On July 28, 2020, the U.S. Securities and Exchange Commission (SEC) accused six individuals and their companies with securities fraud in connection with two cannabis-related businesses in California that raised $25 million in an unregistered securities offering.  The SEC’s complaint was filed in the Central District of California and seeks permanent injunctions, disgorgement of ill-gotten

On June 22, 2020, the U.S. Supreme Court decided in Liu v. SEC that in an SEC civil proceeding a disgorgement award that does not exceed a wrongdoer’s profit and is awarded for victims is equitable relief permissible under the applicable statute. The opinion answers an important question left open by the Court in Kokesh v. SEC that disgorgement operates as a “penalty,” rendering claims for disgorgement subject to the five-year statute of limitations. See Supreme Court Reigns in SEC’s Disgorgement Power. Liu closes the door on speculation that the Court was poised to hold that the SEC did not have authority to seek disgorgement.
Continue Reading SEC Can Recover Disgorgement, With Limits

Perkins Coie’s award-winning White Collar & Investigations practice has teamed up with the ABA’s Global Anti-Corruption Committee to launch a podcast series as an extension of our White Collar Briefly blog.

Our first five episodes, linked below, feature fascinating, candid conversations with a variety of special guests, including:

  • American “book of the year” author, editor, screenplay writer and publisher Dave Eggers
  • Joel Esquenazi (defendant in the high-profile US v. Esquenazi FCPA case)
  • Molson Coors’ Global Ethics & Compliance Chief Caroline McMichen
  • Chicago-based U.S. District Judge Virginia Kendall
  • University of Colorado COO (and former GC) Patrick O’Rourke
  • Avanos Medical Deputy GC Ross Mansbach

Note that all episodes are available on Spotify, Google Podcast, and Apple Podcast. Additionally, you can visit our blog and subscribe to receive each new podcast, including the highly-anticipated Dave Eggers podcast, in your inbox.
Continue Reading Introducing the White Collar Briefly Podcast

Section 14(e) of the Securities Exchange Act prohibits deceptive conduct when making a tender offer to shareholders.  Recently, in Emulex Corp. v. Varjabedian, the United States Supreme Court declined to resolve a split among the circuit courts about what a plaintiff alleging a violation of Section 14(e) must prove.  As a result, the Ninth Circuit is currently the only circuit allowing Section 14(e) claims based on negligent (as opposed to intentional) misrepresentations or omissions of material facts.  This development may result in an uptick in tender offer lawsuits in that jurisdiction.

The Emulex case stemmed from the company’s merger with Avago.  As part of that merger, Avago initiated a tender offer for Emulex’s outstanding shares.  In accordance with SEC rules, Emulex filed a public statement with the SEC in which it supported Avago’s tender offer and recommended that Emulex shareholders tender their shares.  Among other things, the statement observed that Emulex shareholders would receive a premium on their stock and described financial analyses that had been undertaken to reach this conclusion.  However, Emulex’s statement omitted reference to a portion of its financial analysis that concluded the takeover premium offered for Emulex’s outstanding shares was below average for mergers involving similar companies.  A putative class of shareholders brought suit, alleging that Emulex’s statement file with the SEC violated Section 14(e) of the Securities Exchange Act by failing to include the more lackluster price analysis.
Continue Reading Supreme Court Declines to Resolve Circuit Split Over Liability in Tender Offer Suits

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

On December 26, 2018, the Securities and Exchange Commission (“SEC”) announced a settlement with communications technology firm Polycom, Inc. (“Polycom” or the “Company”) for violating the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) in connection with a scheme to bribe Chinese government officials. Under the settlement, Polycom agreed to pay the SEC approximately $12.5 million in disgorgement and prejudgment interest and a civil money penalty of $3.8 million. The Polycom settlement illustrates the liability that can arise from reliance on third-party agents such as distributors, but—as explored below—also presents a missed opportunity for the SEC to provide some clarifying guidance for companies looking to avoid similar outcomes.
Continue Reading SEC’s Polycom FCPA Settlement Leaves Unanswered Questions

On June 28, 2018, the U.S. Securities and Exchange Commission proposed three rule changes to the Commission’s Whistleblower Program, including one that would authorize the SEC to “downward adjust” monetary awards in large actions for which an award might “exceed an amount that is reasonably necessary to advance the program’s goals”—in the view of the Commission.  The proposed change prompted an immediate response from Commissioner Kara Stein who issued a separate Statement on Proposed Amendments to the Commission’s Whistleblower Program Rules (“Statement”) in which she highlights concerns that a move towards a more subjective standard in determining monetary awards could threaten a whistleblower’s incentive to come forward, given the added uncertainty in outcome.  Additionally, Stein questions whether the SEC has the statutory authority under the Dodd-Frank Act to alter the rules impacting awards in this way.    
Continue Reading SEC May Limit “Game Changing” Whistleblower Bounties

On June 21, 2018, the Supreme Court issued its highly anticipated opinion in Lucia v. SEC, finding that the manner in which the U.S. Securities and Exchange Commission (SEC) selects its “in-house” administrative law judges (ALJs) violates the Appointments Clause of the Constitution.  In a 7-2 decision, the Court held that ALJs are “inferior officers” and must be appointed by the president or head of the agency, rather than hired by SEC staff through the civil service process.  The immediate practical impact of the decision requires that petitioner Raymond Lucia be afforded a new hearing before “a properly appointed official.”

In recent years, capitalizing on what some commentators considered a “home court advantage” for enforcement actions, the SEC began favoring administrative proceedings in which agency ALJs serve as adjudicators rather than judicial proceedings in federal court.  An ALJ assigned to hear an SEC enforcement action has the power to issue an initial decision containing factual findings, legal conclusions, and appropriate remedies.  The Commission is not required to review the ALJs decision, and if it declines to review, the ALJs “initial” decision is deemed a final action of the Commission.  In practice, most ALJ initial decisions become final without any Commission review; for example, 2016 data revealed that 90% of SEC ALJ initial decisions were not reviewed by the Commission. 
Continue Reading SCOTUS Finds SEC ALJ Appointments Unconstitutional

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

On December 5, 2017, the U.S. Securities and Exchange Commission (SEC) issued an order awarding more than $4.1 million to a whistleblower who voluntarily provided original information to the agency concerning a widespread, multi-year securities-law violation.  The  award was paid pursuant to the SEC’s Whistleblower Program under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).  While the identities of whistleblowers are kept confidential in accordance with the Program’s rules, information released by the SEC indicates that the latest payout marks the tenth award made to a whistleblower outside the U.S.  A total of 50 whistleblowers have received monetary awards since the first bounty was awarded in 2012.
Continue Reading Foreign Whistleblowers Continue to Collect Lucrative Bounties under Dodd-Frank