Internal Investigations Remain Internal – Attorney Client Privilege Protected by D.C. Circuit

On June 27, 2014, the U.S. Court of Appeals for the D.C. Circuit issued an important, unanimous decision upholding the assertion of attorney-client privilege for an internal investigation.  The decision is especially significant because it (a) forcefully reversed a growing trend in the D.C. federal district courts that had narrowly applied the attorney-client privilege to internal investigations and (b) confirmed that communications made during the course of an internal investigation – e.g., interviews and interview notes and reports – are privileged whenever a primary purpose of the communication was to obtain legal advice.

The case involves a False Claims Act claim against Kellogg, Brown & Root (“KBR”), a former Halliburton subsidiary, regarding alleged fraud and other unlawful conduct violating the company’s code of business conduct.  The plaintiff sought various materials relating to KBR’s investigation of the alleged conduct.  Non-lawyers, acting at the direction of in-house lawyers, conducted the interviews.

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SEC Charges Hedge Fund Adviser with Whistleblower Retaliation under Dodd-Frank

On June 16, 2014, the SEC issued its first-ever charge of whistleblower retaliation under section 922 of the Dodd-Frank Act, charging a hedge fund advisor and its owner with “engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC.” Read More

Flash Rules: Is A Wall Street Reform on the Horizon or is the SEC Merely Reacting to the Latest Media Headline?

Michael Lewis’ new book Flash Boys: A Wall Street Revolt has caused a commotion on Wall Street, on Capitol Hill, and with law enforcement agencies. The SEC is the latest government agency to examine and propose new rules on alternative exchanges and high-frequency trading. The SEC’s latest proposals and enforcement actions raise questions about the agency’s plans to effectively regulate and enforce these activities and its ability to do so.

In Flash Boys, Michael Lewis—author of Liar’s Poker, Moneyball, The Blind Side, and The Big Short—follows a “small group of Wall Street investors” who he says “have figured out that the U.S. stock market has been rigged for the benefit of insiders and that, post-financial crisis, the markets have become not more free but less, and more controlled by the Big Wall Street banks.” High frequency trading is a type of trading using sophisticated technological tools and computer algorithms to rapidly trade securities in fractions of a second to profit from the slightest market blips. High frequency trading is done over traditional exchanges. In contrast, dark pools are alternative electronic trading systems conducted outside traditional exchanges that institutional investors use, sometimes to hide their trading intentions or to move the market with large orders.

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Second Circuit Says Pragmatism Trumps “Cold, Hard” Facts, Limits District Courts’ Powers in Reviewing SEC Settlements

Summer is coming, but this is probably not the vacation Southern District of New York Judge Jed Rakoff had in mind.  On June 4, 2014, the Second Circuit vacated Judge Rakoff’s order refusing to approve the SEC’s $285 million settlement with Citigroup regarding a 2007 collateralized debt obligation (“CDO”) offering.  The highly anticipated opinion – the decision did not come down until more than a year after oral argument – sharply limits the instances in which a court may reject or even modify a Commission settlement, even when the SEC does not extract an admission of facts or liability.  The decision, which comes at a time when the SEC has been seeking and obtaining more admissions from public companies in connection with settlements, is sure to have a significant impact on the agency’s future approach toward settlements and admissions.

Though the facts of the underlying case are almost a footnote at this point, the SEC had alleged that in 2007, Citigroup negligently represented its role and economic interest in structuring a fund made up of tranches of CDOs.  As with similar allegations against Goldman Sachs and its ABACUS CDO, the SEC alleged that Citigroup hand-picked many of the mortgage-related assets in the fund while telling investors that the assets were selected by an independent advisor.  The SEC further alleged that Citigroup chose mortgage-backed assets that it projected would decline in value and in which it had taken short positions.  Thus, according to the SEC, Citigroup sold investors assets on the hope the CDOs would increase in value, while Citigroup had selected and bet against these same assets on the belief they would actually decrease in value.  The SEC alleged that Citigroup was able to reap a substantial profit from shorting the assets it selected for the fund, while fund investors lost millions.

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If the SEC Misses the SOL, It’s SOL (Sorry, Out of Luck) – District Court Holds Statute of Limitations Is Jurisdictional and Applies to SEC Disgorgement and Injunctive Relief Requests

The SEC suffered a blow very recently when Judge James Lawrence King of the U.S. District Court for the Southern District of Florida entered summary judgment  dismissing the entirety of its alleged Ponzi scheme case on statute of limitations grounds.  SEC v. Graham, 2014 WL 1891418 (S.D. Fla. May 12, 2014).  The court’s order is a significant application of last year’s Supreme Court decision in Gabelli v. SEC, 133 S. Ct. 1216 (2013), in that (i) it applies the applicable statute of limitations to sanctions that have usually been considered equitable, rather than punitive, in nature; and (ii) it holds that the applicable statute of limitations is a jurisdictional threshold on which the SEC bears the burden, not an affirmative defense on which the defendant bears the burden.

In Graham, the SEC alleged that five defendants defrauded nearly 1,400 investors of more than $300 million by marketing unregistered securities as real estate investments and guaranteeing an immediate 15% profit and future rental revenue on certain resort properties.  According to the SEC, the defendants were using the new deposits to pay earlier investors in a classic Ponzi-scheme.  After the defendants abandoned their efforts with the collapse of the real estate and credit markets in 2007, the SEC embarked on a seven-year investigation, and ultimately brought suit in January of 2013.  The SEC alleged five counts of violations of federal securities laws, and sought not only civil penalties but also injunctive relief and disgorgement of all ill-gotten gains.  The defendants moved for summary judgment on the ground that the five-year statute of limitations under 28 U.S.C. § 2462 time-barred all of the SEC’s claims.  Section 2462 states, “Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued ….”

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Commodity Futures Trading Commission Issues First Whistleblower Award

On Monday, May 19, 2014, the Commodity Futures Trading Commission (“CFTC”) issued its first award to a whistleblower under its Dodd-Frank bounty program.

The Commission will pay $240,000 to an unidentified whistleblower who “voluntarily provided original information that caused the Commission to launch an investigation that led to an enforcement action” in which the judgment and sanctions exceeded $1 million. The heavily redacted award determination on the CFTC’s website does not reveal the name of the implicated company, the nature of the wrongdoing involved, the percentage of bounty the whistleblower received (which is required to be between 10 and 30 percent pursuant to the statute), or the factors considered in determining the percentage of the bounty.

Prior to this first grant of an award to a whistleblower under the CFTC’s Dodd-Frank bounty program, there were 25 denials of award claims. The reasons for the denials primarily fell into one or more of several categories:

  1. the individuals provided information before the passage of Dodd-Frank;
  2. they did not file a form TCR as required by the regulations;
  3. they did not provide information “voluntarily” but rather in response to a Commission request; and/or
  4. the information did not cause the Commission to open or expand an investigation or significantly contribute to a success of a Commission matter.

Time will tell whether this first award will have any effect on the number of whistleblowers who report to the CFTC or the quality of information the Commission receives.

SEC Speaks, Cuban Tweets

The leaders of the Securities and Exchange Commission addressed the public on February 21-22 at the annual SEC Speaks conference in Washington, D.C.  The presentations covered an array of topics, but common themes included the Commission’s ongoing effort to carry out the rulemaking agenda set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, its role as an enforcement body post-financial crisis, its increasing utilization of technology, and its renewed focus on the conduct of gatekeepers.  In a surprise appearance, Dallas Mavericks owner and former insider trading defendant Mark Cuban attended the first day of the conference.  During his time at the conference, Mr. Cuban shared his thoughts on a number of the presentations via his Twitter account.

From a litigation and enforcement perspective, key takeaways from the conference include the following: Read More

The SEC Scores Another Admission: Scottrade Acknowledges That It Broke Recordkeeping Rules

Last week, Scottrade Inc. became the latest entity to admit wrongdoing in connection with settling SEC charges.  In a January 29, 2014 administrative order, the brokerage firm not only agreed  to a $2.5 million penalty, but also admitted that it violated federal securities laws when it failed to provide the SEC with complete and accurate “ blue sheet” trading data.  This settlement marks the fourth such admission since the Commission’s June 2013 modification to its “no admit/no deny” settlement policy.

Most civil law enforcement agencies – including the SEC –  generally do not require entities or individuals to admit or deny wrongdoing in order to reach a settlement.  The SEC regularly utilizes this “no admit/no deny” policy, finding it an effective tool to facilitate settlements.  In June 2013, however, the Commission announced a revision to this longstanding policy, indicating that it would require public admissions of wrongdoing in selected cases, including those involving “egregious” fraud or intentional misconduct, as well as those involving significant investor impact or that are otherwise highly visible.  Since then, the Commission has obtained admissions in three previous settlements. Read More

Moving Right Along: The Office of Whistleblower Issues Its 2013 Annual Report

The SEC released its Fiscal Year 2013 Annual Report   (the “Report”) to Congress on the Dodd-Frank Whistleblower Program on  November 15, 2013.  The Report analyzes the tips received over the last twelve months by the SEC’s Office of the Whistleblower (“OWB”) and provides additional information about the whistleblower award evaluation process.

Breakdown of Tips Received in FY 2013

The OWB reported a modest increase in the number of whistleblower tips and complaints that it received in 2013 – 3,238 tips in 2013 compared to 3,001 in 2012.  Overall, the 2013 whistleblower tips were similar in number, type, and geographic source to the whistleblower tips reported in 2012.  As in 2012, the most common types of allegations in 2013 were: Corporate Disclosure and Financials (17.2%), Offering Fraud (17.1%), and Manipulation (16.2%).  Most whistleblowers, however, selected “Other” when asked to describe their allegations.  In 2012, the most common complaint categories reported were also Corporate Disclosure and Financials (18.2%), Offering Fraud (15.5%), and Manipulation (15.2%).  See Appendix B to the Report, listing tips by allegation type and comparing tips received in 2013 to those received in 2012. Read More

The Cop is on the Beat: SEC Chair White Says the Agency Aims to be “Everywhere”

In a recent speech to the Securities Enforcement Forum, SEC Chair Mary Jo White fleshed out the Commission’s plan to pursue all violations of federal securities laws, “not just the biggest frauds.”  She also addressed the looming question of whether this approach makes the best use of the agency’s limited resources.

Chair White compared the SEC’s strategy of pursuing all forms of wrongdoing, no matter how big or small, to the “broken window” theory of policing, which was largely credited for reducing crime in New York City under Mayor Rudy Giuliani.  According to the “broken window” theory, a broken window which remains unfixed is a “signal that no one cares, and so breaking more windows costs nothing.”  On the other hand, a broken window which is fixed indicates that “disorder will not be tolerated.”  Chair White postulated that the same theory applies to the US securities markets:  minor violations that go ignored may lead to larger violations, and may foster a culture where securities laws are treated as “toothless guidelines.”  Characterizing the SEC as the investors’ “cop,” she declared that the SEC needs to be a “strong cop on the beat,” understanding that even the smallest securities violations have victims. Read More