Recently, in SEC v. Spartan Securities Group, Ltd, et al.[1], a Florida federal court held that the Securities and Exchange Commission (“SEC”) could seek disgorgement and direct funds to the Treasury because the defrauded victims could not be identified.[2]
Continue Reading Florida District Court Permits the SEC to Pay Disgorgement to the US Treasury Where Victims of the Fraud Could not be Identified
There has been lots of breathless commentary in the financial press and the blogosphere over the SEC’s August 2021 filing of an insider-trading case involving so-called “shadow trading.” Shadow trading as defined in a 2020 academic paper occurs when someone possessing material, nonpublic information (“MNPI”) obtained from his or her employer uses it to trade in the securities of a competitor or economically-linked public company.[1] This is in contrast to the more usual insider trading, in which the stock being traded is that of the subject company. In Panuwat, the defendant is charged with misappropriating MNPI from his employer and using it to trade in a competitor’s securities.[2] Earlier this week, a district court in the Northern District of California denied a motion to dismiss the SEC’s complaint, allowing the enforcement action to proceed.[3]
Continue Reading SEC Complaint Upheld in Rare – But Not Unprecedented – Shadow Trading Case
On July 13, the SEC announced charges against an array of participants in a de-SPAC transaction.[1] Among those charged are the SPAC, the SPAC’s sponsor, the SPAC’s CEO, the merger target, and the merger target’s CEO.[2]
Continue Reading SEC Brings Significant SPAC Enforcement Action
“Naked short selling” is often claimed by struggling public companies to be the source of their woes. But there have been relatively few cases addressing naked short selling. Recently, however, on May 19, 2021, the SEC charged a broker-dealer (“BD”) with violating the order-making and locate provisions of Regulation SHO.[1] Regulation SHO regulates short sales of securities and, broadly speaking, is aimed at minimizing naked short selling, failures to deliver, and other practices.
What is Short Selling?
According to the SEC’s Complaint, “[s]hort selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money.”[2] Thus, short sellers profit from a decline in the price of a security. This is in contrast to “long” investors, who profit from an increase in the price of a security. Short selling is very risky: losses are unlimited because the price of a security can always increase.
What is Regulation SHO?
Regulation SHO, enacted in 2005, established “locate” and “close-out” requirements. Rule 200(g) of Regulation SHO requires BDs to mark all orders to sell stock as “long,” “short,” or “short-exempt.”[3]
Continue Reading SEC Brings “Naked Short Selling” Case
Capital raising through Special-Purpose Acquisition Companies (“SPACs”) has gone through the roof in the last two years. Last year was by far the single highest deal value for SPACs, and the first quarter of 2021 has already surpassed last year’s total deal value.[1] Given the explosion of SPAC transactions, often backed by celebrities, it is a safe bet that the SEC will increase its scrutiny of SPACs.
In fact, on March 25, 2021, Reuters reported that the SEC has requested voluntary information from Wall Street banks on SPAC deals.[2] Whether this inquiry broadens into a full-scale industry sweep remains to be seen, but it is clear that the hotbed of SPAC activity has captured regulatory attention. Also notable is that the plaintiffs’ bar has been filing lots of cases arising from SPAC transactions, which can be a harbinger of SEC inquiries. For these reasons, it is important to understand the regulatory risks of these deals.
Continue Reading SPACs in the Spotlight: Skyrocketing Deal Volume Invites Regulatory Scrutiny
Earlier this week, a near-unanimous[1] United States Supreme Court issued its much anticipated ruling on the SEC’s ability to obtain disgorgement of ill-gotten gains in cases involving securities fraud, FCPA violations, and other securities violations.[2] Justice Sotomayor, writing for the majority, confirmed in Liu v. SEC[3] that the SEC has the authority to obtain such relief. The SEC’s authority to obtain disgorgement had seldom been questioned until the Supreme Court itself raised the issue in a footnote in its landmark Kokesh v. SEC decision in 2017.[4]
Continue Reading Supreme Court Affirms SEC’s Authority to Obtain Disgorgement, But Recognizes Limits on Such Relief
Ron Swanson once stated, “There’s only one thing I hate worse than lying—skim milk, which is water that’s lying about being skim milk.”
Today the SEC announced that it has charged Swanson with his second-least-favorite thing: lying in the form of securities fraud. The SEC alleges that Ronald D. Swanson, the former chief executive officer and general counsel of a company purportedly developing a liquid purification technology, intentionally misled investors from whom he solicited over $2 million between October 2012 and August 2015.
Continue Reading Don’t Cry (or Lie) Over Skim Milk: SEC Charges Ron Swanson with Securities Fraud
Securities and Exchange Commission (the Commission) Chairman Jay Clayton today addressed the much anticipated delay to the compliance deadline for Regulation Best Interest (Reg BI), Form CRS and the related transparency obligations in the new regulation by stating there will be NO DELAY of the June 30, 2020 deadline because of the Covid-19 pandemic.¹
Continue Reading The SEC Opts Not to Extend Reg BI and Form CRS Compliance Deadline
Last year the U.S. Securities and Exchange Commission (“SEC”) approved Regulation Best Interest (“Reg BI”).[1] Reg BI requires broker-dealers and their associated persons to act in “the best interest” of a retail customer when recommending a securities transaction or investment strategy. Reg BI applies not only to broker-dealers but also to investment advisors.[2] It will take effect in June of 2020.[3]
Continue Reading It’s the Final Countdown: Being Prepared for Regulation Best Interest
The Financial Industry Regulatory Authority (“FINRA”) recently published its Risk Monitoring and Examination Priorities Letter (the “Letter”) for 2019 and signaled its intent to expand the scope of its priorities and exam program. Unlike previous years, FINRA’s 2019 Letter took a “somewhat new approach” by identifying materially new areas of emphasis.[1] Admittedly, FINRA will continue to examine longstanding priorities detailed in prior letters,[2] but in adding “Risk Monitoring” to the title to the Letter, FINRA notified the industry it planned to broaden its exam program into three materially new priorities: (1) online distribution platforms, (2) fixed income mark-up disclosure, and (3) regulatory technology.[3]
Continue Reading What You Should Know About FINRA’s Exam Priorities for 2019