"Uncivil Procedure" -- Is SEC Enforcement Becoming Criminal in Nature?

Uncivil Procedure: The Need for Heightened Due Process Protection in SEC Enforcement Prosecutions

Can we admit the obvious? Today’s Securities and Exchange Commission (SEC) law enforcement cases are criminal in nature, and courts should start treating them as such. Despite the misnomer Congress applied in the relevant securities-law provisions, and no matter how many times the SEC and courts insist these cases are “civil” in nature, SEC charges threaten financial sanctions that far exceed those imposed for most federal misdemeanor and petty crimes, and for many federal felonies as well. True, SEC cases don’t raise the specter of incarceration—no small distinction, to be sure—but more than a quarter of criminally convicted defendants are also spared incarceration, especially those whose offenses do not involve violence, weapons, or illegal drugs. See, e.g., Mark Motivans, Federal Justice Statistics, 2021, BJS Bull., Dec. 2022, at 12. Moreover, this distinction is irrelevant where the defendant is a corporation or other non-natural person that cannot be incarcerated.

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Dispensing with the fiction that SEC enforcement cases are just routine civil lawsuits—i.e., on par with private contractual disputes or slip-and-fall accident cases—would bring much-needed clarity and due process enhancement to SEC enforcement. This article briefly discusses four essential changes that would make for a worthy start.

Judge Backs U.S. Sanctions on Crypto Platform Tornado Cash

Sanctions imposed last year by the U.S. Treasury Department against decentralized cryptocurrency platform Tornado Cash are here to stay, according to a recent ruling by a federal judge.

Six individuals filed a civil lawsuit in the U.S. District Court in Austin, Texas, last September against the Treasury Department and its leaders, alleging the designations against Tornado Cash exceeded the department’s legal authority over foreign nationals’ interests in property and violated the First Amendment.

The suit was financed by crypto exchange Coinbase Global in an effort to defend privacy in crypto, its chief executive Brian Armstrong said at the time.

Broker Challenges FINRA as Monopoly in New Attack on Regulator

The Financial Industry Regulatory Authority Inc. is monopolistic and unconstitutional, a broker says in a suit that adds to allegations in a separate case brought by two of the private regulator’s other enforcement targets.

FINRA’s actions violate the Sherman Antitrust Act, Eugene Kim says in his complaint, filed Aug. 18 in the US District Court for the District of Columbia. It has obtained its revenue, dramatically increased from a decade ago, by “abusing its quasi-governmental status to make its members pay up or lose their livelihoods forever,” Kim says.

The Biggest Player in Crypto Is Facing a Risk Over Russia

Binance is helping Russians move money abroad, potentially adding to its sprawling legal problems in the U.S.

The cryptocurrency giant, led by founder Changpeng Zhao, joined many other major international companies early last year in scaling back its business in Russia, one of its largest markets by trading volume at the time. After Russia invaded Ukraine, Binance said it had stopped working there and was implementing Western sanctions requirements. It restricted trading on its platform in Russia.

SEC action against Titan highlights dangers of hypothetical-performance ads

The SEC said the case is its first enforcement action based on the new marketing rule that went into force last November. That regulation overhauled how advisors can promote their firms for the first time since 1961. Major provisions include permitting client testimonials and allowing the use of past performance metrics with many related restrictions.

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“When [the SEC] comes into your shop, they’re looking at every aspect of the marketing rule, not just what they published” in guidance, Lynch said.

The case against Titan touched on other hot-button issues for the SEC. For instance, the agency also charged it with making “conflicting disclosures” about how it custodied client funds; failing to adopt policies and procedures regarding crypto trading by its employees; and violations regarding its use of “hedge clauses.”

“This is the perfect [compliance] cocktail,” Martin said. “There are a lot of issues here.”

SEC Obtains Final Judgment Against IIIinois Resident for Insider Trading

The SEC’s complaint, filed on December 17, 2021, alleges that Catenacci, a Chicago, Illinois based medical doctor, entered into a consulting agreement with Five Prime to serve as a lead clinical investigator for the company’s Bemarituzumab drug trial. Through this role, Catenacci allegedly learned material nonpublic information about the positive drug trial results for Bemarituzumab. According to the SEC, shortly after he allegedly learned of the positive results, Catenacci purchased 8,743 shares of Five Prime. After the company publicly announced the positive drug trial results, Five Prime’s share price increased over 300%. The next day, Catenacci allegedly sold all of his shares, realizing illicit gains of $134,142. Without admitting or denying the allegations, Catenacci consented to the entry of a final judgment that permanently enjoins him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The final judgment also orders Catenacci to pay a $50,000 penalty.

DEI Initiatives Face Increased Scrutiny

As I have noted in recent posts on this site, the developing trend toward anti-ESG litigation has targeted, among other corporate initiatives, company adoption of diversity, equity and inclusion (DEI) programs. These and other developments have encouraged some companies to soft-pedal their initiatives in this and other areas, a phenomenon that has been described as “greenhushing.” But as noted in a recent memo from attorneys at the Wachtel Lipton law firm, while scrutiny for DEI initiatives may continue, companies and their boards properly may pursue DEI strategies as part of their companies’ overall missions. The August 19, 2023, memo in the Harvard Law School Forum on Corporate Governance can be found here.