Proskauer partner Joshua M. Newville and associate Lindsey A. Olson recently wrote the lead article for New York Law Journal’s White-Collar Crime special report. In the article, they discuss how proposed amendments to the Electronic Communications Privacy Act of 1986 could affect financial fraud investigations by the SEC and DOJ.
Securities fraud
SEC Overrules Its Own Administrative Law Judge to Clear Customer of Fraud Charges
By Harry Frischer & Philip Arnold on
In a rare reversal of its own administrative law judge in the Matter of optionsXpress, the full Securities and Exchange Commission unanimously held that the SEC’s Enforcement Division had not met its burden of proof that the customer of a broker-dealer had committed securities fraud in connection with his clearing broker-dealer’s failure to deliver stock as required by Regulation SHO.
The customer in this case implemented an option trading strategy which exploited the price difference between certain options and their underlying securities. The trading strategy focused on “hard to borrow” securities, which were more expensive to borrow due to high short-seller demand. As a result of the trading strategy, the customer held substantial short positions in the underlying hard to borrow securities over a sustained period of time.
Under Regulation SHO, a broker-dealer is required to deliver securities to its clearing house in connection with a sale within three days of settlement. If it does not do so, it must close out the fail to deliver on the next settlement day by purchasing or borrowing similar securities in the market. Here, the broker-dealer repeatedly failed to deliver the securities in which the customer held short positions.
Joshua Newville Discusses Amendments to Rules Governing SEC Administrative Proceedings with Compliance Week
By Edward Canter & Tanya Dmitronow on
Last month, the SEC announced that it had adopted amendments updating the rules of practice governing its in-house administrative proceedings. On August 9, 2016, Compliance Week published an article on the recently-adopted amendments, entitled, SEC modifies administrative proceedings, but did it go far enough? The article features insights from Proskauer partner Joshua Newville, who discusses whether the amendments sufficiently address the SEC’s perceived “home-field advantage” in administrative proceedings.
Sixth Circuit Court of Appeals Accepts Materialization-of-Risk Standard for Loss Causation
By Jonathan Richman on
The U.S. Court of Appeals for the Sixth Circuit yesterday recognized the “materialization of the risk” standard as a means of proving loss causation in securities-fraud cases. The court’s decision in Ohio Public Employees Retirement System v. Federal Home Loan Mortgage Corp. aligns the Sixth Circuit with the majority of other circuits, which have also allowed plaintiffs to plead loss causation by alleging damages arising from a materialization of a concealed risk, even in the absence of a corrective disclosure of the previously hidden or misstated “truth.”
SEC Adopts Amendments to Rules Governing Its Administrative Proceedings
By Joshua M. Newville & Jonathan Richman on
Earlier today, the SEC announced that it will adopt certain amendments to its rules of practice governing administrative proceedings. Faced with criticism from practitioners and the media regarding a perceived “home field advantage” in administrative proceedings, as well as various constitutional challenges to the ALJ process, the SEC has now approved amendments “intended to update the rules and introduce additional flexibility into administrative proceedings.”
SEC Brings First Major Cyber Insider Trading Case Against International Hacking Ring
By Boris Zeldin & Sigal Mandelker on
In an action that emphasizes the agency’s commitment to cybersecurity, the SEC recently charged 32 defendants with violations of the federal antifraud laws and corresponding SEC rules, stemming from an alleged $100 million conspiracy to steal and trade on material non-public information contained in corporate earnings announcements that were obtained by hacking into the computer networks of three newswire services.
SEC Sanctions Dark Pool Operator and Affiliated High Frequency Trader
By Alyse F. Stach, Brian Friedman & Harry Frischer on
In the latest round of regulatory action involving high frequency trading and dark pools, the SEC announced yesterday that it reached a settlement with ITG, Inc., and its affiliate Alternet Securities, Inc., imposing a $20.3 million sanction based on ITG’s misuse of confidential order information to benefit the firm’s proprietary high-frequency trading.
Seventh Circuit Reverses $2.46 Billion Judgment in Securities-Fraud Class Action
By Alexandra Skellet & Jonathan Richman on
The Court of Appeals for the Seventh Circuit last week reversed a $2.46 billion judgment in a long-running securities-fraud class action against Household International and granted a new trial on limited issues. The opinion in Glickenhaus & Co. v. Household International, Inc. 2015 WL 2408028 (7th Cir. May 21, 2015), provides a sophisticated analysis of events studies and loss causation and brings further clarity to what it means to “make” a false statement under the federal securities laws.
The case, which was filed 2002, alleged that Household and three of its top executives committed securities fraud by misrepresenting Household’s lending practices, delinquency rates, and earnings from credit-card agreements. Those misrepresentations purportedly inflated Household’s stock price during the relevant period.