Investigations and Enforcement

In Lorenzo v. Securities & Exchange Comm., No. 17-1077, 2019 WL 1369839 (U.S. Mar. 27, 2019), the Supreme Court of the United States (Breyer, J.) held that an individual who did not “make” a false or misleading statement within the meaning of Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) (blog article here), but instead disseminated it to potential investors with intent to defraud, can be held to have employed a scheme to defraud and/or engaged in an act, practice or course of business to defraud in violation of subsections (a) and (c) of Securities and Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5. This decision broadens the scope of primary liability under Rule 10b-5 beyond those who make false and misleading statements to include those who knowingly “disseminate” (i.e., communicate to potential investors) such false or misleading statements. Although this decision involved an SEC enforcement action, it is likely to be invoked by plaintiffs in private securities litigation to expand the scope of named defendants beyond the issuer and individuals directly responsible for making public statements on the issuer’s behalf.
Continue Reading United States Supreme Court Holds That Knowing Dissemination of False Statements Made by Others Can Constitute Primary “Scheme Liability” In Violation of Rule 10b-5(a) and (c)

In Securities & Exchange Commission v. Jensen, No. 14-55221, 2016 WL 4537377 (9th Cir. Aug. 31, 2016), the United States Court of Appeals for the Ninth Circuit broke new ground by providing the Securities & Exchange Commission (“SEC”) with a new independent cause of action under SEC Rule 13a-14, 17 C.F.R. § 240.13a-14, against a CEO or CFO who certifies false or misleading statements.  The Court also held that the disgorgement remedy authorized under Section 304 of the Sarbanes-Oxley Act, 15 U.S.C. § 7243 (“SOX 304”), applied regardless of whether a restatement was caused by the personal misconduct of an issuer’s CEO and CFO or by other issuer misconduct.  The majority opinion left some important questions unanswered, but Judge Bea, who concurred with the majority’s analysis and holding, wrote separately to clarify the intended scope of the new legal rules announced by the Court’s opinion.
Continue Reading Ninth Circuit Permits SEC to Assert Standalone Claim for False Sarbanes-Oxley Certification and Confirms Disgorgement Remedy Against CEO and CFO Despite Lack of Personal Involvement In Underlying Misconduct

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 United States v. Newman, No. 13-1837 (2d Cir. Dec. 10, 2014), the United States Court of Appeals for the Second Circuit reversed the 2013 convictions of Anthony Chiasson and Todd Newman on charges of conspiracy to commit insider trading and insider trading under 18 U.S.C. § 371, Sections 10(b) and 32 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78ff, SEC Rules 10b-5 and 10b5-2, 17 C.F.R. § 240.10b-5, 10b5-2, and 18 U.S.C. § 2.  Both individuals were portfolio managers at hedge funds who were charged with and convicted of receiving material non-public information from analysts with whom they worked.  The Second Circuit’s decision greatly clarifies the elements required to prove “tippee” liability under the insider trading laws.
Continue Reading Second Circuit Limits “Tippee” Insider Trading Liability

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 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 SEC v. Shields, No. 12-1438, 2014 U.S. App. LEXIS 3369 (10th Cir. Feb. 24, 2014), the United States Court of Appeals for the Tenth Circuit reversed the district court’s order granting defendants’ motion to dismiss, holding that the complaint alleged sufficient facts to (1) raise a plausible claim that the interests at issue involved are securities, and (2) rebut the presumption that an investment labeled as a “general partnership” is a “security.”  The Tenth Circuit’s holding reaffirms that although an investment may be labeled as a “general partnership” interest, courts must look beyond the labels to determine whether the investment constitutes a “security.”
Continue Reading Tenth Circuit Looks Past “General Partnership” Labels in Agreements to Determine Whether Certain Investments Constitute “Securities”

A CEO receives an anonymous call claiming that someone is stealing company trade secrets or that an employee is taking kickbacks from a vendor.  A GC gets a call from the HR director who has an employee accusing the company of submitting false bills to a government agency.  You are served by a government agency with a subpoena seeking records indicating a criminal investigation is underway for violations of environmental laws, insider trading, tax laws or fraud. Your company receives a credible threat of litigation.  These are all real scenarios that occur daily in companies of all sizes all over the world.  They trigger critical internal investigations that require substantial time and resources.  Regardless of the nature of the investigation, it is vital that it be conducted efficiently, with clear direction and attention to preservation of the attorney-client privilege.  This article sets out best practices for doing so.
Continue Reading Corporate Internal Investigations: Best Practices

On September 21, 2012, S.B. 323, the California Revised Uniform Limited Liability Company Act (known as the RULLCA), was signed into law by Governor Jerry Brown and is scheduled to take effect on January 1, 2014. As described in more detail in the prior March 22, 2013 post California’s Revised Uniform Limited Liability Company Act, the RULLCA entirely replaces the Beverly-Killea Limited Liability Company Act and revises certain rules for formation and operation of Limited Liability Companies (LLCs) in the state of California. There is a possibility, however, that the RULLCA will be modified prior to January 1, 2014 and thus the law governing LLCs may still be subject to change and clarification prior to its effective date.


Continue Reading Potential Challenges Associated With California’s Revised Uniform Limited Liability Company Act Scheduled to Take Effect on January 1, 2014