: Landmark Cases from a Veteran Litigator and What They Can Teach Trial Lawyers.
Dan Small: Welcome to another episode of "The Trial Lawyer's Handbook." In this episode we will continue discussing the SG Limited civil SEC case. These episodes are based in part on my latest ABA book, "Lessons Learned from a Life on Trial.”
Imagine winning a big sports game and then, months later, you get a call saying it didn't count and you have to play the whole game over again. Such was what happened after my successful defense of the internet game developing company SG Limited that had resulted in the dismissal of the lawsuit filed against them by the SEC.
Undaunted, and obviously unamused by the obvious fun of the game, the SEC appealed the dismissal to the First Circuit Court of Appeals. We filed extensive briefs and had another lengthy oral argument, going back and forth between our story and the SEC's view of the law. Clearly, we said, this was just a game. But as often happens at the appellate level, the narrow law wins over the broader story. In a 14-page opinion, the court of appeals reversed the district court's dismissal. It did an extensive technical analysis of the law and came to the conclusion that there was enough in the SEC's complaint to get it past a motion to dismiss. The first time I read through the opinion, I was devastated. The SEC had won. The court had taken away my great victory.
But had it? Yes, at that early stage, on a motion to dismiss. But in the long run? The second time I read through the opinion, the power of the story started to come through. The court repeatedly emphasized that this was only a motion to dismiss. At that stage, the court reviews the case, "accepting as true all well-pleaded factual arguments and indulging all reasonable inferences in the plaintiff's favor." If there are factual disputes, if there is a broader story, that is for another day. When reviewing a motion to dismiss, the court does not try to answer those types of fact-sensitive questions.
To the SEC’s dismay, it was clear that even the legalistic Court of Appeals had heard and understood our story. Throughout the opinion there were several statements indicating trouble ahead at trial — parts of our story that "give rise to an issue of fact" (or perhaps multiple issues of fact). And in an extraordinary shot across the bow to the SEC, near the end of its opinion, the court stated: "This is not to say that SG's gaming language and repeated disclaimers are irrelevant. SG has a plausible argument, forcefully advanced by able counsel, that no participant in his or her right mind should have expected guaranteed profits from purchases of company shares."
So even though the SEC had "won" that round in the court of appeals, it was a pyrrhic victory if it signaled a loss at trial. Not surprisingly, the SEC approached us about a settlement. I was happy to tell the SEC that what the court had described as "able counsel" was looking forward to "forcefully advancing" this "plausible argument" at trial. We had a story to tell, and witnesses who could tell it. What were they going to say to the jury about the Fart company? (One of the companies in the game.)
However, my clients were happy to settle. The game had been fun, but it had run its course. They were willing to move on to the next adventure, but they wanted their money back — the $5.5 million that the SEC had frozen. Oh no, we were told, the SEC never does that. Several lawyers I spoke with, who were much more familiar with the SEC than I was, confirmed it: They had never heard of the SEC giving back money that it had seized.
But my clients were adamant: Give us back the money you took, or we go to trial. We pushed hard on the story and how bad the SEC would look, pushing such a technical case against a virtual game. "Call your first witness!" I said, which is what I've always said to anyone — either when I was a prosecutor or in private practice — who comes into my office with a far-fetched case. "Call your first witness." Who would that be? Who would testify under oath that this was real? Do you want to give us our money back now, or risk having to give it back after an embarrassing loss at trial?
Once again, the story came to our rescue. We believed the players all understood this was just a game. Relying on that belief, I proposed a face-saving compromise for the SEC: Give us back most of the money, and we'll agree that the remainder be set aside in a separate fund. If any player submits a signed, sworn affidavit within a set period of time (I think it was six months or something) that they believed these stocks were real and profits were truly guaranteed, they could get their money back out of the fund. It was a way for the SEC to save face and show that it was protecting the "victims," while at the same time for us highlighting the absurdity of their case.
We believed our story. We believed that no one would come forward to sign such an affidavit and submit it to the SEC, admitting to such idiocy. And we were right. No one ever did. The client got back their money, even though the SEC supposedly never gives back money. The case went away, without any finding or admission of wrongdoing. In the end, even though the SEC had "won" in the court of appeals, the client was happy with our story and with the result.
In any case, we should not just focus on the bits and pieces of law and evidence. Find the story that binds them together and focus on that — at every stage of the case. That's the lesson of SG Limited.