SEC Enforcement Victory in its Efforts to Police Cannabis Industry Investments

As the cannabis industry continues to evolve and generate capital raising and investment opportunities, the SEC Division of Enforcement will continue to closely keep watch and target the bad actors that new market opportunities such as this inevitably and unfortunately attract.  Along those lines, investors looking to purchase stock in supposed cannabis company, Covalent Collective, may have found vindication in the recent judgment against Geoffrey Thompson, of Frankfurt, Illinois. Thompson is now permanently barred from engaging in the issuance, purchase, offer, or sale of any security, except in connection with his own personal account.  On January 20, 2021, the United States District Court for the Northern District of Illinois (Case No. 1:20-cv-05205), ruled in favor of the United States Securities & Exchange Commission (SEC), in connection with its complaint targeting Thompson.  Although Thompson did not admit or deny the allegations, he consented to the entry of the final judgment against him, which also ordered him to pay over half a million dollars collectively in disgorgement, prejudgment interest and civil penalties.

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President Biden Announces Gary Gensler as SEC Chair Nominee

On January 18, 2021, the incoming President’s Transition Team announced additional key administration post nominees, including Mr. Gary Gensler as SEC Chair. The announcement specifically provided the following regarding Mr. Gensler’s background:

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Congress Extending the SEC Statute of Limitations to 10 Years?!!

Congress recently overrode President Trump’s veto of the $740 billion 2021 National Defense Authorization Act (“NDAA”) and signed it into law. While the focus of the NDAA is not on the U.S. Securities and Exchange Commission (“SEC”), the NDAA does include a provision that gives the SEC, for the first time ever, statutory authority to seek disgorgement in federal court for securities enforcement matters. Further, the NDAA also provides for a 10-year statute of limitations for the SEC to seek such disgorgement for scienter-based violations, extending and doubling the current 5-year statute of limitations.

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SEC Enforcement in 2020, the Election & Future of the SEC

In Faegre Drinker’s “Enforcement Highlights” inaugural podcast, Jim Lundy moderates a panel with fellow SEC and Regulatory Enforcement partners Mike MacPhail and David Porteous, Capital Markets Team Co-Leader Beth Diffley, and Investment Management Group partner Jillian Bosmann to discuss the pandemic’s impact on the SEC’s Division of Enforcement and the potential impacts of the 2020 election on the SEC and its future.

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FCA: Working from Home Heightens Insider Trading Risks

In an October 12 speech, the Director of Market Oversight for the Financial Conduct Authority (FCA) emphasized the need to adapt insider trading controls to account for changes in working conditions due to COVID-19 restrictions.

The Director’s speech started by discussing that global economic conditions have heightened the need for companies to raise capital, and that the UK has seen a significant portion of this activity, with the FCA citing the fact that “the UK saw a greater volume of follow-on equity issuance than the next 7 major European bourses combined.” At the same time, working conditions of financial professionals has changed dramatically since March 2020 with many now working from home in response to the COVID-19 pandemic. While this situation presents novel issues for firms and professionals, the FCA emphasized the need for firms to adapt and implement effective insider trading controls. The Director emphasized, “[a]t a time where capital raising activity is vital to fuel much needed economic activity, we must be crystal clear that behaviours that risk disrupting that activity will not be tolerated.”

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Liu v. SEC Decision Leaves Ambiguity on Disgorgement Limitations – How to Measure ‘Business Expenses’ Deductible From ‘Illegal Profits’

While the U.S. Supreme Court’s decision in Liu v. SEC limited the SEC’s disgorgement power, it also left open certain complicated issues that are now subject to interpretation.1 As we previously summarized, in an 8–1 vote, the Court held that disgorgement is a permissible equitable remedy for securities fraud under § 78u(d)(5), provided the amount does not exceed a wrongdoer’s net profits and the money is returned to harmed investors.2

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What’s New, and Comings & Goings at the SEC

What’s New:  The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently issued a Risk Alert titled “Select COVID-19 Compliance Risks and Considerations for Broker-Dealers and Investment Advisers” on August 12, 2020. This Risk Alert addressed the following topics:

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The SEC Sees a Significant Uptick in Tips, Complaints, and Referrals

From mid-March to mid-May, the SEC received more than 4,000 tips, complaints, and referrals. This, according to one of the SEC Co-Directors of the Division of Enforcement, represented a 35% increase over the same period last year. Additionally, as recently confirmed by the Director of the SEC’s New York regional office, the SEC is actively monitoring these tips, complaints, and referrals because it knows that doing so sends an important deterrence message to market participants. While the SEC has many sophisticated market monitoring and other fraud detection tools, tips and complaints provide the Enforcement Staff with valuable leads, which often develop into investigations and enforcement actions in matters that would otherwise may have remained hidden. Undoubtedly, many of these tips and complaints are either directly related to the COVID-19 pandemic or are indirectly related to the resulting economic turbulence. It is foreseeable that this significant uptick in tips and complaints will lead to a significant increase in the number of investigations and enforcement actions.

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