Blog Posts Tagged With Decisions/Developments of Note

United States v. Matthew Connolly and Gavin Campbell Black (S.D.N.Y. May 2, 2019, Contested)

Judge Colleen McMahon ruled that interviews conducted during an internal investigation by a defendant’s employer and its counsel at the request of the CFTC were “fairly attributable” to the CFTC.  The court determined that, under Second Circuit precedent,[1] the CFTC’s request that the employer conduct an internal investigation and interview one of the defendants was a government directive, given the pressure that the defendant felt to cooperate.  Accordingly, the use of a criminal defendant’s
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Robare Group v. SEC (D.C. Cir. Apr. 30, 2019)

The D.C. Circuit held that while a defendant investment adviser’s failure to disclose conflicts of interests on registration applications was sufficient to support the SEC’s finding of a violation of § 206 of the Investment Advisers Act, which imposes a negligence standard, the evidence was insufficient to support the SEC’s finding of a violation of § 207 of the Act, which imposes a willfulness standard. According to the court, in order to prove willfulness, the
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SEC Enforcement Staff Offer Guidance in Panel Discussion (Apr. 11, 2019)

SEC enforcement officials participated in a panel discussion at the PLI SEC Speaks conference in Washington, D.C.  The panel was led by SEC Enforcement Co-Directors Stephanie Avakian and Steve Peiken.  Panelists discussed several topics including cooperation, multijurisdictional and interagency investigations, Wells notices, and negotiations with SEC staff.  Panelists also discussed the implications of the Supreme Court’s decision in Lorenzo v. SEC , which held that an investment banker violated Rules 10b-5(a) and (c), Section 10(b)
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Lorenzo v. SEC (U.S. Sup. Ct. Mar. 27, 2019)

The Supreme Court ruled in favor of the SEC in a 6-2 decision, holding that an investment banker had violated Rules 10b-5(a) and (c), Section 10(b) of the Exchange Act, and Section 17(a)(1) of the Securities Act by knowingly disseminating false information to prospective investors at the direction of his boss. The investment banker signed and forwarded two emails that were drafted by his boss to investors that contained false and misleading statements. The Supreme
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Senators Propose Doubling SEC Deadline for Recovering Investor Money from Fraudsters (Mar. 14, 2019)

Two members of the Senate Banking Committee introduced the Securities Fraud Enforcement and Investor Compensation Act in the Senate. The bill seeks to amend the Exchange Act to give the SEC ten years to seek restitution for investors from fraudulent actors while maintaining the five-year limitation on SEC disgorgement actions set forth in the Supreme Court’s 2017 decision in Kokesh v. SEC.

Law360 Coverage
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Congressman Proposes Requiring Public Companies to Disclose Board Members’ Cybersecurity Expertise (Mar. 13, 2019)

A member of the House Intelligence Committee has reintroduced the Cybersecurity Disclosure Act of 2019 that would require the SEC to issue a set of rules making publicly traded companies disclose whether any of their board members have cybersecurity expertise, and if not, to justify the skills gap. A companion bill is pending in the Senate.
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SEC Files Motion for Order to Show Cause in Case Against Elon Musk (S.D.N.Y. Feb. 27, 2019)

The SEC sought an order to show cause why Elon Musk, the CEO of Tesla, should not be held in contempt for a violation of an October 2018 final judgment by the District Court for the Southern District of New York.  The judgment required Musk to obtain pre-approval of any written communications that “contained, or reasonably could contain, information material to Tesla or its shareholders.”  The SEC filed this motion after Musk tweeted about the
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CFTC and UK Authorities Issue Joint Statement on Continuity of Derivatives Trading and Clearing Post-Brexit (Feb. 25, 2019)

The CFTC and the Bank of England, including the Prudential Regulation Authority and the Financial Conduct Authority, issued a joint statement assuring the market that derivative trading and clearing activities will continue between the U.K. and U.S. after the U.K.’s withdrawal from the EU. The statement sets out a list of measures to ensure regulatory and financial stability, including continued supervisory cooperation, extension of existing CFTC relief and comparability for the U.K., and U.K. equivalence
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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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