Category Archives: Securities Fraud

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

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