Financial Fraud

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The U.S. Court of the Appeals for the Ninth Circuit recently held that criminal defendants who gain unlawful proceeds from certain offenses must pay back those proceeds—even when they no longer possess them.  More specifically, the government may obtain “personal money judgments” that can be satisfied through the defendants’ untainted (and currently unidentified or even future) assets.

This ruling—reaffirming prior case law recently called into question—will impact defendants in cases involving economic crimes and forfeiture.…
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The German Federal Ministry of Justice and Consumer Protection recently presented draft legislation to Parliament that could pose a marked shift in how corporate crimes are sanctioned in Germany.  If enacted, this draft legislation, titled the Corporate Sanctions Act (“CSA”), would permit the criminal prosecution and conviction of a corporate entity in circumstances where the entity’s directors or officers committed corporate crimes, and where the entity failed to take reasonable precautions to prevent employees or agents from engaging in criminal wrongdoing.  Companies based or doing business in Germany will be subject to the law.…
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The DOJ has raised the stakes in criminal spoofing enforcement, unveiling sweeping charges against three traders who allegedly conspired to manipulate the precious metals market.  While the DOJ’s involvement in spoofing enforcement—an area previously dominated by civil regulators and SROs—has become more commonplace, the DOJ is using a new tactic in this latest enforcement action.  In addition to the usual spoofing and other financial crime offenses, the indictment charges the traders with a racketeering conspiracy.  The DOJ’s reliance on RICO increases the possible penalties for spoofing, while also potentially making the government’s case simpler to prove.

A Potential New Era of Spoofing Enforcement

After obtaining mixed results in its previous spoofing trials, the DOJ appears to be retooling its approach.  Indeed, the indictment against these precious metals traders marks the first time the DOJ has alleged RICO violations against traders accused of spoofing electronic derivatives markets. Thus, while the alleged spoofing conduct may be familiar, the charges brought are significantly different and more serious than before.  And so are the potential penalties.  In addition to hefty incarceration sentences, RICO provides for the government to seek forfeiture of all proceeds derived from the racketeering activity.…
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The DOJ is increasingly using a “data focused approach” to identify economic crime and corporate misconduct, according to a DOJ official.  In remarks to the 6th Annual Government Enforcement Institute, Deputy Assistant Attorney General Matthew S. Miner recently shared that using data analytics to identify fraud improves efficiency, expedites case development, and makes program enforcement “more targeted.”

While Miner indicated that data analytics are being utilized across the DOJ’s white collar enforcement efforts, he pointed to the healthcare industry and financial sector as two such targets of the DOJ’s data-driven enforcement approach.  The DOJ has already successfully used Medicare claims data to identify fraud.  That success is attributed, in part, to the DOJ’s healthcare data analytics team which analyzes the Centers for Medicare and Medicaid Services’ payment database for health care fraud activity and trends.  The financial sector—specifically the commodities and securities arena—represents an expanding “area of focus” for the DOJ’s data-driven enforcement.  Miner indicated that the DOJ uses trading data to identify indicators or anomalies that are suggestive of market manipulation and other fraudulent activity.…
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Last month, the UK Serious Fraud Office (“SFO”) published non-binding, internal guidance expanding on its view of corporate cooperation in prosecutions. The guidance marks a notable departure from the SFO’s past reluctance to clarify its expectations for corporations seeking cooperation credit, while still making it clear that no outcome will be “guaranteed,” even for companies that have provided “full, robust” cooperation.  Rather, cooperation is just “one of many factors” that the SFO will consider when making a charging decision.…
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Last month, attorneys from around the world descended upon Buenos Aires to tango with criminal justice and anti-corruption experts at the International Bar Association’s 22nd Annual Transnational Crime Conference.  Conference highlights included remarks from distinguished members of the Argentine government, including the Minister of Justice and Human Rights, President of the Financial Information Unit, and Supreme Court President.  These officials focused their comments on criminal justice reforms in Argentina, the role of regulators and the judiciary in establishing and inspiring confidence in the rule of law, and the hope that such efforts would improve Argentina’s reputation in the global fight against graft and corruption.

Panelists and attendees also discussed similar efforts across the globe, cross-border cooperation, and collateral issues to consider when representing clients subject to international anti-corruption inquiries or enforcement actions. Of note were discussions regarding the following:

Evolving Mechanisms for Detecting and Penalizing Corruption  

  1. Increased use of money laundering statutes and administrative remedies.

Although most anti-corruption laws around the world criminalize the payment of bribes to government officials, the receipt of bribes (passive bribery) is conspicuously absent from laws like the U.S. Foreign Corrupt Practices Act (“FCPA”).  As a result, beneficiaries of bribes have traditionally escaped FCPA liability.  However, panelists noted, recent years have seen an increase in anti-money laundering prosecutions and civil administrative actions targeting profits from corrupt dealings that otherwise fall outside the reach of traditional anti-bribery paradigms.  Using money laundering statutes, U.S. prosecutors were able to prosecute officials working for Venezuela’s state-owned energy company, Petroleos de Venezuela, S.A., who accepted bribes from several U.S. executives (themselves prosecuted under the FCPA).

Panelists noted that more than €2 billion in anti-money laundering fines were assessed globally in 2018 alone, calling banks not yet penalized for money laundering issues “the exception and not the norm.”  Another new norm is the decoupling of predicate offenses (i.e., conduct generating illegal proceeds) from allegations that such proceeds were in fact “laundered,” allowing prosecutors to bring intentional and negligent money laundering cases.  Panelists also warned that lawyers were being targeted more than ever as negligent money launderers, based on the sources of client payments.…
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Section 14(e) of the Securities Exchange Act prohibits deceptive conduct when making a tender offer to shareholders.  Recently, in Emulex Corp. v. Varjabedian, the United States Supreme Court declined to resolve a split among the circuit courts about what a plaintiff alleging a violation of Section 14(e) must prove.  As a result, the Ninth Circuit is currently the only circuit allowing Section 14(e) claims based on negligent (as opposed to intentional) misrepresentations or omissions of material facts.  This development may result in an uptick in tender offer lawsuits in that jurisdiction.

The Emulex case stemmed from the company’s merger with Avago.  As part of that merger, Avago initiated a tender offer for Emulex’s outstanding shares.  In accordance with SEC rules, Emulex filed a public statement with the SEC in which it supported Avago’s tender offer and recommended that Emulex shareholders tender their shares.  Among other things, the statement observed that Emulex shareholders would receive a premium on their stock and described financial analyses that had been undertaken to reach this conclusion.  However, Emulex’s statement omitted reference to a portion of its financial analysis that concluded the takeover premium offered for Emulex’s outstanding shares was below average for mergers involving similar companies.  A putative class of shareholders brought suit, alleging that Emulex’s statement file with the SEC violated Section 14(e) of the Securities Exchange Act by failing to include the more lackluster price analysis.…
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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…

The U.S. Supreme Court recently handed down a win for the SEC and private securities litigants, significantly broadening the scope of primary liability under Rule 10b-(5).  In Lorenzo v. SEC, the Court held that liability under Rules 10b-5(a) and (c)—which make it unlawful to employ a scheme to defraud or engage in any practice that operates as a fraud—is not limited only to those who make false or misleading statements as contemplated under sister-section Rule 10b-(5)(b), but may also extend to those who disseminate such statements made by others knowing they are false or misleading.

Background

This case arose from an SEC enforcement action brought against Francis Lorenzo, Director of Investment Banking for a New York broker-dealer.  The SEC alleged that, in connection with a $15 million debt offering, Lorenzo sent emails to prospective investors that significantly overstated the value of the investment.  It was undisputed that the emails were sent at the direction of Lorenzo’s boss, who supplied all the content and “approved” the messages.  It was also undisputed that Lorenzo knew that statements regarding the value of the investment were false or misleading.

The SEC concluded that, by knowingly sending false statements from his email account, Lorenzo directly violated SEC Rule 10b–5 and related provisions of the securities law, including Sections 10(b) of the Exchange Act of 1934 and Section 17(a)(1) of the Securities Act of 1933.  Rule 10b-5 makes it unlawful to: (a) employ a device, scheme, or artifice to defraud, (b) make an untrue statement of a material fact, or (c) engage in an act, practice, or course of business which does or would operate as a fraud or deceit in connection with the purchase or sale of securities.

Lorenzo appealed, contending he had no liability under Rule 10b–5 because under the Supreme Court’s ruling in Janus Capital Group, Inc. v. First Derivative Traders, liability for false statements was limited only to the “makers” of those statements as contemplated by Rule 10b–5(b), defined only as those with “ultimate authority” over the statements’ content and communication.  One who simply prepares or publishes a statement on behalf of another, as Lorenzo saw his role, fell outside of the scope of primary liability under Janus.  The D.C. Circuit agreed that since Lorenzo’s boss directed him to send the emails, supplied their content, and approved them for distribution, Lorenzo did not “make” the statements, and thus could not be held primarily liable for a Rule 10b-5(b) violation. But, the D.C. Circuit sustained the SEC’s finding of primary liability under Rules 10b-5(a) and (c) for knowingly disseminating statements he knew to be false, even though he did not “make” the statements himself.

The Supreme Court’s Ruling

On appeal to the Supreme Court, Lorenzo advanced two main theories, both of which the Supreme Court flatly rejected.…
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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…