Precious Metals Fraud Takes Customers for $290 Million

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The Commodity Futures Trading Commission has filed an enforcement action against one of the largest precious metals fraud cases in its history. In light of that action, we thought it important to remind victims and industry professionals about the CFTC whistleblower program, which offers rewards for nonpublic information about violations of the Commodity Exchange Act.

In total, the CFTC says the companies scammed thousands of retail customers out of more than $290 million. The entities based in Newport Beach, California, are charged with failure to register as a Futures Commission Merchant (FCM) and defrauding retail customers by pitching leveraged trading in precious metals as a safe, secure and profitable investment.

As part of the Dodd-Frank Act, Congress required certain leveraged commodity transactions to be traded on a regulated exchange. One exception provided by the law is for metals transactions that result in actual, physical delivery within 28 days. For the most part though, Dodd-Frank banned most over the counter (OTC) retail contracts involving gold, silver and other metals. Because the companies were not registered and were not engaging in transactions on a regulated exchange, the CFTC alleges that they were in violation of the Dodd-Frank Act.

The complaint also alleged that the entities were defrauding customers through misleading statements and taking advantage of customers through extraordinarily large spreads for transactions (sometimes as much as 100 times what would be found on a regulated exchange).

The CFTC complaint seeks a preliminary injunction to stop marketing of the program, disgorgement of the profits of the venture and the return of the investor funds (restitution).

Off exchange precious metals fraud has been an active area of enforcement for the CFTC over the past five years, although the typical case is more frequently in the several million dollar range. The CFTC offers whistleblowers in this area rewards of between 10 and 30 percent of the amount recovered under the terms of its Dodd-Frank whistleblower program if the amount recovered is in excess of $1 million.

If you have evidence of the operation of a precious metals fraud, please call 1-800-590-4116 to speak confidentially to Eric Young or one of our other CFTC whistleblower lawyers about reporting it.

SEC, CFTC Directors Speak on Whistleblower Programs

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The Chief of the SEC’s Office of the Whistleblower, Jane Norberg, and the Director of the CFTC Whistleblower Office, Christopher Ehrman, spoke recently at the Practicing Law Institute’s program on June 28, 2017, titled Corporate Whistleblowing in 2017. Their comments covered a wide range of hot topics in the field of whistleblower law and were relayed in a recent JDSupra article, so we thought them appropriate to briefly detail here for current and potential Dodd-Frank whistleblowers.

Both Norberg and Ehrman emphasized that the programs are open for business and going well. Norberg said that the United States has recovered over $1 billion as a result of enforcement actions and related actions arising from whistleblower tips. Ehrman emphasized that the CFTC Whistleblower Office is growing, seeing an increase in staffing, tips, and high quality tips. Ehrman expected 2017 to be a strong year for the CFTC Whistleblower program.

About the SEC Whistleblower program, Norberg spoke significantly on whistleblower protection. Protecting whistleblowers from retaliation and efforts to chill their reports are a top priority according to Norberg. Norberg believes that that the SEC’s interpretation of the Dodd-Frank anti-retaliation provision to protect whistleblowers who report internally is the only one consistent with the incentives to encourage internal reporting put in place by the SEC. Norberg also discussed Rule 21F-17, but did not definitely state whether the Rule also covers non-US employment agreements. Instead, she said that it would depend on the facts and circumstances of the case.

About the CFTC Whistleblower program, Ehrman spoke specifically on the changes to the CFTC whistleblower program that will go into effect on July 31, 2017. As he explained, the changes are intended to enhance whistleblower protections and revise the claims review process to mirror the SEC program. Ehrman did not provide a definitive answer to the question of whether the changes would apply retroactively. He said that they are considering it and would let everyone know when they have reached a definitive answer.

We will continue to post information here that provides insight as to any changes in the program during the Trump Administration.

9th Circuit: Internal SEC Whistleblowers Can Sue Under Dodd-Frank Anti-Retaliation Provision

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On a 2-1 decision, the Ninth Circuit has affirmed the right of internal whistleblowers to sue under the Dodd-Frank Act after they are retaliated against for informing their company of suspected violations of federal securities laws. The circuit split on anti-retaliation protections for internal SEC whistleblowers now consists of the Second and Ninth Circuits in favor and the Fifth Circuit against.

In the Ninth Circuit case, the employee reported several possible securities law violations to senior management and was terminated shortly thereafter. The Ninth Circuit opinion said that he was not able to report his concerns to the SEC before he was fired. After suing for retaliation, the defendant sought to dismiss, arguing that he did not meet the definition of “whistleblower” under the Dodd-Frank Act.

The opinion in Somers v. Digital Realty Trust Inc., Case No. 15-17352, 2017 WL 908245 (9th Cir. March 8, 2017) sides with the Second Circuit in Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2015) and disagrees with the Fifth Circuit in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013).

The majority opinion in Somers notes the ambiguity in the statute on the definition of whistleblower as well the limited scope of protections provided by a strict interpretation of the text which would contravene the Congressional intent. Moreover, it notes that the explicit reference to internal reporting provisions of the Sarbanes-Oxley Act meant that Congress could not have been applying the previous definition of whistleblower to this subsection. It then defers to the SEC regulation as a reasonable agency interpretation of the ambiguity pursuant to the Chevron doctrine.

Since Asadi, the SEC has waged war against companies arguing that internal whistleblowers are not protected under Dodd-Frank. It has submitted amicus briefs in support of its position in several cases, including Berman and Somers. It looked close for a while there as a few courts sided with the defendants following Asadi. Now, it has hopefully been firmly resolved in favor of protecting internal whistleblowers.

The Cost of Retaliation Against Whistleblowers is Increasing for Business

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Firing whistleblowers for informing the government about corporate activities has been standard practice at many businesses for a long time. That practice may be changing quickly if the government continues to pursue enforcement actions against companies engaged in retaliation and juries continue to provide multi-million dollar verdicts to whistleblowers.

This week, the media reported an $11 million verdict in the whistleblower retaliation lawsuit against Biorad. The jury verdict included $2.96 million in economic losses and $5 million in punitive damage. The back pay award will be doubled by the retaliation provisions set forth in the whistleblower protections of the Dodd-Frank Act.  The whistleblower’s attorneys are also expected to file to recoup their costs and fees from the pursuit of the lawsuit.

The lawsuit involved an internal whistleblower report made by their General Counsel concerning potential bribery in their China operations. In 2014, the life science company paid $55 million to the DOJ and SEC to settle the allegations of violations of the Foreign Corrupt Practices Act (FCPA).

The whistleblower lawsuit was not based on information provided to the SEC. Instead, the case was based on the SEC regulations that allow an internal whistleblower to successfully bring a case of retaliation under the Dodd-Frank Act.  The SEC has successfully argued for this interpretation of its power several times when challenged by defendants.

The high jury verdict is not an aberration. A few months ago, we covered the news of a $20 million jury verdict in California in favor of a whistleblower. These verdicts suggest that the public is more willing to see whistleblowers as a boon to society rather than a snitch.

Independently, the SEC has also pursued a number of enforcement actions for whistleblower retaliation and attempting to impede communications with the SEC over the past few years. These actions have definitely picked up, with four resolving over the past two months.

Dodd-Frank has been the subject of a great deal of media and government attention recently as President Trump has vowed to rollback its regulations. He has already signed an executive order instructing the Treasury Secretary to identify changes to it. His press secretary called it a “disastrous policy”.

But the whistleblower provisions have been highly effective, resulting in the recovery of hundreds of millions of dollars for violations of the federal securities laws. It also resulted in more protections for whistleblowers, which should be applauded. We urge them to keep these provisions as they look to cut portions from Dodd-Frank to ease the regulatory burden.

Spoofing Whistleblower Emerges in Oystacher Lawsuit

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A trader at a market making firm and his colleague filed a tip with the CFTC whistleblower program about suspected illegal spoofing by Igor Oystacher after discovering suspicious trading activity in the E-mini S&P 500 futures contract market in 2013, according to a Bloomberg article. The CFTC has brought a lawsuit against Oystacher and is seeking to bar him from trading while the lawsuit proceeds. Other agencies / exchanges, such as the Justice Department, continue to investigate the conduct underlying the case.

On cross-examination, the whistleblower admitted that he stands to personally profit if the CFTC is successful. Although this scenario has undoubtedly played out numerous times in the False Claims Act, where a relator’s identity is specifically identified in the lawsuit, it is the first I have heard of it taking place for a Dodd-Frank whistleblower.

Another interesting aspect of the emergence of the whistleblower in this case is its confirmation of the SEC data that a significant number of individuals filing a Form TCR with the agency are neither employees or former employees. Based on the information, it looks like we can continue to expect the U.S. Government to take seriously the tips of victims, competitors and industry experts about misconduct in the securities market.

The Dodd-Frank Act included the first provision to specifically make spoofing in the markets illegal. Spoofing is the practice of bidding or offering on an exchange with the intent to cancel prior to execution. In November 2015, the first individual (a commodities trader) was convicted of the crime of spoofing in a trial. The case was called a landmark in the prosecution of traders for spoofing.

The spoofing case against Oystacher deals with the same product that is at the heart of the flash crash lawsuit, in which there are also reports of a CFTC whistleblower. Based on a review of the news articles in that case, the accused trader is planning to appeal a decision in the United Kingdom that he is subject to extradition to the United States to face the lawsuit. We will keep you up to date if there are any significant events in that case as well.

Update:  The plot thickens as it appears there will be multiple submissions for rewards if the CFTC is successful in receiving more than $1 million in monetary sanctions.  The general counsel of a large hedge fund has also filed a tip with the CFTC whistleblower office concerning anonymous traders engaged in spoofing from 2013 from 2015 in the futures market.  These activities were identified by an algorithm after the company began identifying unusual losses due to the cancellation of large orders.

In the case of multiple whistleblowers, the CFTC will most likely follow the SEC approach paying out rewards both for original information as well as smaller amounts for the substantial contributions of later whistleblowers providing similar, but valuable, information.

To speak to one of our CFTC whistleblower attorneys about a potential tip or questions about the program, please call 1-800-590-4116.

Jury Returns Guilty Verdict in First Spoofing Trial

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The U.S. Attorney’s Office has emerged victorious in a groundbreaking jury trial prosecuting a commodities trader for illegal spoofing. The jury found the high-frequency trader guilty of 12 counts of fraud and market manipulation of the futures market. It was the first criminal trial prosecuting spoofing.

According to the jury, the trader improperly influenced the price of futures contracts on the Chicago Mercantile Exchange. As a result, he may be sentenced to up to 25 years in prison. However, more legal challenges are expected in this case as his attorney has promised to pursue all legal options going forward.

Bloomberg called it the “Biggest Test Yet” of the Dodd-Frank Act’s prohibition on the practice of placing orders with the intent to cancel them. The measure has been controversial because the activity is marked by canceling orders on the exchange, which is perfectly legal unless accompanied by the specific intent not to have those orders executed.

Some experts had expressed concerns that the jury would have difficulty understanding the concept and would vote to acquit. High speed traders frequently cancel a significant percentage of their trades when they are not engaged in market manipulation. Government prosecutions of spoofing so far seem to go after oversized trades with a cancellation rate approaching 100 percent.

This may be the first of many prosecutions, as several other cases are working their way through the system. Perhaps the highest profile is the CFTC charges brought against a London trader for misconduct on the day of the May 2010 flash crash. A CFTC whistleblower reportedly helped the commodities regulator isolate the importance of these trades.

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SEC Corporate Disclosure Issues: Bank Products, Oil Drilling, Conflict Minerals and Cybersecurity

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Investor disclosures have been a bit of a hot button issue this week, with three topics hitting the news that impact issues concerning what corporations are required to tell their shareholders and potential purchasers. Update: After reviewing the news, it looks like there are two more as well.

JPM Investment Steering

J.P. Morgan Chase is expected to pay more than $150 million to settle an investigation into the disclosures its bankers made to clients as they steered them to in-house products. The SEC and Office of the Comptroller of the Currency have been investigating for at least a year because the bank’s products typically have higher fees than other options in the marketplace. The investigation is into the practices of the wealth management division at JPM toward their private-banking clients.

The investigation also relates to potential conflicts of interests. SEC registered investment advisers must meet the fiduciary standard with their clients. If hedge funds pay placement agent fees to JPM broker-dealer affiliates, the advisers may be conflicted.

Separately, Indiana has been conducting an investigation into JPMorgan procedures concerning the suitability of investments for clients. The media reports do not indicate that this investigation will be wrapped up as part of the settlement talks with the SEC.

Offshore Drilling

The price of oil isn’t the only trouble that may be facing oil and gas companies. A group of Senators have sent a letter to the SEC asking them to investigate whether these companies have adequately disclosed the risks of their offshore operations to investors. The letter focuses on drilling in the Gulf of Mexico, Arctic Ocean and other areas. The Senators believe the inherent risks of environmental problems, equipment failures and financial costs may be insufficiently disclosed.

This letter follows up on a petition a number of organizations filed a petition with the SEC in April concerning disclosures made by Shell Oil regarding its Arctic drilling program. The petition suggests that the company has not adequately disclosed the potential for billions in losses from an oil spill at an exploratory well.

This could be an interesting potential area for a whistleblower with information about a company that is facing potential losses in the development of long term assets offshore and yet hasn’t disclosed them to investors.

Conflict Minerals

A portion of the corporate disclosures required by the Dodd-Frank Act has been invalidated by a D.C. Circuit Court of Appeals ruling this week. Companies must file reports with the SEC stating whether products are free of conflict minerals. However, the company can not be forced to disclose on its website that its products are not conflict free. The D.C. Circuit relied on the free speech clause of the First Amendment.

Cybersecurity

The Ashley Madison hack and release of information about its customers may also cause the SEC to take another look at the disclosures required by corporations to investors related to cybersecurity. The SEC released guidance on cybersecurity issues to registered investment advisers this year but the last guidance for corporations related to cybersecurity risks and cyber incidents was issued in 2011. Given the substantial intrusions in this area since then, it seems like a topic that is ripe for additional comment by securities regulators. Ashley Madison isn’t publicly traded, but earlier this year it had discussed an IPO in London in the future. The escalation of these sorts of issues, including the insider trading cases, however, has to be on the radar of the SEC at this point.

Quarterly Reports

Wachtell, Lipton has asked the SEC to consider eliminating the requirement for quarterly earnings reports. Corporations have come under criticism from politicians and others recently for share buybacks and other gimmicks to increase stock gains in the short term while neglecting long term investments needed to increase shareholder value in the long term. Corporations have been required by the SEC to provide a quarterly financial report since the 1970s. The original requirement dates back to 1934, when the annual requirement was installed.

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