As discussed in Cleary Gottlieb’s December 21, 2018 Alert Memorandum, on December 18, 2018, the U.S. Court of Appeals for the D.C. Circuit issued an important ruling in In re Grand Jury Subpoena, holding, inter alia, that foreign state-owned corporations are subject to criminal jurisdiction in the United States and upholding Special Counsel Mueller’s authority to serve and enforce a grand jury subpoena on a sovereign entity.

The foreign state-owned corporation subsequently sought a stay of enforcement of the contempt order from the Supreme Court, which Chief Justice Roberts granted.  This Alert Memorandum focuses on two key developments that took place on January 8, 2019.  First, the Supreme Court, voting as a whole, lifted the administrative stay previously entered by Chief Justice Roberts.  Second, the D.C. Circuit Court issued its full, albeit partially redacted, opinion, which provides additional reasoning for the panel’s decision, seeks to reconcile any purported conflict with rulings issued by other Circuit Courts on the legal question at hand, and focuses on the state owned nature of the entity involved.

Please click here to read the full Alert Memorandum.

On January 11, the Second Circuit Court of Appeals denied the appeal of Rajat Gupta, who was seeking to undo his insider trading conviction.  Relying on the Second Circuit’s decision in United States v. Newman, Gupta argued that—to satisfy the requirement that Gupta personally benefit from tipping inside information—the Government must show “a quid pro quo – in which [Gupta] receive[d] an ‘objective, consequential . . . gain of a pecuniary or similarly valuable nature.’”[1]  In other words—intangible benefits should not, standing alone, constitute a personal benefit sufficient to uphold a criminal conviction.  The Second Circuit rejected this argument, finding that the Supreme Court’s decisions in Dirks v. SEC and Salman v. United States foreclosed such a narrow definition of “benefit,” opting instead for a test that looked at “varying sets of circumstances”—including those that involve indirect, intangible, and nonquantifiable gains, such as an anticipated quid quo pro that can be inferred from an ongoing, business relationship—to satisfy the “personal benefit” test.[2]  This case is the latest in a line of decisions—in the Supreme Court, as well as the Second and Ninth Circuits—to reject defendants’ arguments for a narrow definition of the “personal benefit” element of insider trading law based on Newman. Continue Reading Second Circuit Denies Gupta Appeal of Insider Trading Conviction—Continuing to Give Broad Meaning to “Personal Benefit” Requirement

On December 26, 2018, the SEC announced settled charges against ADT Inc. after finding that ADT, in two earnings releases, gave undue emphasis to non-GAAP adjusted EBITDA figures because they identified the relevant GAAP measures only later and much less prominently.

Without admitting or denying the SEC’s factual or legal claims, ADT agreed to an administrative settlement finding violations of Section 13(a) of the Securities Exchange Act of 1934 and Rule 13a-11 thereunder, relating to the requirements of Item 10(e) of Regulation S-K that an issuer present “with equal or greater prominence . . . the most directly comparable financial . . . measures” calculated under GAAP when it includes non-GAAP financial measures in filings and certain other reports to the Commission.

This is just the second enforcement action concerning non-GAAP disclosures that the SEC has brought against an issuer in the two-and-a-half years since the issuance of Staff guidance on non-GAAP disclosure requirements, and it is the first during SEC Chair Jay Clayton’s tenure.  It also is the first action related to non-GAAP disclosures finding a violation of only Section 13(a) of the Exchange Act without an accompanying finding that the disclosure in question constituted a material misstatement or omission.

Please click here to read the full alert memorandum.

On December 19, 2018, the United States Attorney’s Office for the Southern District of New York (the “USAO”) announced criminal charges against and entered into a deferred prosecution agreement (the “DPA”) with Central States Capital Markets, LLC (“CSCM”), a Kansas-based broker-dealer, under the Bank Secrecy Act (the “BSA”).[1]  The charge was for a felony violation of the BSA, which consisted of CSCM’s willful failure to file a suspicious activity report (“SAR”) regarding the illegal activities of one of its customers.  According to the USAO, this represents the first ever criminal BSA charge brought against a United States broker-dealer.  This case is another milestone in the recent trend towards stricter enforcement of the anti-money laundering (“AML”) regulatory requirements applicable to broker-dealers. Continue Reading First Ever Criminal Bank Secrecy Act Charge Brought Against U.S. Broker-Dealer

On December 20, 2018, the Financial Industry Regulatory Authority (“FINRA”) released a Report on Selected Cybersecurity Practices for broker-dealer firms.  This report reflects FINRA’s current perspective on the cybersecurity threat landscape based on observations from its examinations of securities firms.  Below we discuss the report’s key observations and contextualize these insights for members of the financial industry. Continue Reading FINRA Provides Updated Cybersecurity Guidance to Broker-Dealer Firms

On December 20, 2018, the U.S. Securities and Exchange Commission (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released its 2019 Examination Priorities.  The six themes for this year’s priorities are:  retail investors (including seniors and those saving for retirement), compliance and risk in registrants responsible for critical market infrastructure (clearing agencies, transfer agents, national securities exchanges and Regulation SCI entities), oversight of the Financial Industry Regulatory Authority and Municipal Securities Rulemaking Board, digital assets, cybersecurity and anti-money laundering.  The only new theme for 2019 compared to 2018 is digital assets, which we take to imply a plan to more closely—and substantively—regulate investment advisers and broker-dealers involved with this asset class.  The 2019 priorities also more explicitly than the 2018 priorities describe specific practices that OCIE found concerning in examinations of those entities, many of which involved failure to adequately safeguard client assets and the adequacy of disclosures of conflicts of interest.  We expect to see a corresponding focus in Enforcement Division investigations and cases on these issues as a result. Continue Reading Lessons from the SEC Office of Compliance Inspections and Examinations’ 2019 Priorities

On December 18, 2018, the District of Columbia Circuit Court of Appeals issued an important ruling in In re Grand Jury Subpoena, holding that foreign state-owned corporations are subject to criminal jurisdiction in the United States and that the exceptions to sovereign immunity set forth in the Foreign Sovereign Immunities Act (the “FSIA”)[1] apply to criminal as well as to civil cases.[2]  The court also rejected the foreign sovereign entity’s argument that it should be excused from complying with a subpoena because doing so would violate the law of the respondent’s country of incorporation.  Although In re Grand Jury Subpoena arises in the context of enforcing a grand jury subpoena, its language and holding could potentially be extended to criminal prosecutions of a foreign state or state-owned entity.

Continue Reading D.C. Circuit Rules in Special Counsel Mueller Investigation That State-Owned Corporations Are Subject to Criminal Jurisdiction in the United States

Continuing its efforts to engage with FinTech innovators and market participants in the adoption of new technologies, the Commodity Futures Trading Commission (“CFTC”) and its LabCFTC[1] released a Primer on Smart Contracts (the “Primer”) on November 27. The Commission focused its Primer on (1) detailing the technical aspects of smart contract technology; (2) examining potential benefits and risks connected to their widespread adoption; and (3) the CFTC’s role in regulating the adoption of the technology within those markets under its jurisdiction.

Continue Reading The CFTC Releases Primer on Smart Contract Use in Financial Markets

On November 30, 2018, Judge Richard Sullivan issued a long-anticipated decision in favor of the defendants in Commodity Futures Trading Commission v. Wilson, No. 13 Civ. 7884, following a four-day bench trial in December 2016 before the U.S. District Court for the Southern District of New York.  The court held that the CFTC failed to meet its burden of proof in establishing claims of market manipulation or attempted market manipulation under Sections 6(c) and 9(a)(2) of the Commodity Exchange Act (“CEA”) based on trading by Donald R. Wilson and his firm DRW Investments LLC (“DRW”) of a particular exchange-traded interest rate swap futures contract (the “IDEX Three-Month IRS Contract”).  The court found that although the defendants’ trading affected the price of the IDEX Three-Month IRS Contract in a way that benefitted defendants’ existing positions, there was no evidence that the resulting price was “artificial,” which the Second Circuit has held is a necessary element in establishing market manipulation under the CEA.

The Wilson decision is significant because it rejected the CFTC’s argument that the artificiality element could be satisfied merely by showing that a market participant structured bids in a manner intended to affect settlement prices.  Because the defendants had a “legitimate economic rationale” for the bids they submitted, the court held that defendants’ intent to trade in a manner that affected settlement prices does not itself create liability for market manipulation under the CEA.

Please click here to read the full alert memorandum.

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