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January 31, 2024

Actions in the Federal Courts – Month in Review Newsletter – January 2024

If you want to see the full list of cases we’re following, view our Case Tracker here.

SEC and Investors Win as Court Holds Multiple Crypto Offerings Are Securities Deserving of Investor Protections

At the heart of most crypto-related enforcement actions brought by the SEC is whether the offerings are securities subject to the federal securities laws.  If not, then the SEC lacks the authority to protect investors, markets, and financial stability from these typically fraudulent and unregistered offerings.  Federal district court Judge Jed S. Rakoff, in the Southern District of New York, recently issued another important decision finding that a vast cryptocurrency scheme did indeed involve the offer and sale of securities.

The SEC filed an enforcement action in February 2023 alleging that Terraform Labs PTE, Ltd. and Do Kwon had orchestrated a multi-billion-dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.  The case is SEC v. Terraform Labs PTE LTD & Do Kwon, No. 1:23-cv-1346 (S.D.N.Y.).  On December 28, 2023, Judge Rakoff delivered the SEC a decisive win, rejecting the defendants’ attempts to avoid accountability for their lawbreaking.  He ruled that Terraform’s four crypto assets were securities because they satisfied what’s known as the Supreme Court’s Howey test for investment contracts. Judge Rakoff found that with respect to each token, investors were led to believe that they would profit from the defendants’ efforts to promote the tokens. In other words, as a matter of law, Judge Rakoff determined that these crypto offerings were in fact securities subject to the federal securities laws and the SEC’s jurisdiction.

That didn’t end the case because the SEC is also alleging fraud and those claims are set for trial in March of this year.  But regardless of the outcome on the fraud claims, the December 28 decision is another huge win not just for the SEC, but more importantly for investors who continue to be bombarded with countless crypto offerings that do not comply with the SEC’s investor protection requirements.  The Dec. 28th decision will help ensure that investors receive the vital registration, disclosure, and anti-fraud protections under the securities laws that have protected investors for almost a century.  Judge Rakoff’s ruling sends a clear message to cryptocurrency peddlers that they are not exempt from the rules of the road that govern all other securities trading.

SEC and Better Markets Defend Private Fund Advisers Rule That Protects Teachers, Firefighters, and Policemen Saving for Retirement

On December 22, 2023, we filed an amicus brief in the Fifth Circuit, defending the SEC’s rule requiring more transparency and fairness in the world of private funds.  The case is National Association of Private Fund Managers v. SEC, No.  23-60471 (5th Cir.), another in a series of industry attacks to preserve the profitable status quo by nullifying rules designed to protect investors and improve our markets.  The SEC’s well-crafted rule requires that private fund advisers disclose more information about the funds they manage, including basic information about fund performance, fees, and expenses.  It also limits certain advisor activity, such as giving preferential treatment to some investors in the fund.  In our brief we showed that even supposedly sophisticated investors need disclosure to make sound investment decisions and that they are vulnerable to abusive practices like all investors.  We also showed that these reforms will benefit millions of everyday investors through their retirement funds, since many pension funds have poured trillions of dollars into private funds, representing the savings of the teachers, firefighters, and policemen who serve our communities.  The court has scheduled oral argument for Monday, February 5, 2024, with a decision likely to follow with several months thereafter.

Exxon Seeks to Muzzle Shareholders by Asking Court to Block Climate Resolution From Being Presented for a Vote

On January 21, 2024, Exxon Mobil Corp. filed a lawsuit against two organizations that want to put a climate-related resolution to a shareholder vote at the company’s annual meeting scheduled for May 29, 2024.  The case is Exxon Mobil Corp. v. Ajuna Capital LLC and Follow This, No. 4:24-cv-00069-O (N.D. Tex.).  The resolution calls upon Exxon to accelerate the pace of its reductions in greenhouse gas emissions (GHG).  But Exxon’s management is fighting the resolution by asking a federal district court in Texas to declare that the resolution may properly be excluded from the company’s proxy statement and not presented for a shareholder vote.  The case has drawn attention in part because of the company’s unusual strategy of seeking declaratory relief from a court rather than seeking the SEC’s approval for excluding the resolution.  It is also striking because of its underlying theory:  The Complaint makes the startling and incredible claim that the resolution may be excluded because the issue of how to reduce GHG emissions is one that “deals with a matter relating to the company’s ordinary business operations.” The case has potentially serious implications for shareholders who seek to influence the major priorities of the companies they own.  If Exxon wins, the voices of shareholders will be stifled on important matters of corporate governance that go well beyond simply routine or ordinary matters.

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