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. 

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.

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

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

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

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

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

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

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

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

This past week saw important developments in the cryptocurrency space with two new regulatory actions, and a significant and much-anticipated decision in a criminal securities fraud action relating to an initial coin offering.

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

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

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

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

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

On July 2, 2018, the Securities and Exchange Commission (“SEC”) entered into a settlement with Houston-based global engineering, construction, and services company KBR, Inc. (“KBR” or the “Company”) over accounting issues that had led KBR to restate its earnings and identify a material weakness in its internal control over financial reporting in 2014. In the Matter of KBR, Inc., Admin Proc. No. 3-18569 (July 2, 2018). The accounting issues centered around the Company’s cost and revenue estimates and its calculation of “work in backlog,” a non-financial accounting metric the Company utilized.

On June 28, 2018, the U.S. Securities and Exchange Commission (“SEC”) proposed amendments to the rules governing its whistleblower program. Press Release, SEC Proposes Whistleblower Rule Amendments, No. 2018-120 (June 28, 2018). Among other things, the proposed amendments would affect the types of whistleblower awards authorized by the SEC’s rules, allow for adjustments of awards in certain cases, adopt a new definition of “whistleblower,” improve the SEC’s ability to bar individuals from making frivolous award claims, and clarify what types of whistleblower submissions constitute “original information.” These proposed amendments, which on balance reflect a modest refinement of the whistleblower program and signal that the essential contours of the program continue to have the strong support of the Commission, are subject to notice and comment by the public and further modification by the SEC.

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

Read more

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

Read more

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.
 

On March 6, 2018, the United States Securities and Exchange Commission (“SEC”) instituted a settled administrative proceeding against the New York Stock Exchange (“NYSE”), and affiliated national exchanges NYSE American LLC (“American”) and NYSE Arca, Inc. (“Arca”), for allegedly misrepresenting stock prices as “automated,” applying price collars when there was no rule permitting them, failing to maintain sufficient disaster recovery policies, and other conduct in violation of various sections of the Securities Act of 1933 (“Securities Act”), the Securities Exchange Act of 1934 (“Exchange Act”), and various regulations thereunder.  This administrative proceeding arose from five separate SEC investigations and culminated in a $14 million fine against the exchanges.  See In the Matter of New York Stock Exchange LLC, et al., Admin. Proc. No. 3-18388 (Mar. 6, 2018); see also Press Release, NYSE to Pay $14 Million Penalty for Multiple Violations, Rel. No. 2018-31 (Mar. 6, 2018), https://www.sec.gov/news/press-release/2018-31. 

Read more

On March 6, 2018, Judge Jack B. Weinstein of the United States District Court for the Eastern District of New York entered a preliminary injunction against a virtual currency company and its owner in connection with an alleged fraudulent virtual currency scheme.  CFTC v. McDonnell, et al., No. 1:18-cv-00361 (E.D.N.Y. Mar. 6, 2018).  Judge Weinstein found that the Commodity Futures Trading Commission (“CFTC”) had shown a reasonable likelihood that defendants would continue to violate the Commodity Exchange Act (“CEA”).  In so ruling, Judge Weinstein became the latest judge to recognize the CFTC’s authority to regulate cryptocurrencies as commodities.

Read more

On February 7, 2018, Dutch bank Rabobank’s U.S. subsidiary pleaded guilty to conspiring to impair, impede, and obstruct a review by the Office of the Comptroller of the Currency (“OCC”) of the bank’s anti-money laundering (“AML”) program, agreeing to forfeit more than $368 million as a result.  See United States v. Rabobank, National Association, 18-cr-0614, Plea Agreement (Feb. 7, 2018); DOJ Press Release, Rababank NA Pleads Guilty, Agrees to Pay Over $360 Million, No. 18-148 (Feb. 7, 2018).

Read more

​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. 

Read more

On January 22, 2018, the SEC announced civil charges against six certified public accountants for their role in an alleged scheme to misappropriate confidential information from the Public Company Accounting Oversight Board (“PCAOB”) relating to the PCAOB’s planned inspections of an accounting firm, so that the firm could use the confidential information to help it avoid poor inspections.  Press Release 2018-6, SEC, Six Accountants Charged with Using Leaked Confidential PCAOB Data (Jan. 22, 2018).  On the same day, the United States Attorney’s Office for the Southern District of New York (“USAO”) announced the unsealing of an indictment charging five of the six defendants in the SEC action with conspiracy and wire fraud for their participation in the alleged scheme.  Press Release, DOJ, Five Former KPMG Executives and PCAOB Employees Charged in Manhattan Federal Court (Jan. 23, 2018).  The sixth SEC defendant had previously pleaded guilty (and had agreed to settle the SEC’s claims) and is cooperating with the government’s investigation.

Read more

On December 11, 2017, the United States Securities and Exchange Commission (“SEC”) filed a complaint against two investment advisers, Westport Capital Markets, LLC (“Westport”) and its controlling shareholder, Christopher McClure, alleging that the advisers violated various provisions of the Investment Advisers Act of 1940 (“Advisers Act”) by failing to disclose conflicts of interest and receipt of fees and profits related to their investment decisions on behalf of clients, and by failing to seek the best execution for client transactions.  Complaint, SEC v. Westport Capital Mkts. LLC, No. 3:17-cv-02064 (D. Conn. Dec. 11, 2017), ECF No. 1.

Read more

On November 29, 2017, Deputy Attorney General Rod Rosenstein delivered remarks at the 34^th International Conference on the Foreign Corrupt Practices Act (“FCPA”), in which he announced a revised FCPA Corporate Enforcement Policy.  According to Mr. Rosenstein, the Department of Justice’s (“DOJ’s”) new FCPA Corporate Enforcement Policy—an extension of the FCPA Pilot Program rolled out eighteen months prior—is designed both to aid the DOJ’s ability to identify and punish criminal conduct efficiently and also to provide “guidance and increased certainty to companies struggling with the question of whether to make voluntary disclosures of wrongdoing.”  Remarks at 3. 

Read more

On November 7, 2017, in the midst of a pending examination by, and implementation of previously agreed upon consent orders with, the New York State Department of Financial Services (“DFS”), the Bank of Tokyo Mitsubishi UFJ (“BTMU”), Japan’s largest bank, converted its New York and other U.S. branch office licenses from state to federal licenses. This prompted DFS to issue an order asserting that it still had authority to investigate and prosecute violations of New York law by BTMU.  BTMU then filed suit in the United States District Court for the Southern District of New York seeking to enjoin DFS from exercising any authority over BTMU.  Complaint, The Bank of Tokyo-Mitsubishi UFJ, Ltd. v. Maria Vullo, No. 1:17-cv-08691 (S.D.N.Y. Nov. 8, 2017), ECF No. 1. 

Read more

On November 6, 2017, the U.S. Commodity Futures Trading Commission (“CFTC”) filed a settled enforcement action against Cargill, Inc. (“Cargill”), an agriculture commodities trader, for allegedly misrepresenting the mid-market marks of swaps to counterparties and in reports to its swap data repository (“SDR”), in violation of the Commodity Exchange Act (“CEA”) and commission regulations.  Cargill consented to the CFTC’s order and agreed to pay a penalty of $10 million, without admitting or denying the Order’s findings.  In the Matter of Cargill, Inc. CFTC No. 18-03 (Nov. 6, 2017).

Read more

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.

Read more

On September 29, 2017, a three-judge panel of the United States Court of Appeals for the D.C. Circuit (“D.C. Circuit”) overturned the Securities and Exchange Commission’s (“SEC”) determination that investment banker Frank Lorenzo had violated Rule 10b-5(b) under the Securities Exchange Act of 1934 (“Exchange Act”) by sending emails that allegedly contained material misrepresentations about a debenture offering that were drafted by his employer.  See Lorenzo v. SEC, No. 15-1202, slip op. at 2 (D.C. Cir. Sept. 29, 2017).  The panel held that, per the Supreme Court’s decision in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), Lorenzo was not the “maker” of the alleged misrepresentations in the emails because he had only cut-and-pasted content over which his employer retained “ultimate authority.”  After reversing the SEC’s Rule 10b-5(b) determination, however, a split panel affirmed the SEC’s determination that, by recklessly making use of misleading statements over which he did not have ultimate authority, Lorenzo had violated Rules 10b-5(a) and 10b-5(c), as well as Section 17(a)(1) of the Securities Act of 1933 (“Securities Act”).  The panel then set aside the lifetime industry bar and $15,000 civil monetary penalty that had been imposed on Lorenzo and directed the SEC to reassess the appropriate penalties in light of the panel’s holding that Lorenzo had not violated Rule 10b-5(b).

Read more

On September 27, 2017, an administrative law judge (“ALJ”) for the United States Securities and Exchange Commission (“SEC”) dismissed the SEC’s administrative proceeding against Lynn Tilton and four Patriarch Partners entities (“Patriarch Partners”) that she owned.  The Commission alleged that Tilton and Patriarch Partners willfully violated Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 (“Advisors Act”), and Rule 206(4)-8 thereunder, by overvaluing the loan-assets of certain funds managed by Patriarch Partners and by issuing financial statements that did not comply with generally accepted accounting principles (“GAAP”).  In the Matter of Lynn Tilton, et al., Admin. Proc. File No. 3-16462, Initial Decision Rel. No. 1182 (Sept. 27, 2017).

Read more

On August 18, 2017, the Securities and Exchange Commission (“SEC”) announced that broker-dealer Banca IMI Securities Corp. (“BISC”), an indirect, wholly-owned U.S. subsidiary of Italian bank Intesa Sanpaolo SpA, agreed to pay more than $35 million to settle claims that it violated federal securities laws when it requested the issuance of, and received, pre-released American Depositary Receipts (“ADRs”) from various banks without possessing a corresponding number of underlying foreign shares or taking reasonable steps to ensure that such shares were held by the customers on whose behalf it was obtaining the pre-released ADRs, as required by its contracts with issuing banks.  In the Matter of Banca IMI Securities Corp., Admin. Proc. File No. 3-18118 (Aug. 18, 2017).  The SEC alleged that this conduct violated Section 17(a)(3) of the Securities Act of 1933 and reflected a failure by BISC to supervise reasonably its securities lending desk personnel, as required under Section 15(b)(4)(E) of the Securities Exchange Act of 1934.  This is the second such settlement the SEC has announced this year.  See In the Matter of ITG Inc., Admin Proc. File No. 3-17770 (Jan. 12, 2017).

Read more

On August 15, 2017, KPMG LLP (“KPMG”) and one of its engagement partners settled claims brought by the U.S. Securities and Exchange Commission (“SEC”) that they violated Section 4C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102 of the SEC’s Rules of Practice in connection with KPMG’s 2011 audit of the financial statements of Miller Energy Resources, Inc. (“Miller Energy”).  In the Matter of KPMG LLP and John Riordan, CPA, Admin. Proc. File No. 3-18110 (Aug. 15, 2017).  This is the second SEC enforcement action to grow out of the Miller Energy financial statements. 

Read more

On August 1, 2017, Cadaret, Grant & Co., a Delaware investment adviser and broker-dealer, settled claims brought by the United States Securities and Exchange Commission (“SEC”) that it violated various provisions of the Investment Advisers Act of 1940 (“Advisers Act”) by failing, among other things, to invest its clients in lower-fee share classes of certain mutual funds and to disclose conflicts of interest regarding its incentives to invest clients in higher-fee share classes.   In the Matter of Cadaret, Grant & Co., Inc., Admin. Proc. File No. 3-18087 (Aug. 1, 2017).

Read more

On June 29, 2017, the United States Court of Appeals for the Eighth Circuit vacated a disgorgement order against Crawford Capital Corporation, a venture capital firm, and its owner, Paul D. Crawford, citing the U.S. Supreme Court’s recent ruling in Kokesh v. SEC, which held that disgorgement collected by the Securities and Exchange Commission (“SEC”) is subject to a five-year statute of limitations.  United States Sec. & Exch. Comm’n v. Collyard, No. 16-1405 (8th Cir. June 29, 2017).  At the same time, however, the court ruled that Kokesh does not preclude the SEC from obtaining injunctive relief for five-year-old conduct.

Read more

On April 18, 2017, Securities and Exchange Commission (“SEC” or “Commission”) Administrative Law Judge (“ALJ”) James Grimes dismissed an administrative proceeding instituted by the Commission against Georgia real estate developer Charles Hill, Jr. alleging that Hill engaged in insider trading.  In the Matter of Charles L. Hill, Jr., Admin. Proc. No. 3-16383 (Apr. 18, 2017).  In the course of the administrative proceeding, the SEC’s Enforcement Division argued that Hill had traded on material, nonpublic information about a tender offer while having reason to know that the information came from an officer of the target company.  After a full hearing on the merits, however, ALJ Grimes dismissed the administrative proceeding, concluding that the Enforcement Division had not met its burden of proof because its arguments rested too heavily on speculation.  

Read more

On April 10, 2017, the Securities and Exchange Commission (”SEC”) announced fourteen enforcement actions, charging 28 businesses and individuals in connection with alleged schemes to pay writers to generate “bullish” articles relating to certain public companies, while concealing these promotion payments.  See Press Release, SEC: Payments for Bullish Articles on Stocks Must Be Disclosed to Investors, Rel. No. 2017-79 (Apr. 10, 2017), https://www.sec.gov/news/pressrelease/201779.  Although the SEC did not allege that the articles contained any misstatements about the public companies, the SEC claimed that the failure to disclose the promotion payments violated the anti-fraud and anti-touting provisions of the federal securities laws, including Sections 17(a) and 17(b) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  

Read more

On February 8, 2017, the United States Department of Justice (“DOJ”), Fraud Section, issued guidance on its evaluation of corporate compliance programs in the context of criminal investigations of corporate entities.  By way of background, the United States Attorneys’ Manual outlines various principles federal prosecutors need to consider in deciding whether criminal charges against corporate entities should be pursued and how such charges should be resolved.  These principles include “the existence and effectiveness of the corporation’s pre-existing compliance program” and the corporation’s remedial efforts “to implement an effective corporate compliance program or to improve an existing one.”  United States Attorney’s Office, United States Attorneys’ Manual § 9-28.300 (1997).

Read more

On February 14, 2017, the Securities and Exchange Commission (“SEC”) instituted settled administrative proceedings in two different matters where the SEC alleged disclosure violations in connection with battles for corporate control.  CVR Energy (“CVR”), a Texas-based oil refinery company, agreed to settle claims that it failed to adequately disclose the material terms of its fee arrangements during an attempted hostile takeover, In the Matter of CVR Energy, Inc., Admin. Proc. No. 3-17846 (Feb. 14, 2017), and a group of investors agreed to settle claims that they failed to adequately disclose their ownership stakes during a series of campaigns to influence and exert control over microcap companies.  In the Matter of Jeffrey E. Eberwein, et al., Admin. Proc. No. 3-17847 (Feb. 14, 2017).  CVR was not assessed a penalty (which the SEC attributed to the company’s extensive cooperation with the SEC investigation) while the respondents in Eberwein agreed to pay $420,000.  Neither party agreed to admit the allegations.

Read more

On February 6, 2017, a federal jury in San Francisco, California found that Bio-Rad Laboratories, Inc., a life sciences and clinical diagnostics company, violated the Sarbanes-Oxley Act’s whistleblower protections.  The violation stemmed from Bio-Rad’s decision to terminate its former General Counsel, Sanford Wadler, after he internally reported potential Foreign Corrupt Practices Act (“FCPA”) violations to the company’s audit committee.  See Wadler v. BioRad Laboratories, Inc. et al., No 3:15-cv-2356 Final Verdict Form. 

Read more

On February 3, 2017, California-based technology company Ixia and its former CEO, Victor Alston, settled claims brought by the United States Securities and Exchange Commission (the “SEC”) for failing to properly defer recognition of certain revenue in violation of the books and records and internal controls provisions of the Securities Exchange Act of 1934 (the “Exchange Act”).  In the settlement document, Ixia and Alston neither admitted nor denied the SEC’s findings.  In the Matter of Ixia and Victor Alston, Admin. Proc. No. 3-17825 (Feb. 3, 2017).  The Commission also filed suit in the United States District Court for the Central District of California against two other former Ixia employees in connection with these same claims, and this suit is still pending.  Complaint, SEC v. Miller, et al., 17-cv-00897 (C.D. Cal. Feb. 3, 2017), ECF No. 1.

Read more

On January 25, 2017, the Securities and Exchange Commission (“SEC”) filed contested administrative proceedings against Windsor Street Capital (“WSC”), a NY-based brokerage firm, and its former chief compliance officer (“CCO”) and anti-money laundering officer, John David Telfer, for gate-keeping and AML failures related to sales of penny stocks that WSC facilitated.  In the Matter of Windsor Street Capital, L.P. (f/k/a Meyers Associates L.P.) and John David Telfer, Admin. Proc. No. 3-17813 (Jan. 25, 2017) (“Order”).  The SEC alleged that on numerous occasions between 2013 and the date of the Order, WSC facilitated the unregistered sale of hundreds of millions of penny stock shares without performing adequate due diligence, in violation of Section 5 of the Securities Act of 1933 and failed to file suspicious activity reports (“SARs”) for transactions totaling at least $24.8 million with the United States Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), as required under the Bank Secrecy Act of 1970 and in violation of the Exchange Act of 1934.  Tefler, according to the SEC, was personally responsible for monitoring customer transactions for suspicious activity and thus aided and abetted WSC’s violations of the Exchange Act Section 17(a) and Rule 17a-8.  

Read more

On January 23, 2017, Overseas Shipholding Group, Inc. (“OSG”), an international shipping conglomerate, and its former chief financial officer Myles R. Itkin, reached an agreement with the United States Securities and Exchange Commission (“SEC”) that brought to a close an SEC investigation into OSG’s failure to record certain federal income tax liabilities of approximately $264 million that, when recognized in the second quarter of 2012, drove the company into bankruptcy.  In the Matter of Overseas Shipholding Group, Inc. and Myles Robert Itkin, Admin. Proc. No. 3-17807 (Jan. 23, 2017) (“Order”).  Without admitting or denying the allegations, OSG and Itkin each consented to the entry of an order instituting settled cease-and-desist proceedings, which found that both violated or caused the violation of the negligence-based antifraud provisions as well as reporting, books-and-records, and internal controls provisions of federal securities laws.  OSG agreed to pay a $5 million penalty, which is subject to bankruptcy court approval, and Itkin agreed to pay a $75,000 penalty.    

Read more

On January 18, 2017, Orthofix International N.V. (“Orthofix”), a Texas-based medical device company, agreed to a civil money penalty of $8,250,000 to settle claims brought by the United States Securities and Exchange Commission (“SEC”) for artificially inflating the company’s financial condition through faulty accounting, and separately agreed to disgorge $2,928,000, plus interest, and pay a civil money penalty of $2,928,000 for violating the Foreign Corrupt Practices Act (“FCPA”), by providing improper payments to doctors at government-owned hospitals in Brazil.  Orthofix admitted to facts set forth in the SEC’s two Orders Instituting Proceedings, and acknowledged that the conduct violated the federal securities laws.  In the Matter of Orthofix International N.V., Admin. Proc. No. 3-17791 (Jan. 18, 2017).  In the Matter of Orthofix International N.V., Admin. Proc. No. 3-17800 (Jan. 18, 2017).

Read more

On January 17, 2017, BlackRock, Inc. (“BlackRock”), a New York-based asset management company, settled charges by the United States Securities and Exchange Commission (“SEC”) relating to BlackRock’s separation agreements with employees.  According to the SEC, BlackRock required employees to sign separation agreements in which the employees waived their rights to collect any whistleblower awards as a precondition to receiving their separation payments.  BlackRock neither admitted nor denied the SEC’s allegations, but agreed to pay a $340,000 penalty to settle them.  Martin O’Sullivan, SEC Settles with BlackRock over Whistleblower Waivers, Law360 (Jan. 17, 2017).  

Read more

On January 13, 2017, the United States Supreme Court granted certiorari in the case Kokesh v. SEC, 834 F.3d 1158 (10th Cir. 2016), cert. granted sub nom. Kokesh v. SEC (U.S. Jan. 13, 2017) (Kokesh II), to resolve a circuit split relating to the time in which the SEC must file disgorgement actions. Kokesh, No. 16-529, 2017 WL 125673 (U.S. Jan. 13, 2017).

Read more

On January 6, 2017, the Commissioners of the United States Securities Exchange Commission (“SEC”) partially overturned an administrative law judge’s (“ALJ”) initial decision finding that Harding Advisory LLC (“Harding”), and its principal, Wing F. Chau, committed fraud in connection with selecting assets for certain collateralized debt obligations (“CDOs”) in violation of the Securities Act of 1933 (“Securities Act”) and the Investment Advisers Act of 1940 (“Advisers Act”).  In the Matter of Harding Advisory LLC and Wing F. Chau, Admin. Proc. File No. 3-15574 (Jan. 6, 2017) (opinion of the commission).  Specifically, the Commissioners overturned the ALJ’s determination that Harding failed to follow its standard of care in selecting certain collateral, while agreeing with the ALJ’s determinations that Harding had an undisclosed conflict of interest and violated its fiduciary duties in connection with the selection of other collateral.  In addition, the Commissioners increased the amount of disgorgement ordered, finding that Harding had engaged in “extreme recklessness” by favoring certain clients over others.

Read More

On January 7, 2016, Mondelēz International, Inc. (“Mondelēz”), formerly known as Kraft Foods, Inc., settled claims brought by the United States Securities and Exchange Commission (“SEC”) against Mondelēz and Cadbury Limited (“Cadbury”) for violations of the books and records and internal control provisions of the Foreign Corrupt Practices Act (“FCPA”) by a Cadbury subsidiary in India (“Cadbury India”).  Mondelēz, which neither admitted nor denied the SEC’s findings, agreed to pay a $13 million civil monetary penalty to settle the SEC’s claims.  In the Matter of Cadbury Limited and Mondelēz International, Inc., Admin. Proc. No. 3-17759 (Jan. 6, 2017).  The settlement highlights the importance of thorough post-acquisition diligence, as Mondelēz’s failure to identify potential FCPA violations in the diligence it conducted after its $19 billion acquisition of Cadbury appeared to contribute to the SEC’s decision to bring an enforcement action.

Read More