by T. GormanPosted on Posted in SECActions

The Commission filed three new actions this week. One focused on the custody rule, a second centered on accounting for loss contingencies and a third manipulation.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 1 new civil injunctive action and 2 new administrative proceeding, excluding tag-along actions and those that present a conflict for the author.

Custody rule: In the Matter of Egan Capital Management, LLC, Adm. Proc. File No. 6491 (December 1, 2023) is a proceeding which names as respondent the registered investment adviser. The Order alleges violations of the custody rule in two respects. First, since 2018 Egan Capital has failed to comply with the custody rule for funds it advises. Second, for two other private real estate funds it also advises, the firm violated the custody rule. In resolving the matter, the advisor agreed to implement certain undertakings, including the retention of an independent compliance consultant who will conduct a review. The Order alleges violations of Advisers Act Section 206(4) and the related rules. To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Section and Rules cited in the Order and a censure. The firm will also pay a penalty of $50,000.

Loss contingency: In the Matter of Mallinckrodt PLC, Adm. Proc. File No. 3-21806 (November 30, 2023) is a proceeding which names as respondent the pharmaceutical firm. The company was informed by the Centers for Medicare and Medicaid Services that it had overcharged Medicaid for the flagship drug of the company. By January 2019, the amount of the overcharge had increased to over $500 million. The amount was not disclosed despite the fact that GAAP requires a public company to disclose material loss contingencies that are reasonably possible, and trends or uncertainties that are reasonably likely to affect future net sales. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings, Respondent consented to a cease-and-desist order based on the Sections cited in the Order. It also agreed to pay a penalty in the amount of $40 million and implement certain undertakings.

Misappropriation—manipulation: SEC v. Larmore, Civil Action No. 2:23-cv-02470 (D. Az. Filed November 28, 2023) is an action which names as defendants: Mr. Larmore, co-founder and CEO of Defendant ArciTerra; ArciTerra Companies, LLC; ArciTerra Note Advisors II LLC; ArciTerra Note Advisors III LLC; ArciTerra Strategic Retail Advisors, LLC; and Cole Capital Funds, LLC. Over a period of years, beginning in 2006, Mr. Larmore managed a complex of entities involved in commercial real estate. Starting in 2006 Defendants Larmore engaged in a scheme under which he diverted millions of dollars from the Funds’ to Defendant ArciTerra Strategic Retail Advisors, LLC, also an entity controlled by Defendant Larmore. In 2023, after abdicating direct control over ArciTerra, Defendant Larmore began manipulating the share price of WeWork, Inc. stock. This began with a false press release regarding the firm. Two days prior to that press release Mr. Larmore purchased a large block of call options for the stock. If the share price increased Defendant Larmore would make substantial profits. Because Mr. Larmore mis-timed the press release, his options expired over an hour before WeWork stock price spiked from the manipulative conduct. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2) and Exchange Act Sections 10(b) and 14(e). The case is in litigation.

Insider trading: SEC v. Dupont, Civil Action No. 1:23-cv-05565 (S.D.N.Y.) is a previously filed action which named as defendants Joseph Dupont, previously a vice president of Alexion Pharmaceuticals, Inc., and Stanley Kaplan, a close friend. The complaint alleged that Defendant Dupont tipped his friend, Mr. Kaplan. Both men traded and profited in the stock of Alexion. Previously, Messrs. Dupont and Kaplan pleaded guilty to federal criminal charges for securities fraud in a parallel action. In the Commission’s action, each Defendant consented to the entry of permanent injunctions prohibiting future violations of Exchange Act Section 10(b) and 14(e). Each Defendant was also barred from serving as an officer or director. The court has entered the judgments. See Lit. Rel. No. 25903 (November 28, 2023).

Singapore

Remarks: Ravi Menon, Managing Director, Monetary Authority of Singapore or MAS, delivered remarks at the Launch of COP28 Singapore, titled Catalyzing Climate Solutions, November 30, 3023. The Director focused on his view that the world is running out of time to address climate change (here).

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by T. GormanPosted on Posted in SECActions

In a lengthy session, the Supreme Court heard oral argument in SEC v. Jarkesy, No. 22-859, a case that many suggested could spell the end of the SEC’s enforcement program  by requiring that those charged in its enforcement actions have a Seventh Amendment right to a trial by jury. The government’s final comments during argument on rebuttal summarize what may foreshadow the Court’s decision:  Respondent has not asked that the Court’s 1977 decision in Atlas Roofing Co. v. Occupational Safety Health Review Comm’s, 430 U.S. 442, 450 (1977) which rejected a similar claim be overruled or somehow distinguished. Accordingly, the findings of the Fifth Circuithat Mr. Jarkesy had a right to a jury trial in this case should be rejected – there is no Seventh Amendment right to a jury trial that would preclude the SEC from bringing enforcement actions in an administrative forum as authorized by the statutory scheme. Therefore, Respondent’s challenges should be rejected. (The background on this action and a summary of the briefs is available here.)

 

Fundamental to the claims presented was the key assertion that Mr. Jarkesy, an investment adviser accused of fraud by the SEC and found liable in an administrative proceeding, was entitled to a trial by jury under the Seventh Amendment to the Constitution in any enforcement action initiated by the SEC. Respondent Jarkesy based this claim on the supposition that if the action initiated by the SEC against him as an administrative proceeding was similar to one that could have been initiated in 1791 when the Seventh Amendment was drafted, the person charged in the suit should have a right to have the case heard by a jury. In contrast, Atlas Roofing held that the Seventh Amendment does not require a jury trial in a government initiated enforcement action brought as an administrative proceeding.

 

The argument focused not just on Atlas Roofing but Supreme Court precedent following that decision.  A series of questions by the Court, posed largely to counsel for the SEC, suggested that the teaching of Atlas Roofing is that Congress can create a comprehensive federal regulatory scheme, such as the one reflected in the federal securities laws, which includes administrative remedies  used by the agency to enforce the various statutory provisions through litigation initiated either through an administrative proceeding or in federal court. When Congress acts and creates such a statutory scheme it is not required to give those charged with possible violations of the statutes the right to a trial by jury. To the contrary, the agency can be given the choice of filing either a case in court or before an administrative tribunal.The Seventh Amendment does not require otherwise counsel for Petitioner SEC contended.

 

In considering this conclusion, the Justices drew a distinction between common law cases initiated by private parties and government enforcement actions designed to address what Congress clearly viewed as an issue when creating a statutory scheme such as the one reflected in the federal securities laws. While the Court’s decision will be issued on or before June 30, 2024, the lengthy and repeated questions from the bench during oral argument more than suggest that the decision in Jarkesy will follow Atlas Roofing and clarify its underlying theory. If adopted, that theory will be a clear victory for the SEC.

 

 

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