July 18, 2019

Archives for August 5, 2013

More Changes to the SEC’s “Neither Admit Nor Deny” Consent Decrees

HerrickLidstoneBy Herrick K. Lidstone, Jr., Esq.

The Securities and Exchange Commission (the “SEC”) has the power and authority under the Securities and Exchange Act of 1934 to bring enforcement actions against persons who violate the securities laws. Most of these actions are settled well before trial by the defendant agreeing to a court-ordered “obey the law” injunction, where the defendant neither admits nor denies the factual statements alleged by the SEC to support the injunction. The SEC has received significant criticism from commentators and legislators for entering into settlements without requiring the respondent to admit allegations against it. These have included significant criticisms by Hon. Jed. S. Rakoff (S.D.N.Y.) in his November 28, 2011 memorandum order denying a joint motion by the SEC and Citigroup for approval of a $285 million settlement of certain allegations by the SEC. (SEC v. Citigroup Global Markets, Inc.) This was discussed in more detail in the January 2012 Business Law Section Newsletter.

Obtaining settlements where the defendant “neither admits nor denies” the allegations is a practice that commenced long before 1972, but was formalized in 1972 (17 CFR § 205.5) with the additional SEC requirement that consent judgments be accompanied by a formal written agreement by the defendant “not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis.” This changed the prior practice by defendants who would deny the underlying facts immediately after entering into a consent decree with the SEC.

Perhaps as a result of the outcry from Judge Rakoff and others, in January 2012, the Director of the SEC’s Division of Enforcement announced that the Division would no longer permit those convicted or who otherwise admitted the facts in a parallel criminal action to settle with the SEC based on ““not admitting or denying” the facts.

On June 18, 2013, SEC Chair Mary Jo White further refined the SEC’s “neither admit nor deny” policy when she advised the investment community that even in non-criminal settings, the SEC may require admissions in cases “where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate” (as reported in the New York Times at page B-1, June 22, 2013). In those cases, the SEC enforcement staff has been advised to seek admissions or litigate the case. This may, of course, make litigation more frequent since many defendants may have believed in their innocence, but chose the “neither admit nor deny” settlement to avoid the time, expense, and uncertainty of litigation. Chair White anticipates that the admissions will be required in cases involving “particularly widespread harm to investors” and “egregious intentional misconduct.”

The SEC defense bar has raised a number of concerns about Chair White’s announcement and the anticipated effect of the new SEC practice. Among these concerns is whether this new policy might be subject to arbitrary application by staff. Equally significant, where a defendant is given the option of making admissions (which can then be used in subsequent shareholder litigation or even a criminal proceeding) or contesting the claims, defendants are more likely to contest the claims and seek vindication. Where settlements used to be simpler, the resulting litigation will likely involve a significantly greater amount of SEC resources to prosecute and corporate (that is, shareholder) resources to defend. Defense lawyers have also pointed out that the SEC’s recent track record on significant litigation has not been stellar.

Predictably, the plaintiffs’ attorneys applauded this change since they will now be able to use any admissions in their civil litigation. This fact, itself, will be a significant disincentive to targets of investigation to settle cases with admissions of wrongdoing.

It will be interesting to see how this new policy plays out.

Herrick K. Lidstone, Jr., Esq., is a shareholder of Burns Figa & Will, P.C. in Greenwood Village, Colorado. He practices in the areas of business transactions, including partnership, limited liability company, and corporate law, corporate governance, federal and state securities compliance, mergers & acquisitions, contract law, tax law, real estate law, and natural resources law. Mr. Lidstone’s work includes the preparation of securities disclosure documents for financing transactions, as well as agreements for business transactions, limited liability companies, partnerships, lending transactions, real estate and mineral property acquisitions, mergers, and the exploration and development of mineral and oil and gas properties. He has practiced law in Denver since 1978. He writes for many publications, including the Colorado Bar Association Business Law Newsletter, where this article originally appeared.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Colorado Court of Appeals: Defendant Sentenced Under Sex Offender Lifetime Supervision Act So No Error in Returning to DOC for Remainder of Indeterminate Sentence

The Colorado Court of Appeals issued its opinion in People v. Beck on Thursday, August 1, 2013.

Crim.P. 35(c)—Sexual Assault on a Child—Probation—Revocation of Parole—Colorado Sex Offender Lifetime Supervision Act—CRS § 17-22.5-403(8)(b).

Defendant appealed the district court’s order denying his Crim.P. 35(c) motion. The Court of Appeals affirmed.

In 2004, defendant pleaded guilty to one count of sexual assault on a child, a class 4 felony. The trial court sentenced him to sex offender intensive supervised probation for ten years to life. After twice violating the terms of his probation, defendant was sentenced to two years to life in the custody of the Department of Corrections (DOC), plus parole of ten years to life. In 2009, defendant was released on parole. On October 8, 2010, the parole board revoked defendant’s parole and returned him to the DOC for the remainder of his sentence—that is, his natural life—because he had violated the conditions of his parole when he was terminated from a sex offender treatment program for noncompliance.

Defendant argued that the district court erred in deciding that CRS § 17-2-103(11)(b) authorized the revocation of his parole for the remainder of his indeterminate sentence rather than a maximum of 180 days. CRS §§ 17-2-103(11)(b) and 17-22.5-403(8)(b), which both address the length of time the parole board may return a sex offender to the DOC on revocation of his or her parole, are in conflict and cannot be reconciled. The specific and more recent statute, CRS § 17-22.5-403(8)(b), prevails when the parolee is on parole for a sex offense that falls within the purview of the Colorado Sex Offender Lifetime Supervision Act (SOLSA). The plain meaning of CRS § 17-22.5-403(8)(b) is that the General Assembly gave the parole board the discretion to revoke a sex offender’s parole for the rest of his or her indeterminate sentence.

Here, defendant is a sex offender under SOLSA subject to CRS § 17-22.5-403(8)(b) because he committed the offense in 2003 (after the effective date of SOLSA), and his conviction of sexual assault on a child is a sex offense under SOLSA. Therefore, the parole board was authorized to revoke defendant’s parole for the remainder of his sentence under CRS § 17-22.5-403(8)(b) and the district court did not err in denying his Crim.P. 35(c) motion.

Summary and full case available here.

Colorado Court of Appeals: No Cause for Mistrial Where Defense Counsel Refused Remedies to Prosecutorial Misconduct

The Colorado Court of Appeals issued its opinion in People v. Reed on Thursday, August 1, 2013.

Prosecutorial Misconduct—Evidence—Testimony—Hearsay—Value of Property—Criminal Possession of a Financial Device—Aggravated Sentence—Federal Supervised Release.

Defendant John Benjamin Reed appealed the judgment of conviction entered on a jury verdict finding him guilty of second-degree murder; aggravated motor vehicle theft; criminal possession of a financial device (four or more devices) and two different names; and theft. The Court of Appeals affirmed in part and reversed in part, and the case was remanded with directions.

Reed contended that the trial court abused its discretion in denying his motion for a new trial due to prosecutorial misconduct. Before trial, the court ruled that evidence of Reed’s prior convictions and parole status was inadmissible because its probative value was substantially outweighed by the danger of unfair prejudice. Although three of the prosecution’s witnesses mentioned Reed’s prior convictions during testimony and the prosecutor did not properly advise one of the three witnesses not to mention defendant’s criminal history, the prosecutor did not elicit the inadmissible evidence from the witnesses. Because any prejudice could have been remedied by a curative instruction or by striking the improper statement, Reed’s counsel refused these remedies. Therefore, the trial court did not abuse its discretion in denying Reed’s motion for a new trial on the basis of prosecutorial misconduct.

Reed contended that the trial court abused its discretion in allowing a witness to testify that Reed made threatening remarks to her several weeks before the murder. Although evidence of Reed’s threat had minimal, if any, relevance, any error in allowing the evidence was harmless because it did not substantially influence the verdict or affect the fairness of the trial proceedings.

Reed asserted that the trial court abused its discretion in admitting hearsay evidence under the statutory exception for establishing the value of property involved in a theft. Even if the co-owner’s testimony about the estimated cost to repair the car was inadmissible, any error in its admission was harmless, because additional evidence was presented that the value of the victim’s property damage exceeded $500.

Reed argued that the trial court erred in denying his motion for judgment of acquittal on the charge of criminal possession of a financial device (four or more devices) and two different names. There was insufficient evidence to support the conviction, because the prosecution failed to prove that one of the financial devices, a Visa gift card with no available funds, was capable of being used to obtain anything of value. Accordingly, this charge was reversed and the case was remanded for resentencing on this charge only.

Reed argued further that the trial court erred in aggravating his sentences because Reed was not on parole when he committed the charged crimes. Federal supervised release is effectively the same as parole for purposes of aggravating sentences. Thus, the trial court’s imposition of aggravated range sentences was affirmed.

Summary and full case available here.

Tenth Circuit: Defendant Not Entitled to Reduction in Sentence Based on Amendment 750 or FSA

The Tenth Circuit Court of Appeals published its opinion in United States v. Hodge on Thursday, August 1, 2013.

In 2005, Larry Hodge pleaded guilty to knowingly and intentionally distributing approximately 23.2 grams of crack cocaine. Because Mr. Hodge had multiple prior felony convictions, he qualified as a career offender. The district court sentenced him to 188 months’ imprisonment.

In 2011, Mr. Hodge sought a reduction in his sentence based on Amendment 750 to the Sentencing Guidelines, which reduced the offense levels applicable to his crack cocaine offenses. Mr. Hodge also argued that the Fair Sentencing Act (FSA) lowered the career offender guideline because it reduced the statutory maximum for his offense from forty to twenty years. The district court rejected both arguments and Hodge appealed.

The district court may modify a defendant’s term of imprisonment when he has been sentenced based on a range subsequently lowered by the Sentencing Commission and the reduction is otherwise consistent with policy statements in the guidelines. 18 U.S.C. § 3582(c)(2). The Tenth Circuit held that Mr. Hodge was not eligible for a reduction under Amendment 750 because he was sentenced under the career offender guideline rather than the crack cocaine guideline. Amendment 750 modified the Guidelines provisions pertaining to crack cocaine. The court further held that Mr. Hodge was not eligible for a reduction under the Fair Sentencing Act. Mr. Hodge was sentenced in 2006. The FSA was not effective until 2010, and it is not retroactive.