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”
Please join us at 12:30 p.m. on March 10, 2015 for a webinar titled, “Preparing for and Addressing Activist Shareholders: A Case Study from the Valeant/Pershing Square Bid for Allergan.” My colleague Joel Papernik and I will be discussing a topic that rose to prominence for many public companies in 2014 and that shows no signs of abating in 2015. Joel will begin the presentation with an overview of the existing landscape of shareholder activism, and then will launch into a discussion of the general defensive measures companies are taking even before being targeted by an activist shareholder. During the second half of the presentation, I will use the highly-publicized tender offer that Valeant and Pershing Square made to Allergan as a case study for exploring how the federal securities laws can be implicated in a proxy contest and tender offer. We are presenting this webinar in conjunction with the Northeast Chapter of the Association of Corporate Counsel. We hope you can tune in!
Written by Brian P. Keane
In a groundbreaking decision, the United States Court of Appeals for the Second Circuit has reversed the 2013 insider trading convictions of Todd Newman and Anthony Chiasson. The decision in United States v. Newman, No. 13-1837 (2d Cir. Dec. 10, 2014), significantly raises the bar for the government’s burden of proof in “remote tippee” insider trading cases. The investment community (as well as government prosecutors) have been eagerly awaiting this decision since oral arguments were heard by the Second Circuit in April 2014. Nearly eight months later, the decision handed down has dealt a severe blow to the government’s efforts to push the envelope in prosecuting individuals who trade on inside information but have one or more “layers” between them and the “insider” who initially disclosed the tip (the “tipper”). To read more, click here.
The SEC’s plan to bring more enforcement actions as administrative proceedings before its own administrative law judges rather than in the federal district courts — even in insider trading cases — has been drawing increasing criticism and legal challenges. Most recently, Judge Jed Rakoff of the U.S. District Court for the Southern District of New York questioned the SEC’s use of administrative proceedings in a speech last Wednesday before the Practising Law Institute’s Annual Institute on Securities Regulation. Judge Rakoff observed that the SEC’s administrative powers, which were originally quite limited, have been expanded considerably by the Sarbanes-Oxley Act of 2002 and especially by Section 929P(a) of the Dodd-Frank Act of 2010, which respectively enabled the SEC to obtain administrative orders barring defendants from serving as officers and directors of registered companies and assessing monetary penalties. While administrative proceedings may be more efficient for the SEC, they are not subject to the Federal Rules of Evidence and Federal Rules of Civil Procedure, there is no jury, and the SEC has a much higher winning percentage in front of its own administrative law judges than in the federal courts. Judge Rakoff noted that under the two primary securities enforcement statutes — Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act — the law has been principally developed by the courts. He said that the judiciary and the public should be concerned because the SEC’s increased use of administrative proceedings could hinder the balanced development and interpretation of the securities laws in the future, since courts will tend to give deference to the SEC’s interpretation of the law and its own regulations. Judge Rakoff’s concerns were echoed later in the conference in comments by former SEC Director of Enforcement William McLucas. Continue Reading SEC’s Increased Use of Administrative Proceedings Draws Criticism and Legal Challenges
As the Supreme Court begins its 2014-15 term this month, it will be considering a number of securities cases, including the Omnicare case, which is scheduled for oral argument on November 3rd, and three other cases in which petitions for certiorari are currently pending before the Court. As discussed below, these cases raise significant questions concerning the standards for claims under Section 11 of the Securities Act of 1933, prosecution of insider trading, and the scope of disgorgement penalties in an SEC enforcement action. We also discuss IndyMac, another securities case that had been scheduled to be heard as the first case of the new term on October 6th, but was abruptly dismissed by the Court earlier this week.
Merits Case — Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund. This case, which we have discussed previously, concerns the standard for pleading a claim that a stock registration statement contains an untrue statement under Section 11 of the Securities Act, where the statement involves a matter of opinion. Must plaintiffs allege that the statement was subjectively false – requiring allegations that the speaker’s actual opinion was different from the one expressed – or is it enough to allege that the opinion was objectively wrong? In the proceedings below, the U.S. Court of Appeals for the Sixth Circuit held that it was sufficient for the plaintiffs to plead that a false statement was made; the defendants’ state of mind was irrelevant, the court held, because Section 11 is a strict liability statute.
But other federal courts have taken a different view, holding that “when a plaintiff asserts a claim under section 11 or 12 based upon a belief or opinion alleged to have been communicated by a defendant, liability lies only to the extent that the statement was both objectively false and disbelieved by the defendant at the time it was expressed,” i.e., that it was subjectively false. Fait v. Regions Financial Corp., 655 F.3d 105, 110 (2d Cir. 2011). For example, in Fait the Second Circuit affirmed dismissal of the plaintiffs’ Section 11 and 12 claims based on alleged misstatements concerning goodwill and loan loss reserves in the defendant’s registration statement. The court held that these were matters of opinion based on subjective estimates by the company’s management, and therefore concluded that the claims were properly dismissed because the plaintiffs failed to plausibly allege that the defendants did not believe the challenged statements at the time they were made. See also Rubke v. Capitol Bancorp, Ltd., 551 F.3d 1156, 1162 (9th Cir. 2009) (holding that statements of opinion “can give rise to a claim under section 11 only if the complaint alleges with particularity that the statements were both objectively and subjectively false or misleading”). The choice of standard could have a significant impact on companies’ willingness to express opinions in registration statements for public stock offerings. Continue Reading Upcoming Supreme Court Securities Cases
Can merely late filing of “routine” forms get you in trouble with the SEC? Yes, at least if it happens too often. On Wednesday the SEC announced charges and financial penalties totaling $2.6 million against 28 officers, directors, and major shareholders for repeated late filing of SEC forms reporting holdings and transactions in company stock, and six publicly traded companies for contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies.
Notably, these cases did not involve allegations of intentional wrongdoing or short-swing trading; the late filings appear to have been merely inadvertent violations of certain reporting requirements under the securities laws for which the SEC sought to hold the respondents strictly liable. Thus these cases seem to reflect the SEC’s “broken windows” approach to enforcement under Commissioner Mary Jo White, which seeks to prosecute even the smallest infractions.
Interestingly, the SEC also said that it had used “quantitative data sources and ranking algorithms to identify these insiders as repeatedly filing late.” This enforcement initiative evidences the SEC’s increasing use of data analytics to identify potential violations of the securities laws since the Enforcement Division’s establishment of its Center for Risk and Quantitative Analytics in July 2013.
Recently the New England Chapter of the National Association of Corporate Directors presented a distinguished panel of current and former securities regulators discussing enforcement and governance issues facing boards of directors today. Massachusetts Secretary of State William Francis Galvin; Paul Levenson, director of the SEC’s Boston Regional Office; and George Canellos, former co-director of the SEC’s Division of Enforcement and former director of the SEC’s New York Regional Office spoke with moderator Thomas Dougherty of Skadden, Arps, Slate, Meagher & Flom LLP. Here are some highlights from the discussion.
Enforcement priorities and concerns. The regulators are concerned about: the constant pressure on public issuers to hit earnings targets and its impact on corporate accounting and disclosure; the financial services industry’s management practices and its disclosures and advertising to investors, especially individuals; corporate internal controls, disclosure controls, and risk management; fraudulent investment schemes targeting affinity groups; and insider trading.
FCPA. To avoid problems under the Foreign Corrupt Practices Act, overseas operations should prioritize separation between business development functions and incentives on the one hand, and legal compliance functions and incentives on the other hand.
Insider trading. The panelists noted the increased use of expert networks in the investment community and they were skeptical about whether investors’ warnings to experts, that they did not want to hear material non-public information, actually prevented disclosure of inside information.
Reg. FD. Companies need to be careful about matching what they are saying to individuals or small groups of investors with their broader communications with the investing public, including social media. When there is a violation of Reg. FD, companies should be proactive about dealing with the issue instead of waiting for an outside source to raise it.
Cybersecurity. The SEC is focusing on corporate governance concerning cybersecurity issues, companies’ recognition and control of cybersecurity risk factors, and their disclosures when there is a breach.
SEC administrative proceedings. The Dodd-Frank Act gave the SEC increased power to bring administrative proceedings for securities violations, and given the costs of bringing cases to trial in the federal district courts, the SEC will likely continue to bring more cases before the agency’s administrative law judges.
Corporate governance. When sitting at the top of very large, complex corporations, consisting of disparate entities with different histories, cultures, and strategies, directors should ask themselves whether they are confident that the standards that they personally adhere to are being followed throughout the organization.
Nearly a year has passed since the SEC announced that it would require admissions of wrongdoing as a condition of settling SEC charges in certain cases. Perhaps it can no longer be called a “new” policy. But lawyers are still wrestling with questions about the policy and its consequences – both intended and unintended. How broadly does the new policy apply? How and when should the question of its application be addressed in a case? How will admissions under the policy affect other proceedings or D&O insurance coverage? I recently participated in a panel presentation on these and related topics at the ABA Section of Litigation Annual Conference, along with Lori Echavarria of the SEC’s Los Angeles office, Patricia Canavan of UBS, and Grant Fondo of Goodwin Procter.
This week a jury in the U.S. District Court for the Southern District of New York rendered a guilty verdict against the former SAC portfolio manager on two counts of securities fraud and one count of conspiracy to commit securities fraud in the case of United States v. Martoma (12-CR-00973). Below are several interesting facts and figures from the case.
0 – Number of recorded / wiretapped conversations introduced at trial by the prosecution.
1 – Number of successful motions in limine by defendant seeking to exclude evidence that he had fainted when first approached by FBI agents who sought to discuss with him allegations of insider trading.
0 – Number of trades actually alleged to have been effectuated by the defendant himself.
2 – Number of defense expert witnesses that testified that the alleged non-public information at issue was not material and/or already in the marketplace, and thus in fact public.
15/3 – Number of total hours/days that the jury deliberated.