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

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 22, 2018, in a 5-4 ruling, the United States Supreme Court held that the government’s acquisition of certain cell-site location information (“CSLI”) kept by third parties constitutes a search under the Fourth Amendment that is generally subject to the search warrant requirement. Carpenter v. United States, No. 16-402, 585 U.S. __ (2018). Chief Justice Roberts authored the majority opinion, while Justices Kennedy, Alito, Thomas, and Gorsuch filed separate dissents.

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

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 June 21, 2018, the Supreme Court held that Securities and Exchange Commission (“SEC”) administrative law judges (“ALJs”) are “inferior officers” of the United States, subject to the Appointments Clause of the Constitution. Lucia v. SEC, 585 U.S. ____ (2018).

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

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

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

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

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

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

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

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

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

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At a March 7, 2018 Conference on Cyber Security co-hosted by Boston College and the Federal Bureau of Investigation (“FBI”), Director of the FBI Christopher Wray spoke about the FBI’s efforts to combat cyber threats.  Among other topics, Director Wray emphasized the FBI’s policy to treat companies that have experienced a cyber-attack as victims, and encouraged the need for cooperation between the public and private sectors. 

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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. 

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At the recent American Bar Association’s National Institute on White Collar Crime, the Department of Justice’s (“DOJ”) Acting Head of the Criminal Division, John Cronan, announced that the Criminal Division will use the FCPA Corporate Enforcement Policy (“the Policy”) as “nonbinding guidance” in other areas of white-collar enforcement beyond the FCPA.  As a result of this expansion, absent aggravating factors, DOJ may more frequently decline to prosecute companies that promptly self-disclose misconduct, fully cooperate with DOJ’s investigation, remediate in a complete and timely fashion, and disgorge any ill-gotten gains.  Indeed, Cronan pointed to the DOJ’s recent decision to decline charges against a global bank, after the bank agreed to pay back $12.9 million in profits the DOJ claimed it obtained as a result of an alleged foreign exchange front-running scheme, as an example of the effect of this new wider application of the Policy.

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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.

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On February 27, 2018, the U.S. Supreme Court heard oral arguments in United States v. Microsoft, No. 17-2.  The case presents the question whether a U.S.-based entity (Microsoft) must comply with a judicially-authorized search warrant that was issued under Section 2703 of the Stored Communications Act by providing overseas data to the U.S. Department of Justice (“DOJ”).

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On February 21, 2018, the Supreme Court unanimously held that the anti-retaliation provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) do not cover individuals who do not report violations of the securities laws to the Securities and Exchange Commission (“SEC”).  Digital Realty Trust, Inc. v. Somers, No. 16-1276 (Feb. 21, 2018).  Writing for the Court, Justice Ginsburg explained that Dodd-Frank explicitly defined the term “whistleblower” to include only individuals who report to the SEC and that, when a statute explicitly defines a term, courts must follow that definition.  See 15 U.S.C. § 78u–6(a)(6).  Respondent Paul Somers, who had only reported within his company, was therefore ineligible for Dodd-Frank’s whistleblower protections.  We previously covered the Court’s skepticism of Somers’ position at oral argument.  See Shearman & Sterling LLP:  Government/Regulatory Enforcement, Supreme Court Oral Argument Suggests Skepticism Over SEC Rule Protecting Internal Whistleblowers from Retaliation under Dodd-Frank (Dec. 5, 2017).

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On February 14, 2018, the United States Court of Appeals for the Third Circuit vacated Steven Metro’s 46-month prison sentence for insider trading and remanded the case to the district court for resentencing.  United States v. Metro, No. 16-3813 (3d Cir. Feb. 14, 2018).  The Third Circuit held that a sentencing court cannot attribute illicit financial gains to an insider trading defendant for purposes of the United States Sentencing Guidelines (the “Sentencing Guidelines”) when the gains are “actually attributable to someone with whom he was not acting in concert and to whom he did not provide inside information.”

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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).

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​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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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.

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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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On January 12, 2018, the Supreme Court granted certiorari to hear an appeal from a two-judge, Fifth Circuit panel decision regarding whether federal law permits restitution orders in criminal cases to cover the costs of internal investigations that are “neither required nor requested” by the government.  Lagos v. United States, Petition for Writ of Certiorari, p. 8, filed June 15, 2017. Joining six other circuits, the Fifth Circuit held that the Mandatory Victims Restitution Act (“MVRA”) authorizes recovery of the fees incurred during an internal investigation, if such fees were “directly caused by the defendants’” criminal offense.  United States v. Lagos, 864 F.3d 320, 323 (5th Cir. Mar. 17, 2017). This holding conflicts with a 2011 decision issued by the D.C. Circuit, holding that such costs were not recoverable, if the investigation was “neither required nor requested by criminal investigators or prosecutors.”  United States v. Papagno, 639 F.3d 1093, 1095 (D.C. Cir. 2011).  The Fifth Circuit affirmed the district court’s order requiring former CEO Sergio Lagos of USA Dry Van Logistics to cover $5 million in fees GE Capital incurred during its internal investigation related to USA Dry Van’s bankruptcy petition.

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​On January 12, 2018, the U.S. Supreme Court granted certiorari in Lucia v. Securities and Exchange Commission, No. 17-130, agreeing to resolve a circuit split regarding the appointment process for Securities and Exchange Commission (“SEC”) administrative law judges (“ALJs”).  The case raises significant questions as to whether ALJs constitute inferior officers who must be selected and appointed by the SEC Commissioners themselves (who are politically accountable), or whether they constitute mere employees who can be hired like any other agency employee.  See Shearman & Sterling LLP, D.C. Circuit Court Of Appeals Rejects Constitutional Challenge to SEC’s Use of Administrative Proceedings, Need-to-Know Litigation Weekly, Aug. 15, 2016, http://www.lit-wc.shearman.com/dc-circuit-court-of-appeals-rejects-constitutional;  Shearman & Sterling LLP, Tenth Circuit Splits With D.C. Circuit On Constitutionality Of SEC ALJs, Need-to-Know Litigation Weekly, Jan. 2, 2017, http://www.lit-wc.shearman.com/tenth-circuit-splits-with-dc-circuit-on-constitut; Shearman & Sterling LLP, In Reversal, SEC Agrees That Its Administrative Law Judges Are Inferior Officers That Require Commission Appointment, But Still Seeks Supreme Court Review To Resolve Circuit Split, Need-to-Know Litigation Weekly, Dec. 12, 2017, http://www.lit-wc.shearman.com/in-reversal-sec-agrees-that-its-administrative-la.

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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.

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​On November 29, 2017, the U.S. Solicitor General submitted a brief to the United States Supreme Court in Lucia v. Securities and Exchange Commission, No. 17-130, urging the Court to grant certiorari and resolve a circuit split regarding the appointment process for the Securities and Exchange Commission’s (“SEC”) administrative law judges (“ALJs”).  In a notable shift, the Solicitor General agreed with Raymond J. Lucia and his namesake investment firm that the SEC’s hiring of ALJs, who preside over the initial stages of SEC enforcement hearings, was unconstitutional because ALJs serve as “inferior officers” who must be appointed in accordance with the Appointments Clause of Article II of the Constitution.  The following day, the SEC, in its capacity as a “head of department,” ratified the appointment of its five ALJs in an effort to make their prior hiring compliant with Article II’s Appointments Clause.  Although the SEC’s decision to ratify the hiring of its ALJs in some sense rendered the issue in Lucia moot, the Solicitor General is still seeking certiorari in order to resolve the existing circuit split.

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​On November 29, 2017, the U.S. Department of Justice (“DOJ”) announced that SBM Offshore N.V. (“SBM”), a Netherlands-based maker of offshore drilling equipment for the energy industry, entered into a deferred prosecution agreement (“DPA”) to resolve criminal charges alleging that SBM violated the Foreign Corrupt Practices Act (“FCPA”).  United States v. SBM Offshore N.V., Crim. No. 17-686 (S.D. Tex).  The DOJ alleged that SBM executives made payments in excess of $180 million to intermediaries knowing that intermediates would use some of that money to bribe foreign officials in Brazil, Angola, Equatorial Guinea, Kazakhstan, and Iraq.  According to the DOJ, officials in those countries proceeded to award SBM contracts valued at $2.8 billion.  SBM agreed to pay a $238 million criminal penalty, including a $500,000 criminal fine and $13.2 million in criminal forfeiture, to the United States settle the charges.  Moreover, its U.S. subsidiary, SBM Offshore USA Inc. (“SBM USA”), agreed to plead guilty to one count of conspiracy to violate the FCPA’s anti-bribery provisions.  Three years ago, SBM settled charges with the Dutch Public Prosecutors over related conduct, and paid the Netherlands $200 million in disgorged profits and a $40 million fine.

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On December 5, 2017, the Securities and Exchange Commission (“SEC”) filed an administrative proceeding against Paritosh Gupta (“Gupta”), his hedge fund, Adi Capital Management LLC (“Adi Capital”), his wife, Nehal Chopra (“Chopra”), and her hedge fund, Ratan Capital Management, LP (“Ratan”).  In the Matter of Paritosh Gupta, et. al., Admin. Proc. No. 3-18296 (Dec. 5, 2017).  The SEC alleged that Gupta caused violations of Section 206(2) of the Advisers Act by sharing confidential information, obtained during his employment at a hedge fund described only as “Adviser A,” with Chopra (Gupta’s eventual wife), who used that information in operating Ratan Capital.  Moreover, the SEC alleged that Gupta, Adi Capital, Chopra, and Ratan willfully violated Section 207 of the Advisers Act—and that Gupta caused Ratan and Chopra to violate Sections 206(4) of the Advisers Act and Rule 206(4)-8 thereunder—by failing to disclose the nature of Gupta and Chopra’s communications and the role that Gupta played in advising Chopra on Ratan’s investment strategy.  Without admitting or denying the findings, Gupta, Chopra, and their hedge funds agreed to settle the charges and cease and desist from committing or causing any further violations.  Additionally, Gupta agreed to pay a civil penalty of $250,000, Chopra agreed to pay a civil penalty of $200,000, and Ratan Capital agreed to pay a civil penalty of $200,000.  All four Respondents were censured.

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On November 28, 2017, the Supreme Court heard oral arguments in Digital Realty Trust, Inc. v. Somers, No. 16-1276, a case that raises the question whether an employee who reported alleged misconduct internally, but did not make a report to the Securities and Exchange Commission (“SEC” or the “Commission”), is eligible for protections against retaliation afforded to whistleblowers by the Dodd-Frank Act of 2010 (“Dodd-Frank”).  In 2011, the SEC issued a rule stating that internal whistleblowers were subject to protections under Dodd-Frank, even though the text of the statute defines “whistleblowers” as only those who reported information to the SEC.  16 C.F.R. 240.21F-2(b)(1).  While a decision may remain months away, the questions from the Justices suggested considerable skepticism as to the SEC’s statutory interpretation and rulemaking process.  

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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. 

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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. 

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On November 7, 2017, the Department of Justice (“DOJ”) unsealed charges against five individuals—including two executives—alleging violations of the Foreign Corrupt Practices Act (“FCPA”) in connection with an alleged foreign bribery scheme at Rolls-Royce plc, the United Kingdom-based manufacturer and distributor of power systems for the aerospace, defense, marine, and energy sectors.  All five individuals are accused of participating in a scheme to bribe officials in Central Asia and China to win equipment supply and power services contracts, which partly formed the basis for the DOJ’s enforcement action against Rolls-Royce in January 2017.  Four of the five individuals had pleaded guilty at the time of the unsealing, which represents the latest example of the DOJ’s commitment to prosecute individuals for alleged FCPA violations. 

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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).

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On October 30, 2017, Chief Judge Beryl A. Howell of the United States District Court for the District of Columbia unsealed an order granting the Office of the Special Counsel’s (“SCO”) motion to compel the former counsel (“Counsel”) of Paul J. Manafort, Jr. (President Trump’s former campaign manager) and Richard W. Gates (a former campaign adviser to President Trump) to testify before a grand jury regarding certain aspects of her prior representations of these clients.  In re Grand Jury Investigation, No. 17-ms-2336 (D.D.C. 2017).  The Court rejected Counsel’s assertions of attorney-client privilege and attorney work product protection, finding that the information sought by the SCO fell within the “crime-fraud” exception to the attorney-client privilege and that any applicable privilege had been waived.

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​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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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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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).

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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).

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On September 26, 2017, the United States Court of Appeals for the Second Circuit overturned the political corruption conviction of the former majority leader of the New York State Senate, Dean G. Skelos, and his son, Adam B. Skelos.  United States v. Skelos, et al., No. 16-1618 (2d Cir. 2017).  The Second Circuit’s decision was based on the district court’s erroneous jury instruction.  Though the instruction was consistent with precedent at the time of trial, the Circuit Court found that the instruction was infirm given the Supreme Court’s intervening decision in McDonnell v. United States, 136 S. Ct. 2355 (2016).  The latter decision limited the scope of what can be construed as an “official act,” and the Second Circuit concluded that the trial court’s instructions were too broad.  The Court further found that the error was not harmless beyond a reasonable doubt, since the prosecution in Skelos had rested its argument in part on conduct now considered lawful after McDonnell, and the jury reasonably could have based its decision on that evidence.  The basis for this decision was similar to the Circuit’s reversal of the conviction of Sheldon Silver (former Speaker of the New York State Assembly), as previously reported on July 18, 2017.  Shearman & Sterling LLP: Government/Regulatory Enforcement, Second Circuit Overturns Watershed Conviction Of Sheldon Silver Based On Recent Supreme Court Decision (July 18, 2017).   

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On September 21, 2017, the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) announced significant enforcement actions against Telia Company AB, a Swedish telecommunications firm, for alleged violations of the Foreign Corrupt Practices Act (“FCPA”).  United States v. Telia Company AB, No. 1:17-cr-00581 (S.D.N.Y. 2017); In the Matter of Telia Company AB, Admin. Proc. No. 3-18195 (September 21, 2017) (“Order”).  Specifically, the DOJ charged Telia and its Uzbek subsidiary, Coscom, with conspiring to violate the anti-bribery provisions of the FCPA by offering and paying at least $330 million in bribes to a shell company in Uzbekistan under the guise of payments for lobbying and consulting services that never actually occurred, while the SEC alleged that Telia violated the anti-bribery and internal accounting controls provisions of the FCPA through the same conduct.  Telia’s subsidiary Coscom pleaded guilty in U.S. District Court for the Southern District of New York; meanwhile, Telia entered into a three-year deferred prosecution agreement (“DPA”) with the DOJ, and the SEC instituted settled administrative proceedings against the company.  In aggregate, Telia agreed to pay criminal penalties of approximately $548 million to resolve the DOJ charges and related charges filed by the Public Prosecution Service of the Netherlands, and agreed to pay approximately $457 million in disgorgement to settle the SEC allegations.  Because of certain offsets, Telia’s total payments to the DOJ, SEC, and foreign regulators will be approximately $965 million.  However, Telia was not required to engage a compliance monitor, in light of the company’s remediation and the state of its compliance program.

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On September 14, 2017, the Securities and Exchange Commission (“SEC”) filed an administrative proceeding against SunTrust Investment Services, Inc. (“STIS”), the investment services subsidiary of SunTrust Banks.  STIS consented to the filing of the proceedings and settled the allegations, without admitting or denying them.  STIS agreed to pay a penalty totaling $1,148,071.77, as well as disgorgement plus interest.  In addition, the STIS agreed to be censured.

On August 23, 2017, a divided three-judge panel of the United States Court of Appeals for the Second Circuit upheld the insider trading conviction of SAC Capital Advisors, LLC (“SAC”) portfolio manager Mathew Martoma.  United States v. Martoma, No. 14-3599 (2d Cir. Aug. 23, 2017).  The decision represented the Second Circuit’s first occasion to consider its landmark decision in United States v. Newman in light of the Supreme Court’s recent decision in Salman v. United States.  Over a strong dissent, the majority found that the logic underpinning the Salman decision abrogated Newman’s requirement that a “meaningfully close personal relationship” exist between a tipper and tippee before allowing a jury to infer the personal benefit necessary to establish insider trading liability merely from a tip of inside information.  The majority held “that an insider or tipper personally benefits from a disclosure of inside information whenever the information was disclosed with the expectation that the recipient would trade on it and the disclosure resembles trading by the insider followed by a gift of the profits to the recipient, whether or not there was a meaningfully close relationship between the tipper and tippee.”  Martoma, slip op. at 27-28 (internal quotation marks and citations omitted). In so doing, it shifted the focus from the relationship between a tipper and tippee to the tipper’s subjective intent in making the tip, and seemingly did away with the limiting principle that Newman had established.  However, while clearly a win for prosecutors, this new standard will still require a highly fact-intensive inquiry into the purpose of any tip, meaning that precisely how much of a shift in law it portends remains to be seen.

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