SECURITIES CORNER

In a rare SEC enforcement action that proceeded all the way to a federal jury verdict, it was a win some-lose some result. In the underlying action, the SEC sought to hold an investment firm accountable for breach of fiduciary duties in connection with the alleged intentional and negligent failure to disclose commission structures and conflicts of interest to clients.

The SEC sued an individual investment adviser (the “Adviser”) and his firm (the “Firm”), alleging violations of the Investment Advisers Act of 1940 (the “Act”). The action alleged that the Adviser engaged in deceptive trade practices by moving advisory clients into annuity contracts through his insurance company, while failing to disclose the commission structure.

Particularly, the SEC argued that the Adviser breached his fiduciary duty by not disclosing conflicts of interest and secretly earning commissions from client’s annuity plans through insurance. Adding to its allegation that the Adviser engaged in a “pattern of deception,” the SEC claimed that the Firm failed to implement appropriate written compliance policies.

The jury partially sided with the SEC in one of its three claims finding the Firm and Adviser liable for negligence under Section 206(2) of the Act for employing a device that defrauded clients. The jury cleared the Adviser and Firm of a more severe claim under Section 206(1), requiring proof of reckless or intentional fraud, and rejected the SEC’s claim that the Firm failed to incorporate compliance policies adhering to Section 206(4).

While the SEC characterized the verdict as holding the Firm and Adviser accountable for their fiduciary breaches, the Adviser framed it as confirmation that they did not “intentionally” defraud anyone, but rather some of their actions could only be characterized as negligent.

The first 100 days of any president’s term have long been viewed as a benchmark of the administration’s goals and trends the public may expect for the future. In his second-first 100 days, President Trump and his administration have focused their efforts in reshaping the SEC. Based on the number of new stand-alone actions, including both federal court litigation and administrative proceedings, the Trump administration is hesitant to pursue new matters and taking a more streamlined approach to the SEC’s regulation.

The number of current actions being investigated by the SEC is drastically different than those opened and investigated by the Trump administration during his first term with current federal litigation actions dwindling down to about half of those in the previous administration. Most notably, there are only ten open administrative proceedings being pursued by the SEC, which is a stark decline from about sixty administrative actions being pursued by the Trump administration during his first term. Civil penalties netted from such settlements have also decreased drastically.

The current administration’s policy shifts and implementations have also limited the type of enforcement actions being brought within the first 100 days and the foreseeable future. Currently, the SEC has restricted its cryptocurrency actions and have dismissed existing enforcement cases and has shifted its focus to matters alleging fraudulent conduct.

With a newly confirmed SEC Chair, structural overhaul, and policy constraints, the SEC appears to be more strategic with pursuing new actions and has shifted its efforts matters involving traditional fraud. 

Oregon’s Attorney General (the “AG”) Dan Rayfield filed a lawsuit against one of the largest cryptocurrency trading platforms in the United States. The Oregon Department of Justice’s press release started: “States must fill enforcement vacuum being left by federal regulators who are abandoning these cases under Trump administration.” The lawsuit alleges the platform “both encouraged and helped the sale of unregistered cryptocurrencies,” that “are vulnerable to pump-and-dump schemes and fraud, which often end in devastating losses for investors.” The AG stated the platform “sold high risk investments without them being properly vetted to protect consumers … Oregonians lost money, and we believe [the platform] should be held accountable and take steps to protect consumers.”

The lawsuit comes after the SEC dismissed its case against the platform. The SEC case was brought alongside several other states that were part of task force investigating the platform. These states filed actions alleging the platform allowed unregistered securities offerings. Half of those states have since dropped their suits, some noting that it would “allow policy makers time to consider regulatory constructs.” The other half have not dropped their actions against the platform. Oregon was not part of the original task force, however filed its case in direct response to the SEC’s dismissal.