On September 2 and 3, 2021, the Securities and Exchange Commission (“SEC”) announced settlements with Pareteum Corporation (“Pareteum”) and Kraft Heinz Co. (“KHC”) for accounting fraud following years of alleged accounting improprieties and financial restatements at both companies. The underlying facts differed in significant ways, including with respect to the alleged involvement of senior executives, but both companies apparently received cooperation credit for their prompt and proactive remediation and cooperation with the SEC Division of Enforcement’s investigations. The messaging in relation to the announcement of these cases and their timing, coming in the early days of new Enforcement Director Gurbir Grewal’s tenure, is instructive. We expect the SEC to continue to focus on accounting fraud and to credit companies who provide cooperation in these challenging and resource-intensive investigations. To see a meaningful increase in the frequency and nature of cooperation, the SEC would be well-served to provide even more explicit guidance on how cooperation results in improved settlement terms. That said, these recent settlements are helpful in understanding the benefits of cooperation at this time. Continue Reading Two Recent Settlements Highlight Heightened SEC Focus on Accounting Fraud and Potential Benefits of Cooperation
On August 9, 2021, the SEC issued a cease-and-desist order against digital asset exchange Poloniex, Inc. for allegedly operating an unregistered exchange in violation of Section 5 of the Exchange Act in connection with its operation of a trading platform that facilitated the buying and selling of digital asset securities.
In the cease-and-desist order, the SEC alleged that Poloniex met the definition of an “exchange” because it “provided the non-discretionary means for trade orders to interact and execute through the combined use of the Poloniex website, an order book, and the Poloniex trading engine.” The SEC also found, based on internal communications, that Poloniex decided to be “aggressive,” ultimately listing token(s) it had internally determined carried a “medium” risk of being considered securities under the Securities Act of 1933 pursuant to the test set forth by the U.S. Supreme Court in SEC v. W.J. Howey. However, the SEC did not identify what digital asset(s) it determined were securities nor why, simply stating that Poloniex facilitated trading of “digital assets that were investment contracts and therefore securities.”
Without admitting or denying the SEC’s findings, Poloniex agreed to the entry of the order and a payment of $10,388,309 in disgorgement, prejudgment interest, and a civil penalty. Continue Reading SEC Enforcement Action Against Poloniex Signals Heightened Scrutiny for Crypto Exchanges
On July 29, 2021, the U.S. Attorney’s Office for the Southern District of New York unsealed a securities and wire fraud indictment against Trevor Milton, the founder and one-time chairman of Nikola Corporation (“Nikola”), a pre-revenue electric- and hydrogen-powered vehicle company which went public through a merger with a special-purpose acquisition company (“SPAC”). The Indictment alleges that Milton made deceptive, false, and misleading claims regarding Nikola’s products and technology, which were directed at retail investors through social media and television, print, and podcast interviews. The SEC also filed a parallel civil action against Milton, alleging violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and which contends that Milton engaged in a “relentless public relations blitz” on social media and the popular press directed at “Robinhood investors” in order to inflate Nikola’s stock price.
These actions further confirm the heightened law enforcement and regulatory scrutiny of SPACs, as well as continuing interest by government authorities in protecting retail investors in so-called meme stocks. Continue Reading DOJ Indicts Founder of Nikola for Allegedly Defrauding Retail SPAC Investors
On July 13, 2021, the Securities and Exchange Commission (“SEC”) announced a major enforcement action related to a proposed merger between a special purpose acquisition company (“SPAC”) and a privately held target company (“Target”). This followed numerous warnings by the SEC staff over several months of enhanced scrutiny of such transactions under the federal securities laws. The respondents, except for the Target’s CEO, settled the action by collectively agreeing to civil penalties of approximately $8 million and to certain equitable relief described below.  Continue Reading SEC Brings SPAC Enforcement Action and Signals More to Come
On May 6, 2021, the United States Government Accountability Office (“GAO”)—an independent, non-partisan congressional watchdog organization—published a report summarizing its study on the impact of the Consumer Financial Protection Bureau’s (“CFPB” or the “Bureau”) reorganization of its fair lending enforcement and supervisory activities. In 2018, the Trump administration-led CFPB decided to relocate the Office of Fair Lending and Equal Opportunity (the “Office of Fair Lending”) from the Supervision, Enforcement, and Fair Lending Division (“SEFL”) to the Office of Equal Opportunity and Fairness (“OEOF”), a division within the Office of the CFPB Director that plays no role in enforcement. GAO found shortcomings in the reorganization process and highlighted that the reorganization likely led to a decrease in fair lending enforcement activity in 2018. GAO ultimately recommended that the Bureau analyze the effects of the reorganization on its enforcement and supervision of fair lending laws, develop performance goals, and take measures to assess its fair lending activities going forward.
While not binding on the CFPB, GAO’s report is significant as it comes at a time when the current administration has signaled that it is motivated to increase enforcement of fair lending laws. Acting CFPB Director Dave Uejio has committed the Bureau to implementing GAO’s recommendations, and Biden’s CFPB Director nominee Rohit Chopra has similarly expressed that he would focus on fair lending. Likewise, progressive advocates are using the report as an opportunity to apply increased pressure on the Biden administration to become more active in this area. Continue Reading GAO Recommends CFPB Evaluate Trump Era Fair Lending Reorganization
On May 12, 2021, Telefonaktiebolaget LM Ericsson (“Ericsson”) announced that it had reached an agreement to settle a claim by a competitor, Nokia Corporation, for €80 million (approximately $97 million). Although Nokia’s complaint against Ericsson was not filed publicly, and therefore the details of the claim are not known, Ericsson’s announcement stated that “[t]he settlement relates to events that were the subject of a 2019 resolution with the U.S. Department of Justice (DOJ) and U.S. Securities and Exchange Commission (SEC) of investigations into Ericsson’s violations of the U.S. Foreign Corrupt Practices Act (FCPA).” This appears to be a rare instance in which a company that allegedly paid bribes to obtain business from a government entity agreed to compensate a competitor that lost out on the business opportunity as a result of the corrupt conduct, and demonstrates a further, significant risk of follow-on litigation relating to FCPA violations. Continue Reading Recent Settlement Highlights Risk of Follow-On Litigation Related to FCPA Investigations
On April 29, 2021, the Securities and Exchange Commission (the “SEC”) announced settled charges against eight public companies that filed notifications of late filings on Form 12b-25 (more commonly known as “Form NT”) without disclosing in those filings a pending restatement or correction of financial statements.
These settlements are a reminder that filing a Form NT is not only a necessary procedural step when an issuer will be delayed in filing a 10-K, 10-Q, 20-F or other specified report; it is also a decision point for making potentially sensitive disclosure to the market, and should reflect input from both a company’s IR and legal departments.
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Last week, the Second Circuit affirmed the dismissal for lack of Article III standing a proposed class action against a health services provider that mistakenly disclosed personally identifiable information (“PII”). In its opinion, the Second Circuit held that plaintiffs may establish Article III standing based on an increased risk of identity theft or fraud following an unauthorized disclosure of their data, but that the standard was not met based on the facts presented. The decision, which is the first time the Second Circuit has explicitly adopted this standard, has potentially important implications going forward for data breach cases.
The Biden CFPB has begun a significant expansion in the use of consumer finance enforcement tools to act on behalf of marginalized communities. On the back of Acting Director David Uejio’s announcement earlier this year of his intention to prioritize cases involving racial equity, and subsequent filing of the Biden CFPB’s first enforcement action against Libre Services for alleged abuse and “unfair practices” involving Spanish-speaking immigrant communities, the CFPB has also signaled a focus on potential violations of fair lending protections for LGBTQ individuals. Continue Reading The CFPB Broadens Enforcement Reach to Include Protection of LGBTQ Individuals
Conventional wisdom is that under the Biden Administration, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) will pivot to a more muscular approach to enforcement of consumer financial protection laws. The current leadership has already begun to signal the CFPB’s move towards a more aggressive approach while President Biden’s nomination to lead the agency, FTC Commissioner Rohit Chopra, is considered by the Senate Committee on Banking, Housing, and Urban Affairs. CFPB Acting Director Dave Uejio has issued a number of statements identifying the agency’s priorities, particularly for the Bureau’s Division of Supervision, Enforcement & Fair Lending (“SEFL”), which are expected to continue—and potentially broaden—under a Chopra CFPB. The CFPB has already begun to rescind Trump administration policies restricting its enforcement more generally, and has indicated its intent to prioritize the enforcement of potential violations related to the COVID-19 pandemic and racial inequity. Continue Reading The CFPB’s Much-Anticipated Enforcement Shift Has Begun