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Article
Publication date: 8 April 2021

Russ Ryan, Matthew H. Baughman, Carmen J. Lawrence, Aaron W. Lipson, Richard H. Walker, Jessica Rapoport, Katie Barry and Scott Hiers

To analyze the impact of recent legislation that amended the Securities Exchange Act of 1934 to expressly empower the U.S. Securities and Exchange Commission (SEC) to seek…

Abstract

Purpose

To analyze the impact of recent legislation that amended the Securities Exchange Act of 1934 to expressly empower the U.S. Securities and Exchange Commission (SEC) to seek disgorgement in federal district court proceedings and to codify applicable statutes of limitations.

Design/methodology/approach

This article provides an overview of the authors’ prior work analyzing courts’ treatment of SEC disgorgement and summarizes how the scope of the remedy has evolved since Kokesh v. SEC (2017). Then, the article analyzes the changes to the Securities Exchange Act of 1934 contained in Section 6501 the 2021 National Defense Authorization Act (NDAA), which statutorily empowered the SEC to seek and obtain disgorgement in federal court actions. Finally, the authors discuss the impact of the legislation on the Supreme Court’s decisions in Kokesh and Liu v. SEC (2020).

Findings

The availability and appropriateness of SEC disgorgement have been the subject of vigorous debate. Just as courts began to iron out the contours of SEC disgorgement in the wake of Kokesh and Liu, Congress intervened by granting to the SEC explicit statutory authority to seek a remedy traditionally obtained at equity. In passing this legislation, Congress answered some questions that remained after Liu but also raised many new ones. These new questions will likely take years to resolve through subsequent litigation and potentially additional legislation.

Originality/value

Original, practical analysis and guidance from experienced lawyers in financial services regulatory and enforcement practices, many of whom have previously worked in the SEC’s Division of Enforcement.

Details

Journal of Investment Compliance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1528-5812

Keywords

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Article
Publication date: 25 November 2020

Alan R. Friedman, Dani R. James, Gary P. Naftalis, Paul H. Schoeman and Chase Henry Mechanick

To analyze the U.S, Supreme Court’s decision in Liu v. S.E.C., 140 S. Ct. 1936 (2020) and its potential implications for insider trading cases.

Abstract

Purpose

To analyze the U.S, Supreme Court’s decision in Liu v. S.E.C., 140 S. Ct. 1936 (2020) and its potential implications for insider trading cases.

Design/Methodology/Approach

Provides context on the history of disgorgement in SEC enforcement proceedings; discusses factual and procedural background underlying the Liu decision; summarizes the Court’s opinion and rationale, with a particular focus on the Court’s pronouncements regarding the permissible scope of SEC disgorgement as an equitable remedy; identifies and explores three possible issues in insider trading cases that may be affected by the Court’s narrowing of SEC disgorgement.

Findings

In Liu, the Supreme Court narrowed SEC disgorgement by stating that, as a general matter, SEC disgorgement is not permitted where: (1) the proceeds are not remitted to investors; (2) one defendant is made to disgorge profits that were received by someone else; or (3) the amount of disgorgement fails to deduct legitimate business expenses, in each case subject to possible exemptions as outlined by the Court.

Practical implications

This rule may call into question whether courts may: (a) order disgorgement against insider traders, given the difficulty of identifying investors who have been harmed; (b) order insider traders to disgorge profits earned by others on account of their violations; or (c) order insider traders to pay civil penalties under Section 21 A of the Exchange Act based on profits earned by others.

Originality/Value

Expert analysis and guidance from experienced securities enforcement lawyers with expertise in insider trading.

Details

Journal of Investment Compliance, vol. 21 no. 1
Type: Research Article
ISSN: 1528-5812

Keywords

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Article
Publication date: 4 December 2020

M. Alexander Koch, Carmen J. Lawrence, Aaron Lipson, Russ Ryan, Richard H. Walker, Jessica Rapoport and Katie Barry

To analyze the impact of the U.S. Supreme Court’s decision in Liu v. SEC, where the Court confronted the issue of whether the SEC can obtain disgorgement in federal…

Abstract

Purpose

To analyze the impact of the U.S. Supreme Court’s decision in Liu v. SEC, where the Court confronted the issue of whether the SEC can obtain disgorgement in federal district court proceedings.

Design/methodology/approach

This paper provides an overview of the authors’ prior work analyzing courts’ treatment of SEC disgorgement and a summary of the background and opinion in Liu v. SEC. This article then focuses on the practical implications of Liu on SEC disgorgement by considering questions left open by the decision.

Findings

The Court in Liu held that the SEC is authorized to seek disgorgement as “equitable relief” as long as it “does not exceed a wrongdoer’s net profits and is awarded for victims.” But the Court left many unanswered questions, such as whether disgorged funds must always be returned to investors for disgorgement to be a permissible equitable remedy, whether the SEC can obtain joint-and-several disgorgement liability from unrelated co-defendants, what “legitimate expenses” should be deducted in disgorgement calculations, and to what extent the SEC can seek disgorgement in cases when victims are difficult to identify.

Originality/value

Original, practical guidance from experienced lawyers in financial services regulatory and enforcement practices, many of whom have previously worked in the SEC’s Division of Enforcement.

Details

Journal of Investment Compliance, vol. 21 no. 2/3
Type: Research Article
ISSN: 1528-5812

Keywords

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Article
Publication date: 6 November 2017

Marc Litt, Jerome P. Tomas, Elizabeth L. Yingling and Richard A. Kirby

To explain the Supreme Court’s ruling in its recent Kokesh v. SEC decision and its impact on the SEC’s ability to recover disgorgement of ill-gotten gains beyond the…

Abstract

Purpose

To explain the Supreme Court’s ruling in its recent Kokesh v. SEC decision and its impact on the SEC’s ability to recover disgorgement of ill-gotten gains beyond the five-year statute of limitations.

Design/methodology/approach

This article discusses the Supreme Court’s recent decision and the immediate effects it will have on the SEC’s approach to a variety of cases in which a significant portion of the recovery may now be outside the statute of limitations.

Findings

The article concludes that the recent Supreme Court decision will have an immediate effect of preventing the SEC from reaching back beyond five years for disgorgement; however, the SEC may be able to comply with Kokesh and modify its procedures so that its financial recoveries from those that violate securities laws may be categorized as an equitable remedy (like restitution) rather than as a penalty (like forfeiture) which is subject to a five-year statute of limitations.

Originality/value

The article provides practical guidance from experienced securities litigation and white collar crime lawyers. It explains and analyzes the Supreme Court decision that severely limits the ability of the SEC to seek disgorgement by limiting the SEC’s use of disgorgement to a five-year statute of limitations.

Details

Journal of Investment Compliance, vol. 18 no. 4
Type: Research Article
ISSN: 1528-5812

Keywords

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Article
Publication date: 29 August 2018

Brad Karp, Andrew Ehrlich, Lorin Reisner, Audra Soloway, Richard Tarlowe, Maia Lichtenstein and Peter Vizcarrondo

This paper aims to explain the US Supreme Court’s ruling in Kokesh v. SEC, which limited the U.S. Securities and Exchange Commission’s (SEC) ability to seek the remedy of…

Abstract

Purpose

This paper aims to explain the US Supreme Court’s ruling in Kokesh v. SEC, which limited the U.S. Securities and Exchange Commission’s (SEC) ability to seek the remedy of disgorgement and to examine how lower courts have applied the ruling to other types of equitable relief that that the SEC commonly pursues.

Design/methodology/approach

This study explains why the Supreme Court in Kokesh ruled that disgorgement is a “penalty” and that the five-year limitations period therefore was applicable to actions seeking disgorgement; discusses a footnote in Kokesh that left open the question of whether the SEC has the power to pursue disgorgement at all; and reviews four recent cases that grapple with the application of Kokesh to injunctions and lifetime bars.

Findings

Lower courts and the SEC have not settled on how Kokesh might impact equitable remedies commonly pursued by the SEC, but recent cases indicate that the effect of Kokesh may be broader than its narrow holding suggests.

Originality/value

Practical guidance from experienced white collar and regulatory defense lawyers that consolidates several recent developments in one piece.

Details

Journal of Investment Compliance, vol. 19 no. 3
Type: Research Article
ISSN: 1528-5812

Keywords

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Article
Publication date: 1 January 2006

Thomas R. Smith

The purpose of this paper is to provide a comprehensive background on the recent legislative, regulatory, and prosecutorial scrutiny of mutual funds and underlying issues…

Abstract

Purpose

The purpose of this paper is to provide a comprehensive background on the recent legislative, regulatory, and prosecutorial scrutiny of mutual funds and underlying issues such as the level and transparency of fees and costs, distribution and sales practices, and fund governance.

Design/methodology/approach

Provides a detailed chronology of events since January 2003 concerning mutual fund scandals such as trading abuses and questionable sales practices and related issues such as revenue sharing, directed brokerage, soft dollars, market timing, late trading, and selective disclosure. The chronology in this issue of JOIC will be followed an article in the next issue that describes reform initiatives that have taken place in response to the scandals.

Findings

Despite criticism and scrutiny of equity mutual funds following poor performance in 2001 and 2002, meaningful efforts to achieve reform began to lose momentum in mid‐2003. Then concern with mutual fund abuses was reignited in September 2003 when New York Attorney General Eliot Spitzer announced a settlement with Canary Capital that involved market timing, late trading, and selective disclosure. Since then there have been numerous disclosures of fund trading abuses and questionable trading practices, and the resulting uproar has triggered significant efforts to reform the manner in which funds and their service providers conduct business.

Originality/value

This comprehensive chronology provides an essential reference by bringing together all the events and underlying issues related to mutual fund scandals, abuses, regulation, compliance, and reform efforts since January 1, 2003.

Details

Journal of Investment Compliance, vol. 7 no. 1
Type: Research Article
ISSN: 1528-5812

Keywords

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Book part
Publication date: 18 March 2014

Ethan E. Litwin and Morgan J. Feder

In recent years, the European Commission and various Member States, citing increasingly integrated markets and higher levels of cross-border activity within the European…

Abstract

In recent years, the European Commission and various Member States, citing increasingly integrated markets and higher levels of cross-border activity within the European Union (“E.U.”), have called for the adoption of effective collective redress mechanisms for victims of violations of E.U. law. Although many Member States have already adopted collective action procedures under national law, these procedures have been ineffective in stimulating private enforcement of E.U. law and are often divergent in their approach to consolidating claims. E.U. lawmakers, after a lengthy period of investigation and study, have identified a set of guiding principles for the Member States to use in enacting new collective redress procedures within their national systems. The studies and papers solicited from the public during the Commission’s deliberations are explicit in their rejection of the U.S.-style opt-out class action mechanism. In their effort to avoid similarly calamitous results, European lawmakers propose that Member States adopt “opt-in” class actions, while rejecting many of the economic incentives that some believe lead to filing nonmeritorious claims, such as punitive damages and contingency fee arrangements. The European proposal is unlikely in the authors’ view to stimulate private enforcement of European law or increase victims’ access to compensation, given the flaws inherent in the opt-in class action device. Instead of looking to adopt a “U.S.-lite” approach to victim redress which is fundamentally incompatible with many judicial systems within the E.U., the authors propose that Europeans consider adopting a regulatory administered compensation system, modeled after such U.S. examples as the Securities and Exchange Commission Fair Funds and the September 11th Victim Compensation Fund. The authors also propose that regulatory administered funds can provide more effective and efficient restitution to victims than traditional litigation.

Details

The Law and Economics of Class Actions
Type: Book
ISBN: 978-1-78350-951-5

Keywords

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Article
Publication date: 5 January 2015

Bryane Michael

– The purpose of this article is to assess the extent to which Hong Kong’s laws deter its companies from engaging in corruption and bribery abroad.

Abstract

Purpose

The purpose of this article is to assess the extent to which Hong Kong’s laws deter its companies from engaging in corruption and bribery abroad.

Design/methodology/approach

A mix of economics, public administration, management and legal analysis was used to assess weaknesses in Hong Kong’s laws governing the prohibition of bribe payments abroad.

Findings

Hong Kong does not explicitly criminalise corporate bribery abroad. Companies – as legal persons – can not be found guilty of corruption. It is argued that Hong Kong’s Legislative Council should amend various laws to modernise Hong Kong’s approach to tackling corruption committed by its companies abroad. The various approaches lawmakers can take towards assigning responsibility for corruption to companies are presented. The approaches that prosecutors at the Department of Justice can take to adopt prosecutorial methods like those used in other upper-income jurisdictions and the ways that Independent Commission Against Corruption (ICAC) can assist in this work are also described.

Practical implications

This research has practical findings for Hong Kong’s policymakers, law firms and companies which operate in Hong Kong. For policymakers, we describe legal changes Hong Kong’s legislators will likely make in the years ahead and the preferred ways of engaging in such change. For law firms, we describe the legal changes coming to Hong Kong which legal advisors will need to advise their clients on. For companies, we describe changes that companies operating in Hong Kong will likely need to comply with in the future.

Social implications

This paper shows that when Hong Kong adopts best practice in the field of corporate criminalisation, Hong Kong’s role in “exporting” corruption will likely fall.

Originality/value

This article describes a set of legal changes which will change the way Hong Kong treats corruption. The literature tends to glamorise Hong Kong’s anti-corruption work. It is shown that its law falls far behind other jurisdictions, as well as how “treating companies like people” in the case of Hong Kong will likely change the way Hong Kong’s prosecutors think about crime and criminal perpetrators.

Details

Journal of Financial Crime, vol. 22 no. 1
Type: Research Article
ISSN: 1359-0790

Keywords

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Article
Publication date: 5 May 2015

Kenneth Berman, Gregory Larkin, Phil V. Giglio, Erica Berthou, Michael P. Harrell, Jordan C. Murray, Jaime D. Schechter and Geoffrey Kittredge

– Describe an important recent enforcement action by the Securities and Exchange Commission (SEC) regarding expense allocations by private equity funds.

Abstract

Purpose

Describe an important recent enforcement action by the Securities and Exchange Commission (SEC) regarding expense allocations by private equity funds.

Design/methodology/approach

Discusses a recent enforcement action by the SEC regarding a registered investment adviser’s handling of expense allocation with respect to two private fund clients and certain of their underlying portfolio companies.

Findings

The settlement and sanctions are noteworthy because: (i) there was no suggestion that the misallocations of expenses were designed to systematically favor one private fund client over the other, that the manager benefited from such misallocations, or that the failure to allocate expenses in accordance with the policy had been deliberate and (ii) while not stated explicitly, it appears likely that a significant portion of the disgorgement related to misallocations that occurred before the manager was a registered investment adviser.

Practical implications

Registered investment advisers should ensure that they and their portfolio companies have written policies in place designed to fairly allocate all expenses among all entities that benefit from the activities driving such expenses and that none of the sponsor’s clients are directly or indirectly benefited or harmed from allocation policies at the portfolio company level.

Originality/value

Description of a noteworthy SEC enforcement action regarding expense allocation and practical guidance from investment management lawyers to remind private equity sponsors to ensure that they have adopted and implemented expense allocation policies.

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Article
Publication date: 18 September 2007

Betty Santangelo, Gary Stein and Margaret Jacobs

The purpose of this article is to explain recent enforcement trends under the Foreign Corrupt Practices Act (FCPA), providing examples of recent cases.

Abstract

Purpose

The purpose of this article is to explain recent enforcement trends under the Foreign Corrupt Practices Act (FCPA), providing examples of recent cases.

Design/methodology/approach

The paper describes recent trends in FCPA enforcement, including increased enforcement by US authorities, greater vigilance by private industry, and global anti‐corruption efforts. It provides an overview of the FCPA, including the original reason why the Act was passed, its anti‐bribery provisions, the need to show corrupt intent, the interstate commerce requirement, exceptions and affirmative defenses, record‐keeping and control provisions, and penalties. It describes recent FCPA prosecutions and enforcement actions and draws conclusions on how to reduce FCPA risk.

Findings

The FCPA is a Watergate‐era law that was passed in response to disclosures by a number of large US corporations that they had made illicit payments to foreign government officials. The FCPA applies to bribes by any US issuer or domestic concern, paid to any foreign official, foreign political party, official or candidate, or official of a public international organization in order to assist in obtaining, retaining, or directing business. To prosecute, the government must show corrupt intent. The FCPA also contains provisions that require accurate record‐keeping and internal controls of US issuers. Violations of the FCPA are subject to both criminal and civil penalties.

Originality/value

The paper presents a thorough explanation, practical advice, and examples of recent violations and penalties by experienced lawyers specializing in FCPA compliance as well as white‐collar defense, securities regulatory matters, internal investigations, and anti‐money laundering.

Details

Journal of Investment Compliance, vol. 8 no. 3
Type: Research Article
ISSN: 1528-5812

Keywords

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