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
Last week, the United States Securities and Exchange Commission filed a petition for rehearing en banc with the Tenth Circuit Court of Appeals, imploring the court to reconsider a divided panel’s ruling on the unconstitutionality of its administrative law judges in Bandimere v. SEC. In that ruling (detailed here), the Tenth Circuit overturned the Commission’s 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 (rather than hired) to the position, in violation of the Appointments Clause of the United States Constitution.
Primarily relying on its prior submissions and Judge Monroe G. McKay’s dissent in the panel’s original ruling, the SEC argues that the original decision reflects a fundamental misunderstanding of the role of ALJs and Supreme Court precedent, and risks throwing essential features of the agency into disarray. In particular, the SEC questioned the majority’s opinion that Freytag v. Commissioner, 501 U.S. 868 (1991), was dispositive in equating special trial judges of tax court to the ALJs to find that the ALJs are inferior officers who must be constitutionally appointed. The SEC distinguishes the roles of its ALJs from those of the special tax court trial judges by noting differences in their power and function. First, the special trial judges are vested with authority, including the power to enforce compliance with their orders, that is different in degree and kind from the powers given to ALJs. For example, both the special trial judges and ALJs have the power to issue subpoenas, but unlike the special trial judges, ALJs have no authority to enforce subpoenas. ALJs can only request the Commission to seek enforcement of the subpoenas in district court. In addition, unlike the special trial judges, ALJs cannot use contempt power—a hallmark of a court—to enforce any order it may issue. Second, the function between the special trial judges and ALJs differ because the Tax Court in Freytag was required to defer to the special trial judge’s factual finding unless “clearly erroneous, whereas the SEC decides all questions of fact and law de novo.
Judge Jed S. Rakoff (S.D.N.Y.) recently made headlines after urging lawyers to draft and advocate for a more straightforward insider trading statute to replace judicially-created insider trading law. During his keynote speech at the New York City Bar’s annual Securities Litigation & Enforcement Institute, Judge Rakoff explained that the law has become overly-complicated since courts were forced to define insider trading by shoehorning the concept into the fraud provisions of the Securities Exchange Act of 1934. As a result, increasingly suspect theories have been developed to address potential insider trading in an expanding variety of scenarios.
In promoting a statutory solution for insider trading law, Judge Rakoff pointed to the Europe Union (“EU”) as an example. He explained that the EU defined insider trading by statute in simple and broad terms, and avoided relying on the framework of fraud. Considering Judge Rakoff’s influence and expertise in securities law, inquiry into the EU’s approach to insider trading is warranted.
The Ninth Circuit recently revived a securities class action against Arena Pharmaceuticals, issuing a decision with important guidance to pharmaceutical companies speaking publicly about future prospects for FDA approval of their advanced drug candidates. The court’s opinion reemphasizes the dangers of volunteering incomplete information, holding that a company that touts the results of trials or tests as supportive of a pending application for FDA approval must also disclose negative test results or concerns expressed by the FDA about those studies—even if the company reasonably believes the concerns are unfounded and are the product of a good faith disagreement.
Last week brought more bad news for private blood testing company Theranos Inc., as San Francisco-based Partner Fund Management L.P. (“PFM”) launched a suit claiming that it was duped into making a $96.1 million investment in Theranos in February 2014. The complaint, filed in Delaware Court of Chancery, alleges common law fraud, securities fraud under California’s Corporations Code, and violations of Delaware’s Consumer Fraud Act and Deceptive Trade Practices Act, among other things, against Theranos, its Chief Executive Officer, Elizabeth Holmes, and its former Chief Operating Officer, Ramesh Balwani.
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.
The practice of high frequency trading has been a hot-button issue of late, thanks in part to Michael Lewis’ 2014 book Flash Boys: A Wall Street Revolt, which examines the rise of this phenomenon throughout U.S. markets. Several class action lawsuits have alleged that various private and public stock and derivatives exchanges entered into agreements and received undisclosed fees to favor high frequency traders (“HFTs”), conferring timing advantages that damaged other market participants. Two courts have recently addressed the merits of claims for damages against such exchanges and both ruled that plaintiffs failed to state a claim for relief.
In a lengthy ruling containing a detailed analysis of dueling economic expert reports, a federal court in Texas held on July 25, 2015 that defendant Halliburton Company demonstrated a lack of price impact at the class-certification stage on nearly all of the plaintiffs’ claims, thus rebutting the presumption of reliance. This action has twice been to the Supreme Court, most recently in Halliburton, Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), which held that the fraud-on-the-market presumption of reliance may be rebutted by showing a lack of price impact from the alleged misrepresentation. The district court’s recent decision is significant because it is one of the first to consider the issue of price impact post-Halliburton II, and because the decision suggests that lower courts may be willing to wade deep into the complications of event studies and economic analysis in order to determine price impact at the class-certification stage.
On November 3, 2014, the U.S. Supreme Court held oral argument in Omnicare v. Laborers District Council Construction Industry Pension Fund. As discussed in earlier posts, from March 18, 2014 and July 22, 2014, the Supreme Court in Omnicare has been asked to resolve a circuit split regarding the scope of liability under Section 11 of the Securities Act: does an issuer violate Section 11 if it makes a statement of opinion that is objectively false, or must the issuer also have known that the statement was false when made?
Real estate investment trust American Realty Capital Properties (“ARCP”) recently announced the preliminary findings of an Audit Committee investigation into accounting irregularities and the resulting resignation of its Chief Financial Officer and Chief Accounting Officer. The events surrounding ARCP are a case study of how, within a matter of weeks, an internal report of concerns to the Audit Committee can lead to both internal and external scrutiny: an internal investigation and review of financial reporting controls and procedures, on the one hand; media coverage, securities fraud litigation, and an inquiry by the Securities Exchange Commission, on the other.