The Safe Harbor Provision of Rule 508 is Available to Defendants in SEC Enforcement Actions: Eleventh Circuit | Practical Law

The Safe Harbor Provision of Rule 508 is Available to Defendants in SEC Enforcement Actions: Eleventh Circuit | Practical Law

On February 23, 2017, in SEC v. Levin, the US Court of Appeals for the Eleventh Circuit held that the safe harbor provision of Regulation D's Rule 508(a) is available to a defendant in an SEC enforcement action based on a failure to register securities under Section 5 of the Securities Act.

The Safe Harbor Provision of Rule 508 is Available to Defendants in SEC Enforcement Actions: Eleventh Circuit

by Practical Law Litigation
Published on 27 Feb 2017 • USA (National/Federal)
On February 23, 2017, in SEC v. Levin, the US Court of Appeals for the Eleventh Circuit held that the safe harbor provision of Regulation D's Rule 508(a) is available to a defendant in an SEC enforcement action based on a failure to register securities under Section 5 of the Securities Act.
On February 23, 2017, in SEC v. Levin, the US Court of Appeals for the 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 ( (11th Cir. Feb. 23, 2017)).
In 2012, the SEC brought suit against George G. Levin for violating various securities laws in connection with a Ponzi scheme, including fraud and failure to register certain promissory notes sold to investors. Levin asserted various affirmative defenses, including the defense that the note offerings were exempt from the Securities Act's registration requirement under the safe harbor provision of Rule 508, Regulation D.
The district court rejected Levin's affirmative defenses, reasoning that the safe harbor provision in Rule 508(a) only applies to defendants in private actions, not SEC enforcement actions. As a result, the district court granted summary judgment to the SEC on the registration claim. Later, at trial, a jury found Levin liable on the fraud claims and the court ordered him to disgorge $40.1 million that he and his family received from the scheme. Levin timely appealed to the US Court of Appeals for the Eleventh Circuit, claiming, among other things, that the district court erred when it granted a summary judgment to the SEC and found that the securities Levin sold to investors were not eligible for the Rule 508 exemption.
The Eleventh Circuit agreed with Levin and reversed. Having reviewed the plain language of the rule and the regulatory history, the court held that Rule 508 preserves the safe harbor both in private actions and in SEC enforcement actions and remanded the case. The Eleventh Circuit affirmed the district court's other rulings.
For more information on the SEC's investigation and enforcement processes, see Practice Notes, Roadmap of the SEC's Investigation and Enforcement Process, Exchange Act: Section 10(b) Defense Strategy Overview, and US Securities Laws: Overview.