SCOTUS Gun Cases & New Focus at SEC

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2:10So at the helm of the SEC, I can confidently say it is a new day. It's time for the SEC to end its waywardness and return to its core mission that Congress set for it. investor protection, fair, orderly, and efficient markets, and capital formation. I will work to protect investors from fraud, keep politics out of how our securities laws and regulations are applied, and advance clear rules of the road that encourage investment in our economy to the benefit of Americans. And the SEC has pared back enforcement. Indeed, New enforcement actions have dropped by about 28 percent through September, and the focus has changed to more traditional securities law violations and intentional misconduct.

2:57The agency has retreated from crypto-related litigation and is focusing more on individual offenders than household name companies. Nearly 30 percent of enforcement actions brought under this administration so far focus on offering fraud or insider trading. My guest is securities law expert James Park, a professor at UCLA Law School. Can you start by sort of broadly describing what Gary Gensler's era at the SEC looked like as far as enforcement actions? It was very vigorous, I think, in terms of enforcement. I think they brought significant cases that made an impact. I think there was a willingness to be entrepreneurial, to bring innovative theories in a number of areas, particularly with respect to ESG types of issues, environmental, social, and governance issues.

3:56We had some very significant cases against companies like Volkswagen, for example, which had that emission scandal and Boeing, cases arising out of misrepresentations relating to the accidents that they had before. You had some theories like shadow trading, where you're using inside information not to trade in your own company, but in another company that you don't owe fiduciary duties to, but you may have the duty of confidentiality with respect to that information. and we saw record penalties. And that's something that the prior enforcement director said is he believed that higher penalties are important to deter.

4:36Deterrence was a major theme during the Gensler enforcement era. I think that's the best way to describe it. And how has Chairman Paul Atkins distinguished or tried to distinguish his tenure from Gensler's? What are his focuses? I think he's more focused on the straightforward cases, cases where you have clear evidence of intentional wrongdoing, whether that be theft by a broker, insider trading, really intentional misconduct. I think that's one area of emphasis. Another is that I think the SEC may be looking more at individuals as opposed to bringing cases against corporations. corporations. And that, I think, is a development that we've seen before, actually.

5:25During the 1970s, we had a very aggressive enforcement division under Stanley Sporkin that was bringing innovative cases against corporations for accounting fraud, paying bribes to foreign companies. I mean, there are questions about whether the SEC was exceeding its authority. With Chairman Shad coming in, one of the things he emphasized is that we're going to focus more on individuals and insider trading. And that's kind of an interesting similarity with this era where we're moving from focusing on corporations as wrongdoers to individuals. And I think that may be based on sort of the idea that most wrongdoing is done by rogue actors, people who are just acting on their own.

6:09I think that's the approach I think that we see Atkins taking versus Maybe the Gensler position that goes after corporations is more concerned about sort of bad corporate cultures, that it's not individuals who just decide to do bad things, but because they're in bad corporate cultures that they commit fraud. According to a Bloomberg Law Review, the SEC has brought about 91 new enforcement suits since Inauguration Day through the end of September. That's down from 126 actions filed during the same period in 2024. Is it because it's a new administration? Is it because they're focusing on different things?

6:48I mean, why do you think there's that drop? I think it could be a combination of different things. It's very hard to pinpoint the cause. And I think certainly the fact that you're in a transition period may mean that there are fewer cases that are actually filed. You know, we only got a new enforcement director last month, Judge Ryan, in September, and enforcement moves more slowly without clear guidance from the top. And, you know, just having a leadership transition may be a reason that you have a decline in the number of cases. And, you know, I took a look at a few numbers. And, you know, even before this year, if you look at 2024, which was during the Gensler era, that saw a decline compared to 2023.

7:33583 actions are filed in 2024. 784 were in 2023. That's a 26 % decline within the same administration. Now, The penalties did increase in 2024 relative to 2023. And so I think in a few weeks or a few months, we'll learn what the penalties collected are, and that may tell us something additional. And it is finally possible that the new administration is less aggressive. We have some cases that were dropped that might have settled, and probably investigations that were that could have resulted in actions may either be, you know, just sort of delayed or languishing or maybe even formally closed. So I think it's a combination of a lot of different things.

8:17And did they drop all the crypto-related actions, even the ones that were ongoing? Basically, they dropped them? The major ones against exchanges in particular, I have seen a few crypto-related cases involving outright theft. And so they have not dropped all crypto cases. But the cases against exchanges, for example, or major developers, where the argument is that you should have registered this as a security, I believe all or almost all of those have been withdrawn. So there's not a big discussion anymore. I mean, the last couple of years, you and I were discussing what is a security? Is this a security?

8:57And the judges in New York were having conflicting decision. So that's not happening anymore? They don't have to worry about that? Well, not through the SEC, but there are cases that are private litigation that are percolating up. And I expect that the issue of whether or not certain digital assets or securities will be decided by courts in that context. And I've seen a few cases here and there that have gone both ways. So I think there still will be some litigation about that for the time being, but it'll happen in the context of private litigation rather than SEC government enforcement. The SEC is making it easier for companies going public to force securities fraud claims into arbitration.

9:42Why and what would be the result of that? Well, I think the idea behind this is that shareholders should have a choice. Shareholders should be able to decide how the company is governed. And there's an argument that the way you resolve certain types of shareholder litigation should be up to the shareholders. And if they accept this, while they may not actually have a say in deciding whether or not such provisions are put into the charter of a company going public, they do have a say in that if they're unhappy with the provision, they can choose not to buy the stock. They can choose to pay less for the stock.

10:23This is a well-established academic idea now is that shareholders have a choice with respect to corporate governance. And this policy decision effectively is signaling a willingness to allow companies to try this out if they would like to. I think there are some questions about the legality of some of these mandatory arbitration provisions if they are adopted. So I think there is some risk that if somebody adopts them, this will be litigated. And for now, at least in Delaware, Delaware companies would not be able to put these provisions in their charter because of a Delaware state law. But it's something that academics have talked about for some time.

11:02And it's consistent with a Republican SEC chair to try this out. Now, whether or not companies will do this, how this will work, that's still very much up in the air. And so I think it'll take a few years before it starts having an impact if it does. I'm going to go through just a couple of changes. The division director no longer has authority to issue formal orders of investigation, which allow division staff to issue subpoenas. And so they're going back to something that they did prior to 2009, I think, where the commissioners have to approve the orders by majority vote. It's a significant change.

11:40It's a significant change, a procedural change that very well will likely affect the pace of SEC enforcement. I think it'll be slower. And to give a little background, for a long time, this was the policy of the SEC, where the five commissioners, these five appointees, had to sign off on every enforcement subpoenaed. Any decision to issue orders that open investigations, those five commissioners had to decide this. And I think the issue is that these five commissioners are very busy, right? They're deciding all sorts of things, looking at new rules and all sorts of other matters. And so it will take a while for the subpoena to get on the agenda.

12:22And I think that's what resulted in delays with the SEC and enforcement and even opening up an investigation. And so after the Madoff scandal in 2009, one of the reforms is we're going to delegate some of this to the staff. And so investigations could open more quickly, move more quickly. And in my view, it's a good change. But I think the argument on the other side is that, you know, if you want to control enforcement, you want the commissioners to get involved from the very beginning, because they're ultimately the ones who have to approve an enforcement action being brought, being settled. And if they're involved at the very beginning, they can maybe cut off some investigations that may be, you know, fines.

13:07Does it matter how much money the SEC brings in through enforcement actions? I mean, is that considered a gauge of how well the commissioner is doing? It's cited. And it's something that I think the SEC chair in the past, both Republican and Democrat, have highlighted when they have a record amount of penalties. It's a way to show Congress, hey, we're doing our job. We're vigorous on enforcement. Now, is it a great measure? I think that there's some questions as to whether or not this might lead to artificial inflation of penalties or even an incentive to settle cases more quickly for too little just to get the penalty in your numbers.

13:47There's a Wall Street Journal article about a year ago that reported that a lot of these penalties are actually not collected, that they're from bankrupt companies and so that the SEC doesn't actually end up collecting all the penalties that it imposes. They only announce the ones that they've imposed, not necessarily ones that they've collected. And so it's an imperfect measure, but it's a significant one. And I suspect that if we see a consistent decline, then that may be used against this SEC. If there's a big crash, that would be, oh, look at the penalties. They declined by 50 % under Atkins.

14:23That's why we have a loss of confidence. So the SEC needs to be careful because if it's not vigorous and there's a market correction and a lot of scandals, everyone asks, you know, why was the SEC asleep at the switch? Chairman Atkins has also expressed a commitment to notifying businesses of technical violations before jumping to enforcement. I think that's fine in some cases. If it truly is a minor technical infraction that is a mistake, then it may be faster. It may be faster to simply inform the company, you know, you need to fix this. Now, the problem is if this becomes an excuse to, you know, avoid enforcement of more serious matters, more serious matters where there is repeated violations, where there's harmed investors and customers, whether, you know, sometimes technical rule violations signal a more corrupt corporate culture.

15:20And that's something that I'd be worried if the SEC is not looking into this and following up on some of these minor rule violations. Now, on the other side is maybe it's a better use of SEC enforcements, which have become more limited. There's a lot of staff decline. SECs always have limited enforcement resources. This may be a way of quickly resolving matters without fully investigating. But I would be concerned about overusing this particular method. But I do think used properly, it could be a good thing. You mentioned a focus sort of more on individuals. Can the powerhouse public companies then breathe a sigh of relief and maybe relax their compliance programs or not?

16:01I hope not. I hope they don't see that as the message. A lot of the large companies have already invested in substantial amounts of compliance. And so they have the infrastructure in place. I would be surprised if they abandoned that because we could have a different SEC in the next, you know, if there's a transition in a few years. And also, it's good business to have strong compliance, in my view, that it's a way of controlling misconduct within your organization that you would not want, the shareholders would not want as well. But it would probably send a signal that on some issues we can maybe be a little bit less worried.

16:39And so the danger there is that corporate managers become a little bit too complacent. And so they may get the signal where we can take more risk with respect to misconduct. And they may not listen to the lawyers who are telling them, if you do this, the SEC could come knocking. And they may see that as less credible if you have less vigorous enforcement on the corporate side. And, you know, cases against individuals, I think the reality is they're very expensive. They're very hard to develop. You have to be very, very thorough. And sometimes the evidence to really establish liability against individuals may take years and years to develop.

17:18And so it will provide some deterrence, I think. But I think that, you know, sometimes if you have a substantial wrongdoing by a big corporation, that gets a lot of publicity. That generates a lot of deterrence in the corporate world. Finally, a noticeable decrease in the use of press releases. In September, only one press release. This is according to Reuters. Only one press release announced an enforcement action compared to 43 in September of 2024. That's a big decline, actually. And, you know, I watch those press releases very carefully. The blogs do as well. That's how we learn about the big cases.

17:55And I hope they will issue more press releases with notable cases because that's how we law professors and attorneys get a sense of what the SEC thinks is important. It keeps the SEC visible. But I think it's understandable with the transition. I expect they will ramp up their press releases over the next year or so. I'm sure they'll put out at least more than one a month. Do you have any concerns about enforcement that we haven't addressed? You know, the other point I would make is that, you know, with AI technology becoming so important, I hope the SEC really keeps a close eye on fundraising by AI companies because it's a very opaque technology.

18:36I think there are a lot of opportunities for fraud in this space. It's an important part of our economic boom. And I think that if we lose some confidence in those valuations, investors will lose a lot of money. So I hope the SEC is continuing those initial efforts to look at AI companies. That will certainly keep them busy. Thanks, Jim. That's Professor James Park of UCLA Law School. Support for the show comes from Public.com. If you're actively involved in your portfolio, you probably catch yourself repeating the same actions. Buying the dip, manually sweeping idle cash, putting on a hedge. On public, you can now create AI agents that handle all these tasks on your behalf.

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21:54Earlier this month, the Supreme Court agreed to hear a gun case testing the right to carry. My guest is Andrew Willinger, executive director of the Duke Center for Firearms Law. Andrew, tell us about the federal law at issue here in the Hamani case. This section of federal law might sort of sound familiar to people who have been following the court's Second Amendment jurisprudence over the past couple of years. This is 18 U.S. Code 922, and specifically 922G, which lists a number of prohibited statuses. So groups of people who, because of their status are prohibited under federal law from possessing firearms or ammunition.

22:39And one of those groups, one of those subsections under 922G was at issue in the Rahimi case. That's individuals who are subject to a domestic violence restraining order that meets certain criteria. But there are other groups as well, felons, for example, and then as relevant to the Hamani case, individuals who are considered unlawful users of or addicted to a controlled substance. So that's the specific provision of federal criminal law that's at issue in this case is a ban on unlawful drug users possessing firearms. The Fifth Circuit said that the blanket ban is unconstitutional, but the ban could be used against people accused of being high and armed at the same time.

23:23Explain the logic of that. That's basically right. It is a little bit confusing because there are a number of different cases in the Fifth Circuit. And so if you look back at the Himani case, there really isn't a lengthy decision because the circuit had decided an earlier case called Connolly. And all the judges said in this specific case is that, you know, we're applying our ruling in Connolly, and therefore find that as applied to this individual Himani, the provision is also unconstitutional. But basically, the approach that the Fifth Circuit has taken in these drug cases is to say that as a historical matter, the judges believe that there's support for applying this provision when somebody is under the influence of drugs, and at the same time, in possession of guns or ammunition.

24:13But when there's no proof that those two things were contemporaneous, that they occurred at the same time, then the judges have said that the provision cannot be applied. And that's what they decided in the Hamani case. And this is the same provision that a jury convicted Hunter Biden on? That's correct. That is correct. That's where it got its fame. So the Justice Department is arguing that the law is valid. So they're arguing then for a law that restricts Second Amendment rights. That's right. Yeah, it's a little bit of an interesting posture, as you note. But again, I think what this comes back to is the distinction between a facial challenge and an as-applied challenge.

24:54So the Hamani case deals with an as-applied challenge. And the government is saying, you know, we think the Fifth Circuit got it wrong, but on these specific facts. So I think it's going to be a little bit of a delicate dance throughout this case as it works its way through the briefing and the oral argument before the Supreme Court, where I actually don't think that the current administration believes that 922 G3, as the language has been interpreted, is constitutional in all of its applications, right? I don't know that they would say that this is constitutional as applied to somebody who's just, you know, using marijuana on a regular basis.

25:32But they want to say in this case, because there are maybe exacerbating factors, it's not just marijuana, there's potentially other illegal drugs at issue. And there's a connection to allegedly to foreign terrorism. That's not really relevant to the Second Amendment, but they're going to, I think, focus a lot on the as-applied nature and on the specific facts of this case. The Supreme Court in 2022 in the Bruin case ruled that any restrictions on firearms have to be consistent with the nation's historical tradition of firearms regulation. What is the history and tradition that the government is saying supports their position here?

26:15The government, at least below in these cases, the Fifth Circuit has basically rested on three categories of historical statutes or restrictions. So the first is the historical treatment of the mentally ill. And that's sort of an argument that maybe drug users are analogous in some way to those who are mentally ill, that this is some form of a temporary incapacitation. The second is more generally just laws that were based on a legislative determination that some group of people is dangerous. So that could be, you know, political dissidents, for example, like it could be any group where the determination is, you know, this group is dangerous, and we're not going to allow them to have guns.

26:57And then the third is, And this kind of goes in sequential order, you know, the mental illness and the dangerousness laws are earlier. And then eventually you start to see laws that talk about alcohol and being intoxicated with alcohol. And those are also a category that the government has come forward with in these cases. And again, I think for each one, you know, it's going to depend on this level of generality issue that courts have really been wrestling with under Bruin, which is how close do the historical statutes really need to be in order to uphold the modern law. And the historical statutes go back to the 17th and 18th century.

27:37Do they go back to the 19th century? What does the court consider acceptable history? Yeah, well, that's one of the really interesting aspects of sort of both of these cases that the court has granted now, which is that in some sense, there are narrow questions. But I think they're in the background, you have this doctrinal uncertainty. And we're going to start to get some clues about questions like the one you raised, which is what's even the time period, right? How far back do you go? You know, if something's enacted in the 19th century, is that too new? Like, does that not really inform the original meaning of the Second Amendment?