In Jarkesy Oral Argument, Supreme Court Casts Doubt on Use of ALJs

SEC’s Use of In-House Judges Cast in Doubt by Supreme Court

The US Supreme Court’s conservative majority cast doubt on the Securities and Exchange Commission’s use of in-house judges, hearing arguments in a case that could strip the agency of a key enforcement tool.

In a session that lasted more than two hours Wednesday, the justices suggested that people accused of fraud by the SEC have a constitutional right to go before a federal court jury, at least when the commission is seeking civil penalties.

It “seems problematic to say the government can deprive you of your property, your money, substantial sums in a tribunal that is at least perceived as not being impartial,” Justice Brett Kavanaugh said.

SEC Charges Phoenix-Area Real Estate Fund Adviser Jonathan Larmore with $35 Million Fraud

The Securities and Exchange Commission today announced fraud charges against Phoenix-based real estate investment company ArciTerra Companies LLC and its CEO, Jonathan M. Larmore, for engaging in a multi-year scheme to misappropriate millions of dollars of investor funds from investment vehicles that ArciTerra managed. The SEC also charged several entities controlled by Larmore for their roles in the scheme.

The SEC’s complaint, filed on November 28, 2023, alleges that, since at least January 2017, Larmore and the charged entities misappropriated more than $35 million from private real estate funds and other investment vehicles that ArciTerra managed. Larmore allegedly used a substantial portion of the misappropriated funds to pay for his family members’ personal expenses and to fund a lavish lifestyle of private jets, yachts, and expensive residences.

The SEC’s complaint also alleges that Larmore and Cole Capital Funds LLC, an entity Larmore formed and controlled, issued a press release in November 2023 falsely stating that Cole Capital intended to purchase 51 percent of all minority ownership shares in WeWork, Inc., an unrelated public company, at $9 a share, more than nine times WeWork’s then-current trading price. According to the SEC’s complaint, WeWork’s stock rose close to 150 percent in after-hours trading shortly after the press release was issued. The complaint alleges that Larmore purchased more than 72,000 call options in WeWork at a price far below the stock price in the days before the press release was published, hoping to execute the trades at profit after manipulating the stock price. However, due to a delay in the issuance of the press release, most of the options expired before Larmore could exercise them.

‘A Politician Masquerading as a Regulator’ – 3 Takeaways From Gary Gensler’s Fortune Profile

t’s strange to think now how crypto received Gary Gensler as he became Securities and Exchange Commission chair in 2021. At the time, he was a breath of fresh air for an industry that badly needed change. His SEC predecessor, Jay Clayton, had seemed largely disinterested in digital assets, whereas Gensler had taught courses on blockchain at MIT. He was supposed to get it. And being a person who got it, we thought, he would surely find a sensible way between the need to uphold existing law and allowing a promising industry to grow.

How wrong we were.

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This week, Fortune Magazine took a deep look at Gary’s time at the SEC and put meat on what many of us already know in outline. It’s a great piece based on interviews with “more than 30 financial experts, politicians, and current and former employees from all levels at the SEC and Commodity Futures Trading Commission, including agency leaders,” and you should read it. But, in case you don’t have time, we’ll summarize a few of the takeaways here, especially as they relate to crypto.

SoFi Exiting Crypto With Banking Regulators Stepping Up Scrutiny

SoFi Technologies Inc., the fast growing one-stop shop for financial-services products, is exiting crypto even with token prices surging because of increased scrutiny of the sector by banking regulators.

The San Francisco-based company told crypto customers Wednesday they will need to liquidate their accounts in coming weeks, or move to crypto exchange and wallet provider Blockchain.com.

Short-Seller Reports and Securities Class Action Lawsuits

You all know the pattern: a short seller publishes a splashy report with attention-grabbing revelations about the operations or financial results of a listed company; the company’s shares decline; and a plaintiffs’ securities class action law firm files a securities class action lawsuit, often based solely on the accusations in the short seller’s report. The defendant company will of course file a motion to dismiss – but how will the court assess the accusations in the short seller’s report for purposes of determining the sufficiency of the plaintiffs’ allegations? In a November 2, 2023, Law360 article (here), Richard Zelichov of the DLA Piper law firm considers the way that courts should consider allegations based on short-seller reports.

U.S. Treasury Campaigning for Amplified Powers to Chase Crypto, Tether Overseas

The U.S. Department of the Treasury is pressing lawmakers for a new set of powers that would give the government unprecedented enforcement and sanctions authority over the crypto sector, including the ability to roam well beyond American borders and get involved with transactions that don’t involve its citizenry.

Deputy Secretary of the Treasury Wally Adeyemo has lobbied senior members of Congress with a proposal – mapped out in writing – that he called “a set of common-sense recommendations to expand our authorities and broaden our tools and resources to go after illicit actors in the digital asset space,” according to excerpts from a speech he’s set to deliver on Wednesday in Washington.

The SEC May Have Gone Too Far. The Supreme Court Shouldn’t.

It’s worth pondering the practical implications of such a ruling. Would the SEC be able to protect investors and regulate securities markets if it had to bring its cases to district court? Undoubtedly. But throwing out the intelligible-principle test would cast doubt on existing regulations — as many as hundreds of thousands across the government — and create difficult new questions about how to define which “details” fall under any agency’s purview.

Checks on bureaucratic overreach are important, but they already exist and are proving effective. Agencies must undertake an extended notice-and-comment period before finalizing any new rules. Courts can — and do — overturn agency decisions and vacate rules that are found to be arbitrary or capricious. And many government agencies are led by bipartisan commissions that serve staggered terms.

A court ruling that strips administrators of any autonomy and flexibility would unnecessarily paralyze government. That would be a disservice to American citizens.