SEC

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

Christine Hanley, William Foley and Robert SternPosted on April 19, 2017

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 →

Circuit Split on Whistleblower Protections Widens

Mike Delikat, Renee Phillips and Kevin AskewPosted on March 14, 2017

On March 8, 2017, a divided panel of the Ninth Circuit issued an opinion in Somers v. Digital Realty Trust Inc. that further widened a circuit split on the issue of whether the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply to whistleblowers who claim retaliation after reporting internally or instead only to those who report information to the SEC. Following the Second Circuit’s 2015 decision in Berman v. Neo@Ogilvy LLC, the Ninth Circuit panel held that Dodd-Frank protections apply to internal whistleblowers. By contrast, the Fifth Circuit considered this issue in its 2013 decision in Asadi v. G.E. Energy (USA), LLC and found that the Dodd-Frank anti-retaliation provisions unambiguously protect only those whistleblowers who report directly to the SEC.

Plaintiff Paul Somers alleged that Digital Realty Trust fired him after he made several reports to senior management regarding possible securities law violations. Somers only reported these possible violations internally at the company, and not to the SEC. After his employment was terminated, Somers sued Digital Realty, alleging violations of state and federal securities laws, including violations of the whistleblower protections under Dodd-Frank. Digital Realty moved to dismiss on the ground that Somers was not a “whistleblower” under Dodd-Frank. The district court denied the motion, deferring to the SEC’s interpretation that internal reporters are also protected from retaliation under Dodd-Frank.

A Fraud By Any Other Name: Seventh Circuit Holds That SLUSA Extends to Class Actions That Could Be Pursued Under Federal Securities Fraud Laws

Christine Hanley and William AldermanPosted on February 1, 2017

A divided panel of the Seventh Circuit recently held that the Securities Litigation Uniform Standards Act (“SLUSA”) requires any covered class action that “could have been pursued under federal securities law” to be brought in federal court. The plaintiff maintained an investment account at LaSalle Bank, which was later acquired by Bank of America. Each night, LaSalle invested (“swept”) the account’s balance into a mutual fund approved by the plaintiff. Without the plaintiff’s knowledge, LaSalle also allegedly pocketed the fees that some of the mutual funds paid each time a balance was transferred. When the plaintiff found out, he brought a class action in state court, arguing that LaSalle had breached its contractual and fiduciary duties to its customers by secretly paying itself fees generated by their accounts.

LaSalle and Bank of America successfully argued before the district court that SLUSA required removal of the case to federal court. SLUSA authorizes defendants to demand removal of any class action with at least fifty members that alleges “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” Congress drafted SLUSA to force securities class actions out of state courts and into federal courts, where plaintiffs must clear higher pleading hurdles.

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

M. Todd Scott and Robert CohenPosted on January 11, 2017

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 →

Going After the (Little) Bad Guys: SEC Announces More Actions Against Penny Stock Gatekeepers

Editorial BoardPosted on December 22, 2016

The SEC last week announced that it has sanctioned several market participants in the penny stock industry, including attorneys who wrote offering documents as well as stock transfer agents, for their roles in various sham IPOs of microcap stocks. These are the latest in a string of penny stock enforcement actions since outgoing SEC Chair Mary Jo White announced the implementation of the Commission’s “broken windows” policy in 2013. That policy targeted both large and small issuers and market participants. The strategy has resulted in the SEC racking up its largest-ever volume of enforcement cases in fiscal year 2016.

In the first enforcement actions, the SEC alleged that a California-based securities lawyer wrote false and misleading registration statements in connection with five microcap IPOs, which were part of a scheme to transfer unrestricted shares to offshore market participants. The SEC also alleged that the CFO of American Energy Development Corp. (AEDC), one of the issuers in question, and the attorney who wrote opinion letters for the offerings made false and misleading statements. The market participants were barred from any further penny stock activity, and the attorneys were permanently suspended from appearing and practicing before the SEC. The SEC also suspended trading in shares of ADEC.

(Proxy) Voting Made Easy?

William Foley, M. Todd Scott and Amy RossPosted on November 8, 2016

The SEC recently proposed amendments to the proxy voting rules to require parties in a contested election to use universal proxy cards that would include the names of all board of director nominees. This proposed change would eliminate the two “competing slates” cards and allow shareholders to vote for their preferred combination of board candidates, as they could if they voted in person.

The new rules would apply to all non-exempt votes for contested elections other than those involving registered investment companies and business development companies, would require management and dissidents to provide each other with advance notice of the names of their nominees, and would set formatting requirements for the universal proxy cars. As with any newly proposed SEC rule, there will be a comment period of 60 days to solicit public opinion.

Interestingly, the Commission’s vote to adopt the newly proposed rules was a split decision, with Commissioner Piwowar issuing a strongly worded dissent. According to Commissioner Piwowar, the proposed universal proxy rules “would increase the likelihood of proxy fights at public companies,” and would allow special interest groups to “use their increased influence to advance their own special interests at the expense of shareholders.” He also noted that under the new rules, dissidents are only required to solicit holders of shares representing a majority of those entitled to vote, meaning that many retail investors will not receive either the dissident’s proxy statement or disclosures about the dissident’s nominees.

SEC’s 2016 Activity Breaks Enforcement and Whistleblower Records

Suzette BarnesPosted on October 25, 2016

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.

No Longer a Mirage: FCPA Compliance and Cooperation Has Its Benefits

M. Todd Scott and William AldermanPosted on September 28, 2016

On September 12, 2016, the SEC announced that it had reached a settlement with Jun Ping Zhang (“Ping”), a former executive of a Chinese subsidiary of Harris Corporation (“Harris”), regarding alleged violations of the Foreign Corrupt Practices Act (“FCPA”). The settlement was unusual, in that the SEC declined to also bring charges against Harris, an international communications and information technology company.

SEC Continues to Target Private Equity Firms, Entering Into $52 Million Settlement with Apollo Global Management

Suzette BarnesPosted on August 31, 2016

On August 23, 2016, the SEC entered into a settlement that reflects a continuation of its recent trend of increasingly active pursuit of private equity firms, particularly for failing to disclose conflicts of interests and other material information to investors. The SEC entered into a $52.5 million settlement with four private equity fund advisers affiliated with Apollo Global Management LLC (collectively “Apollo”) arising out of insufficient disclosures and supervisory failures.

SDNY Prosecutors Score First Post-Newman Insider Trading Conviction

Kevin Askew and Robert SternPosted on August 23, 2016

On August 17, 2016, jurors in a New York federal court convicted Sean Stewart on criminal charges of conspiracy, securities fraud, and tender offer fraud after more than five days of deliberation. Stewart, a former investment banker for JPMorgan and Perella Weinberg Partners, was charged with leaking confidential information about health care mergers to his father, Robert Stewart, on at least five occasions over the course of four years. The case provides a victory to Preet Bharara, the United States Attorney for the Southern District of New York, after a series of setbacks in the form of unfavorable decisions in the aftermath of the Second Circuit’s decision in U.S. v. Newman, the repercussions of which have been covered extensively on this blog (see here, here). As the first conviction post-Newman, U.S. v. Stewart provides some insight into the kinds of facts that might support an insider trading charge in the Second Circuit going forward and is thus worthy of analysis.

Securities Litigation, Investigations and Enforcement