SEC

Not So Fast: The Tenth Circuit Creates a Split by Denying the Constitutionality of the SEC’s Administrative Law Judges

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Just before the clock struck 2017, the United States Court of Appeals for the Tenth Circuit weighed in on the constitutionality of the United States Securities and Exchange Commission’s (“SEC” or “Commission”) administrative law judges. In Bandimere v. SEC, the Tenth Circuit overturned Commission sanctions against Mr. Bandimere because the SEC administrative law judge (“ALJ”) presiding over Mr. Bandimere’s case was an inferior officer who should have been constitutionally appointed to the position in violation of the Appointments Clause of the United States Constitution.

The SEC originally brought an administrative action against Mr. Bandimere in 2012, alleging he violated various securities laws. An SEC ALJ presided over the fast paced, “trial-like” hearing, and the ALJ ultimately found Mr. Bandimere liable, barred him from the securities industry, imposed civil penalties and ordered disgorgement.  The SEC reviewed that decision and reached the same result.  Mr. Bandimere, therefore, appealed the SEC’s decision to the Tenth Circuit. READ MORE

Going After the (Little) Bad Guys: SEC Announces More Actions Against Penny Stock Gatekeepers

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The SEC last week announced that it has sanctioned several market participants in the penny stock industry, including attorneys who wrote offering documents as well as stock transfer agents, for their roles in various sham IPOs of microcap stocks.  These are the latest in a string of penny stock enforcement actions since outgoing SEC Chair Mary Jo White announced the implementation of the Commission’s “broken windows” policy in 2013. That policy targeted both large and small issuers and market participants.  The strategy has resulted in the SEC racking up its largest-ever volume of enforcement cases in fiscal year 2016.

In the first enforcement actions, the SEC alleged that a California-based securities lawyer wrote false and misleading registration statements in connection with five microcap IPOs, which were part of a scheme to transfer unrestricted shares to offshore market participants. The SEC also alleged that the CFO of American Energy Development Corp. (AEDC), one of the issuers in question, and the attorney who wrote opinion letters for the offerings made false and misleading statements.  The market participants were barred from any further penny stock activity, and the attorneys were permanently suspended from appearing and practicing before the SEC.  The SEC also suspended trading in shares of ADEC.

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Stockholders Petition the Supreme Court to Liberalize Eleventh Circuit Rules for Pleading Securities Fraud

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A recent petition for certiorari filed in the United States Supreme Court asks the Court to clarify what an aggrieved investor must plead to state a claim for securities fraud under the Securities and Exchange Act of 1934 (the “Exchange Act”).  The petition focuses on the “loss causation” element, which requires plaintiffs to prove a direct causal link between the alleged fraud and the loss in value for which they seek to recover.  In a typical fraud in-the-market case, plaintiffs allege loss causation by showing that they bought the defendant’s securities at prices artificially inflated by fraud, and then had those securities lose value after a “corrective disclosure” revealed the fraud to the public.  If the Supreme Court decides to grant certiorari, it will have the opportunity to lift certain barriers to pleading loss causation in some jurisdictions.

Petitioners, three New England funds (“Funds”) that own stock in Health Management Associates, Inc. (“HMA”), seek to reverse the Eleventh Circuit’s decision that they failed to establish loss causation as a matter of law. The Funds alleged that HMA’s stock price fell precipitously following two disclosures to the market: (1) an announcement that the government had begun an investigation into HMA for fraud, and (2) an analyst report publicizing a whistleblower case filed by a former employee against HMA three months earlier.  A panel for the Eleventh Circuit upheld the lower court’s decision that neither event could form the basis of a securities fraud claim.  First, the panel held that the announcement of a government investigation could not raise an inference of loss causation at the pleading stage because there had been no finding of “actual wrongdoing.”  Second, the panel held that the analyst report was not a “corrective disclosure” because it reported on a publicly-filed case that, although it hadn’t been reported on until then, was already disclosed to the market. READ MORE

(Proxy) Voting Made Easy?

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The SEC recently proposed amendments to the proxy voting rules to require parties in a contested election to use universal proxy cards that would include the names of all board of director nominees. This proposed change would eliminate the two “competing slates” cards and allow shareholders to vote for their preferred combination of board candidates, as they could if they voted in person.

The new rules would apply to all non-exempt votes for contested elections other than those involving registered investment companies and business development companies, would require management and dissidents to provide each other with advance notice of the names of their nominees, and would set formatting requirements for the universal proxy cars. As with any newly proposed SEC rule, there will be a comment period of 60 days to solicit public opinion.

Interestingly, the Commission’s vote to adopt the newly proposed rules was a split decision, with Commissioner Piwowar issuing a strongly worded dissent. According to Commissioner Piwowar, the proposed universal proxy rules “would increase the likelihood of proxy fights at public companies,” and would allow special interest groups to “use their increased influence to advance their own special interests at the expense of shareholders.” He also noted that under the new rules, dissidents are only required to solicit holders of shares representing a majority of those entitled to vote, meaning that many retail investors will not receive either the dissident’s proxy statement or disclosures about the dissident’s nominees.

SEC’s 2016 Activity Breaks Enforcement and Whistleblower Records

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Earlier this month, the SEC (the “Agency”) announced that it initiated a record-breaking 868 enforcement actions in fiscal year 2016. This figure – along with other milestones – reflect the Agency’s commitment to expanding the scope and reach of its enforcement programs to pursue an array of federal securities law violations.

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Early and Often: DOJ Tells Companies to Cooperate Early or Pay the Price

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An important issue for companies and their executives that are the subject of an investigation by the federal government is whether, and how early, to cooperate.

On September 27, 2016, Principal Deputy Associate Attorney General Bill Baer delivered remarks at the Society of Corporate Compliance and Ethics Conference, where he laid out in some detail his views on the value of early cooperation with the federal government in financial cases, and the consequences for waiting. As the number 3 attorney in the Department of Justice who is charged with overseeing civil litigation, antitrust, and other large divisions, Baer’s words are significant, and are a further gloss on the so-called “Yates Memo”, which Deputy Attorney General Sally Yates released last September, detailing DOJ’s guidance on individual accountability for corporate wrongdoing.

Speaking specifically about cases against banks and the fallout from protracted litigation involving residential mortgage-backed securities, Baer said those cases could have been resolved more quickly if only the financial institutions “had decided early to cooperate.” Consequently, “each [institution] paid a lot more than it would have if it had cooperated early on.” Recalling that many of these same institutions had nonetheless sought “significant cooperation credit,” Baer stated that DOJ “dismissed the arguments quickly because they so lacked merit.”

So how early is early enough, and how can your company get credit for cooperating? Baer elaborated on recent “internal” guidance he has provided to his attorneys in civil enforcement matters.

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No Longer a Mirage: FCPA Compliance and Cooperation Has Its Benefits

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On September 12, 2016, the SEC announced that it had reached a settlement with Jun Ping Zhang (“Ping”), a former executive of a Chinese subsidiary of Harris Corporation (“Harris”), regarding alleged violations of the Foreign Corrupt Practices Act (“FCPA”). The settlement was unusual, in that the SEC declined to also bring charges against Harris, an international communications and information technology company.

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SEC Continues to Target Private Equity Firms, Entering Into $52 Million Settlement with Apollo Global Management

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On August 23, 2016, the SEC entered into a settlement that reflects a continuation of its recent trend of increasingly active pursuit of private equity firms, particularly for failing to disclose conflicts of interests and other material information to investors.  The SEC entered into a $52.5 million settlement with four private equity fund advisers affiliated with Apollo Global Management LLC (collectively “Apollo”) arising out of insufficient disclosures and supervisory failures.

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SDNY Prosecutors Score First Post-Newman Insider Trading Conviction

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On August 17, 2016, jurors in a New York federal court convicted Sean Stewart on criminal charges of conspiracy, securities fraud, and tender offer fraud after more than five days of deliberation.  Stewart, a former investment banker for JPMorgan and Perella Weinberg Partners, was charged with leaking confidential information about health care mergers to his father, Robert Stewart, on at least five occasions over the course of four years.  The case provides a victory to Preet Bharara, the United States Attorney for the Southern District of New York, after a series of setbacks in the form of unfavorable decisions in the aftermath of the Second Circuit’s decision in U.S. v. Newman, the repercussions of which have been covered extensively on this blog (see here, here).  As the first conviction post-Newman, U.S. v. Stewart provides some insight into the kinds of facts that might support an insider trading charge in the Second Circuit going forward and is thus worthy of analysis.

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ALJs are A-OK: D.C. Circuit Upholds Constitutionality of SEC In-House Courts

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In several recent decisions we have covered (here and here), Federal Circuit Courts have unanimously ruled that respondents in an SEC enforcement action cannot bypass the Exchange Act’s review scheme by filing a collateral lawsuit in federal district court challenging the administrative proceeding on constitutional grounds.  However, those prior opinions all were based on the narrow ground that district courts did not have jurisdiction to hear collateral challenges, and did not reach the merits of the constitutional challenge.  In Raymond James Lucia Cos. Inc. v. SEC,  No. 15-1345 (D.C. Cir. Aug. 9, 2016), the D.C. Circuit became the first federal appellate court to consider the merits and ruled in favor of the SEC.  The court held that SEC administrative law judges are merely employees, rather than officers of the United States, and thus need not be appointed pursuant to the Appointments Clause of the Constitution.  Their appointment satisfied constitutional scrutiny and could not provide grounds to throw out the results of the proceedings before them.

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