This Week In Securities Litigation (Week of January 11, 2021)
Legislation passed at the close of 2020 reaffirmed the ability of the Commission to seek and obtain disgorgement under a provision added to the Exchange Act. The new provision also extended the statute of limitations to 10 years.
The Office of Inspections issued a Risk Alert based on an executive order focused on investments involving certain PRC based firms. Specifically, the Alert cautions investors regarding transactions involving PRC firms tied to the military in that country.
Be healthy; be safe
Statute of limitations: The adverse rulings the Commission suffered in the Supreme Court’s Kokesh and Liu decisions were legislatively overruled in part by a provision tucked into the recently passed National Defense Authorization Act. Section 6501 of the Investigations and Prosecution of Offenses for Violations of the Securities Laws, incorporated in the National Defense Authorization Act, modified Exchange Act Section 21(d), adding language authorizing the agency to obtain disgorgement and reach back up to 10 years rather than the current five years. See e.g., Section 6501(a)(7)(Commission can obtain disgorgement); (a)(8)(extends statute of limitations to 10 years); (a)(8)(B)(can seek equitable remedies including an junction, bar, cease and desist order for up to 10 years).
Program: The Acting Chairman, joined by the other three Commissioners, ssued a statement regarding the status of a proposed 2011 fraud detection program, announced in a release dated January 7, 2021. Specifically, under an opinion prepared by the DOJ Office of Legal Counsel, the agency previously approved a 2012 proposal for select staff members to be trained by the DOJ to pose as interested investors in responding to telephone, mail or electronic communications by individuals suspected of violating the federal securities laws. The program was an exception to the Privacy Act of 1974. Ultimately the program was not implemented. If the program is implemented in the future, it will have to be approved by the Commission with appropriate restrictions. Those who wish to comment can email to firstname.lastname@example.org.
Whistleblowers: The Commission issued over $1.1 million to multiple parties under an order dated January 7, 2021.
Risk Alert: The Division of Examinations issued a Risk Alert dated January 6, 2021. It focuses on Executive Order 13959 (Nov. 12, 2020) which states that beginning on January 11, 2021, U.S. persons will be prohibited from transacting in certain securities and derivatives of Communist China military companies unless the transactions are for the purpose of disinvestment and took place on or before November 11, 2021. The Treasury Department’s Office Foreign Asset Control has published guidance concerning the Executive Order (here).
SEC Enforcement – Filed and Settled Actions
The Commission did not file any new civil injunctive actions or administrative proceedings last week, excluding 12j, tag-along proceedings and other similar matters. Note: Two actions filed Friday that will be reported later this week.
Misappropriation: SEC v. Connell, Civil Action No. 17-cv-00831 (S.D.N.Y.) is a previously filed action which named as defendant Barry F. Connell, formerly an employee at a major financial institution. Over about a one year period, beginning in late 2015, Mr. Connell moved approximately $5 million between client accounts and wired funds from others. About 100 transactions were involved. Defendant misappropriated the funds. To resolve the matter Mr. Connell consented to the entry of a permanent injunction based on Advisers Act Sections 206(1) and 206(2). He was also ordered to pay disgorgement of $5,148,651 that is deemed satisfied by the restitution ordered in the parallel criminal case. The Commission issued an order barring him from the securities business and from participating in any penny stock offering. Previously, Mr. Connell pleaded guilty in the parallel criminal action and was sentenced to time served which was approximately 36 months. He was also ordered to pay forfeiture and restitution in that case. See Lit. Rel. No. 25004 (Jan. 5, 2021).
MOU: The Commodity Futures Trading Commission and the European Securities and Markets Authority or ESMA announced the signing of a new Memorandum of Understanding regarding certain derivative clearing organizations on January 7, 2020. The agreement enhanced cooperation as to large U.S. Central Counterparties operating in the EU. The new agreement builds on the 2016 CFTC-ESMA MOU (here).