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

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]

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

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,

As everyone in the securities industry appreciates, a registered representative’s departure from one broker-dealer firm to join another is a not uncommon event. Such departures, even when voluntary and made on good terms, can and often raise a host of issues. Just last year for instance, FINRA issued Regulatory Notice 19-10 (April 5, 2019), which can be found here.
Continue Reading Risky Business: How Departing Brokers Can Unintentionally Trip Reg. BI