Please find below the December 2014 issue of the US Securities Law Digest. This update is 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 Digest.
The Second Circuit raises the bar for insider trading convictions
Under the Second Circuit’s new ruling, prosecutors have two large hurdles they must clear to convict under securities laws. First, they must prove that a defendant knew that the source of inside information disclosed tips in exchange for a personal benefit. Second, the definition of “personal benefit” is tightened to something more akin to a quid pro quo exchange.
For years, insider trading cases have been slam dunks for federal prosecutors. The United States Attorney’s Office in the Southern District of New York had compiled a remarkable streak of more than 80 insider trading convictions over the past five years. But that record has evaporated thanks to the United States Court of Appeals for the Second Circuit’s ruling in United States v. Newman, in which the Second Circuit concluded that the district court’s jury instructions were improper and that the evidence was insufficient to sustain a conviction. The Court laid down two new standards in tipping liability cases, both likely to frustrate prosecutors for years to come.
SEC proposes rule amendments to implement JOBS Act provisions that increase thresholds for registration and reporting obligations
On December 18, 2014, the Securities and Exchange Commission (the “SEC”) issued a release proposing amendments to various rules under the Exchange Act of 1934, as amended (the “Exchange Act”) to reflect the new, higher thresholds for Exchange Act registration by all issuers, and for termination of registration and suspension of reporting by banks and bank holding companies, that were set forth in the JOBS Act. The proposed amendments would extend the higher termination and suspension threshold for banks and bank holding companies to savings and loan holding companies. The proposals would also revise the definition of “held of record” under Exchange Act Rule 12g5-1 to implement the JOBS Act provision excluding from these computations certain securities held by persons who received those securities pursuant to employee compensation plans.
Comments on the proposed rules will be due 60 days after publication in the Federal Register.
SEC proposes amendments revising Section 12(g) thresholds as required by the JOBS Act
The SEC proposed rules for comment that address the JOBS Act mandate to revise the thresholds for registration, termination of registration, and suspension of reporting under Section 12(g) of the Exchange Act. The proposed rules would:
amend Exchange Act Rules 12g-1 through 4 and 12h-3, which govern the procedures relating to registration, termination of registration under Section 12(g), and suspension of reporting obligations under Section 15(d) to reflect the new thresholds established by the JOBS Act;
revise the rules so that savings and loan holding companies are treated in a similar manner to banks and bank holding companies for the purposes of registration, termination of registration, or suspension of their Exchange Act reporting obligations; and
apply the definition of “accredited investor” in the Securities Act of 1933, as amended (the “Securities Act”) Rule 501(a) to make determinations as to which record holders are accredited investors for purposes of Exchange Act Section 12(g)(1). The accredited investor determination would be made as of the last day of the fiscal year.
The proposed rules also would amend the definition of “held of record” used in determining whether an issuer is required to register a class of equity securities under Exchange Act Section 12(g)(1) to exclude certain securities.
Advisory Committee will consider accredited investor definition
The SEC announced that at the December 17, 2014 meeting of the Advisory Committee on Small and Emerging Companies, the group will focus on the definition of “accredited investor.” The Dodd-Frank Act requires that every four years the SEC consider the definition. In addition, following the relaxation of the prohibition on general solicitation, consumer groups and state securities regulators have focused on the appropriateness of the definition. The meeting is webcast on the SEC’s site.
Foreign Corrupt Practices Act ("FCPA") charges resolved by payment of significant criminal penalty and disgorgement
California-based medical diagnostics and life sciences company Bio-Rad Laboratories Inc. entered into a non-prosecution agreement with the Department of Justice, Bio-Rad Labs., Inc. Non-Prosecution Agreement Letter from William J. Stellmach, U.S. Dep’t of Justice, to Douglas N. Greenburg, Latham & Watkins LLP (November 3, 2014), and also consented to the entry of an SEC administrative order related to violations of the FCPA. Bio-Rad Labs., Inc., Exchange Act Release No. 73496 (November 3, 2014). Bio-Rad agreed to pay a $14.35 million criminal penalty and $40.7 million in disgorgement and prejudgment interest. According to the statement of facts attached to Bio-Rad’s non-prosecution agreement with DOJ, a French subsidiary of Bio-Rad retained and paid intermediary companies “commissions” of 15% to 30%, purportedly for various services in connection with governmental sales in Russia that were never performed.
SEC settles FCPA charges against global manufacturer
On December 15, 2014, the SEC settled charges against a global manufacturer for allegedly violating the FCPA by providing non-business payments and travel expenses to Chinese government officials with the expectation of obtaining business. The SEC investigation revealed that approximately $230,000 in improper payments were allegedly made out of the company’s China-based offices and were falsely recorded as business and marketing expenses in the company’s records. The SEC alleged that insufficient internal controls allowed for the payments to continue and that as a result the company profited $1.7 million in contracts with state-owned entities in China. The company self-reported its misconduct and provided “extensive cooperation” during the SEC’s investigation, and will pay $1,714,852 in disgorgement, $310,117 in prejudgment interest, and a $375,000 penalty.
Three recent FCPA actions highlight enforcement focus on gifts and hospitality
Three recent FCPA enforcement actions underscore the Department of Justice (“DOJ”) and the SEC’s focus on prosecuting companies and individuals for improper gifts, meals, travel, and entertainment provided to foreign officials.
SEC imposes first FCPA-related administrative sanctions of individuals since 2012
The SEC reached an administrative settlement with two former employees of Oregon-based FLIR Systems, for their role in sending officials from the Saudi Arabian Ministry of Interior (“MOI”) on a trip to inspect products at FLIR’s Boston facility, which included stops in Casablanca, Paris, Dubai, Beirut and New York City, and for buying and giving five luxury watches totaling $7,000 to Saudi MOI officials, some of whom were also included in the trip. Timms, Exchange Act Release No. 73616 (Nov. 17, 2014). There were no allegations of cash payments. According to the SEC’s order, the travel and watches were offered in order to retain $12.9 million in business for thermal binoculars and to obtain a separate $17.4 million order for infrared security cameras. The SEC order further alleges that following an internal review by FLIR of Timms’ request for reimbursement for the cost of the watches, the former employees worked with a third-party agent to obtain false invoices understating the cost of the watches as 7,000 Saudi Riyal (approximately US $1,900), and inaccurately showing direct flights between Riyadh and Boston without the stopovers made by the MOI officials. Under the settlement, one former employee agreed to pay $50,000 and the other, $20,000, to resolve alleged violations of the FCPA’s anti-bribery and books-and-records provisions. This matter represents the SEC’s first administrative sanction of individuals since 2012.
FINRA files complaint against broker-dealer and three employees for alleged submission of falsified documents
Wedbush Securities Inc. and three employees were charged by the Financial Industry Regulatory Authority (“FINRA”) with creating and producing to its staff “falsified and misleading documents” in connection with FINRA’s review of Wedbush’s reporting of municipal securities transactions from October 1 and December 31, 2011. According to FINRA, the respondents admitted that reports submitted to FINRA had been altered.
District Court rejects constitutional challenge to SEC administrative proceedings
This blog recently expressed the view that critics, including Judge Jed Rakoff, have been questioning the SEC’s policy of increasingly bringing enforcement actions in its administrative forum rather than federal court. It noted that several cases had been filed recently that challenged the constitutionality of the SEC’s administrative proceedings. The first of those cases has now been decided: In Chau v. SEC, Judge Kaplan of the U.S. District Court for the Southern District of New York ruled that the court lacked subject-matter jurisdiction to hear an action to enjoin an SEC administrative proceeding on constitutional grounds.
Securities regulation legislation in the coming 114th Congress
If the current 113th Congress is any measure, we can expect the coming 114th Congress to introduce and promote bills seeking, among other matters, to facilitate capital formation, to correct oversights in the original JOBS Act, to make crowdfunded equity offerings a reality and to ease reporting complexity for smaller issuers. We look forward to an interesting 2015 in securities regulation.
SEC distances itself from Janus and adopts expansive view of Rule 10b-5(a)
The SEC recently rendered an opinion in an enforcement action against two persons, John P. Flannery and James D. Hopkins, associated with an investment adviser. In so doing, it sought to limit the Supreme Court’s holding in Janus and offered an expansive view of Rule 10b-5(a) and (c).
In Janus, the Supreme Court interpreted Rule 10b-5(b)’s prohibition against “mak[ing] any untrue statement of a material fact.” After concluding that liability could extend only to those with “ultimate authority” over an alleged false statement, the Court held that an investment adviser who drafted misstatements that were later included in a separate mutual fund’s prospectus could not be held liable under Rule 10b-5(b).
According to the SEC, Rule 10b-5(a) and (c) are different. Those provisions do not address only fraudulent misstatements. Rule 10b-5(a) prohibits the use of “any device, scheme, or artifice to defraud,” while Rule 10b-5(c) prohibits “engag[ing] in any act, practice, or course of business which operates or would operate as a fraud or deceit.” The SEC noted the very terms of the provisions “provide a broad linguistic frame within which a large number of practices may fit.”