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Jeff Kern is a partner in the Government Contracts, Investigations, and International Trade Practice Group and serves as a Managing Partner of Sheppard Mullin’s New York office.

A recent decision by the U.S. Court of Appeals for the Second Circuit has implications for whistleblowers under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “The Act”). In Hong v. SEC, No. 21-529 (2d Cir. July 21, 2022), the Court held that a person who provides the Securities and Exchange Commission (“SEC”) with information about potential securities laws violations is entitled to receive a whistleblower award under Section 21F of the Securities Exchange Act (15 U.S.C. § 78u-6)if the SEC itself brings a qualifying action, but not when the SEC shares the whistleblower’s information to other agencies who then bring an action in partial reliance upon it. The decision sets definitive limits on the reach of the Dodd-Frank Act’s whistleblower incentives and may affect the calculus for individuals considering whether to risk their personal and professional careers to come forward with information of wrongdoing.

Continue Reading Second Circuit Limits Scope of SEC Whistleblower Incentives

A Securities and Exchange Commission (“SEC”) plan to create a registration exemption for certain finders has generated a mixed response.  The nearly 90 comments received by the SEC by the November 12, 2020 close of the comment period reflect a clear divide along predictable lines.  Broker-dealers, issuers, and some practitioners lauded the proposal for bringing regulatory clarity to what has long been a cloudy issue while regulatory groups and investor advocates criticized the plan for allowing unregistered finders to conduct brokerage activities without sufficient investor protection mechanisms.
Continue Reading SEC Proposal to Exempt Finders from Registration Generates Split Reaction

In Securities & Exchange Comm. v. Gentile, No. 18-1242, 2019 WL 4686251 (3d Cir. Sept. 26, 2019), the United States Court of Appeals for the Third Circuit took up the question of whether Securities and Exchange Commission (“SEC”) injunctions constitute penalties subject to a five-year statute of limitations. In vacating a district court decision holding that they do, the Third Circuit held in this case of first impression that injunctions properly tailored to prevent future harm are not penalties. However, the opinion did not reach a determination as to whether the specific relief at issue had been so tailored, remanding that decision to the lower court along with the admonition that relief extending beyond the preventative into the punitive may not issue as an injunction. While the Third Circuit’s decision shielded the SEC’s injunctive powers from wholesale subjection to a five-year statute of limitations, it charted what qualifies as appropriate injunctive relief and, ultimately, may operate to curtail unduly broad injunctions.       
Continue Reading Third Circuit Reversal a Pyrrhic Win for SEC in Ongoing Statute of Limitations Saga

If the New York State Department of Financial Services (“DFS”) has its way, come January 1, 2017, financial services companies that require a form of authorization to operate under the banking, insurance, or financial services laws (“Covered Entities”) will be required to comply with a new set of comprehensive cybersecurity regulations aimed at safeguarding information systems and nonpublic information.
Continue Reading New York State Department of Financial Services Proposes Cybersecurity Regulations for Financial Services Companies

In Ray v. Spirit Airlines, Inc., No. 15-13792, 2016 WL 4578347 (11th Cir. Sept. 2, 2016), the United States Court of Appeals for the Eleventh Circuit held that a defendant corporation is not distinct from its own officers and employees for purposes of forming an “enterprise” under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq. (“RICO”).  The Eleventh Circuit thus joins the Second, Seventh and Tenth Circuits in holding that a corporation cannot form an enterprise with its own agents, as the only way the corporation can act is through those agents.
Continue Reading Eleventh Circuit Holds That a Corporation Is Not Distinct From Its Agents For Purposes of a RICO Enterprise, Following Sister Circuits

The Securities and Exchange Commission’s (“SEC”) recent $1 million settlement with Morgan Stanley Smith Barney LLC (“MSSB”) marked a turning point in the agency’s focus on cybersecurity issues, an area that the agency has proclaimed a top enforcement priority in recent years.  The MSSB settlement addressed various cybersecurity deficiencies that led to the misappropriation of sensitive data for approximately 730,000 customer accounts.
Continue Reading SEC Steps Up Cybersecurity Enforcement with $1 Million Fine Against Morgan Stanley

On April 1, 2015, the Securities & Exchange Commission (the “SEC” or “Commission”) fined a public company $130,000 for requiring employees involved in internal investigations to sign a confidentiality agreement that the Commission deemed violative of the whistleblower protections contained in the Dodd-Frank Act.  KBR, Inc., Exchange Act Release No. 74619 (Apr. 1, 2015).  This case was the first brought by the SEC involving anti-disclosure language of this type.
Continue Reading SEC Takes Aggressive Approach to Fortify Dodd-Frank’s Whistleblower Rules

In an effort to keep pace with rapidly accelerating market technology, the Securities & Exchange Commission (“SEC”) has taken steps to expand oversight over high-frequency trading.  On March 25, 2015, the SEC unanimously approved a plan requiring that rapid-fire trading firms register with the Financial Industry Regulatory Authority (“FINRA”).
Continue Reading SEC Requires FINRA Registration for High Frequency Traders

In Regulatory Notice 14-40, FINRA reminds members that it is a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) to incorporate into a settlement agreement a confidentiality provision restricting or prohibiting a customer or other person from communicating with the Securities and Exchange Commission (SEC), FINRA, or any federal or state regulatory authority regarding a possible securities law violation.
Continue Reading FINRA Issues Guidance Notice on Confidentiality Provisions in Settlement Agreements and the Arbitration Discovery Process

In a case of first impression, the United States Court of Appeals for the Second Circuit in Citigroup Global Markets, Inc. v. Abbar, No. 13-2172, 2014 WL 3765867 (2d Cir. Aug. 1, 2014), established a bright-line definition of “customer” under FINRA’s mandatory arbitration provision.  Absent a written agreement to arbitrate, FINRA Rule 12200 compels FINRA members to arbitrate disputes with “customers,” but the rule does not define “customer.”  It states only that a “customer shall not include a broker or dealer.”  In Abbar, the Second Circuit held that a “customer” is “one who, while not a broker or dealer, either (1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member.”  Whether an investor is a “customer” is a threshold arbitrability question, the resolution of which can entail protracted and costly litigation.  But in establishing a clear definition of “customer,” Abbar provides a reliable framework for making this determination, which should promote the efficient resolution of FINRA-related disputes.
Continue Reading Second Circuit Defines “Customer” for Mandatory FINRA Arbitration

In a closely-watched decision involving judicial review of agency settlements, the Unites States Court of Appeals for the Second Circuit vacated United States District Court Judge Jed Rakoff’s 2011 order rejecting a proposed $285 million settlement between the Securities and Exchange Commission (“SEC”) and Citigroup Global Markets Inc., finding that the judge applied an incorrect legal standard in his review of the proposed accord.  S.E.C. v. Citigroup Global Mkts., Inc., No. 11-5227-CV L, 2014 WL 2486793 (2d Cir. June 4, 2014).  The Second Circuit held that, under the proper standard, the district court is required to determine whether the consent decree is fair and reasonable, and, if it includes injunctive relief, whether the public interest “would not be disserved.”  Absent a substantial basis in the record to the contrary, the appeals court held, the district court is required to enter the order.
Continue Reading Second Circuit Overturns District Court’s Rejection of SEC-Citigroup Fraud Settlement