Tag: SEC

Dodd-Frank Whistleblower Litigation Heating Up

Barnes Thornburg

The past few months have been busy for courts and the SEC dealing with securities whistleblowers. The Supreme Court’s potentially landmark decision in Lawson v. FMR LLC back in March already seems like almost ancient history.  In that decision, the Supreme Court concluded that Sarbanes-Oxley’s whistleblower protection provision (18 U.S.C. §1514A) protected not simply employees of public companies but also employees of private contractors and subcontractors, like law firms, accounting firms, and the like, who worked for public companies. (And according to Justice Sotomayor’s dissent, it might even extend to housekeepers and gardeners of employees of public companies).

Since then, a lot has happened in the world of whistleblowers. Much of the activity has focused on Dodd-Frank’s whistleblower-protection provisions, rather than Sarbanes-Oxley. This may be because Dodd-Frank has greater financial incentives for plaintiffs, or because some courts have concluded that it does not require an employee to report first to an enforcement agency. The following are some interesting developments:

What is a “whistleblower” under Dodd-Frank?

This seemingly straightforward question has generated a number of opinions from courts and the SEC. The Dodd-Frank Act’s whistleblower-protection provision, enacted in 2010, focuses on a potentially different “whistleblower” population than Sarbanes-Oxley does. Sarbanes-Oxley’s provision focuses particularly on whistleblower disclosures regarding certain enumerated activities (securities fraud, bank fraud, mail or wire fraud, or any violation of an SEC rule or regulation), and it protects those who disclose to a person with supervisory authority over the employee, or to the SEC, or to Congress.

On the other hand, Dodd-Frank’s provision (15 U.S.C. §78u-6 or Section 21F) defines a “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission.”  15 U.S.C. §78u-6(a)(6).  It then prohibits, and provides a private cause of action for, adverse employment actions against a whistleblower for acts done by him or her in “provid[ing] information to the Commission,” “initiat[ing], testif[ing] in, or assist[ing] in” any investigation or action of the Commission, or in making disclosures required or protected under Sarbanes-Oxley, the Exchange Act or the Commission’s rules.  15 U.S.C. §78u-6(h)(1). A textual reading of these provisions suggests that a “whistleblower” has to provide information relating to a violation of the securities laws to the SEC.  If the whistleblower does so, an employer cannot discriminate against the whistleblower for engaging in those protected actions.

However, after the passage of Dodd-Frank, the SEC promulgated rules explicating its interpretation of Section 21F. Some of these rules might require providing information to the SEC, but others could be construed more broadly to encompass those who simply report internally or report to some other entity.  Compare Rule 21F-2(a)(1), (b)(1), and (c)(3), 17 C.F.R. §240.21F-2(a)(1), (b)(1), and (c)(3). The SEC’s comments to these rules also said that they apply to “individuals who report to persons or governmental authorities other than the Commission.”

Therefore, one issue beginning to percolate up to the appellate courts is whether Dodd-Frank’s anti-retaliation provisions consider someone who reports alleged misconduct to their employers or other entities, but not the SEC, to be a “whistleblower.” The only circuit court to have squarely addressed the issue (the Fifth Circuit in Asadi v. G.E. Energy (USA) LLC) concluded that Dodd-Frank’s provision only applies to those who actually provide information to the SEC.

In doing so, the Fifth Circuit relied heavily on the “plain language and structure” of the statutory text, concluding that it unambiguously required the employee to provide information to the SEC.  Several district courts, including in Colorado, Florida and the Northern District of California, have concurred with this analysis.

More, however, have concluded that Dodd-Frank is ambiguous on this point and therefore have given Chevrondeference to the SEC’s interpretation as set forth in its own regulations. District courts, including in the Southern District of New York, New Jersey, Massachusetts, Tennessee and Connecticut, have adopted this view. The SEC has also weighed in, arguing (in an amicus brief to the Second Circuit) that whistleblowers should be entitled to protection regardless of whether they disclose to their employers or the SEC.  The agency said that Asadi was wrongly decided and, under its view, employees that report internally should get the same protections that those who report to the SEC receive. The Second Circuit’s decision in that case (Liu v. Siemens AG) did not address this issue at all.

Finally, last week, the Eighth Circuit also decided not to take on this question. It opted not to hear an interlocutory appeal, in Bussing v. COR Securities Holdings Inc., in which an employee at a securities clearing firm provided information about possible FINRA violations to her employer and to FINRA, rather than the SEC, and was allegedly fired for it. The district court concluded that the fact that she failed to report to the SEC did not exclude her from the whistleblower protections under Dodd-Frank. It reasoned that Congress did not intend, in enacting Dodd-Frank, to encourage employees to circumvent internal reporting channels in order to obtain the protections of Dodd-Frank’s whistleblower protection.  In doing so, however, the district court did not conclude that the statute was ambiguous and rely on the SEC’s interpretation.

A related question is what must an employee report to be a “whistleblower” under Dodd-Frank. Thus far, if a whistleblower reports something other than a violation of the securities laws, that is not protected. So, for example, an alleged TILA violation or an alleged violation of certain banking laws have been found to be not protected.

These issues will take time to shake out. While more courts thus far have adopted, or ruled consistently with, the SEC’s interpretation, as the Florida district court stated, “[t]he fact that numerous courts have interpreted the same statutory language differently does not render the statute ambiguous.”

Does Dodd-Frank’s whistleblower protection apply extraterritorially?

In August, the Second Circuit decided Liu. Rather than focus on who can be a whistleblower, the Court concluded that Dodd-Frank’s whistleblower-protection provisions do not apply to conduct occurring exclusively extraterritorially. In Liu, a former Siemens employee alleged that he was terminated for reporting alleged violations of the FCPA at a Siemens subsidiary in China.  The Second Circuit relied extensively on the Supreme Court’s Morrison v. Nat’l Aust. Bank case in reaching its decision. In Morrison, the Court reaffirmed the presumption that federal statutes do not apply extraterritorially absent clear direction from Congress.

The Second Circuit in Liu, despite Liu’s argument that other Dodd-Frank provisions applied extraterritorially and SEC regulations interpreting the whistleblower provisions at least suggested that the bounty provisions applied extraterritorially, disag
reed. The court concluded that it need not defer to the SEC’s interpretation of who can be a whistleblower because it believed that Section 21F was not ambiguous.  It also concluded that the anti-retaliation provisions would be more burdensome if applied outside the country than the bounty provisions, so it did not feel the need to construe the two different aspects of the whistleblower provisions identically.  And finally, the SEC , in its amicus brief, did not address either the extraterritorial reach of the provisions or Morrison, so the Second Circuit apparently felt no need to defer to the agency’s view on extraterritoriality.

Liu involved facts that occurred entirely extraterritorially. He was a foreign worker employed abroad by a foreign corporation, where the alleged wrongdoing, the alleged disclosures, and the alleged discrimination all occurred abroad. Whether adding some domestic connection changes this result remains for future courts to consider.

The SEC’s Use Of The Anti-Retaliation Provision In An Enforcement Action

In June, the SEC filed, and settled, its first Dodd-Frank anti-retaliation enforcement action. The Commission filed an action against Paradigm Capital Management, Inc., and its principal Candace Weir, asserting that they retaliated against a Paradigm employee who reported certain principal transactions, prohibited under the Investment Advisers Act, to the SEC. Notably, that alleged retaliation did not include terminating the whistleblower’s employment or diminishing his compensation; it did, however, include removing him as the firm’s head trader, reconfiguring his job responsibilities and stripping him of supervisory responsibility. Without admitting or denying the SEC’s allegations, both respondents agreed to cease and desist from committing any future Exchange Act violations, retain an independent compliance consultant, and pay $2.2 million in fines and penalties.  This matter marks the first time the Commission has asserted Dodd-Frank’s whistleblower provisions in an enforcement action, rather than a private party doing so in civil litigation.

The SEC Announces Several Interesting Dodd-Frank Bounties

Under Dodd-Frank, whistleblowers who provide the SEC with “high-quality,” “original” information that leads to an enforcement action netting over $1 million in sanctions can receive an award of 10-30 percent of the amount collected. The SEC recently awarded bounties to whistleblowers in circumstances suggesting the agency wants to encourage a broad range of whistleblowers with credible, inside information.

In July, the agency awarded more than $400,000 to a whistleblower who appears not to have provided his information to the SEC voluntarily.  Instead, the whistleblower had attempted to encourage his employer to correct various compliance issues internally. Those efforts apparently resulted in a third-party apprising an SRO of the employer’s issues and the whistleblower’s efforts to correct them. The SEC’s subsequent follow-up on the SRO’s inquiry resulted in the enforcement action. Even though the “whistleblower” did not initiate communication with the SEC about these compliance issues, for his efforts, the agency nonetheless awarded him a bounty.

Then, just recently, the SEC announced its first whistleblower award to a company employee who performed audit and compliance functions. The agency awarded the compliance staffer more than $300,000 after the employee first reported wrongdoing internally, and then, when the company failed to take remedial action after 120 days, reported the activity to the SEC. Compliance personnel, unlike most employees, generally have a waiting period before they can report out, unless they have a reasonable basis to believe investors or the company have a substantial risk of harm.

With a statute as sprawling as Dodd-Frank, and potentially significant bounty awards at stake, opinions interpreting Dodd-Frank’s whistleblower provisions are bound to proliferate. Check back soon for further developments.

 
ARTICLE BY

Brian E. Casey
 
OF 
Barnes & Thornburg LLP

North Carolina General Assembly Fails to Jump Start Our Businesses with Crowdfunding Legislation

Poyner Spruill Law firm

Crowdfunding is a relatively new capital raising tool, which was generally used in the past as a financing method for such ventures as films and music recordings.  To date, crowdfunding has not been a popular method for offering and selling securities because offering a share of financial returns or profits from business activities would subject the transaction to federal and state securities laws, requiring certain registrations with the Securities and Exchange Commission (SEC) and state securities regulators. U.S. Securities and Exchange Commission, SEC Issues Proposal on Crowdfunding (October 23, 2013).

In 2012, Congress passed the JOBS Act (Jumpstart Our Business Startups Act).  The JOBS Act, among other things, added a new section, 4(a)(6), to the Securities Act of 1933, creating a new exemption for certain crowdfunding offerings from SEC and state law registration requirements.  However, before the law can become effective the SEC must promulgate and implement rules regulating the exemption.  For further information on the JOBS Act, please see The JOBS Act—An Overview and Some Recent Developments, written by Michael E. Slipsky and David R. Krosner.

As of this summer, the SEC has proposed rules for crowdfunding, but those rules are not final. A dozen states are making an effort to join Georgia, Kansas, Michigan, Alabama, Maine, Washington, Wisconsin, and Indiana by developing their own regulations allowing crowdfunding within the states. States are growing frustrated and tired of waiting for the SEC to adopt federal regulations.  See Posting of Bill Meagher to TheDeal.com, States make own crowdfunding rules, rather than wait for SEC (May 5, 2014, 15:03 EST).

In response to the federal delay, Representative Tom Murry of Wake County sponsored state legislation attempting to allow and regulate crowdfunding in North Carolina, filing House Bill 680, the JOBS Act, on April 9, 2013.  House Bill 680 did not pass the Senate and was not eligible for consideration in the 2014 short session.  For that reason, in June the House added the crowdfunding provisions, titled, “Jump-Start Our Business Start-Ups Act,” to the 32 page fifth edition of Senate Bill 734, Regulatory Reform Act of 2014. 

When compromise discussions between the House and Senate on Senate Bill 734 stalled, the Senate added to House Bill 1224 various provisions regarding modifications to the local government sales and use tax rate as well as other provisions including the crowdfunding provisions.  House Bill 1224 had been filed at the beginning of the short session as a bill modifying the Job Maintenance and Capital Development Fund.  The House rejected the Senate’s modifications of House Bill 1224.  As a result, the House and Senate appointed a conference committee, and the committee made its report on July 31, 2014.  The Proposed Conference Committee Substitute was passed by the Senate, however it failed in the House. 

The final version of House Bill 1224, the Proposed Conference Committee Substitute, would have allowed North Carolina residents to invest up to only $2,000 per purchaser – unless the purchaser is an accredited investor as defined by rule 501 of SEC regulation D, 17 C.F.R. § 230.501 – in new in-state ventures through the crowdfunding mechanism.  It would have allowed most companies to raise up to $1 million in capital through unregistered securities without a financial audit and up to $2 million in capital if the issuer has undergone and made available to each prospective investor and the Secretary of State the documentation resulting from a financial audit.  Essentially companies would have been able to sell securities directly to the North Carolina public without having to incur the expense of conducting a registered securities offering.  The NC Secretary of State would have been tasked with the regulation of these types of transactions and would have collected quarterly reports.  See Posting of Mark Binker to WRAL TechWire, Crowdfunding bill clears N.C. Senate Committee,  (July 16, 2014 14:08 EST).

The General Assembly has adjourned sine die.  Although crowdfunding provision had an opportunity to become law during the 2014 short session in either Senate Bill 734 or the Proposed Conference Committee Substitute of House Bill 1224, the General Assembly did not pass the crowdfunding provision.  House Bill 1224 failed in the House and the compromise finally reached for Senate Bill 734 in the ratified bill excluded the crowdfunding provision.  There is a possibility the crowdfunding provision could again be considered before the 2015 session, scheduled for late January, if three-fifths of all members of the Senate and three-fifths of all members of the House vote to do so, as provided in Section 11(2) of Article II of the North Carolina Constitution.  However, the more likely scenario for the General Assembly to return would be for a “special session” by call of the Governor.  As provided in Section 5(7) of Article 3 of North Carolina Constitution, “[t]he Governor may, on extraordinary occasions, by and with the advice of the Council of State, convene the General Assembly in extra session by his proclamation, stating therein the purpose or purposes for which they are thus convened.”

ARTICLE BY

Jillian DeCamp
 
OF 
Poyner Spruill LLP

Quarterly Whistleblower Award Update – August 21, 2014

Drinker Biddle Law Firm

Since our last quarterly update, the SEC’s Office of the Whistleblower (“OWB”) has issued four denial orders and three award orders. Here are some lessons learned from this activity:

  • The SEC Will Not Award Whistleblowers Who Provide Frivolous Information. The SEC determined that a claimant (who submitted “tips” relating to almost every single Notice of Covered Action”) was ineligible for awards because he/she “has knowingly and willfully made false, fictitious, or fraudulent statements and representations to the Commission over a course of years and continues to do so.” Under Rule 21F-8, persons are not eligible for an award if they “knowingly and willfully make any false, fictitious, or fraudulent statement or representation, or use any false writing or document knowing that it contains any false, fictitious, or fraudulent statement or entry with intent to mislead or otherwise hinder the Commission or another authority.” 17 C.F.R. § 240.21F-8(c)(7). The OWB found that a number of passages submitted by the claimant were patently false or fictitious and that the person had the requisite intent because of the (1) incredible nature of the statements, (2) continued submissions that lack any factual nexus to the overall actions, and (3) refusal to withdraw unsupported claims at the request of the OWB. (May 12, 2104.)

  • The SEC Will Enforce the Time Frames Set Forth in the Statue. The OWB denied two awards because the claimants did not submit an award claim within the 90-day period established by Rule 21F-10(b). The claimants argued that OWB should waive the 90-day period due to extraordinary circumstances. See 17 C.F.R. § 240.21F-8(a). The OWB determined that neither a lack of awareness that the information that the whistleblower had shared would lead to a successful enforcement action nor the lack of awareness that the Commission posted Notices of Covered Actions on its website constitutes an extraordinary circumstance to waive the timing requirement. See SEC Release No. 72178 (May 16, 2014) and SEC Release No. 72659 (July 23, 2014).

  • Whistleblowers are Not Eligible for an Award Unless the Information Leads to a Successful Enforcement Action. The OWB denied an award to a claimant because the provided information did not lead to a “successful enforcement by the Commission of a federal court or administrative action, as required by Rules 21F-3(a)(3) and 21F-4(c) of the Exchange Act.” OWB also noted that the claimant did not submit information in the form and manner required by Rules 21F-2(a)(2), 21F-8(a), and 21F-9(a) & (b) of the Exchange Act. See In the Matter of Harbinger Capital Partners, LLC, File No. 3-14928 (July 4, 2014).

The OWB Can Be Persuaded to Change Its Preliminary Determination. Although the OWB initially denied the whistleblower’s award claim on the basis that the information did not appear to have been voluntarily submitted within Rule 21F-4(a)(ii) because it was submitted in response to a prior inquiry conducted bya self-regulatory organization (“SRO”). In a Final Determination issued on July 31, 2014, however, the OWB determined that claimant was entitled to more than $400,000. OWB noted that a submission is voluntary if it is provided before a request, inquiry, or demand for information by the SEC in connection with an investigation by the Public Company Accounting Oversight Board, any self-regulatory organization, Congress, the federal government, or any state Attorney General.

On the basis of the unique circumstances of this case, the OWB decided to waive the voluntary requirement of Rule 21F-4(a) for this claimant. The SEC noted that the claimant “worked aggressively … to bring the securities law violations to the attention of appropriate personnel,” the SRO inquiry originated from information that in part described claimant’s role, claimant believed that the company had provided the SRO with all the materials that claimant developed during his/her own internal efforts, and claimant promptly reporting to the SEC that the company’s internal efforts as a result of the SRO inquiry would not protect investors from future harm. Sean McKessy, chief of the SEC’s Office of the Whistleblower, remarked that “[t]he whistleblower did everything feasible to correct the issue internally. When it became apparent that the company would not address the issue, the whistleblower came to the SEC in a final effort to correct the fraud and prevent investors from being harmed. This award recognizes the significance of the information that the whistleblower provided us and the balanced efforts made by the whistleblower to protect investors and report the violation internally.”See SEC Release No. 72727 (July 31, 2014); SEC Press Release, “SEC Announces Award for Whistleblower Who Reported Fraud to SEC After Company Failed to Address Issue Internally,” (July 31, 2014).

  • SEC Continues to Make Awards to Qualified Claimants. On June 3, 2014, the SEC awarded two claimants 15% each for a total of 30% percent of the monetary sanctions collected in the covered action. See SEC Release No. 72301 (June 3, 2014). On July 22, 2014, the SEC awarded three claimants 15%, 10%, and 5% respectively (for a total of 30%) of the monetary sanctions collected in the Covered Action. See SEC Release No. 72652 (July 22, 2014).

ARTICLE BY

William L. Carr
Daniel E. Brewer
 
OF
Drinker Biddle & Reath LLP

SEC Brings Fraud Charges Against Oil and Gas Company and Its CEO

Katten Muchin Law Firm

On August 4, the Securities and Exchange Commission instituted cease-and-desist proceedings against Houston American Energy Corp., an oil and gas exploration and production company, and John F. Terwilliger, its CEO, for making fraudulent claims about the company’s oil reserves. According to the SEC, during late 2009 and early 2010, Houston American raised approximately $13 million in a public offering and saw its stock price increase from less than $5 to more than $20 per share after fraudulently claiming that a Colombian exploration concession, in which Houston American owned a fractional interest, held between one billion and four billion barrels of oil reserves that would be worth the equivalent of $100 per share to investors. The SEC alleged that those estimates lacked any reasonable basis and were falsely attributed to the concession’s operator, who actually had much lower estimates. The SEC order charged Houston American and Mr. Terwilliger with violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act); Rule 10b-5, Section 20(b) of the Exchange Act; and Section 17(a) of the Securities Act of 1933. The SEC seeks a civil penalty and disgorgement from Houston American, and to prohibit Mr. Terwilliger from acting as an officer and director of the company.

Matter of Houston American Energy Corp. et al, Admin. Proceeding No. 3-16000 (Aug. 4, 2014).

ARTICLE BY

Michael S. Gordon
Ashley H. Jones
Of
Katten Muchin Rosenman LLP

SEC Commissioner Highlights Need for Cyber-Risk Management in Speech at New York Stock Exchange

Proskauer Law firm

Cyber risks are an increasingly common risk facing businesses of all kinds.  In a recent speech given at the New York Stock Exchange, SEC Commissioner Luis A. Aguilar emphasized that cybersecurity has grown to be a “top concern” of businesses and regulators alike and admonished companies, and more specifically their directors, to “take seriously their obligation to make sure that companies are appropriately addressing those risks.”

Commissioner Aguilar, in the speech delivered as part of the Cyber Risks and the Boardroom Conference hosted by the New York Stock Exchange’s Governance Services department on June 10, 2014, emphasized the responsibility of corporate directors to consider and address the risk of cyber-attacks.  The commissioner focused heavily on the obligation of companies to implement cybersecurity measures to prevent attacks.  He lauded companies for establishing board committees dedicated to risk management, noting that since 2008, the number of corporations with board-level risk committees responsible for security and privacy risks had increased from 8% to 48%.  Commissioner Aguilar nevertheless lamented what he referred to as the “gap” between the magnitude of cyber-risk exposure faced by companies today and the steps companies are currently taking to address those risks.  The commissioner referred companies to a federal framework for improving cybersecurity published earlier this year by the National Institute of Standards and Technology, which he noted may become a “baseline of best practices” to be used for legal, regulatory, or insurance purposes in assessing a company’s approach to cybersecurity.

Cyber-attack prevention is only half the battle, however.  Commissioner Aguilar cautioned that, despite their efforts to prevent a cyber-attack, companies must prepare “for the inevitable cyber-attack and the resulting fallout.”  An important part of any company’s cyber-risk management strategy is ensuring the company has adequate insurance coverage to respond to the costs of such an attack, including litigation and business disruption costs.

The insurance industry has responded to the increasing threat of cyber-attacks, such as data breaches, by issuing specific cyber insurance policies, while attempting to exclude coverage of these risks from their standard CGL policies.  Commissioner Aguilar observed that the U.S. Department of Commerce has suggested that companies include cyber insurance as part of their cyber-risk management plan, but that many companies still choose to forego this coverage.  While businesses without cyber insurance may have coverage under existing policies, insurers have relentlessly fought to cabin their responsibility for claims arising out of cyber-attacks.  Additionally, Commissioner Aguilar’s speech emphasizes that cyber-risk management is a board-level obligation, which may subject directors and officers of companies to the threat of litigation after a cyber-attack, underscoring the importance of adequate D&O coverage.

The Commissioner’s speech offers yet another reminder that companies should seek professional advice in determining whether they are adequately covered for losses and D&O liability arising out of a cyber-attack, both in prospectively evaluating insurance needs and in reacting to a cyber-attack when the risk materializes.

Read Commissioner Aguilar’s full speech here.

ARTICLE BY

Shawn Ledingham
OF
Proskauer Rose LLP

SEC Settles Charges Against Hedge Fund Adviser for Conducting Prohibited Transactions and Retaliating Against Whistleblower

Vedder Price Law Firm

On June 16, 2014, the SEC settled charges against a hedge fund advisory firm,Paradigm Capital Management, Inc., for engaging in principal transactions with an affiliated broker-dealer without providing effective disclosure to, or obtaining effective consent from, a hedge fund client. The SEC also settled charges against the firm’s owner, Candace Weir, for causing the improper principal transactions.

According to the SEC’s order, Paradigm’s former head trader made a whistleblower submission to the SEC that revealed the principal transactions between Paradigm and the affiliated broker-dealer. The SEC found that, after learning that its head trader had reported potential violations to the SEC, Paradigm engaged in a series of retaliatory actions that ultimately resulted in the head trader’s resignation. This is the first time the SEC has filed a case under its new authority to bring anti-retaliation enforcement actions. According to the SEC, Ms. Weir conducted transactions between Paradigm and an affiliated broker-dealer while trading on behalf of a hedge fund client. The SEC’s order also found that Paradigm failed to provide effective written disclosure to the hedge fund and did not obtain its consent as required prior to the completion of each principal transaction. The SEC’s order stated that Paradigm attempted to satisfy the written disclosure and consent requirements by establishing a conflicts committee to review and approve each of the principal transactions on behalf of the hedge fund. The SEC’s order found that the conflicts committee itself, however, was conflicted, because its two members, Paradigm’s chief financial officer and chief compliance officer, each reported to Ms. Weir and Paradigm’s CFO also served as CFO of the affiliated broker-dealer. The SEC also found that Paradigm’s Form ADV was materially misleading for failing to disclose its CFO’s conflict as a member of the conflicts committee.

The SEC’s order found that Paradigm violated, among other things, Sections 206(3) and 207 of the Advisers Act. The SEC’s order also found that Ms. Weir caused Paradigm’s violations of Section 206(3) of the Advisers Act. Paradigm and Ms. Weir agreed to jointly and severally pay disgorgement of $1.7 million for distribution to current and former investors in the hedge fund, and pay prejudgment interest of $181,771 and a penalty of $300,000. Paradigm also agreed to retain an independent compliance consultant.

Article By:

Investment Services Group
Of:
Vedder Price

SEC Settles Civil Foreign Corrupt Practices Act (FCPA) Action Against Two Former Oil Services Executives

Katten Muchin

On the eve of a trial which was scheduled to begin this week, the Securities and Exchange Commission settled a civil Foreign Corrupt Practices Act (FCPA) case it brought against two former oil services executives. The case was an outgrowth of anindustry-wide investigation the SEC had initially commenced beginning in 2010.

In February 2012, the SEC filed a complaint against Mark A. Jackson, who was the former CEO and CFO of Noble Corporation, and James J. Ruehlen, former Director and Division Manager of Noble’s Nigerian subsidiary, alleging that they authorized the payment of bribes to customs officials to process false paperwork that purported to show the export and re-import of oil rigs, which was necessary under the requirements of Nigerian law. In fact, the rigs had never been moved. The SEC alleged that the scheme was part of a design to save Noble from losing business and incurring costs associated with exporting rigs from Nigeria and re-importing them under new permits. The complaint asserted violations of the anti-bribery and books and records provisions of the FCPA. The complaint also detailed the fact that Jackson had refused to cooperate during Noble’s internal investigation of the matter and had asserted his Fifth Amendment rights and refused to testify during the SEC investigation.

The settlement with Jackson and Ruehlen was the last in a lengthy saga of FCPA actions against Noble and its former employees. Noble was initially charged with FCPA violations in a civil action in 2010. The company settled, agreeing to pay more than $8 million in fees. The SEC filed charges against Jackson and Ruehlen in 2012 following the corporate settlement and also filed charges against Thomas F. O’Rourke, the former controller and head of internal audit at Noble. O’Rourke quickly settled and agreed to pay a penalty.

Despite pursuing the action for more than two years and alleging serious wrongdoing by the defendants, including responsibility for an extensive bribery scheme, the SEC agreed to settle with Jackson and Ruehlen just two days before their trial was to commence with an injunction against violating the books and records provision of the FCPA. Although Noble had settled its own case for a hefty penalty, neither Jackson nor Ruehlen were required to pay a fine, concede a violation of the bribery provisions of the FCPA nor agree to restrictions on employment.

SEC v. Jackson et al., No. 4:12-c-00563 (S.D. Tex. Jul. 7, 2014).  

Article By:

Emily Stern
Ashley H. Jones
Of:
Katten Muchin Rosenman LLP

2nd Conflict Minerals Reporting and Supply Chain Transparency Conference- June 23-25, Chicago, IL

The National Law Review is pleased to bring you information about the 2nd Conflict Minerals Reporting and Supply Chain Transparency Conference, June 24-25, 2014, presented by Marcus Evans.Conflict-Minerals-250-x-250

Click here to register.

Where

Chicago, IL

When

June 24-25, 2014

What

The 2nd Sustaining Conflict Minerals Compliance Conference will break down each SEC filing requirement as well as examine direct filing examples from specific companies. Discussions will tackle key issues including refining conflict minerals teams to create a more successful conflict minerals management program, managing and developing consistent communication within the supply chain, and building an IT program that will continue to secure data from the various levels of the supply chain.

This conference will allow organizations to benchmark their conflict minerals management program against their peers to more efficiently meet SEC expectations and amend their program for future filings. Seating is limited to maintain and intimate educational environment that will cultivate the knowledge and experience of all participants.

Key Topics
  • Scrutinize the Securities and Exchange Commission (SEC) requirements and evaluate external resources for a more efficient conflict minerals rule with Newport News Shipbuilding, Huntington Ingalls Industries
  • Engineer a sustainable conflict minerals program for future filings with Alcatel-Lucent
  • Integrate filings and best practices from the first year of reporting with BlackBerry
  • Maintain a strong rapport with all tiers of your supply chain to increase transparency with KEMET
  • Obtain complete responses moving throughout the supply chain with Global Advanced Metals

Register today!

SEC (Securities and Exchange Commission) Gives Insider Trader a $30,000 Slap On The Wrist

DrinkerBiddle

On April 23, 2014, the SEC agreed to settle insider trading charges against Chris Choi, a former accounting manager at Nvidia Corporation who allegedly set into motion a trading scheme that reaped nearly $16.5 million in illicit profits and avoided losses. Given the amount of the purported loss, the fact that Choi was the original “tipper,” and the fact that nearly every other member of the scheme has been indicted, the Choi settlement seems like nothing more than a slap on the wrist: a $30,000 penalty without admitting to the insider trading allegations. The Choi settlement also represents a notable departure from the SEC’s recent insider trading fines and penalties against “tippers.”

According to the SEC’s complaint, on at least three occasions during 2009 and 2010, Choi tipped material nonpublic information about Nvidia’s quarterly earnings to his friend Hyung Lim. SEC v. Choi, No. 14-cv-2879 (S.D.N.Y. Apr. 23, 2014). Lim passed the information along to Danny Kuo, a hedge fund manager at Whittier Trust Company, who passed the information to his boss and to a group of managers at three other hedge funds.

Kuo and the other tippee-hedge fund managers used Choi’s information to trade in advance of Nvidia earnings announcements and reaped trading gains and/or avoided losses of approximately $16.5 million.

The SEC alleged that Choi was liable for this trading because he “indirectly caused trades in Nvidia securities that were executed” by the hedge funds and “did so with the expectation of receiving a benefit and/or to confer a financial benefit on Lim.” The SEC charged him with violations of Section 10(b) of the Exchange Act (and Rule 10b-5) and Section 17(a) of the Securities Act.

Choi, without admitting or denying the SEC’s allegations, agreed to settle the matter and to the entry of an order: (1) permanently enjoining him from violations of Section 10(b), Rule 10b-5, and Section 17(a); (2) barring him from serving as an officer or director of certain issuers of securities for five years; and (3) ordering him to pay a $30,000 penalty.

Not only is Choi’s settlement a significant departure from the resolutions obtained by his “downstream” tippees, a number of whom were convicted on criminal charges of insider trading, it is a departure from recent SEC “tipper” settlements. For example:

  • A former executive at a Silicon Valley technology company, who allegedly tipped convicted hedge fund manager Raj Rajaratnam with nonpublic information that allowed the Galleon hedge fund to make nearly $1 million profit, agreed to pay more than $1.75m to settle the SEC’s insider trading charges. See SEC Charges Silicon Valley Executive for Role in Galleon Insider Trading Scheme.
  • A physician who served as the chairman of the safety monitoring committee overseeing a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies, who allegedly tipped a hedge fund manager with safety data and eventually data about negative results in the trial approximately two weeks before they became public, which allowed the hedge fund to make nearly $276 million in gains, agreed to pay more than $234,000 in disgorgement and prejudgment interest to settle the SEC’s insider trading charges. The physician’s penalty may have been mitigated by the fact that he cooperated with and received a non-prosecution agreement from the U.S. Attorney’s Office in a parallel criminal action. See SEC Charges Hedge Fund Firm CR Intrinsic and Two Others in $276 Million Insider Trading Scheme Involving Alzheimer’s Drug.
  • A former executive director of business development at a pharmaceutical company located in New Jersey, who allegedly tipped a hedge fund manager (a friend and former business school classmate) with material nonpublic information regarding the company’s anticipated acquisition that allowed the manager to make nearly $14 million in gains, escaped criminal prosecution and agreed to pay a $50,000 penalty to settle the SEC’s insider trading charges. See SEC Charges Pharmaceutical Company Insider and Former Hedge Fund Manager for Insider Trading, Resulting in Approximately $14 Million in Profits.

There are a few reasons the SEC may have settled with Choi for such a small civil penalty. First, the SEC recently settled with Lim, the second chain in the insider trading scheme. Lim tentatively agreed to disgorgement or to pay a penalty once he has completed his cooperation with the U.S. Attorney’s Office for the Southern District of New York and has been sentenced in its pending, parallel criminal action¾ i.e., United States v. Lim, 12-cr-121 (S.D.N.Y.). It also could be Choi’s limited financial means. We likely will never know the reason for the SEC’s agreed-upon resolution, but the fact of the resolution may have some value to other defendants.

Article By:

William L. Carr
Kevin A. Wisniewski
Of:
Drinker Biddle & Reath LLP

 

Conflict Minerals Rule Update: D.C. Circuit Court Denies Request for Stay

Andrews Kurth

As most readers are likely aware, on April 14, 2014, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) dismissed a variety of challenges to the SEC’s conflict minerals rule, but found unconstitutional the rule’s requirement that issuers report, in a conflict minerals report to be filed with the SEC and posted on the issuer’s publicly available website, that any of their products have “not been found to be ‘DRC conflict free.’” Following the SEC’s partial stay of the aspects of the conflict minerals rule the court found to be unconstitutional,1 the appellants in the litigation as to the rule’s validity petitioned the D.C. Circuit for an emergency stay of the entire rule. On May 14, 2014, the D.C. Circuit denied the emergency motion without explanation.2

As a result of this development, issuers subject to reporting obligations under the rule should be working on finalizing their Form SDs and any necessary conflict minerals reports. Issuers must file these forms and reports with the SEC by the June 2, 2014 filing deadline. Issuers should prepare their reports in accordance with the guidance provided in the recent statement (Statement) of the Director of the SEC’s Division of Corporation Finance (CorpFin)3 that indicated that the CorpFin staff expects that filed Form SDs and conflict minerals reports will comply with and address those portions of the rule that the D.C. Circuit upheld and that provided guidance on the disclosure to be provided in Form SDs and conflict minerals reports in light of the D.C. Circuit’s April decision.

As the D.C. Circuit’s April decision created many interpretive questions that the Statement did not fully answer, issuers should stay tuned to see if CorpFin issues further disclosure guidance as the filing deadline nears.

1. See SEC, Order Issuing Stay In the Matter of Exchange Act Rule 13p-1 and Form SD, Rel. No. 34-72079 (May 2, 2014), available at http:// www .sec.gov/rules/other/2014/34-72079.pdf. Only the requirement that issuers report in a conflict minerals report to be filed with the SEC and posted on the issuer’s publicly available website that any of their products have “not been found to be ‘DRC conflict free’” is stayed. Please see our client alert dated May 2, 2014, SEC Issues Partial Stay of Conflict Minerals Rule.

2. nchorOrder, Nat’l Assoc. of Mfrs. v. SEC, No. 13-5252 (D.C. Cir. May 14, 2014).

3. nchorSee Keith F. Higgins, Director, SEC Div. of Corp. Fin., Statement on the Effect of the Recent Court of Appeals Decision on the Conflict Minerals Rule (Apr. 29, 2014), available at www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370541681994. Please see our client alert dated May 2, 2014, The Conflict Minerals Rule: Important Recent Developments, for a discussion of the guidance provided in the Statement.

Article By:

Dudley W. Murrey
G. Michael O’Leary
Eric R. Markus
Of:
Andrews Kurth