After software developer Jitesh Thakkar‘s criminal trial on “spoofing”-related charges ended in a mistrial two weeks ago, the Government determined it will not seek to retry the case. Thakkar was originally charged with conspiracy to commit spoofing and with two counts of spoofing arising out of his company’s development of software that enabled a
Following a week of trial proceedings in the case of defendant Jittesh Thakkar—a software programmer indicted in February 2018 on conspiracy and aiding and abetting charges related to a spoof trading scheme—the government’s case against Thakkar ended in a mistrial. The jurors could not reach a unanimous verdict on the two aiding-and-abetting spoofing counts…
Can a software programmer be held criminally responsible for designing a program that a trader uses to “spoof” the commodity futures market? This is the question posed to the jury in U.S. v. Thakkar, 18-cr-36 (N.D. Ill.), which trial began this week in federal court. The case grew out of the manipulative trading activities of Navinder Sarao, a London-based commodities trader who “spoofed” (i.e., placed bids or offers with the intention of canceling them before execution) futures on the Chicago Mercantile Exchange (CME). Sarao’s activity allegedly contributed to the May 6, 2010, “Flash Crash” in which the Dow Jones Industrial Average dropped nearly 1,000 points within minutes. Sarao pleaded guilty to fraud and spoofing charges in November 2016.
Jittesh Thakkar, the software programmer currently on trial, was indicted in February 2018 on charges that he conspired with Sarao to commit spoofing and that he aided and abetted Sarao’s spoofing by developing a customized software program that Sarao used to execute manipulative trades. The indictment against Thakkar marks the first time the U.S. Department of Justice (DOJ) has prosecuted an individual other than a trader with a spoofing-based crime.…
In United States v. Hoskins, 902 F.3d 69 (2d Cir. 2018) the Second Circuit held that a non-resident foreign national cannot be criminally liable for aiding and abetting or conspiring to violate the FCPA unless the government can establish that such an individual acted as an agent of one of the categories of persons subject to liability as a principal.
The DOJ charged Lawrence Hoskins, a British national and former Alstom UK executive based in Paris, with FCPA and money-laundering violations. The government alleged that Hoskins had approved payments to consultants that were funneled to Indonesian officials to secure a $118 million infrastructure contract with a state-owned power company. Hoskins was never physically present in the U.S., but he called and emailed alleged conspirators who themselves were present in the U.S., and Hoskins authorized payments from Alstom S.A. to the consultants, one of whom had a Maryland bank account.
Hoskins moved to dismiss charges alleging indirect FCPA violations—i.e., that he aided and abetted or conspired to violate the FCPA—arguing that he did not fall within the narrowly-circumscribed group of people for whom the FCPA prescribes liability: American companies, citizens, and their employees and agents, as well as foreign persons acting on American soil. The lower court agreed with Hoskins and dismissed Count I of the indictment. On appeal, the question for the Second Circuit was whether Hoskins could be charged as either a conspirator or an accomplice to the asserted FCPA violations, despite not falling within the categories of persons subject to liability as a principal. The Second Circuit concluded that the statute’s text, combined with its legislative history and the presumption against extraterritoriality, compelled the conclusion that foreign nationals who act abroad and lack a direct connection to one of the categories of persons subject to principal FCPA liability cannot be liable as accomplices or conspirators.
Agency Liability Post-Hoskins
Hoskins creates some uncertainty regarding FCPA prosecutions of individuals or entities who could not be charged as principals. The decision creates a stronger jurisdictional defense for companies that are subject to DOJ or SEC actions solely based on their business association with a U.S. concern. Under the Second Circuit opinion, it will take more than mere conspiracy or assistance to bring such entities within the scope of liability.
It is also likely that investigators will put more emphasis on developing evidence of agency relationships between principal violators and entities otherwise unreachable under Hoskins. Indeed, the court in Hoskins held that the government could present agency evidence and pursue Hoskins as an agent of, for example, Alstom S.A.’s U.S.-based subsidiary. Prosecutors may also attempt to broaden the traditional definitions of agency under the FCPA, particularly as agency theory becomes a critical link to reach now unreachable defendants.
Continue Reading Revisiting Agency Liability Under the FCPA Post-Hoskins
Federal sentencing guidelines for economic crime have long been subject to criticism due to high dollar loss amounts that can produce eye-popping prison terms.
Adding to the fodder, a new report issued by the United States Sentencing Commission found that securities and investment fraud offenders received the longest average sentences under the U.S. Sentencing Guidelines—more than twice as long as the average sentence for all economic crime offenders. The report, What Does Federal Economic Crime Really Look Like?, analyzes sentences imposed under § 2B1.1 of the Guidelines, which is the section that applies to most financial fraud cases, including those involving securities, bank, mail and wire fraud, money laundering, and conspiracy.
The report is chock full of data, but one of the Commission’s big-picture findings was that the average sentences for 29 categories of economic crime vary significantly. Not surprisingly, the report ties these variations to certain guideline enhancements, including loss amounts. For example, the report notes that in 2017, the median loss amount for securities and investment fraud was $2,105,620, a loss amount that corresponds to a 16-level increase under the Guidelines. This enhancement is substantially higher than any other specific offense type analyzed in the report.
Continue Reading Securities Fraud Prison Sentences Highest Among Economic Crime, U.S. Sentencing Commission Reports
On December 26, 2018, the Securities and Exchange Commission (“SEC”) announced a settlement with communications technology firm Polycom, Inc. (“Polycom” or the “Company”) for violating the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) in connection with a scheme to bribe Chinese government officials. Under the settlement, Polycom agreed to pay the SEC approximately $12.5 million in disgorgement and prejudgment interest and a civil money penalty of $3.8 million. The Polycom settlement illustrates the liability that can arise from reliance on third-party agents such as distributors, but—as explored below—also presents a missed opportunity for the SEC to provide some clarifying guidance for companies looking to avoid similar outcomes.
Continue Reading SEC’s Polycom FCPA Settlement Leaves Unanswered Questions
This series, written by recent in-house counsel and former federal prosecutors, aims to help in-house legal and compliance teams avoid the types of seemingly minor or inconsequential missteps that can lead to aggressive government responses, including parallel civil and criminal investigations.
In part two, the authors explain what to do when a search warrant…
This series, written by recent in-house counsel and former federal prosecutors, takes a practical approach to helping in-house legal and compliance teams operating in a world of complex regulatory schemes and increased whistleblower activity. It specifically aims to address how to avoid the types of seemingly minor or inconsequential missteps that can lead to aggressive…
On June 28, 2018, the U.S. Securities and Exchange Commission proposed three rule changes to the Commission’s Whistleblower Program, including one that would authorize the SEC to “downward adjust” monetary awards in large actions for which an award might “exceed an amount that is reasonably necessary to advance the program’s goals”—in the view of the Commission. The proposed change prompted an immediate response from Commissioner Kara Stein who issued a separate Statement on Proposed Amendments to the Commission’s Whistleblower Program Rules (“Statement”) in which she highlights concerns that a move towards a more subjective standard in determining monetary awards could threaten a whistleblower’s incentive to come forward, given the added uncertainty in outcome. Additionally, Stein questions whether the SEC has the statutory authority under the Dodd-Frank Act to alter the rules impacting awards in this way. …
Continue Reading SEC May Limit “Game Changing” Whistleblower Bounties
On May 9, 2018, the Fourth Circuit Court of Appeals issued an opinion in United States v. Kolsuz, holding that the Fourth Amendment requires individualized suspicion for forensic searches of cell phones seized at the border.
In so holding, the Fourth Circuit provides important clarification about how the Fourth Amendment applies to border searches of electronic devices. But, both in the Fourth Circuit and in jurisdictions across the country, critical questions remain unanswered about the scope of the Fourth Amendment in this context.
In United States v. Kolsuz, federal customs agents found firearm parts in the checked luggage of an airport traveler and then detained him as he was attempting to board an international flight. Subsequently, and without a warrant, agents seized his cell phone and “subjected it to a month-long, off-site forensic analysis, yielding a nearly 900-page report cataloging the phone’s data.” Based in part on this information, the traveler was eventually convicted of, among other things, attempting to smuggle firearms out of the country.
On appeal of his conviction, the traveler challenged the denial of his motion to suppress the forensic analysis of his cell phone as a violation of his Fourth Amendment rights.
In addressing the issue, the Fourth Circuit acknowledged that government agents may perform “routine” searches at international borders, or their functional equivalents, without a warrant or individualized suspicion consistent with the Fourth Amendment. But, the Court recognized that even at the border certain “non-routine,” “highly intrusive” searches require individualized suspicion.
Ultimately, the court held that forensic searches of digital devices, like the one at issue in that case, qualify as such “non-routine” searches and are thus prohibited absent some level of individualized suspicion.
The Court’s holding was based, in part, upon its determination that forensic analysis of a digital device can “reveal an unparalleled breadth” of “private,” “sensitive” information. It was also based on the Supreme Court’s 2014 decision in Riley v. California, which recognized the strong privacy interests associated with electronic devices. There, the Supreme Court held that a warrant is required to search a cell phone seized incident to arrest because of the private, extensive information contained on such devices.
Notably, however, the Fourth Circuit did not decide whether the requisite level of suspicion for such forensic searches is reasonable suspicion, or something more (like a warrant supported by probable cause). It also had no occasion to decide the requisite level of suspicion for officers to conduct “manual” searches, where agents review the content of electronic devices without the help of forensic technology.