Court Rejects Effort to Block SEC AP Seeking to Bar Defendants from Securities Business

Court rejects advisors’ bid to block SEC industry ban proceeding

A father-son advisory team lost their fight to stop the SEC from potentially ending their careers, as a federal court upheld the agency’s enforcement powers. […] Michael and David Sztrom, California-based investment advisors, were hoping to block an SEC administrative proceeding that could bar them from the securities business for good. But U.S. District Judge Christopher Cooper dismissed their constitutional challenge, leaving them to face the agency’s tribunal. […]

The Sztroms fought back, arguing the whole setup was unconstitutional. Their main gripe? The same agency that investigated them, charged them, and prosecuted them would also be the one deciding their fate. That sounds unfair, they said, violating their due process rights.

They also claimed only federal courts should handle cases like theirs, not agency tribunals. And they wanted a jury trial, arguing the government can’t take away someone’s livelihood without one.

Judge Cooper wasn’t buying it….

Financial professional asks Pennsylvania Supreme Court to protect jury trial rights

Pennsylvania financial professional asked the Pennsylvania Supreme Court to consider whether the state Constitution guarantees a right to a jury trial when the government seeks to impose substantial civil penalties for conduct that has traditionally been decided by juries.

For centuries, claims involving fraud and similar wrongdoing were resolved in courts of law, where ordinary citizens serving on juries determined liability and punishment. In this case, however, the Pennsylvania Department of Banking and Securities pursued enforcement against Elliot Goldberg through an in-house administrative proceeding, rather than bringing its case in court.

The Department investigated the matter, prosecuted the case, alleged that he violated the Pennsylvania Securities Act of 1972, and imposed nearly $1 million in civil penalties without ever presenting the allegations to a jury. The penalties were punitive in nature and were not ordered to compensate investors or recover losses on their behalf.

SEC Denies Whistleblower Award Despite Recovery

The U.S. Securities and Exchange Commission (SEC) issued an order in August denying a whistleblower award to an individual who provided the agency with evidence that a defendant in a previously filed SEC enforcement matter misrepresented their finances in order to evade sanctions. The putative whistleblower was denied an award even though their information helped the SEC recover funds that could be used to compensate harmed investors. The denial was based on a narrow interpretation of the SEC’s whistleblower rules that poses significant risks to the SEC’s ability to collect sanctions from wrongdoers for the benefit of harmed investors. […]

The SEC’s decision to deny an award in this matter appears at odds with both the facts and the law. As an initial matter, according to the SEC’s order, no civil penalty was imposed in the original judgment, and was only added in the Amended Judgment after the SEC’s post-judgment briefing brought the whistleblower’s information to the court’s attention. Whatever the reason for not imposing a civil penalty initially, the inclusion of the civil penalty in the Amended Judgment appears to be new relief to which the SEC was entitled on the basis of the whistleblower’s information. More broadly, the SEC’s order offers no explanation for why information that enables the SEC to actually collect money for the benefit of harmed investors does not “lead[] to the successful enforcement” of the underlying matter. In other contexts, the SEC undoubtedly considers the actual recovery of funds on behalf of victims to be a measure of success for its Enforcement program.

Can a defendant keep profits earned through securities law violations when the SEC does not show investor/victim harm?

The SEC’s wish was granted: the Supreme Court granted cert in SEC v. Sripetch to settle whether disgorgement can be awarded without showing investors suffered pecuniary (i.e. financial) harm. This will be the third time in less than a decade the Supreme Court deals with the SEC’s disgorgement powers. […]

How did we get here? In 2020, the Court stated in Liu v. SEC that disgorgement is permissible “under [15] § 78u(d)(5)” – which allows the SEC to obtain “equitable relief” – if it does not exceed a wrongdoer’s net profits “and is awarded for victims.” Since then, I (and many others) knew this day was coming. Can a defendant keep profits earned through securities law violations when the SEC does not show investor/victim harm? […]

My guess is the SEC prevails. I believe it’s unlikely the Court holds profits through securities violations are protected from disgorgement absent a showing of financial harm to investors, especially given the language in 15 U.S.C. 78u(d)(3)(A)(ii) pegs disgorgement to “unjust enrichment.” Also, good facts make good law: Sripetch’s conduct was egregious and resulted in him being sentenced to 21 months in prison for the pump-and-dump scheme at issue. It’s not surprising the SEC asked the Court to grant Cert. in this case.

How to Get Cryptocurrency Regulation Right

It’s true that some criminals use cryptocurrencies. But far more exploit traditional financial instruments such as cash, securities and wire transfers. The scales aren’t close. According to the U.N. Office on Drugs and Crime, illicit transactions in traditional finance make up 2% to 5% of global gross domestic product. According to Chainalysis, in 2024, 0.14% of crypto transactions, or about $50 billion, were illicit.

Cryptocurrencies are actually ill-suited for major criminal enterprises because transactions are permanent, immutable and traceable. Law enforcement has become increasingly sophisticated at analyzing blockchain patterns, enabling asset seizures and prosecution.