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  • Technology Services Company Enters Into FCPA Settlement With SEC, While SEC And DOJ Charge Two Former Executives With FCPA Violations
     
    02/20/2019

    On February 15, 2019, the Securities and Exchange Commission (“SEC”) announced a settlement with a New Jersey-based technology company (the “Company”) over allegations that the Company violated the anti-bribery, books-and-records, and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”).  In the Matter of Cognizant Technology Solutions Corporation, Admin Proc. No 3-19000 (Feb. 15, 2019).  Without admitting or denying the allegations, the Company agreed to pay disgorgement and prejudgment interest of approximately $19 million and a civil monetary penalty of $6 million to the SEC to resolve the agency’s claims.  The same day, the Department of Justice (“DOJ”) issued a letter announcing that it had declined to prosecute the Company pursuant to the Department’s FCPA Corporate Enforcement Policy.  Finally, the DOJ announced that the Company’s former president and chief legal officer were indicted on criminal charges relating to their alleged involvement, and the SEC filed a civil complaint against the same two executives, in United States District Court for the District of New Jersey.
  • After Second Look, Judge Grants SEC Bid for Preliminary Injunction Halting Initial Coin Offering
     
    02/20/2019

    On February 14, 2019, Judge Gonzalo P. Curiel of the United States District Court for the Southern District of California reversed his November 2018 decision and granted a motion for preliminary injunction filed by the Securities and Exchange Commission (“SEC”) seeking to halt a planned initial coin offering (“ICO”) by a San Diego based company (the “Company”) and its owner in December 2018. SEC v. Blockvest, LLC, et al., No. 3:18-cv-02287 (S.D. Cal. Feb 14. 2019) (the “Order”). Judge Curiel held that the Company’s digital tokens, which were allegedly offered as part of a fraudulent ICO, met the definition of a “security” followed by courts since the Supreme Court’s decision in SEC v. W.J. Howey Co. This shift in outcome from the Court’s November 2018 decision highlights the fact-specific nature of the inquiry used by courts to determine whether a given distribution of crypto assets constitutes an offer of a security.
  • Tenth Circuit Holds That Dodd-Frank Act Granted SEC Extraterritorial Authority
     
    02/11/2019

    On January 24, 2019, the United States Court of Appeals for the Tenth Circuit affirmed a decision by the United States District Court for the District of Utah holding that the Dodd-Frank Act of 2010 grants the Securities and Exchange Commission (“SEC”) authority to enforce extraterritorially the antifraud provisions of the federal Securities Act of 1933 and the Securities Exchange Act of 1934.  SEC v. Scoville, No. 17-CV-4059 (10th Cir. 2019).  Months before the Dodd-Frank Act was passed, the Supreme Court in Morrison v. National Australia Bank, 561 U.S. 247, 265 (2010), held that, given the general presumption against extraterritorial application of U.S. laws and the lack of clear indicia of congressional intent to the contrary, the federal securities laws did not apply extraterritorially.  But the Tenth Circuit concluded in Scoville that the Dodd-Frank Act “affirmatively and unmistakably” evidenced Congress’s intent to allow the SEC and the U.S. to enforce the federal securities laws whenever the “conducts-and-effects” test is met, effectively rendering Morrison inapplicable to SEC and other government enforcement actions while not disturbing its impact on private securities actions. 
  • FINRA Issues 2019 Annual Risk Monitoring and Examination Priorities Letter, Highlighting Potential Areas Of Enforcement Risk
     
    01/29/2019

    On January 22, 2019, the Financial Industry Regulatory Authority (“FINRA”) issued its annual letter describing its current risk monitoring and examination priorities.  See FINRA, Risk Monitoring and Examination Priorities Letter (Jan. 2019).  Although there are no major surprises in terms of priorities, firms would be well-advised to review the letter to ensure that their own compliance policies are meeting with FINRA’s expectations.  Indeed, the letter can arguably read as a roadmap to potential future enforcement activity, particularly when coupled with FINRA’s recent efforts to restructure internally to increase efficiency and coordination among its enforcement teams.
  • Second Circuit Re-Affirms Insider Trading Conviction Of Rajat Gupta
     
    01/15/2019

    On January 7, 2019, the United States Court of Appeals for the Second Circuit affirmed — for the second time — the insider trading conviction of Rajat Gupta. Gupta v. United States, No. 15-2707 (2d Cir. Jan. 7, 2019). In a collateral attack to his conviction, Gupta argued that the jury instructions in his case were infirm given the Circuit’s decision in United States v. Newman (since abrogated). There, the Circuit held that to the extent a personal benefit may be inferred through a personal relationship between a tipper and tippee, there must be a “meaningfully close personal relationship.”1 The Second Circuit denied Gupta’s appeal on two grounds — that his failure to preserve his objection to the jury instructions was not excused, and that the instructions did not prejudice Gupta.
  • Rental Car Company Enters Into Settlement With The SEC Related To Alleged Accounting Errors
     
    01/08/2019

    On December 31, 2018, the Securities and Exchange Commission (“SEC”) announced that a public rental car company (the “Company”) had agreed to pay a $16 million civil penalty to settle allegations of inaccurate financial reporting and accounting errors.  See In the Matter of Hertz Global Holdings, Inc. and The Hertz Corporation, Admin. Proc. File No. 3-18965 (Dec. 31, 2018).  The allegations arose out of a restatement the Company filed on July 16, 2015, which restated the Company’s annual, quarterly, and periodic reports from February 2012 to March 2014, as well as certain data in filings from 2008, 2010, and 2013.  Notwithstanding the prior restatement, the Company neither admitted nor denied wrongdoing.
  • Fourth Depositary Bank Settles SEC Allegations Of Improper Handling Of Pre-Release ADRs
     
    01/08/2019

    On December 26, 2018, the Securities and Exchange Commission (“SEC”) announced that a fourth depositary bank (“the Bank”) had agreed to pay a civil monetary penalty and disgorgement totaling $135.1 million to resolve allegations that the Bank violated federal securities laws by issuing American Depositary Receipts (“ADRs”) on “pre-release” without taking reasonable steps to ensure that the broker-dealers to whom it was issuing the ADRs, or their counterparties, beneficially owned the requisite number of foreign securities underlying the ADRs.  See In the Matter of JPMorgan Chase Bank, N.A., Admin. Proc. File No. 3-18963 (Dec. 26, 2018).  The SEC alleged that the Bank’s conduct violated Section 17(a)(3) of the Securities Act.  As with all prior entities charged in the SEC’s investigation, the Bank neither admitted nor denied wrongdoing. 
  • Following Bench Trial, Southern District Of New York Finds That CFTC Failed To Prove Artificiality And Enters Judgment For Defendants In Market Manipulation Action
     
    12/11/2018

    On November 30, 2018, Judge Richard J. Sullivan of the United States Court of Appeals for the Second Circuit, sitting by designation on the United States District Court for the Southern District of New York, issued a decision following a 2016 bench trial presided over by Judge Sullivan before his elevation to the Second Circuit in an action brought by the United States Commodity Futures Trading Commission (“CFTC”) against DRW Investments LLC (“DRW”) alleging that DRW had manipulated the price of a certain swap future in violation of the Commodities Exchange Act (“CEA”).  U.S. Commodity Futures Trading Commission v. Donald R. Wilson, et al., No. 1:13-cv-07884 (S.D.N.Y. Nov. 30, 2018).  The Court entered judgment for DRW on all claims, finding that the CFTC failed to prove that DRW’s challenged bids were at artificial prices.
    CATEGORY: Judicial Opinions
  • Second Circuit Affirms Insider Trading Conviction And Vacates Restitution Order Of Sports Gambler Billy Walters
     
    12/11/2018

    On December 4, 2018, the United States Court of Appeals for the Second Circuit affirmed the insider trading conviction, judgment, and order of forfeiture of professional sports gambler Billy Walters, while simultaneously vacating and remanding the $8.89 million restitution order that had been entered against him in light of the Supreme Court’s decision in Lagos v. United States, 138 S. Ct. 1684 (2018).  U.S. v. Walters, et al., No. 17-2373 (2d Cir. Dec. 4, 2018).
  • SEC Loses Bid For Preliminary Injunction Halting Initial Coin Offering After Judge Questions Whether It Involved Securities
     
    12/05/2018

    On November 27, 2018, Judge Gonzalo P. Curiel of the U.S. District Court for the Southern District of California denied a motion for preliminary injunction filed by the Securities and Exchange Commission (“SEC”) seeking to halt a planned initial coin offering (“ICO”) by a San Diego based company (the “Company”) and its owner in December 2018.  SEC v. Blockvest, LLCet al., No. 3:18-cv-02287 (S.D. Cal Nov. 27, 2018) (the “Order”).  Judge Curiel held that, due to disputed issues of material facts, and without full discovery, he could not determine whether the tokens issued by the Company constitute a “security” under the Securities Exchange Act of 1934.
  • OFAC Identifies Digital Currency Addresses Of Iran-Based Financial Facilitators, Highlighting Its Focus On Sanctions Compliance In Crypto Space
     
    12/05/2018

    On November 28, 2018, the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) imposed sanctions pursuant to its cyber-related sanctions program on two Iranian individuals for their role in facilitating ransom payments made in bitcoin.  In doing so, OFAC also identified the digital currency addresses associated with both individuals, which marks the first time that OFAC has published digital currency addresses linked with specific individuals. OFAC’s cyber-related sanctions program was created on April 1, 2015 and targets persons responsible for or complicit in malicious cyber-enabled activities.
  • DOJ Scales Back Yates Memo Policy For Corporate Cooperation
     
    12/05/2018

    On November 29, 2018, Deputy Attorney General Rod Rosenstein announced revisions to the Department of Justice (“DOJ”) policy on individual accountability for corporate wrongdoing, which was originally announced in the Yates Memo of September 2015.  U.S. DOJ, Remarks at the American Conference Institute's 35th International Conference on the Foreign Corrupt Practices Act.  In response to concerns that the policy could lead to wasted resources and impede resolutions, Mr. Rosenstein announced that the revised policy requires that companies identify all individuals who were substantially involved in a potential crime in order for companies to receive cooperation credit in criminal investigations; the policy established in the Yates Memo, on the other hand, required companies to provide information on all individuals who were involved in potential misconduct, no matter how insubstantial their role.
  • ICO Issuers Settle With The SEC Over Unregistered Coin Offerings
     
    11/20/2018

    On November 16, 2018, the U.S. Securities and Exchange Commission (“SEC”) instituted separate settled administrative proceedings against Carrier EQ Inc., d/b/a AirFox (“AirFox”) and Paragon Coin Inc. (“Paragon”) for failing to register initial coin offerings (“ICOs”) they had conducted as securities offerings.  See In the Matter of CarrierEQ, Inc., D/B/A/ AirFox, Admin Proc. File No. 3-18898 (Nov. 16, 2018); In the Matter of Paragon Coin Inc., File No. 3-18897 (Nov. 16, 2018).  The actions against AirFox and Paragon mark the first time that the SEC has imposed civil penalties for standalone registration violations in connection with ICOs, and serve to reconfirm the SEC’s view that many digital tokens will constitute securities.
  • Bank Of England Imposes Personal Fines On Two Individuals For Failure To Disclose Ongoing Enforcement Actions
     
    11/13/2018

    On November 7, 2018, the Bank of England’s Prudential Regulation Authority (“PRA”) handed down rare individual penalties when it imposed fines on two high-level former executives of a UK subsidiary of a Japanese financial institution (the “UK Subsidiary”) for failing to timely inform the PRA of regulatory enforcement matters in the United States.  The PRA levied a fine on the former chair (the “Chair”) of the UK Subsidiary and a former Non-Executive Director of the UK Subsidiary (the “NED”), for violating PRA Statement of Principle 4 by failing to inform the Bank of England that the Chair had been implicated in an enforcement action by the New York State Department of Financial Services (“DFS”) and would likely be subject to certain penalties and restrictions. The PRA concluded that the failure to disclose this information impeded its ability to assess the fitness and propriety of the Chair, and therefore warranted penalties.  The Chair and NED agreed to settle the PRA’s investigation for £22,700 and £14,945, respectively.  See Akira Kamiya, Bank of England Prudential Regulation Authority 1.2 (Nov. 7, 2018) (final notice); Takami Onodera, Bank of England Prudential Regulation Authority 1.2 (Nov. 7, 2018) (final notice).
  • Second Circuit Court Of Appeals Reverses Investment Banker’s Insider Trading Conviction
     
    11/13/2018

    On November 5, 2018, the Second Circuit Court of Appeals in a split decision vacated the insider trading conviction of a former Wall Street analyst and remanded the case back to the district court for a new trial. United States v. Stewart, 2018 U.S. App. LEXIS 31207 (2d Cir. Nov. 5, 2018). The analyst was charged with nine counts, including one count of conspiracy to commit securities fraud and tender offer fraud, one count of conspiracy to commit wire fraud, one count of tender offer fraud, and six counts of securities fraud. The trial took place in the U.S. District Court for the Southern District of New York from July 27, 2016, to August 9, 2016, and the analyst was convicted of all nine counts on August 17, 2016. On appeal, the Second Circuit held that the district court erred by excluding key impeachment evidence the defense had sought to introduce.
  • SEC Enforcement Division Releases Report On FY 2018, Highlighting Focus On Cyber And Efforts To Protect Retail Investors
     
    11/06/2018

    On November 2, 2018, the U.S. Securities and Exchange Commission (“SEC”) Enforcement Division issued its annual report (“Annual Report”) on enforcement efforts for its 2018 fiscal year.  The SEC brought 821 enforcement actions, an approximately 8.9 percent increase over FY 2017.  The Commission also collected over $3.9 billion in disgorgement and penalties and returned approximately $794 million to harmed investors.  SEC Division of Enforcement, FY 2018 Annual Report (Nov. 2, 2018).  By these metrics, the Commission’s enforcement activity level surpassed FY 2017, and fell just short of its all-time record of 868 enforcement actions in FY 2016.  See Annual Report at 9.  The Report also noted a focus on matters impacting retail investors and those involving cyber-related issues (such as blockchain technology).
  • DOJ Announces Updated Policy On Selection Of Corporate Monitors
     
    10/23/2018

    On October 11, 2018, the U.S. Department of Justice (“DOJ”) released an updated policy regarding the selection of corporate monitors. The policy—entitled “Selection of Monitors in Criminal Division Matters” (“Policy”)—is designed to guide the DOJ’s decision-making on whether to require a monitor as part of corporate criminal resolutions.  U.S. DOJ, Selection of Monitors in Criminal Division Matters.  On the same day, Assistant Attorney General Brian A. Benczkowski provided remarks about the Policy at the NYU School of Law Program on Corporate Compliance and Enforcement Conference on Achieving Effective Compliance.  Mr. Benczkowski explained that while the DOJ continues to adhere to the view that “every case will at some stage require a deep look into the sufficiency and proper functioning of the subject company’s compliance program,” the Policy nonetheless recognizes that “the imposition of a monitor will not be necessary in many corporate criminal resolutions, and the scope of any monitorship should be appropriately tailored to address the specific issues and concerns that created the need for the monitor.”  DOJ Press Release, Assistant Attorney General Brian A. Benczkowski Delivers Remarks at NYU School of Law Program on Corporate Compliance and Enforcement Conference on Achieving Effective Compliance.  Thus, the Policy appears to signal a potentially meaningful shift away from the use of monitors by the DOJ, at least in cases involving historical conduct where companies have made meaningful efforts to remediate and invest in corporate compliance programs.
  • SEC Obtains Temporary Restraining Order Halting Initial Coin Offering
     
    10/16/2018

    On October 5, 2018, the Securities and Exchange Commission (“SEC”) obtained a temporary restraining order (“TRO”), halting a planned initial coin offering (“ICO”) by a San Diego based company (the “Company”) and its owner in December 2018.  Judge Gonzalo P. Curiel, of the U.S. District Court for the Southern District of California, issued the Order, which also froze defendants’ assets, ordered an accounting, and granted expedited discovery.  SEC v. Blockvest, LLC, et al., No. 3:18-cv-02287 (S.D. Cal Oct. 5, 2018) (the “Order”).  The grounds for this Order included that defendants falsely claimed that the ICO was approved by the SEC and other regulators and that they were audited by a reputable third party firm.  A preliminary injunction hearing is set for October 18, 2018.  In addition to obtaining the Order, the SEC also filed a Complaint against defendants on October 3, 2018, alleging violations of the antifraud provisions of Section 17(a) (1-3) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5(a-c) of the Securities Exchange Act of 1934, as well as the securities offering registration provisions of Section 5(a) and (c) of the Securities Act.  Complaint, SEC v. Blockvest, LLC, et al., No. 3:18-cv-02287 (S.D. Cal Oct. 3, 2018).
  • District Of Massachusetts Denies Motion To Dismiss, Finds Virtual Currency “My Big Coin” Is A Commodity Under Commodity Exchange Act
     
    10/09/2018

    On September 26, 2018, Judge Rya W. Zobel of the United States District Court for the District of Massachusetts denied a motion to dismiss a complaint filed by the Commodity Futures Trading Commission (“CFTC”) that alleged fraud in violation of the Commodity Exchange Act (“CEA”) arising out of the “My Big Coin” virtual currency.  See CFTC v. My Big Coin Pay, Inc., Case No. 1:18-cv-10077 (D. Mass. Sept. 26, 2018) (Memorandum of Decision).  The motion to dismiss, filed by various individual defendants, argued principally that My Big Coin is not a “commodity” within the meaning of the CEA, making the CEA’s prohibitions on fraud and market manipulation inapplicable.
  • CFTC Brings New Insider Trading Case In Conjunction With Announcing Insider Trading Task Force
     
    10/09/2018

    On September 28, 2018, the Commodity Futures Trading Commission (“CFTC”) filed a civil enforcement action in the Southern District of New York against an introducing broker and one of its associated persons, alleging that they misused material, nonpublic information in connection with block trades of energy contracts on the ICE Futures U.S. market in violation of 7 U.S.C. § 9(1) and 17 C.F.R. § 180.1(a).  CFTC v. EOX Holdings LLC, Case No. 1:18-cv-08890 (S.D.N.Y. Sept. 28, 2018) (Complaint for Injunctive Relief, Civil Monetary Penalties, and Other Equitable Relief).  In conjunction with the enforcement action, James McDonald, CFTC’s Director of Enforcement, announced the creation of a new Insider Trading & Information Protection Task Force.
  • Medical Device Manufacturer Enters Into Second FCPA Settlement In Five Years With SEC
     
    10/09/2018

    On September 28, 2018, the Securities and Exchange Commission (“SEC”) announced a settlement with a Michigan-based manufacturer and distributor of medical devices, over allegations that the company had violated the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”).  The SEC’s order instituting proceedings alleged that the company’s internal accounting controls were insufficient to detect the risk of improper payments in sales of its products in India, China and Kuwait, and that the company’s Indian subsidiary failed to maintain complete and accurate books and records.  See In the Matter of Stryker Corp., Admin. Proc. No. 3-18853 (September 28, 2018).  The company agreed to pay a $7.8 million penalty to settle the SEC’s claims without admitting or denying wrongdoing.  This is the second time in five years that the company has settled with the SEC over alleged shortcomings in its books and records and internal accounting controls.  See In the Matter of Stryker Corp., Admin. Proc. No. 3-15587 (October 24, 2013).
  • Tesla, Musk Settle Tweet-Related SEC Charges
     
    10/02/2018

    On September 27, 2018, the United States Securities and Exchange Commission (“SEC”) charged Elon Musk, the Chairman and CEO of Tesla, Inc., a publically-traded California-based technology company that specializes in electric vehicles, with securities fraud in connection with an August tweet, on his personal Twitter page, regarding the possibility of taking Tesla private.  Two days later, on September 29, the SEC announced that it had settled those charges, and had also settled a previously unfiled claim against Tesla itself, for failing to have required disclosure controls and procedures related to Musk’s Twitter activity.  Tesla and Musk neither admitted nor denied the allegations, but each has agreed to pay a civil penalty of $20 million, and Musk has agreed to step down as chairman of the Tesla board for three years.  Musk will remain CEO during this time.  See SEC Press Release, available at https://www.sec.gov/news/press-release/2018-226 (Sept. 29, 2018).
  • SEC Brings Enforcement Action Against Broker-Dealer For Deficient Cybersecurity Procedures
     
    10/02/2018

    On September 26, 2018, the United States Securities and Exchange Commission (“SEC”) announced a $1 million settlement with an Iowa-based broker-dealer over allegations that it maintained deficient cybersecurity policies and procedures, which resulted in a 2016 cyber intrusion, in violation of Regulation S-P and Regulation S-ID.  See Press Release, SEC Charges Firm With Deficient Cybersecurity Procedures, No. 2018-213 (Sept. 26, 2018); In the Matter of Voya Financial Advisors, Inc., Admin. Proc. No. 3-18840 (Sept. 26, 2018).
  • Significant Judicial And Enforcement Developments In The Cryptocurrency Space
     
    09/18/2018

    This past week saw important developments in the cryptocurrency space with two new regulatory actions, and a significant and much-anticipated decision in a criminal securities fraud action relating to an initial coin offering.
  • Second Circuit Limits Extraterritorial Application of FCPA
     
    09/05/2018

    On August 27, 2018, a three-judge panel of the Second Circuit limited the extraterritorial application of the Foreign Corrupt Practices Act (“FCPA”), holding the statute does not apply to foreign nationals who commit crimes outside the U.S. and who lack sufficient ties to U.S. entities.  U.S. v. Hoskins, No. 16-1010 (2d Cir. Aug. 24, 2018).   The panel largely upheld a decision by the United States District Court for the District of Connecticut, which concluded that the government could not evade the statute’s requirement that a foreign person had to act “while in the United States” by charging a retired British executive of a French multinational company with conspiring with persons in the United States to violate the FCPA.  The Court noted, however, that the government could still proceed on an alternative theory that the foreign person acted as an agent of those U.S. persons.
  • SEC Charges Rating Agency With Internal Controls Failures And Ratings Symbols Deficiencies
     
    09/05/2018

    On August 28, 2018, the Securities and Exchange Commission (“SEC”) announced two settlements with a rating agency (the “Company”) over allegations that it failed to maintain adequate internal controls and to clearly define and consistently apply credit rating symbols.  The SEC’s order instituting proceedings over internal control alleged that the Company failed to establish and document an effective internal control structure over models that it outsourced from an affiliate and used to rate Residential Mortgage Backed Securities (“RMBS”) from 2010 to 2013.  See In the Matter of Moody’s Investors Service, Inc., Admin. Proc. No. 3-18688 (August 28, 2018).  The SEC’s order instating proceedings relating to rating symbols alleged that the Company assigned ratings for 26 “combo notes” with a total notional value of approximately $2 billion in a manner that was inconsistent with other securities that use the same rating symbols.  See In the Matter of Moody’s Investors Service, Inc., Admin. Proc. No. 3-18689 (August 28, 2018).  The Company agreed to pay a $15 million civil penalty to settle the SEC’s claims relating to internal controls and a $1.25 million civil money penalty to settle the SEC’s claims relating to rating symbols, both without admitting or denying wrongdoing.
     
  • SEC Lifts Post-Lucia Stay On Pending Administrative Proceedings And Announces Rehearings For Dozens Of Previously Heard Cases
     
    08/28/2018

    On August 22, 2018, the Securities and Exchange Commission (“SEC”) announced that it will rehear over fifty cases pending before administrative law judges (“ALJs”) that were stayed following the U.S. Supreme Court’s decision in Lucia v. SEC, 138 S. Ct. 2044 (2018), which held that the SEC’s process for appointing ALJs was unconstitutional.  See Order, In re: Pending Administrative Proceedings (Aug. 22, 2018) (the “Order”).  In Lucia, the Court held that ALJs hired by the SEC are “inferior officers” of the United States and are thus subject to the Constitution’s Appointments Clause, which states that inferior officers may only be appointed by the President, a court, or a department head.  Since the SEC’s ALJs were not appointed in such a manner, the Court held that the respondent in Lucia was entitled to a new hearing before a properly appointed official.  See Shearman & Sterling LLP Need To Know Weekly, United States Supreme Court Reverses and Remands SEC Administrative Proceeding - Finding That SEC Administrative Law Judges are Subject to the Appointments Clause of the Constitution and Were Not Properly Appointed by the SEC (June 26, 2018)
  • FINRA Fines Broker-Dealer $5.5 Million For Violations Of Regulation SHO
     
    08/28/2018

    On August 20, 2018, the Financial Industry Regulatory Authority (“FINRA”) announced that it fined a FINRA-regulated broker-dealer $5.5 million over allegations that it violated Regulation SHO under the Securities Exchange Act of 1934, see 17 CFR 242.200-204, by, among other things, failing to properly close out short sale positions when securities were not timely delivered, accepting short sales in restricted securities and at restricted prices, and maintaining a deficient supervisory system.   Press Release, FINRA Fines Interactive Brokers $5.5 Million for Regulation SHO Violations and Supervisory Failures (Aug. 20, 2018); FINRA AWC No. 2014043143401 (Aug. 16, 2018).
  • Former Forex Trader Successfully Avoids Extradition From The UK Through Appeal To UK’s High Court Of Justice
     
    08/14/2018

    On July 31, 2018, the High Court of Justice of England and Wales, Queen’s Bench Division, rejected the United States (“U.S.”) government’s request to extradite a former FX trader and the former head of a bank’s foreign exchange (“forex”) cash trading for Europe, reversing a lower court ruling that had granted the request.  Scott v. Government of the United States of America [2018] EWHC 2021 (Admin).  The U.S. Department of Justice (“DOJ”) sought to extradite the trader to face ten counts of wire fraud and one count of conspiracy in the U.S. District Court for the Eastern District of New York for alleged forex-rigging.  The High Court found that extradition was not in the interest of justice, because most of the harm from the alleged crimes was felt in the United Kingdom (“UK”) and because of the trader’s strong connection with the UK. 
  • United States Moves To Dismiss Sole Remaining Charge In Long-Running Securities Fraud Case
     
    08/07/2018

    On July 30, 2018, federal prosecutors moved to dismiss the sole remaining charge of securities fraud against former bond trader Jesse Litvak, ending a five-year criminal case during which Litvak was twice convicted after trials on securities fraud charges and both convictions were later overturned on appeal.  Although the government’s decision means there will not be a third trial, the government emphasized in its motion to dismiss the charges that the United States Court of Appeals for the Second Circuit had not accepted Litvak’s argument that the case was legally invalid.  See Government’s Motion to Dismiss Count Four, United States v. Litvak, No. 3:13-cr-00019 (D. Conn. July 30, 2018). 
     
  • Northern District Of California Certifies Class In Securities Stock Drop Suit, Finding That “In-and-Out” Traders Should Not Be Excluded From The Class Definition
     
    07/31/2018


    On July 17, 2018, Judge Jon S. Tigar of the United States District Court for the Northern District of California granted plaintiffs’ motion to certify a class in a securities class action against Twitter, Inc. (the “Company”) and two of its officers. In re Twitter Inc. Securities Litigation, No. 3:16-cv-05314 (N.D. Cal. July 17, 2018). Plaintiffs allege that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by making materially false and misleading statements regarding user growth and engagement, resulting in a 15 percent stock drop when the Company later disclosed that user engagement was “slowing quite dramatically.” The Court previously had granted in part and denied in part defendants’ motion to dismiss.
     

  • SEC Announces Settled Enforcement Action Over Failure To Preserve Documents
     
    07/24/2018

    On July 17, 2018, the Securities and Exchange Commission (“SEC”) announced a settlement with a New York-based broker-dealer over allegations that the broker-dealer failed to preserve records requested by the SEC and inaccurately reported certain expenses. The SEC’s order instituting proceedings alleged that the broker-dealer failed to preserve records requested by the SEC staff by deleting certain audio files, and failed to maintain accurate books and records regarding certain expenses, in willful violation of Section 17(a)(1) of the Securities Exchange Act, and Rules 17a-3 and 17a-4 thereunder. The broker-dealer agreed to pay a $1.25 million civil penalty to settle the SEC’s claims without admitting or denying wrongdoing. See In the Matter of BGC Financial, L.P., Admin Proc. No. 3-18598 (July 17, 2018).
  • SEC’s FCPA Charges Against Executives Dismissed As Time-Barred
     
    07/17/2018

    On July 12, 2018, Judge Nicholas G. Garaufis of the United States District Court for the Eastern District of New York dismissed the Securities and Exchange Commission’s charges against two former executives of a hedge-fund management firm on statute of limitations grounds.  SEC v. Cohen & Baros, No. 1:17-CV-00430 (E.D.N.Y. July 12, 2018).  The SEC originally filed the charges before the Supreme Court’s ruling in Kokesh v. SEC, 137 S. Ct. 1635 (2017), in which the Court held that disgorgement is a penalty subject to the five-year statute of limitations under 28 U.S.C. § 2462.  United States Supreme Court Holds SEC Disgorgement Orders Subject to Five-Year Statute of Limitations, Shearman & Sterling (Jun. 6, 2017).  Relying on Kokesh, the district court held that the SEC’s claims for monetary and injunctive relief were time-barred.  In so holding, the district court contributed to a circuit split regarding the applicability of Section 2462 to certain types of equitable relief.
  • Company Settles With The SEC For Allegedly Failing To File Required Suspicious Activity Reports
     
    07/10/2018

    On July 2, 2018, the Securities and Exchange Commission (“SEC”) filed a one-count complaint in District Court for the Northern District of California against Charles Schwab Corp. (“Schwab” or the “Company”) for allegedly failing to file suspicious activity reports (“SARs”) on questionable transactions by its investment advisers. Securities and Exchange Commission v. Charles Schwab & Co, Inc., No. 18-cv-3942 (July 2, 2018). The same day, without admitting or denying the SEC’s findings, the Company consented to an entry of judgment through which agreed to pay the SEC a civil penalty of $2.8 million. Final Judgment, Securities and Exchange Commission v. Charles Schwab & Co, Inc., No. 18-cv-3942 (July 2, 2018).
  • SEC Settles FCPA Allegations Concerning Allegedly Improper Payments By Company’s Indian Subsidiary
     
    07/10/2018

    On July 2, 2018, Chicago-based spirits maker Beam Suntory Inc. (“Beam Suntory” or the “Company”) agreed to pay $8.2 million to settle Foreign Corrupt Practices Act (“FCPA”) claims brought by the Securities and Exchange Commission (“SEC”) for allegedly improper payments by its Indian subsidiary. In the Matter of Beam Inc., N/K/A Beam Suntory Inc. Admin Proc. File No. 3-18568 (July 2, 2018). This settlement reportedly follows Beam Suntory’s voluntary self-disclosure of the underlying issues to both the SEC and the Department of Justice (“DOJ”); however, there has been no reported resolution by the DOJ.
  • SEC Files Settled Action Concerning Accounting Issues That Led To A Restatement In 2014
     
    07/10/2018

    On July 2, 2018, the Securities and Exchange Commission (“SEC”) entered into a settlement with Houston-based global engineering, construction, and services company KBR, Inc. (“KBR” or the “Company”) over accounting issues that had led KBR to restate its earnings and identify a material weakness in its internal control over financial reporting in 2014. In the Matter of KBR, Inc., Admin Proc. No. 3-18569 (July 2, 2018). The accounting issues centered around the Company’s cost and revenue estimates and its calculation of “work in backlog,” a non-financial accounting metric the Company utilized.
  • Supreme Court Requires Law Enforcement To Obtain Search Warrants Before Accessing Certain Cell Phone Location Data
     
    07/03/2018

    On June 22, 2018, in a 5-4 ruling, the United States Supreme Court held that the government’s acquisition of certain cell-site location information (“CSLI”) kept by third parties constitutes a search under the Fourth Amendment that is generally subject to the search warrant requirement. Carpenter v. United States, No. 16-402, 585 U.S. __ (2018). Chief Justice Roberts authored the majority opinion, while Justices Kennedy, Alito, Thomas, and Gorsuch filed separate dissents.
  • Second Circuit Amends Martoma And Reaffirms, But Arguably Still Weakens, Newman’s “Meaningfully Close Personal Relationship” Test In Insider Trading Cases Involving Tips
     
    07/03/2018


    On June 25, 2018, a divided three-judge panel of the Second Circuit amended its decision in United States v. Martoma. We previously reported on the facts of Martoma and the panel’s original decision, which held that the Supreme Court abrogated the “meaningfully close personal relationship” test articulated in United States v. Newman. See Shearman & Sterling LLP: Government/Regulatory Enforcement, Divided Second Circuit Panel Abandons Relationship Test From Landmark Newman Decision in Upholding Insider Trading Conviction (Aug. 29, 2017). The panel’s amended opinion, in contrast, holds that Newman’s “meaningfully close personal relationship” test is still valid for determining whether an insider tipper received a personal benefit (and thus breached a fiduciary duty), but also holds that the test will be satisfied upon a showing that (1) the “tipper and tippee shared a relationship suggesting a quid pro quo” or (2) “the tipper gifted confidential information with the intention to benefit the tippee.” United States v. Martoma, No. 14-3599, Dkt. No. 226 (2d Cir. June 25, 2018), at 5-6.

  • SEC Proposes Amendments To Its Whistleblower Program
     
    07/03/2018

    On June 28, 2018, the U.S. Securities and Exchange Commission (“SEC”) proposed amendments to the rules governing its whistleblower program. Press Release, SEC Proposes Whistleblower Rule Amendments, No. 2018-120 (June 28, 2018). Among other things, the proposed amendments would affect the types of whistleblower awards authorized by the SEC’s rules, allow for adjustments of awards in certain cases, adopt a new definition of “whistleblower,” improve the SEC’s ability to bar individuals from making frivolous award claims, and clarify what types of whistleblower submissions constitute “original information.” These proposed amendments, which on balance reflect a modest refinement of the whistleblower program and signal that the essential contours of the program continue to have the strong support of the Commission, are subject to notice and comment by the public and further modification by the SEC.
  • United States Supreme Court Reverses And Remands SEC Administrative Proceeding - Finding That SEC Administrative Law Judges Are Subject To The Appointments Clause Of The Constitution And Were Not Properly Appointed By The SEC
     
    06/26/2018

    On June 21, 2018, the Supreme Court held that Securities and Exchange Commission (“SEC”) administrative law judges (“ALJs”) are “inferior officers” of the United States, subject to the Appointments Clause of the Constitution. Lucia v. SEC, 585 U.S. ____ (2018).
  • FINRA And SEC Fine Two Entities For Anti-Money Laundering Compliance Deficiencies And Other Violations
     
    05/22/2018

    ​On May 16, 2018, the Financial Industry Regulatory Authority (FINRA) announced a $5.3 million fine on a financial services company (ICBCFS) for alleged systemic anti-money laundering (AML) compliance failures, including an alleged failure to have a reasonable AML program in place to monitor and detect suspicious transactions, and alleged financial, recordkeeping, and operational violations involving penny stock shares.  FINRA Fines ICBCFS $5.3 Million for Anti-Money Laundering Compliance Deficiencies and Other Violations, May 16, 2018, https://www.finra.org/newsroom/2018/finra-fines-icbcfs-53-million-anti-money-laundering-compliance-deficiencies-and-other.  ICBCFS consented to entry of FINRA’s findings without admitting or denying the charges against it.  In a separate but related matter, the U.S. Securities and Exchange Commission (SEC) announced settled charges against a broker-dealer (CCM)—a correspondent of ICBCFS—and ICBCFS for allegedly failing to file Suspicious Activity Reports (SARs) when CCM sold more than $12.5 billion penny stock shares between 2013 and 2014.  In the Matter of ICBCFS, Admin. Proc. No. 3-18488 (May 16, 2018).  The SEC also settled charges against ICBCF for failing to promptly produce documents missing from its productions to the Commission during its investigation, despite repeated requests for the records.  Id.  Without admitting or denying the SEC’s findings, ICBCFS agreed to pay the SEC a civil penalty of $860,000, CCM agreed to pay a fine of $1 million, and CCM's anti-money laundering officer, who allegedly aided and abetted the violations, agreed to pay $15,000.  Id.In the Matter of CCM, Admin. Proc. No. 3-18486 (May 16, 2018); In the Matter of JB, Admin. Proc. No. 3-18487 (May 16, 2018).

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  • DOJ Announces Formalization Of Policy On Corporate Resolution Penalties 
     
    05/15/2018

    On May 9, 2018, the U.S. Department of Justice (“DOJ”) released a long-awaited policy regarding corporate enforcement and resolution.  The policy—entitled “Policy on Coordination of Corporate Resolution Penalties” (“Policy”)—will be incorporated into the U.S. Attorney’s Manual.  U.S. DOJ, Policy on Coordination of Corporate Resolution Penalties.  On the same day, Deputy Attorney General Rod J. Rosenstein provided remarks about the Policy at the New York Conference on the Foreign Corrupt Practices Act and at the New York City Bar White Collar Crime Institute.  Mr. Rosenstein explained that the Policy recognizes that companies may be subject to numerous regulatory authorities—both in the U.S. and abroad—which may result in disproportionate penalties.  The Policy generally instructs DOJ attorneys “to appropriately coordinate with one another and with other enforcement agencies in imposing multiple penalties on a company for the same conduct.”  DOJ Press Release, Deputy Attorney General Rod J. Rosenstein Delivers Remarks.     

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  • Second Circuit Once Again Vacates Bond Trader Jesse Litvak’s Conviction For Securities Fraud
     
    05/08/2018

    ​On May 3, 2018, a three-judge panel on the Second Circuit Court of Appeals (“Second Circuit”) vacated former bond trader Jesse Litvak’s conviction on one count of securities fraud, holding that the district court erred in admitting testimony from a counterparty concerning that counterparty’s mistaken understanding of Litvak’s role in the sale of residential mortgage-backed securities (“RMBS”) to it.  United States v. Litvak, No. 17-1464-cr (2d. Cir. May 3, 2018).  Litvak appealed his 2017 jury trial conviction on one count of securities fraud, arguing that his misstatements to the counterparty—which concerned the price at which Litvak had purchased the RMBS he subsequently sold to the counterparty—were immaterial to a reasonable investor.  Further, Litvak contended that the district court erred in admitting portions of testimony from the counterparty’s trader, who erroneously believed that Litvak was acting as the counterparty’s agent in the sale of the RMBS, rather than acting as principal.  While the Second Circuit held that a reasonable jury could have found that Litvak’s misstatements were material, it ruled that the district court materially erred in admitting testimony that suggested Litvak owed a fiduciary duty to his counterparty, and that the error was not harmless.  Accordingly, the panel vacated the conviction and remanded the case, yet again, to the district court. 

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  • SEC Issues $35 Million Fine For Alleged Failure To Disclose Data Breach
     
    05/01/2018

    On April 24, 2018, the United States Securities and Exchange Commission (“SEC”) instituted a settled administrative proceeding against Altaba Inc., f/d/b/a Yahoo! Inc. (“Yahoo!”) for allegedly failing to disclose a significant data breach that affected its user accounts, in violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 13(a) of the Exchange Act.  See In the Matter of Altaba Inc., f/d/b/a Yahoo! Inc., Admin. Proc. No. 3-18448 (April 24, 2018).  As summarized below, the SEC principally imposed a $35 million penalty on Yahoo!, and Yahoo! neither admitted nor denied the SEC’s findings set forth in the administrative proceeding.

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  • Connecticut Jury Acquits Former Trader Of Spoofing-Related Charges
     
    05/01/2018

    On April 25, 2018, a jury in the United States District Court for the District of Connecticut acquitted a former trader at a major global banking and financial services company (the “Trader”) of conspiracy to commit commodities fraud.  United States v. Flotron, 3:17-cr-00220, Jury Verdict Form (D. Conn. April 25, 2018).  The U.S. Department of Justice (“DOJ”) also alleged that the Trader committed commodities fraud under 18 U.S.C. §§ 2 and 1348, and spoofing under 7 U.S.C. § 6c(a)(5)(C), but those charges were dismissed before trial on grounds of improper venue.  This trial was the first of its kind for criminal spoofing charges.  A civil case against the Trader, filed by the U.S. Commodity Futures Trading Commission (“CFTC”), remains pending.  See United States v. Flotron, 3:18-cv-00158, Complaint (D. Conn. Jan. 26, 2018).

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  • The Supreme Court Dismisses As Moot Microsoft Case That Had Challenged The Government’s Ability To Obtain Search Warrant For Electronic Data Stored Abroad
     
    04/24/2018

    On April 17, 2018, the Supreme Court dismissed United States v. Microsoft, No. 17-12, 548 U.S. ___ (2018) (per curiam), deciding that recently enacted federal legislation had mooted the legal dispute in the case.  The appeal raised the question whether a U.S. based e-mail service provider had to comply with a search warrant issued under Section 2703 of the Stored Communications Act, and disclose to the Government electronic communications that were stored abroad.  As we previously reported, see Shearman & Sterling LLP, The Supreme Court Hears Oral Arguments in United States v. Microsoft, Need-to-Know Litigation Weekly, March, 6, 2018, https://www.lit-wc.shearman.com/the-supreme-court-hears-oral-arguments-in-united-v-microsoft, the Justices had appeared divided during oral argument and questioned whether they should issue a decision while Congress was considering pending legislation to clarify the issue.  On March 23, 2018, Congress passed the Clarifying Lawful Overseas Use of Data Act (CLOUD Act) as part of the Consolidated Appropriations Act, 2018, Pub. L. 115–141.  As expected, the Supreme Court thus dismissed the Microsoft appeal.

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    CATEGORY: Supreme Court
  • SEC, Under New Safe Harbor, Awards More Than $2.2 Million To Whistleblower Who First Reported To Another Federal Agency
     
    04/17/2018

    On April 5, 2018, the Securities and Exchange Commission (“SEC”) announced a whistleblower award of more than $2.2 million in connection with a report of misconduct.  The whistleblower, a former company insider, first reported information to a federal agency other than the SEC, which in turn referred the matter to the SEC, which promptly opened an enforcement investigation.  Subsequently, within 120 days of the original reporting to the other federal agency, the whistleblower reported the same information directly to the SEC.  The resulting SEC enforcement action resulted in monetary sanctions, and the whistleblower received a percentage of the sanctions as an award.  Despite initially reporting to another federal agency, the whistleblower received an award because he or she reported the same information to the SEC within 120 days and subsequently cooperated with the enforcement investigation.

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  • Criminal And Civil Charges Filed In Connection With Initial Coin Offering By Centra Tech

    04/10/2018


    On April 2, 2018, the U.S. Department of Justice (“DOJ”) and Securities Exchange Commission (“SEC”) announced criminal and civil charges against two startup co-founders for allegedly defrauding and conspiring to defraud investors through the offer and sale of unregistered securities in an initial coin offering (“ICO”).  In separate complaints filed in federal court in the United States District Court for the Southern District of New York, both the DOJ and the SEC alleged that the company’s co-founders orchestrated an elaborate marketing campaign to solicit over $25 million in investments for their digital technology company, Centra Tech.  Complaint, SEC v. Sharma et al., No. 1:18-cv-02909 (S.D.N.Y. Apr. 2, 2018); Complaint, U.S. v. Sharma et al., 18-MAG-2695.  The two men each face four criminal charges of commission and conspiracy to commit securities and wire fraud, as well as permanent injunctions and civil penalties for violating various anti-fraud and registration provisions of the Securities Act of 1933 and Securities Exchange Act of 1934.
     

  • SEC And FINRA Fine Broker-Dealer, CEO, And Compliance Officer For Failing To File Suspicious Activity Reports
     
    04/03/2018

    ​On March 28, 2018, the Securities and Exchange Commission (“SEC”) instituted settled administrative proceedings against broker-dealer Aegis Capital Corporation (“Aegis”), its founder and Chief Executive Officer (“CEO”), and its anti-money laundering compliance officer (“AML CO”) for allegedly failing to file hundreds of Suspicious Activity Reports (“SARs”) between late 2012 and early 2014.  In the Matter of Aegis Capital Corporation, Admin. Proc. No. 3-18412 (Mar. 28, 2018); In the Matter of Kevin McKenna and Robert Eide, Admin. Proc. No. 3-18413 (Mar. 28, 2018).  The SEC also instituted a contested administrative proceeding based on the same allegations against a former Aegis compliance officer.  In the Matter of Eugene Terracciano, Admin. Proc. No. 3-18414 (Mar. 28, 2018).  Separately, the Financial Industry Regulatory Authority (“FINRA”) announced it had settled claims against Aegis based on the same SAR-related allegations.  FINRA Fines Aegis Capital Corp. $550,000 for Anti-Money Laundering and Supervision Rule Violations, Mar. 28, 2018, http://www.finra.org/newsroom/2018/finra-fines-aegis-capital-corp-550000-aml-and-supervision-rule-violations.  In connection with its settlement with the SEC, Aegis admitted to willfully failing to file SARs and was fined $750,000.  In addition, the CEO agreed to pay the SEC a $40,000 fine, and the AML CO agreed to pay the SEC a $20,000 fine.  In connection with the settlement, the individuals neither admitted nor denied the SEC’s allegations. 

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  • Record-Breaking Whistleblowing Awards Continue Incentives To Report Misconduct To The SEC
     
    03/27/2018

    On March 19, 2018, the SEC announced three multi-million dollar awards to whistleblowers in connection with reports of misconduct.  SEC Press Release, SEC Announces Its Largest-Ever Whistleblower Awards, No. 2018-44 (Mar. 19, 2018).  One whistleblower received $33 million, which represents the largest SEC whistleblower award in history; the two other whistleblowers will split a $50 million award.  These significant awards continue a trend of rising awards by the SEC, which continues to focus on publicly incentivizing and protecting whistleblowers.

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    CATEGORY: Whistleblower
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