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By Chip Phinney and Geoff Friedman

As we have discussed before, the SEC’s increased use of in-house administrative proceedings in enforcement actions involving allegations of fraud has been a subject of considerable debate. Commentators have questioned the fairness of proceedings where the SEC gains an automatic home field advantage by bringing claims before its own administrative law judges (ALJs), with appeals being heard by the SEC’s own commissioners. But a determined defense can still defeat the SEC by ensuring that it plays by the rules, as demonstrated by a decision issued last week by the U.S. Court of Appeals for First Circuit in a case where Mintz Levin attorneys Jack Sylvia, Andy Nathanson, Jess Sergi, McKenzie Webster, and Geoff Friedman represented one of the petitioners.

The First Circuit vindicated two former employees of State Street Global Advisors (SSgA) who had been targeted by the SEC for alleged securities violations during the 2007 subprime mortgage crisis. Despite applying the highly deferential “substantial evidence” standard of review for agency factfinding, the First Circuit concluded that the SEC abused its discretion in holding Mintz Levin’s client, former SSgA Vice President James Hopkins, liable under Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rule 10b-5. The First Circuit also vacated the Commission’s order holding Mr. Hopkins’ co-defendant, SSgA CIO John Flannery, liable under Section 17(a)(3) of the Securities Act.
Continue Reading First Circuit Overturns SEC Commissioners’ Sanctions Order

This summer the SEC has been aggressively pursuing claims against developers and others involved in the EB-5 Immigrant Investor Program, which permits foreign citizens to apply for U.S. residency if they make a qualified investment in a specified project that creates or preserves at least 10 jobs for U.S. workers.  The latest example is a securities fraud suit by the SEC against Lobsang Dargey, a Bellevue, Washington-based real estate developer, who also happens to be a brother-in-law of tennis star Andre Agassi.  According to the SEC, Dargey and his companies obtained investments from 250 Chinese investors under the auspices of the EB-5 program, misled those investors about their prospects for obtaining permanent residency, and diverted millions of dollars from their investments for unrelated projects and Dargey’s personal use, including a home purchase and cash withdrawals at casinos.   Adam Sisitsky and Doug Hauer analyze the case in depth in this post for our sister blog, EB-5 Financing Matters.

The Dargey case is just the latest in a series of recent actions brought by the SEC involving the EB-5 Program.  Other recent examples include SEC v. Luca International Group, LLC , which charged the defendants with defrauding Chinese investors in their oil and gas ventures under the EB-5 program, and In re Ireeco, where the SEC charged two companies with securities laws violations for failing to register as brokers in connection with advising foreign citizens about potential EB-5 investments.  To learn more about these cases check out the posts on EB-5 Financing Matters here and here.    

Following up on their discussion last week about the SEC’s CitizenVC no action letter, our colleagues Dan DeWolf and Sam Effron have written another alert about the SEC’s recently issued compliance and disclosure interpretations relating to private placements under Regulation D.  For example, they discuss the treatment of securities offerings to an angel investing club and to large groups at venture fairs and demo days; what constitutes a pre-existing relationship; and what makes a relationship “substantive” so that contact with an investor is not considered a “general solicitation” under the SEC’s rules.  You can read more here.

Last week the SEC issued a no action letter that provides guidance and clarity as to how an issuer of securities can conduct a private placement in a password protected web page under Rule 506(b), without it being deemed a “general solicitation” and thereby being subject to the additional requirements imposed by the new Rule 506(c).  In the alert linked here, our colleagues Dan DeWolf and Sam Effron, who prepared the request to the SEC on behalf of CitizenVC, discuss the challenges faced by issuers seeking to offer securities through a private placement online and what issuers can do to take an offering outside of being considered a “general solicitation.”  This is cutting-edge information that can help issuers raise capital online without having to proceed under the more onerous requirements of Rule 506(c).

Our colleague Doug Hauer has launched a new Mintz blog about the federal EB-5 Immigrant Investor Program, EB-5 Financing Matters.  Check it out for a comprehensive review of pending legislation to extend and reform the EB-5 Program.  You will also find two posts discussing recent SEC actions involving the EB-5 Program: (1) a federal suit alleging that the defendants made fraudulent statements in soliciting EB-5 investors for an unprofitable oil company; and (2) an SEC enforcement action against two brokers that solicited investment for EB-5 projects in the United States without registering as securities brokers with the SEC.

The EB-5 Program, administered by the U.S. Citizenship and Immigration Services, offers foreign investors an opportunity to become permanent residents in the United States by making capital investments that create jobs in the U.S.  In the coming weeks we will be working with Doug and other colleagues on a series of posts analyzing the interplay between the EB-5 Program and the securities laws.

Delaware recently enacted new legislation to prohibit stock corporations from adopting fee-shifting bylaws and charter provisions, among other amendments to the Delaware General Corporation Law.  The fee-shifting ban ends a long-running controversy over whether Delaware corporations should be permitted to adopt rules enabling them, and their officers and directors, to recover their attorneys’ fees from shareholder plaintiffs who pursued unsuccessful lawsuits for breaches of fiduciary duty or related claims.  The new legislation also authorizes Delaware corporations to adopt Delaware-only forum selection provisions for litigation involving companies’ internal affairs, and modifies the procedures for statutes concerning ratification of defective corporate acts and issuance of new corporate stock, among other changes.  The new law was signed by Governor Jack Markell on June 24, 2015 and will take effect on August 1st.  A synopsis of its provisions and its legislative history can be found here.

Continue Reading Delaware Bans Corporate Fee-Shifting Bylaws and Authorizes Delaware-Only Forum Requirement for Intra-Corporate Litigation

Home Depot was recently hit with a books-and-records suit in the Delaware Court of Chancery, Frohman v. Home Depot, which seeks documents relating to the giant retailer’s data security breach last September.  The plaintiff, a Home Depot shareholder, is requesting information concerning how the company first learned of the breach, any analysis of how the breach occurred, and what steps it took thereafter, among other topics.  Continue Reading Data Security Breach Documents Sought in Home Depot Books-and-Records Suit

Written by Chip Phinney and Josh Browning

Last week, the Massachusetts Supreme Judicial Court (SJC) handed down Hays v. Ellrich, a decision with important implications for the investor advising community. The case is significant for two reasons. First, even though the defendant advisor did not earn a commission or any other direct compensation for the plaintiff’s investment in a hedge fund, the SJC held the advisor liable as a “seller” under the Massachusetts Uniform Securities Act, M.G.L. c. 110A, § 410(a)(2). Second, despite extensive risk factor language in the hedge fund prospectus and many other “storm warnings,” the SJC held that the statute of limitations on the plaintiff’s Massachusetts Securities Act claim was not triggered until she had actual knowledge that this investment was unsuitable for her. Continue Reading Massachusetts Supreme Judicial Court Takes Expansive View of Investment Advisor’s Liability Under Blue Sky Law in Hays v. Ellrich

As we discussed in a post last November, the SEC’s increasing use of enforcement proceedings before its own administrative law judges (ALJs), rather than before federal court judges, has spawned a number of constitutional challenges in the federal courts.  Most of these challenges have failed, but on Monday a federal judge in Georgia issued a preliminary injunction to stay an SEC administrative proceeding on constitutional grounds. Continue Reading Federal Court Rules That SEC Administrative Proceeding Is “Likely Unconstitutional”

As we discussed in a post last month, the SEC has been closely scrutinizing whether companies may be using non-disclosure and confidentiality agreements that could discourage employees from acting as whistleblowers and communicating with the SEC about potential securities law violations. Yesterday the SEC announced its first enforcement action in this area, against public company KBR, Inc. In the SEC’s press release, SEC Director of Enforcement Andrew Ceresney commented that

“SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.”

Continue Reading SEC Announces Action Against Company for Using Confidentiality Agreements That Allegedly Could Deter Whistleblowers