Blog Posts Tagged With Decisions/Developments of Note

SEC v. Robert H. Shapiro, et al. (S.D. Fla. Jan. 27, 2019)

The Southern District of Florida entered a final judgment in the SEC’s fraud action against Woodbridge Group of Companies LLC, its former owner, and other Defendants.  The SEC alleged that Defendants operated a $1.2 billion Ponzi scheme.  The Court ordered Defendant former owner to pay a civil penalty of $100 million, disgorgement of $18.5 million, and prejudgment interest of $2.1 million.  The court ordered Defendant companies to pay disgorgement of $892 million.

SEC Press Release
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SEC v. Charles D. Scoville and Traffic Monsoon, LLC (10th Cir. Jan. 24, 2019)

The Tenth Circuit upheld an extraterritorial application of U.S. securities law under the Dodd-Frank Act.  The SEC alleged that Defendants, operating from within the United States, ran a Ponzi scheme in which 90% of the fraudulent securities sales were to victims overseas.  On interlocutory appeal from an asset freeze and other preliminary relief, Defendants argued that the antifraud provisions of the Securities Act do not apply to the alleged overseas sales.  The Tenth Circuit disagreed,
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Gupta v. United States (2d Cir. Jan. 11, 2019)

The Second Circuit rejected a collateral challenge to the 2012 insider trading conviction of Appellant, a former Goldman Sachs director.  Appellant Gupta brought a habeas motion arguing that the jury instructions delivered at his trial were invalidated by the decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), where the Second Circuit held that tips of material nonpublic information alone are insufficient for an insider trading conviction without evidence that the
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United States v. Schulman (2d Cir. Jan. 10, 2019)

The Second Circuit upheld the 2017 insider trading conviction of Appellant, a patent attorney, rejecting his challenge to the sufficiency of the government’s evidence.  Although Appellant conceded that he disclosed information regarding a planned acquisition to a friend over dinner, he testified that he intended his comments to be a joke or brag and that he did not intend for the alleged tippee to trade while in possession of the material nonpublic information.  Appellant argued
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Cato Institute v. SEC, et al. (D.D.C. Jan. 9, 2019)

The Cato Institute has sued the SEC under the Free Speech Clause of the First Amendment. The suit is a facial challenge to 17 C.F.R. § 202.5(e), under which a defendant or respondent in an SEC enforcement action must agree not to deny the SEC’s allegations as a condition of settlement.  According to Cato, the regulation is an unconstitutional content-based restriction on free speech.  The Institute’s complaint states that it is seeking to publish a
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Emulex Corp., et al. v. Gary Varjabedian, et al. (U.S. Supreme Court, Jan. 4, 2019)

The Supreme Court has granted a petition for writ of certiorari asking whether the proper liability standard in cases brought under Section 14(e) of the Exchange Act, which prohibits material misstatements or omissions in connection with a tender offer, is negligence instead of intent or scienter.  The Plaintiffs in this putative class action allege that Defendants failed to disclose unfavorable information about a proposed merger.  The district court granted Defendants’ motion to dismiss, finding that
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CFTC Releases Annual Enforcement Results for Fiscal Year 2018 (Nov. 15, 2018)

The CFTC’s Division of Enforcement released its annual report reviewing enforcement actions from the 2018 fiscal year. According to the report, the Commission brought 83 enforcement actions and obtained more than $950 million in monetary sanctions.  The report noted key initiatives that began or continued during fiscal year 2018, including cooperation and self-reporting, data analytics, and the development of specialized task forces focused on four different substantive areas:  (1) spoofing and manipulative trading, (2) virtual
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United States v. Sean Stewart (2d Cir. Nov. 5, 2018, Contested)

The Second Circuit reversed the insider trading conviction of Defendant, a former investment banking analyst, on evidentiary grounds.  The government alleged that Defendant, his father, and his father’s friend traded while in possession of material, nonpublic information.  At trial, the United States introduced an incriminating prior statement by Defendant’s father and codefendant.  The court refused to admit an allegedly inconsistent statement made to the FBI for impeachment purposes at trial. The Second Circuit vacated Defendant’s
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SEC Enforcement Division Issues Report on Priorities and Fiscal Year 2018 Results (Nov. 2, 2018)

The SEC Enforcement Division issued its annual report outlining its priorities for the coming year and reviewing enforcement actions from the 2018 fiscal year. The Commission brought a total of 821 enforcement actions, including 490 stand-alone actions, and imposed disgorgement and penalties totaling more than $3.945 billion.  Cases concerning investment advisory issues, securities offerings, and issuer reporting / accounting and auditing collectively comprised 63 percent of the Commission’s 490 stand-alone cases.  Additionally, actions initiated by
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SEC Issues Investigative Report on Cyber Threats (Oct. 16, 2018)

The SEC released an investigative report addressing cyber threats that companies should consider when implementing internal accounting controls.  The report stems from SEC investigations into alleged cyber fraud perpetrated against nine public companies.  According to the SEC, personnel from these companies received emails from perpetrators posing as company executives or vendors asking that large sums of money be sent to bank accounts belonging to the perpetrators.  The SEC is not pursuing enforcement actions against the
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SEC v. Mitchell J. Stein (9th Cir. Oct. 11, 2018, Contested)

Action against Defendant, outside counsel to a medical device company, for allegedly engaging in a series of frauds designed to inflate the company’s stock price for his benefit.  The SEC alleges that Defendant falsified purchase orders with fictitious companies in order to increase sale numbers in SEC filings and press releases.  The Ninth Circuit affirmed the district court’s grant of summary judgment in favor of the SEC, finding that Defendant’s conviction in a parallel criminal
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United States v. Hoskins (2d Cir. August 31, 2018)

The Second Circuit held that the FCPA’s anti-bribery provisions do not extend to non-U.S. persons absent a U.S. nexus.  The holding specified that a nonresident foreign national cannot be held liable under the provisions under a conspiracy or accomplice theory if they could not otherwise be held liable under the statute.  The Defendant in the case was a U.K. national employed by a U.S. corporation who had never been to the United States.  The holding
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SEC Proposes Whistleblower Rule Amendments (June 28, 2018)

The SEC voted to propose amendments to the rules governing its whistleblower program.  These amendments address, in part, the Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers, which held that the Dodd-Frank Act’s whistleblower anti-retaliation provisions only apply where a securities violation is reported to the SEC itself.  With respect to whistleblower retaliation protection, the proposed rules would require an individual to report information about possible securities laws violations to the Commission
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Lucia v. SEC (June 21, 2018)

The Supreme Court held that the SEC’s appointment of ALJS violated the Constitution because SEC ALJs are “officers” and thus are subject to the Appointments Clause under the Court’s prior precedent.  This decision may have far-reaching consequences for other federal agencies that utilize ALJs because they are vulnerable to similar Appointments Clause challenges.  Further, while Lucia resolved one constitutional challenge to SEC ALJs, a concurrence by Justice Breyer highlights another significant constitutional question:  whether the
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Digital Realty Trust, Inc. v. Somers (Feb. 21, 2018)

The Supreme Court held that the Dodd-Frank Act’s whistleblower anti-retaliation provisions only apply where a violation of the securities laws is reported to the SEC, and do not extend to situations in which the violation is reported only internally.  In so holding, the Court resolved a circuit split that had left uncertainty over the scope of the provisions.  Individuals who report to the SEC remain covered by the provisions, which allow immediate access to federal
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SEC Announces Self-Reporting Initiative for Rule 12b-1 Fee Disclosures (Feb. 12, 2018)

The SEC’s Division of Enforcement announced its “Share Class Selection Disclosure Initiative,”  offering favorable settlement terms to investment advisers who self-report potential violations relating to certain mutual fund share class selection issues and promptly return money to harmed clients.  Qualifying self-reporting advisers will be eligible for a recommendation from the Division of Enforcement that the Commission accept a settlement imposing a cease-and-desist order, disgorgement with prejudgment interest, and various undertakings, but not imposing a civil
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SEC and CFTC Chairs Testify on Virtual Currency Oversight (Feb. 6, 2018)

SEC Chairman Jay Clayton and CFTC Chairman Christopher Giancarlo testified before the Senate Banking, Housing and Urban Affairs Committee on regulatory and enforcement efforts in connection with Bitcoin and other virtual currencies.  Both officials suggested that a broader, coordinated effort to monitor and regulate these currencies was necessary.  Chairman Giancarlo stated:  “It strikes me that we owe it to this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response,
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CFTC v. Southern Trust Metals, Inc., et al. (11th Cir. Jan. 22, 2018)

The Eleventh Circuit held as a matter of first impression that a settlement between a self-regulatory organization (the National Futures Association or NFA) and Defendants did not preclude a subsequent CFTC action brought on the basis of the same action. The court found that equitable estoppel does not apply to a CFTC action where the Defendant entered into a settlement with a self-regulatory organization because (1) the settlement was with a private, nongovernmental organization, (2)
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Robert Jackson and Hester Pierce Sworn in as SEC Commissioners (Jan. 11, 2018)

Robert J. Jackson Jr. and Hester M. Pierce were sworn into office by SEC Chairman Jay Clayton. Their nominations were confirmed by the Senate on Dec. 21, 2017. Commissioner Jackson was previously a professor at NYU School of Law and also taught at Columbia University and served in the Treasury Department. Commissioner Pierce was previously a Senior Research fellow and Director of the Financial Markets Working Group at the Mercatus Center at George Mason University.
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Lucia v. SEC, Petition for Writ of Certiorari (Nov. 29, 2017)

The Solicitor General filed a brief urging the Supreme Court to grant certiorari and settle a circuit split over whether the SEC’s Administrative Law Judges (ALJs) have been unconstitutionally appointed to their posts. The Solicitor General’s brief reversed the agency’s position that its ALJs are employees not subject to the Appointments Clause. In addition, the Solicitor General questioned the validity of statutory restrictions on the removal of ALJs. While the SEC did not sign the
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CFTC Releases Annual Enforcement Results for Fiscal Year 2017 (Nov. 22, 2017)

The CFTC released its annual report reviewing its enforcement actions during fiscal year 2017. The report states that the Commission brought 49 enforcement enforcement-related actions and obtained orders totaling $412,726,307 in restitution, disgorgement, and penalties. The CFTC also issued new cooperation guidelines and new rules to protect whistleblowers, in an effort to strengthen its enforcement program. Of the 49 enforcement actions, 20 involved retail fraud, followed by twelve actions involving market manipulation, seven involving reporting
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Disgorgement for Violating a Federal Securities Law (Nov. 17, 2017)

The IRS has taken the position that disgorgement in securities cases is not deductible. This position is based on the Supreme Court’s decision in Kokesh v. SEC, 137 S. Ct 1635 (2017), in which the Court held that disgorgement imposed as a sanction for violating a federal securities law is a penalty for purposes of the five-year statute of limitations on SEC enforcement actions.

IRS Order
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SEC Enforcement Division Issues Report on Priorities and Fiscal Year 2017 Results (Nov. 15, 2017)

The SEC Enforcement Division issued its annual report outlining its priorities for the coming year and reviewing its fiscal year 2017 enforcement actions. The Commission brought a total of 754 enforcement actions, including 446 stand-alone actions and 196 follow-on actions, and imposed penalties totaling $3.79 billion. Of the Commission’s 446 stand-alone cases, each of investment advisory issues, securities offerings, and issuer reporting/accounting and auditing actions comprised approximately 20% of the total SEC Enforcement actions. The
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