Tag: SEC

Self-Reporting: A Wise Strategy or Chasing Unicorns?

As we noted in an earlier post, Department of Justice (DOJ) representatives have been emphasizing this spring the financial benefits of cooperation. They did so again last week at the Practicing Law Institute’s Enforcement 2015: Perspectives from Government Agencies, during which enforcement officials from the DOJ, SEC, CFTC, FINRA and Consumer Financial Protection Bureau (CFPB) all pushed back last week against complaints that the benefits of self-reporting are illusory and the costs far too high.

Director of the SEC’s Division of Enforcement Andrew Ceresney claimed that significant benefits of self-reporting are evidenced by three FCPA settlements earlier this year: a disgorgement-only settlement with Goodyear, a deferred prosecution agreement with PBSJ Corporation and a settlement with FLIR Systems, Inc. which entailed only a “minimal penalty” of $1 million. William Stellmach, Principal Deputy Chief of the Fraud Section at the U.S. Department of Justice, noted that the Alstom S.A. settlement in which Alstom paid a $772,290,000 criminal penalty to settle an FCPA prosecution “gives you 772 million reasons to self-disclose.” Among the factors cited for such a high fine was the company’s failure to self-report.

Stellmach claimed that – despite the perception of many practitioners that regulators almost always require some form of “public shaming” for even those companies that self-report – decisions not to prosecute are “not unicorns.” The difficulty, he explained, is that such decisions not to prosecute cannot be publicized without risking the adverse publicity companies want to avoid. As a result, he noted, there has been some discussion internally at DOJ about how it might anonymize such resolutions so that they could be publicized in order to provide the defense bar and their clients with evidence as to the benefits of self-reporting. The CFPB did exactly that, according to Deputy Enforcement Director Jeffrey Ehrlich, in a recent action filed against two financial institutions for alleged RESPA violations. A third institution (referred to in the complaint only as “Unnamed Financial Institution”) that engaged in the same conduct escaped being either named or fined by discovering the violation, reporting it and terminating the individual at issue.

The calculus regarding whether to self-report is also changing, according to the SEC’s Ceresney, as a result of the increase in whistleblowers. If a company’s management decides not to reach out to regulators, someone else may very well do it for them in today’s environment of substantial whistleblower awards.

For companies which have made the decision to self-report, the next decision is to which regulator should they report. The Director of the CFTC’s Division of Enforcement Aitan Goelman suggested that, if the company and/or the conduct is within the jurisdiction of multiple regulators, the company should advise all the relevant regulators, as opposed to relying on one regulator to pass the information along to the others.

The regulators also made clear that self-reporting is not, by itself, enough to get significant credit; sincere efforts and cooperation in uncovering the full scope of the problem is required. Ceresney and Stellmach, however, rejected criticism that regulator demands as to the scope of such investigations result in undue costs, sometimes in the hundreds of millions of dollars. Rather than micromanaging the companies’ investigation, the SEC and DOJ only expect a risk based investigation. For example, if an employee was paying bribes in one country, the investigation might cover only the countries in which the employee worked. Absent evidence of a more widespread problem, there would be no need to “boil the ocean” with an investigation that covered all operations around the globe.

Stellmach and others cautioned, however, that in order to receive the most significant credit for cooperation, a company must be willing to identify culpable employees and assist in the gathering of evidence in order to prosecute those individuals. As FINRA’s Executive Vice President of Enforcement J. Bradley Bennett noted, this is the area in which it is most difficult for FINRA to get cooperation. Too often, he indicated, the individuals identified by the company are dead, retired, now employed by a competitor or outside FINRA’s jurisdiction.

© 2015 BARNES & THORNBURG LLP  Authored by:  Anne N. DePrez

Whistleblower Award Update 2015

Drinker Biddle and Reath LLP a leading law firm with a national footprint

There was not much activity from the SEC Office of the Whistleblower (OWB) in the months since it announced the highest whistleblower award to date in September 2014, but that changed in February when it issued a number of denials.

Awards:

In the Matter of the Claim for Award, Exchange Act Rel. No. 72947. On August 29, 2014, the SEC issued its first award under the Dodd-Frank Act to an employee who performed audit and compliance functions. The employee, who had compliance responsibilities, received an award of $300,000. Generally, information provided to an individual with compliance responsibilities is not considered “original.” Such an employee is entitled to an award, however, if they first report the misconduct to the company and it subsequently fails to take action within 120 days. See 17 C.F.R. §§ 240.21F-4(b)(4)(iii)(B),v(v). This exception applied to the claimant because he reported the conduct to his supervisor 120 days prior to submitting it to the Commission.

In the Matter of the Claim for Award, Exchange Act Rel. No. 73174. In September 2014, the SEC announced a record-breaking whistleblower award of $30 million. The significance of this award was discussed in a previous blog post.

In the Matter of the Claim for Award, Exchange Act Rel. No. 74404. The SEC did not announce its next whistleblower award until March 2015. This award was the first ever to a former corporate officer who learned of a violation as a result of another employee reporting misconduct through corporate and compliance channels. Typically, officers who learn about fraud through another employee or through a compliance process are not eligible for an award under the whistleblower program. See 17 C.F.R. § 240.21F-4(b)(4)(iii)(A). However, the SEC’s bounty rules provide an exception that makes an officer eligible for an award if he or she provides the information to the SEC more than 120 days after other responsible personnel possessed the information and failed to adequately act on it. See 17 C.F.R. § 240.21F-4(b)(4)(v)(C). The former corporate officer fell within that exception and the SEC awarded the officer between $475,000 and $575,000 for reporting original, high-quality information regarding misconduct under the Dodd-Frank Act.

Denials:

In the Matter of Pipeline Trading Systems LLC, Notice of Covered Action 2011-194. Pipeline Trading Systems LLC (“Pipeline”) and two of its top executives agreed to pay $1 million for the company’s failure to disclose to customers that a majority of orders placed on its “dark pool” trading platform were filled by a trading operation affiliated with Pipeline. The SEC denied the claimant an award because he did not meet the definition of a “whistleblower” under the Exchange Act. (Denial Order Aug. 15, 2014).

In the Matter of the Claim for Award, Exchange Act Rel. No. 72947. On August 29, 2014, the SEC denied an award to a second claimant because the information provided did not lead to the successful enforcement of the covered action and did not contribute to the ongoing investigation.

SEC v. James Roland Dial, Case No. 4.12-CV-01654 (S.D. Tex. 2012), Notice of Covered Action 2012-66. The defendants caused Grifco International Inc. to issue more than 13 million unrestricted securities to themselves and then sold the securities shortly after into a rising artificial market (caused by their dissemination of false and misleading information). The defendants were ordered to pay disgorgement and prejudgment interest. The SEC denied the claimant an award because (1) claimant did not provide “original information” within the meaning of Section 21F(a)(1) of the Exchange Act and Rule 21F-4(b)(1)(iv), (2) the information provided by claimant did not lead to successful enforcement of a covered judicial or administrative action within the meaning of Section 21F(b)(1) of the Exchange Act and Rules 21F-3(a) and 21F-4(c), and (3) claimant was not a “whistleblower” within the meaning of Section 21F(a)(6) of the Exchange Act and Rule 21F-2 because he did not provide information relating to a possible violation of the federal securities laws in accordance with the procedures set forth in Rule 21F-9(a) under the Exchange Act. (Denial Order Feb. 13, 2015).

SEC v. Harbert Management Corporation, HMC-New York, Inc. and HMC Investors, LLC, 12-cv-5029 (S.D.N.Y. 2012), Notice of Covered Action 2012-89. Here, the SEC denied the claimant an award because (1) he did not provide information that led to the successful enforcement within the meaning of Section 21F(b)(1) of the Exchange Act and Rules 21F-3(a)(3) and 21F-4(c), and (2) he failed to submit information in the form and manner that is required under Rules 21F-2(a)(2), 21F-8(a) and 21F-9(a) & (b) of the Exchange Act. (Denial Order Feb. 13, 2015).

SEC v. Kenneth Ira Starr, 10 civ 4270 (S.D.N.Y. 2010), Notice of Covered Action 2012-129. On March 3, 2011, Starr was sentenced to 90 months in prison, ordered to pay more than $30 million in restitution, and ordered to forfeit more than $29 million in connection with his misappropriation of investor funds in connection to a series of cases filed against him by the government, which included charges of money laundering, wire fraud, fraud by an investment advisor, and misappropriation of client funds. This specific action arose from Starr’s misappropriation of at least $8.7 million of his clients’ money. The SEC denied the claimant an award because he or she did not provide information that led to the successful enforcement within the meaning of Section 21F(b)(1) of the Exchange Act and Rules 21F-3(a)(3) and 21F-4(c). (Denial Order Feb. 13, 2015).

SEC v. George Wesley Harris, No. 3:09-cv-01809-M (N.D. Tex. 2009), Notice of Covered Action 2011-206. The Northern District of Texas entered a $4.8 million judgment against Harris and his co-defendants for operating a fraud scheme that promised returns for investing in oil drilling projects in Texas and New Mexico. The SEC denied the award because (1) claimant did not provide information that led to the successful enforcement within the meaning of Section 21F(b)(1) of the Exchange Act and Rules 21F-3(a) and 21F-4(c), and (2) claimant also did not provide the Commission with original information within the meaning for Section 21F(b)(1) of the Exchange Act because Claimant’s submission was not derived from claimant’s independent knowledge or independent analysis. The SEC further noted that the claimant made a false statement on the Form WB-APP, which was signed under penalty of perjury, by stating he or she was “the 44th President of the United States.” (Denial Order Feb. 13, 2015).

The OWB denied two other claims, one on February 13, 2015, and one on February 16, 2015, in orders that make it impossible to tell the name or nature of the underlying action. Both claims were denied, however, because the information provided by the whistleblowers did not provide information that led to the successful enforcement of an action within the meaning of Section 21F(b)(1) of the Exchange Act and Rules 21F-3(a)(3) and 21F-4(c). Specifically, the information did not (1) cause the Commission to (i) commence an examination, (ii) open or reopen an investigation, or (iii) inquire into different conduct as part of a current Commission examination or investigation under Rule 21F-4(c)(1) of the Exchange Act; or (2) significantly contribute to the success of a Commission judicial or administrative enforcement action under Rule 21F-4(c)(2) of the Exchange Act.

Finally, the Second Circuit upheld the SEC’s denial of an award to a whistleblower who provided information to the SEC before the enactment of the Dodd-Frank Act in July 2010. Styker v. S.E.C., No. 13-4404-ag, 2015 U.S. App. LEXIS 3765 (2d Cir. Mar. 11, 2015). The whistleblower submitted information from 2004-2009 to the SEC, which eventually led to a $24 million settlement with Advanced Technologies Group. The Second Circuit rejected the whistleblower’s argument that the SEC went beyond its congressionally mandated authority, and it deferred to the SEC’s interpretation of the law that information submitted prior to July 2010 does not qualify for an award. Id. at *8-9.

ARTICLE BY

William L. Carr
Daniel E. Brewer
Lucas B. Michelen

Fourth Circuit Sustains Securities Fraud Claim Against Drug Manufacturer

Katten Muchin Rosenman LLP

On March 6, the US Court of Appeals for the Fourth Circuit found that the United States District Court for the Western District of North Carolina had erred in dismissing a class action lawsuit filed under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) because the lower court had inappropriately relied on regulatory filings provided to the Securities and Exchange Commission and had incorrectly applied case law precedent. The plaintiff class contended that the defendants, Chelsea International, Ltd. and several of its corporate officers, materially misled investors over the risk associated with securing Food and Drug Administration (FDA) approval for a blood pressure medication that Chelsea was developing. Notably, the plaintiffs alleged that defendants had misled investors to believe that the FDA would approve the drug at issue based on the results of only one successful efficacy study, even though the FDA repeatedly had warned Chelsea that two successful studies and evidence of “duration of effect” would be necessary for approval of the new drug. The Fourth Circuit first held that the District Court erred in finding that Chelsea had failed to demonstrate the scienter necessary to sustain a securities fraud claim under the Exchange Act. The Fourth Circuit found that the District Court erred in its scienter analysis by considering SEC documents submitted by the defendants that were not integral to the complaint. The documents purportedly showed that the defendants did not sell any Chelsea stock during the class period. However, stock sales were never a part of the plaintiffs’ complaint and thus, the Fourth Circuit reasoned that the lower court should not have considered these SEC documents as evidence of the defendants’ intentions. Further, the Fourth Circuit held that material, non-public information known to the defendants about the status of the drug application conflicted with the defendants’ public statements on those subjects, which was an inconsistency the Fourth Circuit deemed sufficient to establish the severe reckless conduct necessary to establish an inference of scienter in securities fraud cases.

Zak v. Chelsea Therapeutics No. 13-2370 (4th Cir. Mar. 16, 2015)

ARTICLE BY

Michael S. Gordon
Katten Muchin Rosenman LLP

Exclusive Study Analyzes 2014 IPOs – Initial Public Offerings

Proskauer Rose LLP, Law Firm

Proskauer’s Global Capital Markets Group has just released its second annual IPO Study, the group’s analysis of U.S.-listed initial public offerings in 2014 and identification of year-over-year comparisons and trends. As with last year’s first edition, it yields a number of noteworthy observations and insights.

The study examines data from 119 U.S.-listed 2014 IPOs with a minimum deal size of $50 million, and also includes separate industry sections on health care; technology, media and telecommunications; energy & power; financial services; industrials; and consumer/retail. This edition expands on last year’s to include an appendix focusing on foreign private issuers, as 2014 experienced a meaningful return of IPO issuers from Europe and Asia. It also makes year-over-year comparisons of extensive data about deal structures and terms, SEC comments and timing, financial profiles, accounting disclosures, corporate governance and deal expenses.

Underlying the study is the proprietary IPO database that we created for the first edition and have subsequently expanded and enhanced, a valuable resource for sponsors and companies considering an IPO as well as for IPO market participants and their advisors.

Download Proskauer’s 2015 IPO Study

ARTICLE BY

Frank Lopez
Proskauer Rose LLP

Advisory Committee’s Recommendations: Positive Sign for South Florida Companies

Bilzin_logo300 dpi

We previously discussed the SEC’s decision to allow businesses to solicit accredited investors and what this could mean for the growth of companies inFlorida. Now, the SEC is weighing whether the definition of ‘accredited investor’ needs to be amended in the context of continuing to guarantee the health of start-up and other companies and their impact on our economy.

On March 4, 2015, the Securities and Exchange Commission Advisory Committee on Small and Emerging Companies approved its written recommendations regarding changes to the SEC’s definition of “accredited investor.”  Every four years starting in 2014, the Dodd-Frank Act requires the SEC to review the definition of “accredited investor,” as it applies to natural persons, to determine whether it should be modified for the protection of investors, in the public interest and in light of the economy. Since the SEC amended its private placement rules in 2013 to allow companies to engage in general solicitation of investors and advertise their private placement offerings, there has been increased focus on whether the SEC should change the definition of “accredited investor.”

Any changes to the definition could have dramatic effects on the private securities markets and the general economy by significantly increasing or decreasing the number of persons who qualify to invest in the private securities markets. To put this in context, more than $1 trillion was raised in private placements in 2013, as compared to $1.3 trillion raised in public offerings in the same year. As noted in the Advisory Committee’s recommendations, since a majority of net new jobs in the United States is generated by companies less than five years old, their ability to raise capital in the private securities markets is critical to the well-being of the United States.

Many proponents for increasing the dollar thresholds for an individual to qualify as an accredited investor argue that such increases are necessary to prevent fraud against investors who may be unable to fend for themselves. However, the Advisory Committee notes that the connection between fraud and the accredited investor thresholds is tenuous at best. In fact, the Advisory Committee found that there is no substantial evidence that the current definition of accredited investor contributes to fraud or that it has resulted in greater exposure to victims of fraud. Furthermore, the Advisory Committee found that there is substantial evidence that the current system works and is critical to supporting privately held businesses and smaller public companies (i.e., those with less than $250 million in public market capitalization). Consistent with these findings, the Advisory Committee’s first recommendation to the SEC is that the SEC’s primary goal in reviewing the definition of accredited investor should be to “do no harm” to the private offering ecosystem and, accordingly, any changes to the definition should expand (and not contract) the pool of accredited investors. As an example, the Advisory Committee recommends including within the definition investors who meet a sophistication test, regardless of income or net worth.

Second, the Advisory Committee recommends that the SEC should, on a going forward basis, periodically adjust the dollar thresholds in the definition for inflation according to the consumer price index. As its final substantive recommendation, the Advisory Committee suggests that the SEC should focus on enhancing its enforcement efforts and increasing investor education, rather than attempting to protect investors by raising the accredited investor thresholds or excluding certain types of assets from the net worth calculation.

The Advisory Committee was established in 2011 to advise the SEC on its rules, regulations and policies with regard to its mission of protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation, as they relate to (1) capital raising by privately held businesses and smaller public companies, (2) trading in the securities of privately held businesses and smaller public companies and (3) public reporting and corporate governance requirements of privately held businesses and smaller public companies.

While the SEC is not bound to follow any of the Advisory Committee’s recommendations, the SEC gives significant weight to the views and recommendations made by the Advisory Committee when considering new rulemaking initiatives. The Advisory Committee’s recommendations are a positive sign for companies in South Florida as they continue to grow their operations and break ground on new projects.

ARTICLE BY

David T. Schubauer
OF
Bilzin Sumberg Baena Price & Axelrod LLP

Goodyear Pays for Sins of Subsidiaries in $16 Million Settlement

Proskauer Rose LLP, Law Firm

Following recent trends, the U.S. Securities and Exchange Commission brought an administrative proceeding against a U.S. issuer for the corrupt activities of its foreign subsidiaries. Earlier this week, Goodyear Tire & Rubber Company agreed to pay the SEC over $16 million to settle charges that it violated the accounting provisions of theForeign Corrupt Practices Act by failing to prevent or detect over $3 million in bribes paid by its Angolan and Kenyan subsidiaries. Goodyear also must report its compliance remediation efforts to the SEC annually for the next three years.

The SEC’s Charges

According to the SEC’s cease and desist order, between 2007 and 2011, Goodyear’s downstream subsidiaries in Kenya andAngola bribed employees of both private and government-owned companies to obtain business. The subsidiaries also bribed police, tax authorities and other local officials, though the SEC’s order did not allege the purposes of those payments. The bribes “were falsely recorded as legitimate business expenses in the books and records of the subsidiaries, which were consolidated into Goodyear’s books and records.”

The SEC found that “Goodyear did not prevent or detect these improper payments because it failed to implement adequate FCPA compliance controls at its subsidiaries” and, for the Kenyan subsidiary, “because it failed to conduct adequate [pre-acquisition] due diligence.” Goodyear was not alleged to have any involvement with or knowledge of its subsidiaries’ illicit conduct. Nonetheless, comments by Scott Friestad, Associate Director of the SEC’s Enforcement Division, displayed the SEC’s willingness to hold parent companies responsible for failing to adequately supervise their subsidiaries: “Public companies must keep accurate accounting records, and Goodyear’s lax compliance controls enabled a routine of corrupt payments by African subsidiaries that were hidden in their books.”

Lessons Learned

  1. Benefits of self-disclosure, cooperation, and remediation: Although Goodyear had to disgorge over $14 million in profits from its Kenyan and Angolan operations, and over $2 million in prejudgment interest, it avoided a civil penalty. This relatively favorable outcome likely is due to Goodyear’s timely self-disclosure to the SEC after receiving information about the bribes (through internal whistleblower mechanisms), its substantial cooperation with the SEC during the course of the investigation, and its extensive remediation efforts. Those efforts included divesting one subsidiary and preparing to divest the other, disciplining employees, and enhancing its anti-corruption compliance program. The settlement bolsters repeated assertions by law enforcement and regulatory officials that companies who self-disclose and cooperate will be rewarded with leniency.

  2. Buyers (and parents) beware: Parent companies may be on the hook for their subsidiaries’ misconduct, even when the parent company does not participate in or know about the illicit activities. Indeed, the SEC was careful to note that the Kenyan subsidiary’s corrupt activities may have begun prior to Goodyear’s acquisition, and could have been identified through adequate pre-acquisition due diligence. Pre- and even post-acquisition anti-corruption due diligence has become mandatory for companies that seek to acquire entities in high-risk foreign jurisdictions. And after the transaction is consummated, parents who are subject to the FCPA’s accounting provisions must ensure that their subsidiaries maintain robust internal controls and accurate books and records, regardless of whether they too are issuers.

  3. FCPA charges may include commercial bribery: According to the SEC’s order, both of Goodyear’s subsidiaries paid bribes not only to employees of government-owned entities, but also to employees of private companies. This settlement should serve as a reminder that although the FCPA’s anti-bribery provisions only extend to the bribery of foreign government officials, the accounting provisions may be used to prosecute commercial bribery.

  4. Expect more FCPA enforcement actions in administrative proceedings: Companies facing a civil FCPA enforcement action by the SEC must remain cognizant of the likelihood that the proceedings will play out on the administrative stage. Defendants in administrative forums face truncated deadlines, an absence of judicial scrutiny and limited appellate rights, and cannot avail themselves of the protections in the Federal Rules of Evidence and Civil Procedure. The SEC likely will continue to seek home-court advantage, whenever possible.

ARTICLE BY

Sigal P. Mandelker
Rochelle H Emert
Phillip J. Caraballo-Garrison
Proskauer Rose LLP

A Primer on the Foreign Corrupt Practices Act

Gonzalez Saggio & Harlan logo

The conduct of your employees can implicate statutes other than the familiar federal and state fair employment laws, and an unwary employer can find itself subject to stiff fines and unwelcomed publicity by ignoring its compliance obligations under those statutes. For example, does your company conduct business abroad, and, if so, are you familiar with the Foreign Corrupt Practices Act (“FCPA”)? If you are an entity traded on an American exchange, incorporated under the laws of the United States, or acting while in the territory of the United States, or you are an individual who is an officer, director, employee, agent, or shareholder of such a company, are a citizen of the United States, or are a person acting in the United States, you are subject to liability under the FCPA. The FCPA prohibits giving or attempting to give anything of value to a foreign official in order to influence any act or decision of the foreign official in his or her official capacity or to secure any other improper advantage in order to obtain or retain business. The phrase “anything of value” has a very broad definition and includes even charitable contributions or gifts to family members of foreign officials, and bribes come in all shapes and sizes, often making them difficult to detect.

In recent years, the Securities and Exchange Commission(“SEC”) and Department of Justice (“DOJ”) have increased their focus on FCPA compliance, including securing a record $772 million fine against one company last year. Those agencies have also been increasingly targeting (or, at least, stated their intentions to increasingly target) individual actors, in addition to the increased enforcement against companies. This means that you and your employees are at risk under the FCPA in the event of a suspected or actual violation.

A robust FCPA compliance program can be a strong defense or prevention against FCPA issues. Compliance programs should be individually and narrowly developed and tailored to a company’s needs and risks. While there is no guaranteed checklist for an effective compliance program given the unique nature of companies, some hallmarks of an effective FCPA compliance program are:

  • A commitment from senior management and a clearly articulated policy against corruption;

  • Well-established and -disseminated codes of conduct and compliance policies and procedures;

  • Sufficient oversight, autonomy, authority, and resources for the program;

  • Risk assessment, resource allocation, and due diligence proportional to the type of activity or business opportunity, the particular country and industry sector, potential business partners, level and amount of government involvement, governing regulation and oversight of the activity, and exposure to customs and immigration in conducting the business;

  • Training and continuing advice throughout the company that clearly communicates, in the local language where appropriate, the policies and procedures, case studies, and practical advice for real-life scenarios individuals will encounter in their specific roles;

  • Disciplinary measures that are well publicized and clearly applicable to all levels of the organization;

  • Effective due diligence, review, and monitoring of transactions and dealings with third parties and vendors, as they are among the most common means through which violations take place;

  • Mechanisms that facilitate and encourage confidential reporting, such as hotlines or ombudspersons, and that properly document and evaluate actual and possible FCPA issues; and

  • Periodic testing, review, audit, and analysis of the effectiveness of the program to ensure it is the best program in place for your organization.

However, as employers with strong anti-discrimination and anti-harassment policies know, even the best written and most well-intentioned policies cannot guarantee insulation from liability or from investigation by the government of suspected/potential violations. In the event a company discovers a violation by its employees, the DOJ and SEC encourage self-reporting and cooperation by entities and individuals, and cooperation can facilitate and expedite any potential investigation by government authorities and possibly result in non-prosecution agreements and reduced penalties.

Conversely, failing to disclose known violations can result in harsher penalties, thus providing incentive to identify and self-report violations. For its part, the government has created incentives to increase the chances that if a company will not report violations, its employees will. The Dodd-Frank Act established a whistleblower program that rewards whistleblowers between 10-30% of total recovery when the recovery exceeds $1 million, giving financial incentive for individual employees to come forward with reports of FCPA violations. Another important consideration when developing FCPA compliance measures and programs is to ensure that the compliance program is independent of and given due weight in relation to business decisions. All too often, FCPA issues are not timely discovered when compliance programs are not properly implemented because of a perceived business cost, and companies and employees face crippling fines and punishment as a result.

In any event, companies that are navigating these waters would be wise to consult with experienced legal counsel familiar with the FCPA and the government agencies charged with its enforcement, both when developing any compliance program and when dealing with a suspected violation.

ARTICLE BY

Radha Kulkarni
OF
Gonzalez Saggio & Harlan LLP

SEC Charges Chilean Citizens With Insider Trading Concerning Tender Offer for Chilean

Katten Muchin Law Firm

The Securities and Exchange Commission recently filed suit in the US District Court for the Southern District of New York, alleging that defendants, Juan Cruz Bilbao Hormaeche and Thomas Andres Hurtado Rourke, both Chilean citizens, illegally traded on material non-public information that Abbott Laboratories was interested in purchasing CFR Pharmaceuticals, S.A., a pharmaceutical company headquartered in Chile.

According to the complaint, on March 10, 2014, CFR’s Board of Directors met to consider Abbott’s offer to purchase CFR; Bilbao, then a member of the board, participated by telephone. After the meeting, between March 12, 2014 and May 7, 2014, Bilbao allegedly directed his business associate, Hurtado, to place trades purchasing more than $14 million in American Depository Shares (ADSs) of CFR in a US brokerage account maintained in the name of a British Virgin Islands company for the benefit of Bilbao. The SEC further alleges that based on knowledge of confidential information, Hurtado purchased 35,000 ADSs of CFR for $707,710. On May 16, 2014, Abbott announced a definitive agreement to acquire CFR, and on September 23, 2014, Abbott completed the tender offer. According to the SEC, Bilbao tendered his ADSs to Abbott on or before September 23, 2014, and saw a profit of more than $10.1 million. The SEC further alleges Hurtado tendered his ADSs to Abbott for a profit of about $495,000.

The SEC sued defendants for illegally trading on insider information. The SEC alleges that the nexus to the United States is the initial purchase of the ADSs through US-based brokerage accounts. The SEC seeks an order freezing defendants’ assets, an order requiring defendants to repatriate funds obtained from the alleged illegal activities, a final judgment that defendants violated the securities laws, and an order directing defendants to disgorge any illegal gains and to pay civil penalties.

Complaint, SEC v. Hormaeche, No. 14-cv-10036-RJS (S.D.N.Y. Dec. 22, 2014).

ARTICLE BY

Emily Stern
Zachary D. Denver
OF
Katten Muchin Rosenman LLP

SEC Sanctions Operator of Unregistered Virtual Currency Exchanges

Katten Muchin Law Firm

On December 8, the Securities and Exchange Commission sanctioned a computer programmer for operating two online exchanges that traded securities using virtual currencies without registering them as broker-dealers or stock exchanges. The programmer, Ethan Burnside, operated the two exchanges through his company, BTC Trading Corp., from August 2012 to October 2013. Account holders were able to purchase securities in virtual currency businesses using bitcoins on BTC Virtual Stock Exchange and using litecoins on LTC-Global Virtual Stock Exchange. The exchanges were not registered as broker-dealers but solicited the public to open accounts and trade securities. The exchanges also were not registered as stock exchanges but enlisted issuers to offer securities to the public for purchase and sale. Burnside also offered shares in LTC-Global Virtual Stock Exchange itself, as well as interests in a separate Litecoin mining venture, LTC-Mining, in exchange for virtual currencies. The SEC charged Burnside with willful violations of Sections 5(a) and 5(c) of the Securities Act of 1933 and Burnside and BTC Trading Corp. with willful violations of Sections 5 and 15(a) of the Securities Exchange Act of 1934. Burnside cooperated with the SEC’s investigation and settled, paying more than $68,000 in profits plus interest and a penalty. The SEC also barred Burnside from the securities industry.

The action may indicate that the SEC is taking a closer look at decentralized platforms for trading virtual currency using cryptocurrency technology, but the SEC has neither confirmed nor denied such speculation. In recent months, the SEC has reportedly sent voluntary information requests to companies and online “crypto-equity exchanges” offering equity and related interests denominated in virtual currency and websites offering digital tokens for programming platforms. A discussion of the SEC’s voluntary information sweep is available here.

Click here to read the SEC Press Release and here to read the SEC order.

ARTICLE BY

Evan L. Greebel
Kathleen H. Moriarty
Michael M. Rosensaft
Claudia Callaway
Robert Loewy
Gregory E. Xethalis
OF
Katten Muchin Rosenman LLP

What ERISA Plans Should Know about Money Market Reform

Drinker Biddle Law Firm

Most U.S. money market funds will begin restructuring their operations beginning in 2014 and throughout 2015 and 2016 as a result of the SEC’s adoption of wide ranging changes to the rules regulating these funds.  Since many plan participants invest in money market funds, ERISA plan sponsors, recordkeepers and investment consultants and other advisers will need to plan for operational, contractual, disclosure and other changes in connection with these new rules.

Floating and Stable NAV Funds

One of the biggest rule changes involves how money market funds will be allowed to value their shares.  Currently, money market funds generally offer shares at a stable net asset value (“NAV’) of $1.00.  Under the SEC’s new money market rules, only government and “retail” money market funds can offer their shares at a stable NAV.  Government money market funds are those funds that hold at least 99.5% of their investments in government securities, cash or repurchase agreements collateralized by government securities.  Money market funds that don’t qualify to offer shares at a stable NAV because of the nature of their shareholder base (i.e., institutional money market funds) will have to float their NAVs, meaning the share price will fluctuate from day to day.

Retail money market funds are funds that restrict investors only to beneficial owners that are natural persons.  A beneficial owner is any person who has direct or indirect, sole or shared voting and/or investment power.  Under the new rules, retail money market funds will be required to reasonably conclude that beneficial owners of intermediaries are natural persons.  The SEC stated that tax-advantaged savings accounts and trusts, such as (i) participant-directed defined contribution plans; (ii) individual retirement accounts; (iii) simplified employee pension arrangements, and other similar types of arrangements, would qualify for the natural person test.  On the other hand, defined benefit plans, endowments and small businesses are not considered “natural persons” and would not be eligible to invest in a retail money market fund.

It is widely expected that the SEC’s new money market rules will result in many changes in fund offerings.  For example:

  • Money market funds that currently have both institutional and natural persons as holders may spin off the institutional holders into separate floating NAV funds;

  • Some institutional funds may decide to liquidate or merge with other funds;

  • Some advisers may begin offering new money fund-“like” products that only hold short term securities (60 days or less maturity) and therefore value fund holdings at amortized cost; and

  • Some prime money market funds may change their investment strategies to operate as a government money market fund in order to steer clear of the floating NAV and liquidity fee and gate rules (discussed below).

Effect on ERISA Plans.  The SEC provided examples of how funds could satisfy the natural person definition with intermediaries, including through: contractual arrangements, periodic certifications and representations or other verification methods.  Accordingly, ERISA service providers who hold fund shares in omnibus accounts may expect to be contacted by retail money market funds to provide these certifications or representations and/or to enter into new agreements with funds for this purpose.

ERISA plan sponsors and investment consultants and advisers will also need to be alert to potential changes to existing money market funds currently offered in plans to which they provide services and/or new fund offerings that may be appealing to and/or better serve the best interests of participants.

Liquidity Fees and Redemption Gates

All money market funds, except government money market funds, will be subject to the SEC’s new rules with respect to the imposition of liquidity (or redemption) fees and redemption gates during periods when a money market fund’s weekly liquid assets dip below certain thresholds.  Under these new rules a fund board may impose up to a 2% liquidity fee and a gate on fund redemptions if weekly liquid assets fall below 30% of total assets.  The fund board must impose a 1% liquidity fee if weekly liquid assets fall below 10% of total assets, unless the board decides otherwise.  Of course, if 10% of a money market fund’s assets are below 10% of a fund’s total assets, it would be unlikely that a board would not impose liquidity fees and redemption gates.  The redemption gates can last no longer than 10 days and cannot be imposed more than once in a 90-day period.

Effect on ERISA Plans.  The liquidity fee and gate requirements will usually only be triggered in times of extreme market stress.  But they are features that many ERISA participants and ERISA service providers will not find appealing.  For that reason, there may be more demand from participants for government money market funds, which may, but are not required to, comply with the fee and gate rules.  It is not expected that government money market funds will opt to become subject to these fee and gate rules.

The liquidity fee and redemption gate rules will require recordkeepers to make technical changes in their operations.  These operational changes could be expensive and time consuming to implement especially for smaller plans.  In particular, it should be noted that liquidity fees may vary in amount depending on a fund board’s determination and redemption gates may vary in the amount of days and will need to be removed quickly upon notice by a fund board.  Additionally, there may be contractual impediments to implementation of liquidity fees and gates, which are discussed below.

Many commenters on the proposed money market rules raised questions with the SEC regarding possible conflicts caused by the application of the fee and gate rules to funds in ERISA and other tax-exempt plans.  Specifically, commenters mentioned the following issues with the fee and/or gate rules:

  • possible violations of certain minimum distribution rules that could be interfered with by the gate rule;

  • potential taxation as a result of the inability to process certain mandatory refunds on a timely basis;

  • delays in plan conversions or rollovers;

  • possible conflicts with the Department of Labor’s (“DOL”) qualified default investment (“QDIA”) rules; and

  • conflicts with plan fiduciaries’ duties regarding maintenance of adequate liquidity in their plans.

The SEC’s response generally was that these concerns either were unlikely to materialize or could be mitigated by ERISA plan sponsors or service providers.  For example, with respect to QDIAs, the SEC suggested that a plan sponsor or service provider could (i) loan funds to a plan for operating expenses to avoid the effects of a gate, or (ii) pay a liquidity fee on behalf of a redeeming participant.  In connection with rollovers or conversions, the SEC likewise pointed out that if the liquidity fee caused a hardship on a participant, then the ERISA fiduciary or its affiliate could simply pay the liquidity fee; failing that, the SEC suggested that the fiduciary consider a government money market fund for investment purposes, which is not required to comply with the fee and gate rules.

The SEC continues to work with the DOL on these and other ERISA-and tax exempt specific issues but thus far has not provided any relief from its fee and gate rules for these types of plans and accounts.  Thus, ERISA fiduciaries and plan sponsors may need to consider money market fund offerings in their plans in light of these issues.

Contractual Issues

As noted above, the “natural person” requirements for retail money market funds will require these funds to ascertain information regarding beneficial ownership of fund shares from ERISA intermediaries.  Retail money market funds may ask ERISA intermediaries to make representations about their customers through revised service agreements containing representations about the nature of the intermediaries’ customers.  These funds may also use periodic certifications or questionnaires to obtain this information.

In addition, many existing contracts between money market funds and intermediaries have restrictions in them regarding the imposition of redemption fees and may restrict a fund’s right to delay effecting redemptions thereby putting them in conflict with the new liquidity fee and redemption gate rules.  Recordkeepers who contract with retail or institutional money market funds may therefore be asked by these funds to amend or otherwise revise their servicing agreements with the funds to provide for liquidity fees and redemption gates.

Pricing Changes

The new money market rules will require all floating NAV money market funds to price their shares to four decimal places (e.g., $1.0000).  Recordkeepers will need to adjust their systems to accommodate the four-decimal place pricing system.

Disclosure and Education/Training

ERISA service providers will need to train and educate their personnel on the new money market rules and fund options so that they can answer participants’ questions.  ERISA service providers will need to develop disclosure for ERISA participants that clearly describes the risks and differences in money market funds and new fund options.

Compliance Dates

The new money market rules take effect in various stages over the next two years.  Importantly, the floating NAV, decimal pricing, and liquidity fee and gate rules become effective on October 14, 2016.  That said, the mutual fund industry appears to be moving quickly to prepare to comply, and it is probable that investment advisers to money market funds will begin to make some changes, for example, creating new funds and separating retail and institutional shareholders into different funds well ahead of the 2016 compliance date.  Therefore, ERISA service providers will need to be alert to the possibility that their operations may need to be adjusted as these changes occur.

The SEC’s new money market rules will usher in many changes to money market funds over the next 18-24 months that will affect ERISA and tax-exempt participants who invest in these vehicles and ERISA service providers.  ERISA service providers should begin preparing for these changes by assessing their systems, as applicable, to evaluate whether they can comply with the new rules and, if not, what other investment options might be available to address participants’ short-term investment needs.  ERISA service providers may also want to consider whether non-government money market funds or other short-term liquidity vehicles should be offered to ERISA participants in light of the new fee and gate rules.

ARTICLE BY

Diana E. McCarthy
OF
Drinker Biddle & Reath LLP