This Week In Securities Litigation (Week ending May 3, 2019)
The latest round of SEC v. Musk has, at least temporarily, resolved. The Court entered a modification to its earlier order, agreed to by the parties, which created an open-ended list of matters about which the Tesla founder will not communicate without preclearing the content.
The Supreme Court dismissed Emulex Corp. v. Varjabedian, No. 18-459 after oral argument. The question presented focused on the intent standard for an implied cause of action under Exchange Act Section 14(d). Questioning by the Justices during oral argument strongly suggested that the Court would affirm the implied cause of action if the question was presented despite the opposition of the SEC which argued for a negligence standard in agency actions. The Commission’s position undercuts its long-standing support for civil securities damage actions as a necessary adjunct to its enforcement cases.
Finally, the agency filed two new enforcement actions this week. One is a suspicious trading case centered on the acquisition of Anadarko Petroleum Corporation by Chevron Corporation (which now may turn out to be by Occidental Petroleum which is being backed by Warren Buffet and his firm). The second was an offering fraud action against the cousin of the man who originated the scheme in which investors were lured into investing in a firm that supposedly acquired tickets to popular Broadway shows and other high-profile events.
Compliance: The Criminal Division announced publication of guidance on evaluating corporate compliance programs. The new publication is an update of the earlier one prepared by the Fraud Section (here).
Implied cause of action: The Supreme Court dismissed as improvidently granted the writ of certiorari in Emulex Corp. v. Varjabedian, No. 18-459. The question the Court agreed to hear was whether a cause of action for damages implied under Exchange Act Section 14(e) requires only proof of negligence in making a misstatement or omission in connection with a tender offer as held by the Ninth Circuit or of intentional conduct in accord with the decisions of five other circuits. Interestingly, during oral argument questions from conservative and moderate Justices suggested that under the Court’s current jurisprudence a cause of action should be implied under the section.
SEC Enforcement – Filed and Settled Actions
The Commission filed 2 civil injunctive actions and no administrative proceedings this week, exclusive of 12j and tag-along actions.
Suspicious trading: SEC v. One or More Unknown Traders, Civil Action No. 1:19-cv-03785 (S.D.N.Y. Filed April 29, 2019) centers on the proposed acquisition of Anadarko Petroleum Corporation by Chevron Corporation. The shares of both firms are listed on the NYSE. The proposed deal price is set at $65 per share, a 38% premium to market over the April 11, 2019 closing price. Trades in Anadarko shares were placed through two foreign institutions. One is Cowen International Ltd., a boutique investment bank based in London, England. Clearing was done by Pershing, LLC. The second is Renaissance Securities Ltd., an investment banking and securities brokerage services firm in Cyprus. Clearing was done by Interactive Brokers, LLC. None of the traders have been identified. The trading through the two international accounts closely tracts the transaction. The deal began onFebruary 6, 2019 with Chevron’s CEO delivering a letter to Anadarko’s CEO with an acquisition proposal. Two days later on February 8, 2019 and then on April 1, 2019 the trading began with Defendants purchase a total of 1,650 calls for Anadarko, almost half of which were out of the money. Essentially the pattern continued until April 11, 2019 when Anadarko and Chevron publicly announced an agreement for Chevron to acquire all of the outstanding shares of Anadarko through a tender offer. The price was $65 per share in cash and stock. The share price for Anadarko closed on April 12, 2019 at $61.78, up 32%. On April 24, Occidental issued a press release announcing a competing proposal for Anadarko at $76 per share. Subsequently, on April 16, 2019 one account at Cowen liquidated its positions, securing a profit of $824,5000. The same day the other account was liquidated, yielding a profit of about $419,250. The day before the Renaissance Account liquidated its positions, yielding a profit of $727,350. Overall the traders had profits of nearly $2 million for trading over a two-and-one-half month period. The complaint alleges violations of Exchange Act Section 10(b). The Court entered a freeze order nine business days after the accounts were liquidated when the Commission filed its complaint and made the request for the order. See Lit. Rel. No. 24462 (April 29, 2019).
Offering fraud: SEC v. Siniscalchi, Civil Action No. 1:19-cv-03792 (S.D.N.Y. Filed April 29, 2019) is an action which names as a defendant James Siniscalchi. Over a one year period, beginning in May 2017, Mr. Siniscalchi raised about $2.7 million from at least 12 investors who were told that the funds would be put into tickets for Broadway shows and similar events. Defendant followed the lead of his cousin, Joseph Meli, who engaged in a similar fraudulent scheme for which he was charged by the Commission and the criminal authorities. Rather than use the funds in accord with the representations made to investors, Mr. Siniscalchi diverted them to his use and that of his cousin. During the course of the scheme Mr. Meli’s involvement was largely concealed. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. A parallel criminal action was filed by the Manhattan U.S. Attorney’s Office.
Offering fraud: U.S. v. Baylor, No. 1:16-cr-00180 (D. D.C.) is an action which named as a defendant Brynee Baylor, an attorney with the District of Columbia law firm of Baylor & Jackson. Attorney Baylor was convicted by a D.C. jury this week on conspiracy, securities fraud and fraud charges. The charges were based on a scheme in which Ms. Baylor conspired with another man and his firm, the Milan Group, to recruit investors for a so-called trading program. Investors were promised large profits and little risk. Approximately $2 million of investor funds passed through the Baylor & Jackson lawyer trust account. More than half of the funds were diverted to the benefit of the three co-conspirators. The date for sentencing has not been set.
Event: On June 3, 2019, the SEC Historical Society will host a gala celebration to commemorate the 85th Anniversary of the founding of the U.S. Securities and Exchange Commission and its 20th Anniversary. The event will be held at the Building Museum, Washington, D.C. Following a brief program featuring SEC Chairman Jay Clayton, there will be cocktails and dinner. For further information regarding tables, tickets and advertisements in the program please contact the Society here (full disclosure Mr. Gorman is the President of the Society).