DC Circuit Enjoins FINRA Disciplinary Proceeding, Questions Constitutionality Of Hearing Officers
On July 5, the United States Court of Appeals for the D.C. Circuit granted an emergency injunction blocking the Financial Industry Regulatory Authority (“FINRA”) from halting the securities business of Alpine Securities Corporation (the “Company”) through an expedited hearing process pending the Company’s appeal challenging the constitutionality of FINRA’s enforcement proceedings. Alpine Securities Corporation, et al v. Financial Industry Regulatory Authority, Inc., 1:23-cv-01506-BAH (July 5, 2023). While noting that this was not a decision on the merits, the court found that the Company had shown a likelihood that it will succeed on the merits in its challenge to the structure of FINRA enforcement actions, having at this early stage “raised a serious argument that FINRA impermissibly exercises significant executive power.”
SEC And DOJ Bring First Ever Charges For Cryptocurrency Insider Trading Tipping Scheme
On July 21, 2022, the Securities and Exchange Commission (“SEC”) filed a complaint and the Department of Justice (“DOJ”) unsealed an indictment against Ishan Wahi, a former Coinbase employee, his brother, Nikhil Wahi, and friend, Sameer Ramani, for alleged insider trading. SEC v. Ihan Wahi, Nikhil Wahi, and Sameer Ramani, 2:22-cv01009 (W.D. Wa. July 21, 2022); United States v. Ishan Wahi, Nikhil Wahi, and Sameer Ramani, 22-cr-392 (S.D.N.Y. 2022). Both the complaint and indictment concern the same underlying conduct by Wahi, who allegedly provided dozens of tips to his brother and friend over several months to purchase certain digital assets tied to cryptocurrencies (the “digital assets”) shortly before they were publicly listed on Coinbase’s exchange.
SEC Brings Action Against Investment Advisers For Allegedly Misleading Robo-Adviser Clients About Hidden Fees
On June 13, 2022, the Securities and Exchange Commission (“SEC”), announced that it had instituted a settled administrative proceeding accusing several investment advisers (the “Advisers”) that focused on robo-advising, and all of which were themselves subsidiaries of a prominent investment adviser, of violating Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Section 15(b) of the Securities Exchange Act of 1934. Broadly, the SEC accused them of failing to invest client cash in ways that their own analyses showed would be optimal for the clients, and instead retaining cash in a way that benefitted the Advisers. The Advisers did not admit or deny the SEC’s allegations as part of the resolution, but as part of the settlement agreed collectively to disgorge approximately $52 million and to pay a civil monetary penalty of $135 million and were also required to engage an independent consultant and engage in certain other undertakings.
SEC ESG Fines Investment Adviser For Alleged ESG Misstatements In ESG Task Force’s First Enforcement Resolution
On March 4, 2021, the Securities & Exchange Commission (“SEC”) publicly announced the formation of a Climate and Environmental, Social and Governance (“ESG”) Task Force within its Enforcement Division. This task force was reportedly staffed with 22 Enforcement staff members drawn from SEC headquarters, regional offices and specialized units. The task force was assembled in response to, among other things, SEC Chairman Gary Gensler’s focus on investigating misstatements related to ESG disclosures. In remarks by Chairman Gensler on July 7, 2021, he described the SEC as focused on “truth in advertising” and confirming that “funds that market themselves as ‘green,’ ‘sustainable,’ ‘low carbon,’ and so on” were in fact operating consistent with those disclosures. Approximately 14 months later, the ESG Task Force has announced its debut enforcement action by ordering an investment adviser to pay a $1.5 million fine for alleged misrepresentations related to its ESG practices.
FINRA Issues Regulatory Notice On The Scope Of Supervisor Liability For Chief Compliance Officers
On March 17, 2022, FINRA issued a notice to member firms about Rule 3110 as it pertains to the potential liability of Chief Compliance Officers (CCOs) for failure to discharge designated supervisory responsibilities. (Regulatory Notice 22-10, “the Notice”). The Notice provides welcome guidance, clarifying when CCOs will, and will not, be held liable for supervisory violations and explicitly acknowledging that CCOs are generally not responsible for all supervisory activity within member firms.
SEC Announces Settled Insider Trading Action Against Former Director Of Investor Relations
On February 22, 2022, the Securities and Exchange Commission (SEC) announced that John-Michael Havrilla, a former Director of Investor Relations of PAVmed Inc. (PAVmed), a medical device company, had agreed to settle claims of insider trading. The SEC simultaneously filed a complaint in the Southern District of New York, together with a consent agreement and proposed final judgment wherein Havrilla, without admitting or denying liability, agreed to the imposition of a permanent injunction, civil penalties of $160,230, and a five-year officer or director ban.
SEC Enforcement In FY 2021 Included Significant Actions In Traditional And Emerging Areas And Over $1 Billion In Whistleblower Awards
On November 18, the U.S. Securities and Exchange Commission (“SEC”) announced its enforcement results for the 2021 fiscal year, which ended on September 30, 2021. The SEC reported that it filed 434 new enforcement actions in FY2021, a 7% increase over FY2020. But perhaps the most striking thing about the SEC’s enforcement results for the year was its whistleblowing statistics. The SEC has now awarded over $1 billion in whistleblower awards, and the SEC highlighted those figures in its press release—announcing that “[t]he SEC’s whistleblower program was critical to these efforts and had a record-breaking year.”
Consulting Firm Settles Allegations That It Had Inadequate Procedures For Handling Of MNPI Between Units
On November 19, 2021, the Securities and Exchange Commission (“SEC”) announced that an affiliate of McKinsey & Company (“McKinsey”), McKinsey Investment Office Partners, Inc. (“MIO”), had agreed to pay an $18 million penalty for alleged compliance failures in its handling of material nonpublic investment information (“MNPI”). While the SEC did not allege that MIO had ever improperly used material nonpublic investment information in executing trades, it alleged that MIO’s procedures were inadequate to account for the risk that certain members of its investment committee had access to such information due to other roles they had with McKinsey. MIO neither admitted nor denied the allegations in resolving the matter through an administrative proceeding.
CFTC Fines Crypto Exchange That Offered Margin Trading For Failing To Register As FCM, Prompting Calls For Further Rulemaking From One Commissioner
On September 28, 2021, the Commodity Futures Trading Commission (CFTC) entered an order that imposed a $1.25 million fine on Payward Ventures Inc., which does business as digital asset exchange Kraken, for allegedly failing to register as a futures commission merchant (FCM) and for offering certain margin trading services in violation of Sections 4(a) and 4d of the Commodity Exchange Act (CEA). Although the decision did not purport to break new legal ground, one CFTC Commissioner, Dawn Stump, noted that the decision “is informed by” the CFTC’s Final Interpretive Guidance on retail commodity transactions involving certain digital assets issued in 2020, and issued a concurring statement calling upon the CFTC to issue rulemaking to clarify and codify that guidance, which is increasingly important in the cryptocurrency space.
SEC Vacates $1.6 Million In FINRA Fines Against Broker-Dealer And Officers
On September 17, 2021, the Securities and Exchange Commission (“SEC”) vacated $1.6 million in fines and penalties that the Financial Industry Regulatory Authority (“FINRA”) had previously levied against Scottsdale Capital Advisors Corp. (“Firm”) and three of its officers (“Applicants,” collectively). In 2015, FINRA alleged that the Firm failed to maintain appropriate internal controls and executed sales of unregistered microcap securities for its foreign financial institution customers. The next year, following a disciplinary hearing, FINRA imposed a $1.5 million fine on the Firm, a lifetime bar on one of the Firm’s officers, and a $50,000 fine and a two-year suspension on the two remaining Firm officers. In reviewing FINRA’s findings on appeal by the Applicants, the SEC overturned the sanctions after determining that FINRA’s National Adjudicatory Council (“NAC”) applied incorrect legal standards, failed to adequately explain the basis of its conclusions, and conflated applicable regulations in its case against the Firm.
SEC Settles “First-Of-Its-Kind” Action Over “Decentralized Finance” Technology, Alleging Fraud And Unregistered Sales Of Securities
On August 6, 2021, the U.S. Securities and Exchange Commission (“SEC”) announced that it reached a $13 million settlement in a cease-and-desist proceeding against Blockchain Credit Partners (“the Company”) and its two owners. The Company marketed itself as a “decentralized finance” (“DeFi”) technology company that sold two kinds of digital assets: (1) “mTokens,” which were sold as accruing 6.2% interest, and (2) DMM Governance (“DMG”) tokens designed to give holders certain voting rights, a share of excess profits, and the ability to profit from DMG resales in the secondary market. In its cease-and-desist order (the “Order”), the SEC concluded that both mTokens and DMG tokens were securities because they were offered and sold as investment contracts, claimed that the Respondents violated Section 5(a) and 5(c) of the Securities Act for selling these securities without registering them, and further claimed that the Respondents made certain material misstatements and omissions in connection with the sale of the securities in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder.
Cryptocurrency Derivatives Exchange Reaches $100 Million Settlement With CFTC, FinCEN
On August 10, 2021, BitMEX, an offshore cryptocurrency derivatives exchange (the “Exchange”), agreed to a $100 million settlement with the U.S. Commodity Futures Trading Commission (the “CFTC”) and the Financial Crimes Enforcement Network (“FinCEN”), resolving claims that the Exchange operated illegally in the U.S. and failed to comply with anti-money laundering (“AML”) laws and regulations.
Financial Institution Settles SEC Claims Related To Allegedly Unsuitable Investments In Complex Exchange-Traded Product
On Monday, July 19, 2021, the SEC announced that it had settled an action involving an alleged failure to prevent what the SEC contended were unsuitable investments by the respondent’s clients in a volatility-linked exchange-traded product (ETP). As part of the settlement, the respondent agreed to pay a civil penalty of $8 million and disgorgement and prejudgment interest of $112,274.
SEC Announces Settled Enforcement Action In Connection With SPAC Business Combination
On July 13, 2021, the SEC announced its settlement with Stable Road Acquisition Corp. (“Stable Road”), a special-purpose acquisition company (“SPAC”); its CEO; its sponsor; and its proposed merger target, Momentus Inc. (“Momentus”), an early-stage space technology company. The resolution was based on alleged violations of the federal securities laws stemming from material misstatements and omissions related to Momentus’s space technology and national security concerns surrounding Momentus’s former CEO. The SEC has brought charges against and is litigating against Momentus’s former CEO, who was not a party to the settlement.
Supreme Court Resolves Circuit Split On Meaning Of “Exceeding Authorized Access” In The Computer Fraud And Abuse Act
On June 3, 2021, the United States Supreme Court’s decision in Van Buren v. U.S. clarified a controversial provision in the Computer Fraud and Abuse Act (the “CFAA”), which imposes civil and criminal liability on anyone who “intentionally accesses a computer without authorization or exceeds authorized access,” and thereby obtains computer information. 18 U. S. C. §1030(a)(2). The Court held that “an individual ‘exceeds authorized access’ when he accesses a computer with authorization but then obtains information located in particular areas of the computer—such as files, folders, or databases—that are off limits to him” and rejected the prosecution’s broader reading of the CFAA. In doing so, the Court resolved a circuit split.
Supreme Court Rolls Back FTC’s Ability To Obtain Restitution And Disgorgement
On April 22, 2021, the Supreme Court held in AMG Capital Management, LLC v. FTC that the Federal Trade Commission (“FTC”) is not authorized to seek monetary relief, such as restitution or disgorgement, in enforcement actions brought directly in federal court without first initiating an administrative proceeding. The Court’s significant decision overturned the Ninth Circuit’s ruling below and resolved a circuit split in favor of the minority position adopted by the Third and Seventh Circuits. While the FTC retains the ability to seek such monetary penalties through other avenues, the Court’s decision deprives the FTC of an enforcement tool on which it has heavily relied.
SEC Reverses Position On Accepting Settlement Offers Contingent On Waivers, Creating Once Again Risk That Defendants Will Be Forced To Make Settlement Decisions With Significant Uncertainty
On February 11, 2021, the Acting Chair of the Securities and Exchange Commission (“SEC”), Allison Herren Lee, announced that the Division of Enforcement will no longer recommend to the SEC a settlement offer that is conditioned on granting a waiver. While Acting Chair Lee described this as a return to the SEC’s “long-standing practice” of separately considering settlement negotiations and waiver requests, Allison Herren Lee, Acting Chair, SEC, Statement of Acting Chair Allison Herren Lee on Contingent Settlement Offers
(Feb. 11, 2021), the decision is in fact a significant and surprising one that was opposed by two Commissioners and could have broad ramifications for the industry. It signals, in no uncertain terms, that the SEC is looking to be extremely aggressive in enforcement, will almost certainly be far more stingy in granting waivers in future matters, and is prepared to deal with the consequences. What remains to be seen is how the industry will respond, as the advanced assurance of waivers from the SEC is often not just a factor in a defendant’s decision to settle—for some defendants it is a critical gating item without which no settlement is possible.
SEC Reauthorizes Senior Enforcement Officials To Issue Formal Investigation Orders
On February 9, 2021, Acting Chair of the Securities and Exchange Commission (“SEC”), Allison Herren Lee, announced
that she had authorized senior officers in the SEC’s Enforcement Division to approve the issuance of Formal Orders of Investigation without prior approval from the SEC’s commissioners. While significantly less surprising and less consequential than her announcement from the same week regarding conditional settlement offers, this reinstatement of delegated authority reflects another instance of swinging the pendulum back in favor of more aggressive enforcement.
DOJ And SEC Charge Biotech Consultant With Insider Trading, But SEC Passes On Seeking Disgorgement
On February 5, 2021, the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) charged Mark Ahn, a consultant to a biotech company, with insider trading based on confidential information that he allegedly learned regarding a proposed acquisition of Dimension Therapeutics, Inc. (“Dimension”). In parallel civil and criminal actions, the DOJ and SEC allege that Ahn executed trades prior to the public announcement of Dimension’s acquisition, based on material non-public information (“MNPI”) that he obtained through his role as a consultant. Ahn is facing criminal charges of two counts of securities fraud under 18 USC § 1348 and forfeiture pursuant to 18 USC § 981(a)(1)(C) and 28 USC § 2461(c), along with civil charges of violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 and a permanent injunction, civil monetary penalties, and an officer-and-director bar. Notably, while the DOJ is seeking forfeiture, the SEC is not seeking disgorgement.
United Kingdom Supreme Court Limits The Serious Fraud Office’s Extra-Territorial Reach
On February 5, 2021, the U.K. Supreme Court unanimously ruled that the Serious Fraud Office (the “SFO”), the U.K.’s top anti-fraud agency, lacks authority to compel a foreign company to produce documents to the regulator that are held outside of the U.K. While this ruling on its face suggests the SFO’s power to investigate foreign entities has been stymied, the decision may not have much effect in practice in light of the other cross-border tools that remain available to the SFO, including the mutual legal assistance (“MLA”) process.
Energy Company Agrees To Pay Over $150 Million To DOJ, CFTC, And Foreign Regulator To Resolve Coordinated FCPA Allegations
On December 3, 2020, the U.S. Department of Justice (“DOJ”) announced that a Texas-based subsidiary of the Swiss energy trading company (“the Company”) had entered into a deferred prosecution agreement (“DPA”) pursuant to which it agreed to pay $135 million to resolve allegations that it conspired to violate the Foreign Corrupt Practices Act (“FCPA”) and to end a parallel investigation in Brazil. The Company also agreed to pay more than $28 million to the Commodity Futures Trading Commission (“CFTC”) for related matters, in the first coordinated resolution between the DOJ and the CFTC in an FCPA matter.
Beverage Company Agrees To Pay $19.6 Million And Enter DPA To Resolve FCPA Charges With The DOJ, In Follow-Up To SEC Action That Had Starkly Different Tone
On October 27, 2020, the U.S. Department of Justice (“DOJ”) announced that a Chicago-based company that produces and sells distilled beverages (the “Company”), agreed to pay a monetary penalty of approximately $19.6 million to resolve the DOJ’s investigation into alleged violations of the U.S. Foreign Corrupt Practices Act (“FCPA”). As part of its resolution with the DOJ, the Company also entered into a three-year deferred prosecution agreement (“DPA”). The DOJ settlement targets the same underlying conduct that was subject to a separate settlement with the U.S. Securities and Exchange Commission (“SEC”) in 2018, where the Company agreed to pay $8 million, including a civil penalty of $2 million; but the DOJ took a different view of certain facts and refused to credit the $2 million civil penalty paid by the Company to the SEC because, according to the DOJ, the Company “did not seek to coordinate a parallel resolution” with the DOJ.
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.
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.
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.
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.
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.
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.
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.
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.
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 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 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.
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.
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.
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.
Fourth Depositary Bank Settles SEC Allegations Of Improper Handling Of Pre-Release ADRs
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.
SEC Loses Bid For Preliminary Injunction Halting Initial Coin Offering After Judge Questions Whether It Involved Securities
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, LLC, et 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.