Last year, the Forum for US Securities Lawyers in London started to produce a monthly US Securities Law Digest. These monthly updates are intended to provide a compilation of recent legal news relevant to a capital markets practice in the London and international markets. The news pieces have been collected and summarized from various sources, and links to the original sources are provided.
We continue to welcome any feedback that you may have about the monthly Digest.
US SECURITIES LAW DIGEST - APRIL 2013
U.S. Supreme Court rules statute of limitations starts running upon occurrence of fraud, not discovery by SECIn a recent unanimous decision, the United States Supreme Court overturned the Second Circuit Court of Appeals, holding that the federal statute of limitations starts running upon the occurrence of an alleged fraud, rather than the discovery of such fraud by the Securities and Exchange Commission (the “SEC”) or other regulator. (Gabelli v. Securities and Exchange Commission, 133 S.Ct. 1216 (February 27, 2013)).
US Supreme Court imposes strict statute of limitations requirement on SEC
In a sweeping decision, Gabelli v. Securities and Exchange Commission, the US Supreme Court unanimously imposed a strict five year statute of limitations in actions brought by the SEC. The Supreme Court ruled that because the agency serves an investigative purpose and seeks civil penalties intended to punish, the SEC must bring claims within five years of their occurrence, and cannot take advantage of the “discovery rule,” which allows private litigants to bring claims for five years after a fraud is discovered. This could have implications for matters arising from the early stages of the credit crisis (i.e. from 2008).
Statute of limitations for government enforcement actions seeking civil penalties starts when conduct occurs, not when discovered
A recent unanimous Supreme Court decision reversed the Second Circuit and held that the five-year statute of limitations for government civil penalty enforcement actions under 28 U.S.C. §2642 begins to run from the date the alleged fraudulent conduct occurs regardless of whether the government was aware of the conduct at the time. This decision establishes that when the Securities SEC is seeking to impose civil penalties, it cannot take advantage of the "discovery rule" to toll the operative statute of limitations contained in 28 U.S.C. §2462. This ruling will have far-reaching implications for other federal agencies in civil penalty cases.
U.S. Supreme Court issues two important securities-law opinions
On February 27, 2013, the U.S. Supreme Court issued a pair of important securities-law decisions, one requiring the SEC to act more swiftly in pursuing fraud charges, and the other making it significantly easier for private plaintiffs to pursue securities fraud claims on a class-wide basis.
Supreme Court denies SEC extra time to bring enforcement actions for civil penalties
The US Supreme Court recently held that the SEC has five years from the date an alleged fraud occurs, not from the date of its discovery, to bring an enforcement action for civil penalties. In Gabelli et al. v. Securities and Exchange Commission, the SEC claimed that two officials (Petitioners) at Gabelli Funds, LLC aided and abetted violations of the Investment Advisers Act of 1940, and sought civil penalties.
Supreme Court: SEC must file enforcement actions within five years of alleged fraud
On Wednesday, February 27th, the Supreme Court ruled that the SEC must file enforcement actions within five years of an alleged fraud, and is not entitled to the same right to a discovery tolling of the statute of limitation as private citizens.
A big week for the securities bar: Amgen and Gabelli
The Supreme Court last week issued two opinions of major importance to the securities bar. In Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 568 U.S. (2013), the court held that no proof of materiality was required to certify a class of claimants under SEC Rule 10b-5, where those claimants sought to invoke the "fraud-on-the-market" presumption of reliance adopted in Basic Inc. v. Levinson, 485 U.S. 224 (1988). In Gabelli v. SEC, 568 U.S. (2013), the court refused to apply a discovery rule to the statute of limitations applicable to SEC enforcement actions seeking civil penalties for violations of the Investment Advisers Act of 1940. Thus, on the same day, the court in essence made it easier for plaintiffs to bring securities class actions and more difficult for the SEC to bring enforcement actions.
Supreme Court: securities fraud plaintiffs need not prove materiality to certify a class
The Supreme Court recently issued a much-anticipated decision in Amgen Inc v Connecticut Retirement Plans and Trust Funds, affirming the Ninth Circuit and holding that securities class action plaintiffs do not have to prove that alleged misrepresentations or omissions were material at the class certification stage. The ruling has substantial implications for future securities fraud class actions, where materiality could otherwise have proven a significant hurdle for plaintiffs.
Supreme Court holds proof of materiality not necessary to certify a rule 10b-5 class
On February 27, 2013, the Supreme Court held in a 6-3 decision that plaintiffs in securities fraud class actions under Rule 10b-5 do not need to prove the materiality of any alleged misrepresentation or omission in order to obtain Rule 23(b)(3) class certification. (Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085 (Feb. 27, 2013)). But the Supreme Court made clear that plaintiffs seeking certification under the fraud on the market theory must still prove all other prerequisites of the theory.
FINRA proposed rule change to extend temporary limit on application of FINRA rules to security-based swaps
On July 1, 2011, the SEC granted temporary exemptions under the Securities Exchange Act of 1934 in connection with the pending revision of the definition of “security” to encompass security-based swaps. As a result, the Financial Industry Regulatory Authority (“FINRA”) adopted Rule 0180, which (with certain exceptions) temporarily limits the application of FINRA rules with respect to security-based swaps. The SEC has issued an order extending the expiration date of the temporary exemptions until February 11, 2014. Thus, FINRA has filed the proposed rule change in order to align the expiration date of Rule 0180 with the new expiration date of the SEC’s temporary exemptions. The SEC is accepting comments on the proposed rule change. Comments should refer to File Number SR-FINRA-2013-019 and must be submitted to the SEC on or before 21 days from publication in the Federal Register.
See the Katten Muchin Corporate & Financial Weekly Digest here.
FINRA orders broker-dealer to pay more than $11 million in restitution and fines for late pricing of paper mutual fund orders
On December 26, 2012, FINRA announced that it ordered Pruco Securities, LLC (“Pruco Securities”), a New Jersey based registered broker-dealer, to pay nearly $11 million in restitution and $550,000 in fines for failing (i) to timely process written mutual fund orders received by mail or fax, (ii) to have in place an adequate supervisory system designed to detect and prevent the mi-spricing of paper mutual fund orders and (iii) to have written procedures for handling paper mutual fund orders.
FINRA amends rules to address extraordinary market volatility
FINRA adopted rule amendments in furtherance of the joint industry Regulation NMS Plan to Address Extraordinary Market Volatility (the “Plan”). Pursuant to the Plan, FINRA amended its rules to, among other things, require members that are trading centers in national market system (“NMS”) stocks to have written policies and procedures preventing the execution and display of offers outside the Plan’s price band for each tier of NMS stocks. Trading centers must also have written policies and procedures to prevent the execution of trades in NMS stocks during a trading pause. The rule amendments were effective April 8, 2013.
SEC issues guidance to investment companies on social media filings
The SEC’s Division of Investment Management released the first in its “IM Guidance Update” series, to provide guidance on the obligations of mutual funds to file materials posted on their social media sites with FINRA. The IM Guidance Update indicates that SEC staff believes that many mutual funds are filing material on their social media sites with FINRA unnecessarily. In order to address this problem, the staff provides a series of examples of the types of interactive communications that it believes do not need to be filed and those for which filing is required.
New York Federal Court holds Dodd-Frank rule does not bar late SEC suits
On March 24, 2013, the U.S. District Court for the Eastern District of New York held that a Dodd-Frank Act rule requiring the SEC, within 180 days of notifying a target of the pendency of an investigation, to file an action or obtain an extension of time from an SEC director, does not provide for the dismissal of an enforcement action that does not comply with the rule. SEC v. NIR Group, LLC, No. 11-4723, slip op. (E.D.N.Y. Mar. 24, 2013).
Please see the entry on the Buckley Sandler InfoBytes blog here.
SEC issues FAQs regarding rule 15a-6 and foreign broker-dealers
Pursuant to SEC Rule 15a-6 adopted under the Securities Exchange Act of 1934, certain exemptions from broker-dealer registration are available for foreign broker-dealers that engage in limited activities involving US institutional investors. The SEC’s goals in adopting Rule 15a-6 were to allow these investors to access foreign markets through foreign broker-dealers while maintaining the safeguards afforded by broker-dealer registration. Since the adoption of Rule 15a-6, the SEC has provided guidance on the rule and its application in various no-action letters. In addition, the SEC issued responses to frequently asked questions (FAQs) regarding the application of Regulation AC to research activities of foreign broker-dealers, including foreign broker-dealers that rely on the registration exemption under Rule 15a-6. On March 21, the SEC issued FAQs with respect to the operation of Rule 15a-6.
The staff of the SEC’s Division of Trading and Markets recently released answers to frequently asked questions about Rule 15a-6 under the Securities and Exchange Act of 1934 Rule. While the FAQs largely do not break new ground, they do provide some useful clarifications and confirmations of existing interpretations.
Chipping away at barriers to global financial services: SEC staff addresses issues for foreign broker-dealers under Rule 15a-6
Noting the increasingly global nature of financial markets, the SEC adopted Rule 15a-6 nearly 24 years ago to facilitate limited access by foreign broker-dealers to customers in the United States. During the years since the rule’s adoption, globalization of world financial markets has accelerated, but the SEC has only gradually relaxed the restrictions set forth in Rule 15a-6. The staff of the SEC’s Division of Trading and Markets continued this process of incremental change through a series of frequently asked questions issued on March 21, 2013.
SEC exempts another crowd funding site from broker-dealer rulesThe SEC has granted AngelList relief on accepting transaction based compensation for crowd funding, exempting it from the broker-dealer rules. A couple of days ago, the SEC granted relief to thefundersclub.com.
"A night in Tunisia" part 2 -- non-public submissions from foreign private issuers A past installment of the Words of Wisdom blog discussed some of the basics of foreign private issuers (“FPIs”). This week, your good client Dizzy has called to tell you that he wants to take his FPI musical instrument manufacturing company public in the United States. He wants to know if he can begin the SEC review process before publicly filing a registration statement for the initial public offering.
Ongoing requirements for Iran disclosure in U.S. Securities and Exchange Commission filingsOn August 10, 2012, President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012. Among other things, this legislation provides that any company that is required to file annual or quarterly reports under Section 13(a) of the Securities and Exchange Act of 1934 (which includes companies listed on a U.S. securities exchange) must disclose in those reports whether, during the period covered by the subject report, it or any affiliate has knowingly engaged in certain sanctionable activities generally relating to Iran.
Rule 10b5-1 plans under scrutinyThere has been renewed focus on Rule 10b5-1 plans following an article in the Wall Street Journal, published on November 27, 2012, entitled “Executives’ Good Luck in Trading Own Stock,” which reported that executives who traded their own company’s stock recorded gains at a much higher rate than losses. The article also reported that those executives who traded irregularly were much more likely to record quick gains than those who traded according to a more regular pattern. The article further highlighted various executives whose trades occurred at suspicious times—either days or weeks before disclosure of positive or negative news about the company—earning the executives significant gains or saving them from substantial losses.
How hedge funds and private equity firms can manage Foreign Corrupt Practices Act risksIn recent years, the Department of Justice (“DOJ”) and the SEC have aggressively investigated and enforced both the anti-bribery and accounting provisions of the Foreign Corrupt Practices Act (the “FCPA”). Many of these matters have been the result of “industry sweeps,” which have included the oil and gas, pharmaceutical and medical device, and telecommunication industries. The DOJ and the SEC have also made clear that the banking and finance industry is a high priority for FCPA enforcement. Moreover, in November 2012, DOJ and the SEC released a lengthy compendium called “A Resource Guide to the U.S. Foreign Corrupt Practices Act,” in which the banking and finance sector was identified as one of the industries that the agencies would focus their investigative efforts.
FCPA charges based on payments to charity and failure to investigate discountsOn December 20, 2012, the SEC settled an FCPA action with Eli Lilly and Company (“Lilly”), resolving an investigation the SEC began in 2003. In the early-mid 2000s, the DOJ and the SEC initiated an inquiry into potentially corrupt practices in the medical and pharmaceutical industry that focused on many major companies in the industry, including Lilly. The SEC’s complaint against Lily alleges conduct over a 15-year period in multiple countries and involving various alleged improper payment mechanisms.
Courts diverge on the reach of personal jurisdiction in FCPA cases against foreign defendantsLast month, two federal judges in the Southern District of New York reached differing conclusions about the minimum contacts required for U.S. courts to exercise personal jurisdiction over foreign defendants in civil enforcement cases prosecuted by the SEC under the FCPA. This King & Spalding alert briefly attempts to harmonize these decisions and offer some practical insights about what they mean for foreign employees of companies – whether foreign and domestic – whose securities are publicly traded in U.S. markets.
Line in the sand: Siemens Argentina case limits personal jurisdiction under the FCPAA New York federal district court judge has dismissed an FCPA claim against a former executive of Siemens, S.A. Argentina and Siemens Transportation Systems for lack of personal jurisdiction. The SEC brought the civil FCPA enforcement action against Herbert Steffen for his role in an alleged scheme by which Siemens paid bribes to top government officials in Argentina to secure a project to create national identity cards. Siemens settled related FCPA charges with the SEC and the DOJ in December 2008 for $800 million – the largest ever FCPA settlement (at least so far). The SEC then brought civil charges against Steffen and six of his colleagues in December 2011. And a year later, the DOJ brought criminal charges against Steffen and seven other former Siemens executives. All of the defendants named in the civil and criminal cases are non-U.S. citizens living outside the United States, a fact that led the DOJ to put its criminal case on hold just one day after the defendants’ arraignment.
First FCPA enforcement action of the year highlights government focus on high-risk industries and countriesIn the first FCPA enforcement action of the year, the SEC announced on February 28, 2013, that it had entered into a settlement agreement with Keyuan Petrochemicals Inc. (“Keyuan”) and its former Chief Financial Officer, Aichun Li. The company agreed to pay $1 million, and Li agreed to pay $25,000, for alleged violations of federal securities laws that included FCPA-related accounting violations. This advisory summarizes the FCPA-related aspects of the SEC’s allegations and discusses what guidance companies and executives can draw from the case.
Advertised private placements: update on statusThe Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) requires that the SEC amend Rule 506 of Regulation D to permit general solicitation and advertising in private placements as long as all purchasers are accredited investors. This change has the potential to significantly alter the way in which capital is raised by start-ups, operating businesses and private funds. This article discusses the current status of the JOBS Act mandated changes to Rule 506.
Insider trading; neither admit nor deny; and momThere has been a great deal of controversy about the SEC’s policy of permitting defendants to settle enforcement actions without admitting or denying the facts alleged in the complaint. While the policy traces its origins to the early days of the Enforcement Division, and is used by many federal agencies, some critics claim it should be abandoned and that settling defendants should be required to make admissions. The SEC has staunchly defended its policy. Thus those settling with the agency typically are not required to make admissions. There may be some instances, however, in which a defendant may not be able to rely on the policy. That may well have been the case for Juan Carlos Bertini, accused of insider trading by the SEC.
SEC secures largest-ever settlement for insider trading caseHedge fund advisory firm CR Intrinsic Investors (“CR Intrinsic”), a unit of hedge fund SAC Capital Advisors LP (“SAC”), has agreed to pay more than $600 million to settle insider trading claims brought by the SEC. The suit against CR Intrinsic was the largest insider trading case ever charged by the SEC, and the settlement was the largest ever in an insider trading case. The SEC’s complaint alleged that from 2007 through mid-2008, CR Intrinsic and one of its portfolio managers, Mathew Martoma, obtained material non-public information from Dr. Sidney Gilman concerning the clinical trial results of an Alzheimer’s drug being jointly developed by two pharmaceutical companies. Dr. Gilman was the chairman of the safety monitoring committee overseeing the clinical trial for the Alzheimer’s drug. During that period, Dr. Gilman provided the portfolio manager with the material nonpublic information regarding the drug trials through numerous phone calls and paid consultations arranged by an expert network firm.
Corporate executive settles SEC insider trading caseThe SEC filed a settled insider trading case against a corporate executive who traded in advance of a tender offer while in possession of material, non-public information. SEC v. Lackey, Civil Action No. 2:13-CV-2153 (W.D. Tenn. Filed March 11, 2013). The defendant in the case is Michael Lackey, formerly Vice-President and General Manager of International Paper Company. The deal he traded in advance of was the tender offer by his employer for Temple-Inland, Inc., announced on June 6, 2011.
Recent SEC settlements serve as cautionary tale about the use of unregistered broker-dealers by investment advisersThe SEC recently announced settlements involving a private equity firm, its former senior managing director, and an individual “finder” who solicited investors as an independent consultant for the firm. These settlements serve as a reminder to investment advisers and their principals to tread cautiously when engaging an unregistered “finder” in connection with fundraising efforts.
U.S. securities law for foreign companies — are you a foreign private issuer?On February 20, 2013, the SEC issued a general outline, “Accessing the U.S. Capital Markets — A Brief Overview for Foreign Private Issuers” including a summary of eligibility, registration, ongoing reporting obligations, exemptions, and the use of American Depository Receipts. In the view of the author of this alert, the United States is realizing it needs to be more “foreign company” friendly. Compatibility with the securities laws of other jurisdictions is a good thing if the United States wants to maintain its position as an attractive country for capital raising because there is today much more competition internationally.
Cayman Islands to enter into a model 1 IGAThe Cayman Islands announced on March 15 that it intends to enter into a Model 1 Intergovernmental Agreement (“IGA”) with the Internal Revenue Service for Foreign Account Tax Compliance Act (“FATCA”) compliance purposes. Accordingly, hedge funds and private equity funds that operate in the Cayman Islands will not have to enter into FATCA agreements with the Internal Revenue Service (the “IRS”) (although they still will have to obtain FATCA identification numbers). In addition, any FATCA reporting required of such funds will be to the Cayman Islands government, which in turn will provide information concerning direct and indirect ownership by US persons to the IRS. The IGA, when finalized, also may exempt certain funds (that are unlikely to have any direct or indirect US investors) from FATCA compliance.