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Novel Enforcement for Novel Schemes: Emerging Trends in Securities Enforcement

Novel Enforcement for Novel Schemes: Emerging Trends in Securities Enforcement Background Image

Both the SEC and DOJ are looking to stay ahead of emerging trends in securities enforcement by looking for a role for regulators in today’s marketplace trends.

This was the main takeaway from the Securities Enforcement in the Biden Administration panel at the American Bar Association’s 37th National Institute on White Collar Crime, which included among its speakers Erin Schneider, Director of the Securities and Exchange Commission’s (“SEC”) San Francisco Regional Office, and Andrea Griswold, Co-Chief of the Securities and Commodities Task Force at the United States Attorney’s Office for the Southern District of New York. Both speakers highlighted several major enforcement actions over the past year that are exemplative of regulators prioritizing enforcement over new types of misconduct:

Shadow Trading

The SEC filed its first ever “shadow trading” enforcement action in SEC v. Panuwat, filed in August 2021. In Panuwat, the SEC alleged that a biopharmaceutical executive learned that his employer, Medivation, was due to announce an acquisition by Pfizer and, based on that information, immediately bought call options in a third pharmaceutical company that was in the same market.1 “Shadow trading” is a novel theory of insider trading where an individual uses material non-public information about one company to trade on a separate but economically linked company, such as a competitor, business partner, or supplier. In January 2022, Judge William Orrick of the United States District Court for Northern District of California denied Panuwat’s motion to dismiss, rejecting Panuwat’s argument that the SEC had failed to adequately plead materiality, breach of duty, and scienter as essential elements of an insider trading claim.

While many commentators view Panuwat as a significant expansion of the scope of insider trading enforcement, Schneider said that whether this case is an expansion of the required elements under Rule 10b-5 is for the jury to decide and referred to Judge Orrick’s opinion, which stated just because a scheme is novel, that does not mean it is immune from the securities law.2

Market Manipulation Over Social Media

Griswold discussed U.S. v. Gallagher3 as an example of the DOJ prioritizing novel misconduct that is happening in today’s markets. In Gallagher, an active day trader ran a fraudulent penny stock pump-and-dump scheme by using his Twitter account and its 70,000+ followers to artificially “pump the stock” while claiming he planned to hold his shares. In reality, Gallagher was selling millions of shares at heightened prices while publicly claiming his ongoing ownership. He pleaded guilty in February 2022 to one count of securities fraud under Securities Exchange Act of 1934 (“Exchange Act”) Section 10(b).4

When describing the road to securing an indictment, Griswold said that the toughest element to prove was materiality, which required the government to search for investors who said that Gallagher’s Twitter statements were important to them in making investment decisions. She also mentioned the SEC’s broader parallel enforcement action that included a civil charge under Exchange Act Section 9(a)(2).  Section 9(a)(2)5 reads it is unlawful “[t]o effect, alone or with 1 or more other persons, a series of transactions in any security registered on a national securities exchange …creating actual or apparent active trading in such security, or raising or depressing the price of security, for the purpose of inducing the purchase or sale of such security by others,” making it an interesting tool that does not require enforcement to prove any element of deception as long as the stock price has been driven up or down.

Private Funds

Griswold described the private funds space as a ripe area for enforcement given the high risk of profit being prioritized over investors. Private funds have been a focus of the SEC and DOJ for several years, and we previously reported that the SEC plans to escalate its focus on investment advisor compliance in 2022.

In U.S. v. Velissaris,6 the DOJ recently charged the founder and former chief investment officer of an investment advisor with making false and misleading statements to investors concerning the advisor’s process for valuing certain over-the-counter (“OTC”) derivative positions that made up a substantial portion of the holdings of its mutual and hedge funds.7 Velissaris mismarked the value of those positions to inflate fund performance, to attract and retain capital, and to increase his own compensation. Further, the government alleges that he obstructed justice by providing the auditor and the SEC with falsified and altered documents, including altered term sheets that provided fabricated support for the inflated values. The criminal case, as well as parallel civil suits by the SEC and CFTC, are waiting to be tried in the Southern District of New York.


Special purpose acquisition companies (“SPACs”) are also a major developing area of securities enforcement. SPACs are essentially blank-check companies that go public without assets and then merge with private companies. Importantly, SPACs are not subject to the SEC’s rules regarding the “quiet period” — the time from when the registration statement is made effective to 40 days later, during which a company undergoing a traditional IPO must be silent about its business to avoid influencing investors. SPACs, on the other hand, are free to make rosy forecasts during this time.

In July 2021, DOJ and SEC brought parallel criminal and civil actions against Trevor Milton, the founder and former CEO and Executive Chairman of Nikola.8 Both agencies alleged that Milton engaged in a scheme to defraud investors by repeatedly using social media and appearances on television, podcasts, and in print to make false and misleading claims about the status of Nikola’s trucks and technology. Particularly, Milton took advantage of the fact that Nikola went public by merging with a SPAC, rather than via a IPO, by making these false and misleading claims during what would otherwise have been the quiet period. Nikola agreed to pay a civil monetary penalty of $125 million in a settlement with the SEC, while the criminal and civil cases against Milton remain ongoing.

The SEC and DOJ both signaled that more enforcement against SPACs is on the horizon, given the large number of deals both completed and in the pipeline. While Griswold stated that absent scienter, building a criminal case against rosy forecasts alone is difficult, she also cited a recent Wall Street Journal article which found that of the 63 companies that went public through a SPAC deal in 2021 with less than $10 million in trailing sales at the time of their listing, at least 30 didn’t meet their projections.9


In sum, the SEC and DOJ are both on alert with respect to new and emerging securities fraud schemes in the marketplace and are adapting quickly to bring novel enforcement actions. Companies should be aware that the government is particularly focused on private funds and SPACs, and we expect to see more enforcement actions in these areas on the horizon.

1 SEC v. Panuwat, No. 4:21-cv-06322 (N.D. Cal. filed Aug. 17, 2021).

2 Order Denying Motion to Dismiss, Dkt. No. 26., SEC v. Panuwat, No. 21-cv-06322-WHO (N.D. Cal. Jan. 14, 2022).

3 U.S. v. Gallagher, No. 1:21-mj-10220 (S.D.N.Y. filed Oct. 25, 2021).

4 Press Release, Dep’t of Justice, Ohio-Based Stock Trader Pleads Guilty to Securities Fraud (Feb. 25, 2022),

5 SEC v. Gallagher, No. 1:21-cv-08739-PKC (S.D.N.Y. filed Oct. 26, 2021).

6 U.S. v. Velissaris, No. 1:22-cr-00105 (S.D.N.Y. filed Feb. 17, 2022).

7 Press Release, Dep’t of Justice, Founder And Former Chief Investment Officer Of New York Based Investment Adviser Charged With Securities Fraud And Obstruction Of Justice (Feb. 17, 2022),

8 Press Release, Dep’t of Justice, Former Nikola Corporation CEO Trevor Milton Charged In Securities Fraud Scheme (July 29, 2021),; Press Release, Securities and Exchange Commission, SEC Charges Founder of Nikola Corp. with Fraud (July 29, 2021),

9 Heather Somerville & Eliot Brown, SPAC Startups Made Lofty Promises. They Aren’t Working Out., Wall St. J. (Feb. 25, 2022), available at

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.