Month: June 2026

At an open meeting chaired by SEC Chairman Paul Atkins, the Commission voted to propose rescinding Rule 611 (the “trade-through prohibition” requiring trades be executed at the national best bid or offer) and Rule 610(e) (restrictions on locking and crossing quotations) of Regulation NMS, in a significant deregulatory shift for U.S. equity market structure.

Atkins called Rule 611 a “grave misstep” that “prioritized the Commission’s assumptions about markets above what could emerge from competition,” and said the proposal is “intended to simplify market structure and reduce costs.”

The public comment period will remain open for 60 days after publication in the Federal Register.

Read: SEC.gov | SEC Proposes Rescission of Regulation NMS Rules 611 and 610(e)

In a 6–3 decision authored by Justice Barrett, the Supreme Court held that Section 47(b) of the Investment Company Act does not create an implied private right of action for rescission of contracts that allegedly violate the Act, reversing the Second Circuit.

The Court reasoned that Section 47(b) is directed at courts’ remedial authority, not at conferring individual rights, and that the ICA’s comprehensive SEC enforcement scheme and two express private causes of action foreclose additional implied remedies.

The ruling directly limits the ability of activist investors — such as Saba Capital, which had used the provision to challenge closed-end fund anti-takeover provisions — to weaponize the ICA in securities litigation.

Read: 24-345_i42k.pdf

(Reuters) The U.S. Supreme Court on Thursday rejected a challenge to the Securities and Exchange Commission’s broad authority to recover illegal profits using a financial remedy called disgorgement, buttressing one of ‌the Wall Street watchdog agency’s key powers.

The justices, in a 9-0 ruling authored by conservative Justice Neil Gorsuch, upheld a lower court’s decision that had endorsed a wide use of the SEC’s disgorgement authority. President Donald Trump’s administration defended the SEC in the case.

The challenge to the SEC’s disgorgement power was brought by a defendant named Ongkaruck Sripetch. At the agency’s request, a court in California ordered Sripetch to repay more than $3 million in ill-gotten gains and interest related to a financial fraud case.

The SEC’s general power to pursue disgorgement was not in dispute in the case. Courts have long ⁠recognized this authority and Congress enshrined it in federal law. At issue was whether the agency must show that victims suffered economic harm before it can seek the surrender of illegal profits.

“The Supreme Court’s unanimous decision to uphold the agency’s right to seek disgorgement is critical to maintaining a consistent approach across our enforcement program. This remedy will remain an important part of the commission’s renewed emphasis on combating fraud, and we are gratified the Supreme Court agreed with the agency’s position in this case,” said Russell McGranahan, the SEC’s general counsel.

Justice Department lawyers during arguments before the justices in April said the SEC was not required to show that fraud inflicted financial, or “pecuniary,” harm before pursuing repayment through the courts.

Gorsuch, writing for the court, concluded that “a showing of pecuniary loss is not required before an investor may qualify as a victim of an offender’s wrongdoing entitled to compensation.”

Under Trump, the SEC used the remedy to obtain around $1.4 billion in ‌fiscal 2025, ⁠according to an agency tally that excluded certain sums. The prior year under Democratic President Joe Biden, the SEC obtained $6.1 billion through disgorgement, almost three-fourths of its total financial penalties.

The SEC in 2020 sought disgorgement for illicit proceeds that it said Sripetch reaped through fraudulent means, including a so-called pump-and-dump scheme that involved artificially inflating the price of penny stocks before selling off his shares at a profit.

Sripetch admitted violating securities law, and in a related criminal case was sentenced to 21 months in prison. Sripetch challenged the lower ⁠court’s disgorgement order on the grounds that the SEC failed to prove his actions caused stock prices to drop or otherwise financially harmed investors.

A California-based federal judge sided with the SEC’s broader interpretation of its disgorgement power in a ruling that was upheld last year by the San Francisco-based 9th U.S. Circuit Court of Appeals.

Beyond disgorgement, the SEC can ⁠also pursue fines, sanctions and other punishment.

The Supreme Court in a 2024 ruling also involving the SEC rejected the agency’s in-house enforcement of laws protecting investors against securities fraud. The court ruled that agency proceedings seeking penalties for fraud that are handled by the SEC itself instead of in federal court violate the U.S. ⁠Constitution’s Seventh Amendment right to a jury trial.

The SEC’s $1.4 billion disgorgement figure for fiscal 2025 excludes certain repayments secured by other federal agencies and an $8 billion payment made in January 2025, during the second week of Trump’s return to the White House, stemming from long-running SEC litigation concerning a Ponzi scheme.

(Metropolitan News-Enterprise) The Ninth U.S. Circuit Court of Appeals weighed in yesterday on the use of artificial intelligence tools in legal filings, suspending two Orange County immigration attorneys from practice in the court for six months, as well as imposing monetary and other penalties, relating to briefs submitted with fabricated citations and statements characterizing the errors as “typographical” mistakes that involved no use of the hallucination-prone technology.

Saying that “we issue this disciplinary order, and explain our reasoning at some length, as a warning to the members of this Court’s bar,” the court declared:

“[B]e aware of the risks of overreliance on generative AI, read everything cited in a court filing—whether drafted by generative AI or not—and disclose quickly and transparently generative AI hallucinations that are inadvertently included in court filings.”

Circuit Judge Danielle J. Forrest and Senior Circuit Judges Richard A. Paez and Carlos T. Bea signed yesterday’s order imposing the sanctions on Mike Singh Sethi of the City of Orange-based Sethi Law Group and William Rounds, formerly of Sethi Law Group and now, according to State Bar records, with U.S. Legal Group APC.

They declared that each attorney is “personally sanctioned in the amount of $2,500,” “hereby suspended from practice before this Court for a period of six months,” and ordered them to “provide a copy of this Order to their clients, opposing counsel, and the presiding judge in every pending state or federal case in which they are counsel of record.”

The order also mandates that, for a period of two years, “all attorneys at the Firm” must “include in all future filings” a sworn statement “addressing whether generative AI was used, disclosing the name of the tool used, and certifying that the attorney signing the brief or other filing has personally reviewed the filing and that all citations and quotations therein refer to existing authority.”

Immigration Matter

Sethi and Rounds served as counsel for the petitioners in the Lnu v. Blanche matter, in which the petitioners sought review of a Board of Immigration Appeals order. Sethi signed an opening brief that contained citations to non-existent cases and purported quotations from real opinions in which the language did not appear.

He later moved to correct the record, representing in the written request that the reliance on two fake cases was the result of “typographical errors” and seeking to replace the citations with two opinions with similar names, different reporter numbers, and, in one instance, a different year.

The new cases do not support the propositions for which they were cited, and the motion failed to address the misattributed quotations. Only Rounds appeared for oral argument, and he attributed the mistakes to possible “copy and paste error[s] or something like that.”

When pressed on whether generative-AI tools might have been used, he categorically denied that the technology was employed in creating the briefs before conceding that it was possible, clarifying that the filing was written by a recent law-school graduate who was not yet licensed to practice. The panel ordered both attorneys to show cause why they should not be sanctioned, suspended, or disbarred from practice before the court.

In a joint response, the lawyers explained that the firm employs a team of recent law school graduates to write briefs and that the attorneys do not normally “vet citations.” They indicated that they did not suspect AI was used because the office has a policy prohibiting the use of the technology in drafting.

Sethi and Rounds proceeded to concede that the errors were likely the product of an unauthorized use of AI by the brief writers and apologized to the court, saying that they have hired a licensed attorney to check all briefs prepared by the unlicensed authors in the future. Sethi expressed an intention to remedy similar errors made in other pending matters.

Multiple Rules Violated

Saying that both attorneys “violated multiple rules of appellate procedure and professional conduct,” the panel declared:

“Sethi did so when he signed and filed briefs in this Court with nonexistent cases, misattributed quotations, and gross misrepresentations of real cases….Sethi and Rounds also violated their duty of candor when they represented the errors as innocent typographical mistakes and when they affirmatively denied that generative AI might have been the source of the errors.”

Clarifying that “[w]e do not sanction Sethi and Rounds for the simple fact that they or their subordinates used generative AI, the judges noted that the use of such tools is not “inherently unethical or irresponsible.” However, pointing to a 2024 study which showed that certain AI programs utilized by Westlaw and Lexis “hallucinated 17% and 33% of answers,” they wrote:

“The most common error modes of the latest generation tools include misunderstanding holdings, failing to distinguish between legal actors (e.g., presenting a rejected party argument as the holding of the court), and failing to respect the hierarchy of authorities….In other words, the sort of errors that we might expect a first-semester law student to make, but certainly not licensed attorneys appearing before this court.”

Awareness of Tendency

Highlighting that “[l]awyers using generative AI must thus be aware of the tendency of generative AI to make these mistakes and guard against them,” they opined:

“It is ultimately irrelevant to the disciplinary analysis (except for the duty of candor)…whether Sethi, Rounds, or anyone at the Firm actually used generative AI….[T]he rules are not violated at the point of research and drafting, but at the point of signing and filing. If an attorney files a brief with cases or quotations that do not exist, or completely misrepresents what a real authority stands for, it generally does not matter if he pulled the hallucination or misrepresentation from the output of an artificial intelligence tool or from his own natural intelligence.”

Rejecting the assertion that the errors were irrelevant because “other cases…stand for the propositions asserted,” the jurists remarked that “it was [Sethi’s] responsibility to cite them” and opined:

“It is no excuse that Sethi entrusted substantive cite checking to subordinates, and it is no excuse that Sethi purportedly did not know his subordinates had used generative AI….Sethi’s signature was an attestation that he personally reviewed the contents of the brief, including the cited authorities, and that they were accurate.”

They added:

“The misconduct in this case did not end with the initial filing of the…briefs. At every subsequent step…Sethi and Rounds have knowingly or recklessly made false statements to this Court.”

No Plausible Explanation

Commenting that “we have not identified any plausible explanation for how innocent…copy-paste errors could turn” the real cases into the cited fabricated ones, the court attributed knowledge that the errors were something more than typographical to the lawyers. Paez, Bea, and Forrest wrote:

“An attorney who erroneously submits a hallucination in a brief must notify the Court and opposing counsel immediately, describe the nature of the error (a fabrication, a gross misrepresentation, etc.), and disclose how the error came about—here, misused generative AI.”

Saying that the lawyers failed to live up to their obligation to do so, and calling out Sethi for “engag[ing] in more subtle subterfuge” in another matter in which he filed a “Notice of Errata” that did not disclose that certain citations “were hallucinations,” the court declared:

“[F]ailing to disclose the…source of the errors is conduct unbecoming of a member of this Court’s bar.”

Continuing, they said:

“If, in the Motion to Correct, Sethi and Rounds had disclosed that AI was used in the opening brief against firm policy and apologized for failing to check the brief, lesser sanctions may have been warranted. But that is not what they did. The gravity of discipline we impose, including the temporary suspension of practice, is owed to this repeated failure of candor.”

The case is Lnu v. Blanche, 24-4790.

The United States Trade Representative determined under Section 301 of the Trade Act of 1974 that the acts, policies, and practices of 60 economies related to the failure to impose and effectively enforce a prohibition on the importation of goods produced with forced labor is unreasonable and burdens or restricts U.S. commerce, and are thus actionable under Section 301(b) of the Trade Act. The Office of the United States Trade Representative (USTR) has prepared a comprehensive report, Acts, Policies, and Practices of Various Economies Related to the Failure to Impose and Effectively Enforce a Prohibition on the Importation of Goods Produced with Forced Labor, that supports the findings in each investigation.

“The failure of our most important trading partners to address the importation of goods made with forced labor is unacceptable. This creates a dynamic where American workers are forced to compete globally on an unlevel playing field,” said Ambassador Jamieson Greer. “We will no longer tolerate this disparity. Some trading partners have taken initial steps to prevent the importation of forced labor goods, including through USMCA and commitments in Agreements on Reciprocal Trade. However, each of our trading partners must do more to ensure that trade does not perversely encourage and entrench forced labor globally.”

As a result of these determinations in the investigations, the U.S. Trade Representative has proposed responsive action for public comment.

Specifically, the U.S. Trade Representative proposes additional duties on all products of the investigated economies, except as provided in Annex A to the Federal Register notice. For economies that impose a forced labor import prohibition, that have committed to impose and enforce such a prohibition through an Agreement on Reciprocal Trade, or economies that have imposed a partial regime with the effect of preventing the importation of certain forced labor goods, the U.S. Trade Representative proposes 10% as the rate of additional duties. For all other economies, the U.S. Trade Representative proposes 12.5% as the rate of additional duty. The U.S. Trade Representative also proposes a textile mechanism that would allow for a certain volume of apparel and textile imports from certain economies to enter the United States at a reduced Section 301 tariff rate.

To be assured of consideration, interested persons should submit requests to appear at the hearings, along with a summary of testimony by June 22, 2026.

Written comments are due by July 6, 2026.

In an 8-1 decision written by Chief Justice Roberts, the Supreme Court reversed the Fifth Circuit and held that FCC forfeiture orders do not violate the Seventh Amendment when issued without a jury, because they do not create a binding obligation to pay — any collection requires a subsequent de novo jury trial before an Article III court. The case involved over $100 million in FCC fines imposed on AT&T and Verizon for sharing customer location data without adequate vetting of third parties. The Court distinguished the FCC’s scheme from the SEC’s enforcement structure struck down in Jarkesy (2024), since the FCC cannot execute on a forfeiture order unilaterally: only the DOJ can collect through a separate jury trial. The ruling limits the reach of Jarkesy and confirms the constitutionality of similar two-step administrative enforcement schemes.