The fall-out from the Second Circuit’s decision in U.S. v. Newman continued last week in SEC v. Payton, when Southern District of New York Judge Jed S. Rakoff denied a motion to dismiss an SEC civil enforcement action against two former brokers, Daryl Payton and Benjamin Durant, one of whom (Payton) had just had his criminal plea for the same conduct reversed in light of Newman. Although the United States may be unable to make criminal charges stick against some alleged insider traders under a standard of “willfulness,” Judge Rakoff found that the SEC had sufficiently alleged that related conduct of the two brokers at the end of the tip line was “reckless,” satisfying the SEC’s lower civil standard.
Over the past year, the SEC and other regulatory agencies have initiated an increasing number of investigations into companies based on allegations of inadequate internal controls and/or a system for reporting those controls. For more on internal controls and a discussion of recent regulatory activity in this area, see Jason M. Halper & Jonathan E. Lopez, et al., Assessing the Increased Regulatory Focus on Public Company Internal Control and Reporting, Bloomberg BNA: Securities Regulation & Law Report, Oct. 6, 2014.
In a speech last Thursday, SEC Chair Mary Jo White publicly addressed the issue of whether the SEC has been too lax in granting waivers to large corporations that are subject to certain restrictions under the Well-Known Seasoned Issuer (“WKSI”) regulations or the so-called “Bad Actor Rule.”
The SEC classifies certain large widely followed issuers as WKSIs under Rule 405 of the Securities Act of 1933. Issuers with WKSI status benefit from greater flexibility in registration and investor communications. Most notably, registration statements filed by WKSIs become effective immediately and automatically upon filing. Certain categories of “ineligible issuers”—including those convicted of certain crimes and those determined to have violated the anti-fraud provisions of the securities laws—are precluded from qualifying for WKSI status. The SEC, however, can (and does) grant waivers to ineligible issuers upon a showing of good cause.
Last week, the Securities and Exchange Commission announced an award payout of between $475,000 and $575,000 to a former company officer who reported information about an alleged securities fraud. While this is by no means the largest of the 15 payouts the SEC has made since the inception of the whistleblower program in fiscal year 2012 (the SEC awarded approximately $14 million to a whistleblower in October 2013, and roughly $30 million to a foreign whistleblower almost a year later), it is the first time that the SEC provided a whistleblower bounty award under the new program to an officer who learned about the alleged fraud through another employee, rather than firsthand.
On February 24, 2015, the SEC announced that it had reached an agreement with Goodyear Tire & Rubber Co. (“Goodyear”) for Goodyear to disgorge more than $16 million to settle FCPA charges stemming from its Kenyan and Angolan subsidiaries. This settlement is notable because it focuses on bribery involving private companies as opposed to official corruption, which is typically prosecuted by the SEC. While the FCPA’s anti-bribery provisions apply only to improper payments to foreign officials, the SEC charged Goodyear with violations of the FCPA’s books and records provisions, which have no such requirement and instead require a company to keep records that “accurately and fairly reflect the transactions and dispositions of the assets of the issuer” and to “devise and maintain a system of internal accounting controls” sufficient to ensure the integrity of the company’s financial records. This use of the books and records provisions is important because it signals the SEC’s intent and ability to use the FCPA to bring broad, far-reaching enforcement cases that have the potential to ensnare any public company.
Securities and Exchange Commission leadership and staff members addressed the public on February 20-21 at the annual “SEC Speaks” conference in Washington, D.C. Common themes among the numerous presentations included the Commission’s increasing use of data analytics, the Commission’s focus on gatekeepers such as accountants and attorneys, and the Commission’s still incomplete rulemakings mandated by both the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups Act.
In an amicus brief filed earlier this month in Berman v. Neo@Ogilvy LCC, the SEC asked the Second Circuit to defer to the Commission and hold that individuals who report misconduct internally are covered by the anti-retaliation protections of the Dodd-Frank Act of 2002, regardless of whether they report the information to the SEC.
We first heard about the SEC’s increased focus on high-frequency trading in June 2014 when the SEC announced its desire to promulgate new rules on high frequency trading to address the lack of transparency in dark pools and alternative exchanges and to curtail the use of aggressive, destabilizing trading strategies in vulnerable market conditions. However, the SEC and other regulators may not need to rely on new rules to regulate high frequency trading. The United States Commodity Futures Trading Commission special counsel Greg Scopino recently published an article in the Connecticut Law Review arguing that certain high frequency trading tactics violate federal laws against spoofing and wash trading.
On February 3, 2015, the U.S. Securities and Exchange Commission released a Risk Alert addressing cybersecurity issues at brokerage and advisory firms, along with suggestions to investors on ways they can protect themselves and their online accounts. FINRA issued a similar, more extensive “Report on Cybersecurity Practices” on the same day.
The National Exam Program Risk Alert, “Cybersecurity Examination Sweep Summary” summarizes cybersecurity practices and policies of 57 registered broker-dealers, and 49 registered investment advisers based on examinations conducted by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”). These findings should be reviewed by CISOs and CIOs who have responsibility for cybersecurity protection because they highlight best practices and areas ripe for improvement. It is reasonable to assume that both the SEC and FINRA will expect firms to review the findings and tailor their own internal assessments and practices to improve their cybersecurity posture, accordingly. They also underscore that the simplest cyber-related scams (phishing, fraudulent e-mail scams, etc.) are still remarkably successful.
Today, the Securities and Exchange Commission (“SEC” or “Commission”) announced the terms of a settlement with four of the Respondents in In the Matter of BDO China Dhaua CPA Co., Ltd. The four Respondents are the China affiliates of the “Big Four” international accounting firms —Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), and PricewaterhouseCoopers Zhong Tian CPAs Limited. The settlement resolves an administrative proceeding brought by the Commission against Respondents pursuant to Rule 102(e) of the SEC’s Rules of Practice over requests made by the SEC for the production of audit work papers located in China.