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Jeff Kern is a partner in the Governmental Practice and serves as a Managing Partner of Sheppard Mullin’s New York office. Jeff also heads the firm’s Securities Enforcement & Litigation Team and is a charter member of the Blockchain & Digital Assets Team.

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

In European Community v. RJR Nabisco, Inc., Case No. 11-CV-2475 (2d Cir. Apr. 23, 2014), the United States Court of Appeals for the Second Circuit held that the Racketeer Influenced and Corrupt Organizations (“RICO”) statute, 18 U.S.C. § 1961, et seq., could apply to conduct outside the territory of the United States.  In doing so, the Second Circuit addressed the United States Supreme Court’s ruling in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) [blog article here], which held that United States statutes are presumed not apply to extraterritorial conduct, unless Congress has clearly indicated its intent that the statute have extraterritorial application.  Applying Morrison, the Second Circuit determined that RICO could apply to extraterritorial conduct, because a number of the statutes listed as predicate acts for RICO liability clearly apply extraterritorially.  The Second Circuit ultimately concluded “that RICO applies extraterritorially if, and only if, liability or guilt could attach to extraterritorial conduct under the relevant RICO predicate.”  Thus, even after the Supreme Court’s ruling in Morrison, RICO liability can still attach to foreign conduct where the underlying predicate statute applies to extraterritorial conduct.
Continue Reading Second Circuit Applies Morrison v. National Australia Bank to Allow Certain Extraterritorial Application of RICO

In SEC v. Contorinis, 2014 U.S. App. LEXIS 2927 (2d Cir. Feb. 18, 2014), the United States Court of Appeals for the Second Circuit upheld the authority of the Securities and Exchange Commission (“SEC”) to obtain “disgorgement” from a money manager profits earned by another party from trades based material nonpublic information known to the money manager, even though the manager did not receive any of those profits.  Citing the intangible benefits received by the manager and the underlying misuse of inside information, the appellate panel’s decision upheld a broad view of insider trading liability in civil enforcement actions brought by the SEC.
Continue Reading Second Circuit Upholds SEC’s Authority to Obtain Disgorgement from Non-Trading Insider Profits Earned by Portfolio Fund from Insider Trading

In United States v. Vilar, Case Nos. 10-521(L), 10-580(CON), 10-4639(CON), 2013 WL 4608948 (2d Cir. Aug. 30, 2013), the United States Court of Appeals for the Second Circuit held that Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities & Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, do not apply to extraterritorial conduct in both the civil and criminal context.  In so holding, the Second Circuit made clear that the United States Supreme Court’s ruling in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) [blog article here], that civil liability under Section 10(b) does not apply extraterritorially, extends to criminal conduct as well.  In light of that ruling, a criminal conviction for securities fraud can only be found if the defendant “engaged in fraud in connection with (1) a security listed on a U.S. exchange, or (2) a security purchased or sold in the United States.”  While this holding did not disturb the defendants’ convictions in this case, the ruling provides guidance for future prosecutions under Section 10(b), which now require proof of a domestic sale or listing as a necessary element for conviction.
Continue Reading Second Circuit Applies Morrison to Criminal Prosecution Under Section 10(b) and Rule 10b-5