SEC

NBA Team Owner Mark Cuban “Talks Trash” After Defense Verdict

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Matrix

Following a defense verdict in the insider trading case brought against him by the SEC, Dallas Mavericks owner Mark Cuban has not been sitting on the bench—but rather using his blog to stay on the offensive.  Since the October 16, 2013 verdict, Cuban continues to post about the case on his blog—including, just a few days ago, blogging about when his own blog became the focus of the trial.  According to his October 26 post, an SEC attorney asked him during trial if everything he posted on his blog was true information, to which he replied that it was meant more “to communicate a point” and stimulate discussion.  Following up, the SEC attorney  asked: “If you post on your blog that you think the Lakers are going to stink in 2013 . . . you’re not telling this jury that that’s an opinion you don’t honestly hold, right?”   Cuban posted that the courtroom “cracked up” when he replied “This year?”, before going on to answer: “Well, no.  In 2004, I wouldn’t say it.  They had Shaq, they had Kobe, they actually went to the finals . . . To answer your question, if I said in 2004 that they stink, I didn’t believe it.”  In an earlier blog entry, Cuban also poked fun at the former Head of Enforcement—posting about internal emails, disclosed earlier in the case, in which SEC attorneys commented on photos of Cuban. READ MORE →

The Cop is on the Beat: SEC Chair White Says the Agency Aims to be “Everywhere”

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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 →

Route 506: The General Solicitation Highway

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People Walking

A new route to soliciting direct securities investments has opened.  For the first time in 80 years, start-ups and small businesses can broadly advertise and broadly solicit to raise money for private offerings.  Changes to SEC Rule 506, which took effect September 23, 2013, allow companies to avoid complex and costly public offerings and instead search for investors via the Internet, newspaper, social media, direct mail, and other media.  The change is the result of the JOBS Act, which required the SEC to permit general solicitation for certain private placements that are exempt from the registration requirements of Section 5 of the 1933 Act.

To travel this route, investors must be “accredited,” defined in the new rule as having a net worth of over $1,000,000 or at least $200,000 in annual income.  While the accreditation has long been required for private placements, issuers were permitted to sell to non-accredited investors who qualified as sophisticated purchasers.  Businesses who raise funds under the new rule must now take additional “reasonable steps” to ensure all investors are accredited.  Rule 506(c) provides a non-exclusive list of means to satisfy this “reasonable steps” requirement.  Issuers may use investor’s tax forms, bank statements, credit reports, and certifications from accountants, brokers, and investment advisors to ensure accreditation – assuming that investors are willing to deliver copies of such documents to issuers.  There may be other means not specified that would also be acceptable also.  Issuers will want to keep careful records about how they accredit investors, because they will bear the burden to establish their exemption from the registration provisions of the Securities Act.  If an issuer cannot do so, it may be subject to liability for general solicitation in connection with an unregistered offering in violation of the federal securities laws. READ MORE →

Lookout for the SEC: After First Demanding More Admissions, the SEC is Additionally Increasing Monetary Penalties and Giving Advice to Defense Counsel

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After first announcing a change on June 18 of this year to demand more admissions in SEC actions, an SEC leader recently made further comments echoing that same sentiment, as well as referencing the SEC’s intended use of stiffer monetary penalties.  On October 1, at a Practising Law Institute conference, SEC Enforcement Division Co-Director Andrew Ceresney discussed the new SEC regime’s motto of strict enforcement and provided concrete, practical advice for defense lawyers on how to effectively interact with the SEC’s enforcement personnel.

Given the SEC’s ongoing commitment to deter current and future violations, Mr. Ceresney stated that the SEC will continue to increase penalties in an aggressive bid to deter misconduct.  He stated that “[t]here is room for bolder actions” and monetary penalties are a deterrent that everyone understands.  Mr. Ceresney also advised defense lawyers on how to handle meetings with SEC enforcement personnel.  He stated that defense lawyers should focus on a case’s broad policy or legal arguments, including the circumstances surrounding the case, the client’s settlement position, and any flaws in the legal theory and policy implications of the case.  Most importantly, stated Mr. Ceresney, defense lawyers must answer the SEC’s questions, must be trustworthy, and must not attempt to intimidate the SEC. READ MORE →

Take Heart, Companies Can Win Whistleblower Cases: Two Key Victories Last Week in SOX and Dodd-Frank Cases

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Two victories for employers last week in Dodd-Frank and SOX whistleblower cases may provide a basis for at least a sliver of optimism among employers and whistleblower defense lawyers hammered by a recent series of employee-favorable decisions under the two main federal statutes covering whistleblowing activity.

Banko v. Apple

In Banko v. Apple Inc., Case No. 3:13-cv-02977-RS, a Northern District of California judge dismissed a Dodd-Frank retaliation claim where the employee only made a complaint internally to management and never complained to the Securities and Exchange Commission (SEC). The court followed the reasoning of the Fifth Circuit in Asadi v. G.E. Energy (USA), L.L.C. (see Orrick’s prior blog post on Asadi) and rejected a broader interpretation of the Act adopted by four district courts and the SEC that Dodd-Frank covers internal reporting protected by the Sarbanes-Oxley Act (SOX) as well as reports to the SEC. READ MORE →

SEC Issues Huge Bounty Award of $14 Million to Whistleblower under Dodd-Frank

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Whistle

Today the SEC announced that it is issuing a whistleblower award of over $14 million to a whistleblower who provided information that resulted in the recovery of investor funds. The significant whistleblower award comes after many critics have questioned the success of the SEC’s whistleblower award program which, to date, has only issued two much smaller awards since the program’s inception in 2011. The first award payment was issued in August 2012 for approximately $50,000. The second award, paid to three whistleblowers for information that stopped a sham hedge fund, has paid out approximately $25,000 with an expected total payout of $125,000. READ MORE →

Don’t Get Caught In The Crosshairs When The SEC Deploys Its Full Enforcement Arsenal

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On September 26, SEC Chair Mary Jo White gave an important speech to the Council of Institutional Investors in Chicago.  The speech, entitled “Deploying the Full Enforcement Arsenal,” provides the first detailed roadmap to the Commission’s enforcement priorities in the White administration.  While some of the SEC’s enforcement program going forward will involve a continuation and reinforcement of efforts begun during the administration of former Chair Mary Schapiro and former Enforcement Director Robert Khuzami, much of it will entail new initiatives.  The bottom line is that — not surprisingly — Chair White, a former U.S. Attorney, is committed to a vigorous, prosecutorial-minded enforcement program.

Here are the key takeaways from the speech:
Individuals First.  Perhaps most importantly, Chair White stated that the “core principle of any strong enforcement program is to pursue responsible individuals wherever possible.”  Accordingly, she has “made it clear that the staff should look hard to see whether a case against individuals can be brought.  I want to be sure we are looking first at the individual conduct and working out to the entity, rather than starting with the entity as a whole and working in.”  She also indicated that the Commission is likely to seek more industry and officer-and-director bars against individuals.  Chair White described this focus on individuals first as a “subtle” shift in approach, but it is one that, if followed in practice, will have significant consequences, particularly when paired with some of the other initiatives described below. READ MORE →

“Something More” Than “But For” Required in the Ninth Circuit

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The Ninth Circuit recently reversed a ruling by the U.S. District Court of Nevada granting summary judgment in favor of the SEC in a case alleging violations of Section 5 of the Securities Act of 1933 in connection with the sale of unregistered securities.  The SEC’s complaint alleged that 1st Global Stock Transfer LLC (“Global”), a transfer agent, and Global’s owner, Helen Bagley (collectively “Defendants”), assisted in the sale of unregistered securities for CMKM Diamonds, Inc. (“CMKM”), a purported diamond and gold mining company.  The SEC’s complaint further alleged that CMKM had no legitimate business operations but instead the Company concocted false press releases and distributed fake maps and videos of mineral operations to its investors.  While CMKM was one of several defendants in the action, the SEC only moved for summary judgment against Global, Bagley, and CMKM’s attorney.  The District Court granted the SEC’s motion for summary judgment against the three defendants, but only Global and Bagley appealed that ruling.

In perpetrating the scheme, CMKM’s attorney was alleged to have provided hundreds of false opinion letters supporting the issuance of unregistered stock without restrictive legends to indicate that the stock was unregistered.  Relying on these opinion letters, Global and Bagley issued additional CMKM stock without restrictive legends, believing that the issuance was legal.  After a year and a half of this practice, Bagley became suspicious and asked a second law firm to confirm the opinion letters.  The second law firm, however, relied on the first attorney’s opinion letters and also issued an opinion letter stating that the issuance of additional CMKM stock was valid.  Based on the additional opinion letter, Global and Bagley continued to issue CMKM shares without restrictive legends. READ MORE →

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 →

A Ponzi of A Different Color

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Cuffed Hands

High profile schemes perpetrated by Bernie Madoff, Allen Stanford, Nevin Shapiro, and others have brought, or at least reinforced, a general understanding of the term “Ponzi scheme” into the public lexicon.  But what, legally, is a Ponzi scheme?  In SEC v. Management Solutions, Inc., 2013 WL 4501088 (D. Utah Aug. 22, 2013), Judge Bruce Jenkins endeavored to answer that question and, in the process, authored an encyclopedic account of the term and key court opinions, from seven federal circuits, that have construed it.

Management Solutions was an SEC enforcement action against a father-and-son team that had allegedly raised over $200 million through a “classic Ponzi scheme.”  According to the SEC’s complaint, investors in the scheme were sold “membership interests” in an apartment-flipping business and were guaranteed a return of five to eight percent.  In reality, the funds were allegedly deposited into a general account and were used to pay a variety of expenses, including returns to other investors.  Each of the defendants in the SEC case settled without admitting or denying the allegations.

A hearing was held in 2013 to determine whether, as argued by the court-appointed receiver, the scheme was properly classified as a “Ponzi scheme” and, if so, at what point that designation became applicable.  The receiver sought such a finding in order to obtain the so-called “Ponzi presumption,” which is sufficient to establish actual intent to defraud.  READ MORE →