Securities Litigation

On Tuesday, February 7, 2023, the Securities and Exchange Commission’s (“SEC”) Division of Examinations announced its 2023 examination priorities, which provide insights into the areas the Division believes present potential risks to investors and the integrity of the U.S. capital markets.[1] These priorities, SEC Chair Gary Gensler notes, will “emphasize compliance with new SEC rules applicable to investment advisers and investment companies as well as continue our focus on emerging issues and rules aimed at protecting retail investors.”[2]

On January 25, 2023, the Securities and Exchange Commission (the Commission) voted unanimously to re-propose new Securities Act Rule 192. The proposed rule would prohibit securitization participants from engaging in asset-backed security (ABS) transactions that would represent a conflict of interest with ABS investors.[i] The proposed rule aims to protect the integrity of the securitization market by aligning the interest of investors and securitization participants.[ii]

In United States v. Blaszczak,[1] the Second Circuit recently remanded a criminal conviction concerning the misappropriation of confidential information to the District Court in light of the Supreme Court’s decision in Kelly v. United States, which held that a scheme to alter “a regulatory choice is not one to appropriate the government’s property” for purposes of the wire fraud statute.[2]  The Second Circuit previously affirmed convictions against defendants David Blaszczak, Theodore Huber, Robert Olan, and Christopher Worrall for conversion of government property, 18 U.S.C. § 641, and wire fraud, 18 U.S.C. § 1343, as well as convictions against Blaszczak, Huber, and Olan of Title 18 securities fraud, 18 U.S.C. § 1348, and related conspiracy charges under 18 U.S.C. §§ 371, 1349.  The convictions all stemmed from a scheme that involved misappropriating confidential information from the Centers for Medicare & Medicaid Services (“CMS”), at which certain defendants previously worked. 

As has been widely reported, last week, the SEC, CFTC, and U.S. Attorney’s Office (“USAO”) for the Southern District of New York (“SDNY”) announced charges against Samuel Bankman-Fried (“SBF”), the co-founder and majority owner of FTX Trading Ltd. (“FTX”), a crypto asset trading platform, and Alameda Research LLC (“Alameda”), a trading firm specializing in crypto assets. [1] This blog post provides an overview of the claims asserted against SBF, FTX, and Alameda, and discusses some of the surprising aspects of each of the cases.

On November 7, 2022, the U.S. Supreme Court heard oral arguments in the cases of SEC v. Cochran[1] and Axon Enterprise, Inc. v. FTC,[2] which address whether respondents in federal administrative proceedings have the ability to pose constitutional challenges to those proceedings in federal court prior to exhausting the administrative process.  Decisions on these cases, expected in June 2023, could have far-reaching consequences for the federal administrative state.

Partner Greg Baker was quoted in an article from Crowdfund Insider relating to the recent SEC enforcement action against celebrity/influencer Kim Kardashian.

This summer, the U.S. Attorney’s Office for the Southern District of New York broke new ground in its oversight of fraud involving digital assets when it brought charges against Nathaniel Chastain related to an insider trading scheme involving non-fungible tokens (“NFTs”).[1]  NFTs are digital assets that are stored on a blockchain, which is a digital, decentralized transaction ledger.  Each NFT is generally associated with some digital object, such as a piece of digital artwork or meme.  An NFT provides proof of ownership of the digital object

Each year, the U.S. Securities and Exchange Commission (SEC) publishes its enforcement priorities – a reminder that, although the Division of Examinations (EXAMS) remains committed to monitoring compliance with (and penalizing violations of) all regulations, the Agency recognizes that risks to the investing public are not uniform over time. As the SEC noted in its 2022 Examination Priorities Report, the Agency has a “desire to be transparent about the heightened risks that [it] see[s].”[1]

On April 21, 2022, the United States Court of Appeals for the Fourth Circuit affirmed the dismissal by the United States District Court for the District of Maryland of allegations that Marriott International had violated federal securities laws by omitting from its public filings material information pertaining to cybersecurity vulnerabilities.[1]  This blog post examines the facts underlying the decision and the holding’s implications for comparable securities fraud claims.

A pair of recent legal developments cast doubt on the long term ability of the Securities and Exchange Commission (“SEC”) to try contested actions before the agency’s in-house administrative law judges (“ALJ”).  First, the Supreme Court accepted a petition to hear the matter of SEC v. Cochran, Petition No. 21-1239, which concerns whether the SEC’s ALJs are unconstitutionally protected from removal. Second, the U.S. Court of Appeals for the Fifth Circuit issued an opinion holding that (1) a respondent in an SEC administrative proceeding was deprived of his right to a jury trial; (2) that Congress unconstitutionally delegated legislative powers to the SEC by failing to provide it with an intelligible principle by which to exercise its delegated power, and (3) that the administrative law judges were unconstitutionally protected from removal. These developments could have long term implications not only for the SEC, but for all federal administrative agencies.

On March 28, 2022, the Securities and Exchange Commission announced proposed changes to Exchange Act Rules that would expand the scope of which market participants the SEC considers to be a “dealer” or “government securities dealer.” Most investors would notice no change in their portfolio management practices.  But for certain high-frequency trading operations, the new rules might lead to substantial changes.

NFTs, or “non-fungible tokens,” are in the headlines.  Artists, politicians, and celebrities, along with everyday internet users, have been selling and trading various forms of the digital asset, sometimes earning millions of dollars from the sales.  But how do NFTs fit into the current securities regulation framework?  And what are the legal implications of participating in this new and volatile market?  This blog post explores these issues and analyzes ongoing NFT-related litigation.

The full-scale invasion of Ukraine by a revanchist Russia continues to dominate headlines as the war enters its second month. While the sometimes-terrible choices facing those living in the conflict zone are unparalleled, investors around the world also have choices to make. Among those, ESG funds that are tasked with minimizing investment risks associated with environmental, social and governance issues find themselves with difficult – and sometimes contradictory – dilemmas.

On June 29, 2021, a major cryptocurrency exchange (the “Crypto Exchange”) announced a new program called “Lend” in which it proposed offering customers a 4% interest rate on cryptocurrency tied to USD.[i] But on September 7, 2021, the Crypto Exchange announced that the U.S. Securities and Exchange Commission (the “SEC”) had issued a Wells notice, a formal notice that the agency was planning to sue them for offering the program.[ii] While the Crypto Exchange took the position that it was unclear why the SEC had issued this notice, it was evident from public comments that the SEC had been contemplating whether investment cryptocurrency programs should be classified as securities.[iii]  On September 20, 2022, the Crypto Exchange announced that it was dropping its Lend program.

On June 21, 2021, the Supreme Court issued an opinion by Justice Barrett on the reliance element of a securities fraud claim.[1]  In a unanimous portion of her opinion (the “Decision”), Justice Barrett held that courts may consider the generic nature of an alleged misrepresentation in determining whether the misrepresentation impacted share price at the class certification stage.  Of potentially greater significance, Justice Barrett also held, over a dissent by Justice Gorsuch (joined by Justices Thomas and Alito), that defendants bear the burden of persuasion by a preponderance of the evidence that an alleged misrepresentation has not had an impact on the price of a security.  This second holding will facilitate the formation of classes under Rule 23 of the Federal Rules of Civil Procedure by making it at least marginally easier for putative classes to demonstrate reliance through evidence common to the class, which in turn will help the class satisfy Rule 23’s predominance requirement.

In this post, we will summarize the Decision, discuss the caselaw interpreting it to date, and offer concluding thoughts on its potential impact on the practice of securities litigation.

A key question for any company considering the issuance of cryptocurrency is whether that digital asset will be treated by regulators as a security, like BP stock, or a commodity, like Bitcoin.[i]  In 2019, the Securities and Exchange Commission (the “SEC” or the “Commission”) provided guidance on this issue in a “Framework for ‘Investment Contract’ Analysis of Digital Assets” (“Framework”).[ii]   The Framework lists characteristics that make it more or less likely that the SEC will deem a given cryptocurrency to be a security.  The SEC’s enforcement action against Ripple Labs (“Ripple”) for the sale of a digital asset named “XRP,” filed in December 2020 and currently pending before the U.S. District Court, Southern District of New York, illustrates the manner in which the SEC has applied the Framework, and serves as an early test of whether courts agree with the SEC’s broad view of the investment contract analysis with respect to crypto assets.

On November 18, 2021, the Securities and Exchange Commission (the “Commission”) released its Enforcement Results for fiscal year (“FY”) 2021, which spans from October 1, 2020 to September 30, 2021.  The Commission published its results in an abbreviated press-release format with an accompanying addendum, foregoing the more formal annual report format it used in prior years.  Gurbir S. Grewal, who was appointed Director of the Commission’s Division of Enforcement (the “Division”) in July 2021, emphasized a commitment to innovation.  Grewal stated the Division brought “a number of critically important and first-of-their-kind enforcement actions,” and accomplished “record-breaking achievements” for its whistleblower program.  This blog post will review some of the key takeaways, as well as offer predictions for enforcement trends in FY 2022.

Last summer, Representative Alexandria Ocasio-Cortez (D-NY) introduced bill H.R. 4620 to limit the exemption from registration requirements applicable to certain family offices under the Investment Advisers Act of 1940 (the “Advisers Act”).  If the bill becomes law, among other things, a family office with $750,000,000 or more in assets under management will no longer be exempt from registration under the Advisers Act.