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]

In Kokesh, the Court held that disgorgement of ill-gotten gains was punitive in nature and therefore subject to the five-year statute of limitations for “penalties, fines and forfeitures” in 28 U.S.C. § 2642.  If disgorgement is punitive, how can it constitute an equitable remedy designed to restore the status quo?  That was the essential question presented in Liu.

The Court in Liu held that a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims constitutes equitable relief permissible under 15 U.S.C. § 78u(d)(5).  In reaching this conclusion, the Court framed the question as whether disgorgement is a remedy “typically available in equity.”

The Court noted that courts of equity “have long authorized courts to strip wrongdoers of their ill-gotten gains.”  To avoid moving the deprivation of ill-gotten gains outside equitable relief and into the category of a penalty, “courts restricted it to an individual wrongdoer’s net profits to be awarded for victims.”

The Court noted that disgorgement is a relatively recent term for this remedy.  It has also been described as a form of restitution or an accounting.[5]  But whatever its name, the Court reasoned, this remedy has long been recognized as a one “typically available in equity.”  (A rose by any other name would smell as sweet.). 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.

The SEC alleges that Swanson falsely told investors that his employer, Texas-based Sonic Cavitation LLC, was negotiating with a publicly traded oil-and-gas company for a large order of Sonic Cavitation units, which supposedly implemented a liquid purification technology.  The SEC claims that Swanson also falsely told investors that the oil-and-gas company was poised to acquire a 10%-12% equity interest in Sonic Cavitation LLC, even though he knew that the oil-and-gas company did not consider Sonic Cavitation’s technology to be viable. Further, Swanson allegedly misrepresented the liquid purification technology’s testing history, capabilities, and performance in real-life applications.

The SEC’s complaint charges Swanson with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC seeks a permanent injunction, penalties, disgorgement of ill-gotten gains plus interest, and an officer-and-director bar. In a parallel administrative action, the SEC today also ordered that Swanson be forthwith suspended from appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s Rules of Practice, based on his disbarment from the District of Columbia bar.

In response to the SEC’s allegations, the fictional television character Swanson said, “I regret nothing.  The end.”

By Andrew Schumacher, Brad Monk and John Kincade

The COVID-19 pandemic has caused a sudden disruption to businesses and halted almost all forms of global commerce. Contractual parties, lenders and borrowers, and parties to Merger and acquisition agreements are now closely reviewing their contracts, loan agreements and, in particular, any Material Adverse Change clause (also called Material Adverse Effect) (“MAC”) in the contract to analyze what options they might have.  In business use, MAC is a change in circumstances that causes a substantial decline in the value of a business. If successfully invoked, the MAC clause allows the party to avoid its obligation – such as closing on a merger or acquisition or funding a loan — as required by an otherwise enforceable agreement. Although perhaps similar in some respects to its cousin the force majeure clause, force majeure describes facts that constitute contractual impossibility due to an unforeseeable event. See Perlman v. Pioneer Ltd. P’ship, 918 F.2d 1244, 1248 n. 5 (5th Cir. 1990) (citing 6A Arthur L. Corbin, Corbin on Contracts § 1324 (1962)). So although the end goal of invoking a MAC clause may be the same as invoking the force majeure, the MAC clause may allow parties to avoid their obligations under a contract because of a material adverse change in the other party’s financial condition despite that fact performance of the contract is still possible. Continue Reading What a Business Should Know Before Triggering a MAC Clause Based on COVID-19

By Toby M. Galloway,  Matthias Kleinsasser,  Joe Wielebinski

In sports, it is often said that “winning cures everything.”  The same concept applies to uncovering fraud.  When the economy is strong and most investors are making money, there is little incentive to ask difficult questions about a company’s performance.  Once the economy craters, however, investors begin demanding answers and harsh truths are often revealed.  As Warren Buffett has said, “only when the tide goes out do you discover who’s been swimming naked.” Continue Reading Fraud in the Time of Covid-19

Management.com has a new article, found here, that points to the importance of an investment adviser or RIA firm borrower getting their SBA Paycheck Protection Program loan application right the first time: “What you don’t want is to submit an application that’s incomplete and you have to fix it … [because then] you [fall] to the back of the queue.” Meeting the legal requirements is also key.

Our Winstead team including Andrew Rosell , Jennifer Knapek,  and our SL&E team are already consulting with and assisting current and new advisory clients on PPP SBA loan applications. Fellow Winstead attorney John Adolph has summarized the material information here.

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

This week the Delaware Supreme Court ruled that Delaware corporations may enforce federal forum selection clauses (so-called federal forum provisions or “FFPs”) for lawsuits alleging breaches of the Securities Act of 1933. See Salzberg v. Sciabacucchi, No. 346, 2019, 2020 Del. LEXIS 100 (March 18, 2020). This ruling is significant because Delaware companies can require the filing of ‘33 Act claims, including class actions, in federal court. Federal court is perceived as a more favorable forum than state court, including because of dismissal procedures and the perceived familiarity of federal jurists with the federal securities acts. By statute, for instance, federal courts already have exclusive jurisdiction of claims under the Securities Exchange Act of 1934, i.e. Section 10(b) and Rule 10b-5 actions.

Continue Reading Keeping it All in the Family

The Securities and Exchange Commission (the “Commission”) on Friday, March 13, 2020, granted temporary relief under the Investment Advisers Act of 1940 relative to certain filing and delivery deadlines and other requirements that the adviser cannot meet because of the current COVID-19 pandemic. See INVESTMENT ADVISERS ACT OF 1940 Release No. 5463 (March 13, 2020) (the “Order”).

Continue Reading The SEC Grants Temporary Relief Due to the Coronavirus COVID-19 Pandemic

On December 18, 2019, the SEC proposed to amend its definition of “Accredited Investor” with hopes to expand access to private capital markets to a wider range of investors.[1] The proposed changes create two new categories of natural persons who may be considered “accredited investors” and add to the categories of institutional investors who qualify. According to the SEC’s press release regarding the proposed changes, the purpose of the changes is to more effectively identify investors that have the “knowledge and expertise” to safely invest in private markets without the additional investor protections created by the filing requirements of the Securities Act of 1933 (the “Securities Act”).[2]

Continue Reading SEC Proposes to Update “Accredited Investor” Definition

Hollywood martial arts sensei Steven Seagal was recently karate-chopped by the SEC for his alleged undisclosed payments for Twitter-touting a security that was being offered and sold in an initial coin offering.  In a settled cease-and-desist order, the Moscow-based B movie actor consented to a violation of Section 17(b) of the Securities Act of 1933, which prohibits the promotion of a security without fully disclosing the receipt and amount of compensation for such promotion.  The SEC found that that Seagal was kung fu fighting on behalf of something called Bitcoiin2Gen in the promotion of investment contracts to be issued on the Ethereum blockchain.  The operator of the dojo with no mojo agreed to repay $314,000 to settle the charges involved in the practice commonly known as scalping.