Report Shows 2016 Record-Setting Year for Class Action and SEC Settlements

Last week, proxy advisory firm Institutional Shareholders Services (“ISS”) published its semi-annual report of the top 100 U.S. securities class action settlements and top 50 SEC settlements of all time, as of December 31, 2016. The report adds thirteen new class action settlements from last year – making 2016 the most represented year in the report’s settlement rankings – along with two new top SEC settlements.

The ISS report ranks, among other things, the top 100 shareholder class action settlements ever reached in the U.S. for actions filed on or after January 1, 1996, when the Private Securities Litigation Reform Act was implemented. ISS’s June 2017 report reflects that there were 137 court-approved securities class action settlements in the US in 2016, remaining steady with 2015. Notably, however, 13 of the 137 class action settlements were among the top 100 shareholder class action settlements, resulting in a total approved settlement fund of over $5.6 billion, the largest in a single year. The largest of these 13 settlements was in Lawrence E. Jaffe Pension Plan v. Household International, Inc., et al., Case No. 02-CV-05893 (N.D. Ill.), which was based on claims of fraudulent misrepresentations concerning allegedly illegal sales techniques, predatory lending practices, and accounting manipulations. In December 2016, the Northern District of Illinois approved a final settlement fund of $1.58 billion, resulting in the seventh largest securities class action settlement in U.S. history. READ MORE

Dodd-Frank Re-Write—the House of Representatives Edition

The House has approved major changes to signature aspects of Dodd-Frank. While those changes are unlikely to survive intact, they are certainly worthy of close attention. We’ve studied the nearly 600-page bill so you don’t have to.

On June 8, 2017, the House passed H.R. 10, entitled the Financial CHOICE Act of 2017. Sponsored by Rep. Jen Hensarling (R-Texas), the bill advances to the Senate after a largely party-line vote, 233 to 186. All but one Republican supported the bill, while all Democrats opposed.

The bill extensively amends the Dodd-Frank Wall Street Reform and Consumer Protection Act, the landmark 2010 legislation passed by a Democrat-controlled Congress in the wake of the Lehman Brothers collapse and ensuing financial crisis.

Key changes include:

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Supreme Court Unanimously Limits the SEC’s Ability to Seek Disgorgement

This week, the United State Supreme Court finally resolved a circuit split and unanimously held that SEC actions seeking to disgorge ill-gotten gains are subject to a five-year statute of limitations on civil fines, penalties or forfeitures under 28 U.S.C. § 2462.  This decision is expected to dramatically reduce the SEC’s ability to collect disgorgement in enforcement actions.

The decision arose out of an SEC enforcement action brought in 2009 that alleged between 1995 and 2006, Charles Kokesh, a New Mexico-based investment adviser, misappropriated $35 million from two investment advisory companies he owned and controlled, thereby squandering the money of tens of thousands of small investors. Kokesh was ultimately found liable at trial and the trial court ordered him to disgorge the entire $35 million he was found to have misappropriated plus interest, and pay a civil monetary penalty.  Kokesh subsequently challenged the disgorgement order before the U.S. Court of Appeals for the Tenth Circuit, arguing that the SEC’s claim for disgorgement was subject to the five year statute of limitations period codified in Section 2462, and therefore the $35 million disgorgement amount should be significantly reduced by eliminating any ill-gotten gains received prior to 2004—five years prior to the initiation of the SEC enforcement action.  A three judge circuit court panel of the Tenth Circuit unanimously disagreed, and upheld the disgorgement order on the basis that disgorgement is not a “penalty” or “forfeiture” as defined in Section 2462, but rather was “remedial” and “does not inflict punishment” because it leaves the wrongdoer “in the position he would have occupied had there been no misconduct.”  On this basis, the Tenth Circuit held that Section 2462’s limitations period was inapplicable to disgorgement. READ MORE

Government Leaks Lead to Landmark Insider Trading Case

On May 24, 2017, the SEC for the first time brought charges based on allegations of insider trading on confidential government information. The alleged insider trading scheme involved tips related to three announcements by the Center for Medicare & Medicaid Services (“CMS”) regarding non-public rate changing decisions affecting the stock of issuers in the healthcare industry.

The complaint alleges that from May 2012 to November 2013, Christopher Worrall, a health insurance specialist in the Center for Medicare (“CM”), the CMS component that administers Medicare’s national payment systems and determines Medicare reimbursement rates, tipped his long-time friend David Blaszczak about internal deliberations and planned actions of CMS.  Blaszczak is a consultant specializing in healthcare policy issues and a former CMS employee. READ MORE

The Potential Declawing of the SEC: The Financial CHOICE Act

Gavel and Hundred-Dollar Bill

The Financial CHOICE Act (or “CHOICE Act 2.0”), which would significantly narrow the SEC’s ability to bring enforcement actions and make it more challenging for it to prevail in such actions, is inching its way towards becoming law. On May 4, 2017, the Financial Services Committee passed the Act and it is now slated to be introduced to the House in the coming weeks. As part of the push by the current administration to deregulate, this bill aims to repeal key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including those directed towards the SEC.  Although the Act has a long way to go before it is enacted, many of its provisions would have far-reaching consequences and would change the way the SEC operates as we know it.

Should the CHOICE Act 2.0 become law, the following are some of the more important effects it would have on the SEC’s enforcement abilities:

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From Greyball to Snowball: Uber’s Latest Travails, and How Multiple Investigations of Misconduct May Imperil the Attorney-Client Privilege

It emerged on May 5 that the Department of Justice opened an investigation into Uber’s use of software called “Greyball” that concealed the ride-sharing company’s operations from regulators in cities and countries that did not permit Uber’s services.  Since then, the Portland City Council has voted to subpoena documents concerning the program, and lawmakers in Philadelphia and Austin have said they are cooperating with DOJ investigation. Uber allegedly deployed Greyball not only in the United States (including in Boston, Philadelphia, and Las Vegas), but also in Australia, Paris, China, and South Korea.

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What to Watch for From the New SEC Chairman

Last Thursday, Jay Clayton was officially sworn in as the new Chairman of the Securities and Exchange Commission.  As the new Chairman takes office, here are a few things we’re keeping an eye on:

Will Chairman Clayton take a position on the recently introduced bipartisan bill that would increase civil monetary penalties in SEC enforcement actions?  The “Stronger Enforcement of Civil Penalties Act of 2017” would significantly increase civil monetary penalties in enforcement actions to as much as $1 million per violation for individuals and $10 million per violation for entities, or three times the money gained in the violation or lost by the victims.  The current maximum civil monetary penalties are $181,071 and $905,353 per violation for individuals and entities, respectively.

Will the new Chairman preserve the directive reportedly issued by former Acting Chairman Michael Piwowar to re-centralize authority to issue formal orders of investigation?  In 2009, the SEC adopted a rule that delegated authority to issue formal orders initiating investigations to the Director of Enforcement, who then “sub-delegated” it to regional and associate directors and unit chiefs within the Enforcement Division.  In February, Piwowar reportedly revoked the “sub-delegated” authority, ordering it re-centralized exclusively with the Director of Enforcement.

Will enforcement actions against public companies increase or decrease after hitting their highest level since 2009 last year?  A recent report issued by the NYU Pollack Center for Law & Business and Cornerstone Research found that the 92 actions the SEC brought against public companies and their subsidiaries in 2016 is more than double the level of enforcement activity from just three years prior. READ MORE

Congress May Significantly Increase SEC Civil Penalties Up To $10 Million Per Violation

On March 30, 2017, a bipartisan group of Senators introduced a bill called “Stronger Enforcement of Civil Penalties Act of 2017” (the “SEC Penalties Act”) to “crack down on Wall Street fraud” that would significantly increase civil monetary penalties in SEC enforcement actions up to $1 million per violation for individuals and $10 million per violation for entities, or three times the money gained in the violation or lost by the victims.  Currently, the maximum civil monetary penalties in SEC enforcement actions are $181,071 per violation for individuals and $905,353 per violation for entities.[1]

The SEC Penalties Act raises the maximum penalties under all three penalty tiers, would tie penalties to the scope of harm and associated investor losses, triple the maximum penalty caps under each tier for recidivists who have been held criminally or civilly liable for securities fraud within the preceding five years, and provide the SEC with authority to seek disgorgement of ill-gotten gains in SEC administrative actions (currently disgorgement is only available in federal district court actions). The legislation would not alter the current three-tier penalty structure or the standards for establishing a penalty under each tier, and does not define how administrative law judges and federal district courts should interpret the “each act or omission” language in the penalty statutes.[2]

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2016 Could Be Peak SEC

2016 was a high-water mark for SEC enforcement activity; however, with the uncertainties associated with the new administration’s enforcement regime, we could be seeing a downturn going forward. According to a recent report issued by the NYU Pollack Center for Law & Business and Cornerstone Research, the SEC’s 2016 fiscal year (spanning October 1, 2015 – September 30, 2016) saw the highest number of enforcement actions brought against public companies and their subsidiaries since 2009, the year the Pollack Center and Cornerstone Research first began tracking information on such actions.  The 92 actions brought against public companies and their subsidiaries last year is more than double the level of enforcement activity from just three years ago and represents the latest in a continuing upward trend of enforcement actions.  Also consistent with recent trends, the vast majority of these actions have been brought as administrative enforcement proceedings before SEC ALJs, rather than civil actions in federal court.

The SEC continues to focus most heavily on issuers’ reporting and disclosure obligations, which comprised more than a quarter of the enforcement actions initiated last year. The SEC has consistently emphasized issuer disclosures as an area of enforcement priority and its pattern of activity has, to date, backed that up.  Last year also brought enhanced focus on investment advisors and investment companies, with the SEC initiating more actions against those defendants in 2016 than in the previous three years combined.  Allegations of foreign corrupt practices and actions against companies making initial or secondary securities offerings also resulted in an increased rate of enforcement activity over prior periods.

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Changing the Game, Again: Supreme Court Could Limit SEC’s Authority to Seek Disgorgement

This week, the Supreme Court heard argument regarding whether the SEC’s actions to disgorge ill-gotten gains are subject to a five-year statute of limitations for “any civil fine, penalty, or forfeiture.”

The appeal stems from an SEC action alleging that between 1995 and 2006, Charles Kokesh, a New Mexico-based investment adviser, misappropriated a staggering $35 million from two investment advisory companies that he owned and controlled, squandering the money of tens of thousands of small investors. While Kokesh moved into a gated mansion and bought himself a personal polo court (complete with a stable of 50 horses), he allegedly concealed his massive ill-gotten earnings by distributing false proxy statements to investors and filing dozens of false reports with the Securities and Exchange Commission.

In 2009, the SEC brought a civil enforcement action against Kokesh in the District of New Mexico alleging violations of the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Investment Company Act of 1940. The jury found violations of all three acts, and the district court ordered Kokesh to disgorge the $35 million he misappropriated (plus interest) and pay a $2.4 million civil monetary penalty for the “egregious” frauds he committed within the prior five years.  While the district court ordered disgorgement of all of Kokesh’s ill-gotten gains since 1995, the civil monetary penalty it imposed was constrained by the five-year statute of limitations found in 28 U.S.C. § 2462, which applies to claims throughout the U.S. Code for “any civil fine, penalty, or forfeiture.” READ MORE