On October 31, 2017, two former executives from General Cable Corporation (“GCC”) filed a motion to compel Morgan Lewis & Bockius LLP (“Morgan Lewis”) to produce interview memoranda and notes created during an internal investigation of GCC that were subsequently provided to the SEC and an independent auditor. In S.E.C. v. Herrera, et al., No. 17-20301 (S.D. Fla. filed Jan. 24, 2017), the government alleged that Mathias Francisco Sandoval Herrera (“Herrera”) and Maria D. Cidre (“Cidre”), acting as CEO and CFO of the Latin American operations of GCC, violated various securities laws when they “actively concealed from GCC executive management material inventory accounting errors at the company’s subsidiary in Brazil, including the overstatement of inventory by tens of millions of dollars and allegations of a massive theft by GCC Brazil employees.”
On Thursday, the United States Court of Appeals for the Second Circuit refused to revisit a July 2017 decision by a panel of that court in United States v. Allen, which held, among other things, that the Fifth Amendment prohibits the use of compelled testimony in U.S. criminal proceedings, even when the testimony was lawfully compelled by a foreign sovereign. Thursday’s Order is significant because it ensures that the Allen decision is the law of the Second Circuit, and the government’s only remaining option to challenge Allen is to petition the United States Supreme Court for review.
Split Second Circuit Affirms Insider Trading Conviction While Rejecting Newman’s “Meaningfully Close Personal Relationship” Requirement
On August 23, 2017, the United States Court of Appeals for the Second Circuit affirmed an insider trading conviction against a portfolio manager, and in doing so, held that the “meaningfully close personal relationship” requirement set forth in the Second Circuit’s landmark decision, United States v. Newman, to infer personal benefit “is no longer good law.”
Matthew Martoma (“Martoma”) managed an investment portfolio at S.A.C. Capital Advisors, LLC (“SAC”) that focused on pharmaceutical and healthcare companies. His “conviction stem[s] from an insider trading scheme involving securities of two pharmaceutical companies, Elan Corporation, plc (“Elan”) and Wyeth, that were jointly developing an experimental drug called bapineuzumab to treat Alzheimer’s disease.” During the development of bapineuzumab, Martoma arranged for consultation visits paid by SAC with two doctors who were working on the clinical trial. One doctor was the chair of the safety monitoring … Read More »
We previously blogged about the D.C. Circuit’s decision in Raymond J. Lucia Cos v. SEC, which rejected the petitioner’s constitutional challenges to the SEC’s use of administrative law judges that are not appointed by the President. Yesterday, the D.C. Circuit issued a two sentence per curiam order denying an en banc review by an equally divided court.
We noted that the panel’s original opinion was the first appellate ruling of its kind. Although the panel’s decision remains in effect because the full court did not rehear the case, the strength of that ruling is now severely undermined. As we previously reported, the Tenth Circuit has already disagreed with the D.C. Circuit’s panel and held that the SEC’s administrative law judges are subject to the Constitution’s Appointments Clause. Yesterday’s order likely sets the stage for a Supreme Court challenge.
Last week, the Securities and Exchange Commission (SEC) announced that Acting Enforcement Director Stephanie Avakian and former federal prosecutor Steven Peikin had been named Co-Directors of the Division of Enforcement. In making the announcement, SEC Chairman Jay Clayton advised:
There is no place for bad actors in our capital markets, particularly those that prey on investors and undermine confidence in our economy. Stephanie and Steve will aggressively police our capital markets and enforce our nation’s securities laws as Co-Directors of the Division of Enforcement. They have each demonstrated market knowledge, impeccable character, and commitment to public service, and I am confident their combined talents and experience will enable them to effectively lead the Division going forward.
Prior to being named Acting Director in December 2016, Ms. Avakian served as Enforcement’s Deputy Director since June 2014. Mr. Peikin joins the SEC … Read More »
On June 5, 2017, the Supreme Court of the United States released its unanimous opinion in Kokesh v. Securities and Exchange Commission and established that “SEC disgorgement constitutes a penalty within the meaning of § 2462” and therefore is restricted by the applicable 5-year statute of limitations. As predicted in our previous blog post, the Court determined that the SEC cannot impose disgorgement fees without regard to statute of limitations.
The Supreme Court determined that SEC disgorgement “bears all the hallmarks of a penalty” and therefore should be subject to the 5-year statute of limitation in § 2462 for three main reasons: (1) “SEC disgorgement is imposed by courts as a consequence for violation” of public laws, i.e. for violations committed against the United States rather than a “aggrieved individual”; (2) “SEC disgorgement is imposed for punitive purposes” such as deterrence, … Read More »
SEC Puts Administrative Proceedings within Tenth Circuit on Hold After Court Rules Them Unconstitutional
The SEC announced this week that it would stay all administrative proceedings involving certain provisions of the Securities Act, the Securities Exchange Act, and the Investment Company Act in the wake of the Tenth Circuit’s decision in Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016).
In Bandimere, the Tenth Circuit held that the SEC’s administrative law judges (“ALJs”) were “inferior officers” who are subject to the Appointments Clause of the U.S. Constitution. The appeals court granted the petition for review on constitutional grounds because the ALJ was not constitutionally appointed and his duties involved the exercise of significant authority. The court denied the petition for rehearing en banc on May 3, 2017.
The SEC explained that “[i]n light of the U.S. Court of Appeals for the Tenth Circuit’s recent decision denying rehearing en banc in Bandimere v. SEC, we find it … Read More »
Kokesh v. Securities and Exchange Commission: A New Limitation to the Government’s Enforcement Power?
The United States Supreme Court will soon decide whether the SEC can continue to impose disgorgement fees without regard to any statute of limitations. Based on the oral argument in Kokesh v. Securities and Exchange Commission, held on Tuesday, April 18, 2017, it appears likely that the Court will determine that the SEC does not have the wide power it claims in pursuing disgorgement, or the return of profits made from illegal actions.
The petitioner, Charles Kokesh, was the owner of two registered investment advisers. Between 1995 and 2006, he misappropriated $34.9 million from the business development companies operated by the investment advisers. The SEC pursued civil enforcement actions against him in 2009 and the jury found he violated the Securities Exchange Act, the Investment Advisers Act and the Investment Company Act. The United States District Court for the District of … Read More »
Broker Pays $2.5 Million Fine for Using Market Volatility to Hide Markups Yielding Unearned Commissions
Last week, Louis Capital Markets, L.P. (“LCM”) agreed to disgorge $2.5 million in settlement of charges that it charged false execution prices to its customers in order to generate secret commissions.
LCM executed orders to purchase and sell securities for its clients, without holding any securities in its own account and thus bore no market risk, i.e., riskless principal trades. It purported to generate profits by charging customers small commissions, typically between $0.01 and $0.03 per share. LCM, however, unbeknownst to customers, inflated those commissions, by embedding undisclosed markups and markdowns into reported execution prices. LCM provided those false execution prices—either lower sales prices or higher purchase prices than LCM actually obtained in the market—to its customers. Critically, LCM did not engage in this deceptive behavior for every trade, rather “LCM opportunistically added markups/markdowns to trades at times when customers were … Read More »
On March 3, 2017, the SEC published its complaint against Desarrolladora Homex, once one of Mexico’s leading homebuilders. The complaint alleged that Homex committed “massive fraud” when it reported the construction and sale of 100,000 homes that did not even exist.
The complaint alleges that Homex booked revenue from a development in the Mexican state of Guanajuato where it claimed that homes were built and sold by the end of 2011. However, satellite images taken in March 2012 showed that tens of thousands of those homes were “nothing but bare soil.” According to the SEC, through this fraudulent scheme Homex overstated its revenue by 355% (or approximately $3.3 billion).
Signs of trouble for Homex began as early as 2013 when Homex’s builder and his competitors suffered incredible losses on stocks and bonds. In 2014, Homex filed for the Mexican equivalent of bankruptcy … Read More »