First Horizon Settles Mortgage Lending Violations for $212.5 Million

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First Horizon National Corp will pay $212.5 million to resolve the DOJ and HUD investigation into mortgage loans made by First Tennessee Bank, according to media reports last week.

The settlement continues the U.S. Government’s pursuit of banks that made bad loans on real estate immediately prior to or during the financial crisis. The U.S. has also settled its investigation into MetLife and the S&P lawsuit over credit ratings this year. Morgan Stanley has also announced an agreement to settle the investigation into its mortgage practices for $2.6 billion. Last year, banks paid billions to settle government allegations of violations of the False Claims Act and FIRREA.

The investigation looked into underwriting and origination of FHA insured loans made by First Tennessee Bank between 2006 and 2008. Previous media coverage indicates that the government’s investigation involved the False Claims Act.

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DOJ Rewards False Claims Act Whistleblowers with $160+ Million in First Half of FY2015

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It’s time to examine the False Claims Act recoveries for the first half of the U.S. Government’s fiscal year 2015 since the calendar reads April. So far, the U.S. has recovered more than $1.2 billion under the federal False Claims Act, according to Taxpayers Against Fraud. That is down by more than 50% over last year but not a particularly big disappointment given the way last year started for the Department of Justice. It would have been hard to keep up the pace set by the Johnson & Johnson, JPMorgan and Suntrust settlements last year.

This year’s leading settlements under the anti-fraud law so far are DaVita ($389 million) in October and Supreme Foodservice GmbH ($146 million in civil lawsuits and $288.36 million in the criminal case) in December, and Metlife ($123.5 million) in February.

Health Care Fraud

DaVita agreed to pay $350 million to resolve the allegations it paid kickbacks to induce referrals of dialysis patients. DaVita reportedly offered lucrative partnerships to physicians with patient populations suffering renal disease to induce referrals to their dialysis clinics. It also agreed to a civil forfeiture of $39 million for two joint ventures in Denver, Colorado. The whistleblower in the case reportedly received $65 million plus interest.

After DaVita, there’s been a handful of settlements for amounts in the $25 to $75 million range. Violations of the Stark Law and the Anti-Kickback Statute still seem to be key areas where health care companies are at risk of violating the law.

In descending order, settlements under the False Claims Act by health care companies include Community Health Systems ($75 million), OtisMed/Stryker ($41 million), Daiichi Sankyo ($39 million), Extendicare ($38 million), Dignity Health ($37 million), Organon ($34 million) and CareAll ($25 million).

Mortgage Fraud

There’s been a massive drop in the recoveries coming from housing and mortgage fraud. Through this point last year, the U.S. had already reached settlements under the False Claims Act totaling more than $1 billion between Suntrust and JPMorgan. So far this year, the only significant settlement we have seen announced by the DOJ in this area under the False Claims Act was the $123.5 million settlement with MetLife.

There’s also an agreement in principle between Morgan Stanley and the DOJ to settle an investigation into the Wall Street Bank’s mortgage practices for $2.6 billion. It’s too soon to allocate any portion of this settlement to the False Claims Act, but it could be a nice bump in the total when it is announced by the DOJ.

The U.S. has had another victory in this area – it just can’t be counted as a win for the False Claims Act. The federal government’s complaint that led to the $1.375 billion settlement with Standard & Poor’s, half of which went to the Federal Government, was brought under FIRREA. FIRREA was easily the big winner last year in the fight against fraud, eclipsing the False Claims Act for the first time ever.

The other big FIRREA case right now is the appeal between Bank of America and the Department of Justice over the $1.27 billion verdict in a whistleblower-initiated lawsuit.  The False Claims Act allegations were dismissed two years ago but the case against the company under FIRREA remained.  This case was specifically excluded from the massive $16 billion settlement last year and the Judge Rakoff denied a new trial in February.

The drop-off in the False Claims Act and FIRREA in this area could have been easily predicted. It was unlikely that the U.S. could repeat the $3.1 billion in federal funds it recovered under the False Claims Act or the staggering $11 billion under FIRREA.  It was the first time that the DOJ used the FCA to recover more from mortgage fraud than it did from health care fraud.

Government Contracts

The Supreme Foodservice settlement involved a payment of $288.36 million to resolve the criminal case in the Eastern District of Pennsylvania and $101 million to resolve the civil lawsuit under the False Claims Act. The company was accused of using a United Arab Emirates company it controlled to inflate the price of food and bottled water sold under the contract. The whistleblower in the case was to receive $16.16 million from the government’s settlement. A subsidiary of Supreme Group, Supreme Logistics FZE, agreed to pay $25 million to resolve allegations of false billings in food shipping contracts during Operation Enduring Freedom.

There have been a few other mid-sized settlements in government contracts. Office Depot ($68.5 million), Iron Mountain ($44.5 million) and Lockheed Martin Integrated Systems ($27.5 million) jumped off the list. Office Depot and Iron Mountain were both best price violations. LMIS involved over-billing for under qualified workers.


Adding up the rewards from some of the bigger cases to settle this year, relators have earned more than $160 million this year from bringing qui tam lawsuits. In FY2014, whistleblowers were paid $435 million by the Department of Justice. The FY 2015 awards so far include announced payments for:

DaVita: $65 million.
Office Depot: $23 million.
Community Health: 18.67 million.
Supreme Foodservice: $16.16 million.
Iron Mountain: $8.1 million.
OtisMed/Stryker: $7 million.
Dignity Health: $6.25 million.
Daiichi Sankyo: $6.1 million.
CareAll: $3.9 million

For additional information, please contact one of our Philadelphia False Claims Act attorneys.

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Libor Manipulation to Cost Deutsche Bank More Than $1.5 Billion

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Multiple media outlets are reporting Deutsche Bank will resolve the multi-year investigation of the UK FCA, US DOJ, CFTC and New York’s DFS later this month with a settlement totaling more than $1.5 billion in penalties and a guilty plea by a U.K. subsidiary, Deutsche Bank Group Services.

Government regulators have been investigating Libor manipulation by investment banks since at least 2012. So far, the banks have been sanctioned more than $4 billion as a result of their rigging of the short term interest rate benchmark. Barclays, UBS AG, Royal Bank of Scotland, Rabobank and Lloyds have all settled investigations into their misconduct.

Deutsche Bank would be the first settlement of this type to also resolve an investigation by the New York Department of Financial Services. DB has a New York state charter, which brings it within the perview of New York State’s financial regulator. DFS is also investigating Deutsche Bank for manipulation of foreign exchange rates as well as violations of U.S. economic sanctions.

Last fall, Barclays pulled out of negotiations over currency manipulation with the CFTC and other global regulators because of problems reaching a resolution with NYDFS. The state agency is reported to have aggressively pushed for large monetary penalties and other sanctions, such as revoked operating licenses or criminal convictions.

For answers to questions about this and other aspects of the CFTC whistleblower program, as well as assistance reporting violations of the Commodity Exchange Act to the U.S Government, contact one of our whistleblower attorneys via our contact form or by calling 1-800-590-4116.

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NY Whistleblower Lawsuit Sparks $714 Million Forex Settlement by BNY Mellon

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A lawsuit filed under New York’s False Claims Act by a whistleblower in 2009 started the government’s investigation into BNY Mellon’s foreign exchange (Forex) practices. Today, the bank agreed to pay $714 million to settle with multiple government agencies and its customers.

According to a press release by New York Attorney General Eric Schneiderman’s office and the lawsuit, BNY Mellon agreed to give its customers the best price on foreign exchange transactions of the day. Instead, it gave the investors using its financial institution the worst price (or nearly the worst) and kept the best price for itself – pocketing the difference.

The lawsuit filed by New York State in 2011 sought to recover on behalf of state pension funds the $2 billion BNY Mellon earned while using the scheme for the past decade.  The U.S. Government’s lawsuit, filed separately the same year, sought hundreds of millions in penalties.

In the settlement, the U.S. Department of Justice and the New York Attorney General will both receive $167.5 million. The class action will split $335 million among the bank’s customers.  The Securities & Exchange Commission (SEC) and the Department of Labor also participated in the settlement.

According to a Wall Street Journal article in 2011, the whistleblowers also submitted information to the SEC whistleblower program.  The article also mentions similar information provided about currency practices at State Street.

This investigations were separate from the government’s currency manipulation investigation which we discussed earlier in the week.

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DOJ seeks Billions in Currency Manipulation Settlement Talks


Last year’s forex settlement may have just been the start of the fines from U.S. regulators for manipulating the currency market.

The Department of Justice and five banks are in discussions to resolve the U.S. Government’s investigation into currency manipulation at Barclays, Citigroup, JPMorgan, UBS and Royal Bank of Scotland. The DOJ is asking for an average of $1 billion from each bank in an coordinated settlement.

The Justice Department is also asking for guilty pleas from some of the banks for charges of antitrust violations and fraud.

In November, six banks paid worldwide regulators $4.3 billion for manipulation of benchmark rates in the forex markets. In the United States, the fines were levied by the Commodity Futures Trading Commission (CFTC) and the Office of the Comptroller of the Currency. Fines were also issued by the UK Financial Conduct Authority (FCA).

JPMorgan, Citigroup and Royal Bank of Scotland all participated in the November settlement and are facing additional fines.

The NY DFS Investigation

The New York Department of Financial Services is reportedly not a part of the most recent settlement talks. Last year, Barclays refused to settle with the FCA and the CFTC because the NY DFS would not also accept a settlement.

The NY DFS is reviewing Barclays and Deutsche Bank to determine whether the two banks used their forex trading algorithms to engage in currency manipulation. These banks may have designed their electronic trading programs to manipulate prices ahead of client trades.

New York has also subpoenaed Goldman Sachs, Credit Suisse, Societe Generale and BNP Paribas. They have not yet been accused of wrongdoing.

Investigation Leads to SEC Inquiry Into “Last Look” Policy

The currency investigation also uncovered a practice in the FX market known as last look. It allows the banks to back out of trades prior to execution if the market goes against them. It was developed during the era before computers when there was a substantial time lag before trades were confirmed. It remained in place even though the time lag disappeared in the electronic age. The “last look” is built into the Barclays electronic-trading platform, according to the reports.

The NY DFS has reportedly been pursuing this line of investigation. The SEC opened its own investigation to determine whether laws related to the disclosure of conflicts of interest are violated by the “last look” policy.  It’s unclear to what extent the DOJ investigation will include this practice.

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If you found this item of interest, we encourage you to read more about our representation of CFTC whistleblowers.

Morgan Stanley, MetLife Settle Government Investigations into Mortgage Fraud


Morgan Stanley has announced an agreement in principle to settle the Justice Department investigation into its sales of mortgage-backed securities prior to the financial crisis. The $2.6 billion settlement comes only a few days after the Wall Street Journal published an article indicating that the talks were in an early stage. The deal has not been finalized.

The investigation related to Morgan Stanley’s involvement with subprime lender New Century Financial. New Century was the second largest subprime mortgage lender.

Yesterday, a unit of MetLife also settled allegations brought under the False Claims Act that it allowed the FHA to underwrite hundreds of home loans failing to meet federal standards. MetLife Home Loans will pay $123.5 million. The company admitted that it became aware of home loans failing to meet federal standards through its internal quality control practices and yet it still stuck the government with the bill when the loans defaulted.

In other news from the mortgage fraud front:

Goldman Sachs has also been notified by the federal government of potential charges coming in the future because of its mortgage-backed securities practices. The New York Times called Goldman Sachs the last major bank to have unresolved allegations with the DOJ over the subprime crisis. In a securities filing, Goldman expanded the top end of its potential losses to $3 billion. It called this amount “reasonably possible.”

Settlement discussions have fallen apart between Wells Fargo and the DOJ over a potential resolution to the FHA lawsuit over improper certification of certain mortgage loans. According to the Wall Street Journal, there was almost an agreement last summer but the DOJ has asked for additional information. The previous discussions put the amount at issue under $500 million.

Additionally, New York’s Attorney General Eric Schneiderman is building support for a state law that will reward whistleblowers providing information about securities fraud. The law hasn’t been formally introduced but a spokesman for the attorney general told Bloomberg that sponsors of the bill have been lined up. We’ll detail this in a separate blog post shortly.

In a prior year, New York had a bill introduced to reward whistleblowers in the financial industry. The legislation proposed by State Senators James Steward and Joseph Griffo then would have rewarded individuals for information provided to the Department of Financial Services. More details can be found in our previous blog post about the legislation.

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Legality of High Frequency Trading Questioned as Authorities Pursue Companies Favoring Frequent Traders


A Special Counsel with the Division of Swap Dealer and Intermediary Oversight at the U.S. Commodity Futures Trading Commission (CFTC) has published an article in the Connecticut Law Review questioning the legality of “pinging” and “front running” in the futures market by high-frequency trading (HFT) firms. The author expressly notes that it is his personal opinion and that he is not writing in his official capacity at the CFTC. However, the commentary does appear to be part of a larger trend to reign in the industry as several investigations by the SEC have settled and New York State is proceeding with a lawsuit against Barclays.

The HFT practices at issue involves the use of small orders that are cancelled quickly, akin to the high-speed pinging of sonar. A few are filled, most are cancelled instantly, and they allow the HFT firm to detect whether there is an institutional investor seeking to fulfill a large order in a futures contract. Once it is aware of the large order to buy or sell, the HFT will trade ahead for its own profit and earn far more than it lost due to the initial “ping” orders.

The paper begins by examining the practices in the context of insider trading. The HFT firm is able to detect the large order faster than than the order is displayed to the public. It is thus trading on nonpublic information in a fashion. However, the Act doesn’t contain a prohibition on insider trading.

The paper then compares the practice to deceptive or manipulative trading practices such as banging the close, spoofing, and wash trading. It examines whether it would violate four provisions of the Commodity Exchange Act and a regulation promulgated by the CFTC under its authority to enforce the Act. The CEA provisions at issue are: § 4c(a)(2(B) on causing the reporting of non-bona fide prices; § 4c(a)5(C) prohibiting spoofing; § 9(a)(2) on delivering false or misleading market information; and § 6(c)(1) prohibiting market manipulation. The CFTC regulation at issue is Rule 180.1.

It is an interesting read for anyone interested in a potential whistleblower case related to high frequency trading:

The legality of HFT has been a hot topic on Wall Street over the past year. In March, author Michael Lewis published Flash Boys, a book about high frequency trading firms that received widespread publicity for its claim that the markets are rigged. SEC Chairman Mary Jo White testified on the practice before the House Financial Services Committee in April, indicating that the Commission was examining at least one issue: the fairness of the faster data feeds purchased by firms compared to the feeds available to the public. Her public comments a few months later proposed changes to level the fairness of the marketplace.

Unlike the law review article, which takes issue with the operations of the HFT firms themselves, most of the current cases in this arena have involved favoritism and improper disclosure by the investment banks and private stock exchanges catering to the frequent traders, their best customers. Last month, the SEC took aim at improprieties involving high frequency traders in three cases over the course of four days.

In one, UBS Group AG, a subsidiary of UBS, received a $14.4 million fine for violating rules on the execution of stock trades to favor professional market makers. UBS allowed traders to buy and sell stocks at unauthorized increments smaller than a penalty on its dark pool. It also failed to adequately disclose the handling of the trades to all investors.

In another, Bats Global Markets was ordered to pay $14 million for failure to adequately disclose the operation of price sliding rules and the handling of certain order types. We have previously discussed this action on the blog so more details can be found here.

The New York State lawsuit filed last by New York Attorney General Eric Schneiderman against Barclay’s for misleading investors about the operation of its dark pools is similar. Last week, Justice Kornreich of the State Supreme Court in Manhattan refused to dismiss the lawsuit. Although there will still be a ruling later on the issue of whether the lawsuit sufficiently states a claim under the Martin Act, the Justice did rule that traders have a right to rely on the material representations made by banks about the operation of their dark pools and their misrepresentations would shake investor confidence and undermine the integrity of the marketplace.

The defense of high frequency trading has typically claimed that it adds liquidity to the market. But as the controversial industry practices remain under the spotlight, it wouldn’t surprise me the SEC or the CFTC eventually takes a run at a firm for manipulation or deceptive practices similar to the arguments discussed in the law review article.

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Considering Rewards for Environmental Whistleblowers


There have been suggestions that the federal government add incentives for whistleblowers in a number of areas since the passage of Dodd-Frank. One area where I have not seen as much support as I would expect is for the payment of incentives to environmental whistleblowers.

We’re on the verge of the largest fine in history for the violation of the Clean Water Act.  If there was a time to push for it, now would be the time.  BP is facing a potential fine of up to $13.7 billion for violations of the Clean Water Act for the Gulf of Mexico oil spill in 2010.  Transocean already paid $1.4 billion to settle civil and criminal charges related to its role in the spill.

Calls for reform of whistleblower procedures in the securities industry gained momentum because of the unsuccessful efforts of a hedge fund manager to expose the fraud on investors perpetuated by Bernie Madoff.  The BP disaster, similarly, might have been prevented if complaints about the testing of blowout preventers at BP had been encouraged and heeded.

The Potential BP Whistleblower

An industry veteran accused BP of falsifying reports of blowout preventers passing state performance tests in Alaska. The accusations led to his testimony in a 2003 lawsuit. Alaska investigated but did not take action against the company. It only prosecuted one individual, a low level employee.

The BP spill has been blamed in part on problems with the blowout preventer at the Gulf of Mexico rig.  Would additional government scrutiny have led to changes company-wide at BP?  Would the government inspection of this aspect of the oil rig been more stringent after receiving a whistleblower report?

It is impossible to know what would have happened in this case.  Still, there could easily be other looming environmental problems that could be prevented if the EPA gave employees of the company an incentive to come forward.

The Other Environmental Pollution Trial

BP may be garnering all of the headlines, but it isn’t the only environmental trial happening right now.  Dupont is currently facing a trial in a lawsuit under the False Claims Act for failure to report the release of cancer-causing gas at a plant in Louisiana.  The lawsuit, brought by a whistleblower, is based on the company’s failure to report the release under the Toxic Substances Control Act.

Environmental lawsuits are only a small part of the False Claims Act.  More typically, FCA lawsuits have been brought in cases where contractors are paid to cleanup environmental disasters and do not perform the work or overcharge for it.

As it is interpreted by the courts, though, it is no substitute for an EPA whistleblower program.

Why aren’t There Calls for Reform??

The government uses rewards in other areas to encourage insiders and other individuals to bring misconduct to light.  After large oil spills, the need for a government investigation is clear.  So it isn’t an area where the government necessarily needs someone to come forward in order to spur an investigation.  The government may be concerned that parasitic tips will be provided that don’t substantially aid the investigation.

On the other hand, EPA enforcement actions led to $163 million in fines and penalties last year and companies agreed to pay $9.7 billion to clean up contaminated sites and control pollution.  Would the opportunity to prevent billions in environmental damage not be worth the rewards paid to individuals who helped stop them from continuing?

The EPA and Whistleblowers Now

The environmental laws and the EPA don’t totally ignore whistleblowers now.  The EPA website already contains a page to allow for the reporting of environmental violations.  The Clean Air Act, Clean Water Act, CERCLA and RCRA contain protections for whistleblowers who experience retaliation.

The Clean Air Act even authorizes awards of up to $10,000 for information about violations of the law. Unfortunately, an investigation into this provision by Public Employees for Environmental Responsibility last year turned up no evidence it has been used.

Are these measures enough?  Have they been successful?  It would be interesting to see a Governmental Accountability Office report in this area similar to the one done concerning antitrust whistleblowers.

Could it Work?

Corporations are no doubt committing violations of the nation’s environmental laws on a daily basis. Incentivizing whistleblowers have proven to be a cost effective tool to help the United States learn about violations of the fraud and securities laws.  It could similarly help the EPA enforce U.S. laws against environmental pollution.  The SEC and CFTC programs could prove a model for the EPA to implement.

Given the support among environmental groups for protection of the environment and major prosecutions of Kerr-McGee and BP, it’s surprising that there haven’t been more calls for expanded use of whistleblowers in this area. Let’s hope that this is an area that gains additional support. The enforcement of our environmental laws for clean air, water and soil is a worthy place to encourage people to tip off the government to misconduct.

After the S&P Settlements, What’s Next for Government Prosecution?


The Wall Street Journal has reported that Standard & Poor’s, a unit of McGraw Hill Financial Inc., could settle SEC charges of securities fraud related to its rating of commercial real estate in 2011 this week. Previous estimates have put a settlement of these charges, unrelated to the subprime rating lawsuit by the DOJ, at around $60 million.

This report comes on the heels of Bloomberg and Reuters reports that Standard & Poor’s will settle for more than $1 billion the DOJ lawsuit brought under the False Claims Act for misleading the United States Government about its mortgage-backed securities ratings.

The S&P lawsuit is one of four largest that remains as a result of the financial crisis. The United States also has the FHFA lawsuit against the Royal Bank of Scotland settles the FHFA lawsuit and Morgan Stanley is under investigation for its mortgage-backed bond practices in 2015.  All three could easily settle in 2015 to avoid a cloud over their heads while their competitors move on from the mortgage crisis.  large settlements in this arena that have dominated the headlines could be over by the end of the year.

There’s also the $10 billion lawsuit Credit Suisse faces from New York. In an interview with Reuters, New York Attorney General Eric Schneiderman indicated that there will be more lawsuits filed against banks for selling mortgage-backed securities.  So it still may be too early to call the end to cases of mortgage fraud, but not too early to start speculating about the future.

If the U.S. no longer spends significant resources targeting mortgage fraud, what will be the next area of corporate misconduct on the government’s radar?

If the government looks overseas, it should find plenty of potential cases.

Bribery is one area that is prime for additional prosecution. The record settlement with Alstom for violations of the Foreign Corrupt Practices Act (FCPA) in December could be the beginning of greater prosecutions in this area as the government frees resources from the mortgage prosecutions.

The FBI has already announced that it will triple the number of agents investigating foreign corruption, which includes both FCPA violations and kleptocracy. FBI agents play an important role in the investigation of bribery charges brought by the SEC and DOJ under the FCPA.

There should be no shortage of cases for them to investigate. China has been hunting down corruption within its country and whistleblowers are bringing cases to the SEC in record numbers. In FY2014, whistleblowers classified 159 tips as related to FCPA violations. Since starting the whistleblower program, the SEC has received more than 400 tips in this area.

Another area that took a big leap forward last year was the prosecution of anti-money laundering and economic sanctions violations.  With the BNP Paribas settlement reaching nearly $9 billion last summer, this could become a hot area as government attorneys look for other financial institutions involved in similar banking deals.

If the government looks domestically, the auto industry is another potential target. Delayed recalls by car manufacturers have put millions of families at risk as unsafe vehicles have been driven unknowingly by families. There are several bills in Congress to strengthen regulation of motor vehicles and the passage of the Thune-Nelson bill would add whistleblower rewards to this area.

The high profile cases of GM and Takata last year might just be the tip of the iceberg. After a record 60 million cars were recalled last year, more than twice the previous record, the NHTSA is already predicting that we will see a new record set in 2015 as the government pushes manufacturers for more aggressive recalls. The Fiscal Times declared 2015 the year of the recall already.

Will mortgage cases stay on the government’s radar?  Will the government focus elsewhere?  Let us know your thoughts in the comments.

Whistleblower Tip From High Frequency Trader Leads To Record SEC Fine of $14 Million for Stock Exchange Operator


As we approach the five year anniversary of Dodd-Frank this year, it could be a banner year for the announcements of awards as investigations resulting from early whistleblower tips mature.  We got our first example this week.  On Monday, the number two U.S. stock market operator, BATS Global Market, agreed to pay a record $14 million to settle SEC allegations resulting from a whistleblower tip in 2011.

The allegations concerned the selective disclosure of the operation of certain order types to high-frequency trading firms (HFT) by two exchanges formerly owned by Direct Edge Holdings and acquired by BATS.

The Hide Not Slide (HNS) order type was developed at the request of a significant HFT. It changed the rules for price sliding and time stamping that could be expected from ordinary limit orders.

Direct Edge, as part of its development of a new technology platform and upgrade to national securities exchanges, then solicited additional feedback about HNS from two HFTs. It made additional modifications to the order type as a result of these discussions.  Direct Edge did not not announce these changes, did not update its exchange application with the SEC and did not seek approval for changes to rules related to its order types.

Complete and accurate information about the operation of the HNS order type was provided only to the two HFTs. Subsequently, Direct Edge provided information to another HFT and other market participants about NHS.

Hide Not Slide was created to attract high-frequency trading firms to the Direct Edge exchange. HNS orders were not displayed to the rest of the market and in some cases traded ahead of one-day limit orders.

The whistleblower, an experienced trader on Wall Street, ran a high-speed trading firm in 2009 when his stock trades started losing money. Traders at other institutions had switched to HNS. His continued use of plain vanilla limit orders was costing him money as other traders had an advantage. He did not understand what happened until an employee of Direct Edge suggested that he should make the switch to Hide Not Slide. In 2011, he tipped off the SEC to the advantage given to some high-frequency traders by this order type.

The SEC investigation resulted in fines related to the disclosure of the rules only to select market participants. The fines also resulted from the the modification of exchange rules without seeking the approval of the SEC and the failure to provide the SEC accurate information about the operation of the order type.

The SEC order did not take issue with the more controversial aspect of the order type – its ability to allow certain sophisticated traders to get an advantage over other investors using limit orders.  High-frequency trading continues to be an area of investigation but there have been few prosecutions.

The SEC announced its first prosecution of high frequency trading manipulation in October when a trading firm agreed to pay $1 million to resolve the investigation into its rapid-fire orders in thousands of NASDAQ stocks placed in the last two seconds of trading every day for six months.  Back in 2012, the SEC also fined NYSE Euronext for providing information to certain traders faster than it did a public database.

No award has been issued to the individual who provided the tip to the SEC yet. The SEC will post a notice of covered action to its website and the whistleblower will need to submit a claim for award. If the SEC determines the whistleblower eligible, it will. It will take several months for this process to be completed and an award or denial ruling.

An award in this case would be further confirmation of the important role that customers and competitors can play to police the markets through the SEC whistleblower program. The individual was a competitor of the high frequency trading and a customer of the stock exchange fined. He was not an insider or employee of either company. In fact, employees of self-regulatory organizations such as BATS are specifically prohibited from receiving an award under the rules of the SEC program.

The $14 million penalty topped the previous record by $4 million. Nasdaq paid $10 million to the SEC in May 2013 over its handling of the Facebook IPO.

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