Courtesy of JasonHerbertEsq
Courtesy of JasonHerbertEsq

The SEC continued its program of enforcement actions in connection with the Federal EB-5 Program by bringing charges against two firms which raised approximately $79 million for EB-5-related situations. This matter is a little different in that it is the first SEC action to be brought in connection with unregistered broker-dealer activities in the EB-5 context. This action is important and should be reviewed by all participants in the EB-5 arena because it demonstrates the SEC’s willingness to exercise its enforcement powers in connection with these immigration-related matters. It also shows the SEC’s willingness to partner with other regulatory agencies (in this case the U.S. Citizenship and Immigration Services (CIS)). The SEC’s action is summarized in its June 23 press release.

The Federal EB-5 Immigrant Investor Program is designed to provide a way for foreign nationals to achieve legal residency in the U.S. by investing in certain approved U.S.-based businesses or designated regional economic development centers. The requirement for investment in a regional economic development center is generally less than the amount required to invest in a U.S. business under this program.

According to the SEC’s Order, Ireeco LLC and a successor company, Ireeco Limited, acted as unregistered broker-dealers in raising funds from a number of foreign investors. According to the Order, these companies promised to help investors locate the best regional center in which to make their investments, but they allegedly only directed these investors to a small number of regional centers. These regional centers allegedly made payments to the Ireeco companies once the CIS granted certain approvals for conditional residence to the investors. The SEC alleged that the two Ireeco companies raised approximately $79 million in this manner

Continue Reading SEC charges unlicensed broker/dealers in EB-5 Program

Last December, I wrote an UpTick (“There ought to be a law”) about a decision in the Second Circuit Court of Appeals that appears to be wreaking havoc with insider trading prosecutions past and present. The Second Circuit has now rejected a Justice Department request to reconsider the decision, and so we now face a period of uncertainty regarding whether and to what extent insider trading can be prosecuted.

Since the terms “inside information” and “insider trading” have never been defined, one suggestion is that Congress should enact legislation that would define one or both terms. That’s a good idea in principle, but the proposals that have been bandied about thus far provide little confidence that legislation would clarify the situation. For example, one bill would prohibit trading on information that “is not publicly available” but not “information that the person has independently developed from publicly available sources”. I’m not sure this helps; after all, Ray Dirks (the subject of an SEC vendetta that, in my opinion, led to the current confusion on what is and is not insider trading) independently developed the information in question, but the SEC prosecuted him anyway.

Another bill would (1) define inside information as nonpublic information obtained illegally from the issuer “with an expectation of confidentiality” or “in violation of a fiduciary duty” and (2) remove the requirement that a tipper receive a personal benefit for leaking the information. I like the second part, but I’m not sure that the first part works; for example, if I hear the information from someone who heard it from someone who heard it from the issuer, does that remove the taint?

There are also suggestions that Congress may consider a broader approach – i.e., making it illegal to trade when in possession of confidential information regardless of how it’s obtained. This reminds me of a hypothetical posed years ago by Stanley Sporkin, then the very feisty Director of the SEC’s Enforcement Division: you’re flying in a plane and look out of your window to see XYZ Corporation’s biggest plant going up in flames. As interpreted by Mr. Sporkin, if you got off the plane and called your broker with a sell order, you would be engaging in illegal insider trading. Of course, these days you could place the order online well before the plane lands. Is that really how we’d like it to turn out?

It seems to me that before Congress even thinks about acting (not that Congress can act on very much if anything these days), we need to think about what goal we’re trying to achieve. If the objective is to create a level playing field for all investors, that’s one thing, and would probably require a much broader approach. If the goal is less ambitious — i.e., to curtail trading based on knowing leaks and thefts of inside information — that’s another. In any case, wishing for legislation on this topic reminds me of the old saw about being careful what you wish for.

Your thoughts?

A great deal has been written about the recent reversal of two insider trading convictions.  Specifically, the U.S. Court of Appeals for the Second Circuit threw out the convictions of Todd Newman and Anthony Chiasson, hedge fund traders found guilty at the District Court level.

The press reports have treated the reversal as a major slap in the face for Preet Bharara, the U.S. Attorney for the Southern District of New York.  Bharara has made a big name for himself on the backs of numerous alleged – and quite a few convicted – insider traders, including Raj Rajaratnam.  While I’m sure Mr. Bharara isn’t happy about the reversal, he should take solace from the convoluted – no, byzantine – legal route by which insider trading convictions are achieved.

I suspect that most readers will not remember the SEC’s pursuit of Ray Dirks and a few others charged with insider trading many years ago.  Dirks, a securities analyst, uncovered a massive fraud perpetrated by a company named Equity Funding.  He alerted the SEC and some media about the matter, but neither did anything.  When he couldn’t gain any traction, Dirks advised his clients to sell the company’s stock.  For reasons that remain murky (including rumors of bad blood between the SEC and Dirks), the SEC decided to pursue insider trading charges against Dirks and a few other people who arguably should never have been prosecuted.

The courts have a way of dealing with cases that shouldn’t have been brought in the first place, and in this and some other prosecutions the outcome was the “misappropriation” theory of insider trading.  Simplistically stated, insider trading is not insider trading unless the tipper owed some duty to the company whose information was misappropriated (though not necessarily the company about which information was leaked) and derived a personal benefit from leaking the information.  Subsequent cases have generated many more wrinkles in what the theory really means.  As for Messrs. Newman and Chiasson, their convictions were reversed because even though their tipper derived a personal benefit from giving the tip, they didn’t know that he was deriving that benefit.

So if you think that the point of insider trading prosecutions is to maintain a level playing field, think again.  It’s not about what you know, or who you know; apparently, it’s about what you know about who you know.  There ought to be a law, but this isn’t it.

I’d like to know what you think.

A few weeks ago – “From the same wonderful folks who brought you conflict minerals (among other things)” – I complained about Senator Blumenthal’s attempt to tell the SEC what to regulate and how to regulate it.  I had an equal and opposite reaction to the recent news that Commissioner Gallagher and former Commissioner Grundfest had gone after the Harvard Shareholder Rights Project, in effect telling the Project (AKA Lucian Bebchuk) that its actions violate the federal securities laws.

I agree with some (though not all) of Commissioner Gallagher’s views.  I’m also troubled by the notion of an esteemed academic institution taking aggressive, one-size-fits-all positions on corporate governance matters.  However, in this case, I’m inclined to think that Commissioner Gallagher should have taken a higher road – encouraging discussion, maybe even holding an SEC Roundtable on the topic.  And if he really thinks that there’s a violation here, perhaps he should have whispered in the ear of the Enforcement Division that it might want to look into this.  Instead, he’s behaving somewhat like a bully – not that the Good Professor is likely to be quaking in his boots about it.

Also, it strikes me as downright inappropriate for a Commissioner to make a statement about a matter that the Commission could conceivably have to rule on if the matter ever does result in an enforcement action.  At a minimum, he’d have to recuse himself on the matter, which could mean the difference between victory and defeat.  And given recent criticisms of the SEC for (1) pursuing more matters as administrative proceedings than court cases and (2) unfairly touting its enforcement record, does Commissioner Gallagher think he’s enhanced the stature of the SEC by doing this?

Your thoughts?

SEC wants you to confessSEC Chair Mary Jo White has indicated that the SEC will require that, in certain cases, admissions be made as a condition of settling rather than permitting the defendant to “neither admit nor deny” the allegations in the complaint of its enforcement action.  The move marks a departure from the typical practice at the SEC and many other civil federal regulatory agencies of allowing defendants to settle cases without admitting or denying the charges.  The policy of allowing defendants to neither admit nor deny the allegations has been increasingly criticized for its inherent lack of transparency regarding both the alleged wrongdoing and the corresponding disgorgement and forfeiture penalties.

According to White, the new policy will apply only in select cases, such as those where there is egregious conduct and/or wide spread public interest. While the precise parameters of the new policy have not been specified, White did note that the new policy would be applied on a case by case basis and that for most cases currently settling, the old policy would still apply.

Debate about the old policy began about two years ago, when Judge Jed S. Rakoff rejected a $285 million settlement that the SEC negotiated with Citigroup, in part because the deal included “neither admit nor deny” language.  The SEC has appealed, and the case is pending before a panel of the U.S. Second Circuit Court of Appeals. Since then, a handful of other judges have voiced their discomfort with allowing defendants to pay fines without admitting liability.

In previously defending the old policy, the SEC has argued that most defendants would refuse to settle if they had to admit wrongdoing.  Essentially, companies and executives would rather fight in court than admit liability and face additional liability in parallel civil lawsuits, as well as the added difficulty of losing director and officer indemnification coverage which often pays the legal fees for corporate officers (a benefit which can be lost if Continue Reading It was me! SEC to toss "neither admit nor deny" policy in certain cases

SEC wants you to confessSEC Chair Mary Jo White has indicated that the SEC will require that, in certain cases, admissions be made as a condition of settling rather than permitting the defendant to “neither admit nor deny” the allegations in the complaint of its enforcement action.  The move marks a departure from the typical practice at the SEC and many other civil federal regulatory agencies of allowing defendants to settle cases without admitting or denying the charges.  The policy of allowing defendants to neither admit nor deny the allegations has been increasingly criticized for its inherent lack of transparency regarding both the alleged wrongdoing and the corresponding disgorgement and forfeiture penalties.

According to White, the new policy will apply only in select cases, such as those where there is egregious conduct and/or wide spread public interest. While the precise parameters of the new policy have not been specified, White did note that the new policy would be applied on a case by case basis and that for most cases currently settling, the old policy would still apply.

Debate about the old policy began about two years ago, when Judge Jed S. Rakoff rejected a $285 million settlement that the SEC negotiated with Citigroup, in part because the deal included “neither admit nor deny” language.  The SEC has appealed, and the case is pending before a panel of the U.S. Second Circuit Court of Appeals. Since then, a handful of other judges have voiced their discomfort with allowing defendants to pay fines without admitting liability.

In previously defending the old policy, the SEC has argued that most defendants would refuse to settle if they had to admit wrongdoing.  Essentially, companies and executives would rather fight in court than admit liability and face additional liability in parallel civil lawsuits, as well as the added difficulty of losing director and officer indemnification coverage which often pays the legal fees for corporate officers (a benefit which can be lost if Continue Reading It was me! SEC to toss “neither admit nor deny” policy in certain cases

Foreign Corrupt Practices Act (FCPA)The Foreign Corrupt Practices Act (“FCPA”), enacted to deter bribery and other corrupt practices in the conduct of international business, originally claimed jurisdiction over U.S. companies and individuals who used the mail or other instrumentalities of interstate commerce to further a bribe.  A 1998 amendment, however, expanded the FCPA’s jurisdictional reach to include, among others, “issuers” of securities listed on U.S. exchanges (including foreign companies so listed).  Thus, as businesses strategize to capitalize on the increasingly global market, those with securities issued in the United States must make sure to stay in compliance with the FCPA.  If companies like Walmart, Ralph Lauren and Tyco International weren’t doing so before, they certainly are now.

So what is the FCPA and what conduct does it proscribe? Well, the FCPA has two separate and distinct prohibitions.  First, the FCPA’s “anti-bribery provisions” prohibit the offer, promise, or payment of “anything of value” to a “foreign official” in order to “obtain or retain business.” Importantly, the FCPA covers payments to consults, agents, and any other intermediaries or representatives when the party making the payment knows, or has reason to believe, that some part of the payment will be used to bribe or influence a foreign official.

Second, the FCPA’s “books and records” provision imposes affirmative duties on issuers to maintain accurate books and a system of internal controls, and prohibits behavior intended to conceal an issuer’s lack of compliance with these duties.  Essentially, issuers must maintain books that accurately and fairly reflect their transactions and disposition of assets, and must have internal accounting controls adequate to provide reasonable assurance of the integrity of the company’s financial systems and its disclosures.

In the last few years, FCPA enforcement has been on the rise as the SEC and the Department of Justice (“DOJ”), the agencies charged with enforcing the FCPA, have Continue Reading Continued increased enforcement of Foreign Corrupt Practices Act (FCPA) shift toward financial services industry

Although this was a news story that hit about six months ago, we saw very little coverage on, what we think, is a very novel alleged hostile takeover bid by organized crime. 

On October 26, 2011, a federal grand jury indicted Nicodemo S. Scarfo, an alleged member of the Lucchese crime family, Salvatore Pelullo, an alleged associate of the Lucchese and Philadelphia LCN families, and 11 other people, including five practicing lawyers and an accountant for allegedly taking over FirstPlus Financial Group, Inc. (OTC Markets: FPFX), a publicly traded mortgage company in Texas. 

According to the indictment, the men used both explicit and implicit threats of economic and physical harm to seize control of FirstPlus by replacing its existing board of directors and management with members who would further their interests. 

Based on the facts from the indictment, in 2007, the defendants falsely accused a director of financial improprieties, and threatened a lawsuit against the director unless the director agreed to persuade the existing directors and management to turn over control to the defendants.  Over the course of 2007 and 2008, according to the indictment, the men looted the company through various acquisitions of entities controlled by the defendants at inflated prices.  The defendants were indicted for securities fraud, wire fraud, money laundering, extortion, and obstruction of justice. 

No mention of whether the defendants ever filed a Schedule 13D.

Earlier this month, the S.E.C. changed its long standing practice of allowing defendants of securities violations to “neither admit nor deny” criminal wrongdoing.  This change is effectively the S.E.C.’s response to critics that say that the agency should not let criminal defendants simply pay a fine and avoid an admission of guilty.  The new policy will generally require that defendants having a parallel criminal conviction, entering into a non-prosecution agreement or signing a deferred prosecution agreement no longer be allowed to sidestep admitting their guilt in a settlement with the S.E.C.

While this change seems more just, it is limited to only a small number of cases.  Thus, the change should help ease the concerns of the critics, but will not change S.E.C. policy for most situations.  This will help the S.E.C. look more tough on certain securities violations while still allowing the agency to negotiate settlements by allowing defendants to “neither admit nor deny” wrongdoing in most situations.  It remains to be seen whether the new policy will provide the right balance between the benefit of more easily negotiating settlements without requiring an admission of guilt and punishing criminals to the satisfaction of the critics.

See the recent article in the New York Times