Five Years After Flash Crash: SEC, CFTC Ask Congress for More Money


The SEC and CFTC asked Congress for more money yesterday to allow the securities and commodities regulators to have additional resources to expand efforts in registration/examination, data management & surveillance, investigations and enforcement. Today is the fifth year anniversary of the Flash Crash, when the market plummeted nearly 1,000 points very quickly, without apparent reason, before rebounding.

It was with that anniversary overhanging them that SEC Chair Mary Jo White and CFTC Commissioner Timothy Massad testified before the U.S. Senate Committee on Appropriations, Subcommittee on Financial Services and General Government regarding their requests for FY 2016 budget increases.

Among these requests, the SEC asked for more staff to review, triage and investigate incoming Form TCRs from whistleblowers. SEC Chair Mary Jo White recently applauded the success of the whistleblower program created by the Dodd-Frank Act and said that the program was getting both more tips and higher quality tips as it matures. We encourage Congress to grant that request. Hopefully, the SEC will also be able to address the issue that we discussed in one of our blog posts yesterday on the backlog of SEC whistleblower claims for awards. The fact that some have been waiting for more than two years after the SEC successfully concluded an enforcement action will be a problem as the program grows.

Although I have not looked up the figures for the SEC, the Former CFTC Commissioner Bart Chilton’s article in USA Today yesterday said that the CFTC is investigating over 1,000 individuals and entities with only a few hundred enforcement staff. If it were as simple as dividing up the files so that each person takes 5 or 10 files, then this might work. But the CFTC is pursuing investigations that may lead to document productions of hundreds of thousands of chat sessions, emails, system alerts, phone calls and other recorded evidence of their business that the CFTC must comb through in order to compile the evidence of corporate misconduct. Some of its investigations involve billions of dollars in potential settlements, including the ISDAfix, precious metals and dividend arbitration investigations. And that’s without mentioning the three that have been capturing the headlines for the past two years: Libor, Forex benchmark rates and currency manipulation.

There’s other ways to see the effect of the limited resources of these agencies. For example, the 10 organizations overseeing the Consolidated Audit Trail (CAT), a project which is supposed to allow real time monitoring of stock and option orders for manipulation, haven’t even awarded a contract to one of the six firms bidding on it. They also haven’t addressed how they will pay for the program which is expected to cost between $150 and $500 million in its first five years.

CAT is expected to help the regulators detect and prevent events like the flash crash, but it is still years from implementation. In the meantime, an in depth investigation by both the SEC and the CFTC following the market plummet and recovery didn’t reveal wrongdoing by the UK trader that is now the subject of a CFTC enforcement action.

It was a whistleblower that eventually turned the eyes of the U.S. Government to the trader that contributed to the flash crash, and I think that’s important to remember. In the event of limited resources, it’s best to put your cash where you can get the biggest return on investment. Whistleblowers have been paying off for the United States for more than 20 years under the False Claims Act. And now the Dodd-Frank Act seems to be heating up.

Congress should grant the request to provide the SEC, and the CFTC if it needs it, more money to investigate whistleblower tips and pursue enforcement actions against the companies engaged in misconduct.

If you have questions about the SEC whistleblower program or have evidence of misconduct by a company, one of our SEC whistleblower attorneys can assist you. Please contact us or call 1-800-590-4116 to speak to a lawyer at McEldrew Young.

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SEC Questions Sale of Complex Securities to Retail Investors


Commissioner Luis Aguilar told a securities conference that the Securities and Exchange Commission will bring more enforcement actions against companies selling complex securities and structured products, including equity-indexed annuities, leveraged and inverse ETFs, reverse convertibles, alternative mutual funds and structured notes, to less sophisticated retail investors.

Following the financial crisis, the SEC created the Complex Financial Instruments Unit to investigate big banks misleading sophisticated investors with collateralized debt obligations and other structured products. The unit is now addressing more cases on inappropriate products with insufficient disclosures sold to mom-and-pop investors.

Aguilar said that the SEC expects more enforcement actions in this area. The Commission is also going to take an enhanced look at new structured products submitted by registrants to offer to retail investors.

The talk highlighted structured notes as one area that has become popular and targets retail investors. According to the data, 99% of purchasers in the $45 billion market are retail investors. A recent Investor Bulletin from the Commission pointed out that the complexity of the payoff structures, opaque pricing, high fees, illiquidity and other risks makes it difficult to believe that investors who are not highly trained financial professionals can understand them with the current disclosures.

From the prepared remarks, it seems that we can expect most of the enforcement actions to be centered around inadequate disclosures to investors.

If you have information about a bank, broker or other financial professional targeting investors with inappropriate products for their risk tolerances and level of education, please contact us. Our whistleblower attorneys will review your evidence for a potential submission to the SEC whistleblower program.

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SEC Settles Bristol-Myers FCPA Investigation in China for $14 Million


Bristol Myers Squibb settled an enforcement action brought by the Securities & Exchange Commission into allegations that BMS violated aspects of the Foreign Corrupt Practices Act (FCPA) for $14 million.

The SEC alleged that the pharmaceutical manufacturer’s majority owned joint venture paid cash and other benefits to Chinese medical professionals in exchange for prescription drug sales. BMS was charged by the SEC with violations of the record keeping and internal controls provisions of the FCPA. The SEC did not bring charges against BMS for violating the bribery provisions of the FCPA.

Specifically, BMS recorded as advertising and promotional expenses cash payments and expenses for gifts, speaker fees, conference sponsorships and meetings provided to health-care practitioners at state-owned and state-controlled hospitals as well as employees of state-owned pharmacies made to secure prescription sales in China. BMS false recorded these transactions as legitimate business expenses in its books and records.

The SEC also cited the company for failing to respond effectively to red flags within the BMS China unit. Several employees reportedly wrote emails to the head of BMS China in late 2010 and early 2011 indicating that there was no other way to meet their sales targets other than to violate the bribe doctors. BMS China did not investigate.

BMS also did not have sufficient compliance initiatives in place or timely correct internal control deficiencies.. For example, there was no permanent compliance position in China until 2010 and the corporate compliance officer responsible for the Asia-Pacific region through 2012 rarely traveled to China. Issues with internal controls at BMS China were also identified in audits of BMS China between 2009 and 2013 and these problems were reported to BMS but went uncorrected.

China has been the source of numerous allegations of violations of the FCPA for companies listed on the U.S. stock exchanges. In one of the largest settlements in the past year, Avon Products agreed to pay $135 million to resolve the SEC’s investigation into its Chinese bribery. The last time that I looked, there were more than 80 corporations under investigation or self-disclosed violations of the law relating to their operations in China.

Multi-national companies selling pharmaceuticals and medical products in China have been particularly susceptible to violating the law. Mead Johnson and Bruker have both resolved charges with the SEC in the past year regarding improper payments concerning health care professionals. There is also a high profile investigation into GSK regarding behavior that already resulted in a record fine by the Chinese Government of $489 million in 2014.

One SEC official has already said that there is fertile ground within the SEC whistleblower program for FCPA whistleblowers. The SEC program pays 10 to 30 percent of monetary sanctions in qualifying enforcement actions to eligible whistleblowers providing key information. Given the large number of international whistleblowers (approximately 10% or more of tips every year), and the large enforcement actions that may result from violations of the law, it seems likely that there will be quite a few awards made by the SEC in this area in the future.

If you have need additional information, contact one of our FCPA whistleblower attorneys via our contact form or by calling 1-800-590-4116.

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SEC Busts Hackers for Insider Trading After $100 Million in Profits


The SEC has brought an enforcement action against a small group of hackers who fed nonpublic information stolen from press release distribution companies and then passed the information to traders who profited through insider trading with the tips.

The hackers and traders stole information about the corporate releases of more than thirty companies. According to the complaint, they posed as employees and customers of the press release companies and then used proxy servers to mask their identities. The scheme allowed them to learn about upcoming earnings announcements early and then pass that information on to a network of traders in several different countries to trade on that information. The insider trading violations netted them more than $100 million in illegal profits over the five year period.

The press release suggests that the SEC used their analytical trade analysis tools in order to find the suspicious trading patterns rather than a whistleblower. However, this is the type of enforcement action that might have resulted from a SEC whistleblower tip. The program allows individuals to provide information about violations of the federal securities laws, including insider trading, to the government. An insider trading whistleblower, if there was one in this or another case, would stand to be awarded between 10 and 30 percent of the recovery if they were eligible for an award.

Cybersecurity has been a big area recently for the SEC as intrusions into public companies have allowed previously nonpublic information to be passed to traders who can take advantage of it in the stock market. In June, the SEC was reportedly looking for a hacking group known as FIN4 that was hacking into biotechnology and healthcare companies for inside information that they could use to profit on.

SciClone and SAP Settle SEC FCPA Investigations


This week, the SEC announced the resolution of its FCPA investigation into SAP and SciClone Pharmaceuticals announced its own resolution with the SEC.

SciClone agreed to pay $12.8 million to resolve the investigation without admitting or denying wrongdoing. The DOJ declined to continue an investigation into the company as part of the resolution. Last year, SciClone reserved $2 million for penalties to resolve the investigation. According to a 2011 article about the investigation in the Wall Street Journal, a special committee of directors at SciClose determined that the company lacked sufficient controls to ensure compliance with the law with respect to its use of third-party gifts, travel and entertainment expenses and sponsorships in China.

Software manufacturer SAP has agreed to pay $3.7 million to resolve the SEC investigation into its procurement of business in Panama and deficiencies in its internal controls. According to the press release, an SEC investigation found SAP’s deficient internal controls allowed a former SAP executive to pay $145,000 to a senior government official in Panama and offer bribes to two others. The SEC found a violation of the internal control and books and records provisions of the FCPA. SAP agreed to settle without admitting or denying the findings.

Year end reviews by defense law firms called 2015 enforcement more muted and a blockbuster year for non-prosecutions and declined prosecutions. These look to be the first two fines of 2016.

If you have questions about this information or want to speak to one of our FCPA whistleblower attorneys about reporting bribery of a government official through the SEC whistleblower law, please contact us via our online contact form.

Could the Fifa Whistleblower Get a Reward?


The Justice Department unsealed a 47 count indictment against 14 defendants in the FIFA bribery scandal yesterday. The DOJ charges are for racketeering, wire fraud and money laundering. I’ve already been asked this morning by one of our contacts if this is the sort of thing that might lead to a whistleblower reward. Since we know that there is a FIFA whistleblower, it’s a great question.

The Justice Department doesn’t have a catch-all incentive program for whistleblowers. Frequently, cases prosecuted by the DOJ relate to fraud against the government and are brought against corporations by relators through the False Claims Act. The FCA provides specifically for rewards, and the DOJ pays out hundreds of millions a year under it. But this isn’t a False Claims Act case.

That’s not the end of the analysis, however. There are other aspects of the case that might eventually lead to a reward or bring this action within the scope of a reward program.

There’s definitely potential for an FCPA penalty to arise from the allegations. The complaint alleges bribes paid in connection with the Brazilian National Soccer team by a major U.S. sportswear company. The media has reported that this unnamed company could be Nike based on the details that have been released. If the SEC or DOJ determines the bribes were paid to any officer or employee of an instrumentality of a foreign government, then it would fall within the purview of the SEC and its whistleblower program.

If the SEC were to fine Nike for FCPA violations, then this could obviously be the subject of a reward. And this isn’t the only way for the case to move into the realm of the Securities & Exchange Commission. The DOJ is also reportedly investigating the banks involved for their role in the money laundering. Although this sort of investigation need not lead to an SEC investigation, because they are not per se violations of the federal securities laws, there are aspects of it that could implicate SEC rules, such as the record keeping requirements.

If the SEC were to fine any of the players involved, then the DOJ prosecution would become a related action as it is defined by the SEC whistleblower rules. It’s also possible that the Justice Department prosecution would be considered a related action even if there is no SEC fine. The scope of a related action under the Dodd-Frank programs has not been fully tested yet.

Update: The research that I have seen suggests that the Brazil soccer team is a private entity and not government sponsored. However, some have suggested that given the high profile nature of the case, an action might still be brought against Nike for a violation of the internal controls provisions of the FCPA.

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SEC Opens Comments on Market Manipulation Database


For years, the Securities and Exchange Commission has been discussing building a database of information about stock and options trading activity. The Consolidated Audit Trail (CAT) system took another step closer to creation when the SEC voted to open the plan to public comment yesterday.

The goal of CAT is to allow the SEC to better detect market manipulation and insider trading. It currently takes the SEC months to sift through the high volume of market data that is generated on the stock and options exchanges. There are an estimated 58 billion transactions on exchanges every day, plus additional trading in private venues.

The need for tools to assist the SEC in the analyzation of market data has already led to the collection of market data through MIDAS, which helps the government reconstruct market events, monitor mini-flash crashes and assist with other functions. Whistleblowers have also been a temporary stopgap solution to the problem, alerting the U.S. Government to some specific cases of manipulation through the Dodd-Frank reward programs.

If the system achieves its goal, the exchanges and brokers will report data to CAT. It will cost around $100 million to build and an estimated $1.7 billion annually in compliance costs for brokerages. According to the present timeline, it will be rolled out to the various parties between 2017 and 2019. In early years, there would be an expected rate of inaccuracy on data of as much as 5 percent as brokers implement the reporting process.

Telia Settles FCPA Bribery Investigation for $965 Million


The United States has concluded its third-largest FCPA enforcement action with a settlement of $965 million in total penalties (including Dutch and Swedish penalties) by Telia Company AB and its subsidiary, Coscom. The Acting U.S. Attorney of the Southern District of New York called it “one of the largest criminal corporate bribery and corruption resolutions ever.”

This enforcement action involved allegations of bribery by Telia paid to the daughter of a government official through a shell company in order to gain entry into the Uzbek telecommunications market. Telecommunications provider VimpelCom previously entered into a global resolution of allegations that it also bribed the government official. In total, the investigation of this corruption has now resulted in over $1.76 billion in fines and disgorgement worldwide.

The Telia investigation resulted in a criminal fine by the DOJ of more than $508 million and SEC disgorgement of $457 million. Telia will get credit in the amount to the SEC for $40 million paid to the DOJ and up to $208.5 million paid to the Telia entered into a deferred prosecution agreement in response to charges of conspiracy to violate the FCPA. It must implement internal controls and cooperate fully with the Justice Department investigation as part of the terms of the deferred prosecution.

Telia received a 25 percent reduction from the bottom of the U.S. Sentencing Guideline fine range for cooperation with the DOJ and significant remedial measures undertaken. Telia did not receive additional credit because it did not voluntarily self-disclose the misconduct to the United States.

The SEC Order outlines several U.S. connections to establish jurisdiction under the FCPA. Although Telia is a corporation organized in Sweden, Telia was an issuer with shares traded on the NASDAQ from 2002 until September 5, 2007. Communications with the Government Official were conducted using U.S. based email servers, and transactions occurred in U.S. dollars.

Fiscal year 2017 ended for the United States on September 30, 2017, so that will certainly pad the statistics for FCPA enforcement this year despite the slow start during President Trump’s administration.

First SEC Whistleblower Paid $50,000 For Exposing Securities Fraud


On August 12, 2012, the Securities and Exchange Commission reported that it had recovered $150,000 thousand so far out of a Court order $1 million in sanctions against the perpetrators of securities fraud scheme.  The Securities and Exchange Commission awarded the whistleblower, who wishes to remain anonymous, $50,000 for his/her contribution in providing the U.S. Government with provided documents and other significant information that allowed the SEC to investigate, move quickly, and prevent the fraud from ensnaring other victims.  Any additional amount collected will increase the payments to the whistleblower.

SEC Chairman Mary L. Schapiro, stated that “[w]e’re seeing high-quality tips that are saving our investigators substantial time and resources” and that “[t]he whistleblower program is already becoming a success.”  Robert Khuzami, Director of the SEC’s Division of Enforcement stated that “[h]ad this whistleblower not helped to uncover the full dimensions of the scheme, it is very likely that many more investors would have been victimized.”  He also said that “[t]his whistleblower provided the exact kind of information and cooperation we were hoping the whistleblower program would attract.”  The SEC stated they get about 8 tips per day.

The Dodd-Frank Act allows the SEC to reward individuals who offer high-quality original information that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered.  The whistleblower in this case was paid approximately 30% of the amount the government recovered.  The SEC issues rewards between 10% and 30% of the money collected.  “The law specifies that the SEC cannot disclose any information, including information the whistleblower provided to the SEC, which could reasonably be expected to directly or indirectly reveal a whistleblower’s identity.”


For additional information about the SEC whistleblower program, please contact one of our SEC whistleblower lawyers.

SEC Whistleblower Gets $3.5 Million for Tip During Ongoing Case


The Securities and Exchange Commission on Friday announced an award of $3.5 million to a whistleblower that bolstered an existing investigation. The government has now paid $62 million to 28 whistleblowers since the SEC whistleblower program was opened in 2011.

The government’s press release encouraged individuals to come forward “even if they think the SEC may already be looking into it.” The Director of Enforcement, Andrew Ceresney, indicated that the tip from the company’s employee increased their leverage during settlement negotiations.

The claims review staff at the SEC initially recommended that the claim for an award be denied. The claimant challenged the preliminary determination in writing and the whistleblower office received additional factual information from the enforcement staff which led to the award announcement. This is, I believe, the second or third time that the government has reversed the initial position from the preliminary determination.

The award determination opinion clarifies the difference between Rule 21F-4(c)(1) and (c)(2). The “different conduct” of Rule 21F-4(c)(1) is generally limited to where staff has an open investigation into one type of misconduct and the tip relates to a substantially different conduct. It is not satisfied, according to the opinion, where the misconduct is already under investigation even if it causes the government to elevate its inquiry into that area.

Instead, the opinion analyzes whether the information “significantly contributed” to the success of the enforcement action under the standard of Rule 21F-4(c)(2). The government had already generally become aware of the company’s conduct in this case because of media reports regarding it. However, the individual provided supporting documentation and certain new information which helped the SEC during settlement negotiations.
The opinion ultimately issued an award of $3.5 million based on this significant contribution.

To speak to our SEC whistleblower lawyers about this information or for an evaluation of a potential submission to the SEC, please call 1-800-590-4116.

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