In a June 21, 2018 decision, the U.S. Supreme Court held that the SEC’s administrative law judges (ALJs) are not merely “employees” but rather are “officers” who must be appointed to their position by the “Heads of Departments” under the Constitution’s Appointments Clause. The Court’s decision at one level represents a rather straightforward application of the Court’s existing case law regarding ALJs. However, the decision raises a number of troublesome issues for the SEC, and leaves a number of other important questions unanswered. The decision also raises a number of questions for other agencies as well.  The ultimate questions in the wake of Lucia v. Securities and Exchange Commission may be whether and to what extent the SEC (and even perhaps other agencies) will continue to use administrative processes to pursue enforcement action. The Court’s opinion in the case can be found here.
Continue Reading Supreme Court’s SEC ALJ Decision Leaves Many Unanswered Questions

In a long line of cases, the U.S Supreme Court has grappled with the question of who can be held liable under the federal securities laws for fraudulent misrepresentations. Most recently, in the Janus Funds case, the Court has said that only a “maker” of a misrepresentation can be held liable in a private securities lawsuit. On June 18, 2018, the U.S. Supreme Court granted a writ of certiorari to examine whether a person who did not “make” a misrepresentation can nevertheless be held liable under the securities laws on a theory of scheme liability.

The case involves an SEC enforcement action in which the defendant, Francis Lorenzo, sent prospective investors emails at the direction of his boss and with content that he had not created. Lorenzo’s actions were held insufficient to support fraudulent statement liability because he did not “make” the misrepresentations, but Lorenzo nevertheless was held liable for the misrepresentations on a scheme liability theory. The case presents an interesting opportunity for the Court to consider the requirements to establish scheme liability and in particular to determine whether a financial misrepresentation alone is sufficient to support a scheme liability claim. The Supreme Court’s June 18, 2018 order granting the writ of certiorari can be found here.
Continue Reading Supreme Court Grants Cert in Scheme Liability Case

One of the cutting-edge legal issues – one that is raised in a number of pending securities class action lawsuits – is the question of whether cryptocurrencies are “securities” and therefore required to be registered with the SEC before they can be traded. Within this larger question are a host of related issues, perhaps the most interesting of which is the question whether digital currencies that act as “mediums of exchange” are securities, or rather are more like traditional currencies, which are exempt from the definition of securities. The answer to this question could have an enormous impact on the marketplace for digital currencies and could have significant liability implications in a number of pending actions and enforcement actions.
Continue Reading Is a Digital Coin that Functions as a Medium of Exchange a “Security”?

In the latest of several recent high court decisions addressing the questions of statutes of limitations and related questions of tolling, on June 11, 2018, the U.S. Supreme Court unanimously held that equitable tolling principles do not apply to toll statutes of limitation to permit previously absent class members to bring a subsequent class action outside the applicable limitations period. This seemingly narrow ruling is consistent with the Court’s recent proclivity to provide sharper edges and cleaner lines to statutes of limitations issues and to reduce the likelihood that class securities claims may continue be filed after the end of the limitations period. The Supreme Court’s June 11, 2018 opinion in China Agritech, Inc. v. Resh can be found here.
Continue Reading U.S. Supreme Court: Equitable Tolling Does Not Allow Follow-On Class Claims Outside of the Limitations Period

John Reed Stark

As cryptocurrencies and ICOs have proliferated, one very key question has been whether not the coins or tokens are securities within the meaning of the federal securities laws. Earlier this week, the first federal court hearing at which this question was discussed took place in the federal district court in Brooklyn. In the following guest post, John Reed Stark, President of John Reed Stark Consulting and former Chief of the SEC’s Office of Internet Enforcement, provides his detailed report of the court hearing as well as his perspective on the topics under discussion. A version of this article originally appeared on Cybersecurity Docket. I would like to thank John for his willingness to allow me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is John’s guest post.
Continue Reading Guest Post: The First Federal Court Hearing on SEC Jurisdiction over ICOs

One of the trendy concepts in certain circles in recent years has been the idea of litigation management bylaws – that is, the adoption by company of bylaw provisions that help manage the company’s litigation risks. For example, one bylaw provision that has been widely adopted by publicly traded companies is a forum selection provision specifying a particular jurisdiction as the preferred forum for litigating shareholder disputes.

Another one of the proposed litigation management bylaws that has proven more controversial is the idea of a mandatory arbitration clause, requiring shareholder claimants to submit claims – including even claims under the federal securities laws – to arbitration. This idea, which has been percolating for years, received a significant boost in a statement from SEC Commissioner Michael Piwowar. In a recent letter to a member of Congress, SEC Chair Jay Clayton weighed in with his views on the topic, suggesting that the idea is not a particular priority for him. But aspects of his communication and of the current state of debate on the issue suggest that the idea is probably not going to just go away.
Continue Reading Mandatory Arbitration of Shareholder Claims: What’s the Latest?

In a unanimous March 20, 2018 opinion written by Justice Elena Kagan, the U.S. Supreme Court held that state courts retain concurrent jurisdiction over class action lawsuits alleging only violations of the Securities Act of 1933’s liability provisions and that these state court class action lawsuits are not removable to federal court. The court’s holding resolves a lower court split in the authorities on question of whether or not the Securities Litigation Uniform Standards Act of 1998 (SLUSA) eliminated concurrent state court jurisdiction for these ’33 Act class action lawsuits or made the state court ’33 Act lawsuits removable to federal court.

As discussed below, Court’s ruling is likely to result in an increase in ’33 Act claims in state court, a development that could have unwelcome consequences for corporate defendants and their insurers. The Supreme Court’s March 20, 2018 decision in Cyan, Inc. v. Beaver County Employees Retirement Fund can be found here.
Continue Reading U.S. Supreme Court: Notwithstanding SLUSA, State Courts Retain Concurrent Jurisdiction for ’33 Act Claims

Many readers undoubtedly saw the news last week of the enforcement action the SEC filed against Theranos, Inc., its founder, Chairman, and CEO Elizabeth Holmes, and its President and COO Ramesh “Sunny” Balwani. Theranos and Holmes have settled with the agency, although the complaint against Balwani apparently will be going forward. The SEC’s action is interesting at many levels, and it has several important implications that should not be overlooked. The SEC’s March 14, 2018 press release about the charges can be found here. The SEC’s complaint against Thernos and Holmes can be found here. The SEC’s separately complaint against Balwani can be found here.
Continue Reading Critical Implications of the SEC’s Enforcement Action Against Theranos

Britt Latham
Brian Irving

In the following guest post, Britt K. Latham and Brian Irving of the  Bass, Berry & Sims PLC  law firm take a look at the SEC’s enforcement action track record under the Trump administration and take a look ahead at what may be next for the agency. I would like to thank Britt and Brian for their willingness to allow me to publish their article as a guest post. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Britt and Brian’s article.
Continue Reading Guest Post: SEC Enforcement Still Strong Under Trump – What’s Next?

SEC Commission Michael Piwowar caused quite a stir last summer when he suggested that the SEC would favorably view submissions by IPO companies that included bylaw provisions requiring mandatory arbitration of securities claims. The idea of mandatory arbitration for shareholder claims has continued to circulate in the intervening months. In the past few days, several current and former SEC Commissioners and SEC representatives have weighed in on the issue, mostly to pour cold water on the idea. Because I believe this idea will continue to percolate, I survey the latest statements below. Even though the most recent statements strongly suggest a lack of support for the idea in many circles, I suspect we will continue to hear more about this issue.
Continue Reading The Latest on Proposed Mandatory Arbitration of Shareholder Claims