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 what the SEC called “the first federal jury trial by the SEC against a municipality or one of its officers for violations of the federal securities laws,” a jury in the U.S. District Court for the Southern District of Florida found the City of Miami and its former budget director, Michael Boudreaux, guilty of securities fraud for misrepresentations related to three municipal bond offerings in 2009. Both Defendants are expected to appeal the jury decision.
The practice of high frequency trading has been a hot-button issue of late, thanks in part to Michael Lewis’ 2014 book Flash Boys: A Wall Street Revolt, which examines the rise of this phenomenon throughout U.S. markets. Several class action lawsuits have alleged that various private and public stock and derivatives exchanges entered into agreements and received undisclosed fees to favor high frequency traders (“HFTs”), conferring timing advantages that damaged other market participants. Two courts have recently addressed the merits of claims for damages against such exchanges and both ruled that plaintiffs failed to state a claim for relief.
On July 1, 2015, the United States for the District of Columbia sued the estate and trusts of the late Layton P. Stuart – the former owner of One Financial Corporation and its subsidiary One Bank & Trust– and the trust’s beneficiaries, for alleged fraud on the Treasury Department and its Troubled Asset Relief Program (“TARP”). This civil suit is the latest in a growing list of cases brought by the government to recover TARP funds that it alleges were fraudulently procured.
A pair of investment firms recently filed suit against Twitter in the Southern District of New York, alleging that Twitter had fraudulently refused to allow them to sell its private stock in advance of its much-anticipated IPO. If that sentence looks somewhat bizarre, it is because the allegations themselves are bizarre, at best.
In short, the plaintiff investment firms allege that a managing partner of GSV Asset Management, who was a Twitter shareholder, engaged them to market a fund that would purchase and hold nearly $300 million in private Twitter shares from the Company’s early-stage shareholders. Plaintiffs then embarked on an “international roadshow” to line up investors in the fund. Plaintiffs allege that, on the roadshow, “there was substantial interest in purchasing [the private] Twitter shares at $19 per share.” READ MORE
In a recent speech to the Securities Enforcement Forum, SEC Chair Mary Jo White fleshed out the Commission’s plan to pursue all violations of federal securities laws, “not just the biggest frauds.” She also addressed the looming question of whether this approach makes the best use of the agency’s limited resources.
Chair White compared the SEC’s strategy of pursuing all forms of wrongdoing, no matter how big or small, to the “broken window” theory of policing, which was largely credited for reducing crime in New York City under Mayor Rudy Giuliani. According to the “broken window” theory, a broken window which remains unfixed is a “signal that no one cares, and so breaking more windows costs nothing.” On the other hand, a broken window which is fixed indicates that “disorder will not be tolerated.” Chair White postulated that the same theory applies to the US securities markets: minor violations that go ignored may lead to larger violations, and may foster a culture where securities laws are treated as “toothless guidelines.” Characterizing the SEC as the investors’ “cop,” she declared that the SEC needs to be a “strong cop on the beat,” understanding that even the smallest securities violations have victims. READ MORE
Last week the SEC announced the creation of three new Division of Enforcement initiatives designed to combat fraud in financial reporting and microcap securities and to enhance risk identification and analysis: (1) The Financial Reporting and Audit Task Force; (2) The Microcap Fraud Task Force; and (3) The Center for Risk and Quantitative Analytics.
The Financial Reporting and Audit Task Force will focus on expanding and strengthening the Division’s work in identifying securities violations, particularly in the areas of preparation of financial statements, issuer reporting and disclosure, and audit failures. Using technology-based tools like the Accounting Quality Model, designed to identify red flags in areas particularly susceptible to fraudulent financial reporting, along with ongoing review of financial statement restatements and revisions, and analyzing industry performance trends, the Task Force will aim to detect fraud early and to increase prosecution of alleged securities violations involving false or misleading financial statements and disclosures.
The Microcap Fraud Task Force is a much more specialized unit, focusing exclusively on investigating fraud in the issuance, marketing and trading of microcap securities (typically low-priced securities issued by very small companies with limited assets). The principal goal of this Task Force is to develop and implement long-term strategies for detecting and combating fraud in the microcap market, in particular by targeting who the SEC deems as “gatekeepers” or “significant participants,” namely, attorneys, auditors, broker-dealers, transfer agents, stock promoters and purveyors of shell companies. READ MORE
Agreeing to take up yet another securities case, the Supreme Court granted cert on January 18 in three related appeals arising out of the alleged multi-billion dollar Ponzi scheme involving R. Allen Stanford’s Stanford International Bank. The Court’s decision in this case will likely resolve a circuit split over the scope of the preclusion provision of the Securities Litigation Uniform Standards Act (SLUSA).
Congress passed SLUSA in 1998 because plaintiffs were bringing class actions in state court to get around the tough pleading standards and other limitations imposed by the Private Securities Litigation Reform Act of 1995. SLUSA precludes state law class actions involving misrepresentations made “in connection with” the purchase or sale of a security covered under SLUSA. Lower courts have struggled with the meaning of those three words: “in connection with.” If a state court case has anything at all to do with securities, will it fail?How closely must a claim relate to the sale of covered securities before SLUSA bars state law remedies? The Supreme Court is about to weigh in on these questions.
In the Stanford ponzi scheme cases, the plaintiffs are investors who purchased CDs issued by Stanford International Bank. The investors asserted claims against third-party advisors (including law firms and an insurance broker) under Texas and Louisiana law, alleging that the investors were duped into believing the CDs were backed by safe securities. Although the CDs themselves were not securities covered by SLUSA, the third-party advisors argued that SLUSA nevertheless barred the state law claims because the alleged misrepresentations related to the SLUSA-covered securities that purportedly backed the CDs. The district court agreed, dismissing the actions. But the Fifth Circuit reversed the district court, holding that the alleged fraudulent scheme was only “tangentially related” to the trading of securities covered by SLUSA. The Fifth Circuit agreed with the Ninth Circuit that misrepresentations are not made “in connection with” sales of SLUSA-covered securities when they are only “tangentially related” to those sales. This means the Fifth and Ninth Circuits are at odds with the Second, Sixth, and Eleventh Circuits, which have all adopted broader views of SLUSA’s preclusion provision.
The third-party advisor defendants asked the Supreme Court to resolve the split, and the Supreme Court agreed, given that the circuit split threatensinconsistent outcomes in some of the biggest, mostcomplex, and multi-layered securities cases. The Court’s resolution will likely go a long way towards defining the role of state courts in adjudicating important class actions relating to securities issues.