During the current partial government shutdown when few SEC Enforcement actions are being filed or settled it may be a good time to begin considering the future of the program. The Division has repeatedly announced that its focus is retail investors. To that end a group was created within the Division to concentrate its efforts in the area.
Retail investors may be the focus of the Enforcement Division, but that may not chart the overall direction of its program. To a large extent that future may be dictated by a series of issues resolved by the Supreme Court. Those questions, each of which will be discussed in a future installment of an occasional series, include the following:
First, in Kokesh v. SEC, 137 S.Ct. 1635 (2017), the High Court held that the statute of limitations in section 2462 of the judicial code applies to awards of disgorgement obtained by the agency. While that ruling is significant, the case may ultimately be more important in view of the question it did not resolve: “Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context” the Court stated in note 3. Neither the Exchange Act nor the Securities Act specifically provides that the agency with authority to seek disgorgement. Since the SEC routinely seeks disgorgement and prejudgment interest any decision resolving this question is of critical significance to the agency.
Second, the Court’s decision in Lucia v. SEC, 138 S.Ct. 2044 (2018) may continue to have an impact on the agency and its program. While it appears that the Commission has resolved the questions presented by Lucia’s conclusion that the Constitution’s Appointments Clause applies to ALJ’s, it is important to recall that the case was not brought to challenge the law judges but the SEC’s venue decisions. While the Commission has issued orders which apparently implement Lucia, from about May through the end of last year the Commission did not file a single contested administrative proceeding as discussed at the December 5, 2018 Federal Enforcement Forum (here). This month the Commission did file one proceeding involving accounting issues which will be set for hearing. And, Mr. Lucia filed a new case again raising the venue question. That question is significant and can impact at a minimum the appearance of fairness of SEC Enforcement which is critical to the agency.
Third, Lorenzo v. SEC, No. 17-1077 presents a significant question regarding the distinction between primary and secondary liability. The question, as discussed in detail at the Federal Enforcement Forum cited above, hinges on how the Court assesses the distinction between primary and secondary liability. In the context of the case, the question may turn on whether the Court will permit the agency to take a false statement case, typically viewed as falling under subdivision “b” of Rule 10b-5, and repackage it as a “scheme” so it can proceed under other subparts of the rule without having to plead the elements of aiding and abetting. The resolution of this question is very significant to the Commission which has championed a broad view of primary liability for years.
Finally, Emulex Corp. v. Varjabedian, No. 18-459 presents key question under section 14(e) of the Exchange Act regarding fraud in connection with a tender offer. Specifically, the Court will consider if negligence is sufficient to violate that part of the section which deals with false statements – a question that is related to Lorenzo which is also a false statement case. The resolution of this question could have a significant impact on actions brought in the context of take-over transactions.
While the Commission may focus its Enforcement program on retail investors, each of the issues cited above can have a significant impact on the overall direction and impact of its efforts.