The Dodd-Frank Act Has Expanded SEC Enforcement Powers

The Dodd-Frank Wall Street Reform and Consumer Protection Act has significantly expanded SEC enforcement powers. All of the expanded powers are designed to give new protections to investors.

Previously, the SEC had the power to order a respondent to cease and desist certain activity. 1933 Act Section 8A. The SEC also had the power to file lawsuits seeking injunctive and other relief against market participants. 1933 Act Section 22. The Dodd-Frank Act has significantly expanded the SEC’s enforcement powers in several ways.

1. The Dodd-Frank Act amends Section 22(c) of the 1933 Act and Section 27(b) of the 1934 Act to allow the SEC and the United States to bring civil and criminal law enforcement proceedings involving transnational securities frauds. See Section 929Y of the Dodd-Frank Act. Thus, the holding of Morrison v. National Australia Bank, Ltd., 130 S.Ct. 2869 (2010) (holding that the securities law do not have extraterritorial application) applies only to lawsuits brought by private plaintiffs. 1933 Act Section 22(c).

2. Nationwide Service of Process in SEC Enforcement Actions.

The SEC now has the power to serve subpoenas nationwide in SEC enforcement actions. Previously, the SEC was limited to the subpoena power of the federal district court, which extends 100 miles. See 1933 Act Section 22(a); 1934 Act Section 27; Investment Company Act Section 44; Investment Advisers Act Section 214. For the SEC this is very important as it will allow the SEC to require a person who lives in California to appear at a trial in Illinois.

3. Aiding and Abetting Violations.

The Dodd-Frank Act authorized the SEC to bring claims and seek statutory penalties against persons who “knowingly” or “recklessly” aid and abet violations of the securities laws. See 1933 Act Section 15(b); Investment Company Act Section 48(b) and Investment Advisers Act Section 209(f). The Supreme Court has held that private plaintiffs may not bring aiding and abetting claims against lawyers and accountants (and others) who aid and abet a violation of the securities laws. The Dodd-Frank Act now allows the SEC to pursue such violations.

4. Cease And Desist Authority Expanded.

Under Section 8A of the 1933 Act, the Commission has broad powers to obtain a cease and desist order against anyone who has or may intend to violate the Securities Laws. The Dodd-Frank Act amended Section 8A to expand the Commission’s powers to seek and obtain cease and desist orders. Under the amended Section 8A(c)(1) the Commission has the power to issue a temporary cease and desist order when the Commission finds that “the alleged violation or threatened violation specified in the notice instituting proceedings pursuant to subsection (a), or the continuation thereof, is likely to result in significant dissipation or conversion of assets, significant harm to investors, or substantial harm to the public interest, including, but not limited to, losses to the Securities Investor Protection Corporation, prior to the completion of the proceedings.”

The respondent has an opportunity to seek judicial review of the temporary cease and desist order in the federal courts. See Section 9(a) of the Securities Act of 1933 as amended.

Subsection (g) now allows the SEC to assess civil penalties against market participants in connection with a cease and desist order. The SEC must find that the respondent (i) is violating or has violated any provision of thistitle, or any rule or regulation issued under this title; or (ii) is or was a cause of the violation of any provi­ sion of this title, or any rule or regulation thereunder; and (B) such penalty is in the public interest." The penalties increase with successive violations. Section 8A(g).

Under Section 15(b, “any person that knowingly or recklessly provides substantial assistance to another person in violation of a provision of this Act, or of any rule or regulation issued under this Act, shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided.”

Edward X. Clinton, Jr.

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Civil Procedure - Requests To Admit - Illinois Supreme Court Rule 219(b)

A recent decision by the Illinois Appellate Court for the Second District, in the case captioned McGrath v. Botsford, 2-09-0235, will prove useful in commercial cases.

Illinois Supreme Court Rule 216 allows one party to serve requests to admit on the other party. If the requests are not admitted or denied in 28 days, they are deemed admitted. "The purpose of a request to admit pursuant to Supreme Court Rule 216 is to enable the parties and the court to limit the issues and to reduce unnecessary production of proof at trial." The answering party has a "good-faith obligation to make a reasonable effort to secure answers to a request to admit, not only from the facts within its own knowledge but also from persons and documents within its reasonable control."

Under Rule 219(b), the court may award reasonable expenses including attorney's fees for the wrongful denial of requests to admit.

In this case, McGrath denied all of the requests to admit, but later lost at trial. Moreover, McGrath contradicted his denials in deposition testimony.

After the trial, Botsford moved, pursuant to Rule 219(b) for an award of reasonable attorney fees. The trial court denied the award.

The Appellate Court reversed. The Appellate Court found that the denials were unjustified and that the trial court had abused its discretion in denying fees.

To prevail on a Rule 219(b) motion, the moving party must show: "(1) proof of the truth of the matters asserted that were denied by the nonmovant; (2) that the nonmovant lacked good reason to deny the facts asserted; and (3) the materiality to the litigation of the facts as to which admissions were sought." Citing, Exchange National Bank of Chicago v. DeGraff, 110 Ill. App. 3d 145, 160 (1982).

This is an excellent cases for commercial litigators as it allows the recovery of attorney fees for the wrongful denial of requests to admit.

Edward X. Clinton, Jr.

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