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  • Issuer And CEO Charged By The SEC With Fraud And Whistleblower Protection Law Violations For Allegedly Impeding Investor Complaints
     
    11/12/2019

    On November 4, 2019, the Securities and Exchange Commission (“SEC”) filed an amended complaint against Collectors Café, a Nevada-based company purportedly providing online auctions for collectibles (the “Company”), and its CEO, for making false and misleading statements to investors in connection with a $23 million securities offering.  SEC v. Collector’s Coffee, Inc. & Kontilai, No. 10-CV-04355 (S.D.N.Y. Nov. 4, 2019).  The amended complaint added charges against defendants for alleged violations of whistleblower protection laws by conditioning the return of investor money on investors signing agreements that included provisions prohibiting them from communicating with regulatory agencies, including the SEC, about anything related to the Company.
     
  • SEC Lifts Post-Lucia Stay On Pending Administrative Proceedings And Announces Rehearings For Dozens Of Previously Heard Cases
     
    08/28/2018

    On August 22, 2018, the Securities and Exchange Commission (“SEC”) announced that it will rehear over fifty cases pending before administrative law judges (“ALJs”) that were stayed following the U.S. Supreme Court’s decision in Lucia v. SEC, 138 S. Ct. 2044 (2018), which held that the SEC’s process for appointing ALJs was unconstitutional.  See Order, In re: Pending Administrative Proceedings (Aug. 22, 2018) (the “Order”).  In Lucia, the Court held that ALJs hired by the SEC are “inferior officers” of the United States and are thus subject to the Constitution’s Appointments Clause, which states that inferior officers may only be appointed by the President, a court, or a department head.  Since the SEC’s ALJs were not appointed in such a manner, the Court held that the respondent in Lucia was entitled to a new hearing before a properly appointed official.  See Shearman & Sterling LLP Need To Know Weekly, United States Supreme Court Reverses and Remands SEC Administrative Proceeding - Finding That SEC Administrative Law Judges are Subject to the Appointments Clause of the Constitution and Were Not Properly Appointed by the SEC (June 26, 2018)
  • FINRA Fines Broker-Dealer $5.5 Million For Violations Of Regulation SHO
     
    08/28/2018

    On August 20, 2018, the Financial Industry Regulatory Authority (“FINRA”) announced that it fined a FINRA-regulated broker-dealer $5.5 million over allegations that it violated Regulation SHO under the Securities Exchange Act of 1934, see 17 CFR 242.200-204, by, among other things, failing to properly close out short sale positions when securities were not timely delivered, accepting short sales in restricted securities and at restricted prices, and maintaining a deficient supervisory system.   Press Release, FINRA Fines Interactive Brokers $5.5 Million for Regulation SHO Violations and Supervisory Failures (Aug. 20, 2018); FINRA AWC No. 2014043143401 (Aug. 16, 2018).
  • United States Supreme Court Reverses And Remands SEC Administrative Proceeding - Finding That SEC Administrative Law Judges Are Subject To The Appointments Clause Of The Constitution And Were Not Properly Appointed By The SEC
     
    06/26/2018

    On June 21, 2018, the Supreme Court held that Securities and Exchange Commission (“SEC”) administrative law judges (“ALJs”) are “inferior officers” of the United States, subject to the Appointments Clause of the Constitution. Lucia v. SEC, 585 U.S. ____ (2018).
  • Third Circuit Vacates Insider Trading Sentence Based In Part On Third-Party’s Trading
     
    02/27/2018

    On February 14, 2018, the United States Court of Appeals for the Third Circuit vacated Steven Metro’s 46-month prison sentence for insider trading and remanded the case to the district court for resentencing.  United States v. Metro, No. 16-3813 (3d Cir. Feb. 14, 2018).  The Third Circuit held that a sentencing court cannot attribute illicit financial gains to an insider trading defendant for purposes of the United States Sentencing Guidelines (the “Sentencing Guidelines”) when the gains are “actually attributable to someone with whom he was not acting in concert and to whom he did not provide inside information.”

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  • U.S. Supreme Court To Review Ex-CEO’s Appeal Regarding Restitution Of Legal Fees Associated With An Internal Investigation
     
    01/23/2018

    On January 12, 2018, the Supreme Court granted certiorari to hear an appeal from a two-judge, Fifth Circuit panel decision regarding whether federal law permits restitution orders in criminal cases to cover the costs of internal investigations that are “neither required nor requested” by the government.  Lagos v. United States, Petition for Writ of Certiorari, p. 8, filed June 15, 2017. Joining six other circuits, the Fifth Circuit held that the Mandatory Victims Restitution Act (“MVRA”) authorizes recovery of the fees incurred during an internal investigation, if such fees were “directly caused by the defendants’” criminal offense.  United States v. Lagos, 864 F.3d 320, 323 (5th Cir. Mar. 17, 2017). This holding conflicts with a 2011 decision issued by the D.C. Circuit, holding that such costs were not recoverable, if the investigation was “neither required nor requested by criminal investigators or prosecutors.”  United States v. Papagno, 639 F.3d 1093, 1095 (D.C. Cir. 2011).  The Fifth Circuit affirmed the district court’s order requiring former CEO Sergio Lagos of USA Dry Van Logistics to cover $5 million in fees GE Capital incurred during its internal investigation related to USA Dry Van’s bankruptcy petition.

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  • The Supreme Court Agrees To Review Appointment Requirements For SEC’s In-House Judges  
     
    01/17/2018

    ​On January 12, 2018, the U.S. Supreme Court granted certiorari in Lucia v. Securities and Exchange Commission, No. 17-130, agreeing to resolve a circuit split regarding the appointment process for Securities and Exchange Commission (“SEC”) administrative law judges (“ALJs”).  The case raises significant questions as to whether ALJs constitute inferior officers who must be selected and appointed by the SEC Commissioners themselves (who are politically accountable), or whether they constitute mere employees who can be hired like any other agency employee.  See Shearman & Sterling LLP, D.C. Circuit Court Of Appeals Rejects Constitutional Challenge to SEC’s Use of Administrative Proceedings, Need-to-Know Litigation Weekly, Aug. 15, 2016, http://www.lit-wc.shearman.com/dc-circuit-court-of-appeals-rejects-constitutional;  Shearman & Sterling LLP, Tenth Circuit Splits With D.C. Circuit On Constitutionality Of SEC ALJs, Need-to-Know Litigation Weekly, Jan. 2, 2017, http://www.lit-wc.shearman.com/tenth-circuit-splits-with-dc-circuit-on-constitut; Shearman & Sterling LLP, In Reversal, SEC Agrees That Its Administrative Law Judges Are Inferior Officers That Require Commission Appointment, But Still Seeks Supreme Court Review To Resolve Circuit Split, Need-to-Know Litigation Weekly, Dec. 12, 2017, http://www.lit-wc.shearman.com/in-reversal-sec-agrees-that-its-administrative-la.

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  • In Reversal, SEC Agrees That Its Administrative Law Judges Are Inferior Officers That Require Commission Appointment, But Still Seeks Supreme Court Review To Resolve Circuit Split
     
    12/12/2017

    ​On November 29, 2017, the U.S. Solicitor General submitted a brief to the United States Supreme Court in Lucia v. Securities and Exchange Commission, No. 17-130, urging the Court to grant certiorari and resolve a circuit split regarding the appointment process for the Securities and Exchange Commission’s (“SEC”) administrative law judges (“ALJs”).  In a notable shift, the Solicitor General agreed with Raymond J. Lucia and his namesake investment firm that the SEC’s hiring of ALJs, who preside over the initial stages of SEC enforcement hearings, was unconstitutional because ALJs serve as “inferior officers” who must be appointed in accordance with the Appointments Clause of Article II of the Constitution.  The following day, the SEC, in its capacity as a “head of department,” ratified the appointment of its five ALJs in an effort to make their prior hiring compliant with Article II’s Appointments Clause.  Although the SEC’s decision to ratify the hiring of its ALJs in some sense rendered the issue in Lucia moot, the Solicitor General is still seeking certiorari in order to resolve the existing circuit split.

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  • Divided Second Circuit Panel Abandons Relationship Test From Landmark Newman Decision In Upholding Insider Trading Conviction
     
    08/29/2017

    On August 23, 2017, a divided three-judge panel of the United States Court of Appeals for the Second Circuit upheld the insider trading conviction of SAC Capital Advisors, LLC (“SAC”) portfolio manager Mathew Martoma.  United States v. Martoma, No. 14-3599 (2d Cir. Aug. 23, 2017).  The decision represented the Second Circuit’s first occasion to consider its landmark decision in United States v. Newman in light of the Supreme Court’s recent decision in Salman v. United States.  Over a strong dissent, the majority found that the logic underpinning the Salman decision abrogated Newman’s requirement that a “meaningfully close personal relationship” exist between a tipper and tippee before allowing a jury to infer the personal benefit necessary to establish insider trading liability merely from a tip of inside information.  The majority held “that an insider or tipper personally benefits from a disclosure of inside information whenever the information was disclosed with the expectation that the recipient would trade on it and the disclosure resembles trading by the insider followed by a gift of the profits to the recipient, whether or not there was a meaningfully close relationship between the tipper and tippee.”  Martoma, slip op. at 27-28 (internal quotation marks and citations omitted). In so doing, it shifted the focus from the relationship between a tipper and tippee to the tipper’s subjective intent in making the tip, and seemingly did away with the limiting principle that Newman had established.  However, while clearly a win for prosecutors, this new standard will still require a highly fact-intensive inquiry into the purpose of any tip, meaning that precisely how much of a shift in law it portends remains to be seen.

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  • United States Supreme Court Holds SEC Disgorgement Orders Subject To Five-Year Statute Of Limitations
     

    06/16/2017


    On June 5, 2017, a unanimous Supreme Court held that the ability of the Securities and Exchange Commission (“SEC”) to seek disgorgement in connection with a violation of federal securities law is subject to a five-year statute of limitations, reversing a decision from the United States Court of Appeals for the Tenth Circuit, and rejecting the SEC’s argument that disgorgement is an equitable remedy not subject to any statute of limitations.  Kokesh v. SEC, No. 16-529 (June 5, 2017).  Writing for the Court, Justice Sotomayor analyzed the function of SEC disgorgement, concluding that it “bears all the hallmarks of a penalty” and was therefore subject to the five-year statute of limitations under 28 U.S.C. § 2462 (“Section 2462”).  In so doing, the Supreme Court resolved an outstanding circuit split as to whether the statute of limitations applies to disgorgement, answering that question with a definitive "yes."

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  • More Bond Traders Sued By The SEC For Alleged Fraudulent Misrepresentations Relating To MBS Prices
     
    05/23/2017

    On May 15, 2017, the Securities and Exchange Commission sued two commercial mortgage backed securities (“CMBS”) traders for securities fraud allegedly committed while buying and selling CMBS on behalf of a large broker-dealer during the course of their employment at the firm.  SEC v. Chan, S.D.N.Y, 1:17-cv-3605; SEC v Im, S.D.N.Y, 1:17-cv-3613.  These are the latest in a slew of recent lawsuits that have been brought by the SEC and DOJ as part of a federal crackdown on allegedly deceptive bond trading practices, but the DOJ is notably absent from this latest case.  

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  • Utah District Court Limits Reach Of Morrison By Holding That Section 10(b) Of The Exchange Act And Section 17(a) Of The Securities Act Can Be Applied Extraterritorially In Actions Brought By The SEC And The United States  
     
    04/11/2017

    On March 28, 2017, the U.S. District Court for the District of Utah granted the Securities and Exchange Commission’s (“SEC”) motion for a preliminary injunction in a securities fraud case against Traffic Monsoon, LLC, an advertising services company which allegedly ran a Ponzi scheme involving a pay-per-click advertisement program.  SEC v. Traffic Monsoon, LLC, No. 2:16-CV-00832-JNP, (D. Utah Mar. 28, 2017) (order granting preliminary injunction) (“Order”).  The injunction hinged, in part, on the district court’s conclusion that the SEC can bring securities fraud enforcement actions under Section 10(b) of the Exchange Act of 1934 (“Exchange Act”) and Sections 17(a)(1) and (3) of the Securities Act of 1933 (“Securities Act”) in connection with foreign transactions.  In so ruling, the District Court limited the holding of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, 561 U.S. 247 (2010), in which the Supreme Court held that Section 10(b) applied only to transactions in securities listed on domestic exchanges and domestic transactions in other securities. 

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  • FINRA Dismisses Insider Trading Charges
     
    03/21/2017


    On March 13, 2017, Financial Industry Regulatory Authority’s (“FINRA”) National Adjudicatory Council (the “NAC”) affirmed a hearing panel’s finding that Matthew Joseph Sheerin, a trader formerly with investment firm Angelo Gordon & Co., did not engage in insider trading.  Decision, Dep’t of Mkt. Regulation v. Sheerin, Compl. No. 2011027926301 (Mar. 13, 2017).

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  • Northern District Of California Limits SEC’s Disgorgement Reach Under SOX 304
     
    02/14/2017

    On February 8, 2017, United States District Judge Jon S. Tigar of the United States District Court for the Northern District of California granted in part defendant Erik Bardman’s motion to dismiss the Securities and Exchange Commission’s claim for disgorgement of certain compensation pursuant to Sarbanes-Oxley Act Section 304 (“SOX 304”).  Order, SEC v. Bardman, No. 3:16-cv-02023 (N.D. Cal. Feb. 8, 2017).  Mr. Bardman is a former Chief Financial Officer of Logitech International SA.  The Court held that neither an earnings release nor a Form 8-K announcing and attaching an earnings release can be the basis of a SOX 304 disgorgement claim because any purported material noncompliance with a financial reporting requirement in those documents does not cause or require a company to issue an accounting restatement.  

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  • The SEC Charges Three Chinese Nationals With Insider Trading Related To Information That Was Hacked From Two New York Law Firms
     
    01/09/2017

    ​On December 27, 2016, the Securities and Exchange Commission (“SEC”) filed a complaint against three Chinese nationals, alleging that they hacked two New York-based law firms, stole material nonpublic information relating to upcoming mergers and acquisitions, and traded on that stolen information, earning approximately $3 million in illegal profits.  Complaint at 2, SEC v. Iat Hong, No. 16-Civ __ (S.D.N.Y. Dec. 27, 2016) (“Complaint”).  Stephanie Avakian, Acting Director of the Enforcement Division at the SEC, explained that investigators used recently developed “enhanced trading surveillance and analysis capabilities” to identify the scheme.  Press Release, SEC, Chinese Traders Charged with Trading on Hacked Nonpublic Information Stolen from Two Law Firms, Dec. 27, 2016, (“SEC Press Release”).      

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