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U.S. Regulation of the International Securities and Derivatives Markets, § 11.01, INTRODUCTION U.S. Regulation of the International Securities and Derivatives Markets, § 11.01, INTRODUCTION U.S. Regulation of the International Securities and Derivatives Markets, § 11.01, INTRODUCTION U.S. Regulation of the International Securities and Derivatives Markets 1 Edward F. Greene, Alan L. Beller, Edward J. Rosen, Leslie N. Silverman, Daniel A. Braverman, Sebastian R. Sperber, Nicolas Grabar & Adam E. Fleisher, U.S. Regulation of the International Securities and Derivatives Markets § 11.01 (11th and 12th Editions 2014-2017) 11th and 12th Editions Click to open document in a browser p. 11-5 As the earlier chapters of this book indicate, the United States has a complex system of securities regulation. This chapter discusses a further important aspect of this system: how the rules and regulations are enforced. The financial crisis and collapse of several financial institutions, coming on the heels of several high-profile corporate scandals and the enactment of the Sarbanes-Oxley Act, along with public outrage and resulting Congressional pressure, including the enactment of the Dodd-Frank Act, created an environment for heightened enforcement in the United States. Particularly in the wake of the financial crisis, criminal prosecutors, the SEC and civil litigants brought and are continuing to bring actions with unprecedented speed against financial institutions, corporations, executives and, in some cases, their outside accountants and advisors. At the same time, state regulators have instigated a series of investigations and enforcement actions against financial institutions and other market participants. Similar to the basic regulatory framework, the enforcement structure is multifaceted. In many instances, the same allegedly improper conduct can give rise to liability based on more than one statutory provision, and this liability can be enforced in legal actions brought by both governmental entities and private parties. Remedies and sanctions for improper securities activities can be sought in three basic ways: through civil litigation, administrative proceedings and criminal prosecutions. None of these mechanisms is exclusive. Thus, a party accused of violative conduct may be forced to defend itself in more than one type of proceeding. In civil litigation, private parties seek to recover losses allegedly suffered as a result of the defendant's conduct, or request injunctive relief to compel or enjoin action by the defendant. These private rights of action either arise from express statutory provisions or are implied, i.e., created by judges to provide remedies for violations of statutes or rules that are silent as to possible remedies for noncompliance. Government agencies, such as the SEC, may also bring civil actions to seek forfeiture of illegally obtained profits, civil monetary penalties (which may be greater or less than damages awarded in a private civil suit) and/or injunctive relief. The SEC has an active enforcement program with substantial available resources. Administrative proceedings are brought by government agencies such as the SEC and are conducted pursuant to rules promulgated by the relevant agency before administrative law judges it employs. An agency's determination in an administrative proceeding is subject to review by an appellate court, but the scope of review is limited. For certain violations of the federal securities laws, the SEC may bring administrative proceedings to impose civil penalties or to p. 11-5 p. 11-6 obtain cease and desist orders mandating an immediate halt to the allegedly improper conduct. Unlike civil litigation, criminal proceedings based on the federal securities laws may be brought only by the Department of Justice (the "DOJ"), either on its own initiative or as a result of a referral by the SEC. Defendants convicted in criminal proceedings face substantial fines and, in the case of individuals, terms of imprisonment. Increasingly, state authorities are seeking to use state criminal laws to prosecute perceived misconduct in the securities markets. © Cleary Gottlieb Steen & Hamilton LLP, 2019. 697 All rights reserved. U.S. Regulation of the International Securities and Derivatives Markets, § 11.01, INTRODUCTION These enforcement mechanisms and remedies are, as a basic matter, applicable to conduct in the United States and to entities registered and regulated under the U.S. securities laws, such as broker-dealers and investment advisers. In addition, these enforcement mechanisms and remedies may reach certain conduct occurring or entities located outside the United States in connection with securities transactions on U.S. exchanges or in the United States. This chapter deals with the most significant consequences of violating the U.S. securities laws. [1] Its focus is on enforcement of the securities laws as they p. 11-6 p. 11-7 relate specifically to securities transactions; the principal enforcement mechanisms available for other regulatory schemes, such as the broker-dealer sections of the Exchange Act and the Advisers Act, are summarized in the chapters dealing with the subject matter to which they relate. [2] Section 11.02 examines liability for failing to register securities. Section 11.03 discusses liability for disclosure improprieties connected with registered public offerings. Section 11.04 discusses disclosure liabilities connected with private offerings, including a separate discussion of offerings under Rule 144A. Section 11.05 reviews liabilities connected with secondary market transactions, including disclosure violations, insider trading, market manipulation and other fraudulent conduct. Section 11.06 considers liabilities connected with tender and exchange offers, including fraudulent or manipulative conduct and insider trading. Section 11.07 discusses the enforcement provisions of the Sarbanes-Oxley Act. Section 11.08 examines the Foreign Corrupt Practices Act, an important piece of legislation mandating certain accounting controls and prohibiting certain payments to foreign officials. Section 11.09 discusses various enforcement scenarios for violation of these laws, including the possibility of class action lawsuits, SEC enforcement actions, civil or criminal actions under the Racketeer Influenced and Corrupt Organizations Act ( "RICO"), [3] or other criminal proceedings. Section 11.10 reviews the circumstances in which U.S. law will be applied, and the reach of the U.S. judicial system, to activities and entities outside the United States. Finally, § 11.11 discusses special litigation issues relating to derivatives. Although the U.S. securities law enforcement process must be respected by those engaged in securities activities with U.S. aspects, it should be kept in perspective. Most important, the vast majority of carefully conducted transactions do not give rise to litigation of any sort, and it is sometimes possible, where securities litigation without merit has been started, for a defendant to secure a favorable judicial ruling dismissing the case at an early stage of its otherwise generally lengthy life. In addition, even in most cases where a case proceeds beyond its preliminary stages, there is a rational sense of proportionality regarding the eventual outcome. Governmental proceedings and civil litigation by private parties relating to relatively less serious alleged violations are often settled by negotiations and do not result in major adverse consequences. p. 11-7 p. 11-8 More serious accusations of improper conduct (in terms of size, intent, the systematic nature of the violation or other factors) can result, whether settled or not, in more significant consequences. Further, SEC enforcement activity has increased in the wake of criticism the Enforcement Division of the SEC faced after its failure to prevent or detect various high-profile corporate scandals. In addition, the SEC has focused on gatekeepers, such as lawyers (both general counsel and outside counsel) and auditors. The financial crisis of 2008—along with significant frauds and corporate misconduct—spurred a large volume of litigation that has and continues to generate notable decisions that reach into many of the subject matters of this chapter. In one example, plaintiffs attempted to sue all of the parties arguably involved in the sale of mortgage- backed securities—from the issuers, to underwriters, to rating agencies—under a number of theories that, in many ways, test the limits of the securities laws. These cases provide particularly important guidance to market participants, and they are a recurring theme of this chapter. Footnotes © Cleary Gottlieb Steen & Hamilton LLP, 2019. 698 All rights reserved. U.S. Regulation of the International Securities and Derivatives Markets, § 11.01, INTRODUCTION 1 Although this chapter focuses on the consequences of violating the federal securities laws (most particularly, the Securities Act and the Exchange Act), actions that violate the securities laws may also violate other federal or state laws. See § 16 of the Securities Act ( "[T]he rights and remedies provided by this subchapter shall be in addition to any and all other rights and remedies that may exist in law or in equity.") and § 28 of the Exchange Act ( "[T]he rights and remedies provided by this chapter shall be in addition to any and all other rights and remedies that may exist at law or in equity.…"). Determining whether claims under the securities laws may coexist with claims under other statutory regimes sometimes presents a complicated statutory question. For example, the U.S.
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