Gordon & Rees Miami partner Joseph A. Sacher recently obtained favorable results for numerous clients in two, separate enforcement actions brought by the U.S. Securities & Exchange Commission (“SEC” or “Commission”) in two forums, the SEC’s in-house Administrative Court in Washington, D.C., and the U.S. District Court for the Southern District of Florida.
Administrative Law Judge Enters Initial Decision in Case of First Impression Involving the EB-5 Visa Industry
On March 24, 2016, an Administrative Law Judge (“ALJ”) entered an Initial Decision in the SEC’s in-house Administrative Court in a case of first impression. The SEC charged two companies, based in Florida and Hong Kong, with wrongfully assisting 150 people with investments in EB-5 Visas, by acting in an unregistered capacity as a Broker. Congress created the EB-5 Visa Program in 1990 to stimulate the U.S. economy through job creation, by allowing immigrants to invest at least $500,000.00 in authorized programs that are intended to create jobs, in return for U.S. citizenship.
Last year, following a multi-year investigation, Mr. Sacher assisted his clients, two entities and their two principals, with a negotiated and bifurcated settlement. As part of the settlement, the SEC charged the corporate entities, but not their principals. In turn, the entities entered into Consent Orders without admitting or denying the allegations against them, and the corporate entities reserved their right to contest the amount of disgorgement and civil penalties requested by the Commission.
The ALJ declined to order civil monetary penalties, despite the Commission’s request, noting that there was no fraud or mismanagement by the entities or their owners, and that they could not have foreseen the enforcement action by the SEC, since the Commission had never previously regulated this type of activity. Furthermore, while the Initial Decision ultimately ordered the corporate entities to pay $3.2 million in disgorgement, based on the commissions the companies collected without being registered as broker-dealers, the ALJ expressly noted that the disgorgement would be difficult to collect, because the SEC entered into a partial settlement in which it agreed not to charge the principals, despite the fact that the two corporate Respondents were no longer operating and were insolvent.
Mr. Sacher was quoted by Law360 on March 28, 2016, in an article titled, “SEC Orders EB-5 Brokers To Pay $3.2M Over Unlawful Fees.” In the article, Mr. Sacher called the decision a “pyrrhic victory for the SEC,” and further stated that, “on a personal note, having previously and successfully tried the issue of ‘unregistered broker-dealer-activity’ in SEC v. Kramer, I regret that I did not have the opportunity to try the issue of liability before a U.S. District Court Judge or Jury, to let them decide whether the broker-dealer registration laws were violated here in this matter, the first non-fraud case involving the EB-5 industry.” In Kramer, a leading decision in the area of broker-dealer registration, the U.S. District Court found that the defendant, who was charged with unregistered broker-dealer activity, was only a “finder,” not a broker under the Securities Exchange Act.
U.S. District Court Dismisses SEC’s Voluminous Complaint
Additionally, on November 10, 2015, following extensive briefing, the U.S. District Court for the Southern District of Florida, sitting in West Palm Beach, dismissed a 56 page Complaint filed by the SEC against two of Mr. Sacher’s clients, and others. The SEC’s initial Complaint asserted a total of 29 separate counts alleging numerous violations of the antifraud provisions of the Federal Securities Laws, as well as many other alleged violations, purportedly based on control person liability, books and records violations, and aiding and abetting.
The U.S. District Court agreed with Mr. Sacher’s argument and dismissed the SEC’s Complaint, ruling that the Complaint did not satisfy the basic pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure with respect to allegations of fraud. The Motion to Dismiss also focused on the statute of limitations applicable under 28 U.S.C. § 2462. The Court found that, “given the lack of compliance with Rule 9(b), the Court is unable to determine whether the statute of limitations bars the civil penalty claim. Thus, the Court will defer ruling on this argument at this point.”
Following the ruling, the SEC filed an Amended Complaint in November of 2015, followed by a Second Amended Complaint on April 1, 2016. The most recent version now totals 78 pages.