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  • 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). 
  • 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.
  • Former Forex Trader Successfully Avoids Extradition From The UK Through Appeal To UK’s High Court Of Justice

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


    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.

  • DOJ And CFTC Recent Actions Highlight Their Increased Focus On “Spoofing”
    ​On January 29, 2018, the U.S. Department of Justice (“DOJ”) and U.S. Commodity Futures Trading Commission (“CFTC”) announced settlements with three international financial institutions to resolve claims that traders at those institutions placed false bids to manipulate the precious metals markets, a process referred to as “spoofing.”  Separately, the DOJ filed criminal charges, and the CFTC filed civil complaints, against seven individual traders alleged to have engaged in spoofing, and the owner of a software company alleged to have built a program that was designed to enable the practice. 

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  • HSBC Enters Into Deferred Prosecution Agreement To Settle Charges Arising From Traders’ Alleged FX Front-Running

    On January 18, 2018, HSBC Holdings Plc (“HSBC”) entered into a deferred prosecution agreement with the Department of Justice, Criminal Division, Fraud Section (“DOJ”) pursuant to which it will pay $101.5 million in criminal penalties and disgorgement to resolve two counts of wire fraud under 18 U.S.C. § 1343.  Deferred Prosecution Agreement, United States v. HSBC Holdings Plc, No. 1:18-cr-00030 (E.D.N.Y. 2018), ECF No. 3-2.  The charges arose out of two transactions in 2011 where HSBC foreign exchange (“FX”) traders allegedly engaged in “front-running,” or trading ahead of a client’s trade, to manipulate the price of currency. 

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  • Forex Trader Found Guilty Of Defrauding Client

    ​On October 23, 2017, following a four-week trial in the United States District Court for the Eastern District of New York, Mark Johnson, the former head of a foreign exchange (“forex”) trading desk for a major financial institution, was convicted of eight counts of wire fraud under 18 U.S.C. §1343 and one count of conspiracy under 18 U.S.C. §1349 for manipulating the price of foreign currency for his employer’s profit at the expense of his client. U.S. v. Johnson, No. 1:16-cr-00457 (E.D.N.Y. filed July 19, 2016).  This was the first individual conviction to arise out of the government’s multi-year investigation into the forex market.

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  • CFTC Imposes Sanctions On A Proprietary Trading Firm For Spoofing The Market

    On October 10, 2017, the Commodity Futures Trading Commission (“CFTC”) filed and settled charges against Arab Global Commodities DMCC (“AGC”), a proprietary trading firm headquartered in Dubai.  Specifically, the CFTC found that one of AGC’s traders had engaged in a market manipulation practice known as spoofing in violation of Section 4c(a)(5)(C) of the Commodity Exchange Act (“CEA”), and that AGC had failed to “implement adequate policies and procedures to monitor” its employees’ trades for potential spoofing.  In the Matter of Arab Global Commodities DMCC, CFTC No. 18-01, 2017 WL 4511098 (Oct., 10, 2017) (“Order”). AGC consented to the Order and agreed to pay a penalty of $300,000 plus post-judgment interest, without admitting or denying the Order’s findings.

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  • Northern District Of California Limits SEC’s Disgorgement Reach Under SOX 304

    On February 8, 2017, United States District Judge Jon S. Tigar of the United States District Court for the Northern District of California granted in part defendant Erik Bardman’s motion to dismiss the Securities and Exchange Commission’s claim for disgorgement of certain compensation pursuant to Sarbanes-Oxley Act Section 304 (“SOX 304”).  Order, SEC v. Bardman, No. 3:16-cv-02023 (N.D. Cal. Feb. 8, 2017).  Mr. Bardman is a former Chief Financial Officer of Logitech International SA.  The Court held that neither an earnings release nor a Form 8-K announcing and attaching an earnings release can be the basis of a SOX 304 disgorgement claim because any purported material noncompliance with a financial reporting requirement in those documents does not cause or require a company to issue an accounting restatement.  

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  • Ninth Circuit Supports Expansive Interpretation Of SOX 304

    On August 31, 2016, the United States Court of Appeals for the Ninth Circuit vacated a judgment in favor of Peter Jensen and Thomas Tekulve, Jr., former officers of Basin Water, Inc., and remanded for a jury trial.  SEC v. Jensen, No. 14-55221 (9th Cir. Aug. 31, 2016).  The Court held, in relevant part, that the officers could be subject to the disgorgement provisions of Section 304 of the Sarbanes-Oxley Act (“SOX 304”) following the company’s accounting restatements as long as the restatements were issued due to misconduct, even if that misconduct was not on the part of the defendants.  

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  • SEC Enters Into First Settlement Agreements Penalizing Companies for Attempting to Block Employees from Receiving Whistleblower Reward Payments

    On August 10, 2016, the Securities and Exchange Commission (“SEC”) instituted a settled administrative proceeding against a building products distributor.  The allegations focused on the distributor’s use of severance agreements that required outgoing employees to forego their ability to recover monetary rewards under various whistleblower statutes.  In the Matter of BlueLinx Holdings, Inc., Admin. Proc. File no. 3-17371 (Aug. 10, 2016).  Six days later, the SEC instituted another settled administrative proceeding that raised similar allegations regarding the use of such severance agreements; this time, involving a health insurance provider.  In the Matter of Health Net, Inc., Admin. Proc. File No. 3-17396 (Aug. 16, 2016).  The details of both settlements are set forth below:

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  • Supreme Court Limits Extraterritorial Application of Civil RICO

    On June 20, 2016, the Supreme Court held that, to maintain a civil claim under the Racketeer Influenced and Corrupt Organizations (“RICO”) Act, a private plaintiff “must allege and prove a domestic injury to its business or property.”  RJR Nabisco, Inc. v. European Cmty., No. 15-138, 2016 WL 3369423 (June 20, 2016).  And while the Court also separately held that a plaintiff may base a civil RICO claim on predicate acts that were committed abroad, those acts must violate underlying statutes that Congress unmistakably intended to apply extraterritorially.  

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    CATEGORY: Financial Fraud
  • Fund Administrator Settles Charges that it Failed its Gatekeeper Responsibilities

    On June 16, 2016, the SEC settled civil claims with fund administrator Apex Fund Services (US) Inc. (“Apex”), relating to allegations that Apex failed to heed red flags and correct faulty accounting for two of its clients.  SEC Press Release, Private Fund Administrator Charged with Gatekeeper Failures, Rel. No. 2016-120 (June 16, 2016).  

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    CATEGORY: Financial Fraud
  • Second Circuit Holds Federal Courts Cannot Hear Constitutional Challenges to SEC ALJs until Administrative Proceedings

    On June 1, 2016, in Tilton v. SEC,  a divided Second Circuit panel affirmed the dismissal of a constitutional challenge to the SEC’s use of administrative proceedings on the grounds that the claim could only be brought in an appeal following the issuance of a final order by the SEC after the proceedings have concluded.  The panel’s decision to dismiss on jurisdictional grounds, and not reach the merits, may nevertheless result in a circuit split that could trigger Supreme Court review with implications for future SEC enforcement actions, depending on how the D.C. Circuit rules in the pending case of In the matter of Timbervest. 

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    CATEGORY: Financial Fraud
  • New Criminal Charges or Enforcement Actions Logitech and Ener 1

    On April 19, the SEC announced significant enforcement actions against two separate companies – Logitech and Ener 1 – and certain of their officers.  The cases are unrelated, but both include allegations of accounting fraud.  The Logitech matter primarily involves section 10(b) claims that Logitech inflated its earnings by failing to write down excess inventory in a timely fashion.  The SEC settled its case against Logitech in an administrative proceeding, and filed a complaint in federal court against two company officers – the former CFO and Controller – who are contesting the allegations.  Shearman & Sterling is representing the former CFO in this matter.  The Ener1 matter primarily involves section 10(b) claims that Ener1 failed to impair investments and receivables timely.   The SEC filed two separate settled administrative proceedings relating to these allegations – one against the company and certain executives, and one against the former audit partner from PwC.  While each case involves different claims, and none of the defendants admitted the allegations, the SEC’s decision to announce the actions jointly highlights its continued aggressive focus on possible accounting fraud and earnings management.

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    CATEGORY: Financial Fraud