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Archive for the ‘Financial Services and Securities Litigation’ Category

Tesla Going Private? Hold the Charge

Posted on: August 31st, 2018

By: Matt Jones

Elon Musk recently tweeted his plan to take Tesla private at $420/share.  He even went so far to say “Funding secured.”  Such a tweet was of course met with a mix of emotions and responses.  Once that news hit the market, Tesla shares soared approximately 11%.  The tweet itself seems harmless on its face; a CEO was simply stating potential plans for his company.  But if you look deeper, there may be potential legal implications.  Specifically, did Musk’s tweet violate any securities regulations, such as regarding fair disclosure?  The regulations prohibit selective disclosure of material information.  But does the information contained in Musk’s tweet equate to material information?  The tweet itself is not likely per se unlawful, but Musk may run into legal troubles if it turns out the funding is not secured, as it may be viewed as misleading the public.

This issue involving dissemination of information via social media is something that will continue to be evaluated and evolve over time.  As different means for providing announcements to the public become more prevalent, the Securities and Exchange Commission will have to continue to adapt its regulations related to disclosure of material information.  Time will tell whether Musk faces legal ramifications for his tweet or if his Twitter account should be deleted altogether to avoid any problems in the future.

If you have any questions or would like more information, please contact Matt Jones at [email protected].

Is the SEC Mortal After All?

Posted on: August 27th, 2018

By:Ted Peters

The Securities and Exchange Commission, created through the Securities Exchange Act of 1934, is without a doubt one of the most powerful regulatory agencies in the free world.  According to its website, the SEC’s mission is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” Since its inception, the Commission has wielded great power, and in many instances has pushed the envelope to expand that power. But, as reflected in a handful of recent landmark cases, courts around the country and even this nation’s highest court have pushed back making clear that the Commission’s authority is not unlimited.

The SEC initiates enforcement actions in federal court when it determines that a violation of securities law has occurred. Like any other plaintiff, the SEC is subject to statutes of limitation.  The statute governing enforcement actions is five (5) years.  28 U.S.C. § 2462.  Section 2462 provides that, “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued.”

Historically, the Commission has acted with the belief that Section 2462 applied only to the specific enforcement actions enumerated therein.  The SEC’s own enforcement manual provides that “certain claims are not subject to the five-year statue of limitations under Section 2462, including claims for injunctive relief.” (See § 3.1.2 (Nov. 28, 2017)).

In Kokesh v. SEC, 137 S. Ct. 1635 (2017), the United States Supreme Court ruled that Section 2462 extends to disgorgement claims.  Prior to Kokesh, the Commission had taken the position that disgorgement claims could reach back indefinitely.  Writing for a unanimous Court, Justice Sotomayor stated that “[d]isgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of § 2462.”  The Court explained that disgorgement operates as a sanction because it redressed a wrong to the public, as opposed to an individual.  The Court rejected the SEC’s argument that disgorgement is remedial, finding instead that it was punitive because it “does not simply restore the status quo,” and often “leaves the defendant worse off.”

Prior to the Court’s decision in Kokesh, the SEC initiated an enforcement action in SEC v. Cohen, 2018 U.S. Dist. LEXIS 121164 E.D.N.Y. (Jul. 12, 2018), in the United States District Court for the Eastern District of New York.  In that action, the Commission asserted that between 2007-2012, the defendants participated in a scheme that involved making improper payments to government officials in a number of African countries.  As typical, the Commission sought recovery of monetary penalties, disgorgement and injunctive (follow-the-law) relief.  While the action was pending, Kokesh was decided.  Following Kokesh, the Cohen court held that Section 2462 also extended to actions for injunctive relief.  Finding that the SEC’s demand for injunctive relief would operate, at least in part, as a penalty, the court concluded that the claims were time-barred.

But not every court addressing injunctive relief has reached the same result.  In SEC v. Collyard, 861 F.3d 760 (8th Cir. 2017), a case decided after Kokesh, the Eighth Circuit, acknowledging a split of authority over whether an injunction can be a “penalty” for purposes of Section 2462, concluded that the at-issue injunction entered by the district court was not a penalty and, therefore, not subject to Section 2462.  That injunction enjoined the defendant from violating Securities Exchange Act § 15(a) and the district court concluded that the defendant was “reasonably likely to violate Section 15(a) again unless enjoined.”  Upholding that determination, the Eighth Circuit remarked that “[n]ot every injunction that specifically deters an individual is imposed to punish.”

After Kokesh, it is clear that SEC disgorgement actions fall within the limitations of Section 2462.  As for injunctive relief, district courts around the country remain split.  Given the importance of the SEC’s ability to seek injunctive relief, it is likely that the Supreme Court may be called upon to settle the split, perhaps through a possible certiorari of Cohen. Regardless, these recent decisions undeniably provide defendants with more leverage when facing the SEC.

If you have questions or would like more information, please contact Ted Peters  at [email protected].

Supreme Court to Revisit Liability Under Rule 10b-5 – Will Prospective Justice Kavanaugh Weigh In?

Posted on: July 25th, 2018

By: Ted Peters

Section 10(b) of the Securities Exchange Act, and Rule 10b-5 promulgated under it, makes certain conduct in connection with the purchase or sale of any security unlawful.  Specifically, Rule 10b-5(a) prohibits the use of any “device, scheme, or artifice to defraud.”  10b-5(b) prohibits the use of any “untrue statement of a material fact” or the omission of any “material fact necessary in order to make the statements… not misleading.”  And 10b-5(c) prohibits “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.”

In Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), the United States Supreme Court addressed whether a mutual fund investment adviser could be held liable under Rule 10b-5 for false statements included in its client mutual funds’ prospectuses.  The Court concluded that the adviser could not be held liable under the rule because it did not make the statements in the prospectuses.

In Lorenzo v. Securities and Exchange Commission, 872 F.3d 578 (2017), the D.C. Circuit Court of Appeal considered whether a registered representative of a broker-dealer, who allegedly emailed false and misleading statements prepared by his boss to investors, could be found liable under Rule 10b-5.  Initially, the case was tried before an Administrative Law Judge who concluded that Lorenzo’s boss had drafted the emails in question; Lorenzo did not read the text of the emails; and Lorenzo had “sent the emails without even thinking about the contents.”  The judge also found that the emails were sent “at the request” of Lorenzo’s boss.  Notwithstanding these findings, the judge nevertheless concluded that Lorenzo had willfully violated securities laws (i.e., that Lorenzo had acted with an intent to deceive, manipulate or defraud).  As a sanction, the judge not only fined Lorenzo, but also imposed a lifetime suspension effectively barring him from the securities industry.

Lorenzo appealed the ruling before the Securities Exchange Commission.  The Commission affirmed, concluding that Lorenzo himself was “responsible” for the contents of the emails his boss asked him to send even though it was undisputed that Lorenzo’s boss had prepared the contents of the emails and that Lorenzo had simply “cut and pasted” the contents into the emails at issue.  Notably, the SEC found that Lorenzo’s conduct triggered liability under each of the subparts of Rule 10b-5, including 10b-5(b) which, under Janus, necessarily required an affirmative finding that Lorenzo had actually “made” the statements in question.

Lorenzo next appealed to the D.C. Circuit Court.  On September 29, 2017, a divided court upheld the SEC’s determination.  The court agreed that there was substantial evidence that the statements in Lorenzo’s emails were false or misleading and that Lorenzo possessed the requisite intent to mislead, deceive or defraud. However, the court disagreed with the SEC’s determination that Lorenzo was the “maker” of the statements as required by Rule 10b-5(b).  “We conclude that Lorenzo did not ‘make’ the false statements at issue for purposes of Rule 10b-5(b) because Lorenzo’s boss, and not Lorenzo himself, retained ‘ultimate authority’ over the statements.” [Citing Janus.]  On this basis, the court set aside the sanctions and remanded the case to enable the SEC to reassess appropriate penalties.

Judge Brett Kavanaugh, the current presidential nominee to fill the vacancy left by Justice Kennedy, penned a strongly worded dissent.  Kavanaugh criticized the conclusion reached by his colleagues that the “scheme liability” provisions of Rule 10b-5(a) and (c) may be used to find liability even where the defendant is not the “maker” of the statements (and thus not liable under 10b-5(b)).

On June 18, 2018, the U.S. Supreme Court granted the petition for writ of certiorari.  The question before the Supreme Court is simple: Can a defendant be held liable under the so-called scheme liability provisions of Rule 10b-5(a) and (c) in connection with using false or misleading statements, even if that defendant is not the “maker” of the statements?  That the Court accepted certiorari certainly suggests that the Court desires to further define the scope and limitations of Rule 10b-5.

Should Kavanaugh be confirmed as the next Supreme Court Justice, it remains to be seen whether he will recuse himself on the grounds that he heard the case below.  If he does, then the Court could well end up with a 4-4 split, which would effectively affirm the lower court’s ruling.  The Court’s four more liberal justices (Breyer, Ginsburg, Sotomayor and Kagan) each dissented from Janus.  On the other hand, if Kavanaugh is confirmed and does not recuse himself, the majority of the Court will likely endorse a more restrictive interpretation of scheme liability under Rule 10b-5.

If you have questions or would like more information, please contact Ted Peters at [email protected].

Loss of SEC Commissioners Piwowar and Stein May Wreak Havoc on SEC’s Proposed Fiduciary Regulations

Posted on: June 1st, 2018

By: Ted Peters

On May 7, 2018, Republican SEC Commissioner Michael Piwowar announced that he will resign effective July 7, 2018.  Piwowar’s five-year term expires on June 5, but SEC commissioners are permitted to remain in office for up to 18 months following the end of their term.  Democratic Commissioner Kara Stein’s term expired in 2017 and she too is expected to leave the Commission this year.

Piwowar was admittedly a harsh critic of the U.S. Department of Labor’s fiduciary rule (calling it a “terrible, horrible, no good, very bad” rule), which has since been struck down by the Fifth Circuit Court of Appeal.  He also expressed significant misgivings with the Commission’s April 18, 2018 proposals which attempt to establish standards of conduct for financial advisors.  Despite such concerns, Piwowar wholeheartedly voted in favor of putting the proposals out for public comment lest anyone criticize the SEC for failing to take action.  Stein, however, voted against the proposals, finding them too weak and suggesting they be called “Regulation Status Quo.”

Regardless of their personal views, the loss of Commissioners Piwowar and Stein will undoubtedly put further pressure on the SEC as the agency takes comments on the proposals. On the other hand, the SEC might have an easier go in reaching a compromise with the decision being left to just three commissioners.  In theory, the White House and Senate could quickly take action to replace Piwowar and Stein, as it is customary for the Senate to consider commissioners in pairs (Republican and Democrat).  In the meantime, between the departures of Piwowar and Stein, the SEC will operate with four commissioners including two Democrats, which could lead to deadlocked votes, something for which the SEC is well known.

If you have questions or would like more information, please contact Ted Peters at [email protected].

“Senior Safe Act” Encourages Reporting of Senior Investor Fraud

Posted on: May 25th, 2018

By: Ted Peters

On May 22, 2018, the Senior Safe Act, authored by U.S. Senators Susan Collins (R-ME) and Claire McCaskill (D-MO), passed in the House of Representatives as part of a bipartisan banking reform package after previously being passed by the Senate (67-31) in March.  The Act seeks to curb financial exploitation of senior investors by establishing a safe harbor in which advisors and their firms can report abuses without fear of liability for violation of privacy laws.

The Act extends legal immunity to banks, credit unions, investment advisors, broker-dealers, insurance companies and insurance agencies for reporting suspected exploitation or fraud, provided that they have established controls and procedures that will help employees and advisors identify and report suspected abuses, and provided further that they make the report in good faith and with reasonable care.

The Act has been broadly endorsed by the securities industry and has received bipartisan support.  Says FSI (Financial Services Institute) President and CEO, Dale Brown, “We applaud the House for taking a significant step toward the prevention of elder financial abuse by passing the Senior Safe Act… Financial advisors and financial firms are often the first to detect possible financial abuse, so it is critical that they have proper training to identify potential abuse as well as the ability to report it without fear of violating privacy laws.”

President Trump is expected to sign the Act into law as he tweeted that he would do so.

If you have questions or would like more information, please contact Ted Peters at [email protected].