Author Archives: Michelle Louise Austin

The FTC Moves Toward a Rules-Based Approach to Cybersecurity Regulation for Financial Institutions

by Avi Gesser, Kelsey Clark, Jennifer E. Kerslake, and Eric McLaughlin

In our first Cyber Blog post, we predicted that the rules-based approach adopted by the NYDFS would become the model for cybersecurity regulation.  Two years later, we’re feeling pretty good about that prediction, as the FTC recently proposed incorporating a number of aspects of the NYDFS cybersecurity rules into its Standards for Safeguarding Customer Information rule (the “Safeguards Rule”).  The proposal would also expand the Safeguards Rule’s definition of “financial institution” to include “finders,” or companies that connect potential parties to a transaction.  As a reminder, the Safeguards Rule applies to financial institutions that are not regulated by the federal banking agencies, the SEC, or state insurance authorities, including non-bank mortgage lenders, payday lenders, finance companies, check cashers, money transmitters, collection firms, and tax preparers. Continue reading

Energy Market Manipulation Remains a Hot Issue at FERC

by Jonathan G. Cedarbaum, H. David Gold, and Nathaniel B. Custer

Since the passage of the Energy Policy Act of 2005, fraud and market manipulation have been top enforcement priorities of the Federal Energy Regulatory Commission (FERC or the Commission).  FERC’s most recent annual report on enforcement (PDF: 2.72 MB) shows that, in fiscal year 2018, FERC opened some 16 investigations into market manipulation (out of 24 total) and recovered almost $150 million in civil penalties and disgorgement of profits, much of which was from market manipulation cases. 

Recent case law, meanwhile, indicates that courts interpret FERC’s authority in this sphere permissively. The courts, for example, have sided with FERC in allowing considerable time to bring enforcement actions in market manipulation cases, notwithstanding statute of limitations defenses raised by the regulated entities subject to enforcement. 

Energy companies and other businesses subject to FERC’s enforcement authority should continue to monitor developments in this area and make sure that their compliance programs are up to date. Continue reading

CFTC Enters the Market for Anti-Corruption Enforcement

by Alice S. Fisher, Douglas K. Yatter, William R. Baker III, Douglas N. Greenburg, Robyn J. Greenberg, and Benjamin A. Dozier

New enforcement advisory encourages reporting of foreign corrupt practices that the agency intends to pursue under the Commodity Exchange Act.

On March 6, 2019, the Division of Enforcement (Division) of the US Commodity Futures Trading Commission (CFTC or Commission) announced that it will work alongside the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) to investigate foreign bribery and corruption relating to commodities markets.[1] CFTC Enforcement Director James McDonald announced the agency’s new interest in this area as the Division issued an enforcement advisory on self-reporting and cooperation for violations of the Commodity Exchange Act (CEA) involving foreign corrupt practices.[2]

For companies and individuals who participate in the markets for commodities and derivatives — or whose activities may impact those markets — the CFTC announcement adds a new dimension to an already crowded and complex landscape for anti-corruption enforcement. A range of industries, including energy, agriculture, metals, financial services, cryptocurrencies, and beyond, must now consider the CFTC and the CEA when assessing global compliance and enforcement risks relating to bribery and corruption. This article summarizes the new developments and outlines key considerations for industry participants and their legal and compliance teams. Continue reading

The Weakness in Two-Factor Authentication—Your Lost Phone Policy

by Avi Gesser, John R. Kapp, and Michelle Adler

Two-Factor authentication is one of the most common measures that companies use to reduce cyber risk, but it is not very effective if companies don’t also have a good lost phone protocols.

Various regulations and industry rules require two-factor authentication (also referred to as multi-factor authentication or MFA) including the NYDFS cyber rules (PDF: 97.5 KB), the NIST identification and authentication requirements, the Payment Card Industry (PDF: 1.05 MB) (“PCI”) Data Security Standard 8.3, as well as the proposed amendments to GLBA.

MFA involves confirming that a purposed user of a certain login credential and password is actually the authorized user, by employing an additional verification method, such as a passcode sent to an employee’s phone by text message or through an authenticator app like Duo or Google Authenticator.  But, not all forms of verification are equal.  In 2016, the NIST considered not recommending SMS messages as a form of second-factor authentication due to their susceptibility to being redirected by attackers. Continue reading

The Future of Anti-Corruption Enforcement Involving Brazil and the United States

by Bruce E. Yannett, David. A. O’Neil, Andrew M. Levine, Kara Brockmeyer, and Daniel Aun

The beginning of the year allows us to look back at recent developments in the white collar front involving Brazil and the United States, and prompts us to consider what to expect going forward, especially in light of the election of President Jair Bolsonaro and the appointment of former judge Sergio Moro as Minister of Justice. 

Lava Jato, Carne Fraca, and Zelotes are among the Brazilian anti-corruption operations that have echoed in the United States over the last few years.  Intensified cooperation between authorities in the two countries has fueled countless investigations, settlements, convictions, and related civil litigation.  U.S. criminal enforcement also has reverberated in Brazil, with the FIFA prosecutions being perhaps the most headline-making example.  Continue reading

CFTC Publishes Examination Priorities for 2019

By Seth Davis, Paul M. ArchitzelPetal P. Walker and Joseph M. Toner

On February 12, 2019, the Commodity Futures Trading Commission (CFTC or Commission) published for the first time its examination priorities for the coming year.[1] The release of the priorities will provide legal and compliance staff of CFTC-regulated entities greater insight into the Commission’s examination programs and assist them in better preparing for, and successfully navigating, an examination. The Commission bases its priorities on four pillars: (1) effective communication, (2) a risk-based determination of priorities, (3) continuous improvement and (4) efficiency. Continue reading

Strong Whistleblower Protections Reflect a Positive Compliance Culture

By Maria T. Vullo

In a recent submission (PDF: 2.36 MB) to Congress, the U.S. Securities & Exchange Commission (SEC) reported that, for fiscal year 2018, the SEC paid the largest whistleblower awards since the institution of its program in 2012 following the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).  Specifically, in FY 2018, the SEC awarded 13 individuals over $168 million collectively for tips that led to actions by the SEC to protect investors.[1]

Other statutes likewise provide financial incentives to whistleblowing.  Under the False Claims Act (FCA), for example, persons who report fraud in government contracting can receive up to 30 percent of the government’s recovery in an action.  Many states, including New York, have enacted state-level equivalents of the FCA.  For many decades, the FCA has contributed to large recoveries to the U.S. Treasury, with an expansion of recoveries in part due to the reporting of violations by whistleblowers. Continue reading

Hong Kong Court Confirms the SFC’s Broad Powers to Share Investigation Materials With Overseas Regulators

By Gareth Hughes, Mark Johnson, Emily Austin, Adam Lee, Christy Leung, Ralph Sellar, Cameron Sim and Emily Lam

Background

In 2014, the Securities and Futures Commission (the “SFC”) commenced an investigation into share trades undertaken by the First Applicant in 2013, after receiving a report from another licensed corporation indicating suspected market manipulation activities by a fund managed by the First Applicant. The trades concerned shares in Nitto Denko Corporation, a Japanese company listed on the Tokyo Stock Exchange.

During the course of the investigation, the SFC sought and obtained various materials from the First Applicant and its majority shareholder and responsible officer, the Second Applicant, pursuant to section 181 of the Securities and Futures Ordinance (the “SFO”). This section empowers the SFC to require the production of information including information about a client, details of a transaction and instructions relating to a transaction from a licensed person. Failure to comply with a demand from the SFC under section 181 without a reasonable excuse is a criminal offence.

In July 2014, the SFC received and acceded to a request for assistance from two Japanese regulators, the Financial Services Agency (the “FSA”) and the Securities and Exchange Surveillance Commission (the “SESC”). In particular, the SFC permitted the Japanese regulators to attend an SFC interview with the Second Applicant and provided them with materials previously disclosed by the Applicants in response to the SFC’s requests for information. Continue reading

The Rise of Cyber Negligence Claims: Plaintiffs Find Receptive Judges by Going Back to Basics

By Avi Gesser and David Robles

New cyber regulations, such as the California Consumer Privacy Act, have companies concerned about expanding potential liability.  Companies fear that private rights of action are being created that will allow consumers to sue by alleging that the companies failed to protect their personal information.  But attention should also be paid to plaintiffs’ recent successes in applying existing legal frameworks—such as basic tort law—to cyber cases.  We have previously written about the use of state consumer protection acts to recover in data breach cases.  Recently, plaintiffs have also made some significant inroads in bringing negligence actions against companies that have experienced cyber events.

On January 28, 2019, the U.S. District Court for the Northern District of Georgia issued a decision in the Equifax Consolidated Consumer Class Action, allowing the consumers’ negligence claims against Equifax to move forward.  Judge Thrash found that the consumers had sufficiently alleged injuries resulting from the breach, pointing to the “unauthorized charges on their payment cards as a result of the Data Breach” as actual, concrete injuries that are legally cognizable under Georgia law.  The Court rejected Equifax’s arguments that the consumer’s injuries should be attributed to the hackers and could have been caused by data breaches at other companies.  The Court noted that allowing companies “to rely on other data breaches to defeat a causal connection would ‘create a perverse incentive for companies: so long as enough data breaches take place, individual companies will never be found liable.’”  Critically, the Court found that, given the foreseeable risk of a data breach, Equifax owed consumers an independent legal duty of care to take reasonable measures to safeguard their personal information in Equifax’s custody.  In doing so, the Court found that the economic loss doctrine was not a bar to the consumers’ recovery because Equifax owed an independent duty to safeguard personal information. Continue reading

Microchipping Employees and Biometric Privacy Laws – It’s Time To Start Paying Attention

By Avi Gesser, David Popkin, and Michael Washington

Until recently, biometric privacy was a niche area of the law that had little application to most companies.  But with the rapid growth in commercial biometric data collection, including voice samples, fingerprints, retina scans, and facial geometry, as well as some recent developments in the applicable case law, it’s probably time for companies to start paying attention.  Indeed, one of our top privacy law predictions for 2019 was a judicial expansion of the notion of harm, which happened quicker than we anticipated in the context of gathering biometric data.

On January 25, 2019, the Illinois Supreme Court decided Rosenbach v. Six Flags Entertainment Corporation, 2019 IL 123186 (PDF: 61.7 KB), unanimously finding that plaintiffs could bring a private cause of action for violations of the notice and consent requirements of the state’s biometric privacy law without any showing of harm.  In Six Flags, a mother sued the owner of a theme park on behalf of her teenaged son after he was fingerprinted in connection with the purchase of a season pass to the park.  Neither the son nor the mother consented in writing to the taking of the fingerprint or signed any written release. Further, the park did not provide any documentation about their retention schedule or guidelines for retaining and then destroying the data.  The court found that individuals possess a right to privacy in and control over their biometric identifiers. Continue reading