May 09, 2013

Washington, DC

The following is coverage of the D.C. Bar event that took place on May 9, 2013:

Dismissal of Boiler Room Claims Raises ‘Good’ Question of SEC Cross-Border Power

By Yin Wilczek

The recent dismissal of Securities and Exchange Commission allegations over an alleged $44 million international boiler-room scheme raised a ‘good” question as to whether the congressional fix to restore the agency's extraterritorial enforcement authority is too narrow, a senior official said May 9.  In SEC v. Benger, the U.S. District Court for the Northern District of Illinois— citing Morrison v. National Australia Bank Ltd.—dismissed SEC claims that a group of individuals and entities violated 1934 Securities Exchange Act broker-dealer registration requirements in a scheme in which European investors were solicited through cold calls (63 SLD, 4/2/13).  Elizabeth Jacobs, deputy director of the SEC's Office of International Affairs, said the commission still is assessing its options in Benger. She added that the U.S. Supreme Court's Morrison brightline transactional test has not diminished the SEC's ability to pursue cross-border violations of the federal securities laws. “We are continuing full-steam ahead and have a full docket” of investigations, out of which the SEC will be bringing enforcement actions, she said.  Jacobs issued her remarks at a cross-border securities litigation panel hosted by the D.C. Bar. She said she spoke her own opinions, which did not necessarily reflect those of the SEC or other staff members. The panel was moderated by Michael Lowman, a partner at Jenner & Block LLP, Washington.

Landmark Ruling

In Morrison, the Supreme Court concluded that Exchange Act Section 10(b), the federal securities laws' key antifraud provision, applies only to transactions in securities listed on U.S. exchanges, or to securities transactions that take place in the United States (121 SLD, 6/25/10).  Congress responded to the decision by attempting to restore the SEC and the Department of Justice's extraterritorial reach through Section 929P of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The provision states that federal courts have jurisdiction over enforcement actions involving conduct in the United States that “constitutes significant steps in furtherance of the violation,” or conduct occurring abroad that has a “foreseeable substantial effect within the United States.”  The SEC has since maintained that Dodd-Frank effectively overturned Morrison and restored the so-called “conduct and effects” test for commission enforcement actions (04 SLD, 1/6/11).  However, commenters—including Rutgers University law professor Arthur Laby—have suggested that the Dodd-Frank fix might be incomplete. Given that the congressional measure focuses on the SEC's enforcement authority, it might have little effect on the SEC's regulation and registration of foreign firms, Laby suggested in a March study.

Private Actions

In the meantime, private litigants have struggled to circumvent Morrison‘s brightline test to little avail, said Daniel Sommers, a partner at plaintiffs firm Cohen Milstein Sellers & Toll PLLC in Washington. There has been a host of decisions by federal district courts, including the Southern District of New York, rejecting attempts by private plaintiffs to bring actions in connection with non-U.S. investments, he said. “So Morrison has been a bitter pill from the investors' perspective.”  Another fallout from the decision is that securities litigation has become more diffuse, Sommers continued. In an attempt to bypass Morrison, large institutional investors are bringing individual actions in state courts over their non-U.S. securities, he said. At the same time, they also are bringing actions in foreign courts, as well as suing in the United States over their American Depositary Receipts. “There are multiple tentacles” that are ongoing by plaintiff investors trying to deal “with the aftermath of Morrison,” he said.  ADRs are securities issued by U.S. banks and traded on U.S. exchanges that represent shares of foreign issuers that the banks hold in trust.  The big question now for major transnational securities actions is whether there will be a global mechanism through which issuers can coordinate their settlements of such cases, rather than resolve them on a piecemeal basis, Sommers told the panel. “No defendant wants partial peace.” Currently, only the Netherlands has a collective settlement statute, Sommers said. However, the Dutch law applies only where the parties agree to a global resolution; it has no impact on civil remedies, he said.

Chinese Auditors

In other discussions, Jacobs said that recent decisions by the U.S. District Court for the District of Columbia and an SEC administrative law judge have paved the “next steps” forward for commission actions to obtain work papers from auditing firms based in the People's Republic of China.  Judge Gladys Kessler April 22 upheld the lifting of the stay on the SEC's action to enforce an administrative subpoena against Deloitte Touche Tohmatsu CPA Ltd. seeking audit work papers for a China-based issuer under commission investigation (78 SLD, 4/23/13).  A week later, ALJ Cameron Elliot April 30 denied summary disposition motions filed by the Chinese affiliates of five major U.S. audit and accounting firms—including DTTC—over a consolidated SEC administrative proceeding seeking to sanction the firms under 2002 Sarbanes-Oxley Act Section 106 for failing to produce work papers for clients that were being investigated by the SEC (232 SLD, 12/4/12).  Sommers also said plaintiff investors in the next few years will continue to bring U.S. securities actions against China-based issuers, which will yield “fascinating fact patterns” and “interesting legal issues.”  He added that district court judges also will continue to be frustrated by barriers put up by the Chinese government in areas such as service of documents and discovery. It is unclear at this point how the issue will play out, or whether PRC issuers will change their attitudes toward U.S. law, Sommers said.

FCPA Derivative Actions

Meanwhile, derivative shareholder actions filed by investors following Foreign Corrupt Practices Act enforcements by the SEC and the Department of Justice in large part either have been dismissed based on demand futility and other grounds, or resulted in settlements in which the issuers agree to pay attorneys' fees and implement remedial measures, said John Chesley, a litigation associate in Gibson Dunn & Crutcher LLP's Washington office.  Chesley added that in an effort to get around the demand futility barriers, plaintiff investors could be trying to sue issuers under state books and records inspection rules, including Section 220 of the Delaware General Corporation Law. Section 220 allows a shareholder to inspect a company's books and records for “any proper purpose.”  That could be the “next frontier” for investors suing issuers based on FCPA regulatory actions, Chesley said. These books and records-type actions are “starting to percolate,” he said. “We'll have to see where they go.”

For More Information

The ALJ's decision is available at

Event Description

This moderated panel discussion included discussion of hot issues in public and private securities law enforcement.

Panelists include: Barry R. Goldsmith, Partner, Gibson, Dunn & Crutcher LLP and former Chief Litigation Counsel, Securities and Exchange Commission (SEC); Elizabeth Jacobs (invited), Deputy Director of the Office of International Affairs, Securities and Exchange Commission; Daniel S. Sommers, Partner, Cohen Milstein Sellers & Toll PLLC.

Moderator: Michael K. Lowman, Partner, Jenner & Block LLC and former Assistant Chief Litigation Counsel, Securities and Exchange Commission.

This luncheon program was sponsored by the Investor Rights Committee of the Corporation, Finance and Securities Law Section, in cosponsorship with the Administrative Law and Agency Practice Section, Courts, Lawyers and the Administration of Justice Section and International Law Section.