U.S. Supreme Court Rules That Defendants Can Be Held Primarily Liable for Securities Scheme Fraud for Knowingly Disseminating the Misstatements of Others
Yesterday, in a widely watched securities case, the U.S. Supreme Court held in Lorenzo v. SEC that a defendant who disseminates the material misstatement of another—and thus cannot be liable under SEC Rule 10b-5(b) for “making” the statement—can nevertheless be liable under other provisions of the securities laws that proscribe “any device, scheme, or artifice to defraud” or “any act, practice or course of business which operates or would operate as a fraud or deceit.” The Court’s decision may affect long-standing case law in various federal circuits—including those covering New York and California—which had held that alleged frauds solely involving material misstatements or omissions could not be pursued under provisions other than Rule 10b-5(b). Although Lorenzo potentially broadens the scope of conduct subject to securities fraud liability based on dissemination of material misstatements, the opinion emphasizes certain factual circumstances present in this case that may limit its future application in other circumstances. Continue reading →
In 2014, the Securities and Futures Commission (the “SFC”) commenced an investigation into share trades undertaken by the First Applicant in 2013, after receiving a report from another licensed corporation indicating suspected market manipulation activities by a fund managed by the First Applicant. The trades concerned shares in Nitto Denko Corporation, a Japanese company listed on the Tokyo Stock Exchange.
During the course of the investigation, the SFC sought and obtained various materials from the First Applicant and its majority shareholder and responsible officer, the Second Applicant, pursuant to section 181 of the Securities and Futures Ordinance (the “SFO”). This section empowers the SFC to require the production of information including information about a client, details of a transaction and instructions relating to a transaction from a licensed person. Failure to comply with a demand from the SFC under section 181 without a reasonable excuse is a criminal offence.
In July 2014, the SFC received and acceded to a request for assistance from two Japanese regulators, the Financial Services Agency (the “FSA”) and the Securities and Exchange Surveillance Commission (the “SESC”). In particular, the SFC permitted the Japanese regulators to attend an SFC interview with the Second Applicant and provided them with materials previously disclosed by the Applicants in response to the SFC’s requests for information. Continue reading →
Last week, in a much-anticipated decision, the U.S. Court of Appeals for the Tenth Circuit held in SEC v. Scoville et al. that Congress “clearly intended” Section 929P(b) of the Dodd-Frank Act to grant the U.S. Securities and Exchange Commission (“SEC”) authority to enforce the anti-fraud provisions of the federal securities laws abroad where there is sufficient conduct or effect in the United States. In affirming the lower court’s decision, the Tenth Circuit undertook a thorough analysis of the legislative history of Section 929P(b) and concluded that Congress “affirmatively and unmistakably” intended to grant extraterritorial authority to the SEC where either “significant steps” are taken in the U.S. to further a violation of the anti-fraud provisions, or conduct outside the U.S. has a “foreseeable substantial effect” within the U.S.
The Scoville decision thus provides judicial affirmation of the SEC’s ability to bring enforcement actions under what is essentially the same “conduct-and-effects” test that the Supreme Court rejected for private securities litigation in Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010). The Tenth Circuit’s decision, though not entirely unexpected, is significant in that it represents the first Circuit Court decision to directly address the SEC’s authority to enforce the federal securities laws extraterritorially after the Supreme Court’s rejection of the “conduct-and-effects” test in Morrison. Continue reading →
Almost two years ago, Judge Richard Sullivan, then a district court judge in the SDNY, presided over a trial in which the CFTC charged prominent trader Don Wilson and his company, DRW, with violating sections of the Commodity Exchange Act (“CEA”) that prohibit commodities manipulation and attempted manipulation. Last month, Judge Sullivan, now a newly-minted judge on the Second Circuit, issued his opinion in the much-watched case, CFTC v. Donald R. Wilson, 13 Civ. 7884 (RJS) (Dec. 3, 2018). Sullivan’s decision finding that the CFTC failed to prove that Wilson’s admitted (and successful) efforts to move the price of an IDEX interest rate swap violated the CEA’s prohibition against manipulation was a serious setback to the CFTC’s efforts to use the seldom-litigated ban against manipulation codified in Section 9(a)(2) of the CEA.
The CFTC’s Division of Enforcement has long been responsible for policing manipulation in the derivatives and commodities markets. For many decades, its primary and, until Dodd-Frank, only, tool in battling manipulation has been the prohibition against manipulation found in Section 9(a)(2) of the CEA.
The prohibition against manipulation found in Section 9(a)(2) of the CEA is notoriously difficult to enforce, requiring the Commission to establish that “(1) Defendants possessed an ability to influence market prices; (2) an artificial price existed; (3) Defendants caused the artificial prices; and (4) Defendants specifically intended to cause the artificial price.” In re Amaranth Nat. Gas Commodities Litig., 730 F.3d 170, 183 (2d Cir. 2013). Continue reading →
The Court of Appeal reversed the High Court’s decision and found that all of the interviews conducted by ENRC’s external lawyers were covered by litigation privilege, and so too was the work conducted by the forensic accountancy advisors for the books and records review. The Court of Appeal found that ENRC did in fact reasonably contemplate prosecution when the documents were created. Moreover, while determining that it did not have to decide the issue, the Court of Appeal also stated that it may also have departed from the existing narrow definition of “client” for legal advice privilege purposes in the context of corporate investigations. Continue reading →
Last week, the White House, reacting to the Supreme Court’s June 21, 2018 decision in Lucia v. SEC, issued an Executive Orderexempting Administrative Law Judges, or ALJs, from the competitive civil service. This post considers what the order might mean for the Securities and Exchange Commission and other agencies that use ALJs to adjudicate enforcement cases. Lucia held that the SEC’s ALJs are “officers” subject to the Constitution’s Appointments Clause, which means they have to be appointed by (as relevant here) the head of the agency – that is, the SEC’s Commissioners. Previously ALJs were hired through an examination-based process handled by the Office of Personnel Management, or OPM (effectively the human resources department of the federal government). OPM typically presented an agency with a list of eligible candidates ranked on the basis of the examination, among other things, and the agency selected an ALJ from among the top three candidates on the list. Continue reading →
Security breaches and hacking cost publicly traded companies billions of dollars annually in stolen assets, lost business, and damaged reputations. Although detailed data are difficult to collate, the 2017’s annual Cost of Data Breach Study run by the Ponemon Institute for IBM estimated that the average per-capita cost of data breaches reached an all-time high of $225 (a 60% increase over the last decade). This is as much of a concern for businesses as it is for regulators.
As a matter of fact, the knock-on effect of a data breach can substantially affect a company’s reputation, resulting in abnormal customer turnover and loss of goodwill, which in turn affect firms’ policies and ultimately revenues and profits. For this reason, companies are often reluctant to reveal information about security breaches due to fear of both short-term and long-term market reactions.
The Second Circuit has spoken…again. For what seems like the umpteenth time in three years, twice on the same case US v. Martoma, the Circuit put pen to paper to address the controversial personal benefit issue. To understand how we got here…here is a, sort of, brief recap.
Newman shook up the legal world. In US v. Newman, the Second Circuit held that personal benefit (and remember we are talking about it only in relation to a tipper making an improper gift of confidential information to a trading relative or friend) existed where there was a “meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” This raised all kinds of hullabaloo (yes, I just used the word hullabaloo). Some of us thought Newman was brilliant, some thought it was a disaster. Continue reading →
They say the third time’s a charm, whoever “they” are. If that’s the case, then this must be a most charming article because it is the third time I have had the opportunity to write about the battle over whether an SEC Administrative Law Judge is an inferior officer who the Commission must appoint to the position or a mere employee who the human resources department can simply hire to preside over cases. This will be the last time I write about this issue because the U.S. Supreme Court just weighed in and resolved the dispute. The answer is definitive but the impact, practically speaking, will not be far reaching. Nevertheless, the Supreme Court has held that SEC ALJs are inferior officers of the United States subject to the Appointments Clause of the Constitution. Continue reading →
For about 50 years – at least since Texas Gulf Sulphur – the SEC has ordered defendants to disgorge their profits from transactions that violated the securities laws. Despite disgorgement’s long history, in its 2017 opinion in Kokesh v. SEC (PDF: 102 KB), the US Supreme Court put two aspects of the remedy on the table. It applied a five-year statute of limitations to disgorgement. It also reopened old debates over agencies’ power to seek remedies not specified in statute. My article, Disgorgement in Insider Trading Cases: FY2005-FY2015, provides data to inform these debates over the agency’s use of disgorgement and the effects of Kokesh. It reports the results of an empirical study of ten years of the remedies ordered by the SEC in insider trading actions, with particular emphasis on the agency’s reliance on disgorgement. Continue reading →