Investigations and White Collar Defense

No Dog Days of August for the SEC—A Recap of a Busy Month

Why it matters: Who says there is a government slowdown in August? Not for the SEC. August 2015 turned out to be very busy indeed for the agency, which announced charges and settlements in a number of high-profile enforcement actions. Your recap is here.

Detailed discussion:

Cyber Hackers: On August 11 the SEC announced that it had unsealed a complaint against 32 defendants for “taking part in a scheme to profit from stolen nonpublic information about corporate earnings announcements.” The complaint charged “two Ukrainian men who allegedly hacked into newswire services to obtain the information and 30 other defendants in and outside the U.S. who allegedly traded on it, generating more than $100 million in illegal profits” in over a five-year period. The SEC further charged that the two Ukrainian nationals created a “secret Web-based location to transmit the stolen data to traders in Russia, Ukraine, Malta, Cyprus, France, and three U.S. states, Georgia, New York, and Pennsylvania,” who then allegedly used the nonpublic information “in a short window of opportunity to place illicit trades in stocks, options, and other securities, sometimes purportedly funneling a portion of their illegal profits to the hackers.” In parallel actions, the U.S. Attorneys’ Offices for the District of New Jersey and the Eastern District of New York announced that they were bringing criminal charges against several of the same defendants. SEC Enforcement Director Andrew J. Ceresney noted, “Our use of innovative analytical tools to find suspicious trading patterns and expose misconduct demonstrates that no trading scheme is beyond our ability to unwind.”

Insider Trading: On August 25 the SEC announced that it had charged a former JP Morgan analyst with illegally tipping his close friend with confidential information regarding impending mergers and acquisitions of client technology companies. The tippee friend and another individual were also charged with trading on the inside information, which allegedly netted them over $600,000 in illegal profits. In a parallel action, the DOJ announced criminal charges against all three individuals.

Citigroup Global Markets: Citigroup Global Markets Inc. (CGMI) was the focus of two of the SEC enforcement actions announced in August 2015.

  • Hedge Fund Fraud: On August 17 the SEC announced that CGMI and another Citigroup affiliate, Citigroup Alternative Investments LLC (CAI), agreed to pay nearly $180 million to settle charges that they defrauded investors in the ASTA/MAT and Falcon hedge funds (which later collapsed during the financial crisis) by claiming that they were “safe, low-risk, and suitable for traditional bond investors.” The SEC’s investigation found that, from 2002 through 2007, employees at CGMI and CAI made “false and misleading representations” and failed to disclose the “very real risks” to investors in the two hedge funds, which “collectively raised nearly $3 billion in capital from approximately 4,000 investors before collapsing.” The findings further show that, even as the funds began to collapse, nearly $110 million in additional investments were accepted and the CGMI and CAI employees continued to assure investors. Without admitting or denying the SEC’s findings, CGMI and CAI consented to an SEC order finding that they had willfully violated the relevant provisions of the Securities Act of 1933 (’33 Act) and the Investment Advisers Act of 1940 and its Rules (Advisers Act and Rules). In addition to the $180 million penalty, CGMI and CAI agreed to be censured and to cease and desist from committing future violations of these laws.
  • Compliance and Surveillance Failures: On August 19 the SEC announced that CGMI agreed, without admitting or denying the SEC’s findings, to pay $15 million to settle charges that it had failed to enforce policies and procedures to “prevent and detect securities transactions that could involve the misuse of material, nonpublic information.” The SEC also charged CGMI with failing to “adopt and implement policies and procedures to prevent and detect principal transactions conducted by an affiliate.” The findings noted that, from 2002 through 2012, CGMI employees failed to adequately review thousands of trades executed by several of CGMI’s trading desks because the electronically generated reports used to review trades on a daily basis omitted several sources of information about the trades. The findings further noted that CGMI “inadvertently routed more than 467,000 transactions on behalf of advisory clients to an affiliated market maker, which then executed the transactions on a principal basis by buying or selling to the clients from its own account.” In addition to the $15 million penalty, CGMI agreed to be censured and to cease and desist from future violations of these laws. CGMI also agreed to retain a consultant to “review and recommend improvements to its trade surveillance and advisory account order handling and routing.” Enforcement Director Ceresney said in the press release that “[t]oday’s high-speed markets require that broker-dealers and investment advisers manage the convergence of technology and compliance. . . . Firms must ensure that they have devoted sufficient attention and resources to trade surveillance and other compliance systems.”

BNY Mellon: On August 18 the SEC announced that the Bank of New York Mellon Corporation (BNY Mellon) agreed to pay an aggregate of $14.8 million (consisting of $8.3 million in disgorgement, $1.5 million in prejudgment interest and a $5 million penalty) to settle charges that it violated the anti-bribery and internal controls provisions of the Foreign Corrupt Practices Act (FCPA) in 2010 and 2011 by providing “valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.” An SEC investigation found that the internships were a form of illegal payment in violation of the FCPA because “BNY Mellon did not evaluate or hire the family members through its existing, highly competitive internship programs that have stringent hiring standards and require a minimum grade point average and multiple interviews. The family members did not meet the rigorous criteria yet were hired with the knowledge and approval of senior BNY Mellon employees in order to corruptly influence foreign officials and win or retain contracts to manage and service the assets of the sovereign wealth fund.” The SEC further found that the sovereign wealth fund officials initiated the requests for the family member internships, with repeated follow-up communications to BNY Mellon regarding status, timing and details, and that BNY Mellon provided the internships because they were viewed as important to keeping the sovereign wealth fund’s business. While BNY Mellon had an FCPA compliance program in place, the findings show that there were few controls specifically relating to the hiring of customers (including foreign government officials) or their family members and that BNY Mellon thus lacked sufficient internal controls to prevent and detect the improper hiring practices. BNY Mellon sales staff and client relationship managers were found to have wide discretion in such hiring decisions, with human resources personnel not adequately trained to spot such problematic hires and no mechanism for legal or compliance review. In consenting to the SEC’s order, BNY Mellon did not admit or deny the SEC’s findings. Enforcement Director Ceresney said in the press release that “[t]he FCPA prohibits companies from improperly influencing foreign officials with ‘anything of value,’ and therefore cash payments, gifts, internships, or anything else used in corrupt attempts to win business can expose companies to an SEC enforcement action. . . . BNY Mellon deserved significant sanction for providing valuable student internships to family members of foreign officials to influence their actions.” Added Kara Brockmeyer, Chief of the Enforcement Division’s FCPA unit, “Financial services providers face unique corruption risks when seeking to win business in international markets, and we will continue to scrutinize industries that have not been vigilant about complying with the FCPA.”

Investment Technology Group: The SEC announced on August 12 that Investment Technology Group Inc. (ITG) and its affiliate AlterNet Securities Inc. (AlterNet) agreed to pay $20.3 million to settle charges that they operated a “secret trading desk and misused the confidential trading information of dark pool subscribers.” The findings show with respect to ITG that, despite advertising that it was an “agency-only” broker whose interests didn’t conflict with those of its customers, ITG operated “an undisclosed proprietary trading desk known as ‘Project Omega’ for over a year” commencing in 2010. The SEC also found that, while ITG claimed to protect the confidentiality of its dark pool subscribers’ trading information, during an eight-month period in 2010 Project Omega “accessed live feeds of order and execution information of its subscribers and used it to implement high-frequency algorithmic trading strategies, including one in which it traded against subscribers in ITG’s dark pool called POSIT.” The SEC’s order found that ITG violated the relevant provisions of the ’33 Act in connection with Project Omega “by engaging in a course of business that operated as a fraud and by failing to make disclosures about Project Omega and its proprietary trading activities.” ITG was also found to have violated “Rules 301(b)(2) and 301(b)(10) of Regulation ATS by failing to amend its Form ATS filings in light of Project Omega’s trading activities in POSIT, failing to establish adequate safeguards, and failing to implement adequate oversight procedures to protect the confidential trading information of POSIT subscribers.” ITG and AlterNet admitted to the findings contained in the SEC’s order and acknowledged that their conduct violated the federal securities laws.

Guggenheim Partners Investment Management: On August 10 the SEC announced that Guggenheim Partners Investment Management LLC (Guggenheim) agreed to, without admitting or denying the SEC’s findings, pay $20 million to settle charges that it breached its fiduciary duty by failing to disclose a $50 million loan that one of its senior executives (identified in the SEC’s order solely as “GPIM Executive”) received from an unidentified advisory client (referred to in the SEC’s order solely as “Client A”). The findings set forth in the SEC’s order show that the GPIM Executive obtained the loan in question from Client A in July 2010 to enable the GPIM Executive to fund a personal investment in a corporate acquisition led by Guggenheim’s parent company, Guggenheim Partners LLC (GP). In August 2010 Guggenheim invested some of its other advisory clients—on different terms—in two transactions in which Client A had also invested. The findings further show that the GPIM Executive and Client A discussed the two transactions, and that the GPIM Executive provided advice as to how the transactions should be structured. The SEC found that “multiple senior officials” at Guggenheim and GP knew of the loan, but none of them brought it to the attention of Guggenheim’s compliance department, nor did Guggenheim disclose the loan or the potential conflict of interest to its other clients involved in the transactions. The SEC’s order found that Guggenheim’s compliance program “was not reasonably designed to prevent violations of the federal securities laws” and that Guggenheim “failed to enforce its code of ethics, including with respect to Guggenheim employees taking dozens of unreported trips on clients’ private airplanes.” In addition to the $20 million penalty, Guggenheim consented in the SEC’s order to engage an independent compliance consultant, to be censured, and to cease and desist from committing future violations of the Advisers Act and Rules.

Click here to read the 8/11/15 SEC press release titled “SEC Charges 32 Defendants in Scheme to Trade on Hacked News Releases.”

Click here to read the 8/25/15 SEC press release titled “SEC Charges Former Investment Bank Analyst and Two Others With Insider Trading in Advance of Client Deals.”

Click here to read the 8/17/15 SEC press release titled “Citigroup Affiliates to Pay $180 Million to Settle Hedge Fund Fraud Charges.”

Click here to read the 8/19/15 SEC press release titled “SEC Charges Citigroup Global Markets for Compliance and Surveillance Failures.”

Click here to read the 8/18/15 SEC press release titled “SEC Charges BNY Mellon With FCPA Violations.”

Click here to read the 8/12/15 SEC press release titled “SEC Charges ITG With Operating Secret Trading Desk and Misusing Dark Pool Subscriber Trading Information.”

Click here to read the 8/10/15 SEC press release titled “Guggenheim Partners Investment Management LLC Settles Charges It Failed to Disclose Conflict to Clients.”

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Judge Limits FCPA “Accomplice Liability” in Hoskins

Why it matters: On August 13, 2015, in a blow to the government, a Connecticut district court judge in the case of U.S. v. Hoskins limited the government’s theory of “accomplice liability” under the Foreign Corrupt Practices Act, ruling that if the government can’t prove a non-resident foreign national to be principally liable under the statute, no theory of accomplice or conspiracy liability can be used to bring the defendant within the statute’s reach.

Detailed discussion: On August 13, 2015, District of Connecticut Judge Janet Bond Arterton issued a ruling on two pretrial motions filed by the defendant Lawrence Hoskins (Hoskins) and the government, respectively, in U.S. v. Hoskins. Judge Arterton held that unless the government can prove direct liability for a defendant under the FCPA, it cannot use an accomplice theory to establish FCPA liability. More specifically, the Court ruled that since the defendant was a non-resident foreign national, the government had to first prove that the defendant was principally liable under the statute as an “agent of a domestic concern” or that some act in furtherance of the violation took place within the U.S.

Defendant Hoskins, a U.K. citizen, was charged in 2013 with participating in an alleged bribery scheme involving Indonesian government officials for Connecticut-based Alstom Power Inc. (Alstom Power US), a subsidiary of French company Alstom Resources Management S.A. (Alstom). The alleged purpose of the bribery scheme was to secure a $118 million project to build power stations for Indonesia’s state-owned and -controlled electricity company (Taharan Project). The government alleged that, from October 2001 through August 2004, Hoskins was employed by Alstom’s U.K. subsidiary as a Senior Vice President for the Asia Region and was assigned to Alstom in France, where his responsibilities included “oversight of the hiring of consultants in connection with Alstom’s and Alstom’s subsidiaries’ efforts to obtain contracts with new customers and to retain contracts with existing customers in Asia, including the Taharan Project.”

Much legal wrangling ensued between the government and Hoskins’ defense team. Of relevance to the ruling discussed here, on July 31, 2014, Hoskins filed a motion to dismiss the Second Superseding Indictment against him in its entirety because, among other things, it “failed to allege that Mr. Hoskins, as an employee of a non-U.S. Alstom subsidiary, could have been an ‘agent of a domestic concern’ subject to liability under the FCPA.” (There were no allegations that he had engaged in any conduct within the U.S.) The Court denied that motion, holding that the Second Superseding Indictment alleged that Hoskins worked as an “agent” for Alstom Power US and that the existence of an agency relationship is a “highly factual” one for the jury to determine. The government soon thereafter filed a Third Superseding Indictment against Hoskins that amended Count One—the FCPA conspiracy count (Revised FCPA Conspiracy Count)—to replace the existing language charging Hoskins with “being a domestic concern and an employee and agent of” Alstom Power US with “accomplice liability” language charging that Hoskins “conspired by acting ‘together with’ a domestic concern” so as to violate the relevant provisions of the FCPA.

The subjects of Judge Arterton’s August 13 ruling were both (1) the motion filed by Hoskins asking the Court to dismiss the Revised FCPA Conspiracy Count on the basis that “it charges a legally invalid theory that he could be criminally liable for conspiracy to violate the [FCPA], even if the evidence does not establish that he was subject to criminal liability as a principal, by being an ‘agent’ of a ‘domestic concern’” and (2) the motion in limine filed by the government asking the Court to prevent Hoskins from arguing to the jury that the government must prove Hoskins was acting as the “agent of a domestic concern” because, the government argued, Hoskins could also be convicted under theories of accomplice liability even if direct FCPA liability was not proven. In her ruling on the motions, Judge Arterton granted “in part” Hoskins’ motion so as to “preclude Defendant’s FCPA conspiracy prosecution from being de-linked from proof that he was an agent of a domestic concern,” and she outright denied the government’s in limine motion.

The judge began her analysis by framing the issue as presenting “the question of whether a non-resident foreign national could be subject to criminal liability under the FCPA, even where he is not an agent of a domestic concern and does not commit acts while physically present in the territory of the United States, under a theory of conspiracy or aiding and abetting a violation of the FCPA by a person who is within the statute’s reach.” Judge Arterton concluded that the answer to this question was a flat “no,” ruling that “accomplice liability cannot extend to this Defendant under such circumstances.”

Judge Arterton then reviewed the “three jurisdictional bases” of the FCPA, as well as the potential statutory sources of accomplice liability, the conspiracy statute 18 U.S.C. Section 371 and the aiding and abetting statute, 18 U.S.C. Section 2, all in the context of the U.S. Supreme Court’s 1932 decision in Gebardi v. United States, and concluded that “where Congress chooses to exclude a class of individuals from liability under a statute, ‘the Executive [may not]…override the congressional intent not to prosecute’ that party by charging it with conspiring to violate a statute that it could not directly violate.” Applying the Gebardi principle to the FCPA, the judge found that “[t]he clearest indication of legislative intent is the text and structure of the FCPA, which carefully delineates the classes of people subject to liability and excludes non-resident foreign nationals where they are not agents of a domestic concern or did not take actions in furtherance of a corrupt payment within the territory of the United States.” Although she found the text of the statute to be clear, Judge Arterton also noted that the legislative history only served to confirm her conclusion that “Congress did not intend to impose accomplice liability on non-resident foreign nationals who were not subject to direct liability.”

The judge acknowledged that the Seventh Circuit had come to a “contrary result regarding the same statute” in the 1989 case of United States v. Pino-Perez, which criticized the Second Circuit’s interpretation of the Gebardi principle in its approach to reviewing legislative intent because “it ‘could be interpreted to mean that unless a specific intent to punish aiders and abettors appears in the legislative history of a criminal statute, section 2(a) does not apply to that statute; aiding and abetting violations of the statute is not a crime.’” The Seventh Circuit in Pino-Perez instead “applied a ‘more modest version of the approach’ which still looked to legislative intent but resolved ‘[d]oubt about Congress’s intentions…in favor of aider and abettor liability’ and required ‘an affirmative legislative policy to create an exemption from the ordinary rules of accessorial liability.’” Judge Arterton distinguished Pino-Perez, however, stating that “even under the Seventh Circuit’s approach, this Court would reach the same result because its conclusion does not depend on the absence of an explicit discussion in the FCPA’s legislative history of an intent to impose accomplice liability but rather multiple indicators of an affirmative legislative intent to exclude a specific group of non-resident foreign nationals from liability under the FCPA as principals or otherwise.”

The judge did not dismiss the Revised FCPA Conspiracy Count in its entirety, however, because she found that if the government is able to prove at trial that Hoskins was acting as an agent of a domestic concern and thus subject to direct liability under the FCPA, “the Gebardi principle would not preclude his criminal liability for conspiracy to violate the FCPA.” The judge went on to make clear that “[t]he Government may not argue, however, that Defendant could be liable for conspiracy even if he is not proved to [be] an agent of a domestic concern.”

On August 27, 2015, the government filed a motion to reconsider the Court’s order granting, in part, the defendant’s motion to dismiss.

Click here to read the 8/13/15 Order in United States of America v. Lawrence Hoskins, No. 3:12cr238 (JBA) (D. Conn.), and here to read the government’s 8/27/2015 Motion to Reconsider.

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In Re: Kellogg Brown & Root: The Sequel—D.C. Circuit Reaffirms Attorney-Client and Work Product Privileges in Corporate Internal Investigations

Why it matters: On August 11, 2015, for the second time within a year pursuant to a second writ of mandamus sought in a discovery dispute in the same underlying 2005 False Claims Act case and concerning the same contested documents (phew!), the D.C. Circuit found that the attorney-client and work product privileges protect documents created during corporate internal investigations overseen by in-house counsel. In so doing, the Court again vacated rulings by the district court judge that had ordered the internal investigation documents be produced (this time on the theory that the privileges, albeit applicable, had been waived), and voiced its hope that “this opinion will conclusively resolve the issue on which this case has seemed stuck as with a scratch on a broken record.”

Detailed discussion: On August 11, 2015, the D.C. Circuit in In re: Kellogg Brown & Root, Inc. granted a second writ of mandamus (Second Writ) in favor of defense contractor Kellogg Brown & Root (KBR) in connection with a long-running discovery dispute over internal investigation documents in the underlying 2005 False Claims Act (FCA) case. In granting the Second Writ, the Court vacated a series of orders by the district court that had, in effect, required the production of the documents, finding that “the outcomes arrived at by the District Court would erode the confidentiality of an internal investigation in a manner squarely contrary to the Supreme Court’s guidance in [Upjohn Co. v. United States] and our own recent prior decision in this case” (the Court here was referring to the first writ of mandamus it granted in favor of KBR on June 27, 2014 (First Writ)).

The Court began with a short statement of the facts leading up to KBR’s Second Writ petition in December 2014: In 2005 KBR employee Harry Barko (Barko) filed a qui tam complaint against KBR under the FCA alleging that KBR and certain subcontractors defrauded the government by “inflating costs and accepting kickbacks while administering military contracts in wartime Iraq.” During discovery, Barko sought documents that had been created during an internal investigation overseen by KBR’s in-house law department regarding the alleged fraud (Contested Documents). KBR argued that the Contested Documents were subject to the attorney-client privilege because the internal investigation under which they were created had been conducted for the purpose of obtaining legal advice. After an in camera review of the Contested Documents, the lower court judge ordered them to be produced, holding that the attorney-client privilege didn’t apply because, among other things, KBR failed to show that “the communication would not have been made ‘but for’ the fact that legal advice was sought” and that KBR’s investigation had been undertaken “pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice” (First Order). As the result, KBR petitioned the D.C. Circuit for the First Writ in May 2014.

In granting the First Writ on June 27, 2014 and vacating the First Order, the Court relied on the 1981 U.S. Supreme Court case of Upjohn Co. v. United States and its holding that “the attorney-client privilege protects confidential employee communications made during a business’s internal investigation led by company lawyers.” In its opinion, the Court denied KBR’s request that the case be reassigned to a different district court judge (a request resurrected and again denied in the Second Writ) and allowed instead that the judge “might entertain timely arguments for why the privilege should not attach to these documents (that is, arguments other than that they were not prepared primarily for the purposes of seeking legal advice).” Over the next few months, the district court judge did just that, issuing a series of rulings (collectively, Subsequent Orders) that had the combined effect of ordering the production of the Contested Documents, this time because KBR had “impliedly waived” the attorney-client and work product privileges with respect thereto. On December 17, 2014, KBR again petitioned the D.C. Circuit for the Second Writ, which brings us to the Court’s August 11, 2015 opinion.

The Court began its analysis with the question of whether the Second Writ should be granted given that “mandamus is an extraordinary remedy,” and stated that granting mandamus was warranted “if the challenged District Court orders constituted error” and, if so, “whether that error is the kind that justifies mandamus.” The Court found “clear and indisputable error” by the judge in both cases. The first justification given by the district court was that KBR waived the attorney-client and work product privileges via application of Federal Rule of Evidence 612—which provides for production of a document when used to refresh memory before testimony—when one of its in-house attorneys (and designated expert) admitted on the record that he had reviewed the Contested Documents in preparation for his deposition. The Court began by making clear that, in its view, Rule 612 did not apply in this case and the “fairness balancing test” the district court used to make his decision was “inappropriate” and “counter to Upjohn” because it would “allow the attorney-client privilege and work product protection covering internal investigations to be defeated routinely by a counter-party noticing a deposition on the topic of the privileged nature of the internal investigation. Upjohn teaches that ‘[a]n uncertain privilege, or one which purports to be certain but results in widely varying application by the courts, is little better than no privilege at all.’ ” The second justification given by the district court judge was that KBR waived the privileges for the Contested Documents because it put them “at issue” in connection with the KBR in-house counsel’s deposition and subsequent summary judgment motion pleadings. The Court reviewed the factual record as to this determination and found “clear error” there as well, both as to the judge’s factual analysis about what was put “at issue” and his incorrect application of the law of attorney-client privilege on the one hand and “fact” vs. “opinion” work product privilege on the other (which the Court said he got right) to the facts of the case.

After finding “clear and indisputable” error in the district court’s Subsequent Orders, the Court looked to the law of mandamus to see whether granting the Second Writ was justified, and concluded that it was, because “[j]ust as in the [First Writ], the District Court’s [Subsequent Orders] would generate ‘substantial uncertainty about the scope of the attorney-client privilege in the business setting.’… If allowed to stand, the District Court’s rulings would ring alarm bells in corporate general counsel offices throughout the country about what kinds of descriptions of investigatory and disclosure practices could be used by an adversary to defeat all claims of privilege and protection of an internal investigation. . . . These alarm bells would be well founded. If all it took to defeat the privilege and protection attaching to an internal investigation was to notice a deposition regarding the investigations (and the privilege and protection attaching them), we would expect to see such attempts to end-run these barriers to discovery in every lawsuit in which a prior internal investigation was conducted relating to the claims. Accordingly, we think it is essential to act on this Petition in order to protect our privilege waiver jurisprudence.”

Click here to read the D.C. Circuit’s 8/11/15 opinion granting the Second Writ in In Re Kellogg Brown & Root, Inc. (D.C. Cir. 2015).

Click here to read the D.C. Circuit’s 6/27/14 opinion granting the First Writ in In re Kellogg Brown & Root, Inc., 756 F.3d 754 (D.C. Cir. 2014).

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Promontory Financial Group Settles with NYDFS

Why it matters: Averting what could have been a bruising battle with wide-ranging implications in the world of financial consulting, on August 18, 2015, the New York Department of Financial Services announced that it had reached a settlement with prominent consulting firm Promontory Financial Group after a two-year investigation into regulatory compliance work the firm had conducted for Standard Chartered Bank. As part of the settlement, the consulting firm must pay a penalty of $15 million and refrain from conducting business with New York State-licensed banks for a period of six months.

Detailed discussion: On August 18, 2015, the New York Department of Financial Services (DFS) announced that it had reached a settlement with consulting firm Promontory Financial Group, LLC (Promontory) over regulatory compliance work Promontory had conducted for British financial institution Standard Chartered Bank (Standard Chartered). As part of the settlement, Promontory agreed to pay a penalty of $15 million and, in what many consider to be a draconian measure, refrain from taking new consulting engagements with New York State-licensed banks for a period of six months.

The settlement agreement contains a statement of the basic facts of the case: In 2009, Standard Chartered retained Promontory to conduct a “historical transaction review” to identify transactions facilitated by the bank that involved countries or entities subject to U.S. sanctions. Throughout 2010 and 2011, Promontory provided numerous reports and presentations about these transactions to DFS’s predecessor agency. In connection therewith, DFS initiated an investigation into Promontory on September 24, 2013. Almost two years later, on August 3, 2015, DFS issued a “Report of Investigation” which found that “Promontory exhibited a lack of independent judgment in the preparation and submission of certain reports to the Department in 2010-2011. Furthermore, certain testimony regarding key issues provided by the Promontory witnesses during the course of the Department’s investigation lacked credibility.” As a result, DFS imposed a punishment that effectively suspended Promontory from conducting business with all New York State-licensed banks “until further notice.” After much contentious back-and-forth and threats of litigation between the parties in the weeks following the Report of Investigation’s release—largely played out in the financial press—the announcement of the August 18 settlement between Promontory and DFS took many by surprise.

Under the settlement agreement, in addition to the $15 million penalty and six-month suspension referred to above, Promontory was required to admit that “in certain circumstances,” its actions with respect to Standard Chartered “did not meet the [DFS’s] current requirements for consultants performing regulatory compliance work for entities supervised by the DFS.” Moreover, Promontory acknowledged that “any report it submits to the Department must be objective and reflect its best independent judgment,” and agreed that “[i]n all pending and future matters in which it or its client submits a report to the Department, Promontory will document any changes to such a report that it makes at the suggestion of a client or the client’s counsel.”

Anthony J. Albanese, Acting Superintendent of Financial Services for the State of New York, said of the settlement that “[w]e are pleased that Promontory has agreed to resolve this matter and to work constructively with the Department moving forward to help strengthen integrity within the consulting industry. The Department will continue to aggressively investigate and address conflicts of interest at consulting firms, which is a critical part of combating misconduct and improving accountability in the financial markets.”

Click here to read the 8/18/15 DFS press release titled “Statement by Acting New York Superintendent of Financial Services Anthony J. Albanese on Agreement with Promontory Financial Group, LLC.”

Click here to read the 8/18/15 Settlement Agreement between Promontory Financial Group, LLC, and the New York Department of Financial Services.

Click here to read the “Report of Investigation of Promontory Financial Group, LLC” issued by the New York Department of Financial Services on 8/3/15.

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U.S. v. Cosme—Second Circuit Holds That, Absent a Warrant or Probable Cause, “Exigent Circumstances” Don’t Support Indefinite Seizure of Defendant’s Property

Why it matters: On August 10, 2015, the Second Circuit vacated the district court’s ruling in U.S. v. Cosme and remanded the case so that the district court could determine whether there had been probable cause to justify the seizure upon arrest of the assets (including vehicles, cash and bank accounts) of a defendant who had been accused of wire fraud. The Court specifically held with respect to the defendant’s bank accounts that, in the absence of a warrant or a judicial determination of probable cause in earlier stages of the case, the government’s claimed “exigent circumstances” exception was not a sufficient reason to indefinitely seize the accounts.

Detailed discussion: On August 10, 2015, the Second Circuit in U.S. v. Cosme held that, absent a warrant or a judicial determination of probable cause (both of which the Court found to be lacking in this case), the government could not rely on “exigent circumstances” to justify the indefinite seizure of the property of defendant William R. Cosme (“Cosme”), who had been arrested on December 19, 2012, on charges of wire fraud.

The criminal complaint filed against Cosme charged him with defrauding a school in Korea out of approximately $5.5 million. On the day Cosme was arrested, the government seized several assets at his home, including expensive sports cars and cash, and sent letters to financial institutions where he had accounts requesting that they freeze the accounts because (1) there was “probable cause” to believe the accounts contained the proceeds of unlawful activity and were thus subject to seizure under the relevant provisions of the civil forfeiture statute and (2) while the government was “in the process of obtaining a seizure warrant… exigent circumstances require that the [accounts] be frozen immediately to prevent [them] from being dissipated.” In fact, the government never obtained the seizure warrant referred to in the letter. Cosme was indicted on January 17, 2013, in the Southern District of New York and, under the “Forfeiture Allegation” section, the indictment stated that Cosme “shall forfeit,” in addition to the vehicles and cash seized at his home, the funds held in Cosme’s various frozen bank accounts. Of particular importance to the Second Circuit on appeal, the government later conceded that these forfeiture allegations were “merely notice provisions that were not subject to a grand jury vote.” On August 6, 2013, the district court granted a pretrial restraining order (“Restraining Order”) which permitted the government to “maintain custody” of the seized assets “through the conclusion of the pending criminal case” pursuant to the relevant provisions of the criminal forfeiture statute, stating that the property was “already in the lawful custody of the Government” (the Restraining Order also preserved the government’s right to later pursue civil forfeiture). Numerous attorneys for Cosme and lots of legal wrangling later (mostly about freeing up funds from the seized accounts for his defense), Cosme’s eighth attorney filed a motion on February 14, 2014, to vacate the Restraining Order, arguing, among other things, that “the seizure of the assets was unlawful pursuant to the Fourth Amendment because the government had not obtained a warrant and exigent circumstances did not justify the seizure.” On April 21, 2014, the district court denied without hearing Cosme’s motion, ruling that “‘[t]he Government made a sufficient showing of probable cause by virtue of the Indictment, which included the forfeiture allegation.”

Cosme appealed to the Second Circuit, and on August 10, 2015, the Court vacated the district court’s ruling, holding that “[a]fter examining the record, we agree that no proper finding of probable cause has occurred in this case and, thus, we must remand the case to the district court to determine whether probable cause supports the forfeitability of the restrained property.” The Court noted that, between Cosme’s arrest and indictment, the government had changed the basis on which it was seeking forfeiture of Cosme’s assets, from civil to criminal, and although it found “no inherent problem” with this, “this tactic cannot serve as a tool for the government to seize assets without ever showing probable cause.” Upon examination of the record, the Court further noted that the district court’s April 21, 2014, opinion denying Cosme’s motion to vacate the Restraining Order appeared to base its denial on the mistaken belief that the grand jury had voted on the forfeiture allegations in the indictment (thus establishing probable cause). As this was not the case, the Court held that “the district court was required to make its own probable cause finding where none had yet been made in the case.”

The Court specifically agreed that the government’s “seizure and continued possession of [Cosme’s] bank accounts violates the Fourth Amendment” and that the government’s “exigent circumstances” exception “does not immunize the ‘lengthy, warrantless seizure’ ” of the accounts because the exception “only permits a seizure to continue for as long as reasonably necessary to secure a warrant, as the government promised but then failed to do here.” The Court continued, “[w]e are troubled that, in the absence of a warrant, the government retained custody of Cosme’s bank accounts for over two years.” The Court denied Cosme’s request for immediate return of his unlawfully restrained assets, however, finding that, even if assets are initially seized illegally, they can still be subject to forfeiture upon a retroactive finding by the district court on remand that there was probable cause to seize them. Thus, “[i]f the district court determines that probable cause existed at the time of seizure to support forfeitability, Cosme’s request for the return of his property must be denied even though the continuing seizure was illegal. . . . If, on the other hand, the district court determines that no such probable cause existed, then and only then would Cosme be able to seek a vacatur of the restraining order and the return of his restrained assets.”

Click here to read the Second Circuit’s 8/10/15 opinion in United States of America v. William R. Cosme, No. 14-1625-CR (2d Cir. 2015).

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Keeping an Eye Out—Updates and Briefly Noted

FinCen Proposal to Extend AML Regulations to Investment Advisers: On August 25, 2015, FinCen proposed regulations that, if adopted, would (1) require investment advisers to establish anti-money laundering programs and report suspicious activity to FinCEN pursuant to the Bank Secrecy Act and (2) include investment advisers in the general definition of “financial institution,” which, among other things, would require them to file currency transaction reports and keep records relating to the transmittal of funds. The proposal is currently out for comment.

U.S. v. Salman: On 8/20/15, the Ninth Circuit sitting en banc denied a rehearing of the panel’s 7/6/15 decision to uphold the defendant’s insider trading conviction. Defendant had sought to get his conviction overturned based on the Second Circuit’s decision in U.S. v. Newman, which he was urging the Ninth Circuit to adopt (see our discussion of the Ninth Circuit’s Salman decision in our August newsletter under “Are the Circuits A-Splitting? The Ninth Circuit Declines to Follow the Second Circuit’s Insider Trading Decision in U.S. v. Newman”).

Challenges to SEC Administrative Proceedings: Updates to cases reported on in our April 2015 newsletter under “Wherefore Art Thou Due Process? SEC Administrative Hearings Under Attack” and our June 2015 newsletter under “Wherefore Art Thou Due Process – The Sequel.” We are sensing a potential circuit split in the works:

  • Bebo v. SEC: On 8/24/15, the Seventh Circuit upheld an Eastern District of Wisconsin judge’s decision to dismiss the case for lack of subject matter jurisdiction, holding that Bebo must first exhaust her statutory-mandated administrative remedies through the SEC’s in-house proceedings prior to seeking redress in federal court.
  • Duka v. SEC: On 8/12/15, Southern District of New York Judge Richard M. Berman enjoined the SEC’s administrative proceedings as “likely unconstitutional.”
  • Hill v. SEC: On 8/4/15, the SEC appealed Hill to the Eleventh Circuit. Northern District of Georgia Judge Leigh Martin May was the first federal judge to enjoin the SEC’s administrative proceedings as “likely unconstitutional” on 6/8/15.
  • Gray Financial Group, Inc. v. SEC: On 8/4/15, Judge May followed her decision in Hill and again enjoined the SEC’s administrative proceedings as “likely unconstitutional.” Given its actions in Hill, an SEC appeal to the Eleventh Circuit is likely.

FCPA Highlights:

  • Avon Products and lawyers representing shareholders filed a motion in the Southern District of New York seeking approval of a $62 million settlement in a securities fraud lawsuit which alleged that Avon and two former executives failed to disclose problems with the company’s FCPA compliance program in China (8/18/15).
  • The DOJ asked several European countries to freeze an additional $1 billion in assets in the widening Uzbek telecom scandal. The DOJ alleges that Russian and Swedish companies paid bribes to the eldest daughter of Uzbekistan’s president, Gulnara Karimova (under house arrest since 9/14), in exchange for access to the Uzbek telecom market (8/13/15). As reported in our August 2015 newsletter under “Keeping an Eye Out – Updates and Briefly Noted,” on 7/9/15 U.S. District Court Judge Andrew Carter allowed the DOJ to seize $300 million in funds linked to the scandal that were being held by Bank of New York Mellon in Ireland, Luxembourg and Belgium.
  • The SEC announced that Vicente E. Garcia, former executive at worldwide software manufacturer SAP, Inc., agreed to settle charges that he had violated the FCPA by paying $145,000 in bribes to Panamanian government officials to procure software license sales. The DOJ simultaneously announced a parallel criminal action against Garcia (8/12/15).
  • Atlanta-based NCR Corp. disclosed that the SEC had declined to commence an enforcement action following a three-year whistleblower-initiated FCPA investigation (8/4/15).
  • The DOJ announced that it is hiring an FCPA compliance attorney to review putative corporate defendants’ compliance programs and help determine whether the DOJ should nevertheless prosecute such companies for FCPA violations (7/30/15).
  • Texas-based Flowserve Corporation reported in a filing that it received a subpoena from the SEC in connection with possible FCPA violations (7/30/15).

OFAC Updates:

  • OFAC announced that Zurich-based bank UBS AG agreed to pay approximately $1.7 million to settle potential civil liability for processing 222 transactions from 2008 to 2013 that were in violation of U.S. antiterrorism sanctions laws. The violations, which OFAC deemed “non-egregious,” were due to compliance department error (8/27/15).
  • Schlumberger: OFAC issued a Finding of Violation to Schlumberger Oilfield Holdings, Ltd., for violations of Iran and Sudan sanctions but declined to impose additional penalties over the $232.7 million previously imposed in March (8/7/15) (reported on in our April newsletter under “Is OFAC the New Black? Schlumberger and PayPal—The Rise in the Enforcement of Sanctions Penalties”).

SEC Enforcement Action Against Wells Fargo Compliance Officer Dismissed: SEC administrative law judge Cameron Elliot dismissed an SEC enforcement action against a Wells Fargo compliance officer who had allegedly altered a document before producing it to the SEC in an investigation (Administrative Proceeding In the Matter of Judy K. Wolf brought in 10/14). ALJ Elliot ruled that the dismissal was justified because Wolf did not act alone and the case was indicative of widespread systematic problems at Wells Fargo that could not be “pinned” on any one individual (8/5/15).

Swiss Bank Program (8/27/15, 8/20/15, 8/7/15 and 8/3/15): Seven more Swiss banks reached resolution with the DOJ under its Swiss Bank Program (first reported on in our April newsletter under “First Swiss Bank Reaches Resolution with the DOJ Under Its Swiss Bank Program”).

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