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  • SEC Fines International Conglomerate $6.5 Million For FCPA Violations Related To Client Travel And Hospitality Expenses

    On August 25, 2023, the Securities and Exchange Commission (“SEC”) accepted an Offer of Settlement (the “settlement”) from 3M Company (“3M”), related to alleged violations of the Foreign Corrupt Practices Act’s (“FCPA”) books and records and internal accounting control provisions (§§ 13(b)(2)(A) – (B) of the Securities Exchange Act of 1934).  Without admitting or denying the findings, 3M agreed to pay $6,581,618 to resolve allegations that 3M’s China subsidiary (“3M-China”) improperly accounted for overseas trips it provided to 3M-China’s customers who were employed by Chinese state-owned entities (SOEs).  According to the SEC, 3M-China invited SOE customers, who are deemed foreign officials under the FCPA, “to attend overseas conferences, educational events, and health care facility visits … ostensibly as part of 3M-China’s marketing and outreach efforts, but that in fact were often a pretext to provide overseas travel, sightseeing and entertainment … to the Officials to obtain and retain business from the SOE Customers.”
  • In Denying Motion To Dismiss In Terraform Cryptocurrency Case, New York Federal Judge Rejects Key Aspects Of Ripple  Ruling, Continuing Uncertainty On How Securities Law Applies To Cryptocurrencies

    On July 31, 2023, United States District Court Judge for the Southern District of New York Judge Rakoff, denied cryptocurrency company Terraform Labs, Pte Ltd. (“Company”) and its founder’s motion to dismiss a suit that had been brought against them by the Securities and Exchange Commission (the “SEC”).  The SEC sued the Company and its founder in February 2023 after the Company’s algorithmic stablecoin collapsed in May 2022, contributing to multiple bankruptcies.  The SEC alleged that the Company and its founder made false and materially misleading statements to entice U.S. investors to purchase and hold on to the Company’s products, which the SEC claimed were unregistered investment-contracts that qualified as securities under Section 5 of the Securities Act of 1933 (the “Securities Act”).  SEC v. Terraform Labs Pte. Ltd., 2023 WL 4858299, at *1 (S.D.N.Y. July 31, 2023).  The Court held that the SEC had alleged a plausible claim for relief, and enough facts to establish the cryptocurrencies at issue were investment contracts requiring registration under the securities laws.
  • New York District Court Decides Significant Cryptocurrency Case, Holding That Whether Cryptocurrency Is A Security Turns On When And How It Was Sold

    On July 13, 2023, Judge Analisa Torres of the United States District Court for the Southern District of New York issued a decision on the parties’ cross-motions for summary judgment in SEC v. Ripple Labs, Inc., No. 1:20-cv-10832-AT-SN, holding that Ripple Labs, Inc. (the “Company”) unlawfully sold unregistered securities in violation of the Securities Act of 1933 (the “Securities Act”) by selling its cryptocurrency token, XRP, to certain institutional buyers, while at the same time holding XRP was not a security within the meaning of the Securities Act when sold on digital asset exchanges, given the different circumstances and expectations of buyers in those transactions.  The Court also held that the Company’s distributions of XRP to employees and third parties for the development of its project did not constitute sales of unregistered securities.  This is a pivotal decision for the cryptocurrency market and is a significant win for cryptocurrency exchanges in particular.
  • DC Circuit Enjoins FINRA Disciplinary Proceeding, Questions Constitutionality Of Hearing Officers

    On July 5, the United States Court of Appeals for the D.C. Circuit granted an emergency injunction blocking the Financial Industry Regulatory Authority (“FINRA”) from halting the securities business of Alpine Securities Corporation (the “Company”) through an expedited hearing process pending the Company’s appeal challenging the constitutionality of FINRA’s enforcement proceedings.  Alpine Securities Corporation, et al v. Financial Industry Regulatory Authority, Inc., 1:23-cv-01506-BAH (July 5, 2023).  While noting that this was not a decision on the merits, the court found that the Company had shown a likelihood that it will succeed on the merits in its challenge to the structure of FINRA enforcement actions, having at this early stage “raised a serious argument that FINRA impermissibly exercises significant executive power.”
  • SEC Brings Its First Regulation Best Interest Enforcement Action

    On June 15, 2022, the Securities and Exchange Commission (“SEC”) filed a complaint in the U.S. District Court for the Central District of California against registered broker-dealer Western International Securities, Inc. (“Western”) and five of its registered representatives (the “Registered Representatives”), alleging that they had violated the Best Interest Obligation under Rule 15l-1(a) of the Securities Exchange Act of 1934 (“Regulation Best Interest” or “Reg BI”) in connection with their recommendations to retail customers to purchase certain unrated debt securities.  This is the first action brought by the SEC to enforce Reg BI, and the litigation could lead to important legal rulings clarifying its scope.
  • SEC Brings Action Against Investment Advisers For Allegedly Misleading Robo-Adviser Clients About Hidden Fees

    On June 13, 2022, the Securities and Exchange Commission (“SEC”), announced that it had instituted a settled administrative proceeding accusing several investment advisers (the “Advisers”) that focused on robo-advising, and all of which were themselves subsidiaries of a prominent investment adviser, of violating Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Section 15(b) of the Securities Exchange Act of 1934.  Broadly, the SEC accused them of failing to invest client cash in ways that their own analyses showed would be optimal for the clients, and instead retaining cash in a way that benefitted the Advisers.  The Advisers did not admit or deny the SEC’s allegations as part of the resolution, but as part of the settlement agreed collectively to disgorge approximately $52 million and to pay a civil monetary penalty of $135 million and were also required to engage an independent consultant and engage in certain other undertakings.
  • SEC ESG Fines Investment Adviser For Alleged ESG Misstatements In ESG Task Force’s First Enforcement Resolution

    On March 4, 2021, the Securities & Exchange Commission (“SEC”) publicly announced the formation of a Climate and Environmental, Social and Governance (“ESG”) Task Force within its Enforcement Division.  This task force was reportedly staffed with 22 Enforcement staff members drawn from SEC headquarters, regional offices and specialized units.  The task force was assembled in response to, among other things, SEC Chairman Gary Gensler’s focus on investigating misstatements related to ESG disclosures.  In remarks by Chairman Gensler on July 7, 2021, he described the SEC as focused on “truth in advertising” and confirming that “funds that market themselves as ‘green,’ ‘sustainable,’ ‘low carbon,’ and so on” were in fact operating consistent with those disclosures.  Approximately 14 months later, the ESG Task Force has announced its debut enforcement action by ordering an investment adviser to pay a $1.5 million fine for alleged misrepresentations related to its ESG practices.
  • Jury Rejects SEC Fraud Claims Against Trader Accused Of Misstatements Over Pricing Commercial RMBS

    On May 6, 2022, the long-awaited trial between the Securities and Exchange Commission (“SEC”) and James Im (“Im”)—a former Nomura trader—came to an end when a Manhattan federal jury found in favor of Im.  The SEC brought suit against Im in 2017, claiming that he committed securities fraud by making various alleged misstatements to his trading counterparties in connection with trading commercial residential mortgage backed securities (“RMBS”).  The jury’s decision – particularly in a civil trial as opposed to a criminal one – may raise further questions about the government’s multi-year pursuit of misstatements in the commercial RMBS market that began with the Department of Justice’s case against former trader Jesse Litvak.
  • SEC Announces Settled Enforcement Action Alleging Management Of Earnings Figures To Meet Analyst Estimates

    On April 18, 2022, the SEC announced it had reached an $8 million settlement with Rollins Inc. (“Rollins”), a nationwide pest control services company, and its CFO for allegedly engaging in improper accounting practices to boost quarterly earnings per share (“EPS”) to meet consensus quarterly estimates.  The SEC found that the CFO directed the company to make certain adjustments to its records in multiple quarters without performing a generally accepted accounting principles (“GAAP”) analysis or memorializing the basis for the changes.  The changes allegedly caused the EPS to go up a penny, allowing the company to meet analysts’ consensus estimates, and the company often publicly touted the consistency of its earnings growth in its press releases and public filings.  Under terms of the settlement, Rollins neither admitted nor denied the SEC's findings and agreed to pay an $8 million civil penalty, while the CFO agreed to pay a $100,000 civil penalty.  However, the action was brought under Section 17(a)(2) of the Securities Act of 1933 as opposed to Section 10(b) of the Exchange Act of 1934, and although both the company and CFO agreed to the entry of a cease-and-desist order, the CFO was not required to agree to an officer or director bar.
  • SEC Announces Settled Insider Trading Action Against Former Director Of Investor Relations

    On February 22, 2022, the Securities and Exchange Commission (SEC) announced that John-Michael Havrilla, a former Director of Investor Relations of PAVmed Inc. (PAVmed), a medical device company, had agreed to settle claims of insider trading.  The SEC simultaneously filed a complaint in the Southern District of New York, together with a consent agreement and proposed final judgment wherein Havrilla, without admitting or denying liability, agreed to the imposition of a permanent injunction, civil penalties of $160,230, and a five-year officer or director ban.
  • Cryptocurrency Company Fined $100M In Novel Action Concerning Registration Obligations For Crypto Lending Product

    On Monday, February 14, 2022, the Securities and Exchange Commission (SEC) charged cryptocurrency lending company BlockFi Lending LLC (“BlockFi”) with failing to register the offers and sales of its retail crypto lending product, violating the registration provisions of the Investment Company Act of 1940, and making certain material misrepresentations regarding the level of risk associated with its product.  To settle the charges, BlockFi agreed to pay a $50 million penalty, cease its unregistered offers and sales of the lending product—BlockFi Interest Accounts (“BIAs”)—and bring its business within the provisions of the Investment Company Act within 60 days.  BlockFi also agreed to pay an additional $50 million in fines to 32 different states to settle similar charges.
  • California District Court Allows Novel SEC Insider Trading Theory To Proceed

    On January 14, 2022, Judge William Orrick of the United States District Court for the Northern District of California issued an order denying a former biopharmaceutical company executive’s motion to dismiss and allowing the Securities and Exchange Commission (“SEC”) to proceed with a first-of-its-kind insider trading action against a corporate insider for misappropriating confidential nonpublic information related to his employer’s upcoming merger to purchase securities issued by a third company that was not involved in the transaction.
  • Comments At SEC Speaks Conference Suggest Heightened Bar For Cooperation Credit, Return Of Admissions Policy, And Increased Autonomy For Front-Line SEC Enforcement Staff

    On October 13, 2021, SEC Enforcement Director Gurbir Grewal and Deputy Enforcement Director Sanjay Wadhwa appeared at the Practicing Law Institute’s “The SEC Speaks” conference, an annual conference where Commission leaders provide updates on current initiatives and priorities of the Commission for the coming year.  Director Grewal and Deputy Director Wadhwa’s remarks signaled some potentially significant policy changes, particularly in terms of how they will measure corporate compliance programs and cooperation levels, when the SEC will allow settling defendants to “neither admit nor deny” the allegations brought by the SEC, and the overall autonomy granted to the front-line enforcement staff.   While the impact of any such policy change is uncertain, and will need to be assessed over time, it is an unmistakable shift in tone from the prior administration.
  • SEC Vacates $1.6 Million In FINRA Fines Against Broker-Dealer And Officers

    On September 17, 2021, the Securities and Exchange Commission (“SEC”) vacated $1.6 million in fines and penalties that the Financial Industry Regulatory Authority (“FINRA”) had previously levied against Scottsdale Capital Advisors Corp. (“Firm”) and three of its officers (“Applicants,” collectively).  In 2015, FINRA alleged that the Firm failed to maintain appropriate internal controls and executed sales of unregistered microcap securities for its foreign financial institution customers.  The next year, following a disciplinary hearing, FINRA imposed a $1.5 million fine on the Firm, a lifetime bar on one of the Firm’s officers, and a $50,000 fine and a two-year suspension on the two remaining Firm officers.  In reviewing FINRA’s findings on appeal by the Applicants, the SEC overturned the sanctions after determining that FINRA’s National Adjudicatory Council (“NAC”) applied incorrect legal standards, failed to adequately explain the basis of its conclusions, and conflated applicable regulations in its case against the Firm.
  • SEC Brings Insider Trading Charges Based On Novel Theory

    On August 17, 2021, the Securities and Exchange Commission (“SEC”) charged a former executive of California-based biopharmaceutical company Medivation Inc. with violating § 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 for allegedly relying upon inside information he obtained through the course of his employment at Medivation to purchase stock of a different company, Incyte Corp., a practice that some academics have dubbed “shadow trading.”  According to the SEC’s complaint—filed in the United States District Court for the Northern District of California—Matthew Panuwat, the then-head of business development at Medivation, purchased short-term, out-of-the money stock options in Incyte Corp., a biopharmaceutical company similar to Medivation, immediately after learning that Medivation would soon announce its upcoming acquisition by Pfizer.  The SEC claims that Panuwat knew that investment bankers engaged by Medivation had cited Incyte as a comparable company in their valuation analysis and that the announcement of Medivation’s sale to Pfizer would likely cause Incyte’s stock price to increase.  This is one of the SEC’s first enforcement actions based on this novel theory, and Panuwat may be expected to vigorously contest not only the facts but the legal underpinnings of the SEC’s complaint.
  • Financial Institution Settles SEC Claims Related To Allegedly Unsuitable Investments In Complex Exchange-Traded Product

    On Monday, July 19, 2021, the SEC announced that it had settled an action involving an alleged failure to prevent what the SEC contended were unsuitable investments by the respondent’s clients in a volatility-linked exchange-traded product (ETP).  As part of the settlement, the respondent agreed to pay a civil penalty of $8 million and disgorgement and prejudgment interest of $112,274.
  • SEC Announces Settled Enforcement Action In Connection With SPAC Business Combination

    On July 13, 2021, the SEC announced its settlement with Stable Road Acquisition Corp. (“Stable Road”), a special-purpose acquisition company (“SPAC”); its CEO; its sponsor; and its proposed merger target, Momentus Inc. (“Momentus”), an early-stage space technology company.  The resolution was based on alleged violations of the federal securities laws stemming from material misstatements and omissions related to Momentus’s space technology and national security concerns surrounding Momentus’s former CEO.  The SEC has brought charges against and is litigating against Momentus’s former CEO, who was not a party to the settlement.
  • FINRA Orders Record $70 Million Financial Penalty For Systemic Supervisory Failures

    On June 30, 2021, the Financial Industry Regulatory Authority (FINRA) ordered Robinhood Financial LLC (“Robinhood”) to pay a $57 million fine, the highest financial penalty ever ordered in FINRA history, for supervisory failures.  Robinhood will also pay an additional $12.6 million of restitution to users.  In announcing the severe penalty, FINRA attributed it to the “widespread and significant harm suffered by … millions of customers” as a result of Robinhood’s various “systemic supervisory failures.”  Without admitting to the allegations, Robinhood consented to FINRA’s findings and stated that it has “invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams.”
  • SEC Invites Comment On Possible SEC Staff Participation In Undercover Fraud-Detection Program

    On January 7, 2021, the Securities & Exchange Commission (“SEC”) issued an unusual statement inviting comments on a proposal to create a fraud-detection program that had previously been considered internally.  Under the contemplated program, initially conceived in 2011, members of a new unit within the SEC, called the Fraud Surveillance Team (“FST”), would pose as prospective investors and contact individuals suspected of engaging in criminal violations of securities laws in an undercover capacity.
  • Public Company Settles with SEC Over Misleading COVID-19-Related Disclosures

    On December 4, The Cheesecake Factory Incorporated (“the Company”) agreed to settle claims brought by the Securities and Exchange Commission (the “Commission”) that the Company had made materially misleading disclosures about the impact of the COVID-19 pandemic on its business operations and financial condition.  Without admitting to the SEC’s findings, the Company agreed to cease and desist from any future Exchange Act violations and to pay a $125,000 civil money penalty for alleged material misstatements to investors in violation of Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20, which require current and accurate financial disclosures.  This represents the first enforcement action brought by the Commission against a public company for misleading investors about the financial impacts of the pandemic.
  • Co-Directors Of SEC’s Division Of Enforcement Issue Statement On Market Integrity In Wake Of COVID-19 Emergency

    On March 23, 2020, Stephanie Avakian and Steven Peikin, co-directors of the Securities & Exchange Commission’s (“SEC”) Division of Enforcement, issued a statement reminding public companies, officers, and directors of their responsibilities related to material, non-public information in connection to the COVID-19 public health emergency.
  • United States Supreme Court Hears Oral Arguments In Liu v. SEC to Determine Whether the SEC Can Seek Disgorgement in Judicial Proceedings

    On March 3, 2020, the Supreme Court heard oral arguments in Liu v. SEC, No. 18-1501, once again taking up the question of whether the Securities and Exchange Commission (“SEC”) may seek disgorgement as equitable relief in a civil enforcement action for violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.  While it is always difficult to predict the outcome of a given case from oral argument, the questioning suggested that the Justices are likely to preserve some form of the SEC’s ability to seek disgorgement, albeit in perhaps a narrowed form more closely aligned to its underpinnings as an equitable remedy.
  • Issuer And CEO Charged By The SEC With Fraud And Whistleblower Protection Law Violations For Allegedly Impeding Investor Complaints

    On November 4, 2019, the Securities and Exchange Commission (“SEC”) filed an amended complaint against Collectors Café, a Nevada-based company purportedly providing online auctions for collectibles (the “Company”), and its CEO, for making false and misleading statements to investors in connection with a $23 million securities offering.  SEC v. Collector’s Coffee, Inc. & Kontilai, No. 10-CV-04355 (S.D.N.Y. Nov. 4, 2019).  The amended complaint added charges against defendants for alleged violations of whistleblower protection laws by conditioning the return of investor money on investors signing agreements that included provisions prohibiting them from communicating with regulatory agencies, including the SEC, about anything related to the Company.
  • SEC Lifts Post-Lucia Stay On Pending Administrative Proceedings And Announces Rehearings For Dozens Of Previously Heard Cases

    On August 22, 2018, the Securities and Exchange Commission (“SEC”) announced that it will rehear over fifty cases pending before administrative law judges (“ALJs”) that were stayed following the U.S. Supreme Court’s decision in Lucia v. SEC, 138 S. Ct. 2044 (2018), which held that the SEC’s process for appointing ALJs was unconstitutional.  See Order, In re: Pending Administrative Proceedings (Aug. 22, 2018) (the “Order”).  In Lucia, the Court held that ALJs hired by the SEC are “inferior officers” of the United States and are thus subject to the Constitution’s Appointments Clause, which states that inferior officers may only be appointed by the President, a court, or a department head.  Since the SEC’s ALJs were not appointed in such a manner, the Court held that the respondent in Lucia was entitled to a new hearing before a properly appointed official.  See Shearman & Sterling LLP Need To Know Weekly, United States Supreme Court Reverses and Remands SEC Administrative Proceeding - Finding That SEC Administrative Law Judges are Subject to the Appointments Clause of the Constitution and Were Not Properly Appointed by the SEC (June 26, 2018)
  • FINRA Fines Broker-Dealer $5.5 Million For Violations Of Regulation SHO

    On August 20, 2018, the Financial Industry Regulatory Authority (“FINRA”) announced that it fined a FINRA-regulated broker-dealer $5.5 million over allegations that it violated Regulation SHO under the Securities Exchange Act of 1934, see 17 CFR 242.200-204, by, among other things, failing to properly close out short sale positions when securities were not timely delivered, accepting short sales in restricted securities and at restricted prices, and maintaining a deficient supervisory system.   Press Release, FINRA Fines Interactive Brokers $5.5 Million for Regulation SHO Violations and Supervisory Failures (Aug. 20, 2018); FINRA AWC No. 2014043143401 (Aug. 16, 2018).
  • United States Supreme Court Reverses And Remands SEC Administrative Proceeding - Finding That SEC Administrative Law Judges Are Subject To The Appointments Clause Of The Constitution And Were Not Properly Appointed By The SEC

    On June 21, 2018, the Supreme Court held that Securities and Exchange Commission (“SEC”) administrative law judges (“ALJs”) are “inferior officers” of the United States, subject to the Appointments Clause of the Constitution. Lucia v. SEC, 585 U.S. ____ (2018).
  • Third Circuit Vacates Insider Trading Sentence Based In Part On Third-Party’s Trading

    On February 14, 2018, the United States Court of Appeals for the Third Circuit vacated Steven Metro’s 46-month prison sentence for insider trading and remanded the case to the district court for resentencing.  United States v. Metro, No. 16-3813 (3d Cir. Feb. 14, 2018).  The Third Circuit held that a sentencing court cannot attribute illicit financial gains to an insider trading defendant for purposes of the United States Sentencing Guidelines (the “Sentencing Guidelines”) when the gains are “actually attributable to someone with whom he was not acting in concert and to whom he did not provide inside information.”

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  • U.S. Supreme Court To Review Ex-CEO’s Appeal Regarding Restitution Of Legal Fees Associated With An Internal Investigation

    On January 12, 2018, the Supreme Court granted certiorari to hear an appeal from a two-judge, Fifth Circuit panel decision regarding whether federal law permits restitution orders in criminal cases to cover the costs of internal investigations that are “neither required nor requested” by the government.  Lagos v. United States, Petition for Writ of Certiorari, p. 8, filed June 15, 2017. Joining six other circuits, the Fifth Circuit held that the Mandatory Victims Restitution Act (“MVRA”) authorizes recovery of the fees incurred during an internal investigation, if such fees were “directly caused by the defendants’” criminal offense.  United States v. Lagos, 864 F.3d 320, 323 (5th Cir. Mar. 17, 2017). This holding conflicts with a 2011 decision issued by the D.C. Circuit, holding that such costs were not recoverable, if the investigation was “neither required nor requested by criminal investigators or prosecutors.”  United States v. Papagno, 639 F.3d 1093, 1095 (D.C. Cir. 2011).  The Fifth Circuit affirmed the district court’s order requiring former CEO Sergio Lagos of USA Dry Van Logistics to cover $5 million in fees GE Capital incurred during its internal investigation related to USA Dry Van’s bankruptcy petition.

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  • The Supreme Court Agrees To Review Appointment Requirements For SEC’s In-House Judges  

    ​On January 12, 2018, the U.S. Supreme Court granted certiorari in Lucia v. Securities and Exchange Commission, No. 17-130, agreeing to resolve a circuit split regarding the appointment process for Securities and Exchange Commission (“SEC”) administrative law judges (“ALJs”).  The case raises significant questions as to whether ALJs constitute inferior officers who must be selected and appointed by the SEC Commissioners themselves (who are politically accountable), or whether they constitute mere employees who can be hired like any other agency employee.  See Shearman & Sterling LLP, D.C. Circuit Court Of Appeals Rejects Constitutional Challenge to SEC’s Use of Administrative Proceedings, Need-to-Know Litigation Weekly, Aug. 15, 2016, http://www.lit-wc.shearman.com/dc-circuit-court-of-appeals-rejects-constitutional;  Shearman & Sterling LLP, Tenth Circuit Splits With D.C. Circuit On Constitutionality Of SEC ALJs, Need-to-Know Litigation Weekly, Jan. 2, 2017, http://www.lit-wc.shearman.com/tenth-circuit-splits-with-dc-circuit-on-constitut; Shearman & Sterling LLP, In Reversal, SEC Agrees That Its Administrative Law Judges Are Inferior Officers That Require Commission Appointment, But Still Seeks Supreme Court Review To Resolve Circuit Split, Need-to-Know Litigation Weekly, Dec. 12, 2017, http://www.lit-wc.shearman.com/in-reversal-sec-agrees-that-its-administrative-la.

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  • In Reversal, SEC Agrees That Its Administrative Law Judges Are Inferior Officers That Require Commission Appointment, But Still Seeks Supreme Court Review To Resolve Circuit Split

    ​On November 29, 2017, the U.S. Solicitor General submitted a brief to the United States Supreme Court in Lucia v. Securities and Exchange Commission, No. 17-130, urging the Court to grant certiorari and resolve a circuit split regarding the appointment process for the Securities and Exchange Commission’s (“SEC”) administrative law judges (“ALJs”).  In a notable shift, the Solicitor General agreed with Raymond J. Lucia and his namesake investment firm that the SEC’s hiring of ALJs, who preside over the initial stages of SEC enforcement hearings, was unconstitutional because ALJs serve as “inferior officers” who must be appointed in accordance with the Appointments Clause of Article II of the Constitution.  The following day, the SEC, in its capacity as a “head of department,” ratified the appointment of its five ALJs in an effort to make their prior hiring compliant with Article II’s Appointments Clause.  Although the SEC’s decision to ratify the hiring of its ALJs in some sense rendered the issue in Lucia moot, the Solicitor General is still seeking certiorari in order to resolve the existing circuit split.

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  • Divided Second Circuit Panel Abandons Relationship Test From Landmark Newman Decision In Upholding Insider Trading Conviction

    On August 23, 2017, a divided three-judge panel of the United States Court of Appeals for the Second Circuit upheld the insider trading conviction of SAC Capital Advisors, LLC (“SAC”) portfolio manager Mathew Martoma.  United States v. Martoma, No. 14-3599 (2d Cir. Aug. 23, 2017).  The decision represented the Second Circuit’s first occasion to consider its landmark decision in United States v. Newman in light of the Supreme Court’s recent decision in Salman v. United States.  Over a strong dissent, the majority found that the logic underpinning the Salman decision abrogated Newman’s requirement that a “meaningfully close personal relationship” exist between a tipper and tippee before allowing a jury to infer the personal benefit necessary to establish insider trading liability merely from a tip of inside information.  The majority held “that an insider or tipper personally benefits from a disclosure of inside information whenever the information was disclosed with the expectation that the recipient would trade on it and the disclosure resembles trading by the insider followed by a gift of the profits to the recipient, whether or not there was a meaningfully close relationship between the tipper and tippee.”  Martoma, slip op. at 27-28 (internal quotation marks and citations omitted). In so doing, it shifted the focus from the relationship between a tipper and tippee to the tipper’s subjective intent in making the tip, and seemingly did away with the limiting principle that Newman had established.  However, while clearly a win for prosecutors, this new standard will still require a highly fact-intensive inquiry into the purpose of any tip, meaning that precisely how much of a shift in law it portends remains to be seen.

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  • United States Supreme Court Holds SEC Disgorgement Orders Subject To Five-Year Statute Of Limitations


    On June 5, 2017, a unanimous Supreme Court held that the ability of the Securities and Exchange Commission (“SEC”) to seek disgorgement in connection with a violation of federal securities law is subject to a five-year statute of limitations, reversing a decision from the United States Court of Appeals for the Tenth Circuit, and rejecting the SEC’s argument that disgorgement is an equitable remedy not subject to any statute of limitations.  Kokesh v. SEC, No. 16-529 (June 5, 2017).  Writing for the Court, Justice Sotomayor analyzed the function of SEC disgorgement, concluding that it “bears all the hallmarks of a penalty” and was therefore subject to the five-year statute of limitations under 28 U.S.C. § 2462 (“Section 2462”).  In so doing, the Supreme Court resolved an outstanding circuit split as to whether the statute of limitations applies to disgorgement, answering that question with a definitive "yes."

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  • More Bond Traders Sued By The SEC For Alleged Fraudulent Misrepresentations Relating To MBS Prices

    On May 15, 2017, the Securities and Exchange Commission sued two commercial mortgage backed securities (“CMBS”) traders for securities fraud allegedly committed while buying and selling CMBS on behalf of a large broker-dealer during the course of their employment at the firm.  SEC v. Chan, S.D.N.Y, 1:17-cv-3605; SEC v Im, S.D.N.Y, 1:17-cv-3613.  These are the latest in a slew of recent lawsuits that have been brought by the SEC and DOJ as part of a federal crackdown on allegedly deceptive bond trading practices, but the DOJ is notably absent from this latest case.  

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  • Utah District Court Limits Reach Of Morrison By Holding That Section 10(b) Of The Exchange Act And Section 17(a) Of The Securities Act Can Be Applied Extraterritorially In Actions Brought By The SEC And The United States  

    On March 28, 2017, the U.S. District Court for the District of Utah granted the Securities and Exchange Commission’s (“SEC”) motion for a preliminary injunction in a securities fraud case against Traffic Monsoon, LLC, an advertising services company which allegedly ran a Ponzi scheme involving a pay-per-click advertisement program.  SEC v. Traffic Monsoon, LLC, No. 2:16-CV-00832-JNP, (D. Utah Mar. 28, 2017) (order granting preliminary injunction) (“Order”).  The injunction hinged, in part, on the district court’s conclusion that the SEC can bring securities fraud enforcement actions under Section 10(b) of the Exchange Act of 1934 (“Exchange Act”) and Sections 17(a)(1) and (3) of the Securities Act of 1933 (“Securities Act”) in connection with foreign transactions.  In so ruling, the District Court limited the holding of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, 561 U.S. 247 (2010), in which the Supreme Court held that Section 10(b) applied only to transactions in securities listed on domestic exchanges and domestic transactions in other securities. 

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  • FINRA Dismisses Insider Trading Charges

    On March 13, 2017, Financial Industry Regulatory Authority’s (“FINRA”) National Adjudicatory Council (the “NAC”) affirmed a hearing panel’s finding that Matthew Joseph Sheerin, a trader formerly with investment firm Angelo Gordon & Co., did not engage in insider trading.  Decision, Dep’t of Mkt. Regulation v. Sheerin, Compl. No. 2011027926301 (Mar. 13, 2017).

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  • Northern District Of California Limits SEC’s Disgorgement Reach Under SOX 304

    On February 8, 2017, United States District Judge Jon S. Tigar of the United States District Court for the Northern District of California granted in part defendant Erik Bardman’s motion to dismiss the Securities and Exchange Commission’s claim for disgorgement of certain compensation pursuant to Sarbanes-Oxley Act Section 304 (“SOX 304”).  Order, SEC v. Bardman, No. 3:16-cv-02023 (N.D. Cal. Feb. 8, 2017).  Mr. Bardman is a former Chief Financial Officer of Logitech International SA.  The Court held that neither an earnings release nor a Form 8-K announcing and attaching an earnings release can be the basis of a SOX 304 disgorgement claim because any purported material noncompliance with a financial reporting requirement in those documents does not cause or require a company to issue an accounting restatement.  

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  • The SEC Charges Three Chinese Nationals With Insider Trading Related To Information That Was Hacked From Two New York Law Firms

    ​On December 27, 2016, the Securities and Exchange Commission (“SEC”) filed a complaint against three Chinese nationals, alleging that they hacked two New York-based law firms, stole material nonpublic information relating to upcoming mergers and acquisitions, and traded on that stolen information, earning approximately $3 million in illegal profits.  Complaint at 2, SEC v. Iat Hong, No. 16-Civ __ (S.D.N.Y. Dec. 27, 2016) (“Complaint”).  Stephanie Avakian, Acting Director of the Enforcement Division at the SEC, explained that investigators used recently developed “enhanced trading surveillance and analysis capabilities” to identify the scheme.  Press Release, SEC, Chinese Traders Charged with Trading on Hacked Nonpublic Information Stolen from Two Law Firms, Dec. 27, 2016, (“SEC Press Release”).      

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