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Posts by: Ken Herzinger

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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Keep Looking Forward: Federal Court Holds Company’s Bad Legal Predictions Protected by PSLRA’s Safe Harbor

Gavel and Hundred-Dollar Bill

In a comprehensive tour of the Private Securities Litigation Reform Act’s (“PSLRA”) safe-harbor provisions, on November 22, 2016, a federal court in Massachusetts dismissed a shareholder class-action lawsuit against Neovasc, Inc.  In holding that Neovasc’s ultimately faulty predictions concerning the outcome of a trade secrets lawsuit fell within the PSLRA’s safe harbor, the court rejected the plaintiff’s attempts to import a scienter requirement into the safe-harbor inquiry, among other things, and dismissed the complaint without leave to amend.

This putative class-action came on the heels of a $70 million jury verdict against Neovasc in May 2016. In that case, a jury found that Neovasc misappropriated certain trade secrets from CardiAQ Valve Technologies after CardiAQ had severed its manufacturing relationship with Neovasc, and Neovasc had patented a competing product.  Neovasc’s stock price fell approximately 75 percent when the jury verdict was announced.  Shortly after the verdict and stock decline, shareholders filed the class action, alleging securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  The plaintiff alleged, among other things, that prior to the verdict, Neovasc CEO Alexei Marko mischaracterized the lawsuit as “baseless,” and that Neovasc had misstated that the suit was “without merit” in the company’s SEC filings.

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The SEC Wins First Jury Trial in a Muni Case: SEC v. City of Miami and Michael Boudreaux

In what the SEC called “the first federal jury trial by the SEC against a municipality or one of its officers for violations of the federal securities laws,” a jury in the U.S. District Court for the Southern District of Florida found the City of Miami and its former budget director, Michael Boudreaux, guilty of securities fraud for misrepresentations related to three municipal bond offerings in 2009. Both Defendants are expected to appeal the jury decision.

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Even Whistleblowers Must Pay the Piper

In a heavily redacted decision issued on April 5, 2016, the SEC approved the claim of one whistleblower and denied the claim of another for providing information related to an unidentified enforcement action.  The SEC awarded $275,000 to the primary claimant (Claimant 1) but offset that amount by the monetary obligations due related to a separate Final Judgment.  Although the April 5 order was heavily redacted, the publicly available information confirms that the $275,000 award was based on a percentage of the monetary sanctions from both the SEC case and a related criminal action.  This is the first time an SEC order has required a tipster to spend whistleblower proceeds to settle a court-ordered debt.

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SEC Speaks – What to Expect in 2016

The leaders of the Securities and Exchange Commission (“SEC” or “Commission”) addressed the public on February 19-20 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 increasing focus on cyber issues including its use of new technology to surveil and root out harmful practices in the modern and increasingly-complex market, and its continued focus on the conduct of gatekeepers.  From a litigation and enforcement perspective, key takeaways from the conference include the following:

SEC Chair Mary Jo White began her remarks by touting the “unprecedented number of enforcement cases” brought by the Commission in 2015, which produced “an all-time high for orders directing the payment of penalties and disgorgement”—a trend that she stressed would continue in 2016.  READ MORE

Overstock Digital Wars: A New Market Awakens

On the eve of the much anticipated release of Star Wars: The Force Awakens, the SEC approved Overstock Inc.’s plan to issue digital shares.  The online retailer plans to issue company stock via bitcoin blockchain–an enormous database running across a global network of independent computers that tracks the exchange of money.  Just as the original Star Wars movies released in the late 1970s and early 1980s signaled a monumental shift in special effects in film, Overstock’s plan to issue digital shares may herald a significant shift in the way securities are distributed and traded in the future.

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Friend of the Court and Friend of the Little Guy? State Securities Regulators Tell D.C. Circuit in Amicus Brief that SEC’s Regulation A+ Is Too Expansive in Defining “Qualified Purchasers”

Wall Street

On September 2, 2015, the North American Securities Administrators Association (NASAA) filed an amicus brief siding with Montana and Massachusetts in a bid to overturn the SEC’s new capital-raising rule, titled Regulation A but commonly referred to as Regulation A+.  The NASAA, a non-profit association of state, provincial, and territorial securities regulators in the United States, Canada, and Mexico, includes securities regulators from all 50 states and the District of Columbia.  The organization’s purpose is to “protect investors from fraud and abuse in connection with the offer and sale of securities.”

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SEC Awards Third Highest Whistleblower Award to Date

On July 17, 2015, the SEC announced a whistleblower award of over $3 million to a company insider who provided information that “helped the SEC crack a complex fraud.”  This payout represents the third highest award under the SEC’s whistleblower program to date.  The SEC has made two of the three highest payments to clients of the same law firm – Phillips & Cohen LLP. (The SEC paid roughly $14 million to a whistleblower in October 2013, and nearly $30 million to a foreign whistleblower represented by Phillips & Cohen in September 2014.).  This latest multi-million dollar payout suggests that the SEC’s whistleblower program is in full swing, and that legal representation of whistleblowers may be on the rise.

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Will You Blow The Whistle Or Should I? The SEC Grants An Award to a Whistleblower Who Learns of Fraud From Another Employee

Last week, the Securities and Exchange Commission announced an award payout of between $475,000 and $575,000 to a former company officer who reported information about an alleged securities fraud.  While this is by no means the largest of the 15 payouts the SEC has made since the inception of the whistleblower program in fiscal year 2012 (the SEC awarded approximately $14 million to a whistleblower in October 2013, and roughly $30 million to a foreign whistleblower almost a year later), it is the first time that the SEC provided a whistleblower bounty award under the new program to an officer who learned about the alleged fraud through another employee, rather than firsthand.

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SEC Speaks, Cuban Tweets

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