On November 15, 2018, the Division of Enforcement (the “Division”) of the U.S. Commodity Futures Trading Commission (“CFTC”) released its Annual Report on the Division of Enforcement (the “Report”), highlighting the enforcement division’s recent initiatives and reinforcing its focus on cooperation and self-reporting. The Report provides a succinct overview of the Division’s enforcement priorities over the last year, discusses its overall enforcement philosophy, sets out key metrics about the cases brought in the last year, and highlights its key initiatives for the coming year. While the Division’s priorities—preserving market integrity, protecting customers, promoting individual accountability, and increasing coordination with other regulators and criminal authorities—do not mark a departure from prior guidance, the Report does highlight the Division’s particular focus on individual accountability and a few target areas of enforcement. Continue Reading Virtual Currencies, Manipulation, Cooperation, and More: CFTC Enforcement Division’s 2018 Annual Report
On November 8, the Securities and Exchange Commission (“SEC”) imposed a cease-and-desist order against Zachary Coburn for causing his former company, EtherDelta, to operate as an unregistered securities exchange in violation of Section 5 of the Securities Exchange Act of 1934 (“Exchange Act”). Notably, EtherDelta, a trading platform specializing in digital assets known as Ether and ERC20 tokens, was not operated like a traditional exchange with centralized operations, as there was no ongoing, active management of the platform’s order taking and execution functions. Instead, EtherDelta was “decentralized,” in that it connected buyers and sellers through a pre-established smart contract protocol upon which all operational decisions were carried out.
In the SEC’s view, EtherDelta met Exchange Act Rule 3b-16(a)’s definition of an exchange notwithstanding the lack of ongoing centralized management of order taking and execution. Robert Cohen, the Chief of the SEC’s Cyber Unit within the Division of Enforcement stated after the order’s release, “The focus is not on the label you put on something . . . The focus is on the function . . . whether it’s decentralized or not, whether it’s on a smart contract or not, what matters is it’s an exchange.” This functional approach echoes prior SEC guidance and enforcement actions in the digital asset securities markets in emphasizing that the Commission will look to the substance and not the form of a market participants’ operations in evaluating their effective compliance with U.S. securities laws. Continue Reading SEC Brings First Enforcement Action Against a Digital Assets Trading Platform for Failure to Register as a Securities Exchange
On July 18, 2018, the U.S. Securities and Exchange Commission (the “SEC” or “Commission”) voted to approve a final rule (the “Final Rule”) amending Regulation Alternative Trading System (“Regulation ATS”) to require alternative trading systems (“ATSs”) that trade national market system (“NMS”) stocks (“NMS Stock ATSs”) to file with the SEC new Form ATS-N to begin operations or, for currently operating ATSs, to continue operations. Form ATS-N will provide for enhanced disclosures regarding the ATS’s operations and relationship with its broker-dealer operator relative to current Form ATS and will be publicly available. Importantly, unlike under the November 2015 proposal (the “Proposed Rule”), the SEC would automatically deem the Form ATS-N submissions to be effective after the review period, unless the Commission found it to be ineffective. Continue Reading SEC Reforms Regulation ATS to Improve Trading Transparency
When the U.S. Department of Justice opened an investigation against Volkswagen AG (“VW“) and its subsidiaries Audi AG (“Audi”) and Volkswagen Group of America, VW instructed an international law firm to conduct an internal investigation and to represent it (i.e., only VW) before the U.S. Department of Justice. The lawyers, including German lawyers based in the firm’s Munich office, conducted the internal investigation throughout the Volkswagen group. Audi, though not a client of the law firm, allowed the internal investigation within its sphere and accessed the internal investigation’s findings via VW. In January 2017, VW and the U.S. Department of Justice concluded a plea agreement covering 2.0 liter diesel engines designed and produced by VW and installed in VW and Audi vehicles and 3.0 liter engines designed and produced by Audi and installed in VW vehicles. Continue Reading German Federal Constitutional Court: Seizure of Documents Relating to an Internal Investigation at German Office of International Law Firm Found Not to Violate Constitutional Rights
On June 25, 2018, the Second Circuit amended its opinion in United States v. Martoma, an insider trading case that has received significant attention as a vehicle to clarify the “personal benefit” element of tippee liability in insider trading cases in the Second Circuit. While the Second Circuit again upheld the insider trading conviction of former S.A.C. Capital Advisors portfolio manager Mathew Martoma, this time it appears to have breathed life back into its “meaningfully close personal relationship” requirement for establishing insider trading liability against an individual who receives and trades on confidential information (a “tippee”). Those following the evolution of insider trading doctrine should pay close attention to lower courts’ interpretations of the “meaningfully close personal relationship” test, and what prosecutors must show to satisfy this requirement, in the wake of Martoma. Continue Reading Second Circuit Potentially Revives Newman’s “Meaningfully Close Personal Relationship” Test, Amends Martoma Decision
On May 29, 2018, the U.S. Supreme Court issued an unanimous opinion in Lagos v. United States. Lagos presented the issue of whether costs incurred during and as a result of a corporate victim’s investigation (rather than a governmental investigation) must be reimbursed by a criminal defendant under the Mandatory Victims Restitution Act (“MVRA”). Resolving a circuit split, the Court narrowly held that restitution under the MVRA “does not cover the costs of a private investigation” commenced by a corporate victim on its own initiative and not at the Government’s invitation or request.
The Court’s decision is notable for rejecting the Government’s broad interpretation of the MVRA and for recognizing the “practical fact” that such a broad interpretation would invite “significant administrative burdens.” But the opinion is also notable for what it does not decide. The Court’s opinion expressly leaves unaddressed the question of whether professional costs incurred during a private investigation performed at the Government’s request would be covered by the MVRA.
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On June 4, 2018, the U.S. Department of Justice announced that Société Générale S.A. (“Société Générale”) and its wholly-owned subsidiary, SGA Société Générale Acceptance, N.V. (“SGA”), have agreed to pay over $1 billion in total penalties to U.S. and French authorities in connection with bribe payments to Libyan officials and manipulation of the London Interbank Offered Rate (“LIBOR”). SGA pled guilty on June 5 to conspiracy to violate the U.S. Foreign Corrupt Practices Act’s (“FCPA”) anti-bribery provisions. Société Générale entered into a three-year deferred prosecution agreement relating to charges of conspiracy to violate the FCPA’s anti-bribery provisions and conspiracy to transmit false commodities reports. As the first coordinated resolution by U.S. and French authorities of a foreign bribery case, the case highlights the increasing potential legal exposure for multinationals based on violations of the FCPA and anticorruption laws in other jurisdictions. The resolution signals that French authorities will actively exercise the authority they derive from the “Sapin II” anticorruption law, as also demonstrated by the recent bribery charges in France against former Havas chairman Vincent Bolloré. The resolution also underscores the potential benefits of cooperation, remediation and joint resolutions with multiple authorities.
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One year ago, the U.S. Supreme Court ruled in Kokesh v. SEC that the U.S. Securities and Exchange Commission’s disgorgement remedy constitutes a “penalty,” and is therefore subject to the five-year statute of limitations in 28 U.S.C. § 2462. As a result, the SEC can no longer seek disgorgement of ill-gotten gains older than five years. The SEC’s Enforcement Division has traditionally relied heavily on the agency’s virtually unfettered disgorgement power in its settled and litigated cases. As expected, Kokesh has forced the division to trim its disgorgement demands in certain cases and to abandon it outright in others. To date, however, the most dire predictions of Kokesh’s impact — that it would lead to the wholesale elimination of the SEC’s disgorgement power and place strict limitations upon other types of so-called “equitable” remedies — have not come to pass. That said, many of the issues commentators raised in the immediate aftermath of Kokesh have not yet percolated up through the appellate courts, and significant uncertainty concerning its full impact remains. What is clear, however, is that, absent congressional intervention, the SEC will face challenges in obtaining the full measure of ill-gotten gains in long-running, resource-intensive investigations.
The U.S. Securities and Exchange Commission (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released its 2018 National Exam Program Examination Priorities. The 2018 priorities highlight areas of emphasis for OCIE, including cryptocurrencies, cybersecurity, anti-money laundering, and issues affecting retail investors (especially seniors and those saving for retirement). While the core areas of focus and many of the priorities for 2018 are similar to those from 2017, there is a clear shift in emphasis that we attribute to the change in leadership at the SEC. Some specific changes also likely stem from OCIE’s 2017 examination findings, recent market developments, and trends in enforcement. Continue Reading Lessons for Broker-Dealers and Investment Advisers from the SEC Office of Compliance Inspections and Examinations 2018 Priorities
On January 12, 2018, the Supreme Court granted a writ of certiorari in Raymond J. Lucia Cos., Inc. v. SEC, No. 17 130, a case raising a key constitutional issue relating to the manner in which the U.S. Securities and Exchange Commission’s (SEC or Commission) appoints its administrative law judges (ALJs). The Court will decide “[w]hether administrative law judges of the [SEC] are Officers of the United States within the meaning of the Appointments Clause.” The answer to this question matters because if SEC ALJs are “officers,” then they should have been appointed by the Commission itself instead of hired through traditional government channels—and the Commission only exercised its ALJ appointment authority in late-2017. Although the question is limited to SEC ALJs, any decision could also impact ALJs at other agencies government-wide. Continue Reading Supreme Court Grants Certiorari on the Constitutionality of SEC ALJ Appointments– What This Means for the Securities Industry