This Week In Securities Litigation

by Dorsey & Whitney LLP

The Sixth Circuit last week concluded that Morrison, which held that Section 10(b) does not have extraterritorial reach, is inapplicable to Advisers Act Section 10(b). The DC Circuit, on rehearing, reaffirmed its prior holding that a portion of the Commission’s Dodd-Frank conflict rules violates the First Amendment.

SEC enforcement prevailed on a summary judgment motion in an action centered on false statements made by an issuer regarding a claimed cancer treatment. In addition, two new offering fraud actions were filed along with an insider trading case and another action centered on the misappropriation of funds in connection with an EB-5 program.


Statement: Commissioner Luis A. Aguilar issued a statement titled Enhancing the Commission’s Waiver Process (August 27, 2015). The statement calls for more transparency in the waiver process and a flexible approach while discussing a process adopted last year regarding conditional waivers (here).

SEC Enforcement — Litigated cases

False statements: SEC v. Cook, Civil Action No. 1:13-cv-01312 (S.D. Ind.) is an action against Timothy Cook, Xytos, Inc. and Asia Equities. The complaint alleged that beginning in 2010 Mr. Cook made materially misleading statements regarding the company, supposedly in the biomedical business, and a claimed cancer treatment. The SEC also alleged that he sold unregistered shares in the firm. In fact there was no treatment. The court granted summary judgment in favor of the Commission, concluding that Mr. Cook violated Securities Act Sections 5(a) and 5(c) and 17(a) and Exchange Act Section 10(b). The court imposed a permanent injunction, an officer and director bar, a penny stock bar and ordered disgorgement in the amount of $642,828. The Court will consider the amount of a civil penalty. Default judgments were entered against the two entities. See Lit Rel. No. 23328 (August 25, 2015).

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 3 civil injunctive cases and 1 administrative actions, excluding 12j and tag-along proceedings.

Offering fraud: SEC v. Schumacher, Civil Action No. 15-6388 (C.D. Cal. Unsealed August 26, 2015) is an action which names as defendants Harrison Schumacher and his two firms, Quantum Energy LLC and Quaneco LLC. Since 2010 the defendants have raised $12.3 million through a series of five offerings from over 300 investors. Those investors were told the funds would be used to explore for and develop oil and gas properties. Instead they were diverted to other uses by the defendants. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. See Lit. Rel. No. 15-6388 (August 27, 2015).

Insider trading: SEC v. Aggarwal, Civil Action No. 2:15-cv-06460 (C.D. Cal. Filed August 25, 2015). Defendant Ashish Aggarwal worked as an analyst at J.P. Morgan Securities LLC in its San Francisco office. His friend, defendant Shahriyar Bolandian, worked for an e-commerce company founded by Kevan Sadigh, also a defendant in the SEC’s action. Each defendant declined to testify during the staff’s investigation. The case involved trading in two deals. The first involved Integrated Device Technology, Inc. and PLX Technology, Inc. The second involved the ExactTarget, Inc., a provider of email and cloud marketing services, and, Inc., a provider of enterprise cloud computing services. Following the retention of JPM in each instances there were multiple text messages between Messrs. Aggarwal and Bolandian and multiple trades by Mr. Bolandian and Mr. Sadigh. After the first deal announcement Messrs. Bolandian and Sadigh sold their interest in PLXT, yielding, respectively, gains of $36,200 and $41,200. After the second Mr. Bolandian’s accounts had profits of about $317,000. Mr. Sadigh had profits of about $178,000. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is pending. See Lit. Rel. No. 23327 (August 25, 2015).

Offering fraud: In the Matter of Randy E. Olshen, Adm. Proc. File No. 3-16549 (August 25, 2015) is a proceeding naming as a Respondent Mr. Olshen, the founder and President of Innovative Health Solutions, LLC, a sports hydration drinks company. Beginning in 2009 Mr. Olshen is alleged to have implemented a plan to sell unregistered shares in the company using fabricated accounting records. Over $7 million was raised from about 50 investors. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). To resolve the matter Mr. Olshen consented to the entry of a cease and desist order based on the Sections cited in the complaint. In addition, an order was entered barring him from the securities business and from participating in any penny stock offering. In view of the requirement that he pay restitution in the related criminal matter in which he pleaded guilty, no restitution or penalty was ordered.

Misappropriation: SEC v. Path America, LLC, Civil Action No. 2:15-cv-01350 (W.D. Wash. Filed August 24, 2015). Named as defendants in this action are Lobsang Dargey and seven LLCs he controls including Path America, LLC, Path America SnoCo, LLC and five other similarly named entities. Mr. Dargey also controls the bank account for each entity through with the program funds flowed. The action centers around two projects, the Tower Project and the Farmer’s Market Project. For the Tower Project, beginning in November 2013 Mr. Dargey, Path America and three other controlled entities raised about $85 million from 170 Chinese nationals as investments in real estate developments in Seattle. Investors acquired a limited partnership interest for $500,000 plus an administrative fee of $45,000.For the Farmer’s Market project, beginning in 2012 Mr. Dargey, Path America and other related entities raised about $41 million from 82 Chinese nationals as investments in a residential real estate development in Everett, Washington. The PPM was substantially similar to the one for the Tower Project. Both PPMs were false and misleading, according to the complaint. Both represented that the funds would only be used in accord with the business plans provided to USCIS. In fact they were not. Overall defendants are alleged to have misappropriated about $17.6 million of investor funds. The complaint alleges violations of Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). The Commission secured an emergency freeze order. The case is pending. See Lit. Rel. No. 23326 (August 25, 2015).


Net capital: The regulator fined Charles Schwab & Co. $2 million and censured the firm in connection with net capital violations between May 15, 2014 and July 1, 2014. The violations arose because on certain dates the inflows of cash to the firm exceeded the amounts it could invest so it made large, unsecured loans to its parent resulting in net capital violations. In doing that the firm failed to consult with its regulatory group, demonstrating a lack of procedures.

Court of Appeals

Extraterritorial reach: Lay v. U.S., Case No. 13-4021 (6th Cir. August 17, 2015). Defendant Mark Lay was a registered investment adviser. He operated two funds, one on shore and the other off shore, in which he invested funds for the Ohio Bureau of Workers’ Compensation. The off-shore fund suffered losses after he leveraged it, contrary to the rules of the Bureau. Although he concealed the losses and the leverage eventually the Bureau found out and withdrew its funds. Only $9 million of its $225 million investment was returned. Mr. Lay was convicted of securities fraud and other charges. He argued, however, that the securities fraud conviction, based on Advisers Act Section 206, was barred by Morrison v. National Australia Bank, Ltd., 561 U.S. 247 (2010). There the Court held that Exchange Act Section 10(b) did not have extraterritorial reach based on a presumption against such reach absent Congressional intent to the contrary. The Court rejected this contention, concluding that “The problem with defendant’s argument is two-fold: (1) the Securities Exchange Act and the Investment Advisers Act seek to regulate different aspects of securities transactions, and (2) unlike Morrison, the only aspect of this case not tied to the United States is that the fund in question is based in Bermuda. All other aspects of the case are centered in the United States.” In addition, the focus of the Advisers Act is the prevention of wrongful practices by the adviser, the Court determined. This contrasts sharply with the Exchange Act which is centered on the purchase or sale of a security. According, the court concluded that Morrison does not apply to Section 206 of the Advisers Act.

Conflict mineral rule: National Association of Manufactures v. SEC, No. 13-5252 (D.C. Cir. Opinion issued August 18, 2015). This suit challenged the SEC’s conflict minerals rules, written under Dodd-Frank. The initial decision upheld the rules but rejected one provision as contrary to the First Amendment (here). On rehearing by the panel, the result was the same. The rehearing was granted because the en banc court, in another case, reinterpreted the Supreme Court’s decision in Zander v. Office of Disciplinary Counsel of the Supreme Court of Ohio, 471 U.S. 626 (1985) which governed the standard of review in compelled speech cases regarding misleading advertising and broadened it to include labeling for country of origin for meat cuts. That standard is more relaxed than the one applied in the prior decision based on Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557 (1980). Nevertheless, the court refused to apply Zander.

To bolster its decision, the Court added an alternate holding keyed to three points. First, under Central Hudson the court must assess the interest motivating the disclosure requirement. The SEC noted that it is ameliorating the humanitarian crisis in the DRC. This is sufficient. Second, the effectiveness of the measure in achieving that goal must be assessed. The SEC offered little on this point the Court noted. A review of various materials, including the potential costs, lead the Court to conclude that there was little but speculation. “[T]his presents a serious problem for the SEC because . . . the government must not rest on such speculation or conjecture . . . Rather the SEC had the burden of demonstrating that the measure it adopted would ‘in fact alleviate’ the harms it recited . ..” “This in itself dooms the statute and the SEC’s regulations” the Court concluded.

Finally, the Court considered if the compelled disclosures were “purely factual and uncontroversial.” The descriptions of “conflict free” or “not conflict free” are hardly factual and non-ideological. This requires an issuer to tell consumers if its goods are ethically tainted.” “By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

Related Case Law

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at:

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit
  • New Relic - For more information on New Relic cookies, please visit
  • Google Analytics - For more information on Google Analytics cookies, visit To opt-out of being tracked by Google Analytics across all websites visit This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at:

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.