Following a week of trial proceedings in the case of defendant Jittesh Thakkar—a software programmer indicted in February 2018 on conspiracy and aiding and abetting charges related to a spoof trading scheme—the government’s case against Thakkar ended in a mistrial.  The jurors could not reach a unanimous verdict on the two aiding-and-abetting spoofing counts

The U.S. Supreme Court recently handed down a win for the SEC and private securities litigants, significantly broadening the scope of primary liability under Rule 10b-(5).  In Lorenzo v. SEC, the Court held that liability under Rules 10b-5(a) and (c)—which make it unlawful to employ a scheme to defraud or engage in any practice that operates as a fraud—is not limited only to those who make false or misleading statements as contemplated under sister-section Rule 10b-(5)(b), but may also extend to those who disseminate such statements made by others knowing they are false or misleading.

Background

This case arose from an SEC enforcement action brought against Francis Lorenzo, Director of Investment Banking for a New York broker-dealer.  The SEC alleged that, in connection with a $15 million debt offering, Lorenzo sent emails to prospective investors that significantly overstated the value of the investment.  It was undisputed that the emails were sent at the direction of Lorenzo’s boss, who supplied all the content and “approved” the messages.  It was also undisputed that Lorenzo knew that statements regarding the value of the investment were false or misleading.

The SEC concluded that, by knowingly sending false statements from his email account, Lorenzo directly violated SEC Rule 10b–5 and related provisions of the securities law, including Sections 10(b) of the Exchange Act of 1934 and Section 17(a)(1) of the Securities Act of 1933.  Rule 10b-5 makes it unlawful to: (a) employ a device, scheme, or artifice to defraud, (b) make an untrue statement of a material fact, or (c) engage in an act, practice, or course of business which does or would operate as a fraud or deceit in connection with the purchase or sale of securities.

Lorenzo appealed, contending he had no liability under Rule 10b–5 because under the Supreme Court’s ruling in Janus Capital Group, Inc. v. First Derivative Traders, liability for false statements was limited only to the “makers” of those statements as contemplated by Rule 10b–5(b), defined only as those with “ultimate authority” over the statements’ content and communication.  One who simply prepares or publishes a statement on behalf of another, as Lorenzo saw his role, fell outside of the scope of primary liability under Janus.  The D.C. Circuit agreed that since Lorenzo’s boss directed him to send the emails, supplied their content, and approved them for distribution, Lorenzo did not “make” the statements, and thus could not be held primarily liable for a Rule 10b-5(b) violation. But, the D.C. Circuit sustained the SEC’s finding of primary liability under Rules 10b-5(a) and (c) for knowingly disseminating statements he knew to be false, even though he did not “make” the statements himself.

The Supreme Court’s Ruling

On appeal to the Supreme Court, Lorenzo advanced two main theories, both of which the Supreme Court flatly rejected.
Continue Reading Forward at Your Own Risk – U.S. Supreme Court Expands the Scope of Rule 10(b)-5 Liability

Perhaps no part of the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) has garnered as much attention as its whistleblower provisions, which pay corporate whistleblowers bounties under some circumstances, and prevent employers from retaliating against whistleblowing employees. Often times, the bounties paid to whistleblowers under Dodd-Frank warrant the most attention-grabbing headlines.  But Dodd-Frank’s

The month of March has brought with it the first-ever criminal municipal bond securities fraud conviction, the resolution of enforcement actions targeting banks and senior executives accused of shirking duties to oversee municipal bond issuances, and proposed rule amendments intended to improve municipal securities disclosures—continuing a trend of intensified regulatory enforcement that targets industry “gatekeepers” such as auditors, bond underwriters, and others that serve investor clients entering the municipal bond market.   
Continue Reading March Madness in the Municipal Bond Market – A Focus on Gatekeepers

The air of uncertainty was palpable as current and former members of the U.S. Securities and Exchange Commission’s (SEC) Division of Enforcement spoke at the Securities Regulation Institute’s 44th Annual Conference in Coronado, California earlier this week.  Important questions went largely unanswered about the impact of the recent resignations of both SEC Chair Mary Jo White and Enforcement Director Andrew J. Ceresney, and the future direction of the enforcement program under the new presidential administration and proposed SEC Chair Jay Clayton.  SEC Enforcement staff in attendance steered clear of prognostications, and instead used the conference as an opportunity to reiterate the agency’s ongoing enforcement initiatives and successes from the past year.
Continue Reading Uncertainty Looms Over SEC Enforcement Staff

The massive Panama Papers leak has attracted attention to the use of offshore business entities and implicated 2,400 U.S.-based clients of Mossack Fonseca. U.S. taxpayers with offshore assets should be wary of increased scrutiny by federal regulators, which may lead to criminal cases brought by U.S. Department of Justice.

In this update we detail the

In the largest action brought under the Kleptocracy Asset Recovery Initiative, the DOJ seeks to recover over $1 billion in assets bought with laundered funds misappropriated from 1Malaysia Development Berhad (“1MDB”), a Malaysian sovereign wealth fund. 1MDB was created by the Malaysian government to promote economic development through international partnerships and foreign direct investment. The

The Securities and Exchange Commission (SEC) recently announced an administrative settlement with Apex Fund Services (US) Inc., a firm providing administrative services to private funds, based on its alleged failure to heed red flags and correct faulty accounting by two private equity managers.

The SEC alleged that, in carrying out its contractual fund administration functions,

On May 23, 2016, the Second Circuit presented a significant setback to the Department of Justice (DOJ) by reversing a $1.27 billion penalty against Bank of America and Countrywide Loans.  As we’ve posted before, in October 2012, DOJ filed a civil suit against Bank of America and Countrywide based on mortgages sold to Fannie Mae and Freddie Mac.  The Government alleged that Countrywide had a program named “the Hustle” or “High-Speed Swim Lane,” which rewarded the speed of processing residential mortgage loans regardless of their quality.  This, according to the Government, resulted in thousands of fraudulent or defective loans that were subsequently sold to Government Sponsored Entities (GSEs) such as Fannie Mae and Freddie Mac.  Although Countrywide started the program in August 2007, the program continued after Bank of America purchased Countrywide in 2008.  
Continue Reading Second Circuit Reverses $1.27B Penalty Under FIRREA