Corporate Defense and Disputes

Important developments in U.S. securities law, white collar criminal defense, regulatory enforcement and other emerging issues impacting financial services institutions, publicly traded companies and private investment funds

SEC Enforcement Co-Director Gives Guidance for Wells Process, Part 2

On June 4, we posted a summary of SEC Enforcement Co-Director Steven Peikin observations during his recent keynote address at the New York City Bar Association’s 7th Annual White Collar Crime Institute.  Co-Director Peikin imparted a few suggested “do’s and don’ts” for effective communication with the SEC during the Wells process.  Although Co-Director Peikin’s suggestions should serve as helpful guides to defense counsel, we believe a few of the observations bear further consideration.

1. Potential Advice of Counsel Defense.

Co-Director Peikin stated that “[i]n my experience, alluding to privileged information [in connection with a potential advice of counsel defense] in [a] Wells meeting – but not sharing it with the staff – is not effective” because the Division “cannot ground our decision-making on documents we cannot see or testimony we cannot hear.”  While it may be true that the Division will not rest its decision whether to recommend an action solely on an undisclosed, potential reliance on advice of counsel defense, it is also unlikely that the Division will simply ignore such a possible defense.  At the very least, the Division will have to consider the possible defense as a potential litigation risk.  The Commission has been so concerned about the problems associated late claims of the reliance on advice of counsel or other professionals, that in 2016, it amended the Rules of Practice for its administrative proceedings to require, among other things, that respondents state in the answer whether the respondent relied on the advice of counsel, accountants, auditors, or other professionals.

There may be situations in which it makes sense to waive the privilege so that the Division can fully evaluate an advice or presence of counsel defense.  But there may also be situations in which a respondent may have such a defense, but is not yet ready to waive the privilege.  In those situations, defense counsel should not hesitate to raise the existence of the potential defense during a Wells meeting.

2. Commission Votes.

Co-Director Peikin also stated that “my experience has been that is not particularly persuasive when defense counsel argues at a Wells meeting that we won’t have the votes for a particular case, or that a particular Commissioner will not support what we propose recommending.”

However, Commissioners often publicly state their positions on enforcement-related issues.  For example, Commissioner Peirce recently stated that “[c]ivil penalties against corporations are another area of concern and a reason that I have voted against some enforcement recommendations” because “[a]fter being the victims of the fraud that led to the SEC investigation, shareholders are now paying a corporate penalty to resolve the matter.”   While it will rarely be beneficial for defense counsel to argue that she knows “the Commissioners’ views better than [the Co-Directors] do,” defense counsel should not hesitate to raise during a Wells meeting arguments that have been endorsed publicly by a Commissioner – and to note that endorsement.

3. Saber-Rattling.

Co-Director Peikin stated that “I have found that it is rarely productive when defense counsel uses a Wells meeting to threaten to take us to trial.”  However, it is not unusual for a respondent to feel that certain issues are of such importance that they are willing to litigate over them.  For example, an individual who is associated with an investment adviser will likely find an industry bar, which will almost certainly end the individual’s career, to be a deal-breaker.

While “[s]imply telling [Enforcement] that the client will litigate” is unlikely to be productive, it can be beneficial for defense counsel to explain that a respondent feels strongly about certain issues or remedies and is willing to litigate over them.  This is particularly true in the current environment in which the SEC has limited resources and must be judicious about expending resources on litigation.

4. Non-Starters.

Finally, Co-Director Peikin stated that “Wells meetings are least productive when defense counsel raise what I call ‘non-starters,’” which he described as “issues of programmatic importance on which counsel knows that the Commission and the Division have taken clear and consistent positions, and on which we simply don’t have any ability to compromise.”  By way of example, he explained that “defense counsel will not make much progress if they ask us during a Wells meeting to forego an injunction in a settled district court action due to possible Kokesh statute of limitations issues.”

However, the SEC’s view that an issue is a “non-starter” does not insulate the issue from challenge or litigation risk.  For example, the SEC had long held the position that its disgorgement claims were not subject to the five-year statute of limitations – until the Supreme Court ruled last year in Kokesh that they were.  Defense counsel should not hesitate to explain during a Wells meeting that she intends to challenge a long-held position of the SEC if that is the case.  At the very least, such arguments could impact the SEC’s willingness to compromise on other potential remedies as part of a settlement.

Our full summary of Co-Director Peikin’s observations can also be read in the June 13 Law360 article, “Tips For Navigating The SEC Wells Process.”

Supreme Court Rules That Federal Courts Are Not Bound to Give Conclusive Effect to Foreign Governments’ Statements About Their Laws

The Supreme Court ruled today that, when a foreign government presents a formal submission to a federal court about the content of the government’s own laws, the court should accord “respectful consideration” to the government’s statements, but is not bound to grant them “conclusive effect.”  The decision in Animal Science Products, Inc. v. Hebei Welcome Pharmaceutical Co. (No. 16-1220) resolves a Circuit split about the weight to accord a foreign government’s description of its own law and could lead to more in-depth litigation of the content and meaning of foreign law, with expert witnesses on both sides addressing the issues. Continue Reading

Supreme Court Prohibits Stacking of Successive Class Actions Beyond Limitations Period

The Supreme Court ruled today that judicially created principles that toll statutes of limitations for class members in timely filed class actions apply only to subsequently filed individual actions, not to follow-on class actions filed outside the limitations period. The decision in China Agritech, Inc. v. Resh (No. 17-432) thus eliminates the specter of a potentially infinite series of class actions in which each class representative claims that limitations periods were tolled by the pendency of the prior class actions.

China Agritech was a securities class action under the Securities Exchange Act of 1934, which has a five-year statute of repose that sets an untollable outer limit on the filing of claims. But many other causes of action are not governed by statutes of repose. The China Agritech decision should have particular impact on those types of cases. Continue Reading

SEC Enforcement Co-Director Gives Guidance for Wells Process

During his recent keynote address at the New York City Bar Association’s 7th Annual White Collar Crime Institute, SEC Enforcement Co-Director Steven Peikin imparted a few suggested “do’s and don’ts” for effective communication with the SEC during the Wells process—typically the last opportunity to address potential charges prior to the authorization of a SEC enforcement proceeding.  We’ve summarized his observations below. Continue Reading

SEC Flexes Funny Bone in Fictional Token Offering

The Securities and Exchange Commission (the “SEC”) has taken to using humor and sarcasm to educate retail investors about the potential risks of purchasing tokens in initial coin offerings (“ICOs”).This week, the SEC issued a press release presenting “a hot investment opportunity.” The release pointed to a website touting the HoweyCoin—a fictional crypto token intending to disrupt the luxury travel industry—as “one of the largest cryptocurrency platforms ever built” and promising that it would provide potential investors with “excitement and guaranteed returns.” The website closely mimics common components of ICO issuer websites, including offers for tiered pre-sale purchaser discounts and an invitation to review a whitepaper, and contains egregious claims that the tokens are SEC-compliant, images of opulence, and fake celebrity endorsements for good measure. Read the full blog post on Blockchain and the Law.

Supreme Court Rules that State Courts can Adjudicate Class Actions Under the Securities Act of 1933

On March 20, 2018, the Supreme Court ruled that the 1998 amendments to the federal securities laws did not strip state courts of jurisdiction over class actions alleging violations of only the Securities Act of 1933. The Court further held that those amendments do not empower defendants to remove those federal-law cases from state to federal court.

The Court’s unanimous decision in Cyan, Inc. v. Beaver County Employees Retirement Fund (No. 15-1439) ensures that, if a plaintiff chooses to file a state-court class action asserting only Securities Act claims arising from a public offering of a listed security, the case will remain in state court – and will not be subject to the procedural requirements that Congress imposed on federal-court securities class actions. The preservation of a state-court forum thus increases the difficulty of coordinating or consolidating related cases filed in multiple federal and state courts.

Read the full client alert here.

Fourth Circuit Upholds Disclosure of Government Subpoena as Evidence of Loss Causation

The Fourth Circuit ruled yesterday that a plaintiff can sufficiently plead loss causation to establish a securities-fraud claim based on an “amalgam” of two theories:  corrective disclosure, and materialization of a concealed risk.  In so holding, the court concluded in Singer v. Reali that the issuer’s disclosure of a government subpoena and an analyst’s report discussing that subpoena collectively revealed sufficient additional information to connect the company’s alleged misstatements and omissions to the subsequent 40% stock-price drop.

Because of the Fourth Circuit’s “amalgam” analysis, it is unclear whether and, if so, to what extent the Singer decision is in tension with decisions by other Courts of Appeals holding that disclosures of governmental investigations or internal investigations do not, without more, sufficiently establish loss causation for pleading purposes.  Various appellate courts appear to be putting their own refinements on the analysis, and the law might not be entirely settled on this issue. Continue Reading

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