SEC Amends Its Whistleblower Award Program Rules
On September 23, 2020, the Securities and Exchange Commission (“SEC”) announced that it voted to amend the rules governing its whistleblower award program. According to the SEC, the amendments are intended to provide eligible whistleblowers with greater insight into the program as well as to improve efficiencies in reviewing and processing awards. The SEC’s Office of the Whistleblower also issued staff guidance for determining award amounts for eligible whistleblowers.
DOJ Issues FCPA Opinion Procedure Approving Legitimate Payments To Government Instrumentalities
On August 14, 2020, the U.S. Department of Justice (“DOJ”) released its first Foreign Corrupt Practices Act (“FCPA”) Opinion (the “August 14 Opinion”) in six years, in response to a request from a multinational company headquartered in the U.S. (the “Requestor”). The Requestor sought to clarify whether contemplated payments to a majority government-owned foreign investment bank would result in an FCPA enforcement action against it. The DOJ found that the facts and circumstances as presented by the Requestor evidenced a payment to a foreign government instrumentality, and not a “foreign official,” and were in any event supported by a proper business justification; therefore, such payment would not violate the anti-bribery provisions of the FCPA.
CFTC, SEC, And FINRA Settle AML-Related Charges With Broker-Dealer
On August 10, 2020, the Commodity Futures Trading Commission (“CFTC”), Securities and Exchange Commission (“SEC”), and Financial Industry Regulatory Authority, Inc. (“FINRA”) settled charges with a broker-dealer and registered futures merchant for allegations that the broker-dealer failed to flag suspicious activity and fulfill anti-money laundering requirements. Across three separate settlements, and without admitting any wrongdoing, the broker-dealer agreed to pay $15 million in fines to FINRA, over $12 million to the CFTC, and $11.5 million to the SEC, for a total penalty of nearly $38 million.
Pennsylvania Manufacturing Company To Pay $824,314 To OFAC After Self-Appointing Two Monitors
On July 28, 2020, a Pennsylvania-based cookware coating manufacturer (the “Company”) agreed to pay a $824,314 penalty to the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) to settle claims that it violated OFAC’s Iranian Transactions and Sanctions Regulations (“ITSR”). Executive Order 13628, signed in October 2012, prohibited any U.S.-owned or U.S.-controlled foreign entity from knowingly engaging in any transaction, directly or indirectly, with Iran or any person subject to Iran’s jurisdiction, ITSR at § 560.215, and the claims at issue here identified the risk in indirect transactions. According to OFAC, the penalty amount was substantially reduced by virtue of voluntary remedial actions undertaken by the Company following the identification of the issue.
Global Healthcare Company To Enter DPA, Pay $345 Million To DOJ And SEC, To Resolve FCPA Claims
On June 25, 2020, Novartis AG, a global healthcare company headquartered in Switzerland, and two of its subsidiaries (one current and one former) agreed to pay a total of $345 million in disgorgement and fines to the U.S. Department of Justice and Securities and Exchange Commission to settle claims that they had violated the Foreign Corrupt Practices Act (FCPA). 15 U.S.C. §§ 78dd-1. Specifically, the DOJ entered into deferred prosecution agreements with a current Novartis subsidiary operating in Greece and a former Novartis subsidiary based in Singapore and overseeing operations in Vietnam, which agreed to collectively pay more than $233 million in criminal fines. And the parent company agreed to pay the SEC $112 million in disgorgement and pre-judgment interest.
Second Circuit Upholds Jury Conviction Of Two Officials In FIFA For Honest Services Fraud, Rejecting Extraterritoriality Challenge
On June 22, 2020, the Second Circuit Court of Appeals upheld the jury conviction of two former officials of the Federation Internationale de Football Association (FIFA) —the international sports organization based in Zurich, Switzerland—for committing multiple counts of conspiracy to commit honest services wire fraud. United States v. Napout, Case No. 18-2750, (2d Cir. 2020). Defendants, two Paraguayan employees of a Paraguayan company, were convicted by a jury in the United States District Court for the Eastern District of New York for their involvement in an alleged scheme to sell broadcasting and marketing rights to FIFA games in exchange for kickbacks transmitted through U.S. bank accounts and wires. And on appeal, the Second Circuit held that the government permissibly applied the honest services wire fraud statute, 18 U.S.C. § 1346, rejecting defendants’ claim that it was an impermissible extraterritorial overreach.
Supreme Court In Liu Upholds SEC Ability To Seek Equitable Disgorgement Of Net Profits For Return To Victims, But Indicates Limits On Broader Disgorgement Theories
On June 22, 2020, in an 8-1 decision authored by Justice Sotomayor, the United States Supreme Court upheld the ability of the Securities and Exchange Commission to seek disgorgement in civil actions brought in district court as a form of “equitable relief ” under 15 U. S. C. §78u(d), at least to the extent the disgorgement is of a defendant’s “net profits” and the disgorged funds are returned to defendant’s victims. Liu v. SEC, No. 18–1501, __ S.Ct. __ (June 22, 2020). Though it was generally expected that the Supreme Court would uphold the SEC’s ability to seek disgorgement in some form, the precise contours of any such decision have been much anticipated since the Supreme Court held in Kokesh v. SEC, 581 U. S. ___ (2017), that at least certain forms of disgorgement sought by the SEC enforcement action impose a “penalty” for purposes of calculating the appropriate statute of limitations under 28 U. S. C. §2462, calling into question whether it could be considered “equitable relief.” The Liu decision is ostensibly a win for the SEC, in that it upheld the SEC’s ability to obtain disgorgement. But by focusing on ensuring that a given disgorgement order constitutes “equitable relief,” the Supreme Court has placed important limits on the manner in which the SEC may obtain disgorgement that could have significant impacts on the way the SEC pursues enforcement actions.
DOJ Revises Guidance On Evaluation Of Corporate Compliance Programs
On June 1, 2020, the U.S. Department of Justice released a revision of its guidance on the Evaluation of Corporate Compliance Programs. Evaluation of Corporate Compliance Programs, U.S. Department of Justice, Criminal Division (June 2020) (the “Compliance Program Guidance”). The Compliance Program Guidance provides companies with general principles and factors to consider when designing, implementing, and updating their compliance policies and procedures. It also provides a useful basis for companies seeking to avoid or mitigate prosecution pursuant to the DOJ’s “Principles of Federal Prosecution of Business Organizations” and the U.S. Sentencing Guidelines, both of which require DOJ prosecutors to consider a company’s compliance program as a factor in their decisions to instigate a case and in terms of punishment. While the revisions to the Compliance Program Guidance generally represent incremental changes, there are sufficient updates that companies may still want to take this opportunity to reevaluate existing compliance programs to ensure that they are keeping step with evolving best practices.
CFTC Announces Updated Guidance On Civil Monetary Penalties
On May 20, 2020, the Commodity Futures Trading Commission (“CFTC”) announced that the Division of Enforcement had issued new guidance regarding the factors that it would consider when making recommendations to the CFTC on the amounts of civil monetary penalties in CFTC enforcement actions. The binding guidance, which has been incorporated into the CFTC Enforcement Manual, states that the Division of Enforcement staff will be guided by the overarching consideration of ensuring that any proposed penalty achieves the dual goals of specific and general deterrence. And it provides a three-pronged approach to evaluate the appropriate penalty to recommend to the CFTC: (1) the “gravity of the violation;” (2) “mitigating and aggravating circumstances;” and (3) “other considerations.” While not likely to result in any significant shift in CFTC penalty amounts, having written public guidance should make it easier for defense counsel to engage in transparent and productive negotiations with Enforcement Division staff as to how various cases should be viewed.
Supreme Court Overturns Third Circuit, Throws Out Bridgegate Convictions
On May 7, 2020, the U.S. Supreme Court unanimously overturned a ruling from the United States Court of Appeals for the Third Circuit that upheld the convictions of two former New Jersey officials who were part of the 2013 “Bridgegate” scandal to realign lanes to the George Washington Bridge (“GWB”). Kelly v. United States, No. 18-1059, 588 U.S. __, 2020 WL 2200833 (2020). Writing for a unanimous court, Justice Kagan wrote that while the conduct at issue may have constituted an abuse of power, it did not amount to a violation of either the federal wire fraud statute or a violation of the federal program fraud statute because the object of the scheme was the implementation of a regulatory object, rather than to obtain money or property.
Industrial Bank Settles AML Charges With U.S. And New York State Authorities
On April 20, 2020, Industrial Bank of Korea (the “Bank”) and its New York branch (“NY Branch”) reached settlements with the U.S. Attorney’s Office for the Southern District of New York (“USAO”) and the New York State Department of Financial Services (“NYDFS”), agreeing to pay a combined $86 million to resolve investigations into its anti-money laundering compliance program, which the USAO and NYDFS claimed led to the bank processing over $1 billion worth of transactions in violation of U.S. sanctions against Iran. Specifically, the Bank entered into a deferred prosecution agreement (“DPA”) with the USAO, agreeing to pay $51 million to settle charges that it willfully failed to maintain an adequate anti-money laundering program at its New York Branch in violation of the Bank Secrecy Act (“BSA”). And both the Bank and the New York Branch entered into a consent order (“Consent Order” and, together with the DPA, the “settlement agreements”) with the NYDFS, agreeing to pay a $35 million fine for violating New York state law.
Co-Directors Of SEC’s Division Of Enforcement Issue Statement On Market Integrity In Wake Of COVID-19 Emergency
On March 23, 2020, Stephanie Avakian and Steven Peikin, co-directors of the Securities & Exchange Commission’s (“SEC”) Division of Enforcement, issued a statement reminding public companies, officers, and directors of their responsibilities related to material, non-public information in connection to the COVID-19 public health emergency.
United States Supreme Court Hears Oral Arguments In Liu v. SEC to Determine Whether the SEC Can Seek Disgorgement in Judicial Proceedings
On March 3, 2020, the Supreme Court heard oral arguments in Liu v. SEC
, No. 18-1501, once again taking up the question of whether the Securities and Exchange Commission (“SEC”) may seek disgorgement as equitable relief in a civil enforcement action for violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. While it is always difficult to predict the outcome of a given case from oral argument, the questioning suggested that the Justices are likely to preserve some form of the SEC’s ability to seek disgorgement, albeit in perhaps a narrowed form more closely aligned to its underpinnings as an equitable remedy.
SEC Reaches $8.8 Million Settlement With Pharmaceutical Company To Resolve Allegations Of FCPA Violations
On February 28, 2020, the U.S. Securities and Exchange Commission (“SEC”) announced a settled administrative proceeding with an Ohio-based pharmaceutical company, Cardinal Health, Inc. (“Cardinal”) over alleged violations of the Foreign Corrupt Practices Act (the “FCPA”). The settlement relates to alleged improper payments made by employees at its former Chinese subsidiary (“Cardinal China”) to government-employed healthcare professionals and employees at state-owned entities.
Judge Grants Post-Trial Acquittal On FCPA Counts
On February 26, 2020, a federal judge in Connecticut granted, in part, defendant Lawrence Hoskins’s post-trial motion for acquittal on seven counts relating to violations of the Foreign Corrupt Practices Act. United States v. Hoskins, No. 3:12cr238(JBA) (D. Conn.). The acquittal is the latest development in the seven-year case of Mr. Hoskins, a closely watched FCPA prosecution that raises significant questions regarding the extraterritorial reach of FCPA enforcement. Hoskins, a former vice president of French conglomerate Alstom SA, was convicted in November 2019 on charges that he helped to organize a scheme to bribe Indonesian officials in connection with a contract to build a power plant in Indonesia (the “Tarahan Project”). Based on the evidence adduced at trial, District Court Judge Janet Bond Arterton found that a reasonable jury could not conclude beyond a reasonable doubt that Hoskins was an “agent” of Alstom’s Connecticut subsidiary, Alstom Power Inc. (“API”). Accordingly, he could not be convicted of FCPA violations.
Overview Of Cases Of Particular Interest Currently Pending Before The Supreme Court Of The United State
Looking ahead, we preview cases currently pending before the Supreme Court—which have already been accepted for review by the Court—that may be of particular interest to readers of the Need-to-Know Litigation Weekly. These cases pertain to various topics in Securities, Enforcement, and, as to one, arbitration.
DOJ Offers Non-Prosecution Agreements And No-Fines For Self-Reporting Export Control And Sanctions Violations
In a development that could significantly affect how companies deal with possible export control and sanctions violations, the Department of Justice (“DOJ”) recently revised its policy regarding voluntary disclosure of trade violations. The new policy from DOJ’s National Security Division (“NSD”), entitled “Export Control and Sanctions Enforcement Policy for Business Organizations” (“NSD Policy”), took effect December 13, 2019. The NSD Policy supersedes the Division’s previous “Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations” (“2016 Policy”), implemented October 2, 2016. The NSD Policy contains three major changes to the 2016 Policy.
Second Circuit Reverses $18.5 Million Restitution Order For Lack Of Proximate Cause
On December 3, 2019, the Second Circuit affirmed the convictions of two defendants for wire fraud and conspiracy to commit wire and bank fraud, but reversed the District of Connecticut’s order that defendants pay $18.5 million in restitution to the U.S. Department of Agriculture (“USDA”). United States v. Calderon, No. 17-1956, 2019 WL 6482379 (2d Cir. Dec. 3, 2019).
Assistant Attorney General Brian A. Benczkowski Reviews FCPA Enforcement In 2019
On December 4, 2019, Assistant Attorney General Brian A. Benczkowski provided a synopsis of FCPA enforcement in 2019 to the American Conference Institute’s International Conference on the Foreign Corrupt Practices Act. Benczkowski commented on various aspects of FCPA enforcement and emphasized two key points—an increased focus on charging individuals, and Department of Justice’s (“DOJ”) interpretation of agency theory under the FCPA.
Korean Engineering Company Fined $75 Million Over Alleged Foreign Bribery Scheme In Brazil
On November 22, 2019, the U.S. Department of Justice (“DOJ”) announced that it had entered into a three-year deferred prosecution agreement (“DPA”) with a Korean engineering company (“SHI”) to settle allegations of Foreign Corrupt Practices Act (“FCPA”) violations in Brazil. Brazilian prosecutors entered a simultaneous resolution with the company, thus providing another example of U.S. and foreign prosecutors working together and coordinating on these types of cross-border prosecutions.
Issuer And CEO Charged By The SEC With Fraud And Whistleblower Protection Law Violations For Allegedly Impeding Investor Complaints
On November 4, 2019, the Securities and Exchange Commission (“SEC”) filed an amended complaint against Collectors Café, a Nevada-based company purportedly providing online auctions for collectibles (the “Company”), and its CEO, for making false and misleading statements to investors in connection with a $23 million securities offering. SEC v. Collector’s Coffee, Inc. & Kontilai, No. 10-CV-04355 (S.D.N.Y. Nov. 4, 2019). The amended complaint added charges against defendants for alleged violations of whistleblower protection laws by conditioning the return of investor money on investors signing agreements that included provisions prohibiting them from communicating with regulatory agencies, including the SEC, about anything related to the Company.
CFTC Settlement In Kraft Unwound Due To Ineffectuality Of Confidentiality Provisions, Setting Up Possible Key Legal Rulings On Market Manipulation
On October 23, 2019, Judge John Robert Blakey of the United States District Court for the Northern District of Illinois vacated the $16 million settlement consent order between the U.S. Commodity Futures Trading Commission (“CFTC”) and Kraft Foods Group Inc. (“Kraft”) that would have resolved allegations that Kraft improperly traded wheat futures and manipulated the commodity’s market price. The Court reasoned that a prior Seventh Circuit ruling on the same case rendered certain confidentiality provisions within the settlement agreement “ineffectual,” and further concluded that these provisions, which were highly unusual within a regulatory settlement, were a material aspect of the parties’ decision to settle. The decision reopens a closely watched case that, if it continues to dispositive motions or trial, could have significant implications for the CFTC’s interpretation of what constitutes market manipulation.
DOJ Introduces Guidance Over Inability-to-Pay Claims
On October 8, 2019, the Department of Justice (“DOJ”) issued a memorandum (“Memorandum”) providing guidance on how the DOJ’s prosecutors will handle inability-to-pay claims from companies, intending to provide companies—and prosecutors—with a better understanding of how to evaluate and address these claims. Memorandum to All Criminal Division Personnel from Brian A. Benczkowski regarding Evaluating a Business Organization’s Inability to Pay a Criminal Fine or Criminal Monetary Penalty (Oct. 8, 2019). Assistant Attorney General Brian A. Benczkowski announced the Memorandum, stating that it does not provide any new methodology, but rather merely “puts a lot more meat on the bones” of how these claims are analyzed. Assistant Attorney General Brian A. Benczkowski Delivers Remarks at the Global Investigations Review Live New York (Oct. 8, 2019).
DOJ Charges Three Traders Under RICO In Alleged Spoofing Scheme
On September 16, 2019, an indictment was unsealed revealing that the Department of Justice (“DOJ”) has charged three traders at a global banking and financial services company with conspiracy to engage in a pattern of racketeering activity under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and other federal crimes, by allegedly engaging in a scheme to manipulate prices for precious metals futures contracts over an eight-year period. Indictment, Case No. 19-cr-669 (N.D. Ill. Aug. 22, 2019). The same day, the Commodity Futures Trading Commission (“CFTC”) brought a parallel civil suit against two of the traders. See Complaint, Case No. 19-cv-6163 (N.D. Ill. Sept. 16, 2019). According to the DOJ and the CFTC, the traders engaged in the unlawful practice of “spoofing” by placing orders to buy or sell futures contracts with the intent to cancel the orders before execution and influence the prices of those futures contracts. While the DOJ and CFTC have brought a number of spoofing charges in recent years, it is unclear why the DOJ saw fit to bring this set of charges under RICO—an aggressive move that the DOJ may use to try to paint with a broader brush in introducing evidence at trial.
Reargument Sought On Whether Shareholders Can Be Victims Of FCPA Violation For Purposes Of Criminal Restitution
On August 28, 2019, Judge Garaufis of the United States District Court for the Eastern District of New York held that investors in a mining company, Africo Resources Ltd. (“Africo”), could seek restitution from a defendant under the Mandatory Victims Restitution Act (“MVRA”) for harm caused by the corporation’s bribery scheme.The defendant is a subsidiary operating in Africa (“African Subsidiary”) of an asset manager.The African Subsidiary recently moved for reargument of the Order.
Options Clearing Corporation Enters Into Settlements With SEC And CFTC Over Risk Management Policies
On September 4, 2019, the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) announced they had entered into settlements with Options Clearing Corporation (“OCC”) regarding its alleged failure to maintain adequate policies to manage its financial risk, operational requirements, and information-systems security. The case represents the first time the CFTC has brought an enforcement action for violations of the Core Principles applicable to Derivatives Clearing Organizations (“DCO”) and the SEC’s first charges relating to violations of its clearing agency standards. Pursuant to the orders, OCC agreed to pay a combined penalty of $20 million to the CFTC and the SEC.
Second Circuit Limits The Application Of McDonnell v. United States And Declines To Extend The Potential Scope Of Liability In FCPA Cases
On August 9, 2019, the United States Court of Appeals for the Second Circuit denied the appeal by a Chinese real estate developer of his 2017 conviction arising from the alleged bribery of United Nations (“UN”) officials. U.S. v. Ng Lap Seng, No. 18-1725 (2d Cir. 2019). In affirming the conviction, the Second Circuit ruled that the holding in McDonnell v. United States—in which the Supreme Court held that prosecutors must prove that a bribe is paid in exchange for an “official act” in cases involving the federal anti-bribery statute (18 U.S.C. § 201)—does not apply to prosecutions under the Foreign Corrupt Practices Act (“FCPA”). The Second Circuit clarified in its ruling that the FCPA and the anti-corruption law aimed at protecting federal funding, known as Section 666, are written differently and target a broader set of bribery goals than the federal anti-bribery statute that was at issue in McDonnell.
Technology Company Resolves DOJ And SEC FCPA Allegations, With Hungary Subsidiary Entering Three-Year, Monitor-Free NPA
On July 22, 2019, the United States Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) announced that they had resolved allegations of Foreign Corrupt Practice Act (“FCPA”) violations against Microsoft Corporation and one of its wholly owned subsidiaries, Microsoft Magyarország Számítástechnikai Szolgáltató és Kereskedelmi Kft. (“MS Hungary” and, together with Microsoft Corporation, “Microsoft”). As part of the settlement, Microsoft agreed to pay a total of approximately $25 million to the DOJ and the United States Securities and Exchange Commission (“SEC”), and MS Hungary entered into a three-year non-prosecution agreement (“NPA”). See Non-Prosecution Agreement, Microsoft Magyarország Számítástechnikai Szolgáltató és Kereskedelmi Kft. (July 22, 2019); DOJ Press Release, Hungary Subsidiary of Microsoft Corporation Agrees to Pay $8.7 Million in Criminal Penalties to Resolve Foreign Bribery Case (July 22, 2019); In the Matter of Microsoft Corporation, Exchange Act Release No. 86421 (July 22, 2019).
FINRA Releases New Guidance On Extraordinary Cooperation Credit
On July 11, 2019, FINRA provided additional guidance on obtaining extraordinary cooperation credit to supplement its prior enforcement guidance. FINRA Regulatory Notice 19-23, FINRA Investigations: FINRA Supplements Prior Guidance on Credit for Extraordinary Cooperation (July 11, 2019). The new guidance does not represent a significant expansion or material change from previous guidance, but rather seeks to clarify areas of potential uncertainty.
In Significant Shift, SEC Will Consider Offers Of Settlement And Collateral Waiver Applications Together
On July 3, 2019, Chairman Jay Clayton of the Securities and Exchange Commission (“SEC”) issued a Statement Regarding Offers of Settlement (the “Public Statement”) to announce a significant shift in the SEC’s process of considering settlement offers and requests to waive collateral consequences of such settlements. SEC Public Statement, Statement Regarding Offers of Settlement (2019). Chairman Clayton stated that he recognized “that a segregated process for considering contemporaneous settlement offers and waiver requests may not produce the best outcome for investors in all circumstances,” and thus announced “that a settling entity can request that the Commission consider an offer of settlement that simultaneously addresses both the underlying enforcement action and any related collateral disqualifications.” Id.
French Oil And Gas Company And U.S. Subsidiary Fined $296 Million Over Alleged Foreign Bribery Schemes Involving Brazil And Iraq
On June 25, 2019, the Department of Justice (“DOJ”) announced that it had entered into a three-year deferred prosecution agreement (“DPA”) with TechnipFMC PLC to settle allegations of Foreign Corrupt Practices Act (“FCPA”) violations in Brazil and Iraq, while requiring TechnipFMC’s U.S. subsidiary, Technip USA, to enter a guilty plea. United States v. TechnipFMC plc, 19 Cr. 278 (E.D.N.Y. June 25, 2019); United States v. Technip USA, Inc., 19 Cr. 279 (E.D.N.Y. June 25, 2019). The resolution is yet another example of U.S. prosecutors cooperating with foreign prosecutors, as Brazilian prosecutors entered into a simultaneous resolution with the company.
SEC Files Contested Complaint Over Unregistered $100 Million Initial Coin Offering, In Case That Could Clarify Application Of Registration Requirements To Cryptocurrency
On June 4, 2019, the U.S. Securities and Exchange Commission (“SEC”) sued Kik Interactive Inc. (“Kik”) for conducting an unregistered offering of $100 million of digital tokens. See U.S. Securities and Exchange Commission v. Kik Interactive Inc., No. 19-cv-5244 (S.D.N.Y. June 4, 2019). The case has already generated substantial publicity, as Kik previously published a Wells submission it had lodged with the SEC urging against an enforcement action. Kik has argued that the digital tokens it offered were currency, not securities, and that in any event proceeding through enforcement is improper in the face of uncertainty as to how the securities laws apply to initial coin offerings (“ICOs”). The SEC has taken increasingly forceful positions that ICOs require registration, and this case may test the limits of its arguments.
SEC Awards $3 Million To Two Whistleblowers Who First Made Internal Reports, Even Though Reporting To SEC Was Not “Voluntary”
On June 3, 2019, the U.S. Securities and Exchange Commission (“SEC”) announced a joint award of $3 million to two whistleblowers who the SEC stated provided information that led to a successful enforcement action aimed at protecting retail investors. SEC Press Release, SEC Awards $3 Million to Joint Whistleblowers, No. 2019-81 (June 3, 2019). According to the SEC, both whistleblowers reported the alleged violations internally before reporting to the SEC. Interestingly, the Commission found that neither whistleblower was legally entitled to the award because their submissions were not “voluntary,” but the SEC relied on its discretion to issue the award regardless in an apparently conscious effort to further incentivize whistleblowing. SEC Whistleblower Award Proceeding, File No. 2019-7 (June 3, 2019).
D.C. Circuit Clarifies “Willfulness” Requirement For Investment Advisers Act Violations, In Decision With Possible Ramifications For SEC Sanction Authority
On April 30, 2019, the United States Court of Appeals for the District of Columbia Circuit vacated an aggregate $150,000 in fines that the U.S. Securities and Exchange Commission (“SEC”) had levied against an investment advisory firm (the “Firm”) and its three owners. The fines were brought over alleged failures to disclose conflicts of interest to Firm clients related to its fee arrangements. Although the D.C. Circuit agreed with the SEC that the Firm acted negligently in failing to properly disclose certain fee arrangements, it held that such negligent conduct could not as a matter of law constitute “willful” conduct within the meaning of the Investment Advisers Act of 1940 (“Advisers Act”). See The Robare Group, Ltd., et al. v. SEC, No. 16-1453, (D.C. Cir. April 30, 2019). Accordingly, the D.C. Circuit remanded the case for reconsideration of the appropriate sanctions in a decision that could prompt the SEC to alter charging language for certain cases given that so much of its sanction authority requires a finding of “willful” conduct.
DOJ Criminal Division Announces Updated Corporate Compliance Program Guidance
On April 30, 2019, the United States Department of Justice, Criminal Division (“DOJ”), released an updated version of its guidance on “Evaluation of Corporate Compliance Programs” (“Compliance Program Guidance”). This replaces the first version of this guidance, which was issued in February 2017 by the Fraud Section of the DOJ. In keeping with the prior version, the latest updates still contain a list of general questions for prosecutors to ask when assessing a company’s ethics and compliance program, rather than a formal rubric or checklist for compliance. The newly released version, however, goes further by providing more detail and concrete explanations for what prosecutors expect effective compliance programs to entail. U.S. Department of Justice, Criminal Division, Evaluation of Corporate Compliance Programs (Apr. 30, 2019).
DOJ And SEC Announce Resolution Of FCPA Investigation That Spanned Over Fifteen Countries With NPA, Monitor, And Over $231 Million In Disgorgement And Fines
On March 29, 2019, the U.S. Department of Justice (“DOJ”) and U.S. Securities and Exchange Commission (“SEC”) announced that they had reached resolution with a German-based major worldwide provider of medical equipment and services (the “Company”), in connection with alleged bribery payments and books and records violations in more than fifteen different countries. See In the Matter of Fresenius Medical Care AG & Co. KGaA, Admin. Proc. No. 3-19126 (Mar. 29, 2019); Press Release, SEC Charges Medical Device Company with FCPA Violations, No. 2019-48 (Mar. 29, 2019). In aggregate, the Company agreed to pay in excess of $231 million in disgorgement and penalties, and also agreed to the imposition of a compliance monitor for two years. And as part of a non-prosecution agreement with the DOJ, the Company admitted responsibility for willfully violating the Foreign Corrupt Practices Act (“FCPA”) and agreed that the facts described by the DOJ were true and accurate. See Non-Prosecution Agreement, Fresenius Medical Care AG & Co. KGaA (Feb. 25, 2019); Press Release, Fresenius Medical Care Agrees to Pay $231 Million in Criminal Penalties and Disgorgement to Resolve Foreign Corrupt Practices Act Charges (Mar. 29, 2019).
SEC Awards Total Of $50 Million To Two Whistleblowers In A Single Action, While Denying Five Other Claimants
On March 26, 2019, the SEC announced two multi-million dollar awards to whistleblowers who made reports of misconduct that led to a successful enforcement action after denying claims of five other whistleblowers in the same case (only two appealed the preliminary determination denying their application). SEC Press Release, SEC Awards $50 Million to Two Whistleblowers, No. 2019-42 (Mar. 26, 2019). One whistleblower received $37 million, which represents the third-largest SEC whistleblower award in history, while the other whistleblower received a $13 million award, a difference apparently based on the speed with which each reported the misconduct to the SEC and the relative value of their information. These significant awards continue a trend of rising awards by the SEC, and the number of whistleblowers in the action highlights the degree to which the SEC has successfully incentivized whistleblowers. Since 2012, the SEC has now awarded approximately $376 million to 61 whistleblowers, with an average award of over $6 million.
SEC Settles Charges Against Investment Advisers And Returns $125 Million To Investors
On March 11, 2019, the Securities and Exchange Commission (“SEC”) announced that it had settled charges against 79 investment advisers as part of its Share Class Selection Disclosure Initiative (the “Initiative”), which was created to incentivize investment advisers to self-report possible securities law violations to the Commission. As a result of the settlements, more than $125 million will be returned to clients, a substantial majority of which is going to retail investors.
DOJ Revises FCPA Corporate Enforcement Policy
On March 8, 2019, the Department of Justice (“DOJ”) released a revised version of its FCPA Corporate Enforcement Policy (the “Policy”), which provides enforcement and practice guidance to DOJ prosecutors and was formally incorporated into the U.S. Attorneys’ Manual in November 2017. United States Attorneys’ Manual, FCPA Corporate Enforcement Policy Section 9-47.120 (as of Mar. 15, 2019). Assistant Attorney General Brian A. Benczkowski announced the revisions to the Policy in a speech at the American Bar Association’s National White Collar Crime Institute in which he highlighted the DOJ’s commitment to transparency and the need to ensure its “ongoing process of refinement and reassessment.” DOJ Press Release, Assistant Attorney General Brian A. Benczkowski Delivers Remarks at the 33rd Annual ABA National Institute on White Collar Crime Conference (Mar. 8, 2019). Important changes to the Policy include expansion of the Policy in the context of mergers and acquisitions, as well as softening the DOJ’s approach to software that does not retain communications.
CFTC Announces Further Incentives For Self-Reporting, Cooperation For Unregistered Individuals And Entities, While Highlighting Focus On Foreign Corruption
On March 6, 2019, the head of the U.S. Commodity Futures Trading Commission’s (“CFTC’s”) Enforcement Division, James McDonald, announced a new policy related to the benefits of self-reporting foreign corrupt practices-related violations of the Commodity Exchange Act by market participants who are not registered with the agency. McDonald announced that, absent aggravating circumstances, the enforcement division will recommend a deal without civil financial penalties for companies and individuals who self-report misconduct, cooperate with the agency, and reform the bad behavior at issue (including payment of disgorgement and restitution).
Telecommunications Provider & Subsidiary Enter Into Settlement, Deferred Prosecution Agreement And Plea Agreement With SEC And DOJ For FCPA Violations In Third Recent Enforcement Proceeding Involving Uzbek Telecommunications Market
On March 6, 2019, the Securities and Exchange Commission (“SEC”) announced that it was settling allegations that Russian telecommunications company Mobile Telesystems Pjsc (“MTS”) violated anti-bribery, books and records, and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) in order to increase its business in Uzbekistan. Without admitting or denying the SEC’s allegations, MTS agreed to pay a civil penalty of $100 million to the SEC and retain an independent compliance monitor for at least three years. Mobile Telesystems PJSC, Exchange Act Release No. 85261 (Mar. 6, 2019). The same day, the Department of Justice (“DOJ”) announced it had entered into a deferred prosecution agreement (“DPA”) with MTS pursuant to the Department’s FCPA Corporate Enforcement Policy and a plea agreement with MTS’s subsidiary, Kolorit Dizayn Ink LLC (“Kolorit”), for one count of conspiracy to violate the anti-bribery and books and records provisions of the FCPA. Deferred Prosecution Agreement, United States v. Mobile TeleSystems PJSC (S.D.N.Y. 2019); Plea Agreement, United States v. KOLORIT DIZAYN INK Limited Liability Company (SDNY 2019). Pursuant to the DPA, MTS agreed to a fine and restitution of $850 million. The DOJ has agreed to credit MTS’s $100 million civil penalty to the SEC towards this amount.
Federal Judge Acquits Former FX Trader on Charges Related to Alleged Front-Running and Price Manipulation
On March 4, 2019, the U.S. District Court for the Northern District of California acquitted a former sell-side foreign exchange trader on all counts brought against him arising from his alleged misuse of confidential client information in connection with a large foreign currency exchange trade. After the completion the government’s case, the trader moved for acquittal as a matter of law. The Court ruled that, viewing the evidence in the light most favorable to the government, the jury could not reasonably find the defendant guilty beyond a reasonable doubt and granted the motion. The essence of the Court’s decision was that the government had not established that the defendant, who was engaged in arm’s-length transaction with a customer, owed the customer the duties the government’s case assumed. USA v. Bogucki, No. 18-00021, slip op. at 12 (N.D. Cal. Mar. 4, 2019). As discussed further below, the Court’s treatment of the concept of a sell-side trader “pre-positioning” (often referred to as “pre-hedging”) ahead of a customer’s trade is notable. The line between front-running/misuse of confidential information and appropriate pre-hedging, while always inherently case and situation specific, has been at the forefront of multiple criminal and civil regulatory investigations and cases in recent years.
CFTC Settles Spoofing Charges Against Trader Without Monetary Penalty
On February 25, 2019, the Commodity Futures Trading Commission (“CFTC”) settled spoofing charges brought against a former trader who pleaded guilty to similar criminal charges last year brought by the U.S. Department of Justice. In the Matter of Krishna Mohan, Admin. Proc. No. 19-06 (Feb. 25, 2019). The CFTC alleged that the trader participated in a years-long spoofing scheme in which he placed buy or sell orders he intended to cancel in a variety of futures with the purpose of stimulating supply or demand and personally profiting from the resulting price swings. The CFTC required the trader to admit to engaging in manipulative and deceptive schemes as part of the settlement, but the CFTC has not imposed monetary sanctions against him.
CFTC Declines To Appeal Ruling That It Failed To Prove Artificiality In Market Manipulation Action
On February 27, 2019, the Commodity Futures Trading Commission (“CFTC”) announced that it would not appeal a November 2018 decision in U.S. Commodity Futures Trading Commission v. Donald R. Wilson, et al., No. 1:13-cv-07884 (S.D.N.Y. Nov. 30, 2018), by Judge Richard J. Sullivan of the United States Court of Appeals for the Second Circuit, who was sitting by designation on the United States District Court for the Southern District of New York. Judge Sullivan’s decision, which came after a bench trial of claims that defendant DRW Investments LLC (“DRW”) had manipulated the price of a certain swap future in violation of the Commodities Exchange Act (“CEA”), entered judgment for DRW on all claims and found that the CFTC had failed to prove that DRW’s challenged bids were at artificial prices.
Technology Services Company Enters Into FCPA Settlement With SEC, While SEC And DOJ Charge Two Former Executives With FCPA Violations
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
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
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
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
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
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.