Should individuals sued by the Securities and Exchange Commission (SEC) have to give up, or “disgorge,” corporate gains resulting from a fraud, or just their own direct gains? In an August 29 summary order, SEC v. Metter, the Second Circuit avoided wrestling with this question, but it may be one of the next major battles in the wake of the Supreme Court’s June 5, 2017 decision in Kokesh v. SEC, 137 S. Ct. 1635. Kokesh held that the disgorgement remedy in SEC enforcement actions is a “penalty” for purposes of the five-year limitations period for the “enforcement of any civil fine, penalty, or forfeiture.” 28 U.S.C. § 2462. Many have assumed, on the basis of a footnote in Kokesh, that courts will soon be considering whether they have authority to order disgorgement at all in SEC enforcement actions. That issue certainly lurks, but I suspect that courts first will revisit the proper scope of the remedy, including whether a court may force a defendant to “disgorge” ill-gotten gains that the defendant did not personally receive but that went to third parties, such as individuals and entities associated with the defendant. Continue reading
SEC Chairman Jay Clayton, Co-Directors of Enforcement Stephanie Avakian and Steven Peikin, and Acting Director of the Office of Compliance, Inspections and Examinations (“OCIE”) Peter Driscoll participated in a panel discussion on Tuesday, September 5, at NYU Law School. The moderated discussion, followed by questions from the audience, was titled “The Securities and Exchange Commission: Priorities Going Forward.”
In sum, the SEC officials emphasized that investors should expect no major shift from the SEC in terms of enforcement or examinations. While there has been some discussion in recent months of frauds victimizing retail investors, there will not be a major paradigm shift in the kinds of cases the Commission will focus on. The panelists also spent a significant amount of time discussing cybersecurity and cyber-related enforcement actions, as well as the SEC’s increased use of big data in investigations and examinations. Continue reading
In a previous post I noted that United States v. Martoma can be read as an attempt to eliminate the personal benefit standard. By holding “that an insider or tipper personally benefits from a disclosure of inside information whenever the information was disclosed ‘with the expectation that [the recipient] would trade on it,’ Salman, 137 S. Ct. at 428, and the disclosure ‘resemble[s] trading by the insider followed by a gift of the profits to the recipient,’ id. at 427 (quoting Dirks, 463 U.S. at 664), whether or not there was a ‘meaningfully close personal relationship’ between the tipper and tippee” the Second Circuit potentially changed the face of insider trading. The aforementioned can be said to cover all intentional transmission of material nonpublic information because what is a gift other than giving something of value to another person. Thus, the Second Circuit has effectively replaced personal benefit with the tipper’s expectation that a recipient will trade. This is a huge change to the insider trading landscape. If true, it arguably reads fraud out of law that sounds in fraud. Continue reading
In August 2017, the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission released the results of its second Cybersecurity Initiative, which examined cybersecurity-related preparedness and implementation efforts by 75 regulated financial entities. The resulting OCIE Risk Alert depicts an industry demonstrating heightened sensitivity to cyber risks, but also experiencing gaps between policy ambition and day-to-day execution, and confronting growing pains associated with accelerated change, including the introduction of significant new policies and procedures that may lack focus or consistent implementation. While the Risk Alert directly addresses the cybersecurity procedures of broker-dealers, investment advisers, and other SEC-regulated entities, companies in all industries should consider assessing their practices with respect to the issues highlighted by the SEC. Continue reading
by Peter Varlan
Despite the increase in cyberattacks and data breaches against large corporations, directors have avoided personal liability. In three recent data breaches—Wyndham, Target, and Home Depot—shareholders have unsuccessfully brought derivative claims against directors. These Caremark claims against directors have failed because oversight duties for cybersecurity are not yet specific enough to establish that directors deliberately breached a known duty of care.
The current protection that directors have enjoyed from cybersecurity-related Caremark suits may soon come to an end. New and pending regulations from the New York Department of Financial Services and the Federal Reserve System provide more specific cybersecurity guidance for corporations. Failing to comply with these more detailed regulations prior to a cyberattack may increase the possibility that directors will be held liable for violating their Caremark oversight duties. Accordingly, directors should familiarize themselves with these new regulations that are applicable to the corporations they serve, and develop best practices to both protect corporate data and inoculate themselves from personal liability. Continue reading
Less than three years after the U.S. Court of Appeals for the Second Circuit instituted a new test for the personal benefit element of insider trading violations in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), the Court of Appeals in United States v. Martoma , No. 14-3599 (2d Cir. Aug. 23, 2017), expressly overruled the remaining vestiges of that test, which had already been narrowed by the Supreme Court in Salman v. United States, 137 S. Ct. 420 (2016). The recent cases all addressed the Supreme Court’s seminal decision in Dirks v. SEC, 463 U.S. 646 (1983), which held that liability for insider trading under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder requires the insider disclosing material nonpublic information to have received or expected a personal benefit in exchange for disclosing the information. Dirks provided a broad definition of personal benefit, holding that it could be satisfied by (among other things) “a gift of confidential information to a trading relative or friend.” 463 U.S. at 664. In a 2-to-1 decision, the Court of Appeals in Martoma held that Newman’s gloss of a “meaningfully close personal relationship” as part of the personal benefit test was “no longer good law.” Slip Op. at 24. Instead, the majority ruled, liability requires the government to prove that the tipper expected the tippee would trade on the information and the tip “resembled trading by the insider followed by a gift of the profits” to the tippee. Id. at 26. Continue reading
Since the Second Circuit came out with its decision in United States v. Martoma I have been asked many questions about it. I am sorry to say that the answer to pretty much all of them is: “I don’t know.” I hate that answer, by the way, but it is what it is.
People have asked: Why did the Second Circuit do this? Did the panel mean to go as far as it seems they went? Does this mean there is no such thing as personal benefit? Was Newman really just a personal shot at the over reach of former US Attorney Preet Bharara? Will the Second Circuit take this en banc? Will SCOTUS hear another insider trading case so soon after United States v. Salman? Answer: I don’t know. Continue reading
On August 28, 2017, the New York State Department of Financial Services (“DFS”) announced a “Notice of Hearing and Statement of Charges” that seeks to impose a nearly $630 million civil penalty against Habib Bank Limited and its New York Branch (“the Bank”) based on allegations of persistent Bank Secrecy Act/anti-money laundering (“AML”) and sanctions compliance failures. A hearing is scheduled for September 27, 2017 before Cassandra Lentchner, DFS’s Deputy Superintendent for Compliance. The Bank – the largest bank in Pakistan – has contested DFS’s allegations and indicated that it plans to challenge the penalty and surrender its DFS banking license, thus eliminating its only U.S. branch. DFS also issued two related orders, which (1) expanded the scope of a review of prior transactions for AML and sanctions issues, that was already underway under the terms of an earlier consent order; and (2) outlined the conditions under which the Bank could surrender its DFS banking license, including the retention of a DFS-selected consultant to ensure the orderly wind down of its New York Branch.
The severity of the language and proposed penalty in DFS’s statement of charges reflects the large number and extent of alleged compliance failures at the Bank, which DFS claims persisted for more than a decade, despite agreements with DFS and the Federal Reserve Board of Governors (“Federal Reserve”). According to DFS, these failures are “serious, persistent and apparently affect the entire [Bank] enterprise” and indicate a “dangerous absence of attention by [the Bank’s] senior management for the state of compliance at the New York Branch.”
This enforcement action illustrates that a DFS-regulated institution’s failure to show steady progress in remedying identified concerns can have significant and franchise-threatening consequences. We describe the enforcement action in more detail below, including the numerous compliance failures alleged by DFS. Continue reading
“Justice cannot mean a prison sentence for a teenager who steals a car, but nothing more than a sideways glance at a C.E.O. who quietly engineers the theft of billions of dollars,” wrote U.S. Senator Elizabeth Warren in a New York Times op-ed. When she calls for stronger action against corporate crime, she’s not alone. Calls resound, particularly on the political left. In 2015, the Department of Justice, under then-Deputy Attorney General Sally Q. Yates, issued a new policy prioritizing prosecuting corporate criminals.
Punishing corporate executives more strongly may be justified. Punishment rarely occurs, and, when it does, it is often too weak to constitute “justice.” But once we agree that more punishment is warranted, the next question is how we can make punishment more effective in preventing corporate crime? Continue reading
In United States v. Allen, the Second Circuit held that self-incriminating statements compelled by a foreign sovereign cannot be used, directly or indirectly, in a U.S. prosecution. The opinion thoughtfully analyzes how U.S. constitutional principles apply in cross-border investigations and may have some impact on how such investigations are conducted in the future.
During the well-known investigations of alleged manipulation of the London Interbank Offered Rate (“LIBOR”), U.K. citizens and low-level bank employees Anthony Allen and Anthony Conti were suspected of artificially adjusting exchange rate information to affect LIBOR and benefit their confederates. The U.K. Financial Conduct Authority (“FCA”) compelled Allen and Conti’s testimony under the Financial Services and Markets Act 2000 (“FSMA”). The FSMA provides that the FCA could not use Allen and Conti’s statements against them but could use the “fruits” of any investigation developed on the basis of their statements. The FCA also compelled testimony from Paul Robson, one of Allen and Conti’s co-workers, who provided generally exculpatory information regarding himself, Allen and Conti. Later, the FCA commenced an enforcement action against Robson and provided him with transcripts of Allen’s and Conti’s statements, which Robson carefully reviewed. The FCA ultimately decided not to prosecute Allen, Conti, or Robson. Continue reading