Legal Due Diligence: Know Your Rights

In a monumental case, Clear Directory member and former SEC attorney, Russel Weigel, took on the SEC for businesses everywhere and reminds us of the importance of legal due diligence. Listen in as he talks with Tonya Dawn Recla about SEC v Graham and the precedence it set for how government entities can pursue disgorgement claims against businesses indefinitely .

Hello everybody, this is the In the Clear podcast, and today I am your host, Tonya Dawn Recla, and I’m really excited to have with us today Russell Weigel. He’s a securities attorney out of Florida, also former SEC attorney, and the reason why I’m so excited about this is not too long ago, I got an email from Russell’s attorney firm, and it was really really cool because they had won this amazing battle, if you will, on a case that I think to the common business person your eyes might glass over, talking about things like disgorgement and the stream cord and the SEC and all this other stuff, but the implications of a case like this are so powerful in business.

But I really wanted to bring Russell on the show and have him talk about what this means for people and their business. So, we’re gonna be talking with Russell today about legal due diligence, know your rights. So please join me welcoming Russell. He’s also a member of the Clear Directory, I’m just gonna mention that, so welcome Russell to the show.

Thank you, Tonya. Glad to be here.

Awesome. Well, I’m really glad that you joined us, because that message came across my desk and it was like, you know, I think we need to do a better job of making sure the businesses know what legal decisions are being made that have huge implications for their business, do you agree with that?

Yes. Yes, I mean, to put this in context, for businesses that are subject to federal regulation, which could be any one of the alphabet agencies at various levels, so the EPA, FTC, certainly the SEC, the CFTC, maybe even FDIC potentially, there’s various and sundry agencies that are basically structured, the backbone of administrative agencies is they’re pretty much structured the same way and they have similar statutes and regulations, although those statutes and regulations are tailored to their specific missions, so they end up looking different in a lot of respects.

Some of the agencies have special powers that other ones don’t, but in general, the federal agencies, when they bring enforcement actions against businesses or business people or anybody, they typically try to exact a punitive measure as well as what they would call an equitable measure as a remedy for what they say is the appropriate response for the defendant’s violations of these various federal statutes.

I said punitive, but the agencies oftentimes take back, or try to take back money that they claim the defendants have earned, so it’s both finding the defendant and taking back the monies that they earned from their activities that were supposedly in violation, which probably sounds like why is this a big deal, that sounds like it’s an appropriate thing.

The problem is, and the problem that we see on the defense side of the world, is the application of what the government says is equitable. We’re gonna talk about a remedy that they typically use, various, a number of different agencies use it. It’s called disgorgement, and disgorgement is kinda like restitution, except that applied by the federal government, you don’t even have to actually have received the money to now owe money to the federal government.

Well, and I want to jump in before we dig too far into that because I also want to highlight what’s so … one of the things I’m so impressed with you about is that, with your experience in government, you and I have very similar stories, and the fact that we’ve seen behind the veil, if you will, and we chose to use that information out in the world with businesses and help, maybe not necessarily protect them but at least educate businesses on what aspects are maybe working not so much in their favor so that they can be better prepared.

And so, I really want to highlight that fact. So you came out of the SEC and are assisting businesses and really making sure that they know what the risks are. So I wanted to overlay that before we go into this case, because I think it flavors why you’re so passionate about looking at getting some of these things addressed or even highlighted. Is that a fair assessment for me to make?

I guess I’m passionate about it because the way I see it, when the government exceeds what I perceive to be its legitimate powers, then it’s abusing its authority, and that just frankly makes me mad. Then when I see it applied to my clients, it’s my job to push back.

Right.

And most often, defense counsel, in government litigation, are not successful in getting their clients off, if you will. They often are able to mitigate the harshness or the impact or the results on their clients, and that’s the typical service they are able to achieve. In this context, the SEC was the actor. The SEC is famous for suing people for the remedy of disgorgement and has been doing it for decades and has been successful over this period of time in convincing many courts that despite the fact that this remedy may not be based on the actual receipt of money that they’re trying to take back from somebody, they’ve succeeded in getting courts to agree and write opinions and make law that become precedent that say that they don’t have to nail down the dollars and cents that you owe. They don’t necessarily have to give you credit for your legitimate business expenses incurred in raising the money or in earning the money, and they can just tag you with a rough approximation of what they allege you benefited from or perhaps participated in some action in which a quantity of money was raised and now you’re supposed to share in the allegation to pay it back, even though not a cent went to you.

This is what kinda disgorgement has become. There is of course an originating purpose to it, which was to make people give back money that they obtained illegally. In concept, that’s fine. But the government then began to say, well, not only is it … our remedy is unique, is kinda the theory, and it’s not a remedy that is bound by any federal statute of limitations. So most people count on … most businesspeople, I would say, count on there being some sort of statute of limitations on conduct, because you have to have a cutoff period to claims, because otherwise people can sue you for anything at any time in your life, and there might not be the witnesses or evidence for you to rebut it even if you were innocent of the allegations. And so the court system has that general basis that at some point in time, claims must be cut off, and with the exception of certain things like capital murder or kidnapping kinds of crimes, where-

Right. And I would imagine that most small businesses, or business in general, had no idea that this concept of disgorgement, one that it even existed, or two that there was no recognized statute of limitations. Was that your experience?

That’s right. So, there are … for the same kinds of allegations that private parties might bring against a business, so in this case the SEC deals with the securities laws, so if there was an allegation against a company that they had committed securities fraud, there is a defined statute for private actions that limits when those claims are viable. But the SEC has succeeded over the years in convincing courts that their disgorgement remedy is unique and is outside the federal government statute of limitations, and so that there is a federal statute that says claims that involve fines, penalties, or forfeitures have a five year statute of limitations, and that’s great.

It’s a statute that applies across the board to many different alphabet agencies, and that’s the one that we were successful in arguing in front of two courts, the trial court, federal district court in Florida, and eventually the 11th Circuit Court of Appeals, to get them to agree that when the SEC’s doing this, they’re actually making people forfeit money, and they’re forfeiting property, and it’s not a statutory forfeiture but it’s a kind of forfeiture that should be encompassed by this statute, and no case had ever said that, that the SEC’s remedy of disgorgement was really a forfeiture.

There had been a lot of cases that had argued that disgorgement was not punitive, and then there were cases that said in certain circumstances it could be punitive, and that was kinda the backdrop, and so our trial court agreed that what the SEC was trying to do to our clients was a forfeiture, and so the judge threw the entire case out, and that was a huge win for all of the five defendants in that case, because as I said before, defense wins are relatively rare.

And I want to step in there too, because you’re so casual about this and very humble in the sense that you’re casually mentioning that we were successful in arguing this, but this is a big freaking deal, and I think that it’s worth taking a minute and saying this has huge implications and of course, the legal world, the more I get involved with it or hear about it or learn about it, it’s very fluid in how things get applied. But for right now, in this moment, the fact that this happened, for all the reasons that you’re mentioning that defense cases are rarely won in that regard and all these other things, that it’s a big deal and so the fact that you were able to really solidly make that argument, across the board, I think is worthy of a moment of applause.

And I for one as a business owner appreciate the fact that you’re out there doing that kind of work. But before we get too caught up in praising you, I’m gonna take a quick pause here. You’ve been listening to the In the Clear podcast, we’ve been talking with Russell Weigel about legal due diligence and making sure that you know your rights as a business owner. Give us a moment, we’ll be right back and we’ll applaud Russell some more. One moment.

Previous interview with Clear Directory member Russell Weigel – The Complexities of Raising Capital.

Awesome, thank you for coming back with us here. You’re listening to the In the Clear podcast. I’m Tonya Dawn Recla, and we’re talking with Russell Weigel about legal due diligence and we are really, I’m kinda tongue in cheek, but we are applauding him and his efforts and his firm’s efforts for fighting for the little guy to go up against some of the government policies and practices and stuff, like you said, it was rooted in really sound government principles, but the application of it has implicated businesses for a while. This concept of disgorgement and the fact that there was no real statue of limitations on that, and so most businesses had no idea that this was like this looming thing over them, especially in the capital raising game, that could come after them. I for one appreciate people like you, who are working on behalf of your clients, but all of us, because it does have implications.

Let’s talk a little bit about what, why you think you were able to accomplish this. You had started to get into that right before the break. What was so different about your argument versus ones that had been made in the past?

Well, I think it was a perfect storm, in the sense that we had a good set of facts for the defense, we had no current activity that they were alleged to have been doing illegally. All the activity had occurred more than five years before the complaint was filed, and then we had a judge who was just uncharacteristically receptive to the argument, in this case, and without delving any further into that, he went with the idea that … I guess he was bothered by it, and in oral argument he asked the SEC, “So you’re saying to me that if you find some case that the fact pattern is 30 years old, you can sue them for disgorgement?” And they said yes.

Wow.

Disgorgement is like a capital crime, and he said, “I don’t think so.” And of course we’d already briefed this and argued that what they’re doing is a forfeiture because in our fact pattern, particularly in my client’s scenario, he was an employee of a corporation. The corporation was the one that arguable received any ill-gotten gain if there was any ill-gotten gain at all, and it was a giant number, hundreds of millions that the SEC was seeking against all of the five defendants in disgorgement, and this is for monies that they alleged that were the funds generated or contributed by so-called investors in a real estate development project that my clients were involved with.

And it wasn’t a traditional investment in the SEC sense. It wasn’t a capital raise to finance a business, it was people who were buying condominiums that were being marketed by investment properties, and the SEC is saying “Well, that’s an investment, therefore, you know, that gives us jurisdiction,” and-

What? How does this happen? So is that something that it gets reported to the SEC, or does the SEC just go around scouring for this? What’s the motivation?

Well, there are many different motivations, but the SEC does find out things on its own, sometimes by reading the newspaper, sometimes somebody calling up and complaining. Could be a whistleblower, in this case it was somebody who had lost money in the investment and just beat the drum on every agency that would listen until somebody acted. That’s pretty much how the ball got started rolling in this case.

So the theory was flawed, in our view, and the judge didn’t like it, and so he went with us and threw the case out on the lack of merit on the theory of disgorgement. So the SEC didn’t like that, and they end up appealing the decision. They could have just left it, you know, let it lie there and be a lone district court opinion out there in southern Florida that other courts could ignore, but they chose to appeal it and unfortunately for them, the panel from the 11th Circuit Court of Appeals, in a free nothing decision, said that the judge was right.

And now that disgorgement opinion became the law of the entire southeast. And then the SEC strategically decided not to appeal that to the Supreme Court, but they’re bringing cases in other districts all the time and they succeeded in bringing a disgorgement claim against another fellow who lost a trial and he appealed his result to his circuit court, and his argument to his circuit court was “Look what they did in the 11th Circuit, they should do the same thing.” And that court said no, we’re gonna follow the regular group of decisions that other circuits have issued, and they denied him.

So he appealed that to the Supreme Court and cited a conflict between our case and his case, and the Supreme Court accepted certiorari in that and I believe it was one of the first cases that the new justice heard argument on, and I think that panel, the Supreme Court heard argument two days after he started on the bench, and he, I understand, was an active participant in interrogating counsel about the theories. So the Supreme Court then came out and said, they made up their own opinion, they say, and they came out saying that disgorgement is a penalty. It’s punitive, and it’s subject to the five year statute of limitations, which now is the law of the land, so it’s huge.

Oh, it’s giant. And it’s, that’s what I was saying before, it’s like your demeanor’s always so calm but that’s a really big deal, and it had such far-reaching implications. And I think all too often those things get overlooked. I know especially in business, because we’re all busy kinda doing our thing, it’s worthwhile to take a moment and look up and go wow, because any of us, if we move into any kind of investment situation or capital raising gain or anything like that are subject to these situations without even knowing it, and I think that that’s a big thing that fuels you, and to me there’s all these unsung heroes out there, and I get it.

You had a client and you were doing what’s good for your client, but look at the ripple effect. And particularly here, the Clear podcast, we really like to highlight the fact that, you know, be transparent about some of these things that are happening. There’s nothing worse than the feeling of eat, breathing, sleeping, and bleeding over your business venture and then having a big government organization come in and say “Hey, guess what?” And you didn’t even know, and I get that ignorance is really not a defense, but there’s a lot of ignorance in that arena, so I appreciate you shedding light on that.

Can I just add one thing, just so we’re clear. The disgorgement remedy that the government uses is not based on any type of … it’s not necessarily based on a claim of fraud. Any of their violations, which could be just strict liability violations, like in our capital raising scenario, not having met an exemption from registration to doing an attempt to do a private securities offering, is a strict liability kind of offense. It doesn’t involve an allegation that you committed fraud, it’s just a violation of law, but the remedy is the same as in a fraud case. The disgorgement is still, you gotta give back all the money that was raised, or alleged to be raised, in the capital raise.

The idea that you’re a little bit safer now is what applies here because at least for those deals that happened more than five years ago where there were an inadvertent violation of law, at least there’s some solace now, that for business owners, they don’t have to look over their shoulders for 30 years.

And again, I’m gonna add, and that’s thanks to you and your firm. And you’re right, perfect storm and everything else, that you had to be willing to step into that storm. So on the behalf of the business community, I thank you.

Thanks. Well, I believe in this case, I believed in my client, and excuse me, I’m proud to say that I represented him pro bono on appeal, and we were successful and it was just a very happy occasion for everybody that was involved and supported it and a lot of people were praying for it.

Very cool.

It was a very big day here.

Well, I think it was exciting and I’m glad we could share it with our listeners. If you’re out in Florida and need some assistance, connect with Russell. We’ll give you some links. Where can we send people?

Oh, the website for us is investmentattorneys.com

Awesome. And Russell, let’s talk a second about your book.

We can help people anywhere, because we do federal law, so anyone with an SEC problem particularly, or a capital raised concern or a capital raised desire, we’re free to help them anywhere they are, so that’s-

Awesome.

Yes, I wrote a book called Capital for Keeps. I’m actually in the process this week of trying to get the book updated. We’ve had a couple of significant regulations that have been made effective since the original version was written, and Capital for Keeps is a book that is, in layman’s terms, is designed to sorta showcase and I guess try to paint the universe of issues that entrepreneurs and executives oughta consider when they’re contemplating a capital raise.

We want them to do it right, we want them to be aware of the risks, and Capital for Keeps is an attempt at shedding light on these issues.

Perfect, and as we’re very fond of saying over here, make sure that you’re making informed decisions and talking with Russell, reading the book, it’s a great way to start with that. He’s extremely informed with his time as an SEC attorney. That’s a brain you want to go ahead and pick there, folks.

Russell, thanks so much for joining us and thanks for all the work you do in the world. Like I said, little bit tongue in cheek but I mean it from the bottom of my heart, I appreciate you and I appreciate what you’re doing in the world and I think we would do well to recognize the folks that are fighting on behalf of business so that we can create these amazing things that we see, these visions and feed our families and change the world to the degree that we feel inclined, so thank you so much.

Thank you. We’re all doing our part, I think, to try to make our country a better place, and we have to … we can choose our battles and our issues, and we just come at it from a different angle and perhaps a different motivation, but the end result is everybody benefits if we can build a healthier ecosystem around us.

I agree completely. So thank you again for coming on the show and for everything that you do in the world, and to all of you out there, we appreciate you listening to the In the Clear podcast. Before you get involved with somebody in your business, make sure that you’re in the clear. Take care.

Thank you.

2017-08-24T18:41:02+00:00

About the Author:

Tonya Dawn Recla has over 10 years of extensive military and government training in security and intelligence, weapons and tactical driving. Tonya holds a degree in intercultural communication and an advanced degree in education. As an agent Tonya served on an all-male surveillance team investigating espionage subjects and is one of the few agents to testify in an actual espionage case in federal court. As an instructor, she taught other agents about the intricacies of the communication process, awareness, and the power of mindset. She authored a book sharing her experiences from the trenches of a hyper-masculine world and the path of integration she used to traverse it: W.A.R. – Watch, Assess, React: The Ultimate Guide to Personal Power and Safety.