A&O Shearman | Government Regulatory Enforcement Blog | Home
Government/Regulatory Enforcement
This links to the home page

  • Supreme Court And First Circuit Issue Decisions Reversing White Collar Convictions, Cautioning Against Prosecutorial Overreach In Honest Services Fraud Cases

    Two facially unrelated decisions, issued last week by the First Circuit and the Supreme Court, continued a recent theme of courts pushing back against potential prosecutorial overreach in the application of fraud statutes—especially in the area of honest services fraud.  In the first case, the First Circuit reversed the convictions of two “Varsity Blues” parents who had been found guilty of honest services fraud, among other charges, after paying money to individuals to help get their children into college under false pretenses.  And in the second case, the United States Supreme Court unanimously reversed the conviction of Joseph Percoco, a former manager of former New Governor Andrew Cuomo’s re-election campaign who had likewise been found guilty of honest services fraud, unanimously holding that the jury instructions used to convict him were too vague and would sweep in too much innocent conduct.
  • 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 Commissioner’s Dissent Highlights Challenges In Responding To Whistleblowers

    On Tuesday, April 12, the U.S. Securities and Exchange Commission (SEC) fined David Hansen, the former Chief Information Officer of NS8, Inc., a Las Vegas-based fraud detection and prevention software firm, approximately $100,000 for interfering with an employee’s ability to communicate with the SEC in violation of Rule 21F-17(a).  The SEC alleged that Hansen violated the rule by restricting the employee’s access to NS8’s IT systems and monitoring his use of corporate computer systems following the employee providing a tip to the SEC about NS8’s corporate practices.  In dissent, SEC Commissioner Hester Peirce said that the application of Rule 21F-17(a) was inappropriate in this case, arguing that restricting the tipster’s access to IT systems and monitoring their use did not impede their ability to communicate with the SEC and was a reasonable step in preventing unauthorized disclosure of NS8’s data to private parties and the media.
  • Second Circuit Reverses Conviction Of Two Traders Accused Of LIBOR Rigging Scheme, Finding Insufficient Evidence Of False Or Fraudulent Statements

    On January 27, 2022, the United States Court of Appeals for the Second Circuit reversed the convictions of two former traders convicted of wire fraud and conspiracy to commit wire and bank fraud, part of the widely-publicized series of prosecutions for allegedly manipulating the London Interbank Offered Rate (“LIBOR”).  US v. Connolly, No. 19-3806, 2022 WL 244669 (2d Cir. Jan. 27, 2022).  The Court held that although the government had offered evidence that the former traders had sought to impact LIBOR through their submissions, the government had failed to offer sufficient evidence that they did so through fraud.  Because the LIBOR instructions with which the submitters were required to comply called for a hypothetical rate at which the submitting bank could borrow funds, the Court held that if the rate submitted was one a bank could request, be offered, and accept, the submission, irrespective of its motivation, would not be false.  And, in this case, the Court found that there was no evidence that the submitted rates were false under that standard.  Thus, even if the conduct could be perceived as dishonorable, the Court held that the convictions had to be reversed.
  • DOJ And SEC File Securities Fraud Charges Against Founder Of Company Acquired By A SPAC

    On July 29, 2021, the Department of Justice (“DOJ”) announced the unsealing of a criminal indictment against Trevor Milton, the founder, former CEO, and former Chairman of Nikola Corporation, a company that went public in March 2020 through a merger with a special purpose acquisition company (“SPAC”), for allegedly knowingly misleading investors about the company’s ability to build electric and hydrogen-powered vehicles and other green technology.  The SEC filed a parallel civil action against Milton based on the same facts.
  • 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.  
  • Second Circuit Reverses $18.5 Million Restitution Order For Lack Of Proximate Cause

    On December 3, 2019, the Second Circuit affirmed the convictions of two defendants for wire fraud and conspiracy to commit wire and bank fraud, but reversed the District of Connecticut’s order that defendants pay $18.5 million in restitution to the U.S. Department of Agriculture (“USDA”).  United States v. Calderon, No. 17-1956, 2019 WL 6482379 (2d Cir. Dec. 3, 2019). 
  • Federal Judge Acquits Former FX Trader on Charges Related to Alleged Front-Running and Price Manipulation

    On March 4, 2019, the U.S. District Court for the Northern District of California acquitted a former sell-side foreign exchange trader on all counts brought against him arising from his alleged misuse of confidential client information in connection with a large foreign currency exchange trade.  After the completion the government’s case, the trader moved for acquittal as a matter of law.  The Court ruled that, viewing the evidence in the light most favorable to the government, the jury could not reasonably find the defendant guilty beyond a reasonable doubt and granted the motion.  The essence of the Court’s decision was that the government had not established that the defendant, who was engaged in arm’s-length transaction with a customer, owed the customer the duties the government’s case assumed.  USA v. Bogucki, No. 18-00021, slip op. at 12 (N.D. Cal. Mar. 4, 2019).  As discussed further below, the Court’s treatment of the concept of a sell-side trader “pre-positioning” (often referred to as “pre-hedging”) ahead of a customer’s trade is notable.  The line between front-running/misuse of confidential information and appropriate pre-hedging, while always inherently case and situation specific, has been at the forefront of multiple criminal and civil regulatory investigations and cases in recent years.
  • Former Forex Trader Successfully Avoids Extradition From The UK Through Appeal To UK’s High Court Of Justice

    On July 31, 2018, the High Court of Justice of England and Wales, Queen’s Bench Division, rejected the United States (“U.S.”) government’s request to extradite a former FX trader and the former head of a bank’s foreign exchange (“forex”) cash trading for Europe, reversing a lower court ruling that had granted the request.  Scott v. Government of the United States of America [2018] EWHC 2021 (Admin).  The U.S. Department of Justice (“DOJ”) sought to extradite the trader to face ten counts of wire fraud and one count of conspiracy in the U.S. District Court for the Eastern District of New York for alleged forex-rigging.  The High Court found that extradition was not in the interest of justice, because most of the harm from the alleged crimes was felt in the United Kingdom (“UK”) and because of the trader’s strong connection with the UK. 
  • Criminal And Civil Charges Filed In Connection With Initial Coin Offering By Centra Tech


    On April 2, 2018, the U.S. Department of Justice (“DOJ”) and Securities Exchange Commission (“SEC”) announced criminal and civil charges against two startup co-founders for allegedly defrauding and conspiring to defraud investors through the offer and sale of unregistered securities in an initial coin offering (“ICO”).  In separate complaints filed in federal court in the United States District Court for the Southern District of New York, both the DOJ and the SEC alleged that the company’s co-founders orchestrated an elaborate marketing campaign to solicit over $25 million in investments for their digital technology company, Centra Tech.  Complaint, SEC v. Sharma et al., No. 1:18-cv-02909 (S.D.N.Y. Apr. 2, 2018); Complaint, U.S. v. Sharma et al., 18-MAG-2695.  The two men each face four criminal charges of commission and conspiracy to commit securities and wire fraud, as well as permanent injunctions and civil penalties for violating various anti-fraud and registration provisions of the Securities Act of 1933 and Securities Exchange Act of 1934.

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

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

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

    Read more
  • Forex Trader Found Guilty Of Defrauding Client

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

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

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

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

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

    Read more
  • Ninth Circuit Supports Expansive Interpretation Of SOX 304

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

    Read more

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

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

    Read more
  • Supreme Court Limits Extraterritorial Application of Civil RICO

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

    Read more
    Category : Financial Fraud
  • Fund Administrator Settles Charges that it Failed its Gatekeeper Responsibilities

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

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

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

    Read More
    Category : Financial Fraud
  • New Criminal Charges or Enforcement Actions Logitech and Ener 1

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

    Read More
    Category : Financial Fraud