Tag: Liability standards


Calculating SEC Civil Money Penalties

Jonathan N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg.

In addition to going to court to seek sanctions, the Securities and Exchange Commission may impose civil money penalties in its own administrative proceedings on any person who violates or causes a violation of the securities laws. [1] Unlike district courts, administrative law judges do not have authority to base penalties on respondents’ pecuniary gains resulting from violations. [2] Instead, under the various penalty statutes, maximum penalties in administrative proceedings are based on “each act or omission” violating or causing a violation of the securities laws. Currently, the maximum penalties for each act or omission violating the securities laws are:
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Scope of Insider-Trading “Tippee” Liability

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Savarese and George T. Conway III.

In an insider-trading case that will be closely watched until it is decided before the end of June, the U.S. Supreme Court granted certiorari yesterday to decide critical open questions about what is required to establish insider trading by a remote “tippee”—specifically, what kind of personal benefit must a “tipper” receive, and what knowledge of that benefit must the “tippee” have, for a conviction or sanction to stand.

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FAST Act Amendments to the U.S. Securities Laws

Nicolas Grabar is a partner at Cleary Gottlieb Steen & Hamilton LLP focusing on international capital markets and securities regulation. This post is based on a Cleary Gottlieb publication by Mr. Grabar, Les Silverman, and Andrea M. Basham.

On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act (the “FAST Act”), which, among other legislation in its 1300+ pages, includes several bills designed to facilitate the offer and sale of securities. In this post we focus on two of those bills. The first provides additional accommodations related to the SEC registration process for emerging growth companies (“EGCs”), a category of issuer established by the Jumpstart Our Business Startups Act (the “JOBS Act”) in 2012. The second creates a non-exclusive safe harbor under Section 4 of the Securities Act of 1933, as amended (the “Securities Act”) for resales of securities that meet the conditions of the safe harbor.

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Failure-of-Oversight Claims Against Directors

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savarese, Emil A. Kleinhaus, C. Lee Wilson, and Noah B. Yavitz. This post is part of the Delaware law series; links to other posts in the series are available here.

Last week, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of purported shareholder derivative claims alleging that directors of JPMorgan Chase, a Delaware corporation, failed to institute internal controls sufficient to detect Bernard Madoff’s Ponzi scheme. Central Laborers v. Dimon, No. 14-4516 (2d Cir. Jan. 6, 2016) (summary order). The decision represents a forceful application of Delaware law holding that, when directors are protected by standard exculpation provisions in the corporate charter, they will not be liable for alleged oversight failures absent a particularized showing of bad-faith misconduct.

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Governance Challenges When Gatekeepers are “Chilled”

Michael W. Peregrine is a partner at McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine, with assistance from Joshua T. BuchmanEugene I. Goldman, and Kelsey J. Leingang; the views expressed therein do not necessarily reflect the views of McDermott Will & Emery LLP or its clients.

An emerging governance challenge is the need to address the tension between the pursuit of legitimate corporate strategic goals, and the concerns of internal “gatekeepers” who perceive themselves at increasing personal legal risk for corporate wrongdoing. This challenge is a direct byproduct of new enforcement initiatives of the Department of Justice and the Securities and Exchange Commission, and other recent developments with respect to corporate officials.

The concern is that these developments may cause some gatekeepers and other corporate officials to be much more self-protective in performing their corporate and fiduciary responsibilities, to the possible detriment of strategic implementation. Attentive boards will acknowledge this challenge and engage its gatekeepers in an appropriate resolution.

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Ten Trends in SEC Enforcement Actions

Jonathan N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg. The complete publication, including footnotes, is available here.

As 2015 winds down, we offer the following observations about ten important trends in SEC enforcement actions.

1. Increased Number of Enforcement Actions

The number of SEC enforcement actions continues to grow. In FY 2015, the SEC filed 807 enforcement actions, of which 507 were independent actions for violations of the securities laws and 300 were either follow-on actions (e.g., seeking bars against individuals based on prior orders) or actions against issuers who were delinquent in making required filings. This was up from 755 enforcement actions in 2014, of which 413 were independent actions, and that in turn was up from 676 enforcement actions in 2013, of which 341 were independent actions. Total monetary relief ordered rose from $3.4 billion in 2013 to $4.16 billion in 2014 to $4.19 billion in 2015.
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United States v. Litvak: Materiality of Pricing Misstatements

This post is based on a Sullivan & Cromwell LLP publication by Adam S. ParisSteven R. PeikinMichael H. Steinberg and Alexander B. Gura. Mr. Paris and Mr. Steinberg are partners in the Litigation Group; Mr. Peikin is partner in the Criminal Defense and Investigations Group; and Mr. Gura is a firm associate.

On December 8, 2015, the Second Circuit issued its decision in United States v. Litvak, which reversed the defendant’s conviction and remanded the case for a new trial. Notwithstanding the reversal, the Court reaffirmed the “longstanding principle” that Section 10(b) of the Securities Exchange Act of 1934 is to be construed “flexibly,” and held that misstatements that might otherwise be considered “seller’s talk,” when viewed through the lens of the federal securities laws, may be material and can result in criminal liability.

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Regulatory Competition and the Market for Corporate Law

Ofer Eldar is a doctoral candidate at the Yale School of Management. This post is based on an article authored by Mr. Eldar and Lorenzo Magnolfi, a doctoral candidate at Yale Economics Department. This post is part of the Delaware law series; links to other posts in the series are available here.

There is a longstanding debate in corporate law and governance over the merit of competition for corporate laws. “Race to the top” scholars point to the fact that Delaware, the state where most public firms are incorporated, has laws that are highly responsive to business and has been a laggard in enacting anti-takeover statutes. Proponents of the “race to the bottom” have shown that firms are more likely to incorporate in their home state when that state has adopted more anti-takeover statutes. More recently, they have highlighted the recent rise of firm incorporations in Nevada, following a 2001 Nevada law, which exempts managers from liability for breaching their fiduciary duties. Finally, skeptics of competition argue that it is impossible for states to compete with Delaware by simply replicating its laws, and that relatively few firms reincorporate from one state to another.

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Delaware Supreme Court on Potential Financial Advisor Liability

Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper, Peter J. Rooney, and Gregory Beaman. This post is part of the Delaware law series; links to other posts in the series are available here.

In November 30, 2015, the Delaware Supreme Court issued a 107-page opinion affirming the Court of Chancery’s post-trial decisions in In re Rural/Metro Corp. Stockholders Litigation (previously discussed on the Forum here). In the lower court, Vice Chancellor Laster found a seller’s financial advisor (the “Financial Advisor”) liable in the amount of $76 million for aiding and abetting the Rural/Metro Corporation board’s breaches of fiduciary duty in connection with the company’s sale to private equity firm Warburg Pincus LLC. See RBC Capital Mkts., LLC v. Jervis, No. 140, 2015, slip op. (Del. Nov. 30, 2015).The Court’s decision reaffirms the importance of financial advisor independence and the courts’ exacting scrutiny of M&A advisors’ conflicts of interest. Significantly, however, the Court disagreed with Vice Chancellor Laster’s characterization of financial advisors as “gatekeepers” whose role is virtually on par with the board’s to appropriately determine the company’s value and chart an effective sales process. Instead, the Court found that the relationship between an advisor and the company or board primarily is contractual in nature and the contract, not a theoretical gatekeeping function, defines the scope of the advisor’s duties in the absence of undisclosed conflicts on the part of the advisor. In that regard, the Court stated: “Our holding is a narrow one that should not be read expansively to suggest that any failure on the part of a financial advisor to prevent directors from breaching their duty of care gives rise to” an aiding and abetting claim. In that (albeit limited) sense, the decision offers something of a silver lining to financial advisors in M&A transactions. Equally important, the decision underscores the limited value of employing a second financial advisor unless that advisor is paid on a non-contingent basis, does not seek to provide staple financing, and performs its own independent financial analysis.

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Scope of Federal Statutory Whistleblower Provisions

Joseph M. McLaughlin is a Partner at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. McLaughlin and Yafit Cohn. This article appeared in the December 10, 2015 edition of the New York Law Journal.

The Sarbanes-Oxley Act (SOX) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) contain provisions protecting from retaliation individuals who provide information regarding a violation of U.S. securities laws. Various ambiguities in these statutory provisions have been adjudicated, most recently by the Northern District of California, which grappled with a new issue: whether directors who allegedly engage in retaliatory conduct may be liable under SOX and Dodd-Frank.

In Wadler v. Bio-Rad Laboratories, [1] Chief Magistrate Judge Joseph C. Spero held that directors who take retaliatory action against a whistleblowing employee by voting in favor of that employee’s termination are subject to individual liability under both SOX and Dodd-Frank. In addition, the court addressed the unsettled question whether Dodd-Frank’s anti-retaliation protection extends to whistleblowers who report internally but not to the Securities and Exchange Commission (SEC), joining a divided Second Circuit in according deference to the SEC’s view that it does.

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