Category Archives: Securities Fraud

The Dodd-Frank Act’s Whistleblower Protection Provisions

by John O’Donnell, Scott Balber, and Geng Li

In 2010, in the wake of the financial crisis, Congress passed comprehensive financial regulation reform legislation known as the Dodd-Frank Act (Pub.L. 111-203). Section 922 of the Dodd-Frank Act established both a bounty award program as well as anti-retaliation protection for whistleblowers who report securities law violations.

Pursuant to the mandate of Section 922, the US Securities and Exchange Commission (“SEC”) established an Office of the Whistleblower, and implemented its final rules on the Dodd-Frank Program through a comprehensive rulemaking process that involved significant public input in May 2011. Continue reading

Supreme Court Grants Certiorari on the Constitutionality of SEC ALJ Appointments– What This Means for the Securities Industry

by Matthew C. Solomon, Alexander Janghorbani, and Richard R. Cipolla

On January 12, 2018, the Supreme Court granted a writ of certiorari in Raymond J. Lucia Cos., Inc. v. SEC, No. 17 130,[1] a case raising a key constitutional issue relating to the manner in which the U.S. Securities and Exchange Commission’s (SEC or Commission) appoints its administrative law judges (ALJs).  The Court will decide “[w]hether administrative law judges of the [SEC] are Officers of the United States within the meaning of the Appointments Clause.”  The answer to this question matters because if SEC ALJs are “officers,” then they should have been appointed by the Commission itself instead of hired through traditional government channels—and the Commission only exercised its ALJ appointment authority in late-2017.  Although the question is limited to SEC ALJs, any decision could also impact ALJs at other agencies government-wide.

At this point, both the petitioner and the Solicitor General (SG) actually agree that ALJs are officers.  In its response to the cert petition raising this issue in Lucia, the SG, in an about-face, had abandoned the SEC’s long-held defense of the manner in which it appoints its ALJs.  Up until now, in an attempt to fend off an asserted constitutional defect in their AJL’s method of appointment, the SEC has argued (with SG approval) that ALJs are “mere employees” of the SEC, and not “officers.”  The day after the SG dropped this position—and with no warning in its briefing—the Commission took the step to appoint the current ALJs.[2]   Continue reading

Securities Fraud Class Action Suits following Cyber Breaches: The Trickle Before the Wave

by Michael S. Flynn, Avi Gesser, Joseph A. Hall, Edmund Polubinski III, Neal A. Potischman, Brian S. Weinstein, Peter Starr and Jessica L. Turner

Overview

Large-scale data breaches can give rise to a host of legal problems for the breached entity, ranging from consumer class action litigation to congressional inquiries and state attorneys general investigations.  Increasingly, issuers are also facing the specter of federal securities fraud litigation.[1]

The existence of securities fraud litigation following a cyber breach is, to some extent, not surprising.  Lawyer-driven securities litigation often follows stock price declines, even declines that are ostensibly unrelated to any prior public disclosure by an issuer.  Until recently, significant declines in stock price following disclosures of cyber breaches were rare.  But that is changing.  The recent securities fraud class actions brought against Yahoo! and Equifax demonstrate this point; in both of those cases, significant stock price declines followed the disclosure of the breach.  Similar cases can be expected whenever stock price declines follow cyber breach disclosures.  Continue reading

Oral Downloads of Interview Memoranda to Government Regulators Waive Work Product Protection

by Andrew J. Ceresney, Bruce E. Yannett, Kara N. Brockmeyer, Robert B. Kaplan, Julie M. Riewe, Colby A. Smith, Jonathan R. Tuttle, Ada Fernandez Johnson, and Ajani B. Husbands

In a decision that makes clear the importance for counsel conducting internal investigations to think carefully about the consequences of providing oral summaries of witness interviews to government investigators, a federal Magistrate Judge recently held that a law firm waived work product protection for its interview memoranda when counsel provided oral downloads of those interviews to the U.S. Securities and Exchange Commission (“SEC”).[1] Noting that “very few decisions are consequence free events,” the Court held that there was “little to no substantive distinction” for purposes of work product waiver between providing the actual notes and memoranda and reading or orally summarizing the notes. The Court, however, rejected the notion that a waiver of work product protection extends to information the law firm shared with its client’s accounting firm, holding that the accounting firm and the company shared a “common interest.” Continue reading

The Enforcement Outcomes of the Australian Securities and Investments Commission

By Ian Ramsay and Miranda Webster

The following post provides an overview of the key findings from our research on the enforcement outcomes of the Australian Securities and Investments Commission (ASIC) for the five-year period from 1 July 2011 to 30 June 2016. The full journal article can be accessed here.

ASIC is Australia’s corporate, markets, financial services and consumer credit regulator. This government organization regulates Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit. ASIC dedicates a significant amount of resources (around 70%) to surveillance and enforcement activity, reflecting its view that enforcement is an important part of its regulatory role. Continue reading

Behind the Annual SEC Enforcement Report: 2017 and Beyond, Part III

by Urska Velikonja

The following is the third post in a series of three on recent SEC enforcement. The full report can be accessed here. A note of caution to the readers: the SEC does not share enforcement data. All three posts are based on a database of SEC enforcement actions I have put together along with several research assistants, covering the period between 2007 and 2017. The data was collected by hand, and reviewed at least once. Entries were compared with SEC releases and reports, but the chance of error remains.

Litigation Venue

The Dodd-Frank Act authorized the SEC to bring almost any enforcement action in an administrative proceeding. Before Dodd-Frank, the SEC could secure civil fines against registered broker-dealers and investment advisers in administrative proceedings, but had to sue in court non-registered firms and individuals, including public companies and executives charged with accounting fraud, as well as traders charged with insider trading violations. After the Dodd-Frank amendment, save for a few remedies that can only be obtained in court, the SEC can choose the forum in which it prosecutes enforcement actions. Continue reading

Behind the Annual SEC Enforcement Report: 2017 and Beyond, Part II

by Urska Velikonja

The following is the second post in a series of three on recent SEC enforcement. The full report can be accessed here. A note of caution to the readers: the SEC does not share enforcement data. All three posts are based on a database of SEC enforcement actions I have put together along with several research assistants, covering the period between 2007 and 2017. The data was collected by hand, and reviewed at least once. Entries were compared with SEC releases and reports, but the chance of error remains.

I. Enforcement Against Entities

The first post observed that enforcement against individual defendants remained largely unchanged in the second half of the 2017 fiscal year. Enforcement against entities, on the other hand, has changed quite substantially. Fewer entities were targeted in actions brought in the second half of FY 2017: 34% of defendants (165 of 488) in standalone actions in the second half were entities, compared with 47% (201 of 427) in the first half of the year. Continue reading

Behind the Annual SEC Enforcement Report: 2017 and Beyond, Part I

by Urska Velikonja

The following is the first post in a series of three on recent SEC enforcement. The full report can be accessed here. A note of caution to the readers: the SEC does not share enforcement data. All three posts are based on a database of SEC enforcement actions I have put together along with several research assistants, covering the period between 2007 and 2017. The data was collected by hand, and reviewed at least once. Entries were compared with SEC releases and reports, but the chance of error remains.

Last week, the SEC released its enforcement report for fiscal year 2017. In it, the SEC reported moderate declines in the number of filed enforcement actions, 754 compared with 868 in fiscal year 2016, and in the total monetary penalties ordered, $3.8 billion compared with $4.1 billion in fiscal 2016. The narrative accompanying the release suggests that despite the change in SEC leadership, enforcement remains consistent. Continue reading

Response to Professor Sepinwall’s Article on Sentencing Reforms

by Lee S. Richards

In a recent post to this blog, Professor Amy Sepinwall made a startling argument.  Reflecting on the debate between liberals and conservatives over the Sentencing Reform and Corrections Act of 2016, she strongly suggested that the Act’s strengthening of the mens rea element in criminal cases should be limited to the disadvantaged and not extended to “the already advantaged.”  She applauded the proposed bill for providing “deserved fairness for the disadvantaged,” but appeared to lament the fact that a more stringent mens rea requirement under that bill would be available for “some senior corporate management ‘fat cats,’” as well.  This position is consistent with her defense of the “responsible corporate officer” doctrine, which does away with any mens rea requirement in certain cases against high level corporate officers. Continue reading

Insider Trading, a Vague Law With Heavy Consequences

by Walt Pavlo

Since Congress has not specifically defined insider trading, courts have interpreted the Securities Exchange Act’s prohibition against manipulative or deceptive means to determine whether a violation has occurred. The imprecision of securities law has led many people to weigh in on what constitutes a criminal act.  Recently, Antonia Apps wrote over 2,000 words on the Second Circuit’s recent insider trading decision, United States v. Martoma, 869 F.3d 58 (2d Cir. 2017), and Greg Morvillo wrote two posts to clarify his thoughts on that case. Can you imagine a crime that is so difficult to define that it continues to spark debate with each new decision from a court? Continue reading