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In SEC v. Levin, the United
States Court of Appeals for the Eleventh Circuit (“Eleventh Circuit”) held that
the safe harbor provision of Regulation D’s Rule 508(a) is available to a
defendant in a Securities and Exchange Commission (“SEC”) enforcement action
based on a failure to register securities under Section 5 of the Securities
Act.
In
2012, the SEC brought suit against George Levin (“Levin”) for violation of
securities laws in connection with a $1.2 billion Ponzi scheme orchestrated by
Scott Rothstein. The first claim against
Levin was for failure to register promissory notes he sold to investors
pursuant to Section 5 of the Securities Act.
Levin asserted good faith affirmative defense, arguing that the note
offerings were exempt from the Securities Act’s registration requirement under
the safe harbor provision of Rule 508, Regulation D.
The
United States District Court for the Southern District of Florida (“District
Court”) rejected Levin’s affirmative defense and granted summary judgment to
the SEC on the registration claim, stating that the safe harbor provision in
Rule 508(a) only applies to defendants in private actions, not SEC enforcement
actions. At trial, Levin was found
liable on fraud claims and was ordered to pay $40.1 million is
disgorgement. On appeal, the Eleventh
Circuit agreed with Levin and reversed and remanded back to the District Court.
The
Eleventh Circuit used traditional methods of statutory interpretation to reach
its decision. First, it looked at the
“failure to comply” language of Rule 508, noting it appeared several times, and
stated it must be interpreted in the same manner each time. Because “failure to comply” in 508(a)
appeared in the context of private offering exemptions, it logically followed
that the same phrase in 508(b) related to compliance with Regulation D, not to
compliance with Section 5. Second, the
Eleventh Circuit determined if the SEC had intended for Rule 508(b) to address
non-compliance with Section 5, it would have been expressly stated. Third, the Eleventh Circuit analyzed the
regulatory history and found that the SEC proposed a standard on good faith
compliance before any distinction was made between private actions and SEC
enforcement actions.
The
Eleventh Circuit’s recent decision in SEC v. Levin should prove useful
to defendants charged with similar violations in the future. With the ability to assert a defense under
the safe harbor provision, defendants can now make a good faith argument as
part of their defense to a SEC enforcement action, not just in a private
action.