TheCorporateCounsel.net

We’re accustomed to seeing the SEC announce the resolution of some high-profile enforcement proceedings shortly before its September 30 fiscal year end. We expect the same this year, but it’s possible that this year may be a little different that years past, as the SEC continues to sort out the implications of the SCOTUS’s Jarkesy decision for its enforcement program. This excerpt from a recent Seyfarth guest blog on “The D&O Diary” discusses how Jarkesy might affect the agency’s decisions around fraud-based enforcement actions:

Jarkesy will likely have a significant impact on the SEC’s appetite and ability to litigate securities fraud claims going forward. As Justice Gorsuch noted in his concurrence, since the Dodd-Frank Act, the SEC has won significantly more of the enforcement actions it brought in administrative proceedings than those it brought in federal courts (Jarkesy, 144 S. Ct. at 2141 (Gorsuch, J., concurring)).

While Jarkesy left a number of open questions, it unequivocally required the SEC to bring securities fraud actions seeking civil penalties in federal court rather than in administrative proceedings. Therefore, Jarkesy will likely result in the SEC being more selective in its enforcement of securities fraud, primarily bringing the more serious fraud actions. The increase in resource usage required to bring an action in federal court will likely reduce the SEC’s ability to pursue smaller fraud cases, which may incentivize it to either settle those cases or bring lesser charges involving non-fraud claims and seek equitable remedies in administrative proceedings. This trend should provide an advantage to counsel representing entities or individuals in SEC investigations and settlement negotiations.

The blog says that while these changes will improve the fairness of outcomes to defendants by subjecting the SEC to the more demanding procedural and evidentiary standards required by federal courts, they will also reduce the SEC’s ability to bring these cases and potentially embolden bad actors.

– John Jenkins