Financial institutions, accounting firms, and public companies turn to Paul Rugani to advise them in connection with their most significant exposures. Paul has helped his clients achieve victories through motion practice, at trial, and on appeal. And his advocacy for clients before government regulators has successfully minimized or avoided potential enforcement action.
Legal 500 touts Paul as a recommended attorney for Securities Litigation, observing that he is “among the most creative and strategic lawyers” who always has “an eye on the end game.” He has been recognized as a Super Lawyers Rising Star for Securities Litigation every year since 2012.
Paul has extensive experience representing clients in securities class actions, shareholder derivative lawsuits, commercial contractual disputes and other complex litigation matters at both the trial and appellate levels, as well as in connection with internal, government and regulatory investigations. Paul also counsels domestic and foreign accounting firms on matters related to state CPA licensing and state board regulation.
A D.C. Circuit panel unanimously ruled that the Public Company Accounting Oversight Board (“PCAOB”) acted unlawfully by denying former Ernst & Young partner Marc Laccetti his right to bring an accounting expert to an investigative interview. The March 23rd decision in Laccetti v. Securities & Exchange Commission potentially throws the validity of many pending PCAOB investigations into question and provides important procedural rights to the subjects of those investigations.
Laccetti was investigated and sanctioned by the PCAOB in connection with Ernst & Young’s audit of Taro Pharmaceutical Industries, Ltd.’s 2004 financial statements. The PCAOB’s rules provide witnesses interviewed by the PCAOB the right to be represented by counsel. However, the PCAOB had interpreted that rule as limited to lawyers only. Accordingly, when Laccetti was interviewed during the PCAOB’s investigation, the PCAOB permitted Lacetti to be accompanied by an in-house Ernst & Young lawyer but refused his request that an Ernst & Young accounting expert also be present. The PCAOB advised Laccetti that he and his counsel could consult with an expert before or after testifying, but that the presence of any technical expert was “not appropriate” at the interview. Following that interview, in a decision subsequently affirmed by the Securities and Exchange Commission (“SEC”), the PCAOB fined Laccetti $85,000 and suspended him from the accounting profession for two years. READ MORE
After a five-week trial, a jury of five men and seven women convicted notorious pharmaceutical executive Martin Shkreli of securities fraud on August 4, 2017. Shkreli had been charged with two counts of securities fraud, three counts of conspiracy to commit securities fraud, and three counts of conspiracy to commit wire fraud for operating a sophisticated Ponzi scheme in which he looted the assets of his pharmaceutical company to pay off defrauded investors in his hedge funds. The jury convicted Shkreli of two counts of securities fraud and one count of conspiracy to commit securities fraud but acquitted him of five other counts, including the wire fraud charges.
Shkreli gained notoriety in 2015, when he was head of Turing Pharmaceuticals, for increasing the price of a life-saving drug from $13.50 to $750 per pill. However, Shkreli’s conviction stems from his time before Turing, when he managed two hedge funds, MSMB Capital Management and MSMB Healthcare Management. The government alleged that between 2009 and 2012, Shkreli induced investments of around $3 million from eight investors in MSMB Capital and $5 million from thirteen investors in MSMB Healthcare by misrepresenting key facts, including the funds’ performance and assets under management, and omitting key facts, such as significant trading losses at another fund Shkreli had previously managed. Shkreli allegedly also withdrew money from the funds for personal use and produced false performance reports touting profits as high as forty percent. MSMB Capital ceased trading after a series of trading losses in early 2011, and MSMB ceased operating in late 2012. In September 2012, Shkreli notified both funds’ investors that he was winding down the funds, that he had doubled their investments net of fees, and that investors could have their interests redeemed for cash, even though the funds had no money. At trial, Shkreli’s attorney argued that the hedge funds’ investors had not only received all of their money back but made significant profits. READ MORE
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.
On February 2, 2017, the New York Appellate Division, First Department, issued a decision in Gordon v. Verizon Communications, Inc., No. 653084/13, 2017 WL 442871 (1st Dep’t 2017), approving the settlement of litigation over an acquisition by Verizon Communications (“Verizon”) and articulating a new test to evaluate the fairness of such settlements. The Gordon decision signals that New York will remain a friendly venue to disclosure-based M&A settlements and may see increased shareholder M&A lawsuits as a result
As we have repeatedly written about (here, here and here), Delaware Chancery Courts have spent the past year attempting to curtail, or eliminate altogether, M&A litigation settlements where the sole remedy is enhanced proxy disclosures. Chancellor Bouchard’s landmark decision in In re Trulia Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016), rejected these “disclosure-only” settlements, finding that the “enhanced” disclosures produced by such settlements were not “material or even helpful” to stockholders. The Chancery Court bemoaned the proliferation of disclosure-only settlements in Delaware, and indicated that these types of settlements would be met by “continued disfavor” unless the supplemental disclosures are “plainly material,” i.e., they must “significantly alter the ‘total mix’ of information made available.”
In Trulia’s wake, the number of M&A suits filed in Delaware plummeted—declining by almost 75% in the first half of 2016—as plaintiffs’ counsel opted to file in federal court or states other than Delaware in the hope of finding more hospitable fora for “disclosure-only” resolutions. READ MORE
On January 12, 2017 the SEC announced its Office of Compliance Inspections and Examinations (OCIE) priorities for the year, including areas of focus for Retail Investors, Senior Investors and Retirement Investments, Market-wide risks, FINRA oversight, and cybersecurity. These priorities reflect an extension of previous years’ commitments, in particular with regard to focus on the retirement industry and cybersecurity. The “Regulation Systems Compliance and Integrity” (Regulation SCI) adopted by the SEC in November 2014 will also be a continued focus.
Once again, protection of retail investors is of primary concern for the OCIE. Among the detailed areas of focus are examining risks related to electronic investment advice, “wrap fee” programs where investors are charged a single fee for bundled advisory and brokerage services, and “Never-before examined” Investment advisers, an initiative that was started in 2014 to engage with newly-registered advisers that had never-before been examined. Examination of Exchange-Traded funds (ETFs) and continuation of the ReTIRE initiative are two carryovers from 2016 priorities . The OCIE previously identified ETFs, which are sometimes seen as alternatives to mutual funds, for examination related to compliance with the Securities Exchange Act of 1934 and the Investment Company Act of 1940. ReTIRE, launched in June 2015, places particular focus on those SEC-registered investment advisers and broker dealers who offer retirement-oriented investment services to retail investors, including examining whether there is a reasonable basis for the recommendations made. This year, the SEC will expand ReTIRE to include “assessing controls surrounding cross-transactions, particularly with respect to fixed income securities.”
In June 2014, the Office of Investor Education and Advocacy at the Securities and Exchange Commission issued an alert cautioning that investment newsletters are often “used to carry out schemes designed to deceive investors.” In particular, the SEC advised investors to be “highly suspicious” of newsletter “promises” of “high investment returns” and to contact the SEC to report potential securities fraud in newsletters and other promotional materials.
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.
After four failed attempts at persuading federal appellate courts to hear constitutional challenges to SEC administrative courts, it is increasingly clear that defendants in SEC in-house proceedings will not be able to pursue an early out because of the manner in which SEC administrative judges are appointed. The latest loss came on June 17, when the Eleventh Circuit in consolidated cases Gray Financial Group Inc. et al. v. SEC, No. 15-13738 (11th Cir. Jun. 17, 2016), and Charles L. Hill v. SEC, No. 15-12831 (11th Cir. Jun. 17, 2016), agreed with the Second Circuit’s decision of three weeks ago in Tilton v. SEC, No. 15-2103 (2d. Cir. Jun. 1, 2016) (which we covered here) in ruling that respondents in an SEC administrative enforcement cannot bypass the Exchange Act’s review scheme by filing a collateral lawsuit in federal district court challenging the administrative proceeding on constitutional grounds. A different decision from the Eleventh Circuit would have created a circuit split and a heightened possibility of Supreme Court review, but instead it joined the Second, Seventh, and D.C. Circuits in an approach that is unanimous among the circuit courts to have considered the question. The constitutional legitimacy of SEC administrative law judges is thus likely to continue unchallenged, at least for now.
On June 1, the Second Circuit in Tilton et al. v. SEC, No. 15-2103 (2d. Cir. Jun. 1, 2016), echoed recent Seventh and D.C. Circuit decisions (respectively, Bebo v. SEC, No. 15-1511 (7th Cir. Aug. 24, 2015), cert. denied, 136 S. Ct. 1500 (Mar. 28, 2016), and Jarkesy v. SEC, No. 14-5196 (D.C. Cir. Sept. 29, 2015)) in finding that constitutional or other challenges to SEC proceedings cannot go forward in court until the administrative proceeding ends; review can only be sought as an appeal from a final decision by the Commission. The Second Circuit’s decision in Tilton creates unanimity among the circuit courts that have addressed the issue to date, although, as we previously reported, the Eleventh Circuit is likely to rule on the issue sometime this year in Hill v. SEC, No. 15-12831. Unless the Eleventh Circuit bucks this trend and creates a circuit split, it now looks unlikely that the Supreme Court will weigh in on this issue (particularly because the Supreme Court previously denied a petition to review the Seventh Circuit’s decision in Bebo).
On May 16, 2016, the United States Supreme Court handed down two decisions that may, in practice, limit the ability to access federal district courts. In Spokeo, Inc. v. Robins, No. 13-1339, 578 U.S. ___ (2016), the Supreme Court rejected the Ninth Circuit’s conclusion that statutory violations are per se sufficient to confer Article III standing, and, in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, No. 14-1132, 578 U.S. ___ (2016), the Court concluded that jurisdiction under Section 27 of the Securities and Exchange Act (Exchange Act) is limited to suits brought under the Exchange Act and state law claims that turn on the plaintiff’s ability to prove the violation of a federal duty.