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Matthew C. Solomon has significant experience in complex and high-stakes civil and criminal matters, having served for 15 years with the U.S. Department of Justice and the U.S. Securities and Exchange Commission—including most recently as the SEC’s Chief Litigation Counsel.

Last month, the Supreme Court granted a writ of certiorari in Lorenzo v. SEC,[1] a case where Francis Lorenzo, a registered representative of a broker-dealer, allegedly emailed false and misleading statements to investors that were originally drafted by his boss.  After administrative and Commission findings of liability, a divided panel of the D.C. Circuit determined that, while Lorenzo was not the “maker” of the statements, he did use them to deceive investors, and thereby violated the so-called scheme liability provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder.  As described in the petitioner’s motion seeking certiorari, the case presents the question whether, under the Court’s 2011 Janus Capital Group, Inc. v. First Derivative Traders decision,[2] the scheme liability provisions of Rule 10b-5(a) and (c) may be used to find liability in connection with false or misleading statements by persons who are not themselves the maker of those statements and, thus, not liable under the false-and-misleading statements provision of Rule 10b-5(b).[3]  The answer to this question could have implications for the Securities and Exchange Commission’s (“SEC” or “Commission”) Enforcement Division as well as potentially significant implications for private securities litigants who principally rely on Section 10(b) to bring private causes of action sounding in fraud.  Continue Reading Lorenzo v. SEC: Will the Supreme Court Further Curtail Rule 10b-5?

On June 25, 2018, the Second Circuit amended its opinion in United States v. Martoma, an insider trading case that has received significant attention as a vehicle to clarify the “personal benefit” element of tippee liability in insider trading cases in the Second Circuit.  While the Second Circuit again upheld the insider trading conviction of former S.A.C. Capital Advisors portfolio manager Mathew Martoma, this time it appears to have breathed life back into its “meaningfully close personal relationship” requirement for establishing insider trading liability against an individual who receives and trades on confidential information (a “tippee”).  Those  following the evolution of insider trading doctrine should pay close attention to lower courts’ interpretations of the “meaningfully close personal relationship” test, and what prosecutors must show to satisfy this requirement, in the wake of Martoma. Continue Reading Second Circuit Potentially Revives Newman’s “Meaningfully Close Personal Relationship” Test, Amends Martoma Decision

Last week, the Supreme Court ruled in Lucia v. SEC that SEC Administrative Law Judges are “officers” for the purposes of the Constitution’s Appointments Clause.  Not only does the decision require the rehearing of the petitioner’s case, but it leaves unanswered questions for the SEC and other agencies moving forward.  Indeed, another trip up to the Supreme Court on a related constitutional issue involving the ALJs’ civil service protections seems likely.  In the meantime, the SEC and other agencies will be forced to grapple with the legitimacy of their administrative proceedings, potentially impacting their enforcement efforts.

Please click here to read the full alert memorandum.

A recent report in the Wall Street Journal, drawing on a source “familiar with the matter”, indicates that the Securities and Exchange Commission’s Division of Enforcement has launched a probe into whether certain issuers may have improperly rounded up their earnings per share to the next higher cent in quarterly reports. While the SEC has neither confirmed the report nor otherwise disclosed the existence of any such investigation, the Journal reports that the SEC has sent inquiries to at least 10 companies requesting information about such accounting adjustments that could have inflated reported earnings. The targeted companies have not yet been identified. Whether the reported inquiries amount to a broad-based sweep of issuer accounting practices remains to be seen. However, such an investigation would be consistent with SEC Chairman Jay Clayton’s announced enforcement priorities, which include a focus on public-company accounting practices and the protection of retail investors.

Please click here to read the full alert memorandum.

One year ago, the U.S. Supreme Court ruled in Kokesh v. SEC[1] 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.

Continue Reading Kokesh and Its Impact on SEC Enforcement, a Year Later

On April 25, 2018, a jury in the United States District Court in Connecticut acquitted former UBS AG (“UBS”) trader Andre Flotron of conspiring to manipulate the precious metals futures market through “spoofing.”  The verdict, the first acquittal in a criminal spoofing-related case since the practice was outlawed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010, reflects the difficulties the government faces in cracking down on the practice. Continue Reading Acquittal of Former UBS Trader Signals Potential Challenges for Government’s Anti-Spoofing Initiative

On April 24, 2018, Altaba, formerly known as Yahoo, entered into a settlement with the Securities and Exchange Commission (the “SEC”), pursuant to which Altaba agreed to pay $35 million to resolve allegations that Yahoo violated federal securities laws in connection with the disclosure of the 2014 data breach of its user database.  The case represents the first time a public company has been charged by the SEC for failing to adequately disclose a cyber breach, an area that is expected to face continued heightened scrutiny as enforcement authorities and the public are increasingly focused on the actions taken by companies in response to such incidents.  Altaba’s settlement with the SEC, coming on the heels of its agreement to pay $80 million to civil class action plaintiffs alleging similar disclosure violations, underscores the increasing potential legal exposure for companies based on failing to properly disclose cybersecurity risks and incidents.

Please click here to read the full alert memorandum.

On Wednesday, the Supreme Court resolved a question that had created significant uncertainty concerning the scope of the anti-retaliation protections provided by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).

In Digital Realty Trust, Inc. v. Somers, the U.S. Supreme Court unanimously rejected the expansive interpretation of Dodd-Frank’s anti-retaliatory protections established by relevant Securities and Exchange Commission (“SEC”) regulations and previously accepted by the Second and Ninth Circuits. In so doing, the Court held that employees who report potential securities law violations internally but not to the SEC fall outside the definition of a “whistleblower” under Dodd-Frank and accordingly do not benefit from its anti-retaliation protections. Instead, the Court held that the plain text and purpose of Dodd-Frank make clear that its anti-retaliatory protections – and not just Dodd-Frank’s whistleblower bounty incentives – apply only to whistleblowers who report securities law violations to the SEC.

The decision provides an additional incentive for whistleblowers to report to the SEC, and limits some remedies that might otherwise be available to whistleblowers who face retaliation. However, the decision should not generally cause companies to change their whistleblower policies and practices.

Please click here to read the full alert memorandum.

As the Securities and Exchange Commission Division of Enforcement signaled in its recent annual report, policing the asset management industry will be a key priority in its continuing focus on protecting retail investors.[1]  This renewed emphasis reaffirms the view that if a significant error or misconduct is detected, firms generally should not wait for SEC scrutiny to take corrective steps and mitigate investor harm.  Voluntary remediation must be considered as part of any strategy for managing regulatory exposure as well as reputational and litigation risk.  Where a firm does decide to remediate, it must proceed carefully to avoid pitfalls that could lead to fresh scrutiny from regulators or even private civil litigation.

This post provides guidance to regulated firms on managing risks once they determine to voluntarily remediate – as distinct from the fact-specific issue of whether to “self-report” errors or misconduct – in the SEC context.  It begins with an overview of the benefits and risks of voluntary remediation and common types of remedial measures.  It then identifies potential issues that can arise when undertaking remediation.  Finally, it advises on structuring and implementing remedial measures to minimize risks of regulatory or litigation exposure. Continue Reading Voluntary Remediation in the SEC Context: Avoiding Common Pitfalls

On January 12, 2018, the Supreme Court granted a writ of certiorari in Raymond J. Lucia Cos., Inc. v. SEC, No. 17 130,[1] 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