Top 10 Securities Enforcement Developments of Summer 2024

In the dynamic landscape of securities regulation, staying informed is critical. In this review, we highlight the top 10 securities enforcement developments of summer 2024, offering insights into the latest trends, landmark cases, and strategic shifts that are likely to influence compliance strategies and corporate governance moving forward. Whether you're navigating these issues in-house or advising clients, understanding these developments is essential for staying aligned with the evolving standards of securities law.

1. SDNY Judge Rules on SEC's Cybersecurity Enforcement in SolarWinds Case

On July 18, 2024, Judge Paul Engelmayer of the Southern District of New York issued a significant ruling in the case of SEC v. SolarWinds Corp. The court partially dismissed the SEC’s first cyber enforcement action related to internal accounting control violations under Section 13(b)(2)(B). The judge ruled that cybersecurity controls do not qualify as internal accounting controls, dismissing related claims. However, the court allowed the SEC's claims concerning SolarWinds' misleading cybersecurity statements to proceed, marking a nuanced approach to cybersecurity disclosures.

2. SEC Charges Andrew Left and Citron Capital with Fraudulent Trading Practices

On July 26, 2024, the SEC charged activist short-seller Andrew Left and Citron Capital with using “bait-and-switch” tactics to manipulate the market and generate $20 million in illegal profits. The SEC's complaint, filed in the Central District of California, alleges that Left and Citron Capital engaged in deceptive practices, including publishing misleading reports and tweets, then reversing their market positions to exploit the resulting price movements. The case emphasizes the SEC's crackdown on fraudulent activities in the financial markets.

3. Court Upholds SEC’s Definition of “Broker-Dealer” in Auctus Fund Case

On July 22, 2024, Judge Angel Kelley ruled in SEC v. Auctus Fund Management that the definition of a "dealer" under the Exchange Act includes entities buying and selling securities for their own accounts, regardless of whether they interact with customers. The court rejected the defendants' argument that they did not need to register as dealers since their activities were for investment purposes, reinforcing the broad scope of the SEC's regulatory authority.

4. FINRA’s Use of In-House Tribunals Challenged Post-Jarkesy

On July 15, 2024, D. Allen Blankenship filed a lawsuit in the Eastern District of Pennsylvania challenging FINRA’s disciplinary proceedings against him. Citing the Supreme Court's ruling in SEC v. Jarkesy, Blankenship argued that his Seventh Amendment rights were violated by FINRA's in-house tribunals, which do not provide jury trials. The case highlights ongoing legal challenges to the use of in-house proceedings by regulatory bodies.

5. SEC Pursues Action Against “Decentralized” Crypto Platform BitClout

On July 30, 2024, the SEC filed a complaint against Nader Al-Naji, alleging securities fraud related to the BitClout platform. The SEC claims that Al-Naji raised $257 million through the sale of unregistered crypto asset securities while misusing investor funds for personal gain. The case underscores the SEC's continued efforts to regulate the rapidly evolving cryptocurrency market and ensure compliance with securities laws.

6. Supreme Court Limits SEC's Use of Administrative Law Judges in Jarkesy Ruling

On June 27, 2024, the Supreme Court ruled in SEC v. Jarkesy that the SEC's use of administrative law judges (ALJs) in enforcement actions violates the Seventh Amendment right to a jury trial. The decision limits the SEC's ability to impose civil penalties through in-house proceedings, requiring such cases to be tried in federal courts. This ruling is expected to have a significant impact on how the SEC conducts its enforcement actions going forward.

7. First Criminal Conviction for Insider Trading Using a Rule 10b5-1 Plan

On June 21, 2024, a federal jury convicted Terren Peizer, the former CEO of a healthcare company, for insider trading under Rule 10b5-1. The conviction marks the first time a defendant has been found guilty of using a trading plan to unlawfully trade on material nonpublic information. The case sets a precedent for future prosecutions involving 10b5-1 trading plans, signaling increased scrutiny of their use.

8. SEC Targets Consensys Over Staking Tokens as Securities

In July 2024, the SEC filed a complaint against Consensys, a major player in the blockchain industry, alleging that its staking tokens qualify as securities. The SEC claims that by offering and selling these tokens without proper registration, Consensys violated federal securities laws. This case represents the SEC's ongoing strategy to regulate the crypto and blockchain industry by enforcement.

9. Fifth Circuit Vacates SEC Rule Regulating Private Fund Advisers

In a major setback for the SEC, the Fifth Circuit Court of Appeals vacated a recent SEC rule regulating private fund advisers. The court found that the rule exceeded the SEC’s statutory authority and imposed undue burdens on private fund managers. This decision could lead to significant changes in how private funds are regulated, with potential implications for the SEC's rulemaking process.

10. Fifth Circuit Overturns SEC Rescission of Proxy Voting Advice Rule

In another significant ruling, the Fifth Circuit vacated the SEC's rescission of a Trump-era rule regulating proxy voting advice. The court held that the SEC's actions were arbitrary and capricious, failing to adequately justify the reversal. This ruling may impact the SEC's approach to regulating proxy advisory firms and their role in corporate governance.

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