Second Circuit Upholds Enforceability Of SEC Tolling Agreements (August 16, 2021)

Published date18 August 2021
Subject MatterCorporate/Commercial Law, Government, Public Sector, Litigation, Mediation & Arbitration, Corporate and Company Law, Government Contracts, Procurement & PPP, Trials & Appeals & Compensation, Securities
Law FirmSheppard Mullin Richter & Hampton
AuthorMr Christopher Bosch

In Securities & Exchange Comm'n v. Fowler, No. 20-1081, 2021 WL 3083655 (2d Cir. July 22, 2021), the United States Court of Appeals for the Second Circuit upheld a lower court judgment awarding the Securities and Exchange Commission ("SEC") civil penalties, disgorgement, and injunctive relief in a securities fraud action against a broker engaged in unsuitable and unauthorized high-frequency trading. The district court entered its judgment following a jury trial finding the defendant guilty of violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933. On appeal, defendant asserted that the action was subject to a five-year statute of limitations imposed by 28 U.S.C. ' 2462 despite the parties having entered into tolling agreements. Defendant also argued that the civil penalties assessed against him were excessive, and the disgorgement award failed to properly account for legitimate business expenses as required by Liu v. Securities & Exchange Comm'n, 140 S. Ct. 1936 (2020). After reviewing its text and legislative history, the Second Circuit concluded in this matter of first impression that ' 2462 is non-jurisdictional and, therefore, the district court had the power to hear the case in light of the parties' tolling agreements. The decision is important because it reaffirms the enforceability of tolling agreements between the SEC and its investigative quarries. The court also rejected defendant's arguments alleging improper civil penalty and disgorgement calculations.

The SEC began investigating defendant, a financial advisor for J.D. Nicolas, in 2014 for conduct that began in 2011. His trading strategy entailed reviewing news reports to identify events he determined stocks had not yet fully absorbed into their price and invested his clients in those stocks. Defendant's approach resulted in high turnover rates, significant transaction fees, and unauthorized trades. In 2016, the SEC and defendant entered into two agreements that operated to toll the five-year statute of limitations for the SEC to file an action against defendant that would have expired in 2016 until February 28, 2017. The SEC brought its action on January 9, 2017.

The jury convicted defendant of making false and misleading statements to investors, recommending an unsuitable high-frequency trading strategy, and engaging in unauthorized trading. On February 28, 2020, the...

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