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

Originally created by Congress in 1990, the EB-5 program was intended to stimulate the U.S. economy through job creation and capital investment by foreign investors. Under a pilot immigration program first enacted in 1992 and regularly reauthorized since, certain EB-5 visas also are set aside for investors in Regional Centers designated by the United States Citizenship and Immigration Services, based on proposals for promoting economic growth. Unscrupulous parties have on occasion taken advantage of interested parties and perpetrated schemes in this area on people who are understandably keen to take part in this otherwise very beneficial program.

Our colleagues at the EB-5 Matters blog have written an interesting post on one such case in Florida. Check it out here.

 

As originally reported on our Privacy & Security Matters blog, Mintz Levin will sponsor a webinar on September 30 at 1:00 p.m. (ET) to address regulatory compliance and risk management aspects of cyber attacks and data breaches at financial institutions and their service providers.

This topic is especially timely in light of the OCIE’s 2015 Cybersecurity Examination Initiative, announced just this week.  For more details about the key aspects of the OCIE initiative and our upcoming webinar, please check out this excellent post on the Privacy & Security Matters blog.  To register for the webinar, click here.

By Heidi Lawson and Jacquelyn Burke

As was recently reported in the New York Times and elsewhere, the Justice Department issued new policies last week that place individual executives as the focus of their prosecution efforts, and encourage companies to cooperate in building a case against those individuals. The New York Times specifically noted that: (1) allegedly responsible individuals will be the focus of investigations at the outset; and (2) in settlement negotiations, companies will not be able to obtain credit for cooperating with the government unless they identify employees and turn over evidence against them.  This announcement appears to be the start of a larger agenda hinted at by newly minted Attorney General Loretta Lynch, who has promised to focus on white-collar crime. The Times article can be found here.

Of course, the scope and impact of this initiative will become clearer as it is implemented.  However, it should serve as a stark reminder to executives that their interests are not always aligned with those of their company, and that they should closely examine the insurance coverage dedicated to their defense and indemnity of government investigations and other lawsuits.  Continue Reading What Questions Executives Should Be Asking About Their D&O Insurance Following The New DOJ Policies Issued Last Week

A witness testifying under oath before the SEC recently refused to answer any questions directed to him, not because of any privilege, but rather — as he said, sixty-eight different times — because he was “scared” and “frightened.”  The SEC subsequently (and successfully) petitioned a Massachusetts federal court for an order compelling the individual to re-appear before the SEC and comply with the subpoena in question. SEC v. Carlos R. Garza, 1:15-mc-91258-RGS (D.Mass.).

On August 12, 2015, Carlos Garza appeared at the SEC’s Boston District Office pursuant to an administrative subpoena served on him by the SEC in connection with the SEC’s investigation of GAW Miners, LLC, (“GAW”) a purported leader in the virtual currency “mining” industry.

According to the SEC, Garza, the brother of GAW’s CEO, served as a salesman at GAW where he focused on soliciting high-net-worth investors. GAW allegedly started as a distributor of computer hardware used in virtual currency (e.g. “Bitcoin”) mining, but its business model soon transitioned to selling shares in the profits it claimed would be derived from its own virtual currency mining operations. GAW named these shares “Hashlets” because they were claimed to represent a share of the company’s purported “hashing power,” (or computing power), that would be devoted to virtual currency mining. When its profits slowed, GAW allegedly sponsored the introduction of its own, new virtual currency, known first as HashCoin, and eventually as PayCoin. The SEC claimed that although GAW represented to the public that PayCoin would have a fixed value of at least $20 (U.S. dollars) per PayCoin, in actuality, its value quickly declined to approximately $.04 per PayCoin.

The SEC’s continuing investigation centers around potential securities law violations that occurred in connection with GAW’s sale of Hashlets and PayCoin, and the possibility that claims to investors about the virtual currency mining operations were false and misleading. The Commission is also investigating whether GAW’s Hashlet sales had the hallmarks of a Ponzi scheme and is investigating what happened to the millions of dollars in revenue that GAW earned in bitcoin and other virtual currencies.

Notwithstanding his feelings of fear and intimidation, Garza repeatedly claimed during the hour-and-a-half of testimony, that he was “eager to help” but would only do so if the SEC provided him with an attorney. After adjourning the hearing, the SEC promptly filed an Application for Order to Show Cause and for Order to Comply with Administrative Subpoena, which the Court ruled on just five days later.

Per the Court’s Order, Garza has until September 4th to comply or show cause why he need not comply with the subpoena. The Garza case further illustrates that although fear-of-self-incrimination, when properly communicated via assertion of one’s Fifth Amendment Rights, may be a valid grounds for refusing to testify before the SEC, simply claiming general fear, nervousness or intimidation, is not enough.

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.    

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.

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”

The U.S. Department of Justice, through the Assistant Attorney General in charge of its Criminal Division, spoke forcefully on Tuesday regarding “the role of criminal law enforcement in prosecuting conduct that may also be subject to regulatory enforcement.”   Speaking at a conference at New York University, AAG Leslie R. Caldwell discussed the sometimes “critical need” for criminal prosecution even where there are civil and regulatory options, noting that individuals may receive prison sentences and companies may suffer collateral consequences that are “the only just punishment” for the conduct at issue and that serve to deter others.  Recognizing that there are different kinds of breaches, she spoke of calibrating the penalty to the nature of the breach and the entity’s history and culture.   AAG Caldwell also stated that  DOJ’s Criminal Division, unlike other authorities, requires entities to admit their misconduct when resolving a criminal matter by a Non-Prosecution Agreement, a Deferred Prosecution Agreement, or a guilty plea.  She addressed the Criminal Division’s power – and resolve – when it suspects or finds non-compliance with an NPA or a DPA, stating,

“And let me be clear:  the Criminal Division will not hesitate to tear up a DPA or NPA and file criminal charges, where such action is appropriate and proportional to the breach.”

In addition to the strong message that DOJ will ultimately bring a criminal prosecution if it believes an entity has committed a worthy breach of an NPA or a DPA, AAG Caldwell’s remarks serve as a reminder that there are steps that can be taken to avoid such a consequence.  If an entity is under an NPA or DPA, rigorous adherence to its terms are, of course, required.  More importantly to the vast number of entities that are not laboring under such agreements, proactively conducting risk assessments and fine-tuning compliance policies, procedures and training should be done at least annually and whenever changing circumstances make it advisable.

 

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