Litigation & Investigations

Yesterday, the Supreme Court issued its decision in the closely-watched SEC v. Jarkesy, holding that the SEC could no longer seek civil monetary penalties for fraud in its in-house courts consistent with the Seventh Amendment, which grants the right to a jury trial and thus requires such cases to be heard in federal court. The Supreme Court’s decision has potentially profound implications, not only for the SEC’s regulation of the securities industry, but for dozens of federal administrative agencies that, depending on the authorizing statute, can or must impose civil penalties through administrative proceedings.

In early March 2024 at the American Bar Association’s 39th National Institute on White Collar Crime, Deputy Attorney General (DAG) Lisa Monaco’s keynote remarks previewed the development of new and significant Department of Justice (DOJ or the Department) policy initiatives. Her speech reemphasized many of DOJ’s key themes throughout the current administration, including individual accountability, the importance of strong corporate compliance programs, incentivizing voluntary self-disclosure of misconduct, and adapting to keep up with disruptive technologies such as artificial intelligence.

Throughout 2023, the Department of Justice has prioritized voluntary self-disclosure of misconduct. The introduction of the M&A Safe Harbor Policy extends these principles to mergers and acquisitions, emphasizing the pivotal role of effective compliance programs. White Collar Defense and Government Investigations Practice Co-chair Eoin Beirne and Associate Nick LaPalme present a high-level summary of the policy, offering valuable insights into its implications for companies navigating the complexities of mergers and acquisitions.

Just barely two weeks ago, we wrote about the half-victory for Ripple Labs in its ongoing litigation with the Securities and Exchange Commission (“SEC”), in which Judge Analisa Torres granted partial summary judgment in favor of Ripple on the issue of whether certain sales of Ripple’s XRP cryptocurrency tokens were “securities” under the federal securities laws. Some in the crypto industry interpreted her ruling to mean that secondary transactions in crypto assets on centralized and decentralized crypto exchanges were not transactions in “securities,” even though Judge Torres expressly declined to address the secondary trading issue. Fast forward to today, and a new ruling out of the SDNY against Terraform Labs casts further doubt on this interpretation.

In the ever-changing and divisive political climate facing our nation today, boards of directors and the companies they oversee face myriad pressures from numerous stakeholders to weigh in on specific political, cultural, and social issues. Helpfully, a recent decision by the Delaware Chancery Court determined that a board’s decision to utilize the company’s voice and speak out about the pertinent issue is a “business decision” by the Company. 

Late last month the Supreme Court of the United States opened the door to a potential sea change in personal jurisdiction over corporate entities.  In Mallory v. Norfolk Southern Railway Company, the Court held that any corporation registered to do business in a state which requires out-of-state businesses to consent to general personal jurisdiction waives its right to assert a Due Process challenge to jurisdiction in that state. Thus, businesses registered to do business in such states can be sued there, even if none of the events underlying the lawsuit took place in that state.

The U.S. Court of Appeals for the Second Circuit (“Second Circuit”) recently issued an important decision concerning challenging the rejection of claims made by class members in settled U.S. class actions. Contant v. AMA Cap., LLC, No. 21-3058 (2d Cir. Apr. 14, 2023). In sum, the Second Circuit affirmed the decision of the U.S. District Court denying a class claimant’s (the “Claimant”) request for the court to overturn the claims administrator’s rejection of the Claimant’s claims.

Registered reps beware: your personal device or messaging account is not the right place to conduct your business affairs, and regulators have made clear that they will not look the other way.  In particular, the Financial Industry Regulatory Authority (“FINRA”) and member firms are cracking down on improper communication recordkeeping practices and the use of non-firm applications, including text messages, to communicate with clients.

Last week, the U.S. Supreme Court solidified the “tracing” requirement for private plaintiffs to be able to assert Section 11 claims pursuant to the Securities Act of 1933, holding that plaintiffs asserting such securities fraud claims must show that they own stock that was issued pursuant to an allegedly misleading registration statement—even though such tracing may be impossible in the context of a direct listing.  In effect, the decision likely protects future direct listings from Section 11 liability so long as the direct listing does not involve a “lock-up period” pursuant to which unregistered and registered shares enter the market at different times.

The Financial Industry Regulatory Authority (“FINRA”) has acted on its promise to bring Reg BI to life, announcing last week that it has expelled member firm SW Financial, as well as disciplined its CEO and majority-owner, Thomas Diamante. See FINRA Press Release.

Banks and financial institutions beware: an increased focus on so-called “junk fees” has litigants and regulators alike taking aim at checking account and deposit fees.  Although recent political focus on “junk fees” has been aimed more squarely at the entertainment, travel, and other related industries, bank fees are in the crosshairs and the landscape is rapidly changing.  Banks and financial institutions ought to heed recent developments and take renewed steps to review account agreements and current practices to minimize risk in the collection of routine fees.

In late March, the United States Supreme Court granted certiorari involving a case that could have a nationwide impact on lawsuits brought under Title III of the Americans with Disabilities Act (“ADA”).

Last week, the U.S. Supreme Court paved a path for petitioners to assert constitutional challenges to the structure of U.S. Securities and Exchange Commission (“SEC”) and U.S. Federal Trade Commission (“FTC”) administrative hearings in federal courts.

Class Plaintiffs in the case of In re Foreign Exchange Benchmark Rates AntiTrust Litigation alleged that Defendant banks conspired to fix prices in the foreign exchange (“FX”) market in violation of Sections 1 and 3 of the Sherman Antitrust Act.  All but one of the Defendant banks settled several years ago for a total of $2.3 billion.  Defendant Credit Suisse decided to proceed to trial, and on October 20, 2022, a Manhattan federal jury found that Credit Suisse played no part in a conspiracy to fix the foreign currency exchange market. 

After bringing its first disciplinary action related to Regulation Best Interest (“Reg BI”) back in October 2022, the Financial Industry Regulatory Authority (“FINRA”) has made it clear that compliance with the long-dormant regulation will be a significant focus of the regulator’s attention this year.  Bill St. Louis, FINRA’s Executive Vice President and Head of the National Cause and Financial Crimes Detection Program, announced last week that FINRA intends to conduct Reg BI compliance examinations of 1000 broker-dealers – or just under one-third of FINRA’s member firms – by the end of the year.

In an Article 77 trust instruction proceeding, the Commercial Division of the Supreme Court of the State of New York recently issued a ruling safeguarding privileged communications between a corporate trustee and securities administrator (the “trustee”) and its counsel where the trustee is seeking a finding of good faith.  The development suggests that trustees and other parties may seek findings of good faith in Article 77 proceedings without losing privilege protections, so long as certain criteria are met.

At the American Bar Association’s 38th Annual National Institute on White Collar Crime, Department of Justice (“DOJ”) officials announced multiple significant policy updates regarding corporate compliance.

Whistleblowers are often thought of as public company insiders who report alleged wrongdoing like insider trading, market manipulation, submitting false or misleading company disclosures or other securities and commodities law violations. The emergence of the digital asset industry, and the expanding number of crypto companies using public-facing blockchains, has changed this paradigm. Now anyone with the time, skill, and inclination can audit every transaction on a public blockchain, and the concept of the “traditional” whistleblower has greatly expanded in this relatively unregulated space.

Last month, the Fifth Circuit Court of Appeals reversed the lower court’s March 2021 dismissal in Oklahoma Firefighters Pension and Retirement System v. Six Flags Entertainment Corporation. In the now-revived class action, investors sued Six Flags in relation to 11 Chinese theme parks that Six Flags licensed to a local company for construction and operation, which were expected to be a major driver of Six Flags’ revenue growth – before construction stalled and the licenses were ultimately cancelled in February 2020, these Chinese parks were expected to contribute up to $60 million in pre-tax profits to Six Flags. In the Fifth Circuit’s opinion, the Court ruled that the lower court had excessively discounted the Complaint’s factual allegations, and that the Complaint did, in fact, sufficiently allege material misstatements and scienter.