Gale Encyclopedia Of American Law 3Rd Edition Volume 9 P10 ppt

cases the persons who made the transactions, or persons who passed information to those individuals, were found to have violated rule 10b-5. However, not every instance of financial unfairness rises to the level of fraudulent activity under rule 10b-5. In Chiarella v. United States, 445 U.S. 222, 100 S. Ct. 1108, 63 L. Ed. 2d 348 (1980), Vincent F. Chiarella, an employee of a financial printing firm, worked on some documents relating to contemplated tender offers. He ascertained the identity of the targeted companies, purchased stock in those companies, and then sold the stock at a profit once the tender offers were announced. The Supreme Court overturned Chiarella’s criminal conviction for violating rule 10b-5, ruling that an ALLEGATION of fraud cannot be supported absent a duty to speak and that duty must arise from a relation- ship of “trust and confidence between the parties to a transaction.” However, following Chiarella, criminal convictions of lawyers, printers, stock- brokers, and others have been upheld by courts that have ruled that these employees traded on confidential information that was “misappro- priated” from their employers, an issue that was not raised in Chiarella. Moreover, courts have also ruled that the person who passes inside information to another person who then uses it for a transaction is as CULPABLE as the person who uses it for his or her own account. The test for materiality in a rule 10b-5 insider information case is whether the information is the kind that might affect the judgment of reasonable investors, both of a conservative and speculative bent. Furthermore, an insider may not act the moment a company makes a public announcement but must wait until the n ews could reasonably have been disseminated. The Insider Trading Sanctions Act of 1984 (Pub. L. No. 98-376, 98 Stat. 1264) and the Insider Trading and Security Fraud Enforcement Act of 1988 (15 U.S.C.A. §§ 78u-1, 806-4a, and 78t-1) amended the 1934 act to permit the SEC to seek a civil penalty of three times the amount of profit gained from the illegal transaction or the loss avoided by it. The penalty may be imposed on the actual violator, as well as on the person who “controlled” the violator—generally the employing firm. A whistleblower may receive up to 10 percent of any civil liability pena lty recovered by the SEC. The maximum criminal penaltie s were increased from $100,000 to $1 million for individuals and from $500,000 to $2.5 million for business or legal entities. Regulation of the Securities Business Only dealers or brokers who are registered with the SEC pursuant to the 1934 act may engage in business (other than individuals who deal only in exempted securities or handle only intrastate business). Firms act in three principal capacities: broker, dealer, and investment adviser. A broker is an agent who handles the public’s orders to buy and sell securities for a commission. A dealer is a person in the securities business who buys and sells securities for her or his own account, and an investment adviser is paid to advise others on investing in, pu rchasing, or selling securities. Investment advisers are regulated under the Investment Advisers Act of 1940 (15 U.S.C.A. § 80b et seq.). This law provides for registration similar to that in the 1934 act for brokers and dealers, but its coverage is generally not as comprehensive. Certain fee arrangements are prohibited, and adverse personal interests in a transaction must be disclosed. Moreover, the SEC may define and prohibit certain fraudulent and deceptive pra ctices. The SEC has the power to revoke or suspend registration or impose a censure if the broker-dealer has violated federal securities laws or commi tted other specified misdeeds. Similar provisions apply to municipal securities dealers and investment adviser s. Problems may arise in a number of ways. For example, a broker-dealer may recommend or trade in securities without adequate information about the issuer. Churning is another problem. Churning occurs when a broker- dealer creates a market in a security by making repeated purchase from and resale to individual retail customers at steadily increasing prices. This conduct violates securities antifraud provisions if the broker-dealer does not fully disclose to customers the nature of the market. Churning also occurs when a broker causes a customer’s account to experience an excessive number of transactions solely to generate repeated commissions. Fraudulent scalping occurs when an investment adviser publicly recom- mends the purchase of securities without disclosing that the adviser purchases such securities before making the recommendation and then sells them at a profit when the price rises after word of the recommendation spreads. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 78 SECURITIES In 1990 Congress enacted the Penny Stock Reform Act (15 U.S.C.A. § 78q-2), which gives the SEC authority to regulate the widespread incidence of high-pressure sales tactics in the peddling of low-priced speculative stocks to unsophisticated investors. Dealers in PENNY STOCKS must provide customers with disclosure documents discussing the risk of such investments, the customer’s rights in the event of fraud or abuse, and compens ation received by the broker-dealer and the salesperson handling the transaction. Securities Investor Protection Corporation The Securities Investor Protection Act of 1970 (15 U.S.C.A. § 78aaa et seq.) created the Securities Investor Protection Corporation (SIPC) to supervise the liquidation of securities firms suffering from financial difficulties and to arrange for the payment of customers’ claims through its trust fund in the event of a broker- dealer’s BANKRUPTCY. SIPC is a government- sponsored, private, nonprofit corporation. It relies on the SEC and self-regulatory organizations to refer brokers or dealers having financial difficulties. In addition, SIPC has authority to borrow money (through the SEC) if its trust fund from which it pays claims is insufficient. SIPC guarantees repayment of money and securities up to $100,000 in cash equity and up to $500,000 overall per customer. Self-Regulatory Organizations Although the SEC plays a major role in regulating the securities industry, regulation responsibilities also exist for self-regulatory organizations. These organizations are private associations to which Congress has delegated the authority to devise and enforce rules for the conduct of an association’s members. Before 1934, stock exchanges had regulated themselves for well over a century. The 1934 act required every national security exchange to register with the SEC. An exchange cannot be registered unless the SEC determines that its rules are designed to prevent fraud and manipulative acts and practices and that the exchange provides appropriate discipline for its members. Congress extended federal registration to non-exchange, or OTC, markets in 1938 and authorized the establishment of national securities associations and their registration with the SEC. Only one association, the National Association of Securities Dealers, had been established as of the mid 1990s. In 1975 Congress expanded and consoli- dated SEC authority over all self-regulatory organizations. The SEC must give prior approval for any exchange rule changes, and it has review power over exchange disciplinary actions. Investment Companies Under the Investment Company Act of 1940 (15 U.S.C.A. § 80a et seq.), investment companies must register with the SEC unless they qualify for a specific exception. Investment companies are companies engag ed primarily in the business of investing, reinvesting, or trading in securities. They may also be companies with more than 40 percent of their assets consisting of investment securities (securities other than securities of majority-owned subsidiaries and government securities). Investment companies include open-end companies, commonly known as mutual funds. The SEC regulatory responsibilities under this act encompass sales load, management contracts, the composition of boards of directors, capital structure of investment companies, approval of advise r contracts, and changes in investment policy. In addition, a 1970 amendment imposed restrictions on management compensation and sales charges. Every investment company must register with the SEC. Registration includes a state ment of the company’s investment policy. Moreover, an investment company must file annual reports with the SEC and maintain certain accounts and records. Strict procedures safe- guard against looting of investment company assets. Officers and employees with access to the company’s cash and securities must be bonded, and LARCENY or embezzlement from an investment company is a federal crime. In addition, the Investment Company Act of 1940 imposes substantive restrictions on the activities of registered investment companies and persons connected with them and provides for a variety of SEC and private sanctions. State Regulation State securities laws are commonly known as blue sky laws because of an early judicial opinion that described the purpose of the laws as preventing “speculative schemes which have no more basis than so many feet of blue sky” GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION SECURITIES 79 (Hall v. Geiger-Jones, 242 U.S. 539, 372 S. Ct. 217, 61 L. Ed. 480 [1917]). In 1956 the COMMISSIONERS ON UNIFORM LAWS approved the first Uniform Securities Act. A total of 37 states adopted the uniform law, though states frequently diverted from some of its provisions. The commissioners approved a second version of the act in 1985, but only six states adopted the revised version. A third version was approved in 2002. As of 2009, a total of 18 states and territories had adopted the 2002 version, and two other state legislatures were considering its adoption. Changes in the 2002 Uniform Securities Act include a simpli- fied process for registering securities; more regulation of investment professionals; expanded enforcement powers of administrative agencies; new penalties for violations of the act; and several other changes. Despite the existence of the various versions of the Uniform Securities Act, much diversity among state securities laws still exists. Typical provisions include prohibitions against fraud in the sale of securities, registration requirements for brokers and dealers, registration requirements for securities to be sold within the state, and sanctions and civil liability under certain circum- stances. In addition to complying with the registration requirements of the 1933 act, a nationwide distribution of a new issue requires compliance with state blue sky provisions as well. A majority of states have laws regulating takeovers of companies incorporated or doing business within the state. Although the courts have invalidated some of these statutes, these laws tend to aid in preserving the STATUS QUO of management. Securities Scandals During the early 2000s, a number of high- profile companies became embroiled in major scandals that adversely affected consumer confidence in the companies and led to a number of investigations by the SEC. The most notorious of these scandals involved Hou ston- based Enron Corporation, once one of the world’s largest energy, commodities, and service companies. The company suffered a collapse in 2001 that resulted in the largest bankruptcy at that time in U.S. history and numerous lawsuits alleging violations of federal securities laws. As of December 2000, Enron’s stock sold for $84.87 per share. However, stock prices fell throughout 2001. On October 16, 2001, the company reported losses of $638 million in the third quarter of 2001 alone. It also announced that it was reducing shareholder equity by $1.2 billion. The SEC began a formal investigation shortly thereafter regarding potential conflicts of interest within the company regarding outside partnerships. Many of the problems centered on flawed accounting practices by Enron and its accounting firm, Arthur Andersen, L.L.P. In 2002 Arthur Andersen was found guilty of obstructing justice by destroying thousands of Enron documents, but the conviction was overturned on appeal. The top officials of Enron either pleaded guilty or were convicted on numerous counts of fraud, MONEY LAUNDERING, and criminal CONSPIRACY. The co llapse of the U.S. financial markets in September 2008 led the U.S. government to inject hundreds of billions of dollars into banks and other financial institutions on Wall Street. The U.S. real estate boom that had fueled economic expansion in the early 2000s had enticed banks to repackage home mortgages as securities. Almost 80 percent of these mortgages were adjustable rate, which meant that after an initial period the lender could raise the interest rate. Many borrowers had agreed to subprime mortgages, which are adjustable rate contracts in which the interest rates are higher. Banks and mortgage companies offered subprime mortgages to people with poor credit and incomes that were too low to meet increase in terest rate hikes. As home foreclosures mounted, the value of the securitized mortgages plummeted, putting in peril those who held these investments. The U.S. government stepped in and provided funds to recapitalize banks and to allow healthier banks to acquire those banks with so-called toxic assets. In return, the government became a major shareholder in many of the banks. By mid-2009, congressional committees were well underway investigating the behavior of the banks, the federal banking regulatory agencies, and the SEC. It seemed likely that Congress would enact laws that curtailed risky and speculative behavior in the securities market. FURTHER READINGS Hazen, Thomas, and David Ratner. 2006. Securities Regula- tions in a Nutshell. 9th ed. St. Paul. Minn.: West Group. Soderquist, Larry D. and Theresa A. Gabaldon. 2007. Securities Law. New York: Foundation Press. Steinberg, Marc I. 2007. Understanding Securities Law, 4th ed. Newark, N.J.: LexisNexis. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 80 SECURITIES Western, David. 2004. Booms, Bubbles and Busts in the U.S. Stock Market. New York: Routledge. Zandi, Mark. 2008. Financial Shock: A 360-degree Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis. New York: FT Press. CROSS REFERENCES Accounting; Mergers and Acquisitions; Risk Arbitrage; Stock Market; Stockholder’s Derivative Suit. SECURITIES AND EXCHANGE COMMISSION The Securities and Exchange Commission (SEC) is the federal agency primarily responsible for administering and enforcing federal securities laws. The SEC strives to protect investors by ensuring that the securities markets are honest and fair. When necessary, the SEC enforces securities laws through a variety of means, including fines, referral for criminal prosecution, revocation or suspension of licenses, and injunctions. Headquartered in Washington, D.C., the Securities and Exchange Commission itself is comprised of five members appointed by the president; one position expires each year. No more than three members may be from one political party. With more than 900 employees, the agency has five regional and six district offices throughout the country and enjoys a generally favorable reputation. Securities Laws Before the October 29, 1929, STOCK MARKET crash on Wall Street, a company co uld issue stock without disclosing its financial status. Many bogus or severely undercapitalized corporations sold stock, eventually leading to the disastrous plunge in the market and an ensuing panic. From the havoc wreaked by the crash came the first major piece of federal securities legislation, the Securities Act of 1933 (15 U.S.C.A. § 77a et seq.). The act regulat es the primary, or new issue, market. The following year, Congress provided for the creation of the Securities and Exchange Commission when it enacted far-reaching securities legislation in the Securi- ties Exchange Act of 1934 (15 U.S.C.A. § 78a et seq.). These two laws, along with the Trust INDENTURE Act of 1939 (15a U.S.C.A. §§ 77aaa– 77bbbb), the Investment Company Act of 1940 (15 U.S.C.A. §§ 80-1–80a-64), the Investment Advisers Act of 1940 (15 U.S.C.A. §§ 80b-1– 80b-21), and the Public Utility HOLDING COMPANY Act of 1935 (15 U.S.C.A. §§ 79a–79z-6) make up the bulk of federal securities laws under the jurisdiction of the SEC. In addition to federal statutory authority, the SEC has broad rule-making authority. It has used this power to fashion procedural and technical rules, define terms used in the laws, and make substantive rules implementing the laws. The SECalsodevisesformsthatmustbeusedtofulfill various requirements in the statutes and rules. Moreover, the SEC engages in a significant amount of informal lawmaking through the distribution of SEC releases containing its opinions on questions of current concern. These releases are disseminated to the press, companies and firms registered with the SEC, and other interested persons. In addition to these general public statements of policy, the SEC also responds to individual private inquiries. Securities Act of 1933 The Securities Act of 1933 regulates the PUBLIC OFFERING of new issues. All public offerings of securities in interstate commerce or through the mails must be registered with the SEC before they can be offered and sold, subject to exemptions for specifically enumerated types of securities, such as government securities, nonpublic offerings, offerings below a certain dollar amount, and intrastate offerings. The registration provisions apply to issuers of securities or others acting on their behalf. Issuers must file a registration statement with the SEC containing financial and other pertinent data about the issuer and the securities that are being offered. The Securities Act of 1933 also prohibits fraudulent or deceptive practices in the offer or sale of securities, whether or not the securities are required to be registered. U.S. Securities and Exchange Commission Chairman Mary Shapiro testifies at a hearing held to discuss the SEC’s response to the 2009 financial crisis. ALEX WONG/GETTY IMAGES GALE ENCYCLOPEDIA OF AMERICAN LAW, 3 RD E DITION SECURITIES AND EXCHANGE COMMISSION 81 A major part of the SEC work is reviewing the registration documents required by the 1933 act and determining when registration is required. Registration with the SEC is intended to allow potential investors to make an informed evaluation regarding the worth of securities. Registration does not mean that the commission approves of the issue or that the disclosures in the registration are accurate, nor does it insure an investor against loss in the purchase. Registration requires extensive disclosure on behalf of a corporation. For example, full disclosure includes management’s aims and goals; the number of shares the company is selling; what the issuer intends to do with the money; the company’s tax status; contingent plans if problems arise; legal standing, such as pending lawsuits; income and expenses; and inherent risks of the enterprise. Registration consists of two parts: a prospectus, which must be furnished to every purchaser of the security, and other information and attachments that need not be furnished to purchasers but are available in SEC files for public inspection. A registration statement is generally effective 20 days after filing, but the SEC has the power to delay or suspend the effectiveness of the registration statement. When a disclosure or registration statement becomes effective, it is called a prospectus and is used to solicit orders for the security. Securities Exchange Act of 1934 The Securi- ties Exchange Act of 1934 transf erred responsibility for administration of the 1933 act from the FEDERAL TRADE COMMISSION to the newly created SEC. The 1934 act also provided for federal regulation of trading in already issued and outstanding securities. Other provisions include disclosure requirements for publicly held corporations; prohibitions on various manipulative or deceptive devices or contrivances; SEC registration and regulation of brokers and dealers; and registration, oversight, and regulation of national securities exchanges, associations, clearing agencies, transfer agents, and securities information processors. The SEC has broad oversight responsibilities for the self-regulatory organizations within the securities industry. For approximately 140 years prior to 1934, stock exchanges regulated their own members. Self-regulation continues to be an important component of the industry, but as of 2003 the SEC provides additional regulation, including authority to review disciplinary actions taken by a self-regulatory organization. The 1934 act also established the Municipal Securities Rulemaking Board and conferred oversight power upon the commission. The Municipal Securities Rulemaking Board formulates rules for the municipal securities industry. The commission has the authority to approve or disapprove most proposed rules of the board. The 1934 act seeks to provide the public with adequate information about companies with publicly traded securities. Subject to certain exemptions, disclosure requirements apply not only to companies with securities listed on national securities exchanges but to all companies with more than 500 shareholders and more than $5,000,000 in assets. Companies must file detailed statements with the SEC when first registering under the 1934 act and must provide periodic reports as prescribed by the commission. Under the 1934 act, the SEC also regulates the solicitation of prox ies. Proxies are voting solicitations allowing stockholders to participate in the annual or special meetings of stockholders without actually attending the meeting; the PROXY empowers someone else to vote on behalf of the shareholder. Detailed SEC regulations delineate the form of proxies and the information that must be furnished to stockholders. A registered company must furnish each stockholder, before every stockholder meeting, a proxy statement and a proxy form on which he or she can indicate approval or disapproval of each proposal expected to be introduced at the meeting. Companies must file with the commission copies of the proxy statement and the proxy form. The SEC may comment on the proxy statement and insist on changes before it is mailed to security holders. The WILLIAMS ACT of 1968 (Pub. L. No. 9 0-439, 82 Stat. 454) amended the 1934 act to ad- dress recurring problems arising in tender offers and corporate takeovers. A tender offer is a formal request that stockholders sell their shares in response to a large purchase bid; the buyer reserves the right to accept all, none, or a certain number of shares tendered for sale. A takeover occurs when a corporation assumes control of another corporation through an acquisition or merger. Pursuant to the law as amended, any person or group that takes ownership of more than 5 percent of any class of specific registered securities must file a statement within 10 days with the issuer of the GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 82 SECURITIES AND EXCHANGE COMMISSION security and with the SEC. This statement provides the background of the purchaser, the source of funds used in the purchase, the purpose of the purchase, the number of shares owned, and any relevant contracts, arrangements, or understandings. In addition, no person may make a TENDER OFFER unless he or she has first filed with the SEC and provided certain specific information to each offeree. A tender offer must remain open for a minimum of 20 days and at least 10 days after any change in the terms of the offer. The Securities Act of 1934 also requires any person who beneficially owns, whether directly or indirectly, more than 10 percent of a class of certain registered securities and every officer or director of every company with specific registered securities to report to the SEC. Reports must be filed at the time the status is acquired and at the end of any month in which such a person acquires or disposes of any equity securities of that company. This provision is designed to discourage short-term trading by preventing corporate insiders from unfairly using nonpublic information. Investment Company Act of 1940 Pursuant to the Investment Company Act of 1940, investment companies must register with the SEC. Investment companies are companies engaged primarily in the business of investing, reinvesting, or trading in securities. They may also be companies with more than 40 percent of their assets consisting of investment securities, that is, securities other than those of majority-owned subsidiaries and government securities. Among other types of companies, this act covers open-end companies, commonly known as mutual funds. The SEC regulatory responsibilities under this act encompass sales load, management contracts, the composition of boards of directors, capital structure of investment companies, approval of adviser contracts, and changes in investment policy. In addition, a 1970 amendment imposed restrictions on management compensation and sales charges. The act prohibits various transactions by investment companies, unless the commission has first made a determination that the transaction is fair. Moreover, the act permits the SEC to bring a court action to enjoin the execution of mergers and other reorganizatio n plans of investment companies if the plans are unfair to security holders. The SEC also has the power to impose sanctions pursuant to administrative proceedings for violation of this act and may file suit to enjoin the acts of management officials involving breaches of FIDUCIARY duties or personal misconduct and may bar such officials from office. Investment Advisers Act of 1940 The Invest- ment Advisers Act of 1940 provides for SEC regulation and registration of investment advisers. The act is comparable to provisions of the 1934 act with respect to broker-dealers but is not as comprehensive. Generally speaking, an investment adviser is a person who engages in the business of advising others with respect to securities and does so for compensation. Certain fee arrangements are prohibited; adverse personal interests in a transaction must be disclosed. Moreover, the SEC may define and prohibit certain fraudulent and deceptive practices. Other Sec urities Laws The Trust Indenture Act of 1939 applies to public issues of debt securities in excess of a certain amount. This law prescribes requirements to ensure the indepen- dence of indenture trustees. It also requires the exclusion of certain types of exculpatory clauses and the inclusion of certain protective clauses in indentures. In addition, the Public Utility Holding Company Act of 1935 (15 U.S.C.A. §§ 79a–79z-6) was enacted to correct abuses in the financing and operation of electric and gas public utility holding companies; SEC functions under these provisions were substantially com- pleted by the 1950s. After the disclosure of major corporate scandals involving the Enron Corporation and the Arthur Andersen accounting firm, Congress enacted the SARBANES-OXLEY ACT OF 2002 (also known as the Public Company Accounting Reform and Investor Protection Act). The act imposes new disclosure requirements when companies file financial reports. It mandates that the SEC, by rule, requires the principal executive officer and principal financial officer to certify in each annual or quarterly report the accuracy and completeness of the information contained in the report. A knowing violation of this section is pu nishable by up to 10 years in jail and a $1 million fine. A willful violation is punishable by up to 20 years in jail and a $5 million fine. The act authorizes the establishment of a Public Company Accounting Oversight Board to oversee the accounting profession. The SEC appoints the five-person board. The GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION SECURITIES AND EXCHANGE COMMISSION 83 board is charged with developing standards and enforcing them with appropriate sanctions. It must file an annual report with the SEC. SEC Enforcement Authority The commission enforces the myriad laws and regulations under its jurisdiction in a number of ways. The SEC may seek a co urt INJUNCTION against acts and practices that deceive investors or otherwise violate securities laws; suspend or revoke the registration of brokers, dealers, investment companies, and advisers who have violated securities laws; refer persons to the JUSTICE DEPARTMENT for criminal prosecution in situations involving criminal FRAUD or other willful violation of securities laws; and bar attorneys, accountants, and other professionals from practicing before the commission. The SEC may conduct investigations to determine whether a violation of federal securities laws has occurred. The SEC has the power to SUBPOENA witnesses, administer oaths, and compel the production of records anywhere in the United States. Generally, the SEC initially conducts an informal inquiry, including interviewing witnesses. This stage does not usually involve sworn statements or compulsory testimony. If it appears that a violation has occurred, SEC staff members request an order from the commission delineat- ing the scope of a formal inquiry. Witnesses may be subpoenaed in a formal investigation. A witness compelled to testify or produce evidence is entitled to see a copy of the order of investigation and be accompanied, represented, and advised by counsel. A witness also has the absolute right to inspect the transcript of his or her testimony. Typically the same privileges one could assert in a judicial proceeding, such as the Constitution’s FOURTH AMENDMENT prohibition against unreasonable searches and seizures and the Fifth Amendment’s PRIVILEGE AGAINST SELF-INCRIMINATION, apply in an SEC investigation. Proceedings are usually con- ducted privately to protect all parties involved, but the commission may publish information regarding violations uncovered in the investigation. In a private investigation, a targeted person has no right to appear to rebut charges. In a public investigation, however, a person must be afforded a reasonable opportunity to cross- examine witnesses and to produce rebuttal testimony or evidence, if the record contains implications of wrongdoing. When an SEC investigation unearths evidence of wrongdoing, the commission may order an administrative hearing to determine responsibility for the violation and impose sanctions. Administrative proceedings are only brought against a person or firm registered with the SEC or with respect to a security registered with the commission. Offers of settlement are common. In these cases the commission often insists upon publishing its findings regarding violations. An administrative hearing is held before an administrative law judge who is actually an independent SEC employee. The hearing is similar to that of a nonjury trial and may be either public or private. After the hear ing the judge makes an initial written decision containing findings of fact and conclusions of law. If either party requests or if the commission itself chooses, the commission may review the decision. The SEC must review cases involving a suspen sion, denial, or revocation of registration. The commission may request oral argu- ment, will study briefs, and may modify the decision, including in creasing the sanctions imposed. Possible sanctions in administrative proceedings include censure, limitations on the registrant’s activities, or revocation of registration. In 1990 SEC powers were expanded to include the authority to impose civil penalties of up to $500,000, to order disgorgement of profits, and to issue cease-and-desist orders against persons violating or about to violate securities laws, whether or not the persons are registered with the SEC. The U.S. Court of Appeals for the District of Columbia or another applicable circuit court of appeals has jurisdiction to review most final orders from an SEC administrative proceeding. Certain actions by the commission are not reviewable. The SEC may request an injunction from a federal district court if future securities law violations are likely or if a person poses a continuing menace to the public. An injunction may include a provision that any future violation of law constitutes CONTEMPT of court. The SEC may request further relief, such as turning over profits or making an offer to rescind the profits gained from an INSIDER TRADING transaction. In cases of pervasive corporate mismanagement, the SEC may obtain appointment of a receiver or of independent GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 84 SECURITIES AND EXCHANGE COMMISSION directors and special counsel to pursue claims on behalf of the corporation. Willful violations may be punished by fines and imprisonment. The SEC refers such cases to the DEPARTMENT OF JUSTICE for criminal prosecution. Willfulness means only that the DEFENDANT intended the act, not that he knew that it was a violation of securities laws. FURTHER READINGS Larimore, James. N., ed. 2008. Securities and Exchange Commission: Programs and Operations. New York: Nova Science. Securities and Exchange Commission. Available online at www.sec.gov (accessed July 28, 2009). Seligman, Joel. 2003. The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance. 3d ed. New York: Aspen. Western, David. 2004. Booms, Bubbles, and Busts in the U.S. Stock Market. New York: Routledge. Winer, Kenneth B., and Samuel J. Winer. 2004. Securities Enforcement: Counseling & Defense. Newark, N.J.: LexisNexis. CROSS REFERENCES Administrative Law and Procedure; Bonds; Mergers and Acquisitions; Securities. SECURITY Protection; assurance; indemnification. The term security is usually applied to a deposit, lien, or mortgage voluntarily given by a debtor to a creditor to guarantee payment of a debt. Security furnishes the creditor with a resource to be sold or possessed in case of the debtor’s failure to meet his or her financial obligation. In addition, a person who becomes a surety for another is sometimes referred to as a “security.” SECURITY COUNCIL See UNITED NATIONS. SECURITY DEPOSIT Money aside from the payment of rent that a landlord requires a t enant to p ay to be kept separately in a fund for use should the tenant cause damage to the p remises or otherwise violate terms of the lease. A security deposit is usually in the amount of one or two months’ rent. It usually must be paid at the time that the LANDLORD AND TENANT sign the lease. The landlord must place the funds in an escrow account and give the tenant any interest generated by such funds. Upon the termination of the lease, the landlord must return the security deposit to the tenant if no violations of the lease occurred. He or she may keep the security deposit or portion thereof for the amount of any damages, which can be proven, pursuant to the terms of the lease. CROSS REFERENCE Landlord and Tenant. SEDITION Sedition is a revolt or an incitement to revolt against established authority, usually in the form of treason or defamation against government. Sedition is the crime of revolting or inciting revolt against govern ment. However, because of the br oad protection of free speech under the FIRST AMENDMENT, prosecutions for sedition are rare. Nevertheless, sedition remains a crime in the United States under 18 U.S.C.A. § 2384 (2000), a federal statute that punishes seditious CONSPIRACY, and 18 U.S.C.A. § 2385 (2000), which outlaws advocating the overthrow of the federal government by force. Generally, a person may be punished for sedition only when he or she makes statements that create a CLEAR AND PRESENT DANGER to rights that the government may lawfully protect (Schenck v. United States, 249 U.S. 47, 39 S. Ct. 247, 63 L. Ed. 470 [1919]). The crime of seditiou s conspiracy is com- mitted when two or more persons in any state or U.S. territory conspire to levy war against the U.S. government. A person commits the crime of advocating the violent overthrow of the federal government when she willfully advocates or teaches the overthrow of the government by force, publishes material that advocates the overthrow of the government by force, or organizes persons to overthrow the government by force. A person found guilty of seditious conspiracy or advocating the overthrow of the government may be fined and sentence d to up to 20 years in prison. States also maintain laws that punish similar advocacy and conspiracy against the state government. Governments have made sedition illegal since time immemorial. The precise acts that constitute sedition have varied. In the United States, Congress in the late eighteenth century believed that government should be protected from “false, scandalous and malicious” criticisms. Toward this end, Congress passed the Sedition Act of GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION SEDITION 85 A sample security agreement Security Agreement CALIFORNIA ENERGY COMMISSION SECURITY AGREEMENT AND ASSIGNMENT OF CERTIFICATE OF DEPOSIT _______________ (“Debtor”), and the State Energy Resources Conservation and Development Commission (“Secured Party”) agree as follows: A. Debtor has executed a Promissory Note payable to Secured Party in the original principal amount of ________ Dollars ($____________) (“Promissory Note”). The Loan Agreement, Promissory Note, Work Statement, Budget, as well as this Security Agreement and Assignment of Certificate of Deposit (“Security Agreement”), together are referred to as the Loan Documents (“Loan Documents”). B. To secure Debtor’s obligations under the Promissory Note and Debtor’s obligations under this Security Agreement, Debtor has agreed to grant Secured Party a security interest as provided below. 2. EFFECTIVE DATE OF AGREEMENT This Security Agreement shall become effective on the date it is executed and approved by Secured Party in Sacramento, California (the “Effective Date”). To secure Debtor’s Obligations (as defined below), Debtor grants to Secured Party a continuing first priority security interest in all of its right, title and interest in, to and under the Collateral described hereinafter. For purposes of this Security Agreement, “Obligations” means any and all debts, obligations, and liabilities of Debtor to Secured Party arising out of, or relating in any way to the Promissory Note, Loan Agreement and other Loan Documents, and any obligations of Debtor to Secured Party pursuant to this Security Agreement, whether existing or arising after the Effective Date; whether voluntary or involuntary; whether jointly owned with others; whether direct or indirect; or whether absolute or contingent; and whether or not from time to time increased, decreased, extinguished, created, or incurred. “Collateral” means all of Debtor’s right, title and interest in a certificate of deposit in the amount of $_____________________, including earned interest, from ____________________, a nationally or state chartered, FDIC-insured financial institution (“Certificate of Deposit”). Debtor represents and warrants to Secured Party that such Certificate of Deposit is true and genuine and that Debtor is the sole owner of the Certificate of Deposit. Debtor represents that no other person or entity has any rights in the Collateral that have priority over the rights assigned pursuant to this Security Agreement. Debtor represents that no part of the Collateral is exempt or protected by law from this Security Agreement. 1. BACKGROUND AND PURPOSE 3. GRANT OF SECURITY INTEREST 4. OBLIGATIONS 5. COLLATERAL 6. ASSIGNMENT For value received, Debtor assigns and transfers to Secured Party all of its rights, title, and interest in the Certificate of Deposit, including all renewals or substitutions, pledged as security for the Obligations. Debtor authorizes the financial institution to release all information relating to this account to Secured Party. Debtor shall direct the financial institution to maintain the account on behalf of, and for the exclusive benefit of, Secured Party. Debtor specifically requests and directs the financial institution to honor and accept this Security Agreement as evidence of Secured Party’s priority interest in the Collateral, and to maintain the account in accordance with its terms and conditions. 7. WITHDRAWALS 8. TERMINATION Debtor shall request and direct the financial institution to provide no less than five days notice to Secured Party prior to honoring instructions to release or withdraw funds from, or to cash out or redeem, the Certificate of Deposit. Debtor shall ensure that the financial institution will not release or permit withdrawal of funds from the Certificate of Deposit that would reduce the cash balance below $________, without prior written consent from Secured Party. In the event of default under the Promissory Note, Secured Party shall have the right to withdraw all or any part of the Collateral and apply the withdrawal toward payment of the Obligations, even if such withdrawal results in a penalty. If the Obligations are in default, Secured Party can exercise this right without notice to Debtor. Debtor agrees to appoint Secured Party as its attorney in fact to redeem or cash out the Certificate of Deposit in the event of default under the Loan Documents. This Security Agreement shall not terminate until Debtor’s Obligations are paid in full, at which time Debtor may request Secured Party to release this Security Agreement given as Collateral for the Loan. Upon such request, Secured Party will deliver a release to the financial institution holding the Collateral within ten business days of receipt by Secured Party of the Debtor’s written request. [continued] GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 86 SECURITY 1798, which authorized the criminal prosecution of persons who wrote or spoke falsehoods about the government, Congress, the president, or the VICE PRESIDENT. The act was to expire with the term of President JOHN ADAMS. The Sedition Act failed miserably. THOMAS JEFFERSON opposed the act, and after he was narrowly elected president in 1800, public opposition to the act grew. The act expired in 1801, but not before it was used by President Adams to prosecute numerous public suppor- ters of Jefferson, his challenger in the presiden- tial election of 1800. One writer, Matthew Lyon, a congressman from Vermont, was found guilty of SEDITIOUS LIBEL for stating, in part, that he would not be the “humble advocate” of the Adams administration when he saw “every consideration of the public welfare swallowed up in a continual grasp for power, in an unbounded thirst for ridiculous pomp, foolish adulation, and selfish avarice” (Lyon’s Case, 15 F. Cas. 1183 [D. Vermont 1798][No. 8646]). Vermont voters reelected Lyon while he was in jail. Jefferson, after winning the election and assuming office, pardo ned all persons convicted under the act. In the 1820s and 1830s, as the movement to abolish SLAVERY grew in size and force in the South, Southern states began to enact seditious libel laws. Most of these laws were used to prosecute persons critical of slavery, and they were abolished after the Civil War. The federal government was no less defensive; Congress enacted seditious conspiracy laws before the Civil War aimed at persons advocating secession from the United States. These laws were the precursors to the present-day federal seditious conspiracy statutes. In the late nineteenth century, Congress and the states began to enact new limits on speech, most notably statutes prohibiting OBSCENITY.At the outset of WORLD WAR I, Congress passed legislation designed to suppress antiwar speech. The ESPIONAGE ACT OF 1917 (ch. 30, tit. 1, § 3, 40 Stat. 219), as amended by ch. 75, § 1, 40 Stat 553, put a number of pacifists into prison. Socialist leader EUGENE V. DEBS was convicted for making an antiwar speech in Canton, Ohio (Debs v. United States, 249 U.S. 211, 39 S. Ct. 252, 63 L. Ed. 566 [1919]). Charles T. Schenck and Elizabeth Baer were convicted for circulating to military recruits a leaflet that advocated opposition to the draft and suggested that the draft violated the Thir- teenth Amendment’sbanon INVOLUNTARY SERVI- TUDE (Schenck v. United States, 249 U.S. 47, 39 S. Ct. 247, 63 L. Ed. 470 [ 1919]). The U.S. SUPREME COURT did little to protect the right to criticize the government until after 1927. That year, Justice LOUIS D. BRANDEIS wrote an influential concurring opinion in Whitney v. California, 274 U.S. 357, 47 S. Ct. 641, 71 L. Ed. 1095 (1927), that was to guide First Amendment IN WITNESS WHEREOF, this Security Agreement and Assignment of Certificate of Deposit has been executed by the parties hereto. SECURED PARTY: DEBTOR: NAMENAME ADDRESSADDRESS AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE DATE DATE Security Agreement A sample security agreement (continued) ILLUSTRATION BY GGS CREATIVE RESOURCES. REPRODUCED BY PERMISSION OF GALE, A PART OF CENGAGE LEARNING. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3 RD E DITION SEDITION 87 . feet of blue sky” GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION SECURITIES 79 (Hall v. Geiger-Jones, 242 U.S. 5 39, 372 S. Ct. 217, 61 L. Ed. 480 [ 191 7]). In 195 6 the COMMISSIONERS ON UNIFORM LAWS approved. takes ownership of more than 5 percent of any class of specific registered securities must file a statement within 10 days with the issuer of the GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 82. the Sedition Act of GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION SEDITION 85 A sample security agreement Security Agreement CALIFORNIA ENERGY COMMISSION SECURITY AGREEMENT AND ASSIGNMENT OF