Venue Decision Could Affect Forums For SEC Enforcement Actions
Say what you want about Chris Benyo and the SEC’s trial unit, but they are fighters. Who, you say? From 2000 to 2001, Benyo was the Senior Vice President for Marketing and Network Development for PurchasePro, which made software for online “business-to-business” sales. And much later, the SEC’s trial unit became his foil. But way before that, and on Benyo’s watch at the company, Purchase Pro began to document sham transactions in September 2000 to inflate its reported revenue. The company also backdated or entirely falsified new agreements with AOL, which had become a significant business partner by late 2000.
In January 2005, federal prosecutors indicted Benyo, three other PurchasePro executives, and two executives from AOL in the Eastern District of Virginia. On the same day, the SEC filed a civil enforcement action against the same defendants in the District of Columbia, and waited for the inevitable convictions to make the civil case fall in turn. Only it didn’t turn out way. Staff from the trial unit observed much of the criminal trial and watched as all of the defendants in the criminal case were acquitted. Some expected the SEC to pack up its bags at that point and dismiss its own case. It didn’t. The Commission saw it through and secured a finding of liability against Benyo for aiding and abetting securities fraud by PurchasePro.
But it didn’t end there. Benyo appealed, and this summer, won a reversal of the judgment against him. See SEC v. Johnson(link is external), 650 F.3d 710 (D.C. Cir. 2011). The U.S. Court of Appeals for the D.C. Circuit held that the case had actually been doomed from the beginning, when the SEC chose to file in the District of Columbia. As Benyo had argued in (1) his answer, (2) a motion to dismiss, (3) after trial in a motion for judgment as a matter of law, and (4) on appeal, venue simply wasn’t proper under Section 27 of the Exchange Act. That section allows the SEC to bring enforcement actions “in the district wherein the defendant is found or is an inhabitant or transacts business” or “in the district wherein any act or transaction constituting the violation occurred.” 15 U.S.C. § 78aa.
As Benyo noted, the District of Columbia wasn’t any of those things for him. Still, the SEC argued that D.C. was a permissible forum because under the “co-conspirator venue theory, Benyo had been “in league with a defendant who . . . act[ed] within the District.” Johnson, 2011 WL 2535601, at *2. While Benyo’s actions may have taken place in Nevada, the company’s public filings were made in D.C.
The D.C. Circuit wasn’t having it. Benyo relied on Central Bank of Denver v. First Insterstate Bank of Denver, 511 U.S. 164 (1994), in which the Supreme Court held there was no private right of action for aiding and abetting securities fraud and strongly implied there could be no cause of action for any form of “secondary liability for fraud that does not require proof of each of the elements of the primary violation. See id. at 180, 184. After that case was decided, Congress enacted Exchange Act Section 20(e) to give the Commission express authority to pursue the aiding and abetting claims that private plaintiffs could not. But that section did not allow the SEC to sue for conspiracy to commit securities fraud. So, an allegation of conspiracy without proof of actual participation in the fraud was not enough under Central Bank of Denver and therefore an insufficient basis for venue.
The court was having that. It noted that by its terms, Section 27 foreclosed the co-conspirator theory of venue, and that a suit simply could not be brought in a forum where venue had no statutory basis. No act or transaction in the District? No case in the District. The court noted that the Supreme Court had previously rejected the co-conspirator theory in a suit under the antitrust laws, which allow a plaintiff to sue only in a district wherein the defendant “resides or is found or has an agent.” Bankers Life & Casualty Co. v. Holland, 346 U.S. 379, 384 (1953) (quoting 15 U.S.C. § 15). While the SEC argued harmless error, the court held that reversal was the only appropriate remedy.
This case has received scant attention since it came down in June. But it could affect operations in the SEC’s Enforcement Division, and especially its trial unit. Many of its cases involve multiple defendants acting in multiple districts. Without the ability to consolidate them into a single forum, the result may be several cases brought in several districts to account for the actions of each defendant. Given the recent budgetary problems faced by the Commission, it could even lead to potential defendants being investigated but not sued as the trial staff focuses on the highest-profile targets. As of this writing, Johnson has not been cited by other courts. It will be somewhat surprising if that doesn’t change soon. It will also be interesting to see if the SEC starts this particular fight over again with Benyo, this time in the U.S. District Court for the District of Nevada.