Securities Industry Commentator by Bill Singer Esq

January 11, 2019

Cato Institute v. United States Securities and Exchange Commission, Jay Clayton, and Brent J. Fields, Defendants (Complaint for Declaratory and Injunctive Relief, United States District Court for the District of Columbia) 

The Commission has adopted the policy that in any civil lawsuit brought by it or in any administrative proceeding of an accusatory nature pending before it, it is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur. Accordingly, it hereby announces its policy not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings. In this regard, the Commission believes that a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations.

17 C.F.R. § 202.5(e).

As set forth in the "Introduction" of the Cato Complaint:

1. This civil-rights lawsuit challenges an unconstitutional federal policy of conditioning civil settlements on a lifetime gag order that prohibits settling defendants from ever denying "any allegation in [the government's] complaint." In effect, the government uses its extraordinary leverage in civil litigation to extract from settling defendants a promise to never tell their side of the story, no matter how outrageous the government's conduct may have been and no matter how strong the public's interest may be in knowing how the government conducts itself in high-stakes civil litigation. 

2. The Cato Institute is a nonprofit think tank and publisher that wants to-but legally cannot-publish a book recounting perceived overreach on the part of the Securities and Exchange Commission ("SEC"). Cato cannot publish the proposed book because the SEC previously coerced the book's author (as a condition of settling the enforcement action that prompted the book in the first place) into a broad and sweeping gag order that effectively prohibits him from criticizing any aspect of the SEC's enforcement actions against him. In fact, the SEC has demanded such an overbroad gag order in every (or nearly every) similar civil or administrative settlement it has entered into over the course of the past forty years, routinely conditioning settlement on a defendant's waiver of his First Amendment rights. This civil-rights lawsuit seeks to end the federal government's decades-long use of gag orders in violation of the First Amendment to the United States Constitution and to vindicate the Cato Institute's basic First Amendment right to publish a book critical of official government conduct. 

3. Specifically, the Cato Institute is currently unable to exercise its contractual right to publish the above-mentioned book because the book's author is bound by a gag-order agreement he was required to enter into as a condition of settling an SEC enforcement action. The Cato Institute believes the SEC gag-order agreement is unenforceable under the First Amendment and brings this action seeking a declaration to that effect in order to clarify its own rights and responsibilities as a publisher.

Bill Singer's Comment: For a 16-year-old take on this very issue, read: "Regulatory Double Standard: Dissing Your Settlement" ( Blog / March 24, 2008)

2Cir Affirms EDNY Finding of Criminal Intent by Non-Trading Tipper Who Said He Merely "Boasted"
United States of America, Appellee, v. Tibor Klein, Defendant and Robert Schulman, Defendant/Appellant (Opinion, United States Court of Appeals for the Second Circuit, 17-3355 / January 10, 2019) As set forth in the "Syllabus"

Defendant‐appellant Robert Schulman appeals from an October 4, 2017 judgment convicting him, following a jury trial, of one count of conspiracy to commit securities fraud and one count of securities fraud. On appeal, Schulman argues that the district court erroneously denied his motion pursuant to Federal Rule of Criminal Procedure 29 to vacate his convictions. According to Schulman,his convictions cannot stand because the government adduced insufficient evidence at trial of his criminal intent. Because the jury was not required to credit Schulman's deposition testimony that he intended only to brag when he tipped his friend and financial advisor about an upcoming merger, and the evidence taken as a whole permitted the jury to find beyond a reasonable doubt that Schulman intended his communication to lead to trading in securities of the company in question, we disagree. Accordingly, we AFFIRM the judgment of the district court.

Hot Nepal Real Estate Market Burns Stockbroker With FINRA Fine and Suspension
( Blog)
In today's featured FINRA regulatory settlement, a stockbroker is fined and suspended for introducing two acquaintances to a profitable real estate deal in Nepal. Ah yes, beautiful downtown Kathmandu with its stunning ocean views and red-hot real estate market! Psst . . . wanna get in on the new Trump Kathmandu Palace condominium development? How about a Nepalese fixer-upper you can flip? In any event, FINRA is all roiled up about the apparent violation of its Private Securities Transaction Rule and, you know what, given the facts at hand, the regulator may have a point. That being said, there's still something unsettling when a private regulator controlled by employer member firms decides what the industry's men and women can and cannot do without giving those same folks any vote on its rulemaking process.