Tag Archives: DOJ

Supreme Court Holds 5-Year Statute of Limitations Applies to SEC Disgorgement

On June 5, 2017, by unanimous decision, the U.S. Supreme Court determined that disgorgement – a remedy that generated $3 billion in 2015 – is a “penalty” thereby subjecting it to the 5-year statute of limitations that applies to any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.” Kokesh v. SEC, No. 16-529, slip op. at 1 (June 5, 2017) (quoting 28 U.S.C. §2462). The Court’s decision relieved Kokesh of a $30 million disgorgement order entered in the lower court.

The SEC had argued that disgorgement is a different animal – it simply places the defendant in the same position as he or she would have been but for the offense. The Court strongly disagreed noting the deterrent qualities of disgorgement, which is a hallmark of a penalty, “[s]anctions imposed for the purpose of deterring infractions of public laws are inherently punitive.” Id. at 8. The Court observed that the victims (if there are any) of a securities law violation need not participate in the enforcement action and may not even support it. In addition, money that is disgorged to the Treasury often stays there; i.e., there is no absolute requirement that the money that is recovered be distributed to the purportedly aggrieved investors.

Going forward, the SEC is faced with having to speed up its investigations and charging decisions.  That can be a challenge, especially in complex cases where the Enforcement Division would prefer to thoroughly build out a case in advance.

Here is the decision:

Click to access 16-529_i426.pdf


EB-5 Program Operator Settles With SEC For Over $7.9 Million

The SEC has announced that an Idaho man who operated an EB-5 regional center has agreed to settle a case against him alleging that he took millions of dollars to pay for luxury cars and investments unrelated to the purpose of the particular EB-5 program at issue, i.e., to develop luxury real estate and invest in gold mining ventures in Idaho and Montana.

The EB-5 program is a special expedited path to a green card for foreign investors who provide a set minimum of investment capital that creates at least 10 U.S. jobs within 2 years of the investment. The program is designed to incentivize investment in rural areas (e.g., Idaho) or high unemployment areas. Whereas the minimum for such “targeted employment areas” is $500,000, the minimum for more affluent areas is $1 million.

The respondent, Serofim Muroff, and his assistant and bookkeeper are alleged to have diverted about $5.5 million of the $140.5 million in investment money provided by Chinese investors. In addition to disgorging the allegedly diverted proceeds, Muroff has agreed to a $2 million penalty plus interest, and to be barred from conducting further EB-5 offerings. Neither Muroff nor his assistant admitted or denied the allegations in the SEC’s complaint.

Here is the press release.


Senate Bill Would Increase SEC Penalties To $1 Million And Up

Under a Senate bill, the SEC would be able to administratively impose a maximum $1 million per violation penalty on individuals and a maximum $10 million per violation penalty on financial firms for the most serious (e.g., fraud, deceit) violations.  The current levels are substantially lower — at $181,071 for individuals and $905,353 for firms — though the SEC is empowered to go to federal court to get the equivalent of the ill-gotten gains in a given case.

Under the proposed measure, the SEC would not have to go to federal court to get large remedies, though the total remedy per violation would be capped – the maximum penalty for an individual could not exceed, for each violation, the greater of (i) $1 million, (ii) three times the gross pecuniary gain, or (iii) the losses incurred by victims as a result of the violation.  The maximum amount that could be obtained from entities could not exceed, for each violation, the greater of (i) $10 million, (ii) three times the gross pecuniary gain, or (iii) the losses incurred by victims as a result of the violation.

In addition, individuals and firms that were found civilly or criminally liable for securities law violations in the 5 years leading up to a new violation could face up to three times the new caps, e.g., penalties of $3 million/$30 million.

It is important to note that SEC administrative or “in-house” courts have faced substantial constitutional challenges recently and are often considered subject to agency bias.  At a minimum, it is clear that the SEC courts lack some of the procedural safeguards provided in federal court.  If the Senate bill becomes law, the SEC will have significantly increased leverage in negotiations with respondents not only because of the amounts involved but because the Enforcement staff would not need to go to federal court to get such amounts.



California DOJ Takes Advantage of “Lower” Insider Trading Standard

The Los Angeles U.S. Attorney has brought charges against a former J.P. Morgan analyst and two of his friends alleging that the analyst tipped deal information he learned while at the bank to his friends.

Ashish Aggarwal, 27, of San Francisco, and two longtime friends surrendered to the FBI Tuesday, after being charged with a scheme that netted over $600,000 due to stock tips. While interesting in and of itself, this case is nationally significant because it appears to be the first use of the Ninth Circuit’s “lower” standard for remote tippee liability under the Salman decision issued on July 6, 2015.

One of the elements of tippee liability is that there be a “personal benefit” to the tipper (here, Aggarwal).   In Salman, the Court found that the personal benefit to the tipper can occur where an “insider makes a gift of confidential information to a trading relative or friend.” That is exactly what is alleged in the Aggarwal case: Aggarwal tipped his boyhood friends.

By contrast, the Second Circuit, in U.S. v. Newman (December 2014) found that the benefit must represent, “at least a potential gain of a pecuniary or similarly valuable nature.” The Court vacated the underlying convictions and the decision has spawned multiple challenges across the country.

Because of Newman’s significance to the Government’s entire insider trading campaign, the Solicitor General, on July 31, 2015, sought review by the Supreme Court. The Court will likely decide in October whether to hear the Newman appeal. Among other things, the Court will look at the Salman decision to determine whether there is a circuit split on these issues.

In the meantime, it is likely that the Aggarwal case will proceed in California, though there will likely be some motion practice seeking a stay pending the outcome in Newman. Here is an article summarizing the charges.


SEC Remote Tippee Cases Now Subject to Higher Newman Standard

The heightened Newman requirements for remote tippee liability apply not only in criminal cases but also in civil cases brought by the SEC.  On April 6, 2015, in SEC v. Payton, Judge Rakoff of the Southern District of New York ruled that the principles set forth in the criminal case, U.S. v. Newman (2d Circuit), apply equally in civil cases brought by the SEC.  That means, among other things, that the SEC must prove that the original tipper received a significant personal benefit from the original tippee.

As Judge Rakoff pointed out, however, there is an important distinction between a remote tippee case brought by the DOJ and one brought by the SEC.  While the DOJ must prove the remote tippee actually knew of the of the personal benefit provided to the original tipper by the original tippee, the SEC can rely on the lower “recklessness” standard.  Recklessness includes conscious avoidance of learning whether there was a direct quid quo pro between the original tipper and tippee.  Thus, in a case where a remote tippee has enough circumstantial facts at hand to raise red flags but refuses to search out whether there is a quid quo pro between the original tipper and tippee, the remote tippee may be civilly liable.

By applying Newman to SEC cases, the Court made it clear that the Government will have to be careful in bringing remote tippee cases, whether they are civil or criminal.  That said, all other things being equal, the safer path for the Government will likely be to go the SEC/civil route.

Judge Rakoff’s decision can be found here.  http://www.scribd.com/doc/261139623/SEC-v-Payton-Rakoff-Opinion-April-6-2015

Supreme Court To Decide Whether Government Must Prove That A Bank Fraud Defendant Intended To Defraud A Bank, As Opposed To Just Someone

On April 6, 2011, a jury convicted Kevin Loughrin of bank fraud and a number of other crimes relating to a scheme that he and an accomplice hatched in Utah to defraud some unsuspecting citizens and Target, the retail store.[1]  Loughrin and his accomplice dressed up like Mormon missionaries, went around to various homes, stole checks from people’s mailboxes, altered the checks, purchased items at Target, then returned the items to Target for cash.[2]  Loughrin made about $1,200 and was ultimately sentenced to 36 months in prison.[3]

At trial, his attorney tried to convince the Court that it should issue a jury instruction explaining to the jury that he could not be found guilty of bank fraud pursuant to 18 U.S.C. § 1344 unless the jury concluded that Loughrin had intended to defraud a financial institution, as opposed to simply intending to defraud someone.[4]  The trial court disagreed, citing precedent from the Tenth Circuit Court of Appeals, and issued an instruction requiring the Government to prove that Loughrin acted with “an intent to defraud” someone (e.g., Target, the account holders, etc.).  As noted above, the jury convicted Loughrin of bank fraud.  On appeal, the Court of Appeals upheld the trial court’s decision not to instruct the jury that, in order to convict under § 1344, the Government had to prove that Loughrin intended to defraud a bank.[5]

On December 13, 2013, the Supreme Court agreed to hear the case, Loughrin v. United States, in order to resolve a split among the federal circuit courts as to whether the U.S. Government must prove that a defendant intended to defraud a bank in order to secure a conviction for bank fraud under 18 U.S.C. § 1344(2).[6]  Specifically, the majority of federal circuit courts require the Government to prove beyond a reasonable doubt that the defendant intended to defraud a financial institution under both subsections of § 1344.[7]  The minority position, which is shared by the appeals court that decided the Loughrin case, is that the Government need only prove that the defendant intended to defraud someone for a § 1344(2) (obtaining property owned by, or under the control of, a bank) conviction.[8]

The Supreme Court will likely hear a variety of arguments in support of and against the majority position.  One rationale for that position is that the purpose of the statute is to “protect[] the federal government’s interest” in the financial integrity of federally chartered or insured banks. [9]  “Where the victim is not a bank and the fraud does not threaten the financial integrity of a federally controlled or insured bank, there seems no basis in the legislative history for finding coverage under [the statute].”[10]

Another rationale is that the expansive interpretation sought by the Government would federalize areas of crime normally prosecuted by state authorities.  This is a federalism argument rooted in an interpretation of the statute.  However, as seen in decisions across different topical areas and different Supreme Court eras, the appeal of such federalism arguments depends almost entirely on the composition and politics of the Supreme Court bench at a given point in time.

By contrast, a rationale for the Government’s position – that the state of mind required for a § 1344(2) conviction is an intent to defraud someone, bank or otherwise – is that the plain language of the two subsections of § 1344 show an intent to create two separate crimes: “[C]lause (1) focuses on the conduct as it affects the financial institution, while clause (2) emphasizes the conduct of the defendant.”[11]  “Indeed, the latter extends to any knowingly false representation by the defendant.”[12]  For liability under clause (2), the Government need only show that the defendant obtained or attempted to obtain bank property or property held by a bank with an intent to defraud someone else.[13]  Relatedly, because the target of the fraud need not be a bank, the Government need not prove that a bank was “at risk” for a loss.[14]

Whether Loughrin or the Government will carry the day and on which specific issues remains to be seen.  For example, the record is a bit unclear as to whether the issue of intent to defraud a bank is the only issue properly before the Court.  The Government has devoted a lot of its briefing to arguing that the issue of risk of loss to a bank was not preserved on appeal.  At a minimum, the Court will likely wrangle with the issue of resolving the circuit split on the issue of whether the Government need prove an intent to defraud, generally, or an intent to defraud a financial institution for subsection 2 liability.

[1] See U.S. v. Loughrin, 10-cr-00478-TC, Dkt. Nos. 3, 115 (D. Utah).

[2] See id.

[3] See id. at Dkt. Nos. 3, 150.

[4] See U.S. v. Loughrin, 710 F.3d 1111, 1115 (10th Cir. 2013) (discussing trial court decision).  Specifically, the Court found that there was no need to prove intent to defraud a bank with respect to subsection 2 of § 1344.  Section 1344 provides that it is a felony to knowingly execute, or attempt to execute, a scheme or artifice: (1) to defraud a financial institution; or (2) to obtain any … property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises.  18 U.S.C. § 1344.

[5] See id. at 1116.

[6] Loughrin v. United States, Dkt. No. 13-316.

[7] See e.g., U.S. v. Kendrick, 221 F.3d 19, 29 (1st Cir. 2000).

[8] See, e.g., Loughrin, 710 F.3d at 1116.

[9] See United States v. Rodriguez, 140 F.3d 163, 168 (2d Cir. 1998).

[10] See id.

[11] See Loughrin, 710 F.3d at 1116 (citations omitted).

[12] See id. (citation and internal quotations omitted).

[13] See id.

[14] In addition, the Government will likely argue before the Court that there is substantial case law across the federal circuits where convictions under § 1344(2) were upheld even though the bank in question is not the primary victim.

Whistleblowers (and Companies) Beware – Court Rules That Employees Must “Report Out” to SEC in Order to Claim Whistleblower Status Under Dodd-Frank

On July 17, 2013, the Fifth Circuit Court of Appeals ruled that an ex-employee of a regulated entity, who internally reported alleged violations of the Foreign Corrupt Practices Act (FCPA) but failed to provide the information to the SEC, is not entitled to “whistleblower” status under Dodd-Frank, 15 U.S.C. § 78u-6(a)–(h), and is therefore cut-off from an anti-retaliation lawsuit and possible recovery of enhanced back pay.[1]   In rendering its decision, the Court explicitly rejected the SEC’s own interpretation of the statute, set forth in a final SEC Rule.[2]  The Court also rejected the decisions of the federal district courts that have considered the issue.[3]

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This has tremendous implications, at least in cases arising in the Fifth Circuit, both for employees and their regulated employers.  Employees who want to be treated as a Dodd-Frank whistleblower and take advantage of its enhanced protections will have to provide information to the SEC of violations by the former employer.[4]  That means that the SEC will be involved much earlier in any internal corporate investigations that may be taking place.  This is a bad idea for two reasons.

First, it undermines the extensive statutory and regulatory scheme already in place, which is designed to encourage companies to conduct rigorous internal investigation and then self-report to the SEC and/or DOJ.  For example, under the Sentencing Guidelines, the DOJ’s Principals of Federal Prosecution of Business Organizations, and the SEC’s Cooperation Initiative, “cooperation” credit may be awarded for self-reporting.  Under Asadi, however, corporations may be forced to race to the SEC or DOJ before an employee does without the benefit of knowing if something wrongful has actually occurred.

Second, the rule in Asadi, if widely adopted, has the potential to undo the detailed compliance programs painstakingly put into place by in-house counsel and compliance officers for internal reporting, review, analysis, and disclosure to the government.  If Asadi becomes the law of the land, corporate law and compliance departments will have to substantially overhaul those programs and deal with the uncertainty that it injects into the compliance realm.

[1] See Asadi v. G.E. Energy (USA), LLC, No. 12-20522, 2013 WL 3742492 (5th Cir. July 13, 2013).

[2] See 17 C.F.R. § 240.21F-2(b)(1).

[3] See, e.g., Kramer v. Trans-Lux Corp., 2012 WL 4444820, at *4 (D. Conn. Sept. 25, 2012); Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986, 994 n. 9 (M.D. Tenn. 2012); Egan v. TradingScreen, Inc., 2011 WL 1672066, at **4-5 (S.D.N.Y. May 4, 2011).

[4] Such persons are still, however, entitled to a private cause of action for retaliation under Sarbanes-Oxley.  See 18 U.S.C. § 1514A.