Supreme Court: What Constitutes an Insider Trading “Personal Benefit”
Why it matters: On October 5, 2016, the Supreme Court heard oral argument in Salman v. United States, where the central issue was what the government needs to prove to establish a “personal benefit” to the insider tipper—one of the elements of insider trading liability. The government, relying on the 1983 Supreme Court case of Dirks v. SEC, argued that a personal benefit need not be something tangible and can be inferred if the insider and the tippee share a close family relationship and the information is relayed as a “gift.” By contrast, the petitioner argued that the personal benefit received by the insider must be financial or something of similar value that is “tangible” and “concrete,” as the Second Circuit held in 2014 in United States v. Newman. The Justices will now decide. Based on the tenor of their questioning, while the Justices may add more guidance to the “personal benefit” test set forth in Dirks, they will most likely uphold Salman’s conviction and don’t appear inclined to make any major changes to the insider trading laws that have been in effect for over three decades.
Detailed discussion: On October 5, 2016, the Supreme Court heard oral argument in Salman v. United States on the issue of what the government needs to prove to establish a “personal benefit” to the insider tipper. This was the first time that the Supreme Court had agreed to hear a case on insider trading liability since its seminal 1983 decision in Dirks v. SEC.
Review: Salman, Newman and Dirks
We covered the Ninth Circuit’s July 6, 2015, opinion in this case in our August 2015 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.” To briefly review the facts and procedural history of the case, Salman involved a complicated insider trading scheme involving members of petitioner Bassam Yacoub Salman’s extended family. At trial, the government introduced facts showing that Salman had received insider information involving upcoming mergers and acquisitions of an international investment bank’s clients from his brother-in-law (via marriage to his sister) Michael Kara (Kara Brother #2). Kara Brother #2 had learned the information from his brother, Mahar Kara (Kara Brother #1), who worked in the bank’s healthcare investment banking group. Salman then shared the insider information he learned from Kara Brother #2 with the husband of his wife’s sister, with whom he split the illicit profits. Of particular relevance on appeal was evidence presented by the government at trial that showed that Salman was “well aware” both that Kara Brother #1 was the source of the insider information and that Kara Brother #1 and Kara Brother #2 shared an extremely “close fraternal relationship” that was “mutually beneficial.”
In the appeals period following Salman’s conviction, the Second Circuit decided Newman, which vacated the insider trading convictions of two downstream tippees on the grounds that the government failed to prove that the tippees knew whether the original insider tippers derived a “tangible personal benefit” from disclosing the information. After the Second Circuit sitting en banc denied the government’s petition for rehearing in Newman in April 2015 (the Supreme Court subsequently denied certiorari in Newman in October 2015), Salman appealed his conviction to the Ninth Circuit. Salman argued that, applying the Second Circuit’s Newman standard to his case (which Salman urged the Ninth Circuit to adopt), the information the government presented was insufficient because it failed to show that Kara Brother #1 disclosed the information to Kara Brother #2 in exchange for a tangible personal benefit; that is, a financial benefit, and that Salman knew of such benefit.
On July 6, 2015, the Ninth Circuit upheld Salman’s conviction. The Court pointed to the holding in Dirks that, to establish a personal benefit to the insider tipper—one of the elements of insider trading liability—“the test is whether the insider personally will benefit, directly or indirectly, from his disclosure … for in that case the insider is breaching his fiduciary duty to the company’s shareholders not to exploit company information for his personal benefit.” The Court further noted that, under Dirks, “a tippee is equally liable if ‘the tippee knows or should know that there has been [such] a breach,’ … i.e., knows of the personal benefit.” Of particular importance to the Court was the language in Dirks that gave objective examples of when a “personal benefit” to the insider can be inferred, one of which was “when an insider makes a gift of confidential information to a trading relative or friend.” The Court found that “this last-quoted holding of Dirks governs the case” because Kara Brother #1’s disclosure of confidential information to Kara Brother #2, “knowing that he intended to trade on it, was precisely the ‘gift of confidential information to a trading relative’ that Dirks envisioned.” Thus, “there can be no question that, under Dirks, the evidence was sufficient for the jury to find that [Kara Brother #1] disclosed the information in breach of his fiduciary duties and that Salman knew as much.”
The Court declined to follow the Second Circuit’s standard in Newman because “[d]oing so would require us to depart from the clear holding of Dirks that the element of breach of fiduciary duty is met where an ‘insider makes a gift of confidential information to a trading relative or friend.’ ” The Ninth Circuit concluded that, if Salman’s reading of Newman were followed and the evidence against Salman was found to be insufficient, “then a corporate insider or other person in possession of confidential and proprietary information would be free to disclose that information to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return. Proof that the insider disclosed material nonpublic information with the intent to benefit a trading relative or friend is sufficient to establish breach of the fiduciary duty element of insider trading.”
The Supreme Court granted certiorari in Salman to consider the following questions presented: “Whether the personal benefit to the insider that is necessary to establish insider trading under Dirks v. SEC requires proof of ‘an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,’ as the Second Circuit held in U.S. v. Newman, or whether it is enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case.”
The oral argument focused on the issues raised by the questions presented—i.e., whether Kara Brother #1 received a “personal benefit” from giving the information to Kara Brother #2—and touched only briefly on petitioner Salman’s downstream insider trading liability (see here to read the oral argument transcript).
Ms. Shapiro, counsel for Salman, began by arguing that, as the Court has done in cases involving public corruption, such as Skilling and McDonald, criminal statutes need to be construed narrowly to “avoid serious separation of powers and vagueness problems.” Shapiro further argued that, because there is no statute that defines the elements of the crime of insider trading and Congress has not chosen to define it, the Court should limit the insider trading crime to its “core,” which in this case is “trading by the insider or its functional equivalent … where the insider tips another person in exchange for a financial benefit” (Shapiro later clarified that, while the benefit did not necessarily have to be financial, such as cash, it should be something “concrete” or “tangible”). Thus, Shapiro argued, as Kara Brother #1 did not receive any pecuniary or other concrete benefit from Kara Brother #2 in exchange for the information, Kara Brother #1’s actions would not satisfy the “personal benefit” test.
Here, Shapiro received sharp questioning by the Justices as to why, as held in Dirks, the close family relationship between Kara Brother #1 and Kara Brother #2 wasn’t sufficient to establish personal advantage, whether or not Kara Brother #1 received a financial or other tangible benefit. For example, to Shapiro’s argument that, at most, Kara Brother #1 got the “scant” benefit of getting his brother, who was pestering him, “off his back” by providing the information, Justice Stephen Breyer asked, “[w]hy do you say ‘scant’? ... the question … is when you use [the confidential information] to benefit a close family member is that, in effect, benefiting yourself.” Added Justice Ruth Bader Ginsburg at a later point, “[a]nd why isn’t it a benefit, if you said the brother was pestering him so now his brother is happy? He’s no longer being pestered. Isn’t that a benefit?”
There then ensued a lengthy back-and-forth about the nature of gift-giving and whether the particular language in Dirks regarding the inference of personal benefit from an insider’s “gift of confidential information to a trading relative or friend” was, as the Justices’ questioning seemed to support, a part of the personal benefit test for insider trading established in that case, or, as Shapiro argued, merely dicta and not controlling. To Shapiro’s suggestion that including something so non-concrete or intangible as a “personal benefit” would serve to expand insider trading liability rather than narrowly construe it, Justice Elena Kagan responded, “Ms. Shapiro, here is not a question of expanding it further. You’re asking us to cut back significantly from something that we said several decades ago [in Dirks], something that Congress has shown no indication that it’s unhappy with, and in a context in which, I mean, obviously the integrity of the markets are a very important thing for this country. And you’re asking us essentially to change the rules in a way that threatens that integrity.”
During questioning of counsel for the government, Deputy Solicitor General Michael R. Dreeben, the Justices posed numerous hypotheticals in their attempts to ascertain where to draw the line between, on one end of the spectrum, a clearly criminal “gift” of confidential inside information to family and friends with the knowledge that they will trade on it and, on the other end of the spectrum, non-intentional or accidental “social interchange” disclosures with no anticipation of trading which would not be considered “gifts” under Dirks. Here, Chief Justice John Roberts gave the hypothetical of telling your friends you couldn’t go away with them for the weekend because you were working on a “Google thing,” adding that “[i]t’s hazy -- it’s kind of a hazy line to draw, isn’t it, between something that you characterize as a gift and something that would be characterized as social interaction, isn’t it?” Dreeben responded that it wasn’t hazy but rather was based on the facts of each particular case, and in any event, under Dirks, the burden was on the government to prove that the information was given to a third party in breach of a fiduciary duty, in exchange for a personal benefit, and with knowledge that the information would be traded. Dreeben argued that this should be the test, and that the identity of the third party the information was actually given to—friend, family, etc.—would be just one factor in that analysis. Dreeben was then subjected to lengthy questioning about the elements of his proposed test, i.e., what would constitute a “personal advantage” in various hypotheticals and what was needed to prove that the insider “knew” that the tippee would trade on the information. Dreeben concluded his argument by urging the Justices to, at a minimum, affirm Dirks and retain the “gift of confidential information to trading friends and family” language as a part of the test for proving that the insider tipper received a “personal benefit.”
During the questioning of Dreeben, Justice Ginsburg brought the questioning back to petitioner Salman himself, who was asking the Court to overturn his insider trading conviction: “[T]he defendant here is not the insider, and … we’ve been talking about the two brothers. How far down the line do you go? Because Salman is not -- he’s a relative by marriage, but … he gets the tip from the first tippee … how long does it continue?” Dreeben responded that the only limitation on the government charging in “tipping chains” is a “limitation of proof,” stating that “[w]e need to be able to show that the tippee, perhaps at the end of the chain will be more difficult than the ones earlier in the chain, had knowledge that the information originated in a circumstance in which there was a breach of fiduciary duty for personal benefit.”
A decision in Salman is expected in spring 2017. Reading the tea leaves based on the tone and tenor of the questioning during oral argument, the Justices may seek to establish a compromise “personal benefit” test between the extremes of Dirks and Newman, but will most likely affirm Salman’s conviction and not make any major changes to insider trading law that has developed over the last three decades since Dirks was decided. We will keep an eye out for the Salman decision and report back.
Other recent insider trading sentences, convictions and charges: In addition to the Salman oral argument, there has been a plethora of government announcements involving insider trading cases in the news of late. Read on for a roundup of those that caught our eye.
- On September 22, 2016, the SEC announced that judgment had been entered by a Southern District of New York court against Sheren Tsai and her boyfriend, Colin Whelehan, who allegedly tipped Tsai with confidential information relating to security company ADT. The SEC alleged that Whelehan, who was then a Senior Associate at an investment advisory firm, provided Tsai (employed at a different investment advisory firm) with inside information that he obtained in the course of his employment regarding an impending acquisition of ADT by funds managed by affiliates of Apollo Global Management, LLC. The SEC alleged that, after receiving this nonpublic information from Whelehan, Tsai purchased 1,500 shares of ADT stock in January 2016 and also recommended that a close relative purchase ADT stock, which resulted in Tsai and her close relative generating illicit profits of approximately $19,500.00 and $4,414.41, respectively, when the ADT acquisition closed in February 2016. As part of the judgment, Whelehan agreed to pay $23,914.41 in civil penalties, and Tsai agreed to disgorge $23,914.41 in illicit profits plus $521.08 in prejudgment interest, and pay $23,914.41 in civil penalties.
- On September 21, 2016, the SEC announced that final judgment had been entered by a Northern District of California court against two men, Saleem Khan and Roshanlal Chaganlal, involved in a 2014 insider trading scheme in connection with Ross Stores. The SEC’s action charged Khan and Chaganlal with insider trading in Ross Stores securities based on nonpublic sales information leaked by Chaganlal while he was a Ross Stores employee. Two other defendants who were Khan’s work colleagues settled the SEC’s charges against them in September 2015. As part of the final judgment, Khan was ordered to pay over $16 million in disgorgement, penalties and prejudgment interest and Chaganlal was ordered to pay almost $400,000 in disgorgement, penalties and prejudgment interest.
- On September 21, 2016, the SEC announced that it had charged hedge fund manager Leon G. Cooperman and his firm Omega Advisors with insider trading based on material nonpublic information Cooperman learned in confidence from a corporate executive. The SEC alleged that Cooperman generated substantial illicit profits by purchasing securities in Atlas Pipeline Partners (APL) in advance of the sale of its natural gas processing facility in Elk City, Oklahoma. The SEC alleged that Cooperman used his status as one of APL’s largest shareholders to gain access to the executive and obtain confidential details about the sale. According to the SEC, Cooperman and Omega Advisors allegedly accumulated APL securities despite explicitly agreeing not to use the material nonpublic information for trading purposes, and when APL publicly announced the asset sale its stock price jumped more than 31%.
- On September 14, 2016, the U.S. Attorney’s Office for the District of New Jersey announced that Steven Metro, a former managing clerk for Simpson, Thatcher & Bartlett LLP law firm, was sentenced to 46 months in prison and a $10,000 fine for stealing sensitive, confidential information for use in a five-year insider trader scheme that yielded net profits of more than $5.6 million. Metro had previously pled guilty to the charges. Metro admitted to stealing material nonpublic information from 2009 to 2013 from the law firm related to corporate transactions, such as mergers and acquisitions or tender offers, in which the firm represented a party or financial advisor to the transaction. Metro admitted that he stole the inside information by scouring the firm’s computer system for client names and the keywords “merger agreement,” “bid letter,” “engagement letter,” and “due diligence.” Metro would then pass the information on to a friend, Frank Tamayo, who in turn passed it on to another friend, Vladimir Eydelman (who knew Metro was the source) to purchase the securities using the inside information. The three men all benefited from and shared in the illicit profits amounting to $5.6 million. Both Tamayo and Eydelman also previously pled guilty to the charges.
- On August 17, 2016, the U.S. Attorney’s Office for the Southern District of New York announced that, after a two-week jury trial, Sean Stewart, a former managing director in the healthcare division of two unnamed Manhattan investment advisory firms (news reports identified them as Perella Weinberg Partners and JP Morgan Chase, respectively), was convicted of insider trading when a jury found that he tipped his father (who he knew was having financial difficulties) with nonpublic information relating to a number of mergers and acquisitions, which resulted in $1 million in illegal profits. Stewart is scheduled to be sentenced in February 2017. This was the first insider trading conviction obtained by SDNY U.S. Attorney Preet Bahara since the Second Circuit’s 2014 decision in Newman.
- On August 11, 2016, the SEC announced charges against Paul T. Rampoldi, a former stockbroker and his friend William Scott Blythe III for participating in an insider trading scheme through which they gained $90,000 in illicit profits in advance of two major announcements out of a pharmaceutical company. The SEC alleged that Rampoldi coordinated the insider trading with two other brokers at his firm as well as a then-IT executive at Ardea Biosciences. The SEC alleged that the Ardea employee tipped one of the brokers ahead of the company’s announcement of an agreement to license a cancer drug and later tipped him in advance of its acquisition by AstraZeneca PLC. The SEC charged the other two brokers and the Ardea employee in June 2015.
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Spotlight on the False Claims Act
Why it matters: Since our last newsletter, the DOJ announced numerous False Claims Act resolutions, especially in the healthcare field. The largest by far of these involved a “major U.S. hospital chain” and allegations of fraud on the government, and criminal violations of the Anti-Kickback Statute. Read on for a review of this and other government resolutions of note from the past month, as well as a discussion of recent court activity—one involving the filing of a complaint by the SEC and the other an Eighth Circuit decision—that touched upon interesting issues in the False Claims Act arena.
Detailed discussion: Below, we discuss significant government resolutions and court activity involving the False Claims Act (FCA) and related statutes that were announced in the weeks since our last newsletter.
Healthcare resolutions of note
The most significant resolution in the past month was announced by the DOJ on October 3, 2016. There, the DOJ said that Tenet Healthcare Corporation (Tenet), described as a “major U.S. hospital chain,” and two of its indirect Atlanta-based subsidiaries, Atlanta Medical Center Inc. (AMC) and North Fulton Medical Center Inc. (NFMC), agreed to pay approximately $513 million to resolve criminal charges and civil claims, respectively, that they (1) violated the federal Anti-Kickback Statute (AKS) by making illegal payments to doctors in exchange for patient referrals, and (2) defrauded the government when they submitted claims to government healthcare programs for reimbursement of the cost of medical services provided to the illegally referred patients.
According to the allegations in the criminal information and civil FCA litigation filed in the case, AMC, NFMC (which up until April 2016 operated acute-care hospitals in and around Atlanta) and two other Tenet facilities they operated paid bribes and kickbacks to prenatal care clinics that primarily served undocumented Hispanic women in return for the referral of those women for labor and delivery medical services at Tenet hospitals. The government alleged that these bribes and kickbacks resulted in Tenet being reimbursed over $145 million under federal and state Medicaid and Medicare programs based on the illegal patient referrals.
In the criminal information, the DOJ alleged that, in some cases, expectant mothers were told at the prenatal care clinics that Medicaid would cover the costs associated with childbirth and newborn services only if they delivered at one of the Tenet hospitals. In other cases, the expectant mothers were allegedly told that they were required to deliver at one of the Tenet hospitals. The DOJ also charged AMC and NFMC with conspiring to defraud the U.S. Department of Health and Human Services (HHS) in its administration and oversight of Medicare and Medicaid healthcare programs, as well as in its enforcement of Tenet’s September 2006 corporate integrity agreement with HHS’s Office of Inspector General (OIG), which was in effect when many of the unlawful kickbacks were paid. The DOJ further alleged that AMC and NFMC executives criminally concealed the unlawful payments from HHS-OIG while the corporate integrity agreement was still in effect by, among other things, “falsely certifying compliance with the requirements of the [corporate integrity agreement] and failing to disclose reportable events relating to the unlawful relationship under the [corporate integrity agreement].”
As part of the criminal resolution, the DOJ said that AMC and NFMC agreed to plead guilty to conspiracy to defraud the United States “by obstructing the lawful government functions of the HHS” and violating the AKS (the plea agreement is subject to court approval). Under the plea agreement, the DOJ said that AMC and NFMC will forfeit the $145 million it received from federal and state healthcare programs in connection with the illegal referrals. In addition, the DOJ said that Tenet, AMC, NFMC and their parent company, Tenet subsidiary Tenet HealthSystem Medical Inc. (THSM), agreed to enter into a three-year nonprosecution agreement (NPA) with the DOJ Criminal Division’s Fraud Section and the U.S. Attorney’s Office for the Northern District of Georgia pursuant to which they will avoid prosecution if, among other requirements, they “cooperate with the DOJ’s ongoing investigation and enhance their compliance and ethics program and internal controls.” The DOJ said that Tenet further agreed in the NPA to “retain an independent compliance monitor to address and reduce the risk of any recurrence of violations of the AKS by any entity owned in whole, or in part, by Tenet.”
As part of the civil settlement, the DOJ said that Tenet agreed to pay approximately $368 million (comprised of approximately $244.3 million to the federal government, $123 million to the state of Georgia and $900,000 to the state of South Carolina) to resolve a qui tam lawsuit brought under the federal and Georgia state FCA statutes, for which the whistleblower will receive a significant award of approximately $84.4 million.
In a statement, Principal Deputy Assistant Attorney General David Bitkower said that “[w]hen pregnant women seek medical advice, they deserve to receive care untainted by bribes and illegal kickbacks … The Tenet case is the first brought through the assistance of the Criminal Division’s corporate health care fraud strike force. This is one of more than a dozen active corporate investigations by the strike force, and we are committed to following evidence of health care fraud wherever it leads—whether it be individual physicians, pharmacy owners or corporate boardrooms.”
The following are other recent healthcare resolutions/actions involving medically unnecessary services, Stark Law violations and cold calling:
- September 28, 2016—The DOJ announced that Pennsylvania-based Vibra Healthcare LLC (Vibra) agreed to pay $32.7 million to resolve civil claims that it violated the FCA by billing Medicare for medically unnecessary services: The DOJ alleged that between 2006 and 2016 Vibra—which operates approximately 36 freestanding long-term care hospitals (LTCHs) and inpatient rehabilitation facilities (IRFs) in 18 states—admitted numerous patients to five of its LTCHs and to one of its IRFs who did not “demonstrate signs or symptoms that would qualify them for admission.” In addition, the DOJ alleged that Vibra “extended the stays of its LTCH patients without regard to medical necessity, qualification and/or quality of care” and that, in some instances, ignored the recommendations of its own clinicians who had deemed the patients ready for discharge. As part of the settlement (in which Vibra neither admitted nor denied the allegations), Vibra agreed to enter into a chainwide corporate integrity agreement with HHS-OIG. The qui tam whistleblower in the case will receive a $4 million award.
- September 27, 2016—The DOJ announced that the former CEO of Tuomey Healthcare System agreed to pay $1 million to settle Stark Law violations: The DOJ said that it reached the $1 million settlement with Ralph J. Cox III, the former CEO of South Carolina-based Tuomey Healthcare System (Tuomey) for his involvement in the hospital’s illegal Medicare and Medicaid billings for services referred by physicians with whom the hospital had improper financial relationships in violation of the Stark Law. The illegal physician arrangements had resulted in a $237.4 million judgment against Tuomey following a month-long jury trial in May 2013. The verdict was upheld by the Fourth Circuit in July 2015, which we covered in our August 2015 newsletter under “Tuomey Healthcare $237 Million Verdict Upheld: Advice of Counsel Means ALL Counsel.” According to the press release, the DOJ had settled the verdict with Tuomey for $72.4 million in October 2015, and Tuomey was sold to Palmetto Health, a multihospital healthcare system based in Columbia, South Carolina. Under the terms of the government’s settlement agreement with Cox (in which he neither admitted nor denied the allegations), in addition to paying the penalty Cox will also be “excluded for four years from participating in federal health care programs, including providing management or administrative services paid for by federal health care programs.”
- September 19, 2016—The DOJ announced that North American Health Care Inc. (NAHC) agreed to pay $28.5 million to settle FCA claims for medically unnecessary rehabilitation therapy services: The DOJ said that Orange County, California-based NAHC’s chairman of the board, John Sorenson, and its senior vice president of Reimbursement Analysis, Margaret Gelvezon, also agreed to pay $1 million and $500,000, respectively, in the settlement. According to the DOJ’s allegations (which were neither admitted nor denied by the defendants), NAHC, Sorenson and Gelvezon violated the FCA by causing the submission of false claims to government healthcare programs for medically unnecessary rehabilitation therapy services provided to residents at NAHC’s skilled nursing facilities. The DOJ said that, as part of the settlement, NAHC also entered into a five-year corporate integrity agreement with the HHS-OIG which applies to all facilities managed by NAHC and requires an independent review organization to annually review therapy services billed to Medicare.
- September 7, 2016—The DOJ announced that two diabetic medical equipment companies agreed to pay over $12 million to resolve FCA allegations involving unsolicited calls: The DOJ said that U.S. Healthcare Supply LLC and Oxford Diabetic Supply Inc. and the two owners and presidents of those companies (brothers Jon and Edward Letko) agreed to pay more than $12.2 million to resolve allegations (neither admitted to nor denied by the defendants) that they violated the FCA by using a fictitious entity (called Diabetic Experts Inc.) to make unsolicited telephone calls to Medicare beneficiaries in order to sell them expensive durable medical equipment. The companies allegedly then submitted claims to Medicare for the equipment that they sold based on these unsolicited calls in violation of the Medicare Anti-Solicitation Statute.
- September 7, 2016—The DOJ announced that it had filed a complaint against six Vanguard nursing and related facilities as well as Vanguard’s Director of Operations for violations of the FCA: The DOJ’s complaint alleged that the defendants were responsible for the submission of false claims to Medicare and Medicaid for skilled nursing home services that were either nonexistent or grossly substandard. The lawsuit also alleged that the defendants submitted required nursing facility Pre-Admission forms with forged physician and nurse signatures.
Notable non-healthcare resolutions—both involving FHA mortgage lending:
- October 3, 2016—The DOJ announced that Utah-based Primary Residential Mortgage Inc. and SecurityNational Mortgage Company agreed to pay $5 million and $4.25 million, respectively, to resolve separate allegations arising from FHA mortgage lending: The DOJ alleged that the two lenders violated the FCA by “knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) that did not meet applicable requirements.”
- September 13, 2016—The DOJ announced that Regions Bank agreed to pay $52.4 million to resolve FCA liability arising from FHA-insured mortgage lending: The DOJ said that the Alabama-based bank violated the FCA by “knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) that did not meet applicable requirements.”
FCA-related cases: The following is a brief summary of recent court activity—an SEC complaint and an Eighth Circuit opinion—that touched upon interesting FCA issues:
- SEC v. RPM International, et al.: On September 9, 2016, the SEC announced that it had filed a complaint against RPM International Inc. (RPM) and its General Counsel/Chief Compliance Officer (GC/CCO) for disclosure and accounting failures in connection with RPM’s $61 million FCA resolution with the DOJ in 2013. The SEC said that, in connection with that FCA settlement, RPM and the GC/CCO failed to disclose a material loss contingency, or record an accrual for, the DOJ’s FCA investigation when required to do so under governing accounting principles and securities laws. The SEC further alleged in the complaint that from 2011 to 2013, when the DOJ was conducting its FCA investigation into RPM and one of its subsidiaries, the GC/CCO (who was in charge of RPM’s interactions with the DOJ) failed to inform any of RPM’s CEO, CFO, Audit Committee, or independent auditors of material facts about the FCA investigation which resulted in the filing of multiple false and misleading documents with the SEC.
- United States ex rel. Estate of Donegan v. Anesthesia Assocs. of Kan. City, PC: On August 12, 2016, the Eighth Circuit affirmed the grant of summary judgment by the district court in an FCA case and held that the defendant anesthesiology group’s reasonable interpretation of an ambiguous regulation precluded a finding that it knowingly submitted false or fraudulent claims, even if the Centers for Medicare and Medicaid Services or a reviewing court would interpret the regulation differently. The Court said that in this case the relator had failed to provide sufficient evidence, such as official government guidance, to rebut the defendant’s “strong showing” that its interpretation of the ambiguous provision was “objectively reasonable.” The Court further found that, in the absence of such official government guidance, the defendant did not have a duty to inquire into the government’s true intent behind ambiguous regulatory language prior to submitting a claim.
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FCPA Focus—SEC Edition
Why it matters: This month, we focus on two recent SEC resolutions that we found particularly interesting. The first involves hedge fund manager Och-Ziff, marking the first FCPA action against a hedge fund. In the second, involving Anheuser-Busch InBev, we saw, in an FCPA context, the SEC’s latest focus on punishing employers whose employee severance agreements serve to “chill” whistleblowers by imposing financial penalties for sharing information of corporate wrongdoing with the SEC. We also take a look at other recent SEC FCPA resolutions and matters that caught our eye. Read on for a recap.
Detailed discussion: In August and September 2016, the SEC announced numerous FCPA resolutions, recapped below. We begin by focusing on two in particular that were announced in late September that raised interesting issues for corporations operating abroad.
Och-Ziff: On September 29, 2016, the DOJ and the SEC announced significant criminal and civil resolutions in parallel investigations into violations of the FCPA by “alternative investment” hedge fund manager Och-Ziff Capital Management Group, LLC (Och-Ziff). Principal Deputy Assistant Attorney General David Bitkower was quoted as saying that “[t]his case marks the first time a hedge fund has been held to account for violating the Foreign Corrupt Practices Act.”
First, the criminal resolution: In its press release, the DOJ said that Och-Ziff and its wholly owned African subsidiary OZ Africa Management Group (OZ Africa) agreed to pay over $213 million in criminal penalties and plead guilty to violating the anti-bribery provisions of the FCPA (as well as falsifying books and records and failing to maintain sufficient internal controls) in connection with a “widespread scheme involving the bribery of officials in the Democratic Republic of Congo (DRC) and Libya” detailed in the press release. Och-Ziff also entered into a three-year deferred prosecution agreement (DPA) with the DOJ under which it agreed to “implement rigorous internal controls, retain a compliance monitor for a term of three years and cooperate fully with the department’s ongoing investigation, including its investigation of individuals.” The DOJ also said that, in connection with the DOJ’s investigation into Och-Ziff’s activities in the region, on August 16, 2016, Samuel Mebiame, the son of Gabon’s former prime minister, was arrested and charged with conspiracy to bribe officials in violation of the FCPA in three African countries to help win mining rights for an Och-Ziff joint venture.
In the civil resolution, the SEC said that Och-Ziff agreed to pay nearly $200 million to settle civil charges that it violated the anti-bribery, books and records and internal controls provisions of the FCPA in connection with its findings that Och-Ziff paid bribes in order to both “induce the Libyan Investment Authority sovereign wealth fund to invest in Och-Ziff managed funds” and to “secure mining rights and corruptly influence government officials in Libya, Chad, Niger, Guinea, and the Democratic Republic of the Congo.” In addition to the corporate civil penalty, the SEC said that Och-Ziff CEO Daniel S. Och agreed to separately pay approximately $2.2 million to settle charges that he “caused certain violations along with CFO Joel M. Frank, who also agreed to settle the charges” (the SEC said that a financial penalty will be assessed against Frank at a later date). The SEC said that Och and Frank consented to its order without admitting or denying the SEC’s findings.
Of particular interest here was the SEC’s affirmative statement in the press release that Och-Ziff’s misconduct was not voluntarily disclosed but rather “[t]he SEC detected the misconduct while proactively scrutinizing the way that financial services firms were obtaining investments from sovereign wealth funds overseas.”
Anheuser-Busch InBev: On September 28, 2016, the SEC announced that Anheuser-Busch InBev (ABInBev) agreed to pay approximately $6 million in disgorgement and civil penalties to settle charges that it violated the books and records provisions of the FCPA in India as well as “chilled” a whistleblower who reported the misconduct.
An SEC investigation found that ABInBev used third-party sales promoters to make improper payments to government officials in India to increase the sales and production of ABInBev products in that country, and failed to ensure that the transactions were properly recorded in the company’s books and records. The SEC further alleged that ABInBev disregarded the repeated complaints of its employees and had inadequate internal accounting controls to detect and prevent the improper payments.
What sets this garden-variety FCPA resolution apart from others is that part of the company’s wrongdoing specifically cited by the SEC centered on a provision in the separation (or severance) agreement used by the company “that stopped an employee from continuing to voluntarily communicate with the SEC about potential FCPA violations due to a substantial financial penalty that would be imposed for violating strict non-disclosure terms.” Thus, ABInBev’s separation agreement “exacerbated the problem by including language … that chilled an employee from communicating with the SEC,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit. As part of the resolution, in addition to agreeing to cooperate with the SEC and report on its FCPA compliance efforts for a period of two years, ABInBev is also obligated to make “reasonable efforts to notify certain former employees that Anheuser-Busch InBev does not prohibit employees from contacting the SEC about possible law violations.”
Severance, confidentiality and other employee agreements have been under scrutiny by the SEC of late to root out language that could be seen to chill departing employees/would-be whistleblowers in violation of Exchange Act Rule 21F-17. For example, in our September 2016 newsletter update on federal whistleblower programs, we reported on the August 10, 2016, announcement by the SEC that it had imposed a civil fine against building products distributor Blue Linx Holdings, Inc., for provisions in its severance agreements that required outgoing employees to waive their rights to any whistleblower awards or other monetary recovery, and even risk losing their severance payments or other post-employment benefits, in the event they filed a complaint or charges against the company with the SEC. Another example is the SEC’s June 23, 2016, resolution, also discussed in our September 2016 newsletter in the article “White Collar Enforcement Roundup—Summertime Blue[Sheet] Edition.”
Since then, the SEC has made other announcements along these lines and it appears that severance and other employee agreements will remain in sharp focus at the agency. As Jane Norberg, Acting Chief of the SEC’s Office of the Whistleblower, said in the ABInBev press release, “[t]hreat of financial punishment for whistleblowing is unacceptable.… We will continue to take a hard look at these types of provisions and fact patterns.”
Other recent SEC FCPA enforcement actions/resolutions/declinations of note—China continues to be a hotbed of FCPA enforcement activity for the SEC, as the majority of the following matters illustrate:
- On September 30, 2016, the SEC announced that GlaxoSmithKline plc (GSK) agreed to pay $20 million to settle charges that it violated the books and records and internal controls provisions of the FCPA when its China-based subsidiaries engaged in “pay-to-prescribe” schemes to increase pharmaceutical sales. According to the findings in the SEC’s order, which were neither admitted nor denied by GSK, from 2010 through 2016 GSK’s China-based subsidiaries transferred money, gifts, and other “things of value” to Chinese state healthcare professionals, which led to millions of dollars in increased sales of GSK pharmaceutical products to China’s state health institutions. The SEC also found that these payments and gifts were improperly recorded in GSK’s books and records. The SEC acknowledged GSK’s cooperation and remedial efforts as factors that led to the settlement.
- On September 20, 2016, the SEC announced that Provo, Utah-based Nu Skin Enterprises, Inc. (Nu Skin US) agreed to pay over $765,000 in disgorgement and penalties to settle charges that it violated the internal controls and books and records provisions of the FCPA in connection with an approximately $154,000 payment its Chinese subsidiary made to a local charity to obtain the influence of a high-ranking Chinese Communist Party official in an ongoing provincial agency investigation. The SEC acknowledged Nu Skin US’s remedial efforts as a factor that led to the settlement.
- On September 13, 2016, the SEC announced that the former head of Harris Corporation’s (Harris) Carefx subsidiary in China agreed to pay the SEC a civil penalty of $46,000 to resolve FCPA violations. The SEC found that the employee helped bribe Chinese government officials with gifts totaling $1 million and then covered up the bribes in Harris’s books and records. The SEC said that Harris had become aware of the potential FCPA violations in 2012 (shortly after its 2011 acquisition of Carefx) and self-disclosed to the SEC. Upon receiving a “formal investigation order” from the SEC in 2013, Harris conducted an internal investigation which uncovered Zhang’s and other employees’ improper activities. In connection with the penalty against Zhang, Harris Corporation received a declination letter from the SEC (Harris Corporation had received a declination letter from the DOJ in November 2015).
- On September 8, 2016, Cisco Systems, Inc. (Cisco) disclosed in its Form 10-K that it had been informed by the SEC and DOJ that they were declining to bring enforcement actions against it in connection with possible FCPA violations in Russia and other Commonwealth of Independent States countries. Cisco said it previously disclosed in 2014 that, at the request of the agencies, it was conducting an internal investigation into FCPA violations involving the operations of the company and certain of its resellers in those jurisdictions. Cisco said that the DOJ and SEC informed it that they would not bring enforcement actions after Cisco “fully cooperated” with the agencies and shared with them the results of its internal investigation.
- On August 30, 2016, the SEC announced that AstraZeneca plc (AstraZeneca) agreed to pay approximately $5.5 million in disgorgement and civil penalties to resolve charges that it violated the books and records and internal controls provisions of the FCPA as a result of its wholly owned subsidiaries in China and Russia making improper payments to foreign officials. According to the findings in the SEC’s order, which were neither admitted nor denied by AstraZeneca, employees of AstraZeneca’s subsidiary in China made improper payments in the form of cash, gifts and other items to foreign official healthcare providers as incentives to purchase or prescribe AstraZeneca pharmaceuticals, and also made payments in cash to the local officials to get reductions or dismissals of proposed financial sanctions against the subsidiary. The investigation found that employees of AstraZeneca’s subsidiary in Russia also made improper payments in connection with pharmaceutical sales. The SEC’s order noted that, while AstraZeneca did not self-disclose its misconduct, it did “significantly” cooperate with the investigation and conduct remediation.
- On August 29, 2016, Reuters and the Financial Review (Australia) reported that the SEC appeared to have paid its first-ever FCPA-related award under its whistleblower program when it awarded $3.75 million to the BHP Billiton whistleblower. We covered the SEC enforcement action against BHP Billiton in connection with its investigation into bribes paid to Asian and African officials during the 2008 Beijing Olympics in our June 2015 newsletter under “Falling Short of the Gold: SEC Charges BHP Billiton with FCPA Violations Relating to its 2008 Summer Olympics Sponsorship Program.”
- On August 11, 2016, the SEC announced that Key Energy Services, Inc., agreed to pay $5 million in disgorgement to settle charges that it violated the internal controls and books and records provisions of the FCPA in connection with payments its Mexican subsidiary, Key Mexico, made to a contract employee at Petróleos Mexicanos (Pemex), Mexico’s state-owned oil company. An SEC investigation found that Key Mexico made payments to the Pemex employee to induce him to provide advice, assistance and inside information that was used by Key Energy and Key Mexico in negotiating contracts with Pemex. The SEC found that Key Mexico paid the Pemex employee through an entity that provided purported consulting services to Key Mexico, even though Key Energy had not authorized the relationship with the consulting firm and lacked supporting documentation regarding the purported consulting work performed.
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Give a Little Whistle—SEC Whistleblower Program Update
Why it matters: On September 14, 2016, SEC Director of Enforcement Andrew Ceresney gave what in effect amounted to a “state of the union” speech about the SEC’s whistleblower program. In it he gave an overview of the program and touted its successes to date, saying that “I am proud of the program’s accomplishments during its brief existence and anticipate that the whistleblower program will continue to be a game changer in future years.” We cover Ceresney’s remarks, and the current state of the SEC’s whistleblower program, here.
Detailed discussion: In a speech before the Sixteenth Annual Taxpayers Against Fraud Conference in Washington, D.C., on September 14, 2016, SEC Director of Enforcement Andrew Ceresney touted the accomplishments of the SEC’s whistleblower program. The speech was entitled “The SEC’s Whistleblower Program: The Successful Early Years,” and we’ve recapped some of the highlights here, updated with statistics for fiscal year 2016 that were released by the SEC on October 11, 2016 (FY 2016 report):
- Ceresney said that “[t]he success of the program can be seen, in part, in the over $107 million we have paid to 33 whistleblowers for their valuable assistance, in cases with more than $500 million ordered in sanctions.” Indeed, on August 30, 2016, the SEC announced that it had awarded approximately $22 million—its second largest award—to a whistleblower under its program, and later that day it issued a press release that the earlier-announced award had served to tip (no pun intended) total payouts under the program over the $100 million threshold. On this point Ceresney predicted that, at the rate the program was performing, “it will take us significantly less time to announce that we have passed the $200 million milestone than it did to pass the $100 million mark.” In the FY 2016 Report, the SEC said that the program awarded over $57 million to 13 whistleblowers in fiscal year 2016 alone, which “is more than in all previous years combined.”
- Ceresney pointed out that many of the SEC’s investigations are instigated by a whistleblower’s tip, and highlighted a few of the “significant actions” the SEC has taken to “ensure that employees feel secure in reporting wrongdoing.” Here, Ceresney referenced, among other things, the SEC’s recent actions against companies for violations of Exchange Act Rule 21F-17, which prohibits the use of severance, confidentiality or other types of employment agreements that impede a whistleblower—via the imposition of financial punishments or other “chilling” provisions—from communicating with the SEC.
- Ceresney said that “as imitation is the sincerest form of flattery, other domestic and foreign regulators have sought to replicate the successes of our program.” As one illustration of this, on August 30, 2016, the Commodity Futures Trading Commission posted proposed amendments to its whistleblower program in the Federal Register that would bring it more in line with the SEC’s program, including the creation of a dedicated Office of the Whistleblower and specialized staff to handle tips and claims review.
- Ceresney highlighted the following types of cases where the Whistleblower Office has found “whistleblower assistance [to be] particularly invaluable”: (1) issuer reporting and disclosure cases—Ceresney said tips relating to these cases are the most common and accounted for 18% of all tips received in fiscal year 2015; (2) offering frauds and Ponzi schemes—Ceresney said that tips relating to these cases are also common and accounted for 16% of all tips received in fiscal year 2015; and (3) Foreign Corrupt Practices Act (FCPA) cases—Ceresney said that tips related to FCPA violations increased 62% from 115 in fiscal year 2012 to 186 in fiscal year 2015, and Ceresney is hopeful this upward trend will continue given the difficulties of overseas investigations. He said that the SEC has to date made eight awards to whistleblowers living in foreign countries: “In fact, our largest whistleblower award to date — $30 million — went to a foreign whistleblower who provided us with key original information about an ongoing fraud that would have been very difficult to detect.” Again, the FY 2016 Report did not update these specific statistics for fiscal year 2016.
- Ceresney addressed the question of who qualifies as a “Dodd-Frank whistleblower,” pointing out that through fiscal year 2015 “almost half of the award recipients were current or former employees of the companies for which they reported wrongdoing.” Particularly helpful were tips from corporate “insiders” such as personnel from the compliance and internal audit divisions. Ceresney did not address the issue of the language in Section 922 of the Dodd-Frank Act and SEC Rule 21F-2 that defines a “whistleblower” as someone who gives information to the SEC, but the issue of whether someone can qualify as a whistleblower if they just report misconduct internally without going to the SEC has been litigated and the circuits are split. We covered the issue in our October 2015 newsletter under “Do You Have to Whistle to the SEC to Get Protection Under Dodd-Frank? The Second Circuit Says No, Splits With Fifth Circuit.” The most recent case on this issue is Lamb v. Rockwell Automation Inc., where on August 12, 2016, a Wisconsin district court followed the Fifth Circuit and held that a whistleblower must specifically give information to the SEC in order to qualify for Dodd-Frank protection. In so ruling, the court adopted the Fifth Circuit’s holding in the 2013 case of Asadi v. F.E. Energy (USA), LLC and rejected the Second Circuit’s contrary holding in 2015 in Berman v. Neo@Ogilvy LLC as well as the SEC’s own regulatory guidance on the matter.
Ceresney’s speech gave us helpful insight into the SEC’s whistleblower program from the SEC’s perspective and portrays a system where the SEC and the whistleblowers work together to stanch corporate misconduct. We therefore found the following news item to be intriguing, as it gave us a rare view of the program from the standpoint of an unsatisfied whistleblower who was actually granted a significant monetary award and turned it down. On August 18, 2016, Reuters reported that Deutsche Bank whistleblower Eric Ben-Artzi wrote an opinion article in the Financial Times in which he said that he turned down his 50% share—$8.25 million—of the total $16.5 million awarded by the SEC under its whistleblower program because of the SEC’s “failure to punish Deutsche Bank executives.” The SEC had made the award in connection with its May 2015 settlement with Deutsche Bank, pursuant to which the bank agreed to pay $55 million for filing misstated financial reports during the financial crisis that “failed to take into account a material risk for potential losses estimated to be in the billions of dollars.” Whistleblower Ben-Artzi said in his opinion article that the “true perpetrators of the fraud,” the Deutsche Bank executives, went unpunished because of a “revolving door” situation in which top SEC lawyers who had held senior posts at Deutsche moved “in and out of top positions at the regulator even as the investigation into malfeasance at Deutsche were [sic] ongoing.” Ben-Artzi wrote that he wanted his $8.25 million share of the award to be given to “Deutsche Bank and its stakeholders” and that the award money should be “clawed back” from bonuses paid to Deutsche executives. The other whistleblower presumably accepted his share of the award.
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Keeping an Eye Out—Updates and Briefly Noted
1. New rulemaking and advisories:
- September 13, 2016—NYDFS (DFS) proposed new cybersecurity regulations affecting covered financial services institutions. The proposed regulations, entitled “Cybersecurity Requirements for Financial Services Companies,” would mandate strict cybersecurity standards for financial service entities regulated by the DFS. For a detailed discussion of the proposed rules, see here to read the October 3, 2016, newsletter alert authored by Manatt financial services partner David Gershon entitled “New York’s DFS Proposed Cybersecurity Regulations for Financial Institutions.” The proposed regulations expand upon the cybersecurity proposals discussed in the DFS’s November 2015 letter to the Financial and Banking Information Infrastructure Committee, which we discussed in our January 2016 newsletter under “DFS and FinCEN—The Rise of the New Enforcers.”
- September 7, 2016—FinCEN issued an advisory to financial institutions regarding the Financial Action Task Force’s updated list of jurisdictions with strategic anti-money laundering (AML)/counter-terrorist financing deficiencies, stating that “[t]hese changes may affect U.S. financial institutions’ obligations and risk-based approaches regarding relevant jurisdictions.”
- August 25, 2016—FinCEN proposed a new rule that would extend the AML and customer information program (CIP) requirements of the PATRIOT Act to all banks. The proposed rule would also extend to all banks the customer due diligence (CDD) requirements published by FinCEN in May 2016 (covered in our June 2016 newsletter under “New Rulemaking”). One significant change: under current FinCEN regulations, banks not subject to regulation by a “federal functional regulator” are exempted from formal AML requirements. The proposed rule would remove this exemption and amend the regulations such that all entities meeting the definition of “bank” in the FinCEN regulations would be subject to AML, CIP and CDD requirements. FinCEN said that, if adopted, the proposed rule would affect an estimated 740 banks in the United States.
- August 25, 2016—the SEC announced that it had approved FINRA’s proposed broker-dealer pay-to-play rule, FINRA Rule 2030, which will prohibit broker-dealers from, among other things, (1) soliciting a government entity (such as a public pension plan or other collective government fund) on behalf of an investment adviser, and (2) engaging in distribution activities with a government entity for a period of two years after the broker-dealer makes certain specified types of contributions to officials of the government entity. In addition, on that same day the SEC announced that it had adopted amendments to several Investment Advisers Act rules and the investment adviser registration and reporting form to “enhance the reporting and disclosure of information by investment advisers.” The SEC said that the amendments will (a) require investment advisers to provide additional specified information regarding their separate managed account businesses, (b) facilitate streamlined registration and reporting for private fund advisers operating a single advisory business and (c) amend Investment Advisers Act Rule 204-2 to require advisers to maintain additional records related to the calculation and distribution of performance information.
2. Briefly noted—roundup of other enforcement items of interest:
- On October 12, 2016, the SEC announced that Deutsch Bank Securities agreed to pay a $9.5 million penalty for “failing to properly safeguard material nonpublic information generated by its research analysts,” publishing an “improper” research report and failing to “properly preserve and provide certain electronic records sought by the SEC during its investigation.” In consenting to the SEC’s order, Deutsch Bank Securities did not admit or deny the SEC’s findings.
- On October 11, 2016, the SEC announced detailed enforcement statistics for fiscal year 2016. The SEC said that, overall, it had filed 868 enforcement actions in fiscal year 2016, a “new single year high,” which included “the most ever cases involving investment advisers or investment companies (160) and the most ever independent or standalone cases involving investment advisers or investment companies (98).” The SEC said that it also “reached new highs” for “Foreign Corrupt Practices Act-related enforcement actions (21) and money distributed to whistleblowers ($57 million) in a single year.” Said SEC Chair Mary Jo White of the statistics: “By every measure the enforcement program continues to be a resounding success holding executives, companies and market participants accountable for their illegal actions.”
- On September 30, 2016, the DOJ announced the arrest and charging of a pharmaceutical CEO in a $100 million fraud scheme. The DOJ said that Jack Kachkar, the CEO of pharmaceutical company Inyx, Inc., perpetrated the fraud scheme that caused over $100 million in losses and led to the collapse and failure of Westernbank Puerto Rico, once one of Puerto Rico’s largest banks. Kachkar was charged in the Southern District of Florida with 8 counts of wire fraud.
- On September 27, 2016, the SEC announced that oil services company Weatherford International agreed to pay a $140 million penalty to settle charges that it inflated earnings by using deceptive income tax accounting. Two of the company’s then senior accounting executives also agreed to settle charges that they were responsible for the fraudulent accounting practices.
- On September 19, 2016, the CFTC announced that it had settled charges against banking institutions JSC VTB Bank (VTB), headquartered in St. Petersburg, Russia, and VTB Capital PLC (VTB Capital) for executing fictitious and noncompetitive block trades in Russian Ruble/U.S. Dollar (RUB/USD) futures contracts, which were cleared through the Chicago Mercantile Exchange (CME). VTB Capital, a U.K.-incorporated bank, is 94% owned by a holding company that, in turn, is 100% owned by VTB. The CFTC’s Order requires VTB and VTB Capital to jointly and severally pay a $5 million civil monetary penalty as a result of their unlawful conduct.
- On September 19, 2016, the SEC announced that public accounting firm Ernst & Young agreed to pay $9.3 million to settle charges that two of its audit partners “got too close” to their clients on a personal level and “violated rules that ensure firms maintain their objectivity and impartiality during audits.” SEC Enforcement Director Andrew Ceresney said that “[t]hese are the first SEC enforcement actions for auditor independence failures due to close personal relationships between auditors and client personnel.... Ernst & Young did not do enough to detect or prevent these partners from getting too close to their clients and compromising their roles as independent auditors.”
- On September 15, 2016, Deutsche Bank announced that it was in negotiations with the DOJ to resolve civil claims in connection with the bank’s issuance and underwriting of residential mortgage-backed securities (RMBS) between 2005 and 2007. The bank confirmed the DOJ’s “opening position” of a $14 billion fine to resolve the matter, and said that it would submit a counterproposal and had “no intent to settle these potential civil claims anywhere near the number cited. The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.” We will keep an eye on this one and report back if and when a settlement is reached.
- On August 25, 2016, the SEC announced penalties against 13 investment advisory firms found to have violated securities laws by spreading the false claims made by an investment management firm about its flagship product. The SEC said that, in an “enforcement sweep of investment advisers,” it found that the 13 firms accepted and negligently relied upon claims by F-Squared Investments that its AlphaSector strategy for investing in exchange-traded funds (ETFs) had outperformed the S&P Index for several years. The firms repeated many of F-Squared’s claims while recommending the investment to their own clients without obtaining sufficient documentation to substantiate the information being advertised. In 2014, F-Squared admitted that it had substantially inflated its claims. The SEC said that penalties assessed against the firms ranged from $100,000 to a half-million dollars based upon the fees each firm earned from AlphaSector-related strategies.
- On August 23, 2016, the SEC announced that four private equity fund advisers affiliated with Apollo Global Management agreed to pay $52.7 million to resolve charges that they misled fund investors about fees and a loan agreement and failed to supervise a senior partner who charged personal expenses to the funds. The SEC found that the Apollo advisers failed to adequately disclose the benefits they received to the detriment of fund investors by accelerating the payment of future monitoring fees owed by the funds’ portfolio companies upon the sale or IPO of those companies. The SEC also found that one of the Apollo advisers failed to disclose certain information about interest payments made on a loan between the adviser’s affiliated general partner and five funds.
- On August 19, 2016, the DFS announced that it had issued a $180 million penalty against Mega International Commercial Bank of Taiwan for past violations of Bank Secrecy Act/AML laws, requiring an independent monitor going forward. For a detailed discussion of this matter, see here to read the September 22, 2016, newsletter alert authored by Manatt financial services partner David Gershon.
- On August 18, 2016, the CFTC filed a complaint against Deutsche Bank AG in New York district court charging the bank with failing to report any swap data for multiple asset classes for five days in April 2016 when a software update crashed the system. The CFTC also charged the bank with failing to supervise its employees responsible for swap data reporting, not correcting inaccurate filings, having an inadequate Business Continuity and Disaster Recovery Plan, and violating a prior CFTC Order. Even though Deutsche Bank had already agreed to appoint a reporting compliance monitor, the CFTC said it still wasn’t in full compliance with reporting requirements. The CFTC asked for unspecified financial penalties in the complaint.
3. Talks about town: In addition to SEC Enforcement Director Andrew Ceresney’s September 14, 2016, speech at the Sixteenth Annual Taxpayers Against Fraud Conference in Washington, D.C., detailed in this newsletter in the article entitled “Give a Little Whistle—SEC Whistleblower Program Update,” other government officials were making the rounds:
- September 28, 2016—U.S. Attorney for the Eastern District of Michigan Barbara L. McQuade testified at a hearing on healthcare fraud investigations before the U.S. House of Representatives Committee on Ways and Means Subcommittee on Oversight.
- September 21, 2016—SEC Chair Mary Jo White spoke at the International Bar Association 2016 Annual Conference in Washington, D.C., about, among other things, the SEC’s continuing focus and emphasis on FCPA enforcement. Attorney General Loretta E. Lynch also spoke on various topics including U.S. initiatives and actions involving cybersecurity and kleptocracy.
- On September 20, 2016, Assistant Attorney General Leslie R. Caldwell spoke at the New York University Center for Cybersecurity.
- On September 8, 2016, Principal Deputy Assistant Attorney General David Bitkower spoke at American Bar Association Southeastern White Collar Crime Institute in Georgia.
- On September 5, 2016, Principal Deputy Assistant Attorney General Caroline D. Ciraolo spoke at the Cambridge International Symposium on Economic Crime in the U.K.
- On August 17, 2016, Principal Deputy Assistant Attorney General Ciraolo spoke in Panama at the Panama Bankers Association Anti-Money Laundering Conference with respect to the DOJ tax division’s offshore tax enforcement efforts.
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