Articles Posted in Investment litigation

The Securities and Exchange Commission reported its first enforcement action earlier this month against a company that inserted restrictive language in an employee confidentiality agreement to impede the whistleblower reporting process. In this action, the SEC charged that engineering firm KBR, Inc. violated whistleblower protection rule 21F-17 under the Dodd-Frank Act. (Click here for Order).

The SEC uncovered certain employees who were subject to the internal investigation process were required to sign confidentiality agreements. Among other things, the agreements included language that required the employee to first discuss what they were going to say to the SEC with in-house counsel and that violation of the confidentiality agreement could result in termination of employment.

As a result of this agreement, the SEC imposed a relatively modest fine of only $130,000. The Director of Enforcement for the SEC stated that, “By requiring its employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us. SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.”
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On November 13, 2014 the New Jersey Supreme Court added New Jersey to the growing number of states that have established complex business litigation programs. Effective January 1, 2015, designated judges in each county will provide individualized case management to complex commercial and construction cases that meet the required criteria. The Supreme Court of New Jersey will designate the specific judge who will participate in the program and these judges will receive extensive specialized training in areas that are specific to business litigation.

Attorneys will self-designate their case for this program on the civil case information statement or they may move for inclusion or removal from this program depending on what opposing counsel may or may have not selected. Case will have a minimum $200,000 threshold but in certain circumstances a case may be included in the program due to the complex nature of issues even if the amount in controversy is less than $200,000.

The result of the program will be a win for all parties involved. Consistency will be developed as fewer judges will be ruling on complex commercial disputes. This will help the attorneys provide better cost benefit advice to their client based upon what they can expect at trial.

Judges will benefit as well as they will gain more experience in handling complex business disputes and gain experience and insight into what works and does not work from the point of view from the bench. For example, the judges will see what impact their discovery ruling has at the trial stage and whether they would have liked more information on a particular topic. Now the judges will see what impact their discovery ruling has at trial. In the past, a discovery judge might limit an area of inquiry, but at trial you are faced with a different judge looking down at you with a perplexed look wondering why you did not develop this through further discovery.
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For those of us that actually read the bottom of their lawyer‘s email you probably noticed the arcane “IRS Circular 230 Disclosure” that stated the advice contained in this email is not intended and cannot be used for tax avoidance purposes etc… You then probably thought to yourself, but I was just confirming lunch, what the heck does this have to do with tax advice anyway? Perhaps a little perspective is in order.

Circular 230 was the IRS’s compilation of regulations regarding tax services provided by lawyers and other tax professionals with respect to the tax shelter abuses of the 1990s. Circular 230 set the minimum standard with respect to written tax advice and therefore wound up being placed on everything.

Thankfully the IRS issued new rules on June 12 (click here for PDF of rule) which included the following statement; “Treasury and the IRS expect these amendments will eliminate the use of a Circular 230 disclaimer in email and other writing.” Good riddance and where are we meeting for lunch again?
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The SEC’s Office of the Whistleblower (OWB) awarded individuals over $14 million in 2013 for their “significant and original contributions” to successful enforcement of the securities laws. The OWB is now in its 3rd full year and the number of tips and complaints is trending upward. OWB reports that it received 3,001 tips and complaint in 2012 and 3,238 in 2013. These numbers are certain to increase as the OWB continually expands the whistleblower laws.

For example, in July 2013, a new pilot program was put into place that protected federal grant workers from whistleblower retaliation. In a nutshell, the new program is designed to protect an employee from employment retaliation for reporting mismanagement of a federal grant or contract funding. An employee who claims to have been retaliated against must file a claim with the Inspector General of the agency involved. If no retaliation is found, the employee can then file a complaint in federal court. If successful, in addition to reinstatement and back pay, attorneys’ fees and costs will also be awarded
Last month I discussed the new path the Securities and Exchange Commission was embarking upon in its efforts to enforce the securities laws from the outside in with the use of deferred prosecution agreements. I noted this was a philosophical change made from the highest levels of the SEC to pursue companies that violate the securities law by targeting employees of suspected target companies. The questions you need to ask yourself as an employee of a company that is involved in fraud are; do I wait until the government agency contacts me as part of its investigation, or do I contact the government agency when I have knowledge of my employer’s widespread fraud? By contacting the government first, you may be entitled to a piece of the substantial awards discussed above. In addition, by taking preemptive action you can protect yourself from being brought down by fellow employees who allege you were part of the fraud.
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Late last year the Securities and Exchange Commission announced that it had entered into its first deferred prosecution agreement (DPA) with an individual who worked in an administrative capacity at a large hedge fund. The DPA allowed the SEC to successfully go after hedge fund manager Berton Hochfield who reportedly stole more than 1.5 million from his hedge fund and overstated the fund’s performance to investors.

A deferred prosecution agreement is a voluntary agreement between an individual and a government agency, in this case the SEC, where the agency will agree to lesser charge in exchange for the individual’s cooperation in connection with the investigation. In the Hochfield case, Scott Herckis voluntarily came to the SEC with concerns over certain accounting irregularities involving Hochfield’s hedge fund, Heppelwhite Fund, LP. Herckis produced a substantial number of documents and described in detail to the SEC how Hochfield perpetrated his fraud. Based upon the information Herckis provided, the SEC was able to take emergency action and freeze the fund’s assets within weeks of Herckis reaching out to the SEC. While Herckis did not get off “scot free” for his participation in the fraud scheme, he did receive a substantially reduced penalty. For example, instead of being unable to be a hedge fund administer for the remainder of his life, Herckis was only prohibited from being a fund administrator for 5 years. Herckis also had to disgorge the fees (approximately $50,000) he received in connection with the fraud.

This DPA is significant because it seems to support new SEC Chair Mary Jo White’s earlier statement that the SEC is going to strongly pursue individuals on the periphery to build its case against greedy insiders and their business entities. By adopting this outside in approach and offering DPAs to periphery individuals, the SEC is placing a significant carrot in front of those who were part of an overall fraud scheme but perhaps feel trapped and want out but do not know how to safely do so.
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For Immediate Release
Contact: Douglas M. Leavitt Danziger Shapiro & Leavitt, P.C.
Danziger Shapiro & Leavitt, P.C.
Announces Investigation of NQ Mobile, Inc.

PHILADELPHIA, PA, December 16, 2013- Danziger Shapiro & Leavitt, P.C., a Philadelphia based litigation law firm, ( is investigating securities fraud claims against NQ Mobile, Inc.. (NYSE: NQ). This inquiry centers on allegations that statements issued by NQ Mobile regarding its business operations and the company’s financial condition were deceptive and false.

NQ Mobile purports to provide security solutions for the mobile phone market. On October 24, 2013, a report issued by Muddy Waters states that NQ Mobile had engaged in fraudulent practices by, among other things, vastly overstating its market share in China by asserting it had a 55% share of the market when in fact it only had a 1.5% market share and that at least 72% of NQ Mobile’s alleged Chinese security revenue is fictitious. Upon the release of this news, in less than 36 hours, shares of NQ Mobile dropped approximately 56%, representing over $500 million in losses to investors
Individuals who purchased NQ Mobile shares between May 5, 2013 and October 24, 2013 who would like to learn more about this investigation, have an interest in joining a class-action lawsuit, or have any questions concerning this announcement and their rights, should on or before December 23, 2013, contact Douglas M. Leavitt, Esquire: (215) 545-4830 or visit: You may also email Mr. Leavitt at

This press release may be considered Attorney Advertising in some jurisdictions under the applicable law and ethical rules.
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Well this doesn’t happen every day – or does it? The SEC finds itself being investigated for improper financial holdings. According to a November 2013 Reuters post, federal prosecutors and the office of the inspector general of the SEC contacted employees in the SEC’s New York office about trading in companies that are under SEC investigation. This is a direct violation of internal SEC rules. While the report indicates that it does not appear to be a widespread issue, it is another black eye for the SEC that is still marred by the 2009 allegations regarding insider trading by SEC employees. Stay tuned to see how this plays out.
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In the past the Securities and Exchange Commission had allowed defendants to settle civil and administrative claims brought by the SEC without requiring defendants to admit or deny liability. However, there has been a change of policy with the recent appointment of the new SEC Chair Mary Jo White. Now, in “egregious” cases, the SEC will push extremely hard for, and in fact almost require, an admission of wrongdoing.

This new policy creates a tactical dilemma for defense counsel on several fronts. Defense counsel needs to be cognizant that shareholders will be able to use the admission of wrongdoing as the main exhibit in any civil lawsuit brought against their client. As a result, timing is a consideration. Settle to early before the statute of limitations runs on the civil side and the results can be disastrous.

However, the real conundrum for defense counsel is predicting how the Department of Justice will react in its parallel criminal investigation when its target has just admitted wrongdoing in writing. Making matters worse is the fact that it is the “egregious” cases that the DOJ is interested in. Will DOJ prosecutors be satisfied with the admission of wrongdoing in the SEC case or use it as low hanging fruit in its criminal prosecution?

In addition, can you even enter into a settlement with the SEC where you admit wrongdoing and not commit perjury? Defendants will occasionally give testimony to the SEC early in the process minimizing their role. Does the admission of wrongdoing in the settlement directly contradict the earlier statements? Do you need to take the 5th amendment earlier on in the SEC investigation to prevent this from happening?
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Ever wonder what an “instrument under seal” is? When the word [SEAL] is placed next to the signature block at the end of the written guaranty or loan agreement, does it have any impact? The answer is a big YES.

Earlier this summer, the Pennsylvania Supreme Court confirmed what we have always told our clients when they have asked us this question. When a written contract states that it is an “instrument under seal” and has the word “SEAL” next to or part of the signature block, the statute of limitations to enforce the terms of the written contract in question has been increased from the standard 4 year limitation period to 20 years!

So what is the important take away here? Review your loan agreements and other agreements (a guaranty for example) to make sure this language is standard on all agreements going forward. Not only does this give you a longer time period to decide if you want to bring legal action for nonperformance, but it also makes your negotiable instruments more marketable should you decide to sell them to third parties.
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On July 9, 2012, the Financial Industry Regulatory Authority (FINRA) implemented a new securities rule governing the obligation of brokers to make “suitable” investment recommendations to customers. While FINRA Rule 2111 is based upon NASD Rule 2310 – the prior suitability rule – FINRA Rule 2111 expands the old rule in several significant ways.

The Suitability Obligation

Investors go to their stockbrokers not only to get advice as to which stocks are likely to offer good returns. They also are seeking input on which investments are suitable for their specific circumstance. The suitability rule is intended to provide the investor with peace of mind that his/her broker has reasonably believes the broker’s investment recommendations are appropriate at the time the investment is made. Unfortunately, we have seen far too many situations where the proposed investment makes more sense for the broker than for the investor.

Rule 2111 requires that brokers:

“have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile”

FINRA Rule 2111(a) essentially takes existing case law and codifies it into three specific suitability claims. (1) reasonable-basis suitability; (2) customer-specific suitability; and (3) quantitative suitability.

1. Reasonable-Basis Suitability Reasonable-basis suitability means that a broker must perform reasonable diligence to understand the investment products and strategies that the broker recommends to her customer. The broker must also be able to demonstrate that she actually understands the product that she is recommending to her client.

2. Customer-Specific Suitability Customer-specific suitability means that a broker must have a reasonable basis to believe that her recommendations are suitable for a customer based on the customer’s “investment profile.” The broker must be able to establish that she understands who her client really is, what their needs are, and how this recommendation fits into what they are trying to accomplish.

3. Quantitative Suitability Quantitative suitability means that a broker who has control over a customer’s account must have a reasonable basis to believe that a series of recommended securities transactions is not excessive (often called a churning analysis). The broker’s must be able to establish that her overall trading record comports with the client’s goals.

New Requirements Imposed Upon Brokers

FINRA is clearly trying to send a message to brokers in this new economic climate and that message is “You will be responsible to your clients.” They are also expanding the potential definition of “clients” to include those who only had an informal relationship with the broker or prospective customers who may never have opened an account with the firm. Even recommended strategies, such a “hold” recommendation, may come under the purview of new FINAR Rule 2111. There is no requirement that the advice resulted in a commission before Rule 2111 comes into play. Simply put, brokers are now responsible for all customer recommendations.
While this is not an exhaustive discussion of the impact the new FINRA Rule will have upon brokers and their customers, it is clear FINRA is trying to chart a new course with an emphasis on protecting the individual customer from abuse. FINRA arbitration is relatively cheap and quick, especially in comparison to litigation a case in court. In fact, there is an expedited process for the elderly wherein you can file your complaint and have your case heard in less than 9 months.
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