This Week In Securities Litigation (Week ending June 30, 2017)

The Supreme Court concluded that the three year limitation period for bringing suits based on Section 11 of the Securities Act is a statute of repose – it cannot be extended. The High Court also agreed to hear next term a case concerning the scope of the Dodd-Frank whistleblower protection provisions an another regarding the jurisdiction of state courts over Securities Act claims. Finally, the DC Circuit, sitting en banc, split over the applicability of the Constitution’s Appointments Clause to the retention of SEC ALJ’s thereby affirming a panel decision in favor of the agency. That creates a circuit split with the Tenth Circuit which reached a contrary conclusion.

SEC enforcement this week continued the “broken windows” approach, bringing a series of fraud actions against individuals who agreed for a fee to serve as the sole shareholder, officer and executive of penny stock issuers. The Commission also brought three insider trading case, another offering fraud action and a financial fraud case.


Remarks: Scott Bauguess, Acting Director and Acting Chief Economist, DERA, delivered the key note address at the OpRisk North America 2017 Conference titled The Role of Big Data, Machine learning and AI in Assessing Risks: a Regulatory Perspective. The remarks included a brief review of AI and discussed the Commission’s efforts to use it in the staffs’ work (here).

Supreme Court

Whistleblowers: Digital Realty Trust, Inc., v. Paul Summers, No. 16-1276 (cert. granted June 26, 2017, 2017). The Supreme Court agreed to hear a key issue regarding the protections afforded whistleblowers. Specifically, the High Court will consider whether to be protected under the anti-retaliatory provisions of Dodd-Frank the person must report the information to the SEC or if it is sufficient to have reported to the firm involved.

Jurisdiction: The Court agreed to hear an action presenting the question of whether state courts retain concurrent jurisdiction for liability suits brought under the Securities Act of 1933 or if, in view of SLUSA, those courts lack jurisdiction of such claims. ­­Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439 (cert. granted June 27, 2017).

Statute of repose: The Supreme Court concluded that the three year limitation period of Securities Act Section 13 applicable to Section 11 claims cannot be extended or tolled. California Public Employees’ Retirement System v. Anz Securities, Inc., No. 16-373 June 26, 2017).

The suit centered on the fall of Lehman Brothers Holding Inc. in 2008 during the market crisis. In 2007 and 2008 the firm raised capital through a number of public securities offerings. Petitioner, the largest public pension fund in the United States, purchased securities in some of those offerings. Respondents are the securities firm that conducted the offerings. The complaint claimed that the securities offerings contained material misstatements and omission.

Shortly after Lehman filed for bankruptcy a securities class action was filed. The suit alleged that the registration statements were defective. CALPERS was included in the suit but not a lead plaintiffs. In 2011 the pension fund opted out and filed a separate action that was identical to the initial case. It was eventually consolidated with the initial case.

Following the settlement of the initial case respondents moved to dismiss the CALPERS suit as time barred under three year statute of repose included in Securities Act Section 13. The district court granted the motion. The Second Circuit affirmed.

The Supreme Court, in a 5-4 decision authored by Justice Kennedy, affirmed. There are two types of time bars. One is a statute of limitations; the second is a statute of repose. Both are designed to limit the extent or duration of liability but each is different. The statute of limitations, begins when the cause of action accrues. Stated differently, when the plaintiff can obtain relief or when the injury is discovered the statute begins to run. The purpose of the statute is to encourage the diligent prosecution of the action.

In contrast, statutes of repose place a flat time limit on the filing of the suit. The time begins with the last culpable act. Such a statute reflects a “legislative judgment that a defendant should be free from liability after the legislatively determined period of time.” [internal quotations omitted]. These statutes constitute a complete defense. Here the language of Section 13 which provides that “In no event shall any such action be brought . . .” makes it clear that this is a statute of repose the Court concluded.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 5 civil injunctive cases and 9 administrative proceedings, excluding 12j and tag-along proceedings.

Shill: In the Matter of Marilyn Stark, Adm. Proc. File No. 3-18054 (June 29, 2017) is an action which names 76 year old Ms. Stark as a Respondent. It is one of a series of seven largely identical actions in which an individual is charged with agreeing for a fee to serve as the sole director, shareholder and officer of a Florida corporation. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(b)(2)(A) and 13(b)(2)(B). It was resolved with the entry of a cease and desist order based on the Sections cited in the Order, an undertaking not to act as an officer or director of an issuer in the future and the payment of $10,000 in disgorgement, prejudgment interest and a penalty of $10,000.

Improper loans: In the Matter of Resilience Management, LLC, Adm. Proc. File No. 3-18055 (June 29, 2017) is a proceeding which names as respondents the registered investment adviser, its co-founder, Bassem Mansour, and the former CFO, George Ammar. Over a period of about three years, beginning in August 2013, the firm and Mr. Mansour improperly borrowed money from three private equity funds and caused the general partners not to make timely capital contributions as required. The amounts totaled about$10 million. Entries were made in the books and records to conceal the transactions. A new CFO determined the transactions were inappropriate. The Order alleges violations of Advisers Act Sections 204, 206(2) and 206(4). Respondents Resilience and Mansour each consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to certain undertakings. Resilience also consented to the entry of a censure. Mr. Mansour will pay a penalty of $500,000 while the firm will pay $250,000. Mr. Ammar consented to the entry of a cease and desist order based on Advisers Act Section 204. He was also barred from the securities business and will pay a penalty of $50,000.

Offering fraud: SEC v. Lovera, Civil Action No. 17-cv-22407 (S.D. Fla. Filed June 28, 2017) is an action which names as a defendant Diana Lovera. The complaint alleges a boiler room operation to sell shares of what was claimed to be the largest publicly traded diversified portfolio of professional sports teams in the world. It centered on the Oxford City Football Club. About $6.6 million was raised from about 150 investors over a two year period beginning in July 2013. Boiler room tactics were coupled with misrepresentations to sell the shares. Ms. Lovera previously pleaded guilty in a parallel criminal case. The Commission also brought an action centered on the Oxford City Football Club. The complaint in this case alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). To resolve the action Ms. Lovera consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, she will pay $81,374 in disgorgement along with prejudgment interest which will be deemed satisfied by the restitution ordered in the criminal case. Ms. Lovera also consented to an SEC order imposing a permanent associational bar. See Lit. Rel. No. 23869 (June 28, 2017).

Financial Fraud: SEC v. Penn West Petroleum Ltd., Civil Action No. 17 Civ. 4866 (S.D.N.Y. Filed June 28, 2017) names as defendants the firm, a Canadian oil and gas company, two of its former officers, CFO Todd Takeyasu and v.p. of finance Jeffery Curran, and former employee Waldemar Grab. The complaint alleges that from 2012 through the first quarter of 2014 the firm engaged in a financial fraud largely by inappropriately capitalizing certain costs to alter firm metrics. The company discovered the practices, conducted an investigation and restated its financial statements in September 2014. Penn West self-reported and provided extensive cooperation to the staff during its investigation. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and13(b)(5). The case is pending. [Full disclosure, Mr. Gorman is counsel to the issuer].

Insider trading: SEC v. Altvater, Civil Action No. 17-cv-1118 (D. Mass. Filed June 27, 2017); SEC v. Curran, Civil Action No. 7-cv-11179 (D. Mass. Filed June 27, 2017); SEC v. Dubuc, Civil Action No. 17-cv-1118 (D. Mass. Filed June 27, 2017). Each case centers on trading in the shares of Ariad Pharmaceuticals, Inc. prior to announcements by the FDA regarding the company. Defendant Harold Altvater is the husband of a firm employee from whom he is alleged to have misappropriated inside information, traded and reaped profits of over $100,000. Defendant Maureen Curran is Ariad’s former Senior Director of Pharmacovigilance and Risk Management who is alleged to have traded after attending meetings with the FDA. She obtained profits of over $9,000. And, Defendant Susan Dubuc is Ariad’s former Associate Director of Pharmacovigilance and Risk management. After receiving a blackout notice from the firm in advance of an FDA announcement she tipped her relatives who traded and avoided losses of about $2,888. The complaint in each case alleges violations of Exchange Act Section 10(b). Ms. Curran and Ms. Dubuc each settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of the Section cited in the complaint. Ms. Curran will also pay disgorgement of $9,420, prejudgment interest and a civil penalty equal to the amount of the disgorgement. Ms. Dubuc will pay disgorgement of $2,888.10, prejudgment interest and a civil penalty equal to the amount of the disgorgement. The action against Mr. Altvater is pending. See Lit. Rel. No. 23868 (June 27, 2017).

Policies and procedures: In the Matter of William Smith & Co., Adm. Proc. File No. 3-18046 (June 26, 2017) is an action which names as Respondents the registered broker-dealer and William Smith, its founder and president. During the period January 2013 through the end of 2015 the firm failed to enforce its policies and procedures as to Mr. Smith. Specifically, during the period he failed to comply with the firm’s pre-approval procedures regarding personal securities trades; repeatedly violated its internal information barriers; and knew, or should have known, of instances when firm personnel violated its policies regarding the dissemination of MNPI to the public. The Order alleges violations of Exchange Act Section 15(g). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. In addition, the firm will pay a penalty of $50,000 while Mr. Smith will pay $35,000.

Court of Appeals

Appointments Clause: Raymond James Lucia Cos. Inc. v. SEC, No. 15-1345 (D.C. Cir. en banc June 26, 2017). In a per curiam order the Court announced it split evenly after a rehearing on the question of the applicability of the Constitution’s Appointments Clause to SEC ALJs. Accordingly, the original panel decision stands and the petition for review is denied. In that decision the panel rejected Petitioner’s claim that SEC ALJs must be appointed in accord with the dictates of the Constitution. That decision conflicts with the determination by the Tenth Circuit Court of Appeals in Bandmere v. SEC, 844 F. 3d 1168 (10th Cir. 2016).


Impairment: The Australian Securities Investment Commission commenced an action against Patrick Godfrey, former managing director of Banksia Securities Limited tied to its failure to comply with certain accounting standards. Specifically, he was responsible for the calculation of an impairment charge for Banksia which failed to comply with the applicable accounting requirements, according to the regulator.

Hong Kong

False financial information: The Market Misconduct Tribunal entered orders against Gu Chujun, former chairman and CEO of Greencool Technology Holdings Ltd. for furnishing false financial information for the years 2000 through 2004 regarding the company. The MMT imposed a cease and desist order against him and others involved, a “cold shoulder” (effectively a bar from the securities business) and directed he and others involved pay the costs of investigation. The Panel imposed the its largest disgorgement order to date: $481,060,785.

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