Uncertainty Looms Over SEC Enforcement Staff

The air of uncertainty was palpable as current and former members of the U.S. Securities and Exchange Commission’s (SEC) Division of Enforcement spoke at the Securities Regulation Institute’s 44th Annual Conference in Coronado, California earlier this week.  Important questions went largely unanswered about the impact of the recent resignations of both SEC Chair Mary Jo White and Enforcement Director Andrew J. Ceresney, and the future direction of the enforcement program under the new presidential administration and proposed SEC Chair Jay Clayton.  SEC Enforcement staff in attendance steered clear of prognostications, and instead used the conference as an opportunity to reiterate the agency’s ongoing enforcement initiatives and successes from the past year. Continue Reading

Anti-Corruption Scrutiny in Mexico Expands

Mexico’s new anti-corruption system, which was signed into law by President Enrique Peña Nieto on July 18, 2016, builds on constitutional reforms passed in May 2015 and is designed to increase oversight of public officials to deter corruption at all levels of the Mexican government. The laws establish new responsibilities and stricter penalties applicable to public servants and all private parties (domestic and foreign) doing business in Mexico, and for the first time in Mexican legal history, applies to companies and the officers, directors, and employees acting on their behalf.  Coupled with last week’s unsealing of U.S. Department of Justice (DOJ) charges against six individuals who pleaded guilty in an aviation bribery scheme—including two Mexican public officials—Mexican government officials and corporate actors appear to be situated squarely within the enforcement cross-hairs of both U.S. and Mexican anti-corruption authorities as 2017 begins. Continue Reading

How Will Criminal Trade Secret Prosecutions Fare Under President Trump?

Analysis of public sources indicates that under the Obama administration, the U.S. government has made substantial efforts to combat trade secret theft through an increase by the U.S. Department of Justice in the number of criminal trade secret prosecutions.  In this update, we review statistics relating to criminal trade secret cases brought by the Obama administration, analyze statements by President-elect Donald Trump and Jeff Sessions, the nominee for U.S. Attorney General, and consider what companies may expect from the DOJ in the area of trade secret theft.  Their comments suggest that the Trump administration may be equally, if not more, likely to encourage prosecution of suspected trade secret theft, particularly when foreign nationals and national security are involved.


Unanimous Supreme Court Rejects Second Circuit’s Limitations on Insider Trading Cases

For those watching in the trading world, the U.S. Supreme Court has confirmed that your friends can, indeed, pass on a gift of non-public information about a company that could leave you criminally liable for insider trading, even if they gain nothing concrete in return. This morning the Supreme Court released its unanimous opinion in Salman v. United States, a closely-watched case that resolves a circuit split between the Ninth Circuit Court of Appeals and Second Circuit Court of Appeals and unwinds a Second Circuit decision that had imposed new requirements for insider-trading convictions. Specifically, the Supreme Court confirmed that in a prosecution against a “tippee” who received material inside information, prosecutors do not need to show that the tipper received a concrete benefit in exchange for the leak.

The Supreme Court established the potential for tippee liability for insider trading over thirty years ago in Dirks v. SEC, 463 U.S. 646 (1983), a seminal decision in which the Court held that a tippee could be liable if the tippee knows inside information was disclosed in breach of the tipper’s fiduciary duty. The Court further explained that a tipper breaches such a fiduciary duty when the tipper discloses information for a personal benefit, and that the jury could infer a personal benefit where the tipper receives something of value or “makes a gift of confidential information to a trading relative or friend.” This framework was then used by lower courts and juries for decades in criminal and civil insider trading cases brought by prosecutors and the Securities and Exchange Commission.

The Salman case involved an investment banker who passed on sensitive information about pending mergers and acquisitions to his brother, who then traded on that information and passed it on to others, including Salman. Salman was indicted in federal court in California, and was convicted of securities fraud in a jury trial in 2013 after the brothers (who both pleaded guilty) testified at Salman’s trial.

While Salman’s appeal to the Ninth Circuit was pending, the Second Circuit issued its opinion in United States v. Newman, 773 F.3d 438 (2014), in which the Second Circuit reversed convictions of two portfolio managers who traded on insider information after finding that they were several steps removed from corporate insiders. Though the Second Circuit acknowledged that Dirks allowed a factfinder to infer a personal benefit to the tipper from a gift of information to a trading relative or friend, the Second Circuit had held that such an inference “is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” At the time and since, the Newman decision was viewed as establishing a new, heightened bar for prosecutors and the SEC considering insider trading cases against tippees, and in fact numerous convictions were overturned in the wake of Newman.

On appeal to the Ninth Circuit, Salman had pointed to Newman to argue that his conviction should be reversed, asserting that there was no evidence that the tipper received anything of “a pecuniary or similarly valuable nature” in exchange for sharing information or that Salman knew of any such benefit. The Ninth Circuit rejected the argument and the decision in Newman, finding that it was governed by Dirks‘s holding that a tipper benefits personally by making a gift of confidential information to a trading relative or friend.

Salman renewed his arguments in the Supreme Court, which accepted the case after denying a prior request that it review the decision in Newman. He argued that an insider’s gift of confidential information to a trading friend or relative is not enough to establish securities fraud, and that a tipper’s goal in disclosing information must be to obtain money, property, or something of tangible value. But the Supreme Court disagreed, and held that its decision in Dirks “easily resolves the narrow issue” presented by the Salman case.

The Supreme Court reaffirmed that disclosure of confidential information without personal benefit is not enough, but held that its discussion of “gifting” insider information in Dirks was dispositive. The Court emphasized that in Dirks it held that a personal benefit could be inferred when a tipper made a gift of information “to a trading relative or friend,” and in Salman the tipper provided insider information to a close relative, his brother. The Court then explicitly held that the Second Circuit’s suggestion that a tipper must receive something of a “pecuniary or similarly valuable nature” was inconsistent with Dirks. The Court also rejected Salman’s argument that the gift-giving standard in Dirks is unconstitutionally vague, finding instead that it created a “simple and clear ‘guiding principle’ for determining tippee liability.”

The decision is the first Supreme Court decision in an insider trading case in decades, and likely will have an immediate and significant impact on prosecution decisions in the Second Circuit and elsewhere. By any measure, it is a big win for the government, and leaves prosecutors and the SEC with considerable discretion in making decisions on the appropriate scope of insider trading enforcement, an area that has been a high priority of both the DOJ and SEC for years. However, practitioners and traders who had appreciated the Second Circuit’s effort to clarify the requirements for insider trading will view the “simple and clear” guidance from the Supreme Court in Dirks and now Salman as anything but. As the Supreme Court itself acknowledged, because it viewed Salman as involving “precisely” the situation that Dirks envisioned, there was no need for it to address the “difficult questions” that might arise in other factual circumstances.

JPMorgan Chase Will Pay $264 Million to Settle FCPA Charges Relating to Improper Hiring Practices

Yesterday, the U.S. Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) announced that JPMorgan Chase & Co. (“JPMorgan”) and its Hong Kong-based subsidiary, JPMorgan Securities (Asia Pacific) Limited (“JPMorgan-APAC”), agreed to pay over $264 million to settle charges that JPMorgan violated the Foreign Corrupt Practices Act (“FCPA”) by providing jobs and internships to relatives and friends of clients, including government officials, in order to obtain business in the Asia-Pacific region.

The enforcement action resulted in a DOJ Non-Prosecution Agreement (“NPA”) with JPMorgan-APAC (JPMorgan also agreed to certain terms and obligations under the NPA), which included a $72 million criminal penalty, as well as a SEC Cease-and-Desist Order against JPMorgan, under which the company agreed to pay disgorgement and prejudgment interest of approximately $130 million. Further, the Federal Reserve Board, which lacks FCPA enforcement authority, also announced that JPMorgan agreed to pay a nearly $62 million civil penalty for “unsafe and unsound” hiring practices.

According to the SEC order and the DOJ NPA, investment bankers at JPMorgan-APAC instituted a client referral hiring program that bypassed the company’s regular hiring process and gave well-paying, career-building jobs to candidates referred by client executives and influential government officials. From 2006 to 2013, JPMorgan-APAC hired approximately 100 interns and full-time employees referred by clients, including executives at state-owned enterprises, owned or controlled by the Chinese government, which the enforcement agencies deem government “instrumentalities” covered by the FCPA. From the outset, the goal of the program was to boost JPMorgan-APAC’s business. Continue Reading

CFTC Proposes Rules to Align with SEC Whistleblower Program

Business Team Investment Entrepreneur Trading ConceptOn August 30, 2016, the U.S. Commodity Futures Trading Commission (CFTC) proposed amendments to the regulations governing its whistleblower bounty program.  A number of the changes are aimed at more closely aligning the CFTC’s whistleblower program and the parallel program administered by the U.S. Securities and Exchange Commission (SEC), causing speculation that the CFTC plans to up its enforcement game with respect to whistleblower actions. Continue Reading

FBI Director Comey Takes Baton in DOJ’s Continuing Push for Access to Encrypted Data

Technician replacing the screen of a used smartphone

At various times over the last several years, the DOJ has pushed for updates to the Electronic Communications Privacy Act (ECPA) that would include greater access to encrypted information stored on electronic devices. This week, FBI Director James Comey once again pressed for changes that would provide law enforcement with greater access to encrypted data, citing the need for an “adult conversation” so the public can understand how the current system is affecting the FBI’s work.

Under the ECPA, law enforcement needs a probable cause warrant to access the contents of emails and other electronic communications stored with third-party service providers that are less than 180 days old or unopened. They can obtain opened correspondence or messages older than 180 days old with just a subpoena. But significantly, if the requested data is stored in an encrypted format, the ECPA does not require the third-party service providers to provide law enforcement with data in an unencrypted format.

Assistant Attorney General Leslie Caldwell, Director of the DOJ’s Criminal Division, delivered a speech at a cybercrime symposium this summer in which she argued that “warrant-proof encryption” has increasingly hampered all sorts of criminal investigations, ranging from local murder cases to international cybercrimes. The problem, Caldwell said, is that even when law enforcement has obtained a valid warrant, if the data is encrypted on a device, law enforcement is often beholden to the device’s manufacturer or a service provider to provide law enforcement with access to the data. She even cited examples of cases where prosecutors chose to not request evidence from technology companies when they knew the request would have resulted in a fruitless search. Caldwell pushed for a policy-based solution, arguing that “critical evidence comes from smart phones, computers, and online communications. These materials are increasingly unavailable to law enforcement as a result of some encryption technologies, even when we have a warrant to examine them. Our inability to access this data can stop our investigations and prosecutions in their tracks, which in turn poses a real threat to public safety and national security.”

Speaking at another cybercrime symposium earlier this week, Comey echoed Caldwell’s comments, warning of the FBI’s increasing inability to access data stored on electronic devices because widespread encryption built into smartphones is “making more and more of the room that we are charged to investigate dark.” Standing behind Caldwell’s calls for a legislative solution, Comey suggested that it is not the role of the FBI or tech companies to tell the American public how to govern itself. Instead, he plans to collect information that will assist in a legislative policy discussion next year. “We need to understand in the FBI, how this is exactly affecting our work, and then share that with folks,” Comey said, while acknowledging that the American people may ultimately decide that privacy in electronic communications is more important than unblocking a potential investigative avenue for the FBI.

As the DOJ continues to push for legislation that provides law enforcement with greater access to encrypted data, look for increased debate on the appropriate policy that balances the multiple interests at stake: public safety, cyber security, civil rights, and civil liberties.

Will the Panama Papers Lead to Criminal Charges Against U.S. Taxpayers?

The massive Panama Papers leak has attracted attention to the use of offshore business entities and implicated 2,400 U.S.-based clients of Mossack Fonseca. U.S. taxpayers with offshore assets should be wary of increased scrutiny by federal regulators, which may lead to criminal cases brought by U.S. Department of Justice.

In this update we detail the civil and criminal liabilities for failing to report offshore income and the current prosecutorial landscape in connection with the release of the Panama Papers.


DOJ Brings Largest Kleptocracy Asset Recovery Action For Over $1 Billion Misappropriated From 1MDB

In the largest action brought under the Kleptocracy Asset Recovery Initiative, the DOJ seeks to recover over $1 billion in assets bought with laundered funds misappropriated from 1Malaysia Development Berhad (“1MDB”), a Malaysian sovereign wealth fund. 1MDB was created by the Malaysian government to promote economic development through international partnerships and foreign direct investment. The fund was allegedly controlled by “Malaysian Official 1,” who was not named by the DOJ but widely believed to be Malaysia’s Prime Minister Najib Razak. Najib and his associates are alleged to have misappropriated more than $3.5 billion from the fund from 2009 through 2015, $1 billion of which is alleged to have been laundered through the United States though a series of complex transactions and fraudulent shell companies with bank accounts located in Singapore, Switzerland, Luxembourg, and the United States.

The DOJ alleges that the conspiracy occurred in three principal phases. The first phase involved a joint venture between 1MDB and PetroSaudi International, a private Saudi oil extraction company. The joint venture was allegedly used to transfer funds from 1MDB to a Swiss bank account controlled by Najib’s associate who, in turn, transferred funds to Najib and others involved in the conspiracy. The second and third phases involved bond offerings arranged and underwritten by Goldman Sachs in 2012 and 2013, the funds from which were transferred to bank accounts of shell companies controlled by Najib and his associates. The misappropriated funds were used to buy real estate, artwork, and interests in companies in the United States, including an interest in Red Granite Pictures, which financed the production of The Wolf of Wall Street.

According to The Guardian, Najib responded to the Malaysian government’s investigation by clamping down on free speech, firing the country’s attorney general, suspending the work of the parliamentary accounts committee handling the investigation, and authorizing martial law. Despite Najib’s control in his home country, the DOJ’s action “should send a message to kleptocrats and other criminals that the United States is not a safe haven for their stolen property,” according to remarks by Assistant Attorney General Leslie Caldwell.

The DOJ’s Kleptocracy Asset Recovery Initiative was created in 2010 to combat large-scale foreign official corruption and to recover public funds. The Initiative is run out of the DOJ’s Asset Forfeiture and Money Laundering Section of the Criminal Division and draws on civil forfeiture laws to recover assets linked to criminal acts.

SEC Charges Private Fund Administrator with Gatekeeping Failures

The Securities and Exchange Commission (SEC) recently announced an administrative settlement with Apex Fund Services (US) Inc., a firm providing administrative services to private funds, based on its alleged failure to heed red flags and correct faulty accounting by two private equity managers.

The SEC alleged that, in carrying out its contractual fund administration functions, Apex missed or ignored clear indications of fraud perpetrated by two private fund managers, making Apex a “cause” of that fraud under Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.

In charging Apex in connection with ClearPath and EquityStar’s violations, the SEC is highlighting its expectation that fund administrators live up to their “gatekeeper” responsibilities and take affirmative action to ensure that fund records provide accurate information about the value and existence of fund assets.

In this update, we offer background on the SEC’s action and consider the resulting warning it sends to all gatekeepers: the SEC will use negligence-based securities laws to hold service providers responsible, especially where indications of fraud are ignored.