Posts by: Editorial Board

Making a Statement: The Two Faces of Janus in the SDNY

Editorial BoardPosted on May 7, 2013

Almost two years after the Supreme Court issued its momentous decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), lower courts continue to reach significantly different conclusions concerning its scope. The Supreme Court held that, for purposes of SEC Rule 10b-5, “the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” Id. at 2302. Specifically, in Janus, the Supreme Court held that an investment advisor could not be liable for statements in prospectuses filed by a related, but legally separate entity. Because the investment advisor did not “make” the statements—that is, did not have “ultimate authority” over them—it could not be liable as a primary violator of Rule 10b-5 for any misstatements or omissions contained therein.

Janus established a bright-line rule. But the Southern District of New York, in particular, has split over whether Janus applies beyond the context of private actions brought under Rule 10b-5(b). In the most recent decision from that district to address the issue, SEC v. Garber, No. 12 Civ. 9339, 2013 WL 1732571 (S.D.N.Y. Apr. 22, 2013), Judge Shira A. Scheindlin deepened this divide. READ MORE →

PCAOB Issues Its First Cooperation Policy Statement

Editorial BoardPosted on April 25, 2013

On April 24, 2013, the Public Company Accounting Oversight Board issued its inaugural “Policy Statement Regarding Credit for Extraordinary Cooperation in Connection with Board Investigations.” The Policy Statement reiterates many of the themes of the SEC’s “Seaboard Report,” and therefore many may view it as largely plowing over well-trodden ground. But, the Policy Statement merits close attention, because it is the first such statement the Board has issued since it was formed, it sets forth specific examples of conduct that is likely to earn credit for cooperation, and it focuses specifically on the auditing profession.

The Policy Statement identifies three forms of “extraordinary” cooperation that could result in audit firms and/or individuals receiving credit in enforcement investigations:

self-reporting;
remedial or corrective action; and
substantial assistance.

According to the Board, “[a] firm or associated person may earn credit for self-reporting by making voluntary, timely and full disclosure of the facts relating to violations before the conduct comes to the attention of the Board or another regulator.” And, the sooner self-reporting is made, the more likely it will result in credit. The Board stressed, however, that self-reporting is “not eligible for cooperation credit” if it is “required by legal or regulatory obligations,” e.g., the auditor’s obligation under Section 10A of the Securities Exchange Act of 1934 to report a client’s illegal acts. READ MORE →

Record SEC Settlement in S.A.C. Capital Investigation. Well….Kind Of.

Editorial BoardPosted on April 24, 2013

On April 16, 2013, Judge Victor Marrero conditionally approved a $600 million consent judgment between the SEC and CR Intrinsic Investors LLC (“CR”) where CR “neither admitted nor denied” the allegations brought against it. The settlement was on the heels of a highly publicized investigation and lawsuit regarding CR’s purported insider trading scheme involving S.A.C. Capital Advisors and former S.A.C. trader Mathew Martoma. Despite finding the proposed injunctive and monetary relief “fair, adequate, and reasonable, and in the public interest,” Judge Marrero questioned the appropriateness of the “neither admit nor deny” provisions because of the extraordinary public and private harm caused by CR’s alleged wrongful conduct.

Approval of the CR settlement was conditioned upon the outcome of the pending Second Circuit appeal in S.E.C. v. Citigroup Global Markets, Inc., 11-cv-5227 (2d Cir.). In Citigroup, Judge Rakoff (of the Southern District of New York) denied approval of the SEC’s proposed settlement of fraud charges against Citigroup. Rakoff’s opinion harshly critiqued the agency’s use of “no admission” settlements as imposing “substantial relief on the basis of mere allegations.” He questioned whether “no admission” settlements could be properly judged when the Court did not know the relevant facts and therefore “lack[ed] a framework for determining adequacy.” Both Citigroup and the SEC appealed Rakoff’s decision to the Second Circuit, where the decision remains pending. READ MORE →

In the Wake of Gabelli, SEC Voluntarily Dismisses Follow-on Cert. Petition

Editorial BoardPosted on March 13, 2013

Today, the Solicitor General filed a motion asking the Supreme Court to dismiss the Securities and Exchange Commission’s petition for a writ of certiorari in SEC v. Bartek. As noted in a previous blog post, the Bartek petition focused on when the limitations period under 28 U.S.C. § 2462 begins to accrues, a question that was answered in Gabelli.

However, the petition also presented a second question: whether director and officer bars and injunctive relief constituted penalties. Although the Supreme Court was unlikely to take up that question at this juncture, the government’s decision to dismiss the petition perhaps signals a view that Gabelli will not have a significant adverse impact on the SEC’s civil enforcement activities. Certainly, Gabelli’s impact can be minimized if, as expected, Mary Jo White is confirmed as the next SEC Chair and follows through on her commitment to the Senate Banking Committee to “aggressive” pursuit of wrongdoers.

The Revolving Door Spins Again

Editorial BoardPosted on February 20, 2013

On January 24, President Obama announced his nominee for Chairman of the Securities Exchange Commission – Mary Jo White, a former United States Attorney for the Southern District of New York.

By selecting White, the President is signaling an interest in seeing a more forceful approach at the Commission. Indeed, if confirmed, White will be the first former criminal prosecutor to head the SEC. Previous SEC chairs, by contrast, had established careers in private legal practice, in academia, in business, and in government, either as legislators or, in the case of Harvey Pitt, as general counsel to the SEC (before his long career in private legal practice) — but not as criminal prosecutors. Although White has little regulatory or policymaking experience, she brings to the table a wealth of experience in enforcement, which has been a top priority for the SEC in recent years.

As the United States Attorney for the Southern District of New York from 1993 to 2002, White is best known for winning convictions for the 1993 World Trade Center bombing and for the 1998 bombings of two U.S. embassies in Africa as well as for winning the conviction of mobster John Gotti. The President emphasized, “Today . . . there are rules to end taxpayer-funded Wall Street bailouts once and for all. But it’s not enough to change the law. We also need cops on the beat to enforce the law.” READ MORE →

The Litigation Explosion in Executive Compensation

Editorial BoardPosted on February 1, 2013

Earlier this month, Orrick partner Rick Gallagher joined an interesting panel discussion on the latest trends in executive compensation litigation. The full transcript can be viewed here. Special thanks for Broc Romanek and CompensationStandards.com for organizing and hosting a terrific panel.

The SEC Wants to Know About Your Whistleblower Policy

Editorial BoardPosted on December 18, 2012

SEC Regional Office Director David Bergers recently emphasized the importance of a company’s whistleblower policy when deciding whether to file an enforcement action against a company. Bergers made his comments at an internal investigations panel on December 7, 2012 sponsored by the Massachusetts Lawyers Weekly. For more information about the panel, see Martha Kessler, Bergers Tells Issuers to Preserve Data Upon Learning of Possible Investigation, Bloomberg Securities Regulation & Law Report, 44 SRLR 2280 (Dec. 17, 2012).

Bergers noted that a company should show the SEC that it takes whistleblowers seriously, even if a particular whistleblower has issues that the company believes undermine his or her credibility. “We want to see that the company is taking their concerns seriously, and how they are talking about them,” Bergers said. The SEC wants to know that the company is “separating [the allegations] from whatever or whoever is making them.” The company that acknowledges that there has been a whistleblower complaint, but tells the SEC “first let us give you the employment file” may find itself at odds with the SEC’s approach to a whistleblower’s concerns. Although the SEC will consider information about the whistleblower, including material in an employment file, Bergers noted that the agency is primarily interested in what the company does with the whistleblower’s allegations and how it treats the whistleblower.

Let this serve as a reminder of the importance of a well-considered whistleblower policy in preparing for potential communications with the SEC.

Texas Court Rules that Regardless of Fault, CEOs and CFOs Will Have to Pay Up Under Sarbanes-Oxley Section 304

Editorial BoardPosted on November 20, 2012

A Texas federal judge denied defendants ArthoCare CEO Michael A. Baker and CFO Michael T. Gluk’s motion to dismiss the SEC’s claim against them under Sarbanes-Oxley (“SOX”) Section 304’s clawback provision. Section 304 requires CEOs and CFOs to reimburse their company for any bonus or similar compensations, or any profits realized from the sale of company stock, for the 12-month period following a financial report, if the company is required to prepare an accounting restatement due to material noncompliance committed as a result of misconduct.

Baker and Gluk, who were not alleged to have participated in the misconduct that led to ArthoCare’s restatement, challenged Section 304 as unconstitutional, arguing that the SEC could not require them to repay bonus compensation and profits from stock sales for merely holding CEO and CFO positions during the time of the alleged misconduct. In particular, they argued that Section 304 is vague and is unconstitutional because it does not require a reasonable relationship between the triggering conduct and the penalty as is required by the Due Process Clause.

Judge Sam Sparks of the Western District of Texas rejected the Officer-Defendants’ constitutional arguments. Judge Sparks first held that Section 304 was not vague because it clearly referred to misconduct on behalf of the issuer of the allegedly false financial statement. Judge Sparks noted that Defendants “should have been monitoring the various internal controls to guard against such misconduct; they signed the SEC filings in question, and represented they in fact were actively guarding against noncompliance. As such, they shouldered the risk of Section 304 reimbursement when noncompliance nevertheless occurred.” READ MORE →

Supreme Court Hears Argument in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds

Editorial BoardPosted on November 15, 2012

Securities class action lawyers are looking to the U.S. Supreme Court this term to clear up an issue that has been at the center of several prominent securities class actions, specifically, what is the standard for class certification where the class members’ reliance on defendants’ alleged misstatements is presumed under the fraud-on-the-market theory of reliance. Last term, in a class action ruling in an employment case, Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 1541 (2011), the Court signaled that class certification may require “a preliminary inquiry into the merits of a suit,” singling out elements of the fraud-on-the-market theory as an example.

On November 5, the Supreme Court heard argument in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, a securities fraud putative shareholder class action presenting the question of how far a court should consider a merits issue when deciding whether to certify a class. The appeal in Amgen is from a Ninth Circuit decision that affirmed the district court’s order certifying a plaintiff class of purchasers of Amgen stock. Defendants opposed class certification on the ground that the rebuttable presumption of reliance under the fraud-on-the-market theory requires not only that the market for Amgen stock was efficient, but that the alleged misstatements were material. Defendants offered evidence that the alleged misstatements in the case were immaterial. Therefore, according to defendants, reliance could not be presumed, and the proposed plaintiff class could not be certified because common issues did not predominate. The Supreme Court took the case in order to determine whether the district court was correct to disregard defendants’ evidence of immateriality on the ground that materiality is an issue appropriately considered at trial or at summary judgment rather than at the class certification stage. READ MORE →

Securities Litigation, Investigations and Enforcement