Early and Often: DOJ Tells Companies to Cooperate Early or Pay the Price


An important issue for companies and their executives that are the subject of an investigation by the federal government is whether, and how early, to cooperate.

On September 27, 2016, Principal Deputy Associate Attorney General Bill Baer delivered remarks at the Society of Corporate Compliance and Ethics Conference, where he laid out in some detail his views on the value of early cooperation with the federal government in financial cases, and the consequences for waiting. As the number 3 attorney in the Department of Justice who is charged with overseeing civil litigation, antitrust, and other large divisions, Baer’s words are significant, and are a further gloss on the so-called “Yates Memo”, which Deputy Attorney General Sally Yates released last September, detailing DOJ’s guidance on individual accountability for corporate wrongdoing.

Speaking specifically about cases against banks and the fallout from protracted litigation involving residential mortgage-backed securities, Baer said those cases could have been resolved more quickly if only the financial institutions “had decided early to cooperate.” Consequently, “each [institution] paid a lot more than it would have if it had cooperated early on.” Recalling that many of these same institutions had nonetheless sought “significant cooperation credit,” Baer stated that DOJ “dismissed the arguments quickly because they so lacked merit.”

So how early is early enough, and how can your company get credit for cooperating? Baer elaborated on recent “internal” guidance he has provided to his attorneys in civil enforcement matters.


No Longer a Mirage: FCPA Compliance and Cooperation Has Its Benefits


On September 12, 2016, the SEC announced that it had reached a settlement with Jun Ping Zhang (“Ping”), a former executive of a Chinese subsidiary of Harris Corporation (“Harris”), regarding alleged violations of the Foreign Corrupt Practices Act (“FCPA”). The settlement was unusual, in that the SEC declined to also bring charges against Harris, an international communications and information technology company.


SEC Continues to Target Private Equity Firms, Entering Into $52 Million Settlement with Apollo Global Management


On August 23, 2016, the SEC entered into a settlement that reflects a continuation of its recent trend of increasingly active pursuit of private equity firms, particularly for failing to disclose conflicts of interests and other material information to investors.  The SEC entered into a $52.5 million settlement with four private equity fund advisers affiliated with Apollo Global Management LLC (collectively “Apollo”) arising out of insufficient disclosures and supervisory failures.


SDNY Prosecutors Score First Post-Newman Insider Trading Conviction


On August 17, 2016, jurors in a New York federal court convicted Sean Stewart on criminal charges of conspiracy, securities fraud, and tender offer fraud after more than five days of deliberation.  Stewart, a former investment banker for JPMorgan and Perella Weinberg Partners, was charged with leaking confidential information about health care mergers to his father, Robert Stewart, on at least five occasions over the course of four years.  The case provides a victory to Preet Bharara, the United States Attorney for the Southern District of New York, after a series of setbacks in the form of unfavorable decisions in the aftermath of the Second Circuit’s decision in U.S. v. Newman, the repercussions of which have been covered extensively on this blog (see here, here).  As the first conviction post-Newman, U.S. v. Stewart provides some insight into the kinds of facts that might support an insider trading charge in the Second Circuit going forward and is thus worthy of analysis.


ALJs are A-OK: D.C. Circuit Upholds Constitutionality of SEC In-House Courts


In several recent decisions we have covered (here and here), Federal Circuit Courts have unanimously ruled that respondents in an SEC enforcement action cannot bypass the Exchange Act’s review scheme by filing a collateral lawsuit in federal district court challenging the administrative proceeding on constitutional grounds.  However, those prior opinions all were based on the narrow ground that district courts did not have jurisdiction to hear collateral challenges, and did not reach the merits of the constitutional challenge.  In Raymond James Lucia Cos. Inc. v. SEC,  No. 15-1345 (D.C. Cir. Aug. 9, 2016), the D.C. Circuit became the first federal appellate court to consider the merits and ruled in favor of the SEC.  The court held that SEC administrative law judges are merely employees, rather than officers of the United States, and thus need not be appointed pursuant to the Appointments Clause of the Constitution.  Their appointment satisfied constitutional scrutiny and could not provide grounds to throw out the results of the proceedings before them.


The SEC Audit Trail – Several Industry Groups See Problems as Currently Proposed


Last week, several securities industry groups filed critical responses to the SEC’s plan for an audit trail.  While most groups that commented on the SEC’s proposed regulation supported implementing the proposal, several had concerns regarding the cost for investors and firms, and the protection of private data.


Will It Be Enough?: SEC Amends Rules to Look More Like Federal Court


In a move that will make Securities and Exchange Commission administrative proceedings look more like civil litigation in federal court, on July 13, 2016, the SEC announced that it had adopted amendments to its rules of practice.  These rules appear similar to those the Commission proposed last September.  For critics of the amendments, they may not go far enough, but the expanded discovery and clarifications regarding dispositive motion practice may address some of the issues previously raised regarding the Commission’s perceived home-court advantage.


Equity Trust Notches a Rare Defense Win in SEC Administrative Proceedings

Pen and Calculator

On June 27, 2016, SEC Administrative Law Judge Carol Fox Foelak dismissed the Division of Enforcement’s charges against IRA custodian Equity Trust Company in connection with the company’s processing of investments marketed by two convicted fraudsters.  Judge Foelak’s decision—a complete defense victory for Equity Trust—shows that while the Division of Enforcement may still win most of its cases in administrative proceedings, it doesn’t win them all.


Eleventh Circuit Joins Peers in Preserving SEC’s Home Court Advantage


After four failed attempts at persuading federal appellate courts to hear constitutional challenges to SEC administrative courts, it is increasingly clear that defendants in SEC in-house proceedings will not be able to pursue an early out because of the manner in which SEC administrative judges are appointed.  The latest loss came on June 17, when the Eleventh Circuit in consolidated cases Gray Financial Group Inc. et al. v. SEC, No. 15-13738 (11th Cir. Jun. 17, 2016), and Charles L. Hill v. SEC, No. 15-12831 (11th Cir. Jun. 17, 2016), agreed with the Second Circuit’s decision of three weeks ago in Tilton v. SEC, No. 15-2103 (2d. Cir. Jun. 1, 2016) (which we covered here) in ruling that respondents in an SEC administrative enforcement cannot bypass the Exchange Act’s review scheme by filing a collateral lawsuit in federal district court challenging the administrative proceeding on constitutional grounds.  A different decision from the Eleventh Circuit would have created a circuit split and a heightened possibility of Supreme Court review, but instead it joined the Second, Seventh, and D.C. Circuits in an approach that is unanimous among the circuit courts to have considered the question.  The constitutional legitimacy of SEC administrative law judges is thus likely to continue unchallenged, at least for now.


The Whistle Blows Again: SEC Pays Second Largest Whistleblower Bounty Award


On June 9, 2016, the Securities and Exchange Commission (‘SEC”) awarded the second largest whistleblower bounty – $17 million – granted under the Dodd-Frank whistleblower rules to date.  Previously, the highest whistleblower awards were a $30 million award in September 2014 and a $14 million award in October 2013.  The $17 million award comes on the heels of $26 million in whistleblower awards given to five anonymous individuals over the last month alone.  These awards serve as a warning to companies that the SEC takes its whistleblower program seriously and will continue to encourage and reward company insiders for coming forward with information that leads to successful enforcement actions.  As Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower – a department created by the SEC to give whistleblowers a place to submit their tips – said, “[W]e hope these substantial awards encourage other individuals with knowledge of potential federal securities law violations to make the right choice to come forward and report the wrongdoing to the SEC.”