Posts by: Robert Cohen

Pack Your Bags: SEC and DOJ to Intensify the Spotlight on the Foreign Corrupt Practices Act

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Comments made by Kara N. Brockmeyer, the Securities Exchange Commission’s chief of the Foreign Corruption Practices Act (FCPA) unit, and Charles E. Duross, deputy chief of the Department of Justice’s FCPA unit, at the recent International Conference on the FCPA suggest that both agencies are increasing their scrutiny of possible FCPA violations for the next year.  Both units have increased their resources for tackling investigations of possible FCPA violations.  Additionally, both agencies have increased awareness among other U.S. and international government agencies so that those agencies could also be on the lookout for possible FCPA violations.  Having strengthened their relationships with overseas regulators, both agencies are optimistic that they are in the position to bring significant FCPA cases in the following year.

According to Andrew Ceresney, co-director of the SEC’s enforcement division, the SEC also expects that FCPA violations will be “increasingly fertile ground” for the Dodd-Frank whistle-blower program.  The SEC received 149 FCPA violation tips from whistle-blowers in just the last year and the SEC expects more enforcement cases to arise from whistle-blowers. READ MORE →

“Order up!” FIRREA update

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Judge Carter issued his final order on July 16, 2013, following our blog post.  The final order is substantively the same as the tentative order, and denies S&P’s motion to dismiss the case for the same reasons previously set forth.  Judge Carter added a note rejecting Defendants’ argument at the hearing on July 8, 2013 that no reasonable investor or issuer bank could have relied on S&P’s claims of independence and objectivity, because this would beg the question of whether S&P truly believed that S&P’s rating service added zero material value as a predictor of creditworthiness.  Judge Carter’s finding that an issuer bank could be a victim that was misled by S&P’s fraudulent ratings of its own mortgage-backed security products is an interesting development, and one that may open new doors to mortgage-backed securities litigation under FIRREA.

Where There’s Smoke, There’s FIRREA (Part Two)

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We first blogged about the obscure Financial Institutions Reform Recovery Enforcement Act (“FIRREA”) on May 14. As we explained, this statute provides a generous ten-year statute of limitations and a low burden of proof. Just as we predicted, the FIRREA story is beginning to heat up.

The most recent FIRREA litigation involves claims brought under this statute against ratings agency giant Standard & Poor’s. The DOJ sued S&P for $5 billion, accusing it of knowingly issuing ratings that didn’t accurately reflect mortgage-backed securities’ credit risk. S&P’s practices of issuing credit ratings to banks that paid for those services led to an inherent conflict of interest. To reassure banks and investors that its ratings were accurate, S&P issued a “Code of Conduct,” containing promises that it had established policies and procedures to address these conflicts of interest. The DOJ alleged that the “Code of Conduct” statements were false and material to investors.

On July 8, Judge David O. Carter of the Central District of California tentatively denied S&P’s motion to dismiss the case. In his tentative order, Judge Carter explained why S&P’s three arguments for dismissal were unpersuasive. First, he found that the allegedly fraudulent statements regarding the credibility of S&P’s ratings were not “mere puffery” because they were filled with “shalls” and “must nots” that went beyond mere aspirational language. READ MORE →

SEC v. Hackers: More Cybersecurity Enforcement on the Horizon?

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Data Privacy

Cybersecurity may be the SEC’s newest area for enforcement actions. While the SEC first released Disclosure Guidance concerning cybersecurity in 2011, the recent media attention surrounding significant cybersecurity breaches at a number of U.S. companies may cause the SEC to renew interest in the issue, and may result in enforcement actions, as well as shareholder class actions and derivative lawsuits. Companies that fail to disclose cybersecurity events in their public filings may find themselves on the wrong end of an SEC investigation and enforcement action.

Companies may also see an increase in class actions where there is a significant stock drop following disclosure of a cybersecurity breach—however, to date, there is little evidence to suggest the market reacts in a negative way following disclosure of a cybersecurity breach, leaving questions about whether plaintiffs could prove materiality and causation in a securities fraud case. Finally, increased focus on cybersecurity disclosures may result in an increase in shareholder derivative actions against officers and directors, with shareholders alleging that the company breached their fiduciary duties by failing to ensure adequate security measures. READ MORE →

Shareholder Plaintiffs Score a Class Certification Win from SCOTUS

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On Wednesday, the Supreme Court issued its decision in Amgen, Inc. v. Connecticut Retirement Plans. In a 6-3 decision authored by Justice Ginsburg, the Supreme Court handed a win to plaintiffs in securities fraud class actions, holding that plaintiffs do not have to prove materiality at the class certification stage. The decision marks a departure from some of the Court’s more recent class action rulings, which seemed to narrow class action litigation. Justices Scalia, Thomas and Kennedy dissented.

In their complaint, plaintiff shareholders alleged that Amgen and its executives misled investors about the safety and efficacy of two anemia drugs, thereby violating Section 10(b) and Rule 10b-5. During class certification, Amgen argued that Rule 23(b)(3) required that plaintiffs needed to prove materiality in order to ensure that the questions of law or fact common to the class will “predominate over any questions affecting only individual members.” Both the district court and the Ninth Circuit Court of Appeals rejected Amgen’s argument. The Supreme Court followed suit, affirming the Court of Appeal’s judgment and holding that proof of materiality is not a prerequisite to class certification in securities fraud cases. READ MORE →

Supreme Court Unanimously Limits SEC’s Ability to Bring Civil Penalty Claims for Conduct Older Than Five Years

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In Gabelli v. SEC, a unanimous Supreme Court held that the statute of limitations for “penalty” claims in governmental enforcement actions begins to run from the date of the underlying violation of the law, not when the government discovers or reasonably should have discovered the misconduct.  Gabelli has important implications for the Securities and Exchange Commission (“SEC”) and all governmental agencies because it limits the sanctions available to the agency for conduct that occurred more than five years before it commences a civil enforcement action. Opinion.

Gabelli involved the application of 28 U.S.C. § 2462, which provides that “an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture … shall not be entertained unless commenced within five years from the date when the claim first accrued[.]”  In 2008, the SEC sought civil penalties from Mark Gabelli, a mutual fund portfolio manager, for alleged violations of the Investment Advisers Act in connection with alleged market timing issues.  Gabelli successfully moved to dismiss the penalty claims as time-barred under Section 2462 because the complaint was filed almost six years after the alleged misconduct.  On appeal, the Second Circuit reversed, reasoning that in cases of fraud the statute of limitations does not begin to run until the SEC discovered (or reasonably could have discovered) the wrongful acts.  The Supreme Court disagreed, holding that “a claim based on fraud accrues—and the five-year clock begins to tick—when a defendant’s allegedly fraudulent conduct occurs.”  READ MORE →

Sprint Offers Unlimited Data, But Not for Shareholders: KPMG Documents Prepared for the PCAOB Mostly Privileged Under SOX

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On October 10, 2012, a federal district judge in Missouri granted in part and denied in part class action plaintiffs’ motion to compel certain documents that KPMG had supplied to the Public Company Accounting Oversight Board (“PCAOB”) in a 2006 investigation.

Judge Ortrie D. Smith held that KPMG was not required to produce the bulk of its withheld documents relating to a 2006 PCAOB inspection because those documents were privileged under SOX. Specifically, SOX provides that documents and information prepared or received by or specifically for the PCAOB are confidential and privileged and not subject to disclosure. Not all documents fell under the privilege, the court held: documents from the underlying transaction and work that was the subject of the investigation were not prepared for the PCAOB and so could not claim the privilege protection.

The court rejected plaintiffs’ arguments that the SOX privilege only covers documents “in the hands” of the PCAOB and not third parties, like KPMG, because the privilege covered materials both prepared for, and received by, the PCAOB. Finally, KPMG had not waived the privilege when it shared some of the information with Sprint employees or defendants in the litigation.

Supreme Court To Hear Amgen’s Appeal of Class Cert

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The Supreme Court will hear Amgen’s appeal in Amgen v. Connecticut Retirement Plans in the upcoming October term, the Court announced on Monday June 11. The lawsuit against Amgen alleges that the biotech company made misrepresentations about the safety of two anti-anemia drugs for US FDA-approved uses. In certifying the class, the Ninth Circuit held that plaintiff only needed to plausibly allege that Amgen’s misrepresentations were material based on a fraud-on-the-market theory for the class to be certified. Amgen’s appeal claims the district court must both require proof of materiality and allow Amgen to present evidence rebutting the fraud-on-the-market theory before certifying the class.