SEC “Zombie Claims” Not Reactivated With New Law, Penny Stock Fraud Charged With

The seal of the United States Securities and Exchange Commission at their headquarters in Washington, DC, United States, on May 12, 2021. REUTERS / Andrew Kelly

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(Reuters) – Congress has done the United States Securities and Exchange Commission a favor in this year’s defense spending bill, giving the SEC 10 years instead of just five to sue for restitution against fraudsters.

But according to two defendants in a sec trial Alleging a massive penny stock fraud scheme, lawmakers failed to empower the agency to revive claims that were dead by the time the new law was passed.

Defense attorneys for Vedder Price and DLA Piper argued in dismissal motions filed Wednesday for Graham Taylor and Paul sexton that the clock has passed at least a year before Congress extended the deadline for SEC rendition requests in the National Defense Authorization Act. (Yes, strangely enough, after intense lobbying from then-SEC Chairman Jay Clayton, lawmakers inserted the SEC provision into the forthcoming defense spending bill, which came into effect on January 1st.)

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The defendants argue that the specific wording of the restitution extension does not allow the SEC to apply the provision retroactively to expired claims – and that the SEC’s attempt to exercise law against targets that were in the clear is not only fundamentally unfair, but also a potential violation of the Constitution’s ex post facto clause.

“Why do we have a statute of limitations in the first place? Taylor’s attorney Michael Quinn of Vedder Price said. “To be free from it all for two and a half years and then have it come back just seems wrong to me. “

The SEC did not respond to my email request on the Taylor and Sexton motions, but argued in response to another defendant’s protest against NDAA’s retroactive claim that the text of the law specifically extends the time limit for restitution in all cases started after January 1, 2021. The penny stock case has been filed in August, the SEC said, so the longer the statute of limitations applies.

The SEC also said that the Constitution’s ex post facto clause prohibits retroactive application only of laws relating to criminal acts, not civil enforcement proceedings.

The SEC complaint in Boston federal court makes Taylor and Sexton secondary players in a multinational ploy to manipulate penny stock prices through covert stock sales by controlling shareholders. The controlling groups have reportedly used offshore shell companies, foreign bank accounts and secret phone lines to sell shares in the over-the-counter market.

Taylor and Sexton argued that the SEC complaint did not allege any wrongdoing on their part after 2014 or 2015. (The government claims other members of the scheme continued the fraud until at least 2019). that the SEC waited too long to ask them for a monetary penalty, since the NDAA did not extend the five-year limitation period for SEC sanction requests. The provision only addresses restitution in SEC lawsuits alleging fraudulent intent, overturning the five-year deadline for restitution claims that the U.S. Supreme Court imposed in 2017 Kokesh v. DRY.

The question, then, is whether the wording of the NDAA provision – which says the extension applies to proceedings initiated after the enactment of the law – applies retroactively to revive dead claims. Taylor and Sexton argued that he did not pass the Supreme Court test in the 1994s Landgraf v. USI Film Products. Congress did not expressly request that the law authorize the SEC to bring back claims against the zombies, according to the termination briefs, and the ambiguity is supposed to be resolved in favor of the defendants.

When Congress enacted the Sarbanes-Oxley Act in 2002, it used language similar to the text of the NDAA’s restitution provision to extend the statute of limitations on certain securities fraud claims. The 2nd United States Court of Appeals ruled in an influential 2004 decision in Regarding the acceptance of a business mortgage that the Sarbanes-Oxley statutory extension could not be used to revive claims that were dead when the law was passed because Congress did not unambiguously spell out the retroactive application of the provision.

Taylor and Sexton argued that the same reasoning should prevail in their case – all the more so, argued lawyers for Sexton at DLA Piper, because Congress should have known how the courts interpreted Sarbanes-Oxley when lawmakers said adopted substantially identical language in the NDAA.

The defendants made their ex post facto clause as a safeguard argument, insisting that even though the SEC enforcement action is a civil matter, the SEC uses restitution to penalize targets so that the constitutional clause applies. The SEC noted in its brief opposing another defendant’s revocation motion that in September a Los Angeles federal judge rejected parallel ex post facto arguments about the NDAA provision. But Sexton’s brief argued that there was enough doubt about the constitutionality of the use of the NDAA provision to revive deadly claims that the judge in the penny-stock case, U.S. District Judge William Young, “should avoid interpreting the NDAA in a way that could potentially result in ex post facto sanction.

Young’s interpretation of the retroactive effect of the NDAA’s disgorgement provision, attorney for Taylor Quinn said, will reverberate beyond the penny stock case as the SEC initiates further action. execution based on disgorgement requests that were dead before the new law was passed. “This is the first case,” Quinn said. “It won’t be just one, that’s for sure.”

Read more:

Congress hid big SEC giveaway in defense spending bill pending Trump signing

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