News & Insights

The Eleventh Circuit Holds That The Safe Harbor Provision Is Available To Defendants In Sec Enforcement Actions

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.