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Chairman of SEC Identifies Three Key Pressure Points in the SEC's Current Enforcement Efforts, Including Rarely Invoked Section 20(b) of the Securities Exchange Act

In a presentation at the NYC Bar Association's Third Annual White Collar Crime Institute on May 19, 2014, SEC Chair Mary Jo White identified three areas of focus for the SEC in its current enforcement regime, including use of Section 20(b) to hold individuals primarily responsible for alleged misconduct. Specifically, Chairperson White stated as follows:

"What Is Old Is New

One new approach to charging individuals is to use Section 20(b) of the Exchange Act. Although this section dates back to the original Exchange Act of 1934, chances are you may not be very familiar with it because, frankly, it has not been a common charge. Before you start reaching for your smart phones to look it up, let me save you the trouble. Section 20(b) imposes primary liability on a person who, directly or indirectly, does anything "by means of any other person" that would be unlawful for that person to do on his or her own.[10] This is analogous in the criminal contect to 18 U.S.C. Section 2(b), which provides for criminal liability as a principal for anyone who "willfully causes an act to be done which if directly performed by him or another would be" a criminal violation.[11] We are focusing on Section 20(b) charges where - as is frequently the case in microcap and other frauds - individuals have engaged in unlawful activity but attempted to insulate themselves from liability by avoiding direct communication with the defrauded investors. It is potentially a very powerful tool that can reach those who have participated in disseminating false or misleading information to investors through offering materials, stock promotional materials, or earnings call transcripts, but who might not be liable under Rule 10b-5(b) following the Supreme court's decision in Janus because they may not be the "maker" of the statement.[12] 

Just as importantly, though, as with 18 U.S.C. Section 2(b), Exchange Act Section 20(b) is a form of primary liability, rather than secondary liability, which would require proof of a separate violation by someone other than the defendant. So, we can use Section 20(b) where aiding and abetting or controlling person theories may fall short because there is no underlying violation by someone else, such as, for example, when the other person who publicly makes the misleading statements lacks knowledge that they were misleading."

For the full text of Chairperson White's remarks, please see IdXUU

Section 20(b) appears to be a powerful tool for future SEC enforcement actions. SFMS will continue to monitor developments in this important field. For any questions, please contact James E. Miller ([email protected]) or Chiharu Sekino ([email protected]).

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