New York Court Settlement Collector’s Coffee Breached SEC Rule

On November 17, 2021, the U.S. District Court for the Southern District of New York ruled that a company and its CEO violated Exchange Act rule 21F-17 by entering into confidentiality agreements with investors prohibiting communications with the SEC then attempting to enforce those agreements. SEC c. Collectors Coffee Inc., n ° 19-cv-4355.

Fund. As we previously reported in 2019, the SEC sued Collector’s Coffee, an online sports memorabilia auction platform, and its CEO, for allegedly defrauding investors and obstructing their communications with the SEC in violation of Rule 21F-17. Rule 21F-17, adopted after the passage of the Dodd-Frank Act, prohibits any person from acting to “prevent a person from communicating directly with Commission staff about a possible violation of the Act on securities, including the application or threat of application of a confidentiality clause. agreement… with regard to these communications.

As noted in our July 2021 update, the Court previously ruled that rule 21F-17 applies to investors as well as to employees, finding that the broad definition of “whistleblower” under Section 21F of The Exchange Act extended its protections beyond the employer-employee context. .

Decision. The Court declined to interfere with previous decisions, finding that the only remaining question to be resolved is whether the defendants’ conduct actually violated Rule 21F-17. The defendants had entered into agreements with investors which expressly prohibited “communications with regulatory bodies, such as the United States Securities and Exchange Commission …” and, in at least one case, sued an investor for violating this confidentiality clause. The Court ruled that such actions were undoubtedly “obstructive actions” prohibited by Rule 21F-17, and granted summary judgment in favor of the SEC.

Implications. The SEC’s successful application of Rule 21F-17 should serve as a reminder that companies must ensure that their confidentiality agreements and provisions include clear exceptions allowing whistleblowing to the SEC and other regulators.

© 2021 Proskauer Rose LLP / srl. Revue nationale de droit, volume XI, number 351

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