McManis Faulkner successfully closed a yearslong family law matter, scoring the client a victory worth $15 million at the California Court of Appeal.
The case involved a married couple who jointly invested $900,000 in a hedge fund that the husband started in the mid-1990s. The husband was indicted in 2011 for securities fraud and later convicted of insider trading.
When the wife filed for divorce, the husband claimed the $900,000 investment had come from his premarital earnings and had grown to $18 million, which he claimed as separate property. He also claimed that his soon-to-be ex-wife should be responsible for half of the more than $10 million he had been assessed in insider trading fines, penalties, and fees.
During the trial, the McManis Faulkner team forced our client’s ex-husband and his forensic accountant to admit that their attempt to trace the $900,000 investment led to the wrong account, defeating his premarital earnings claim. The judge sided with our client and characterized the parties’ entire position in the fund (over $30 million total) as community property, entitling the ex-wife to roughly $15 million. The judge also declared that most of the millions in insider trading fines, penalties, and fees were separate property and the ex-husband’s duty to repay, but that a $935,306 civil penalty was a community obligation.
On appeal, the Court of Appeal affirmed the trial court’s denial of the $18 million separate property claim and its characterization of the insider trading charges, while the McManis Faulkner team successfully argued that the trial court had erred in characterizing the ex-husband’s $935,306 penalty as a community debt.
In its published opinion, the Court of Appeal quoted the trial court, which had opined:
“[T]he spouse who knowingly commits a crime willfully accepts the risk that he will be caught and have to face the consequences, whereas the spouse who was unaware of the risk and could do nothing to avoid it should not bear the same burden.”
The Court of Appeal said it “could not agree more” and ruled the ex-husband should bear the entire $935,306 penalty as his separate obligation.