Earlier this year, the Office of Management and Budget solicited suggestions for “regulatory reforms that will better safeguard due process in the regulatory enforcement and adjudication settings.” That invitation was a rare opportunity to comment on the procedures federal agencies use to investigate potential misconduct and to litigate charges in administrative proceedings.
My comments addressed several enforcement and adjudication procedures at the Securities and Exchange Commission:
(1) Partiality issues with the heads of certain agencies including the SEC and with initial SEC administrative proceedings before administrative law judges.
Due process prohibits the same person from charging a defendant and then … Read more
A major issue in United States v. Blaszczak, 2019 WL 7289753 (2d Cir.), was whether the government needed to prove the elements of a Rule 10b-5 tipping violation from Dirks v. SEC, 463 U.S. 646 (1983), when charging a tipper and tippees with the crimes of wire fraud and securities fraud in Title 18. The Second Circuit’s answer was no. In an insider trading case based on tipping charged as a Title 18 fraud, the government did not need to prove that an insider received a personal benefit in exchange for disclosing material, non-public information to an outsider.… Read more
The Securities and Exchange Commission requested public comment on ways to simplify, improve, or harmonize exemptions from the requirement to register securities offerings. The SEC acknowledged that the current array of exempt offerings is complex and might be difficult for issuers to navigate. See Concept Release on Harmonization of Securities Offering Exemptions, 84 Fed. Reg. 30,460 (June 26, 2019).
My comment proposed a new exemption from the registration requirements to replace several of the current exemptions and simplify access to capital for startup companies and small to mid-sized companies. It would combine features from Rules 506(b) and (c) of Regulation … Read more
In Lorenzo v. SEC, the U.S. Supreme Court continued the struggle to define the difference between primary liability and aiding and abetting liability in Rule 10b-5 and other securities fraud claims. The difference matters because private plaintiffs do not have a claim against an aider and abettor. After several decisions narrowing the category of primary liability, the Court tacked back toward the plaintiff’s side in Lorenzo, but the decision resolved little about the difference between primary and aiding-and-abetting liability and created new questions.
Lorenzo was the director of investment banking at a broker-dealer. His boss prepared and approved a … Read more
Largely because of the U.S. Supreme Court’s 1975 decision in Withrow v. Larkin, the accepted view for decades has been that a federal administrative agency does not violate the Due Process Clause by combining the functions of investigating, charging, and then resolving allegations that a person violated the law. Many federal agencies have this structure, such as the Securities and Exchange Commission and the Federal Trade Commission.
In 2016, the Supreme Court decided Williams v. Pennsylvania, a judicial disqualification case that, without addressing administrative agencies, nonetheless raises a substantial question about one aspect of the combination of functions … Read more
The financial services industry is watching the Supreme Court closely in anticipation of a decision in Salman v. United States, which will be the Court’s first insider trading case since United States v. O’Hagan in 1997. Salman concerns the tipping violation the Court recognized in Dirks v. SEC in 1983 and calls on the Court to consider the requirement that an insider receive a personal benefit in exchange for disclosing material, nonpublic information to a tippee. The meaning of the personal benefit requirement has been controversial and led to a difference between the Ninth Circuit in … Read more
The Supreme Court decided to consider the meaning of the personal benefit requirement in an insider trading case based on a tipping violation. It accepted review of the Ninth Circuit’s decision in United States v. Salman, which reached substantially different conclusions about the meaning of the personal benefit requirement than the Second Circuit did in United States v. Newman.
The personal benefit requirement is an essential element of a tipping violation. For tipping to occur, an insider must breach a duty of trust and confidence by disclosing material nonpublic information to another person, and the test … Read more
In a recent paper, I considered the strength of securities fraud charges asserted in several computer hacker cases filed in mid-2015. Some of the defendants in the cases were the hackers who used computer methods to obtain unauthorized access to corporate press releases before they were released to the public. Other defendants were the traders who paid for the stolen information and used it to buy and sell securities. The press cast the scheme as an insider trading ring tied to computer hackers, but the SEC and criminal authorities asserted general securities fraud charges under Rule 10b-5.… Read more
The enforcement program at the Securities and Exchange Commission has been the subject of severe criticism in recent years, and occasional changes to the system have not begun to root out the deeper, structural defects in the investigation and charging process at the SEC. Reforms going to the essence of the way the Division of Enforcement operates are needed.
The three fundamental problems with SEC enforcement are that the Commission and the Division of Enforcement (1) advance legal theories that are outside settled boundaries, (2) misunderstand or mischaracterize the factual record, and (3) fail to accord fair and impartial treatment … Read more
In an administrative enforcement case called Flannery, a bare majority of SEC Commissioners adopted broad positions on primary liability under parts of the two main anti-fraud provisions in the securities laws, Rule 10b-5(a) and (c) and Section 17(a)(1), (2), and (3). The Commission not only advanced expansive legal conclusions, but it also insisted that the courts accept the agency’s legal interpretations as controlling.
The SEC’s decision in Flannery raises thought-provoking issues about the role of administrative agencies in the development, enforcement, and adjudication of federal law. In my comment on the decision, which is publicly available on SSRN, … Read more