Category Archives: Securities Fraud

Tenth Circuit Affirms SEC’s Extraterritorial Reach

by Mary Jo White, Kara Brockmeyer, Andrew J. Ceresney, Matthew E. Kaplan, Robert B. Kaplan, Julie M. Riewe, Jonathan R. Tuttle, and Ada Fernandez Johnson

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.[1] 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

Decision in DRW Makes It Even Harder For The CFTC To Prove Up Manipulation

by Aitan Goelman

Summary

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.

Background

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

Court Of Appeal In London Overturns Widely Criticised High Court Judgment In SFO V ENRC

by Patrick Doris, Sacha Harber-Kelly, Richard Grime, and Steve Melrose

I. Introduction

Today the Court of Appeal of England and Wales issued its judgment in The Director of the Serious Fraud Office and Eurasian Natural Resources Corporation Limited[1] regarding the privileged nature of documents created in the context of an internal investigation.

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

The Post-Lucia Executive Order on ALJs

by Daniel Walfish

Last week, the White House, reacting to the Supreme Court’s June 21, 2018 decision in Lucia v. SEC, issued an Executive Order exempting 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

Cyber-Attacks and Stock Market Activity

by Dr. Daniele Bianchi and Dr. Onur Tosun

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.

Continue reading

Finality on Insider Trading Law…Until The Next Challenge

by Gregory Morvillo

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

Supreme Court Tells SEC to Appoint ALJs (Even Though SEC Already Did)

by Gregory Morvillo

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

Disgorgement After Kokesh – Evidence from SEC Insider Trading Actions (FY2005-FY2015)

by Verity Winship

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

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