Securities and Exchange Commission

Report Shows 2016 Record-Setting Year for Class Action and SEC Settlements

Last week, proxy advisory firm Institutional Shareholders Services (“ISS”) published its semi-annual report of the top 100 U.S. securities class action settlements and top 50 SEC settlements of all time, as of December 31, 2016. The report adds thirteen new class action settlements from last year – making 2016 the most represented year in the report’s settlement rankings – along with two new top SEC settlements.

The ISS report ranks, among other things, the top 100 shareholder class action settlements ever reached in the U.S. for actions filed on or after January 1, 1996, when the Private Securities Litigation Reform Act was implemented. ISS’s June 2017 report reflects that there were 137 court-approved securities class action settlements in the US in 2016, remaining steady with 2015. Notably, however, 13 of the 137 class action settlements were among the top 100 shareholder class action settlements, resulting in a total approved settlement fund of over $5.6 billion, the largest in a single year. The largest of these 13 settlements was in Lawrence E. Jaffe Pension Plan v. Household International, Inc., et al., Case No. 02-CV-05893 (N.D. Ill.), which was based on claims of fraudulent misrepresentations concerning allegedly illegal sales techniques, predatory lending practices, and accounting manipulations. In December 2016, the Northern District of Illinois approved a final settlement fund of $1.58 billion, resulting in the seventh largest securities class action settlement in U.S. history. READ MORE

2016 Could Be Peak SEC

2016 was a high-water mark for SEC enforcement activity; however, with the uncertainties associated with the new administration’s enforcement regime, we could be seeing a downturn going forward. According to a recent report issued by the NYU Pollack Center for Law & Business and Cornerstone Research, the SEC’s 2016 fiscal year (spanning October 1, 2015 – September 30, 2016) saw the highest number of enforcement actions brought against public companies and their subsidiaries since 2009, the year the Pollack Center and Cornerstone Research first began tracking information on such actions.  The 92 actions brought against public companies and their subsidiaries last year is more than double the level of enforcement activity from just three years ago and represents the latest in a continuing upward trend of enforcement actions.  Also consistent with recent trends, the vast majority of these actions have been brought as administrative enforcement proceedings before SEC ALJs, rather than civil actions in federal court.

The SEC continues to focus most heavily on issuers’ reporting and disclosure obligations, which comprised more than a quarter of the enforcement actions initiated last year. The SEC has consistently emphasized issuer disclosures as an area of enforcement priority and its pattern of activity has, to date, backed that up.  Last year also brought enhanced focus on investment advisors and investment companies, with the SEC initiating more actions against those defendants in 2016 than in the previous three years combined.  Allegations of foreign corrupt practices and actions against companies making initial or secondary securities offerings also resulted in an increased rate of enforcement activity over prior periods.

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Changing the Game, Again: Supreme Court Could Limit SEC’s Authority to Seek Disgorgement

This week, the Supreme Court heard argument regarding whether the SEC’s actions to disgorge ill-gotten gains are subject to a five-year statute of limitations for “any civil fine, penalty, or forfeiture.”

The appeal stems from an SEC action alleging that between 1995 and 2006, Charles Kokesh, a New Mexico-based investment adviser, misappropriated a staggering $35 million from two investment advisory companies that he owned and controlled, squandering the money of tens of thousands of small investors. While Kokesh moved into a gated mansion and bought himself a personal polo court (complete with a stable of 50 horses), he allegedly concealed his massive ill-gotten earnings by distributing false proxy statements to investors and filing dozens of false reports with the Securities and Exchange Commission.

In 2009, the SEC brought a civil enforcement action against Kokesh in the District of New Mexico alleging violations of the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Investment Company Act of 1940. The jury found violations of all three acts, and the district court ordered Kokesh to disgorge the $35 million he misappropriated (plus interest) and pay a $2.4 million civil monetary penalty for the “egregious” frauds he committed within the prior five years.  While the district court ordered disgorgement of all of Kokesh’s ill-gotten gains since 1995, the civil monetary penalty it imposed was constrained by the five-year statute of limitations found in 28 U.S.C. § 2462, which applies to claims throughout the U.S. Code for “any civil fine, penalty, or forfeiture.” READ MORE

Hold the Phone: SEC Takes One Last Stand Before the Tenth Circuit regarding the Constitutionality of the SEC’s Administrative Law Judges

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.

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

court decision

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

SEC’s 2016 Activity Breaks Enforcement and Whistleblower Records

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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Will It Be Enough?: SEC Amends Rules to Look More Like Federal Court

In a move that will make Securities and Exchange Commission administrative proceedings look more like civil litigation in federal court, on July 13, 2016, the SEC announced that it had adopted amendments to its rules of practice.  These rules appear similar to those the Commission proposed last September.  For critics of the amendments, they may not go far enough, but the expanded discovery and clarifications regarding dispositive motion practice may address some of the issues previously raised regarding the Commission’s perceived home-court advantage.

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The Whistle Blows Again: SEC Pays Second Largest Whistleblower Bounty Award

whistleblower

On June 9, 2016, the Securities and Exchange Commission (‘SEC”) awarded the second largest whistleblower bounty – $17 million – granted under the Dodd-Frank whistleblower rules to date.  Previously, the highest whistleblower awards were a $30 million award in September 2014 and a $14 million award in October 2013.  The $17 million award comes on the heels of $26 million in whistleblower awards given to five anonymous individuals over the last month alone.  These awards serve as a warning to companies that the SEC takes its whistleblower program seriously and will continue to encourage and reward company insiders for coming forward with information that leads to successful enforcement actions.  As Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower – a department created by the SEC to give whistleblowers a place to submit their tips – said, “[W]e hope these substantial awards encourage other individuals with knowledge of potential federal securities law violations to make the right choice to come forward and report the wrongdoing to the SEC.”

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Here’s a Tip: “Substantial and Important Contributions” to Pre-Existing SEC Investigations Can Pay Off For Whistleblowers

In a move evidencing the SEC’s continued commitment to its whistleblower program, the Commission announced on Friday that it has awarded a whistleblower over $3.5 million for providing information that did not lead to a new investigation, but rather only served to bolster an ongoing investigation.  This decision came after the SEC’s Claims Review Staff preliminarily determined that the SEC should deny the whistleblower claim because the information provided by the individual did not appear to “cause Enforcement staff to open the investigation or to inquire into different conduct, nor . . . to have significantly contributed to the success” of the action.  But after reviewing the whistleblower’s written response for reconsideration, in addition to factual information from staff in the Division of Enforcement, the Commission changed course, determining that the information indeed “significantly contributed” to the success of the SEC’s action, and approving the award.

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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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