In Audet v. Fraser, an unusual case where federal jurors in a class action lawsuit considered whether digital assets known as “Hashlets” constitute securities, the District of Connecticut jury found that the Hashlets were not securities, and therefore the defendant was not liable for securities fraud. Notably, the SEC took a contrary position on Hashlets in 2015, when it sued GAW Miners, LLC, its founder Homero Joshua Garza, and another company founded by Garza for securities fraud, alleging that Hashlets were, in fact, securities. Both companies were permanently enjoined from violating securities laws and ordered to disgorge more than $10 million, and each was ordered to pay a $1 million civil penalty. Garza was later sentenced to 21 months imprisonment in a related criminal case.

The jury’s verdict comes as the SEC has expressed increased interest in regulating digital assets as securities. For example, in November, SEC Chair Gary Gensler noted that his staff’s enforcement mission includes bringing “novel” and “high-impact” cases involving crypto. And in September, Gensler called for greater regulation of crypto assets, likening the environment in crypto finance, issuance, trading, and lending to “the Wild West.” While increased enforcement in crypto markets may be on the horizon, the jury’s decision in Audet highlights some of the uncertainties that currently pertain to the regulation of digital assets, such as “Hashlets.”

Continue Reading Co-Founder of Crypto Mining Firm Prevails in Jury Verdict Based on Interpretation of Unique Securities Fraud Instruction

Through a series of recent public comments, top leadership from the Consumer Financial Protection Board (“CFPB”) is warning that the agency is poised to play an increasingly affirmative role in the oversight of new payments systems, including the technologies and technology companies involved. First, CFPB Director Rohit Chopra told federal lawmakers that “the desire of Big Tech to gain greater control over the flow of money in the economy raises a number of questions.” Director Chopra’s comments make clear that his agency is stepping up its regulatory scrutiny of large technology firms as well as more traditional participants in the consumer finance industry, such as banks and mortgage companies. Just days later, Director Chopra issued a statement reiterating his concerns about the role of large technology companies in consumer finance and further declaring that the CFPB is “actively monitoring” and preparing for a broader consumer adoption of cryptocurrencies. Commenting specifically on the Report on Stablecoins issued by the President’s Working Group on Financial Markets, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation, Director Chopra stated that the use cases for stablecoins in retail payments, consumer deposits, stored value instruments, and others “trigger obligations under federal consumer financial protection laws,” including the prohibition of unfair, deceptive, or abusive acts or practices. These comments and others by the CFPB lead many to conclude that a more aggressive enforcement approach across industries is likely to follow.

As a starting point, Director Chopra indicated that the CFPB is examining the following questions regarding tech firms’ role in real-time consumer payments:

  • How will these firms harvest and monetize data they collect on consumer transactions?
  • What criteria will the firms use to decide who is removed from the platform?
  • How will they ensure that payment systems adhere to consumer protections?
  • Will Big Tech giants have an incentive to impede the entry of new firms seeking to offer competitive products and services?

Continue Reading Consumer Protection Regulator Signals Increased Scrutiny of Payments Systems and Tech Companies

In this second episode of a series regarding False Claims Act (FCA) enforcement, Perkins Coie attorneys Barak Cohen and Alex Canizares are joined by guest Pete Jensen, Global Chief Compliance Officer for Arthrex, Inc., one of the world’s largest medical device companies. In the podcast, Pete discusses the myriad challenges healthcare companies face when managing compliance risks, including risks related to whistleblowers. Barak, Alex, and Pete also discuss how current enforcement positions by the U.S. Department of Justice are especially troubling given the dense mixture of laws, regulations, sub-regulatory guidance, and policies that compliant healthcare companies must navigate.

Listen to “False Claims Act Enforcement Risks and Healthcare Compliance: A Conversation With Pete Jensen, Global Chief Compliance Officer for Arthrex” on Spreaker.

Note that all episodes are available on Apple PodcastGoogle Podcast, and Spotify.

Deputy Attorney General Lisa Monaco delivered an exacting message to the white-collar defense bar at the ABA’s 36th National Institute on White Collar Crime: the DOJ is stepping up its enforcement of corporate crime through several new initiatives. Speaking to an audience of white-collar criminal defense attorneys, DAG Monaco marched through a series of initiatives that will rollback more lenient enforcement policies adopted during the prior administration. This increase in enforcement will be buoyed by a surge of resources provided to DOJ prosecutors, including a new squad of FBI agents embedded in the DOJ’s Criminal Fraud Section—placing “agents and prosecutors in the same foxhole,” as DAG Monaco described it. As discussed in further detail below, these efforts have ramifications on both the individual and corporate level, including: (1) increased individual accountability; (2) a focus on corporate recidivism; and (3) greater scrutiny of corporate resolutions with the DOJ.

Focus on Individual Accountability. First, the DOJ is renewing its focus on holding individual actors responsible for corporate wrongdoing.  As such, DAG Monaco announced that the DOJ is reviving its policy that companies will only be eligible for cooperation credit in resolutions with the DOJ if they provide prosecutors with non-privileged information about all individuals involved in or responsible for the misconduct at issue—regardless of the individual’s position, status, or seniority. This pronouncement reverses the DOJ’s prior guidance, which allowed companies to receive cooperation credit for disclosing only those individuals “substantially involved” in the misconduct. Continue Reading Corporate Compliance Crackdown: DOJ Announces New Enforcement Policies for Business Entities

During a speech last week to a group of white collar defense attorneys, John Carlin, a senior official at the Department of Justice (DOJ) confirmed what many in the white collar and corporate compliance space have been preparing for since January: the DOJ is devoting a “surge” of resources to ramp up its white collar enforcement efforts. According to a report by The Wall Street Journal*, Carlin listed several agency actions that are either in the works or already underway:

  • Embedding Federal Bureau of Investigation agents within the DOJ, including a new “squad” of dedicated agents in the agency’s fraud section, to focus on investigations into foreign bribery, market manipulation, and healthcare fraud cases;
  • Enhancing efforts to incentivize companies to develop compliance programs to preemptively prevent legal violations by employees;
  • Developing new tools, including the use of data analytics, to identify corporate wrongdoing (and encouraging corporations to do the same); and
  • More strictly enforcing the terms of deferred- and non-prosecution agreements.

Although the increased focus on enforcement should not come as a surprise to careful (or even casual) observers, the DOJ’s emphasis on preemptive compliance suggests the agency will be receptive to organizations who are proactively improving their compliance practices.

Companies should consider reviewing their compliance policies and implementing certain best practices to minimize the risk of being swept up in any future enforcement pushes:

Continue Reading Preparing for DOJ’s White Collar Enforcement “Surge”: Five Compliance Practices for Companies to Shore Up Now

The SEC’s Division of Corporate Finance has sent a first wave of comment letters to registrants based on its recent review of climate disclosures included in their 10-Ks. View a sample comment letter and read insights on Corp Fin’s ESG priorities from Allison Handy, co-chair of Perkins Coie’s Environmental, Social, and Governance (ESG) advisory team, on the Public Chatter blog.

The Sixth Amendment’s Confrontation Clause provides criminal defendants with the right to “confront”—i.e., cross-examine—the witnesses against them.  But can a criminal defendant “open the door” to the admission of evidence otherwise barred by the Confrontation Clause?  The U.S. Supreme Court will address that question in Hemphill v. New York, scheduled for oral argument next month.  The outcome of that case may significantly expand when prosecutors at all levels, from local district attorneys’ offices to DOJ Main Justice, can overcome defendants’ right to exclude absent-witness testimony.

Darrell Hemphill was convicted of murder in New York after another man was unsuccessfully prosecuted for the same crime.  Hemphill argued at trial that the first suspect committed the crime.  That was enough for the trial court, and ultimately New York’s highest court, to determine he had opened the door for the prosecution to introduce evidence rebutting Hemphill’s claim—specifically, an out-of-court statement by the first man that he did not possess the type of gun responsible for the murder.

Federal and state rules of evidence like New York’s typically allow a party to introduce rebuttal testimony like this—even if it could not do so originally—if the opposing party puts the issue into play.  But Hemphill argues that the Confrontation Clause is a separate safeguard that cannot be overcome simply by opening the door.  Under Hemphill’s theory, the first man’s statement should not have been admitted, even after Hemphill implicated him for the crime, unless the man could also be cross-examined at trial. Continue Reading Supreme Court to Weigh Protections Under Confrontation Clause

On July 19, 2021, CME Group Inc. (the CME), the parent company of derivatives exchanges including the Chicago Mercantile Exchange and New York Mercantile Exchange, issued a Market Regulation Advisory Notice amending prior guidance on prohibited disruptive trading practices. The CME’s amended Advisory Notice RA2107-5 (Advisory Notice), took effect on August 2, 2021, and impacts the types of trading behavior for which individual traders and their employers may be held liable.

The Advisory Notice underscores the CME’s expectations in two key areas: market participants’ internal controls for risk management; and the integrity of messaging data that traders submit to the CME. The Advisory Notice sets forth scenarios under which compliance failures in either of these two areas might constitute a disruptive trading practice. Of course, violations of CME’s disruptive trading practice rules can result in significant fines, a bar from exchange access, and follow on enforcement actions from other market regulators. Thus, it is significant that the Advisory Notice takes aim at internal controls that are not typically associated with market manipulation but can nonetheless result in regulatory enforcement.

Click here to read the full article on Bloomberg Law.

Perkins Coie LLP White Collar & Investigations partners Lee Richards III and David Massey are joined by Eric Grossman, the Chief Legal Officer of Morgan Stanley, for an in-depth discussion of hot topics in the financial services enforcement area, including big banks’ readiness for another financial crisis; Environmental, Social, and Governance (ESG) investing; the “gamification” of trading; SPACs; corporate criminal investigations and resolutions; and the influence of politics on law enforcement. Mr. Grossman also reflects on the importance of diversity and inclusion in the legal profession.

Listen to “Discussion with Eric F. Grossman, Chief Legal Officer, Morgan Stanley” on Spreaker.

 

In this post, Perkins Coie attorneys discuss a U.S. Federal Trade Commission settlement regarding its most recent law enforcement action to monitor the marketplace for misleading cannabidiol product claims. The action targets Kushly Industries LLC and the company’s sole officer for allegedly making false or unsupported health benefit claims about Kushly’s CBD product.

Read the full post at Perkins Coie’s Cannabis Legal Highlights blog at FTC Continues Crackdown on Unsupported CBD Marketing.