On February 21, 2018, in Class v. United States, the U.S. Supreme Court reaffirmed that a defendant who pleads guilty can still raise on appeal any constitutional claim that does not depend on challenging his or her “factual guilt.” The Court’s holding preserves a federal criminal defendant’s ability to challenge the constitutionality of the statute underlying his or her conviction, even in the event of a guilty plea. In other words, where the appellate claim implicates “the very power of the State” to prosecute the defendant, a guilty plea alone cannot bar it. Continue Reading
Supreme Court Ruling Narrows Dodd-Frank Whistleblower Protections
Perhaps no part of the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) has garnered as much attention as its whistleblower provisions, which pay corporate whistleblowers bounties under some circumstances, and prevent employers from retaliating against whistleblowing employees. Often times, the bounties paid to whistleblowers under Dodd-Frank warrant the most attention-grabbing headlines. But Dodd-Frank’s anti-retaliation provisions—which protect employees who blow the whistle from retaliation from their employer—are just as important. After all, the chance of receiving a bounty serves as little comfort if employees fear for their jobs when reporting potential corporate wrongdoing.
But exactly which whistleblowers qualify for protection under Dodd-Frank’s anti-retaliation provisions has been a subject of much debate. By its terms, Dodd-Frank provides that an employer may not take any negative employment action against “a whistleblower.” Dodd-Frank further defines “whistleblower” as an individual who provides information relating to a violation of the securities laws to the “Commission,” i.e., directly to the SEC. By its language, then, Dodd-Frank’s anti-retaliation terms do not extend to employees who only report their concerns internally.
Nonetheless, the SEC had historically distinguished between whistleblowers eligible for a bounty and whistleblowers eligible for protection from retaliation: according to SEC’s interpretation, to be eligible for a bounty the employee must report to the SEC itself, while to be eligible for anti-retaliation protection the employee need only report internally. 17 CFR § 240.21F-2.
Whether the SEC’s interpretation comported with Dodd-Frank had split the circuit courts. The Fifth Circuit disagreed with the SEC rule, holding that to be eligible for anti-retaliation protection, the employee must report to the SEC. The Second Circuit and Ninth Circuit reached the opposite result, concluding that the SEC had it right: to be protected from retaliation, the whistleblower need not report to the SEC directly.
In Digital Realty Trust Inc. v. Paul Somers, the Supreme Court has now resolved the split, holding that, in order for an employee to gain Dodd-Frank’s whistleblower protection, they must report wrongdoing to the SEC itself. In a unanimous ruling, the Court said that it need look no further than the language of Dodd-Frank itself: the anti-retaliation term applied to “whistleblowers,” which the statute itself defined as individuals who report information to the SEC. The Court further observed that this result is consistent with the objective of Dodd-Frank’s whistleblower program: to encourage the reporting of securities law violations to the SEC itself.
At first blush, the limits put on Dodd-Frank’s anti-retaliation provisions by the Court would seem to benefit businesses, curbing the potential retaliation claims they face from employees. But the side-effects of the decision could be costly for corporations if employees are now incentivized to bring complaints directly to the SEC, rather than first reporting them internally. Even corporations with robust compliance programs could lose the opportunity to first investigate claims of potential wrongdoing before the SEC launches its own inquiry—which is often followed by costly and time-consuming shareholder litigation
Whether by corporate policy, or statutory provisions such as those implemented by the Sarbanes-Oxley Act, there are numerous other means of anti-retaliation protections for whistleblowing employees. Thus, while the Digital Realty decision may not result in a sea change for the structure of corporate compliance programs, it may well lead to an increase in whistleblowers reporting directly to the SEC. While companies wait to see whether Digital Realty has a significant impact on how employees report whistleblower concerns, they can redouble efforts to effectively implement and broadly publicize their own internal reporting programs.
Former Colorado Chief Justice and Colleagues Examine Broader Implications Of Sessions’ Marijuana Move
There will be little debate that this has been a bad day for the state-sanctioned (and regulated) marijuana industry. The Obama-era directives that significantly fettered the discretion of U.S. attorneys to bring federal narcotics charges against marijuana growers, distributors and possessors in states that “legalized” marijuana for medicinal or recreational purposes are now a thing of the past. This change in federal enforcement approach is significant considering the fact that more than half of the states in the nation have, in one form or another, legalized marijuana, and that the marijuana industry is serviced by many banks, landlords, law firms and others. But, contrary to some initial reactions concerning the implications on states’ rights, the authors suggest that this move by Attorney General Jeff Sessions may actually signal a new era of increasingly decentralized federal law enforcement decision-making. To continue reading, click here.
DOJ’s FCPA Policy Puts Companies on Notice Regarding Electronic Communications
As cybersecurity concerns move more companies to batten down employee use of external email accounts and other websites through blocking software and other measures, the DOJ’s recently issued FCPA Corporate Enforcement Policy—now incorporated in the U.S. Attorneys’ Manual—unequivocally states that companies seeking full cooperation credit from DOJ in FCPA cases must ensure that employees are prohibited “from using software that generates but does not appropriately retain business records or communications,” among other business-record retention measures. Even setting aside the difficulties in policing “old” technology such as personal email accounts and text messaging on employee-owned devices, the constant evolution and emergence of new electronic messaging platforms will undoubtedly create significant challenges for companies seeking to satisfy DOJ’s expectations. Continue Reading
Foreign Whistleblowers Continue to Collect Lucrative Bounties under Dodd-Frank
On December 5, 2017, the U.S. Securities and Exchange Commission (SEC) issued an order awarding more than $4.1 million to a whistleblower who voluntarily provided original information to the agency concerning a widespread, multi-year securities-law violation. The award was paid pursuant to the SEC’s Whistleblower Program under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). While the identities of whistleblowers are kept confidential in accordance with the Program’s rules, information released by the SEC indicates that the latest payout marks the tenth award made to a whistleblower outside the U.S. A total of 50 whistleblowers have received monetary awards since the first bounty was awarded in 2012. Continue Reading
DOJ Highlights Disclosure Incentives Under New FCPA Enforcement Policy
The DOJ recently took another step to encourage corporate self-disclosure for FCPA violations through the announcement of a new FCPA Enforcement Policy based on the eighteen month FCPA Pilot Program. The DOJ’s Pilot Program proved to be successful—the FCPA Unit received over 30 voluntary disclosures in the 18-month period the Pilot was in place—compared to only 18 voluntary disclosures in the previous 18-month period, according to Deputy Attorney General Rosenstein. The new Enforcement Policy contains many of the same incentives as the Pilot Program, with a few added benefits to sweeten the deal for corporations hoping to avoid hefty FCPA fines.
Presumption of Declination. Building on the cooperation credit offered under the Pilot Program—and barring aggravating circumstances—corporations will receive a presumption that the DOJ will resolve the case through a declination if they 1) voluntarily self-disclose; 2) fully cooperate; and 3) timely and appropriately remediate. The Enforcement Policy delineates the DOJ’s expectations as to each of these requirements, many of which track the Pilot Program. Evaluation of compliance programs, for example, will vary depending on the size and resources of a business and includes factors such as fostering a culture of compliance; dedicating sufficient resources to compliance activities; and ensuring that experienced compliance personnel have appropriate access to management and to the board. Continue Reading
Michael Coscia’s Spoofing Conviction Upheld by the Seventh Circuit
In a move that will have commodities traders on high alert, the Seventh Circuit Court of Appeals has upheld the conviction of Michael Coscia, who was sentenced to three years in prison after a federal jury found the former trader guilty of spoofing and commodities fraud. In its 42-page opinion, a three-judge panel denied Coscia’s argument that the anti-spoofing statute is void for vagueness, finding the provision “provides clear notice and does not allow for arbitrary enforcement.” As a result, Coscia’s first-of-its-kind conviction was affirmed.
Coscia’s trial in October 2015 was followed closely by market participants because Coscia was the first person criminally prosecuted under the anti-spoofing law at issue. After the jury found Coscia guilty, the prosecutor argued that traders such as Coscia, “contemplating sophisticated scams will think twice if they know that there are more significant consequences than a civil lawsuit or a regulatory action.” U.S. District Judge Leinenweber subsequently imposed a three-year sentence with two years’ probation, which put the shocked trading community on notice.
As the former owner of Panther Energy Trading in New Jersey, Coscia practiced in high-frequency trading, a form of automated trading with programmed algorithms that allowed him to place a high volume of orders in a matter of milliseconds. His conviction was based on this automated trading strategy, which the prosecutors successfully characterized as spoofing, in addition to his suspect order-to-fill ratio, and testimony from other traders. Spoofing—a form of disruptive trading where a trader places bids to buy or sell futures contracts with the intent to cancel before execution—was implemented by the Obama administration as part of the 2010 Dodd-Frank financial reform. In creating false demand, a spoofer can artificially move prices for financial gain.
In finding Coscia guilty, the jury concluded that Coscia used computer algorithms to place large orders he never intended to have filled in the markets. Coscia’s trading strategy, as explained in the Seventh Circuit opinion, involved placing small orders to sell higher than current market price, then placing much larger volume orders on the buy side of the market. These large orders created the “illusion of market movement, swelling the perceived value of any given futures contract.” This allowed Coscia to execute his small volume sell orders at a higher price he created with artificial market movement. Once he sold the small volume contracts, he would buy back at a lower price to make a profit. Coscia did this by first placing small buy orders below the price he had created, then placing several large volume orders on the sell side, causing the price to drop in that market. Coscia then bought the small orders at the much lower price, and immediately cancelled the large volume orders. Executing this strategy tens of thousands of times in less than three months resulted in a $1.4 million profit for Coscia, which the prosecution successfully argued was ill-gotten gains.
The Seventh Circuit rejected Coscia’s vagueness argument in part because it found the above-described conduct fell squarely within prohibited spoofing conduct. Coscia’s computer algorithms were designed to “act like a decoy,” automatically placing orders to pump or deflate the market with large orders, which were then cancelled by design if ever at risk of getting filled. His commissioned program would cancel the orders if either a certain amount of time passed, the small orders were filled, or if any one of the large orders was filled. “Read together, these parameters clearly indicate an intent to cancel, which was further supported by his actual trading record.”
Additionally, the Seventh Circuit rejected Coscia’s contention that the evidence of record did not support his spoofing conviction. In doing so, the court pointed to a list of circumstantial evidence: Coscia’s cancellations represented 96% of all Brent futures cancellations on the Intercontinental Exchange, Coscia filled only 0.08% of his large orders on the Chicago Mercantile Exchange, Coscia’s algorithm developer testified that the algorithms were designed to prevent large orders from being filled and that the orders were designed to “pump [the] market,” only 0.57% of Coscia’s large orders were on the market for more than one second, and Coscia’s order-to-trade ratio was 1,592% while the average trader’s ratio ranged from 91% to 264%. Viewing the circumstantial evidence in its totality, the Seventh Circuit found a rational trier of fact could have found Coscia intended to cancel before execution, in violation of the anti-spoofing statute.
In today’s markets, the point-and-click traders are often outpaced by advanced computer algorithms such as those created by Coscia and Panther Energy. However, the decision to uphold Coscia’s spoofing conviction should be a warning to those employing such advanced strategies. Going forward, traders can expect that prosecutors—emboldened by the Seventh Circuit’s ruling—will look for others acting with the intent to cancel bids in order to favorably push the market as potential targets in criminal investigations.
In Action Against Yahoo, the SEC Seeks Emails Without A Warrant
Since 2010, the SEC has abided by the Sixth Circuit’s decision in United States v. Warshak, and has not subpoenaed emails of an individual from third party service providers. That changed, however, when the SEC decided to test the law by filing a recent action against Yahoo to force compliance with a subpoena for the emails of an individual.
In Warshak, the court held that the use of something less than a warrant, such as a subpoena or court order under the Electronic Communications Privacy Act (ECPA), violates the Fourth Amendment. Not only had the SEC respected that decision but the DOJ had also changed its policies to comply with Warshak. While the SEC stayed out of court, it did oppose efforts in Congress to codify the Warshak holding via ECPA reform. However, when Yahoo refused to comply with an SEC subpoena based on Warshak, the SEC took Yahoo to court, leading to a hearing on the matter on June 30, 2017 in the federal court for the District of Maryland. SEC v. Yahoo, Inc., Case No. 8:15cv1339 (D. Md) (GJH). While the Judge did not make a decision at the hearing, he did express views on the facts and law that will influence his decision. Continue Reading
Supreme Court to Decide Significant Whistleblower Issue
In granting a petition to review the Ninth Circuit’s decision in Somers v. Digital Realty, the Supreme Court will resolve a circuit court split on the issue of whether Dodd-Frank prohibits retaliation against internal whistleblowers who did not report their concerns about potential securities law violations to the SEC. In March, partners Tony Caliendo, Todd Kerr, and Michael Clyde reported on Somers, which held that internal whistleblowers are protected, joining the Second Circuit on this issue. See Berman v. Neo@Ogilvy LLC, 801 F.3d 145, 155 (2d Cir. 2015). The Fifth Circuit, the first circuit court to address the issue, has taken a different view, holding, “[u]nder Dodd-Frank’s plain language and structure, there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC.” Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 621 (5th Cir. 2013).
Both the Ninth and Second Circuits referenced the SEC’s interpretation of the relevant statute, as set forth in Exchange Rule 21F-2: employees who report violations internally are protected regardless of whether they report to the SEC. To the extent the circuit courts’ rulings were based on Chevron deference to the SEC’s interpretation, that could set up an interesting battle at the Supreme Court, where its newest Justice is an outspoken critic of such deference.
Five Criminally Charged in Flint Water Crisis
In an unprecedented move on June 14, 2017, Michigan’s Attorney General, Bill Schuette, charged five state officials with involuntary manslaughter, alleging that each had failed to address the city of Flint’s contaminated water issue that they knew was connected to the poisoning deaths of 12 individuals. One of the charged officials, Michigan Department of Health and Human Services Director Nick Lyon did not issue any public warning of possibly tainted water until 2016 even though several cases of Legionnaires’ disease that appeared to be linked to the water issue had been reported throughout the previous two years.
Also charged with involuntary manslaughter were Howard Croft, former City of Flint Water Department Manager; Liane Skekter-Smith, Drinking Water Chief for the Michigan Department of Environmental Quality; Stephen Busch, Water Supervisor; and Darnell Earley, who was appointed to be Flint’s Emergency Manager by Michigan Governor Rick Snyder because of the city’s failure to meet its financial obligations. More than 10 other current and former state/local officials face criminal charges other than involuntary manslaughter, including Eden Wells, the Department’s Chief Medical Executive. Wells was charged with obstruction of justice and lying to a peace officer for allegedly misleading the investigators and attempting to prevent the investigation into the water crisis.
Although Governor Snyder was not charged, he continues to face stiff criticism from state residents for what caused Flint’s water crisis. In early 2014, Flint, at the direction of its former emergency manager Earley, switched its water supply from Detroit Water and Sewerage Department treated water to the Flint River in an effort to save money. In fact, a $200-a-day solution of anti-corrosion chemicals could have prevented the crisis, but officials failed to take that measure due to cost considerations. As Attorney General Schuette reports, the state focused entirely on “data, finances and costs, instead of placing the health, safety and welfare of citizens first.” Since the charges were announced, Governor Snyder has voiced strong support for Lyon and Wells, keeping both in their positions at the Department of Health and Human Services. Although Governor Snyder does not appear to face personal criminal exposure, the now 17-month long investigation remains ongoing, and Attorney General Schuette declined to comment whether more charges would be filed.
At the center of this involuntary manslaughter case is Robert Skidmore, an 85-year-old former auto industry worker who died after contracting Legionnaires’ disease. The prosecution has focused on Lyon first allegedly receiving notice of a deadly Legionnaires’ disease outbreak in January 2015, but choosing not to advise the public until one year later. Lyon is alleged to have “deliberately failed to inform the public of a deadly Legionnaires’ disease outbreak, which resulted in the death of Robert Skidmore” and “exhibited gross negligence” in failing to inform the public about the outbreak, even “taking steps to suppress information” relating to the water crisis. This failure to disclose is alleged to have led to the preventable deaths of several individuals, including Skidmore.
These new charges demonstrate a shift in the criminal investigation’s focus—looking not only at the lead contamination of the water but now at the deaths resulting from that contamination and placing the blame squarely on high-ranking government officials. This aggressive posture poses its own challenges; prosecutors may find it tough to establish a direct link between Flint’s water crisis and the deadly outbreak of Legionnaires’ disease upon which the criminal case rests. Regardless, even if the charged officials are able to successfully defend the involuntary manslaughter charges, their individual reputations, along with Michigan’s government at large, is in ruins.
The city and state’s responses to the Flint water crisis and ensuing public relations efforts were poorly executed. One of the key takeaways from this case is the importance of opening an investigation the moment an official learns of possible harm, danger, or criminal activity in their jurisdiction. This lesson extends from the government to the private sector, and is applicable as well to managers and executives at companies, providing a good example of how much emphasis regulators and law enforcement place on ensuring public safety. Delays in responding to harmful activity or disclosing information about it to potential victims can result in criminal exposure as much as causing the failure or gap would in the first place. Although there may be changes in or a lessening of environmental regulations under the new Trump administration, failures that result in public harm may still be subject to heightened scrutiny and prosecution. For example, even if the Environmental Protection Agency eliminated the federal Safe Drinking Water Act, state liability would still be in place. In this case, the relaxing of environmental protections by the EPA would likely not have had any impact since local officials were charged with violating the state of Michigan’s Safe Drinking Water Act. Finally, this case again illustrates the value of cooperating with a government investigation rather than obstructing it.
