One year ago, the U.S. Supreme Court ruled in Kokesh v. SEC that the U.S. Securities and Exchange Commission’s disgorgement remedy constitutes a “penalty,” and is therefore subject to the five-year statute of limitations in 28 U.S.C. § 2462. As a result, the SEC can no longer seek disgorgement of ill-gotten gains older than five years. The SEC’s Enforcement Division has traditionally relied heavily on the agency’s virtually unfettered disgorgement power in its settled and litigated cases. As expected, Kokesh has forced the division to trim its disgorgement demands in certain cases and to abandon it outright in others. To date, however, the most dire predictions of Kokesh’s impact — that it would lead to the wholesale elimination of the SEC’s disgorgement power and place strict limitations upon other types of so-called “equitable” remedies — have not come to pass. That said, many of the issues commentators raised in the immediate aftermath of Kokesh have not yet percolated up through the appellate courts, and significant uncertainty concerning its full impact remains. What is clear, however, is that, absent congressional intervention, the SEC will face challenges in obtaining the full measure of ill-gotten gains in long-running, resource-intensive investigations.
Alexander Janghorbani’s practice focuses on complex securities issues, litigation and enforcement, informed by nearly nine years of service with the U.S. Securities and Exchange Commission.
On May 3, the Second Circuit vacated on evidentiary grounds Jesse Litvak’s conviction – after a second trial – on a single count of securities fraud related to trades of residential mortgage backed securities (“RMBS”) and remanded the case to the United States District Court for the District of Connecticut. This ruling is the latest setback for the government, as the Second Circuit in 2015 had vacated Litvak’s prior conviction on ten counts of securities fraud, one count of fraud against the Troubled Asset Relief Program (“TARP”), and four counts of making false statements to the government, following his first trial. Continue Reading Second Circuit Again Reverses Fraud Conviction of RMBS Trader Litvak
On April 18, 2018, the Securities and Exchange Commission (“SEC”) proposed Regulation Best Interest under the Securities Exchange Act of 1934 to establish a new “best interest” standard of conduct for broker-dealers when making a recommendation of any transaction or investment strategy involving securities to a retail customer. The SEC also proposed an interpretation to reiterate and clarify the fiduciary duty applicable to investment advisers under the Investment Advisers Act of 1940. Finally, the SEC proposed a new disclosure form for investment advisers and broker-dealers to provide to retail investors.
In proposing the new Regulation Best Interest and the Guidance, the SEC has attempted to more closely align the standards of conduct applicable to broker-dealers and investment advisers while recognizing the fundamental differences between the services each provides and maintaining investor choice.
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2017 brought marked challenges to the SEC’s ability to aggressively enforce the securities laws, including the Supreme Court limiting the SEC’s ability to seek disgorgement and court action endangering the validity of its oft-used administrative proceedings. 2017 also saw a decrease in the SEC’s total enforcement statistics. However, there is reason to believe that 2018 will see an uptick in enforcement actions and perhaps some clarity on the use of administrative proceedings. The SEC enters 2018 with a full complement of Commissioners and most senior Enforcement leadership positions filled, and it now has clearly articulated areas of focus, including protecting retail investors and prosecuting cyber cases. A recent Supreme Court cert grant should also help move to closure questions surrounding the use of administrative proceedings, historically an important enforcement mechanism. Below are a few observations from the past year, as well as key enforcement areas to keep an eye on in 2018. Continue Reading SEC Year-in-Review and a Look Ahead
On January 12, 2018, the Supreme Court granted a writ of certiorari in Raymond J. Lucia Cos., Inc. v. SEC, No. 17 130, a case raising a key constitutional issue relating to the manner in which the U.S. Securities and Exchange Commission’s (SEC or Commission) appoints its administrative law judges (ALJs). The Court will decide “[w]hether administrative law judges of the [SEC] are Officers of the United States within the meaning of the Appointments Clause.” The answer to this question matters because if SEC ALJs are “officers,” then they should have been appointed by the Commission itself instead of hired through traditional government channels—and the Commission only exercised its ALJ appointment authority in late-2017. Although the question is limited to SEC ALJs, any decision could also impact ALJs at other agencies government-wide. Continue Reading Supreme Court Grants Certiorari on the Constitutionality of SEC ALJ Appointments– What This Means for the Securities Industry
More than six months have passed since the Supreme Court held, in Kokesh v. SEC, 137 S. Ct. 1635 (2017), that the Securities and Exchange Commission’s (SEC or Commission) disgorgement power constitutes a penalty subject to a five-year statute of limitations. As expected, the Supreme Court’s holding on the penal nature of SEC disgorgement has spurred defendants to seek to broaden its application to other contexts. Most fundamentally, this includes whether the SEC has the statutory authority to seek disgorgement at all. To date, courts have mostly turned aside these challenges. At the same time, however, litigants have grown more creative in their attacks, evidenced by a class action suit seeking reimbursement of nearly $15 billion from the SEC of certain historical disgorgement payments.
Below, we look back at how the lower courts have handled post-Kokesh challenges to the SEC’s disgorgement power and other so-called equitable remedies to date. Continue Reading Kokesh v. SEC: Half a Year On
Following the 2016 election, it has been widely assumed that the SEC’s Division of Enforcement would no longer pursue the “broken windows” policy implemented under then-SEC Chair Mary Jo White. Under that approach, the Division of Enforcement intentionally pursued smaller, non-fraud cases in an attempt to improve the overall compliance culture within the securities industry. Pronouncements this fall by the Co-Directors of the Division of Enforcement, Stephanie Avakian and Steven Peikin, on their face confirm that assumption, suggesting an end to “broken windows” as a broad-based strategy focused on street-wide sweeps for strict liability and other non-scienter conduct. However, signs persist that the Enforcement Division will continue to pursue some varieties of non-scienter cases, particularly where there exists, even indirectly, the potential for harm to retail investors.
In a September 25, 2017 speech in New York, U.S. Commodity Futures Trading Commission (the “CFTC”) Division of Enforcement (the “Division”) Director James McDonald outlined the CFTC’s focus on creating greater incentives for self-reporting and cooperation in order to deter and detect misconduct in the commodities markets. Director McDonald’s speech accompanied the release of an Updated Advisory on Self Reporting and Full Cooperation, which supplements the guidance issued by the CFTC earlier this year.
The new guidance reflects an effort by the CFTC to rebalance the incentives facing firms who identify potential misconduct to favor voluntary reporting and pro-active cooperation, reinforced by the potential for concrete benefits in the form of fine reductions and, potentially, declination of prosecution in appropriate cases. Commodities market participants and financial institutions should take note of this guidance when considering how to respond to potential evidence of misconduct and in dealing with the Division.
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