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.)
James A. Meyers
Mr. Meyers, a partner in the Washington, D.C., office, is a member of the Securities Litigation and Regulatory Enforcement group. Mr. Meyers’ practice focuses on the full range of SEC enforcement matters, including alleged accounting and financial fraud, broker-dealer issues, insider trading, and alleged false statements or omissions in SEC filings and elsewhere. Mr. Meyers has also successfully represented clients in private securities litigation.
Mr. Meyers is recognized by Chambers USA 2014 in Band 2 for securities litigation and is described by clients to be “an incredibly engaged, responsive and thoughtful counselor.” Successful results include:
For Financial Institutions and Related Individuals
- SEC v. Mozilo, et al. Representation of former president and chief operating officer of Countrywide Financial Corporation, in SEC enforcement action alleging disclosure fraud by three of Countrywide’s senior executives. The case settled with client consenting, without admitting the allegations of the complaint, to certain injunctive relief, an out-of-pocket payment of US$520,000, and an agreement not to serve as a director or officer of a public company for three years.
- Representation of a Wall Street investment firm in numerous SEC and NASD investigations regarding a variety of issues. No enforcement action was taken against our client in any of these matters; however, three other major investment firms were fined and censured in at least one of the matters.
- Representation of a trader at a hedge fund in SEC investigation into possible market timing; no enforcement action taken against our client, though the hedge fund and the broker-dealer through which it traded agreed to a settled enforcement action.
- Representation of a former compliance officer of a major investment bank in SEC investigation into possible market manipulation; no enforcement action taken against our client.
- Representation of a floor trader for a major investment firm in SEC and DOJ investigations into possible insider trading; no enforcement action taken against our client.
For Other Public Companies and Related Individuals
- Representation of entities in several SEC accounting fraud investigations; no enforcement action taken.
- Representation of public companies and other entities in internal investigations, including investigations resulting from whistleblower allegations, regarding possible accounting and other issues.
- Representation of two public companies in SEC insider trading investigations of alleged insider trading with respect to those companies’ stocks.
- Representation of the former CFO of an insurance company in connection with the SEC’s omnibus investigation of accounting for finite reinsurance. Client received a Wells notice indicating the staff’s intent to pursue fraud and other charges but, following receipt of our Wells submission, the staff terminated the investigation without taking any enforcement action against our client, though the company did enter into a consent agreement with the commission.
- Representation of a company and one of its officers in a SEC investigation of alleged accounting fraud in the oil and gas industry. Though the SEC staff issued Wells notices to the firm’s clients, it ultimately terminated the investigation without enforcement action against the clients, even though another company and several other individuals entered into consent agreements with the commission.
- Drafted a Wells submission on behalf of client, the CEO of a public company, in an insider trading investigation; ten days after the Wells submission was made, the staff decided to terminate the investigation without taking any enforcement action.
- Representation of the former CFO of a company in the health care industry in a SEC investigation into possible accounting fraud. The SEC staff terminated the investigation without enforcement action against the firm’s client.
- SEC v. Berry. Representation of the former general counsel of KLA-Tencor Corp. and Juniper Networks, Inc., in SEC and private litigation alleging unlawful stock options backdating. Achieved partial Rule 12(b)(6) dismissal of the SEC’s original and first amended complaints as well as the private plaintiffs’ complaint. The private action settled, with client paying no money. The SEC action settled pursuant to a consent order that did not include an injunction against scienter-based fraud violations, the first instance to our knowledge in which the commission did not require such relief against a general counsel in litigated or settled actions alleging unlawful options backdating.
- SEC v. Mercury Interactive, LLC, et al. Representation of the former general counsel of Mercury Interactive, LLC, in a federal court SEC enforcement action alleging unlawful stock options backdating. Achieved full dismissal (without prejudice) of the SEC’s first amended complaint and partial dismissal of the SEC’s original and second amended complaints. The case settled pursuant to a consent order that did not include an injunction against scienter-based fraud violations; this case and Berry are, to our knowledge, the only ones in which the commission did not require such relief against a general counsel in alleged options backdating cases.
- SEC v. Espuelas, et al. Representation of the former senior vice president, Global Sales, of StarMedia Network, Inc., in a federal court SEC enforcement action alleging improper revenue recognition. The court dismissed the fraud and most of the other claims of the SEC’s original complaint as to the firm’s client, and it dismissed the allegations of the first amended complaint as to the client based on one of the two sets of transactions. The case settled pursuant to a consent order that required no civil penalty, no disgorgement, and no officer-and-director bar.
For Auditing Firms and Related Individuals
- In re Doral Financial Corp. Sec. Litig., 563 F. Supp. 2d 461 (S.D.N.Y. 2008), aff’d, 2009 WL 2779119 (2d Cir. Sept. 3, 2009): obtained Rule 12(b)(6) dismissal with prejudice on the first motion to dismiss on behalf of PricewaterhouseCoopers LLP in a case alleging accounting fraud by a mortgage lender, and summary affirmance by Second Circuit.
- In re Acterna Corp. Securities Litigation, 378 F. Supp. 2d 561 (D. Md. 2005): on behalf of PricewaterhouseCoopers LLP, obtained Rule 12(b)(6) dismissal with prejudice of federal securities law and state common law claims alleging accounting fraud (alleged overstatement of company’s goodwill as a result of two acquisitions).
- In re Lawrence A. Stoler, CPA, Admin. Proc. File No. 3-12179 (July 31, 2006): representation of former engagement partner in SEC Rule 102(e) administrative proceeding with respect to audits of a defunct hedge fund; helped to negotiate consent order pursuant to which client agreed to cease and desist order and one year suspension from practice before the Commission, with right to reapply.
- Representation of a partner at a Big Four accounting firm in a PCAOB investigation in connection with client’s receipt of the PCAOB equivalent of a Wells notice. Following receipt of our Wells submission, the Division of Enforcement and Investigations declined to recommend any enforcement action as to our client.
- Representation of individual auditor at a Big Four accounting firm in the first-ever litigated PCAOB administrative proceeding. Matter is confidential.
Prior to joining the firm, Mr. Meyers served as Assistant Chief Litigation Counsel in the Securities and Exchange Commission’s Division of Enforcement. During his tenure, he received the Chairman’s Award for Excellence and the Capital Markets Award. While at the SEC, Mr. Meyers handled the following matters that involved significant litigation or other work in the district court, and was also involved in other prominent matters that were brought as settled actions.
- The Global Research Analyst Settlement. Mr. Meyers was the SEC’s lead trial counsel in these path-breaking actions against 12 Wall Street investment banking firms and two individuals alleging conflicts of interest among research analysts, publication of fraudulent and/or misleading research and similar conduct at such firms. These actions resulted in a settlement exceeding US$1.4 billion. Mr. Meyers’ primary responsibilities in this matter included negotiating certain settlement terms and the language of the complaints, drafting the final judgments and representing the commission before the court in obtaining approval of the proposed final judgments and responding to investors’ motion to intervene.
- SEC v. Breed. Mr. Meyers obtained a final judgment, including full disgorgement, injunctive relief and a three-time civil penalty, against a defendant for insider trading, and final judgments against three of his family members as relief defendants. He also obtained discovery sanctions, including attorneys’ fees and costs, jointly and severally against relief defendants and their counsel.
- SEC v. System Software Associates, Inc. Mr. Meyers obtained final judgments, including injunctions, disgorgement and a third tier civil penalty, in a financial fraud case alleging improper recognition of software license revenues. He also obtained a reported decision (145 F. Supp. 2d 954 (N.D. Ill. 2001)) denying defendants’ motion to dismiss.
- SEC v. Leach. In this case alleging fraud regarding mini-tender offers, Mr. Meyers obtained final judgments containing full injunctive relief, full disgorgement and third tier civil penalties against two individuals and a company wholly owned by one of the individuals.
- SEC v. Schiffer. Mr. Meyers obtained summary judgment for approximately US$15 million in disgorgement (plus prejudgment interest) in this case involving material false and misleading statements, insider trading, market manipulation and sale of unregistered securities.
- SEC v. Midpoint Trading Corp. In this insider trading case, Mr. Meyers obtained a temporary restraining order and a preliminary injunction freezing assets and according other relief against foreign defendants.
Mr. Meyers has written numerous articles and has spoken frequently on a variety of topics involving SEC enforcement, antitrust and trade regulation.
An otherwise mundane SEC announcement on July 30, 2014 of an enforcement action charging a public company CEO and CFO with accounting fraud and internal controls violations is significant because the SEC is proceeding against the non-settling individual (the CEO) in an administrative proceeding rather than in federal court. While not unprecedented, it has been, to date, exceedingly rare for the Commission to proceed against an unregulated entity or person administratively rather than in federal court. This decision reflects the Commission’s and Enforcement Division’s recently, but frequently, stated intent to bring more administrative proceedings that previously would have been brought in federal court, now that the Commission has expanded remedies under Dodd-Frank Act. The decision also raises significant due process issues.
The action itself charges Marc Sherman and Edward Cummings, CEO and former CFO, respectively, of QSGI Inc., a Florida-based computer equipment company, with violation of the antifraud and other provisions of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. According to the Commission’s press release, Sherman and Cummings claimed they had disclosed all significant deficiencies in internal controls over financial reporting to the company’s independent auditors, but in fact did not disclose or direct anyone else to disclose ongoing inventory and accounts receivable issues or improper acceleration of recognition and the resulting falsification of QSGI’s books and records. The Commission also alleges that the executives signed SEC filings and Sarbanes-Oxley certifications that were rendered false and misleading due to the above issues. Cummings entered into an administrative settlement with the SEC, agreeing to a cease and desist order, a $23,000 civil penalty, a 5-year officer and director bar, and a 5-year bar on appearing or practicing before the Commission as an accountant. Sherman did not settle, and will instead litigate against the Division of Enforcement in an administrative proceeding. Read More
On June 27, 2014, the U.S. Court of Appeals for the D.C. Circuit issued an important, unanimous decision upholding the assertion of attorney-client privilege for an internal investigation. The decision is especially significant because it (a) forcefully reversed a growing trend in the D.C. federal district courts that had narrowly applied the attorney-client privilege to internal investigations and (b) confirmed that communications made during the course of an internal investigation – e.g., interviews and interview notes and reports – are privileged whenever a primary purpose of the communication was to obtain legal advice.
The case involves a False Claims Act claim against Kellogg, Brown & Root (“KBR”), a former Halliburton subsidiary, regarding alleged fraud and other unlawful conduct violating the company’s code of business conduct. The plaintiff sought various materials relating to KBR’s investigation of the alleged conduct. Non-lawyers, acting at the direction of in-house lawyers, conducted the interviews.
On June 16, 2014, the SEC issued its first-ever charge of whistleblower retaliation under section 922 of the Dodd-Frank Act, charging a hedge fund advisor and its owner with “engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC.” Read More
Michael Lewis’ new book Flash Boys: A Wall Street Revolt has caused a commotion on Wall Street, on Capitol Hill, and with law enforcement agencies. The SEC is the latest government agency to examine and propose new rules on alternative exchanges and high-frequency trading. The SEC’s latest proposals and enforcement actions raise questions about the agency’s plans to effectively regulate and enforce these activities and its ability to do so.
In Flash Boys, Michael Lewis—author of Liar’s Poker, Moneyball, The Blind Side, and The Big Short—follows a “small group of Wall Street investors” who he says “have figured out that the U.S. stock market has been rigged for the benefit of insiders and that, post-financial crisis, the markets have become not more free but less, and more controlled by the Big Wall Street banks.” High frequency trading is a type of trading using sophisticated technological tools and computer algorithms to rapidly trade securities in fractions of a second to profit from the slightest market blips. High frequency trading is done over traditional exchanges. In contrast, dark pools are alternative electronic trading systems conducted outside traditional exchanges that institutional investors use, sometimes to hide their trading intentions or to move the market with large orders.
Summer is coming, but this is probably not the vacation Southern District of New York Judge Jed Rakoff had in mind. On June 4, 2014, the Second Circuit vacated Judge Rakoff’s order refusing to approve the SEC’s $285 million settlement with Citigroup regarding a 2007 collateralized debt obligation (“CDO”) offering. The highly anticipated opinion – the decision did not come down until more than a year after oral argument – sharply limits the instances in which a court may reject or even modify a Commission settlement, even when the SEC does not extract an admission of facts or liability. The decision, which comes at a time when the SEC has been seeking and obtaining more admissions from public companies in connection with settlements, is sure to have a significant impact on the agency’s future approach toward settlements and admissions.
Though the facts of the underlying case are almost a footnote at this point, the SEC had alleged that in 2007, Citigroup negligently represented its role and economic interest in structuring a fund made up of tranches of CDOs. As with similar allegations against Goldman Sachs and its ABACUS CDO, the SEC alleged that Citigroup hand-picked many of the mortgage-related assets in the fund while telling investors that the assets were selected by an independent advisor. The SEC further alleged that Citigroup chose mortgage-backed assets that it projected would decline in value and in which it had taken short positions. Thus, according to the SEC, Citigroup sold investors assets on the hope the CDOs would increase in value, while Citigroup had selected and bet against these same assets on the belief they would actually decrease in value. The SEC alleged that Citigroup was able to reap a substantial profit from shorting the assets it selected for the fund, while fund investors lost millions.
The SEC suffered a blow very recently when Judge James Lawrence King of the U.S. District Court for the Southern District of Florida entered summary judgment dismissing the entirety of its alleged Ponzi scheme case on statute of limitations grounds. SEC v. Graham, 2014 WL 1891418 (S.D. Fla. May 12, 2014). The court’s order is a significant application of last year’s Supreme Court decision in Gabelli v. SEC, 133 S. Ct. 1216 (2013), in that (i) it applies the applicable statute of limitations to sanctions that have usually been considered equitable, rather than punitive, in nature; and (ii) it holds that the applicable statute of limitations is a jurisdictional threshold on which the SEC bears the burden, not an affirmative defense on which the defendant bears the burden.
In Graham, the SEC alleged that five defendants defrauded nearly 1,400 investors of more than $300 million by marketing unregistered securities as real estate investments and guaranteeing an immediate 15% profit and future rental revenue on certain resort properties. According to the SEC, the defendants were using the new deposits to pay earlier investors in a classic Ponzi-scheme. After the defendants abandoned their efforts with the collapse of the real estate and credit markets in 2007, the SEC embarked on a seven-year investigation, and ultimately brought suit in January of 2013. The SEC alleged five counts of violations of federal securities laws, and sought not only civil penalties but also injunctive relief and disgorgement of all ill-gotten gains. The defendants moved for summary judgment on the ground that the five-year statute of limitations under 28 U.S.C. § 2462 time-barred all of the SEC’s claims. Section 2462 states, “Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued ….”
On Monday, May 19, 2014, the Commodity Futures Trading Commission (“CFTC”) issued its first award to a whistleblower under its Dodd-Frank bounty program.
The Commission will pay $240,000 to an unidentified whistleblower who “voluntarily provided original information that caused the Commission to launch an investigation that led to an enforcement action” in which the judgment and sanctions exceeded $1 million. The heavily redacted award determination on the CFTC’s website does not reveal the name of the implicated company, the nature of the wrongdoing involved, the percentage of bounty the whistleblower received (which is required to be between 10 and 30 percent pursuant to the statute), or the factors considered in determining the percentage of the bounty.
Prior to this first grant of an award to a whistleblower under the CFTC’s Dodd-Frank bounty program, there were 25 denials of award claims. The reasons for the denials primarily fell into one or more of several categories:
- the individuals provided information before the passage of Dodd-Frank;
- they did not file a form TCR as required by the regulations;
- they did not provide information “voluntarily” but rather in response to a Commission request; and/or
- the information did not cause the Commission to open or expand an investigation or significantly contribute to a success of a Commission matter.
Time will tell whether this first award will have any effect on the number of whistleblowers who report to the CFTC or the quality of information the Commission receives.
The leaders of the Securities and Exchange Commission addressed the public on February 21-22 at the annual SEC Speaks conference in Washington, D.C. The presentations covered an array of topics, but common themes included the Commission’s ongoing effort to carry out the rulemaking agenda set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, its role as an enforcement body post-financial crisis, its increasing utilization of technology, and its renewed focus on the conduct of gatekeepers. In a surprise appearance, Dallas Mavericks owner and former insider trading defendant Mark Cuban attended the first day of the conference. During his time at the conference, Mr. Cuban shared his thoughts on a number of the presentations via his Twitter account.
From a litigation and enforcement perspective, key takeaways from the conference include the following: Read More
Last week, Scottrade Inc. became the latest entity to admit wrongdoing in connection with settling SEC charges. In a January 29, 2014 administrative order, the brokerage firm not only agreed to a $2.5 million penalty, but also admitted that it violated federal securities laws when it failed to provide the SEC with complete and accurate “ blue sheet” trading data. This settlement marks the fourth such admission since the Commission’s June 2013 modification to its “no admit/no deny” settlement policy.
Most civil law enforcement agencies – including the SEC – generally do not require entities or individuals to admit or deny wrongdoing in order to reach a settlement. The SEC regularly utilizes this “no admit/no deny” policy, finding it an effective tool to facilitate settlements. In June 2013, however, the Commission announced a revision to this longstanding policy, indicating that it would require public admissions of wrongdoing in selected cases, including those involving “egregious” fraud or intentional misconduct, as well as those involving significant investor impact or that are otherwise highly visible. Since then, the Commission has obtained admissions in three previous settlements. Read More