The fall-out from the Second Circuit’s decision in U.S. v. Newman continued last week in SEC v. Payton, when Southern District of New York Judge Jed S. Rakoff denied a motion to dismiss an SEC civil enforcement action against two former brokers, Daryl Payton and Benjamin Durant, one of whom (Payton) had just had his criminal plea for the same conduct reversed in light of Newman. Although the United States may be unable to make criminal charges stick against some alleged insider traders under a standard of “willfulness,” Judge Rakoff found that the SEC had sufficiently alleged that related conduct of the two brokers at the end of the tip line was “reckless,” satisfying the SEC’s lower civil standard.
Danielle P. Van Wert
Danielle Van Wert, a senior associate in the Silicon Valley office, is a member of the Securities Litigation Group.
Ms. Van Wert's practice focuses on securities litigation and white collar criminal defense. She represents companies and individuals in securities-related regulatory investigations, including SEC and FINRA matters, and also represents special committees in internal investigations. In addition, Ms. Van Wert's practice focuses on shareholder derivative actions and actions brought under federal and state securities laws.
Her significant involvement in recent cases include the following.
- Representation of a former CFO of a technology company in action brought by the SEC alleging revenue recognition and accounting fraud.
- Representation of multiple board special committees in connection with internal investigations arising out of stock options issues.
- Representation of a former manager of a brokerage company in FINRA investigation.
Prior to joining the firm, Ms. Van Wert was an associate at DLA Piper Rudnick Gray Cary.
In an amicus brief filed earlier this month in Berman v. Neo@Ogilvy LCC, the SEC asked the Second Circuit to defer to the Commission and hold that individuals who report misconduct internally are covered by the anti-retaliation protections of the Dodd-Frank Act of 2002, regardless of whether they report the information to the SEC.
A federal court’s recent dismissal of Securities Exchange Act claims against the auditor of a Chinese company prompted us to examine the state of recent U.S. civil securities litigation against accounting firms that audited China-based companies that were listed on US exchanges.
Until recently, it was extremely rare for the SEC to bring enforcement actions against unregulated entities or persons in its administrative court rather than in federal court. However, as a result of the Dodd-Frank Act (and perhaps the SEC’s lackluster record in federal court trials over the past few years), the SEC is committed to bringing, and has in fact brought, more administrative proceedings against individuals that previously would be filed in federal court. Many have questioned the constitutionality of these administrative proceedings. As U.S. District Judge Jed Rakoff remarked in August 2014: “[o]ne might wonder: From where does the constitutional warrant for such unchecked and unbalanced administrative power derive?” Several recent SEC targets agree with Judge Rakoff, and have filed federal court suits challenging the constitutionality of the SEC’s administrative proceedings. (Notably, in a 2011 order regarding the SEC’s first attempt to use its expanded Dodd-Frank powers to bring more administrative cases, Judge Rakoff denied a motion to dismiss a constitutional challenge to the SEC’s decision to bring an administrative proceeding in an insider trading case against an unregulated person, following which the SEC terminated that proceeding and litigated in federal court.)
The clock will strike on the first self-report deadline under the SEC’s Municipalities Continuing Disclosure Cooperation Initiative (the “MCDC Initiative”) at 12:00 a.m. EST on September 10, 2014. Under the MCDC Initiative, underwriters and issuers of municipal securities may choose to self-report any potential, materially inaccurate statements relating to prior compliance with continuing disclosure obligations in exchange for a recommendation of “favorable settlement terms.” Under the terms of the original SEC announcement, the deadline for both underwriters and issuers was September 10. But the SEC announced a set of modifications to the MCDC Initiative on July 31, 2014, including a shift to a piecemeal approach whereby the deadline for underwriters went unchanged but the deadline for issuers was moved to December 1, 2014. This decision was admonished in an August 28, 2014 letter from U.S. Representatives Steve Stivers and Krysten Sinema to SEC Chair Mary Jo White, in which they “urge[d] the SEC to extend the self-reporting deadline for dealers to match the deadline for issuers” because there “simply is no justification for separate reporting deadlines.” Read More
The SEC announced last week that it has obtained yet another admission of wrongdoing in connection with an agreement to settle an SEC enforcement action. This time, Peter A. Jenson, the former COO of Harbinger Capital Partners LLC, admitted that he aided and abetted Harbinger’s CEO, Philip Falcone, in obtaining a fraudulent loan from Harbinger. Jenson agreed to a $200,000 penalty along with a two-year suspension from practicing as an accountant on behalf of any SEC-regulated entity. The settlement awaits court approval.
The Jenson settlement is the latest in a series of settlements in which the SEC has obtained admissions of wrongdoing since announcing changes to its “no admit/no deny” settlement policy in June 2013. Other examples include the March 2014 Lions Gate settlement, the February 2014 Scottrade settlement, and the August 2013 Falcone/Harbinger settlement that settled charges related to those Jenson settled last week. Read More
On April 14, 2014, a divided panel of the U.S. Court of Appeals for the District of Columbia held in National Assoc. of Mfg., et al. v. SEC that the required disclosures pursuant to the SEC’s Conflict Minerals Rule violated the First Amendment’s prohibition against compelled speech, throwing that rule into uncertainty and possibly opening the door to constitutional challenges to similar disclosure rules.
The Conflict Minerals Rule requires companies and foreign private issuers in the U.S. to disclose their use of “conflict minerals” both to the SEC and on their websites. The Rule, which was adopted pursuant to Section 1502 of the Dodd-Frank Act as a response to the Congo War, defines “conflict minerals” as gold, tantalum, tin, and tungsten from the Democratic Republic of Congo (“DRC”) or an adjoining country, which directly or indirectly financed or benefited armed groups in those countries. The deadline for satisfying the Rule, which became effective in November 2012, is May 31, 2014. The National Association of Manufacturers, along with Business Roundtable and the U.S. Chamber of Commerce, challenged the Rule in the district court and then appealed to the Circuit Court. Read More
On March 5, the Supreme Court heard oral arguments in Halliburton v. The Erica P. John Fund. As discussed in previous blog posts, the United States Supreme Court agreed to consider Petitioner Halliburton’s argument to modify or overturn the fraud-on-the market presumption that the Court first articulated more than a quarter century ago in Basic v. Levinson, 485 U.S. 224, 243-50 (1988). As our readers know, the fraud-on-the market theory allows investors to bring securities class action suits under Section 10(b) of the 1934 Securities Exchange Act by using a rebuttable presumption that public information about a company is reflected in its stock price because of the efficient markets hypothesis. Basic significantly relaxes the burden on securities class action plaintiffs because they do not need to show actual reliance on a purported misstatement when deciding to buy or sell stock. Overturning or modifying Basic would significantly dampen shareholder litigation by making it more difficult to obtain class certification or to survive a motion to dismiss. Read More
On January 31, 2014, Chevron Corporation moved to certify to the Delaware Supreme Court the question of whether exclusive forum bylaws are valid under Delaware law. Chevron filed its motion before the Honorable Jon S. Tigar of the Northern District of California. If Judge Tigar certifies the question, it seems likely that the Delaware Supreme Court will affirm a recent Delaware Court of Chancery decision finding such bylaws to be valid under statutory and contractual law, given that the author of that decision, then-Chancellor Leo E. Strine, is now Chief Justice of the Delaware Supreme Court.
In 2013, plaintiffs filed suit in both the Delaware Court of Chancery and the Northern District of California challenging Chevron’s board-adopted forum exclusivity bylaw. The case in the Northern District was stayed pending the outcome of the Delaware case, since both involved questions of Delaware state law. The Delaware plaintiffs argued that the forum exclusivity bylaw was statutorily invalid under Delaware General Corporation Law (DGCL), and contractually invalid because it was adopted unilaterally without shareholder consent. In June 2013, the Delaware Court of Chancery – in a decision by then-Chancellor Strine – found that the bylaw was enforceable, and that the Delaware Court of Chancery should be the sole and exclusive forum for (1)any derivative action brought on behalf of the Corporation, (2) any action asserting a claim of breach of a fiduciary duty, (3) any action asserting a claim arising pursuant to any provision of the DGCL, or (4) any action asserting a claim governed by the internal affairs doctrine. Read More
The second quarter of 2013 saw the largest quarterly percentage decline in new securities actions since before the 2007/2008 financial crisis. New filings in the first quarter plummeted by 41 percent, from 352 in the first quarter to 234 in the second quarter. This drop represents a 55 percent decrease in the number of new securities actions filed as compared to same period last year (Q2 2012). It has been approximately five years since we have seen a lower number of quarterly filings.
The number of new securities fraud cases also plummeted, falling 59 percent from the prior quarter, with the number of new filings decreasing from 149 to 61. There were also quarterly declines in newly-filed shareholder derivative actions, which decreased from 43 filings in the first quarter to 37 in the second quarter, and breach of fiduciary duty cases, which fell from 99 new filings in the first quarter to 71 in the second quarter.
Not only did the number of securities actions filed drop significantly, but so too did the average settlement amounts. The average settlement for all types of securities cases in the second quarter was just over $37 million, a marked decrease from the average settlement amount of $69.3 million during the first quarter of 2013.
What’s going on? There are a number of factors that may be contributing to these downward filing trends. The stock market has been strong, so many investors have little to complain about. Moreover, the surge in suits against U.S.-listed Chinese companies appears to have run its course, and no new scandal or market development has yet become the next “big thing” that will drive increased filings. In addition, SEC enforcement activities have continued to shift into areas (such as insider trading and whistleblowing) that do not always spawn parallel private litigation. It remains to be seen whether the recent appointment of new SEC personnel or a renewed focus on accounting fraud cases by regulators, which is anticipated by some analysts, will cause a variation in these trends moving forward.
Source = Advisen D&O Claims Trends: 2013 Report (July 2013)