As a recent post on noted, the Tenth Circuit recently affirmed the convictions of Howard O. Kieffer.  Kieffer, who for several years practiced criminal defense law, had a problem - he never went to law school and had no license to practice law.  A California resident, Kieffer held himself out as a criminal defense attorney via a domain name with a Virginia company, which also hosted the web site.  The government argued that the web site he maintained, which was accessed by two of his victims, in Colorado and Tennessee, was a “wire communication in interstate commerce” sufficient to establish jurisdiction under the federal wire fraud statute.

One aspect, in particular, of the Tenth Circuit decision raises eyebrows.  The issue is what constitutes an interstate wire for the purpose of the wire fraud statute.  The White Collar Crime Professor Blog identified this as a particularly important issue in the cyber-connected world we now live in.  This issue has been evolving for some time, as shown in United States v. Phillips, 376 F. Supp2d 6 (D. Mass. 2005).  There, the court rejected the government argument that “in order to satisfy the elements of the wire fraud offense, it was not necessary to present evidence that the pertinent wire communications themselves actually crossed state lines, as long as the communications (whether interstate or intrastate) traveled via an ‘instrument of an integrated system of interstate commerce,’ such as the interstate phone system.”  More recently, the Tenth Circuit, in United States v. Schaefer, 501 F.3d 1197 (10th Cir. 2007), held that one person’s use of the internet, “standing alone” was insufficient evidence that the item “traveled across state lines in interstate commerce.”

Therefore, it is now somewhat surprising to read in Kieffer that the Tenth Circuit changed its position.  The court noted that before the website could reach the local host server, it had been uploaded by Kieffer to the Virginia company, and then transmitted from Virginia to Colorado and Tennessee. Based on those facts, the court held that "[t]he presence of end users in different states, coupled with the very character of the internet” permitted the jury to infer transmission across state lines.  Now, under Kieffer, an allegation that a web site was used to perpetrate fraud would give rise to federal wire fraud jurisdiction in nearly every case.  Stated differently, given the “the very character of the internet,” it is unlikely that a defendant will reside in the same state as his web site host and victims. 

Now, as Paul F. Enzinna noted, unless other courts reject Kieffer, the potential exists for a surge in federal wire fraud prosecutions.  With Kieffer seemingly establishing such minimal interstate contact requirements, it would seem that virtually any viewing or use of a web site could be used to trigger federal jurisdiction.

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This week, the FDIC and SEC approved the Volcker Rule and released a draft for public comments.  Bank regulators will have to solidify the Rule in the coming months, as the Rule is set to take effect in July, 2012 – although banks would have three years to comply with the Rule. 

Part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Volcker Rule limits the type of investments that banks can make with their own money.  A result of the financial crisis, the Rule seeks to reign in the behavior that caused banks to fail in 2008.  The Rule is named after former Federal Reserve Chairman Paul Volcker, a man who criticized bank practices long before the financial crisis.  The Rule applies to banks that have government guarantees and may even impose limits on financial companies supervised by the Federal Reserve Board.  

The Volcker Rule places two big limitations on banks.  First, the Rule prohibits banks from owning or controlling hedge funds and private equity funds: a bank cannot own more than three percent of a hedge fund or private equity fund, and cannot invest more than three percent of its capital in such funds.  

Second, the Rule prohibits banks from engaging in proprietary trading.  Proprietary trading occurs when a bank makes trades for its own benefit, rather than for the benefit of a customer.  There are a few exceptions to this rule though, including trades of foreign currencies, commodities, and government bonds.  Additionally, banks can engage in proprietary trading if they are hedging while trading on behalf of a customer.  And banks may still act as market-makers and underwriters.      
The Rule is not without problems though.  Even its supporters claim note that the Rule may not be strict enough, and may contain loopholes.  Also, it can be difficult to draw a line between proprietary trades and trades made for customers.  

Wall Street is certainly not happy with the additional regulations.  Compliance will create new costs; the Rule requires banks to create internal compliance programs overseen by executives.  And Moody's noted that the Rule gives certain companies, like investment firms and offshore banks, a competitive advantage because they are not subject to the regulations.  

At almost 300 pages, the Volcker Rule will likely receive several public comments in the next few months, including some very loud ones from Wall Street.  

William F. Auther is a partner with an active trial practice in business litigation and Kelly M. McInroy is a law clerk in the Phoenix office of Bowman and Brooke LLP.  

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Last week, the Court's unanimous Erica P. John Fund opinion removed a hurdle to certain securities fraud class action plaintiffs.  On June 13, however, the Court issued a 5-4 opinion favoring securities fraud defendants in Janus Capital Group, Inc. v. First Derivatives Traders, 564 U.S. ___ (2011).  In it, the Court addressed what it means to "make" a false statement that violates Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.  Analogizing to a speechwriter, the majority ruled that an investment adviser is not liable under Rule 10b-5 if it provides misleading information that the adviser's client uses in a prospectus.  Rather, only the client can be liable; the client is like the speech maker who is responsible for the words coming out of his mouth, even if another person scripted them. 
Janus Capital Group, Inc. is a publicly-traded company that created the Janus family of mutual funds.  Janus Capital Group also has a subsidiary--Janus Capital Management, LLC--that provides investment advise and administration services to those mutual funds.  Janus Investment Fund is a separate legal entity owned entirely by the mutual fund investors.  As required by law, Janus Investment Fund registered prospectuses, etc., with the SEC as part of its investment activities.    
Prospectuses for many Janus mutual funds indicated they were not suitable for market timing and suggested that the separate management company would implement policies to prevent that practice.  As it turns out, however, no such policies existed.  In fact, the New York Attorney General alleged that secret arrangements permitted such market timing (which harms other investors in the fund).  This led investors to flee Janus Investment Funds.  According to the plaintiffs, those withdrawals reduced the management company's compensation significantly, which also diminished the value of Janus Capital Group's stock.  Thus, the plaintiffs in this case are investors in Janus Capital Group and sued over the decline in that entity's stock price. 
In concluding that Janus Capital Group and Janus Capital Management did not make the allegedly-misleading statements in the prospectuses, the Court viewed this case as continuation of its earlier decisions in Central Bank of Denver, N.A., v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), and Stoneridge Investment Partners, LLC v. Scientific Atlanta, Inc., 552 U.S. 148 (2008).  Central Bank held that no private right of action under Rule 10b-5 exists against aiders and abettors of securities fraud.  Stoneridge held that the private right of action doesn't reach a third party whose undisclosed conduct enables another person to make misleading statements in securities filings.
The Court concluded that only the entity filing the prospectuses, Janus Investment Fund, could "make" the misleading statements in those prospectuses, even if Janus Capital Group or Janus Capital Management participated in drafting the offending portions of those documents.  This is where the Court compared Janus Investment Fund to a speechmaker and the other entities to speechwriters.  In doing so, the Court declined to defer to the SEC's interpretation, noting "skepticism" over the degree of deference the SEC should receive when dealing with the implied right of action.  Slip Op. at 9 n.8.  Moreover, to the extent some liability should attach when an adviser participates in drafting the misleading statements, that change in the law "is properly the responsibility of Congress and not the courts."  Id. at 10. 
Addressing concerns raised in the dissent, the majority noted that nothing in the prospectuses suggested that the challenged statements came from either Janus Capital Group or Janus Capital Management.  Id. at 11.  And while it is possible to "indirectly" make a misleading statement supporting a private claim under Rule 10b-5, "attribution is necessary," at a minimum.  Id. at 11 n.11. 
A principal concern for the dissent is that the rule may lead to no one facing liability.  For example, if the adviser intentionally prepared false information and the fund's board believed it was true, "in such circumstances, no one could be found to have 'ma[d]e' a materially false statement . . . ."  Dissent at 10.
While the case presents an important analysis of the scope of Rule 10b-5 liability for advisers, managers, etc., it also is interesting in its refusal to defer to the SEC's interpretation of "make."  Combined with Central Bank and Stoneridge, this opinion continues to narrow the scope of potential defendants for these types of claims. 
Justice Thomas authored the opinion, and the Chief Justice and Justices Scalia, Kennedy, and Alito joined.  Justice Breyer dissented, joined by Justices Ginsburg, Sotomayor, and Kagan.


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On May 25, the Securities and Exchange Commission adopted new rules concerning the whistleblower program implemented under Section 922 of the Dodd-Frank Act.  In a party-line divided vote of 3-2, the SEC took a “middle of the road” approach to the controversial aspect of the rule of whether to require a whistleblower to first inform his or her company of the alleged conduct.  While the SEC did not require whistleblowers to take this step, it provided additional monetary incentives for those who do and guaranteed whistleblower status to those who report internally where the company subsequently discloses the conduct to the SEC.  The new rules, which become effective 60 days after publication in the Federal Register, require a whistleblower provide the SEC with original information that results in the successful enforcement by the agency in a federal court or administrative proceeding where the SEC obtains more than $1 million in sanctions. 

The requirement for internal reporting of alleged conduct has been hotly debated.  Senior Vice President and General Counsel of the Association of Corporate Counsel Susan Hackett characterized the SEC’s new rules as a “Pandora’s box.”  Likewise, public companies have criticized the SEC’s new rules and foreshadowed the potential damage to internal compliance and reporting systems. 

In contrast, SEC Chairman Mary Schapiro commented that the rules “are intended to the break the silence of those who see a wrong” and that the SEC found the proper balance between encouraging whistleblowers to report internally, but also gave them the option to contact the SEC directly.

Read the SEC Press Release in its entirety here.


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A study released by Cornerstone Research (“Cornerstone”) and reported by Reuters earlier this month has identified a trend where securities class action settlements are increasingly tied to SEC investigations and enforcement actions, which is driving up settlement amounts.  Although the total number of class action settlements decreased in 2010, the percentage of settlements that were associated with SEC enforcement actions rose to 30% compared to 20% in 2009.  This trend resulted in the overall median settlement amount increasing more than 20% over 2009 at least in part because settlements that follow SEC enforcement actions are generally larger.  In fact, the study showed that the median settlement amount for cases associated with enforcement actions was more than double the settlement amount in cases where the SEC was not involved. 

The study by Cornerstone also identified other statistically significant factors that may increase the settlement value of a securities class action.  One of these factors – alleged violations of Generally Accepted Accounting Principles (“GAAP”) – is typically used by plaintiffs to enhance settlement leverage.  Frequently, GAAP violations are associated with a restatement announcement by the issuer.  Plaintiffs can then use the existence of the restatement along with any associated details disclosed by the issuer to enhance their ability to meet the specificity requirements set forth in the Private Securities Litigation Reform Act.  This detailed ammunition not only provides additional potential “staying” power, but also may pique the interest of the SEC.  That interest, in turn, may lead to an investigation which provides additional leverage to plaintiffs. 

In any event, expect the SEC’s efforts to become even more pronounced in coming years.  The SEC has publicly stated that it intends to increase enforcement activities and Robert Khuzami, Director of the Enforcement Division, testified before Congress on March 10 that the SEC has taken action to carry through with this promise by significantly restructuring the Enforcement Division to streamline operations and expedite the investigation and filing of actions.   The results are already showing – the total number of enforcement actions have increased each of the past two years.  In addition, the SEC acquired a broader enforcement mandate through the Dodd-Frank Act, and is scheduled to have its budget doubled by 2015.  As the SEC ramps up its new initiatives, we will likely see more class action settlements influenced by parallel enforcement actions.

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According to Chairwoman Mary Schapiro, the case against Goldman Sachs was just the tip of the S.E.C.’s enforcement iceberg.  The following article quotes Chairwoman Schapiro telling reporters that investors have not seen the bulk of cases brought by the S.E.C. and that the S.E.C. has investigations “in the pipeline across products, across institutions”.  While not surprising in light of the recent extensive financial and regulatory reform signed by President Obama on July 21st, Chairwoman Schapiro’s comments are confirmation that the S.E.C. will continue to seek accountability for the 2008 disruptions in the financial and real estate markets.

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