Securities Exchange Act

SEC Expands its Focus in the Municipal Bond Market, Bringing First-Ever Charges Against an Underwriter for Pricing Violations Related to Primary Offerings

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Coming on the heels of the SEC’s first wave of settlements with underwriters as part of its Municipalities Continuing Disclosure Cooperation (“MCDC”) initiative, the agency has brought yet another precedent-setting enforcement action against an underwriter in the municipal bond market.  On August 13, 2015, the SEC brought a settled enforcement action against the brokerage firm Edward Jones, in which the firm agreed to pay more than $20 million to settle charges that it overcharged customers in connection with the sale of municipal bonds in the primary market.  Edward Jones settled without admitting or denying the SEC’s findings.

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Carrying the Halli-burden: District Court Takes Up Price Impact at Class Certification in the Wake of Halliburton v. Erica P. John Fund

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In a lengthy ruling containing a detailed analysis of dueling economic expert reports, a federal court in Texas held on July 25, 2015 that defendant Halliburton Company demonstrated a lack of price impact at the class-certification stage on nearly all of the plaintiffs’ claims, thus rebutting the presumption of reliance.  This action has twice been to the Supreme Court, most recently in Halliburton, Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), which held that the fraud-on-the-market presumption of reliance may be rebutted by showing a lack of price impact from the alleged misrepresentation.  The district court’s recent decision is significant because it is one of the first to consider the issue of price impact post-Halliburton II, and because the decision suggests that lower courts may be willing to wade deep into the complications of event studies and economic analysis in order to determine price impact at the class-certification stage.

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The SEC Criticizes One of Its Own

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Even with the SEC’s home-court advantage in bringing enforcement actions in its administrative court rather than in federal court, the SEC will still criticize its own administrative law judges (“ALJ”) when an ALJ’s decision falls short of established legal standards.  On April 23, 2015, the SEC found that an ALJ’s decision to bar Gary L. McDuff from associating with a broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent or nationally recognized statistical rating organization was insufficient because it lacked enough evidence to establish a statutory requirement to support a sanctions analysis.  The SEC then remanded the matter to the same ALJ – no doubt in an effort to encourage him to revise his initial opinion.

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Sheer Yoga Pants and Over-Stretched Allegations: Court Refuses to Stretch Allegations of Corporate Mismanagement into Federal Securities Fraud

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Matrix

A lack of sweaty models trying on yoga pants may be problematic, but does it give rise to securities fraud? Not in the Southern District of New York. In In re lululemon Securities Litigation, decided on April 18, 2014, Judge Katherine B. Forrest dismissed in its entirety a class action complaint against lululemon based on sheer yoga pants alleging violations of Section 10(b) and Section 20(a) of the Exchange Act and SEC Rule 10b-5. As summarized by the court, lead plaintiff alleged, “if only lululemon had someone try on its black luon yoga pants before they shipped, it would have realized they were sheer; similarly, if lulumeon had only had someone exercise in certain athletic wear (enough to produce sweat), it would have realized that the colors bled.” Based on these purported shortcomings, plaintiff alleged that statements touting the high quality of the company’s products were materially false and misleading. The court, however, disagreed: “This narrative requires the Court to stretch allegations of, at most, corporate mismanagement into actionable federal securities fraud. This is not the law.” READ MORE →

The SEC Scores Another Admission: Scottrade Acknowledges That It Broke Recordkeeping Rules

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Last week, Scottrade Inc. became the latest entity to admit wrongdoing in connection with settling SEC charges.  In a January 29, 2014 administrative order, the brokerage firm not only agreed  to a $2.5 million penalty, but also admitted that it violated federal securities laws when it failed to provide the SEC with complete and accurate “ blue sheet” trading data.  This settlement marks the fourth such admission since the Commission’s June 2013 modification to its “no admit/no deny” settlement policy.

Most civil law enforcement agencies – including the SEC –  generally do not require entities or individuals to admit or deny wrongdoing in order to reach a settlement.  The SEC regularly utilizes this “no admit/no deny” policy, finding it an effective tool to facilitate settlements.  In June 2013, however, the Commission announced a revision to this longstanding policy, indicating that it would require public admissions of wrongdoing in selected cases, including those involving “egregious” fraud or intentional misconduct, as well as those involving significant investor impact or that are otherwise highly visible.  Since then, the Commission has obtained admissions in three previous settlements. READ MORE →

The Smack of IndyMac: Second Circuit’s Decision in IndyMac Creates Palpable Effect in SDNY

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As noted in a previous blog, in Police & Fire Retirement Systems of City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013), the Second Circuit held that tolling under American Pipe – which plaintiffs had often used to revive claims by relying on earlier-filed class actions – does not apply to statutes of repose, including Section 13 of the ’33 Act.   The significance of IndyMac was felt in New Jersey Carpenters Health Fund, et al. v. Residential Capital, et al., No. 08 CV 8781, 08 CV 5093 (S.D.N.Y. Dec. 18, 2013), where Hon. Harold Baer, Jr. was asked to reconsider his pre-IndyMac order denying defendants’ motion to dismiss a securities class action involving mortgage-backed securities.  Upon reconsideration, Judge Baer dismissed one of the defendants, Deutsche Securities Inc., and several claims against other defendants, finding that intervening plaintiffs did not have standing to sue because the claims were not filed within the ’33 Act’s three-year statute of repose.  As the case highlights, IndyMac’s effect will continue to be felt in pending cases – Judge Baer held that it should be applied retroactively – and will significantly limit the timing of future lawsuits.

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Extra, Extra! – Extraterritoriality And Criminal Actions As To Alleged Securities Fraud

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In its seminal decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), regarding antifraud provisions of the U.S. securities laws, the Supreme Court held that “Section 10(b) [of the Securities Exchange Act of 1934] reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.”  Id. at 2888.  Although Morrison—which involved a private action by foreign plaintiffs—appeared to set down a bright-line rule, it spurred a number of questions, including whether its holding would apply beyond the private civil context, to SEC civil enforcement actions and criminal prosecutions as well.  A large number of courts have already applied Morrison to SEC actions.  In a recent significant development, the Court of Appeals for the Second Circuit concluded that Morrison also applies to criminal cases brought pursuant to Section 10(b) and Rule 10b–5.  United States v. Vilar, Case No. 10-521, at *3 (2d Cir. Aug. 30, 2013).  But the Dodd-Frank Act’s “extraterritorial jurisdiction” amendment to the Exchange Act for actions brought by the SEC and the DOJ—the immediate congressional response to Morrison—will presumably be invoked by the government for actions based on post-amendment conduct. READ MORE →

Time is Money: Second Circuit Vacates SEC’s $38 Million Fine Against Hedge Fund Pentagon Capital Management

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On August 8, 2013, the Second Circuit vacated the SEC’s $38 million fine against hedge fund Pentagon Capital Management PLC, holding that the Supreme Court’s decision in Gabelli v. SEC required the case to be remanded for recalculation of the civil penalty. This case is one of several SEC enforcement actions affected by the Gabelli ruling since the Court issued its decision less than six months ago. The Second Circuit’s decision highlights the limiting effect Gabelli will have on civil remedies available to the SEC for securities law violations that occurred more than five years before the agency initiated its enforcement action.

In Gabelli, the Court held that the five-year statute of limitations for filing civil enforcement actions seeking penalties for fraud begins to run from the date of the alleged violation, not when the SEC discovers, or reasonably should have discovered, the violation. Citing Gabelli, the Second Circuit in SEC v. Pentagram Capital Management PLC found that any profits Pentagon earned more than five years before the SEC filed its suit could not be included in the penalty. The parties agreed that remand on the issue was required.

The SEC alleged that Pentagon and its owner, Lewis Chester, committed securities fraud under Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 by engaging in late trading of mutual funds. Late trading involves placing and executing orders as if they occurred at or before the time the mutual fund price was determined. Such trading allows the purchaser to profit from information released after the mutual fund price is fixed each day, but before it can be adjusted the following day. The SEC alleged that Pentagon engaged in late trading through its broker dealer, Trautman Wasserman & Co., from February 2001 through September 2003. READ MORE →

The Honeymoon is Over: Post-DOMA, Same-Sex Couples Now Spouses For Purposes of the Securities and Exchange Act Rules

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The Supreme Court in U.S. v. Windsor held that the federal Defense of Marriage Act’s (DOMA) section defining marriage as between a man and woman is unconstitutional because it violates the Fifth Amendment’s equal protection clause. Under Section 3 of DOMA a person could only be considered a spouse under federal law if they were married to a person of the opposite sex.

The term “spouse” appears several times in the Securities and Exchange Act Rules. Exchange Act Rule 10b5-2 provides a non-exclusive definition of circumstances in which a person has a duty of trust or confidence for purposes of the misappropriation theory of insider trading. The misappropriation theory expands the traditional view of insider trading to cases where a person misappropriates confidential information in breach of a duty owed to the source of the information.

Subsection (b)(3) of Rule 10b5-2 enumerates circumstances where this duty is presumed to exist and includes circumstances when “a person receives or obtains material nonpublic information from his or her spouse[.]” Because Rule 10b5-2’s enumerated list is non-exclusive it’s possible a duty of trust and confidence could be found between domestic partners regardless of the Windsor ruling. However, the expanded definition of spouse post-Windsor shifts the burden, creating a rebuttable presumption that such a duty exists between same-sex couples in states where they are legally married for the purposes of the misappropriation theory of insider trading.

There are other instances where the term spouse may be significant under the securities laws, including beneficial reporting requirements for Section 16 insiders and Audit Committee independence rules.

 

Can We Be Classmates?

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On September 6, the Second Circuit expanded class standing in a mortgage-backed securities class action suit for alleged misrepresentations in a shelf registration statement. NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., No. 11-2763 (2d Cir. Sept. 6, 2012). The plaintiff, an investment fund, sued Goldman Sachs & Co. (“Goldman”) and GS Mortgage Securities Corp. (“GS”) alleging violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 on behalf of a putative class of persons who acquired mortgage-backed certificates underwritten by Goldman and issued by GS. The plaintiff alleged that a single shelf registration statement connected with 17 separate offerings sold by 17 separate trusts contained false and misleading statements concerning underwriting guidelines, property appraisals, and risks and that these alleged misstatements were repeated in prospectus supplements.

The lower court had granted the defendants’ motion to dismiss, holding that the plaintiff—who had purchased securities from only two of the seventeen trusts—lacked standing to bring claims on behalf of purchasers of securities of the other fifteen trusts.

The Second Circuit disagreed that the plaintiff lacked class standing. Although the plaintiff had individual standing only as to the securities it purchased from the two trusts, the court held that the analysis for class standing is different. According to the court, to assert class standing, a plaintiff has to allege (1) that he personally suffered an injury due to the defendant’s illegal conduct and (2) that the defendant’s conduct implicates the “same set of concerns” as the conduct that caused injury to other members of the putative class. READ MORE →