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.

Top False Claims Act Settlements in the First Quarter of FY 2015


We’re in the first full week of 2015 but the federal government flipped its calendar three months ago when fiscal year 2014 concluded at the end of September. There have already been several significant cases resolved under the Federal False Claims Act in FY 2015. These include:

DaVita – October 2014
The largest settlement in the healthcare industry covering solely allegations of kickbacks was agreed to in October by one of the largest companies providing dialysis treatment and support services for chronic kidney failure. They will pay $350 million under the False Claims Act and forfeit $39 million related to two joint ventures in Denver. The whistleblower had served as a senior financial analyst in the company’s M&A department.

Supreme Foodservice – December 2014
This supplier of food, water and fuel to troops in Afghanistan overcharged the Department of Defense from 2005 until 2009 according to the government’s allegations. It agreed to pay $101 million under the False Claims Act and $288.36 million in restitution and criminal fines.

Stryker – December 2014
A former Stryker sales representative reported the company for distributing knee replacement surgery cutting guides after they were rejected by the FDA. The company agreed to pay $40 million under the False Claims Act and $40 million in criminal penalties and forfeiture.

Iron Mountain – December 2014
The information management company paid $44.5 million to settle allegations it overcharged the federal government for record storage services.

Extendicare – October 2014
The company paid $37 million to resolve allegations it billed Medicare and Medicaid for worthless nursing services and unnecessary rehabilitation therapy at 33 skilled nursing homes in eight states between 2007 and 2013.

Dignity Health – October 2014
The company, one of the five largest hospital systems in the nation, paid $37 million to settle allegations 13 of its hospitals billed government health programs for admitted patients having elective cardiovascular procedures who could have been treated on an outpatient basis and 4 hospitals similarly billed elective kyphoplasty procedures to treat spinal compression fractures.

Lockheed Martin Integrated Systems – December 2014
LMIS billed the government for work allegedly performed by employees who lacked the job qualifications specified by two U.S. Army Communication and Electronics Command issued contracts. It will pay $27.5 million to resolve the allegations.

CareAll – November 2014
This home health care agency, one of Tennessee’s largest, billed Medicare and Medicaid for services that were not medically necessary and rendered to patients who were not homebound. The $25 million settlement with the United States and Tennessee covered allegations of misconduct between 2006 and 2013. The company previously paid over $9 million in 2012 to resolve allegations of false cost reports submitted to Medicare.

Boeing – October 2014
The defense contractor paid $23 million to resolve allegations it improperly billed labor costs on maintenance contracts for the Air Force’s C-17 Globemaster. The government alleged that the company billed inappropriately, including for mechanics when they were attending meetings not directly related to the contracts.

State Lawsuits

In addition to the Federal False Claims Act, approximately thirty states have their own version of the law to prevent fraud against their state treasury. There have been a few noteworthy settlements in the past three months under state False Claims Acts as well. These include:

Office Depot – November 2014
The office supply store agreed to pay $68.5 million plus legal fees to resolve allegations under the California False Claims Act that the company failed to deliver its best price on goods sold to the state. Office Depot previously settled a similar lawsuit with New York State in May 2014 for $475,000 and Florida in 2010 for $4.5 million.

Organon – October 2014
The Netherlands pharmaceutical company now owned by Merck paid $31 million to various states, including approximately $2.5 million to New York State, to settle allegations of misrepresented drug prices, underpaid rebates, off label marketing and kickbacks to nursing home pharmacies.

Whistleblower Rewards

In the case listed above, whistleblowers earned more than $110 million. That figure doesn’t include the $170 million announced by whistleblowers from the Bank of America settlement from August which were made public in December.

We were able to quickly isolate these cases because of the work done by Taxpayers Against Fraud. If you would like to see the rest of the settlements from October through December, visit their website here.

The $1+ Billion Settlements For Corporate Misconduct Possible in 2015


Last post, we took a look at more than $40 billion in settlements between the government and corporations in 2014. After a year of record settlements including the largest civil settlement reached between the U.S. Government and a single entity, a decrease in the overall amount of fines should be expected. Nevertheless, it looks like there will still be multiple settlements over the next year reaching more than $1 billion.  Banks dominate the list once again as additional players will be resolving investigations into mortgage fraud and market manipulation that have been common in the financial industry over the past few years.

Here are the settlements we are currently watching for in 2015:

1. Royal Bank of Scotland – FHFA Mortgage Securities
RBS has yet to resolve the private label securities lawsuit filed by the Federal Housing Finance Agency in 2011 related to mortgage securities it sold to Fannie Mae and Freddie Mac. It is one of only two unresolved FHFA lawsuits and The Times reported that RBS may have to pay at least $7.7 billion to resolve the matter. The bank has already set aside $2.9 billion towards a settlement.

2. Standard & Poor’s – Mortgage Ratings
The subsidiary of McGraw Hill Financial faces a $5 billion lawsuit from the Department of Justice and a California lawsuit seeking $4 billion for its inflation of mortgage bond ratings. In July, the Wall Street Journal reported that S&P was open to paying more than $1 billion to resolve the charges brought by the Federal Government.  S&P may also make the news for a smaller settlement of more than $60 million to resolve an investigation into its practices governing grading of commercial real estate bonds in 2011 by the Securities & Exchange Commission, New York and Massachusetts.

3. Morgan Stanley – Mortgage Securities
Bloomberg has reported that Morgan Stanley could resolve a DOJ investigation into its mortgage-backed bond practices in the first few months of 2015.  Documents suggest that Morgan Stanley encouraged subprime lender New Century Financial to make risky loans from 2004 until 2007.  The potential settlement amount for the investigation into its due diligence practices and disclosures to purchasers has not been disclosed, but the number could be significant since New Century made more than $50 billion in mortgage loans in 2006 and was the second largest subprime mortgage lender behind Countrywide.

4. Commerzbank – Anti-Money Laundering and Sanctions
The Financial Times reported that Germany’s second largest bank could pay more than $1 billion to resolve an investigation of the Department of Justice, the New York State Department of Financial Services (NY DFS) and the Manhattan District Attorney’s office into anti-money laundering and sanctions violations. A settlement of $650 million was expected last year but delayed as authorities began investigating the bank’s role in the Olympus accounting scandal.

5. Deutsche Bank – Interest Rate Benchmark Manipulation
Deutsche Bank is under investigation by the U.S. and U.K.  for Libor manipulation between 2005 and 2011.  Settlement talks between the authorities and the European bank are still at an early stage but both UBS and Rabobank paid more than $1 billion to authorities globally to resolve similar allegations.

6. Barclays – FOREX
Barclays could be headed for a fine around $1 billion for FOREX manipulation because of its role in the same misconduct causing six banks to pay $4.4 billion to three regulators in November. Barclays reportedly pulled out of the global settlement with the Commodity Futures Trading Commission and the UK Financial Conduct Authority at the last minute because the NY DFS, where it is also under investigation, would not agree to a resolution. Citigroup and JPMorgan both paid more than $1 billion to resolve regulators’ investigations while receiving a 30% discount with the FCA for the early settlement.

7. General Motors – Ignition Switch Recall
GM discovered ignition switch problems with its vehicles more than ten years prior to its recall announcement in 2014.  It is expected to face a fine from the U.S. Government similar to the one paid by Toyota Motors.  Toyota paid $1.2 billion in March 2014 to resolve the investigation into its misleading disclosures over vehicle problems with unintended acceleration.  Arizona has already sued GM for $3 billion related to its delayed automotive recall of ignition switches. GM also faces a lawsuit from car owners seeking $10 billion for the lost value of their vehicles.

8. Wal-Mart – FCPA
Wal-Mart’s multi-year investigation into bribery allegations in Mexico and elsewhere will be moving from the investigation phase into settlement negotiations at some point over the next few years. 2015 is probably too early to expect a settlement but with spending on the internal investigation starting to slow it could be a hot topic at the end of 2015 and throughout 2016. Some have speculated that the potential resolution will require more than $1 billion, making it the largest FCPA fine ever.  Wal-Mart has already spent approximately $500 million to investigate the bribery charges.

Top Government Settlements from 2014


As the calendar year wraps up, we thought it would be interesting to take a look back at the companies paying more than $1 billion in 2014 to resolve investigations into corporate misconduct.  Twelve companies agreed to these large fines (if we include Suntrust which fell just shy of $1 billion) for a total of more than $45 billion in penalties to the US (and a handful to the UK from the forex settlement).  A few things worthy of note:

  • Only 2 companies were not financial institutions.
  • Only 5 cases involved mortgage fraud.
  • Not one pharmaceutical company is on the list.
  • We only used the calendar year.  J&J and JPMorgan Chase both had large settlements that would have qualified if we used Fiscal Year 2014.

Bank of America – $16.65 Billion in August
The largest civil settlement with a single entity in American history was agreed to by the financial institution to resolve misconduct by Countrywide, Merrill Lynch and BofA stemming from .  The $5 billion penalty imposed under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) is the largest under the law, eclipsing the $4 billion paid by Citigroup only a month before.  Four whistleblowers in this case were paid approximately $170 million in total under the False Claims Act and FIRREA.

BNP Paribas – $8.9 Billion in June
The French bank agreed to a guilty plea to charges it violated US economic sanctions by providing dollar clearing services to individuals and entities dealing with Sudan, Cuba and Iran between 2004 and 2012.  Three individuals helped the government make their case agains BNP.

Citigroup – $7 Billion in July
The settlement covered misrepresentations made to investors regarding the quality of mortgage securities.  It paid a short-lived record $4 billion as a civil penalty to settle the Justice Department claims under FIRREA.  It also paid $208.25 million to the Federal Deposit Insurance Corporation (FDIC) and nearly $300 million to five states participating in the agreement.  The remaining $2.5 billion was earmarked for consumer relief.

Anadarko – $5.15 Billion in April
Anadarko agreed to pay the largest recovery for the cleanup of environmental contamination.  It resolves the liability of Kerr-McGee, an Anadarko subsidiary acquired in 2006, for legacy liabilities spun off in an inadequately funded company which filed for bankruptcy in 2009.

Goldman Sachs – $3.15 Billion in August
Goldman agreed to pay the Federal Housing Finance Agency (FHFA) for securities law violations in the sale of private-label mortgage-backed securities to Freddie Mac and Fannie Mae between 2005 and 2007.

Credit Suisse – $2.6 Billion in May
The Swiss bank pleaded guilty to conspiracy to aid U.S. taxpayers in filing false income tax returns with the Internal Revenue Service.  It paid $1.8 billion to the Department of Justice for the U.S. Treasury, $100 million to the Federal Reserve, and $715 million to the New York State Department of Financial Services.  It also paid $196 million to the SEC earlier in the year for providing cross-border brokerage services without registering.

MF Global Holdings Ltd. – $1.3 Billion in December
A consent order in December 2014 requires the parent company of brokerage unit MF Global Inc. to pay $1.2 billion in restitution and $100 million in fines to the CFTC.  MF Global had liquidity problems in 2011 due to trading losses that caused its bankruptcy.

Morgan Stanley – $1.25 Billion in February
The FHFA settled its claims over private-label mortgage-backed securities sold to Freddie Mac and Fannie Mae between 2005 and 2007 for $625 million to each.

Toyota Motors – $1.2 Billion in March
Toyota agreed to the largest penalty for an automobile manufacturer to resolve allegations of misconduct related to its recall of vehicles for unintended acceleration.  The charges involved misleading statements made to consumers and regulators in 2009 and 2010 concerning the safety of its vehicles.

FOREX Manipulation – $4.3 Billion by six banks in November to three agencies in the US and UK.
Citigroup and JPMorgan each paid a total of about $1 billion in fines between the US Commodity Futures Trading Commission, Office of the Comptroller of the Currency and UK Financial Conduct Authority to resolve allegations its traders manipulated the FOREX market.  Four other banks paid amounts under $1 billion to resolve the investigations by these government agencies.  UBS, RBS, HSBC and Bank of America each paid between $250 million and $800 million.

Suntrust Mortgage – $968 Million in June
The mortgage company settled claims involving problems with improper mortgage origination, servicing and foreclosure arising between 2006 and 2012.  The settlement involved the Justice Dept., Housing and Urban Development (HUD), Consumer Financial Protection Bureau (CFPB) and 49 states plus the District of Columbia.  The deal was agreed to in principal in late 2013 but announced in 2014.

Other Settlements of Interest

While we were doing our research, we found a few other record settlements that we thought you would find interesting.

Alstom – The French engineering company agreed to the largest criminal tax penalty for an FCPA violation imposed by the Department of Justice, $772 million, in December 2014.  Alstom used consultants to pay $75 million in bribes to secure $4 billion in projects with state-owned companies in five countries.

Hyundai Motor and Kia Motors – The two related auto manufacturers agreed to a $100 million penalty, the largest ever for violation of the Clean Air Act, in November 2014.  They overstated the fuel economy and understated the greenhouse gas emissions of their cars and SUVs in 2012 and 2013.

AT&T Mobility – The $105 million settlement with the Federal Communications Commission over cramming unauthorized third party subscriptions and premium text messaging onto customer bills was the largest enforcement action in the FCC’s history.

We are aware of ten whistleblowers involved in four of these cases.  At this point, only payments to the individuals in the Bank of America case have become public knowledge.

There may have been additional cases involving insiders where the details have not yet been made publicly available.  For example, the CFTC has not yet issued a notice of covered action for the fines issued to the banks in the forex case.

Judge Confirms $1.8 Billion Fine Against Credit Suisse for Tax Evasion


My discussion yesterday about international cooperation against tax avoidance was particularly timely, I suppose.  Today, U.S. District Judge Rebecca Beach Smith confirmed the deal Credit Suisse struck in May to plead guilty to conspiracy to aid and assist U.S. taxpayers in filing false income tax returns with the Internal Revenue Service (IRS). The company will pay a total of $2.6 billion, including $1.8 billion to the U.S. Treasury.

If there was a Credit Suisse whistleblower, we could know in the next year.  Credit Suisse will pay a fine of $1.136 billion and restitution of $666.5 million.  There is also the potential for a civil tax assessment.  The IRS whistleblower program pays a reward of between 15 and 30 percent of the amount collected to eligible whistleblowers in cases qualifying for §7623(b).  Similar to the Dodd-Frank programs, it also authorizes payments for “related actions”.  I haven’t taken a complete look at this issue here, but at first glance it seems that the $715 million payment to the New York Department of Financial Services could lead to a payment as a related action.

However, the IRS may not pay off on the full amount because some of it will be considered a criminal penalty.  The agency has declared criminal fines off limits to the program – they are not “collected proceeds” that can trigger a payment.  So there may not be the potential for a $500+ million award that is theoretically possible with a settlement of this size.

In February, Credit Suisse agreed to pay $196 million to settle charges the company provided services to U.S. clients while not appropriately registered in the country.  It followed that up with the settlement at issue here in May.  Here is the original press release from the DOJ in May as well as the SEC press release in February.  The latest press release is located here.

This is the second major tax case against a Swiss bank to be settled.  The 2009 settlement with UBS resulted in a penalty of $780 million to the IRS and an additional $200 million to the SEC.  It also resulted in the largest award ever to a tax whistleblower, $104 million to Bradley Birkenfeld.

Credit Suisse now holds the honors for the largest penalty in a criminal tax evasion case with the United States.  However, UBS may soon be able to reclaim its spot as #1 in the world for a tax fine.  France has also been pursuing the company for its efforts to help clients avoid taxes and the settlement amounts being discussed in the media range up to $6 billion.

The confirmation of the CS settlement extends the large fines that have been imposed on financial institutions in the 2014 calendar year.   Most recently, the CFTC imposed a $1.4 billion penalty on 5 banks for currency market manipulation.  The DOJ collected $24 billion in Fiscal Year 2014, and that doesn’t include the money from the $16 billion settlement with Bank of America.

Record Penalties Under FIRREA Boost Justice Department Collections to $24 Billion in FY2014


Record penalties under FIRREA helped make financial fraud the largest source of money collected by the Department of Justice through enforcement efforts in Fiscal Year 2014.  The DOJ statistics released today revealed that agency led enforcement actions and negotiated civil settlements resulted in collections of more than $24 billion during the fiscal year ending in September.

FIRREA had fallen into disuse until prosecutors began bringing enforcement actions against banks for conduct surrounding the financial crisis of 2008.  Now, it has become the nation’s leading tool against mortgage fraud.  It resulted in settlement amounts of $2 billion (JPMorgan), $4 billion (Citigroup) and $5 billion (Bank of America) over the past year as banks sought to put their misconduct involving residential mortgage backed securities behind them.  JPMorgan and Citigroup were cited by the DOJ as paying significant sums in 2014, with Bank of America unnamed.  Because the BofA settlement happened toward the end of the fiscal year, it may not have paid the money to the U.S. Government yet.

FIRREA’s increasing importance also led Attorney General Eric Holder to call for an increase in the law’s incentives for whistleblowers just days before he announced he was stepping down.  Rewards are currently capped at a maximum of $1.6 million.  The False Claims Act, SEC and IRS programs are all uncapped, with payments potentially reaching over $100 million on large cases.

In the press release, the Justice Department credited whistleblowers under the False Claims Act for bringing many of the cases leading to large civil collections.  Whistleblowers were involved in a number of large cases reaching a resolution in 2014, including investigations into Bank of America and JPMorgan Chase in the financial arena and Johnson & Johnson in health care.

The DOJ press release added another financial crime to the list of penalties paid by financial institutions: LIBOR manipulation.  UBS Securities Japan and RBS Securities Japan paid large amounts to end investigations into their manipulation of the London Interbank Offered Rate.

The $24 billion number includes money paid during FY2014 even if the settlement or enforcement action happened in a preceding year.  It excludes settlements agreed to in 2014 but not paid during the government’s fiscal year.  The DOJ received $13.7 billion while its civil and criminal enforcement efforts helped other federal agencies, states and additional parties receive another $11 billion.  It’s unclear to us how much, if any, overlaps with the $7 billion collected by the CFTC and SEC.

The amount was more than three times the $8.1 billion collected in 2013.  The ongoing antitrust investigation into the auto parts industry, environmental cleanups of pollution and criminal penalties for violations of the FCPA also led to significant collections.  Significant antitrust and environmental cases also led to more than $1 billion in 2013.

Last year, health care fraud topped the list of collections with large fines paid by Abbott and Amgen.  It’s absence from the list this year is noticeable because of the large amounts settlements gathered from this area in the past ten years for violations of the False Claims Act.

For additional information about today’s DOJ announcement, here is the press release.


Global Currency Settlements Could Create First Major Test of Related Actions for Dodd-Frank Whistleblowers.


The Office of Comptroller of the Currency (OCC) has just added $950 million to the $3.1 billion settlement announced earlier by the United Kingdom Financial Conduct Authority (FCA) and the U.S. Commodity Futures Trading Commission (CFTC), bringing total fines against six banks by four regulators (including Swiss Finma) to $4.3 billion.

The OCC settlement for currency rigging included $350 million fines each against JPMorgan Chase and Citigroup. Bank of America, not included in the earlier settlements by the CFTC or FCA, settled with the OCC for $250 million.

Reports are that the New York State Department of Financial Services (NYDFS) believed the fines too weak and will pursue its own settlement (or prosecution) with the banks it regulates. Pressure by NYDFS reportedly led Barclays to pull out of today’s FX settlement.

First Major Test of a Related Action Award?

The Dodd-Frank Act contemplated payments to whistleblowers when agencies without a compensation program benefit as a result of a tip to the SEC or CFTC. Dodd-Frank requires the SEC and CFTC to also pay rewards on “related actions” by certain agencies as well as on their own enforcement actions.

Of the six government agencies reported to be a part of settlement negotiations, only the CFTC has an incentive program for whistleblowers. There has been a proposal for the NYDFS to pay rewards but the measure has not passed the New York State legislature. The Department of Justice has been investigating criminal charges but this is not covered by either of its incentive programs (the False Claims Act or FIRREA).

The CFTC defines a related action as “any judicial or administrative action brought by an entity listed in § 165.11(a) that is based upon the original information voluntarily submitted by a whistleblower to the Commission pursuant to § 165.3 that led to the successful resolution of the Commission action.” § 165.2(m). Related actions include judicial or administrative actions brought by the Department of Justice, a department or agency of the Federal Government, a state civil agency and a foreign futures authority. § 165.11(a). Although not named specifically, this would appear to cover fines by the OCC, DOJ, NYDFS, FCA and Finma.

The dollar amounts involved in this settlement mean that any whistleblower that emerges could stand to gain millions of dollars depending on how the CFTC pays out for a “related action”. Additionally, as the related action settlements are double the CFTC settlement, how it is handled will ultimately matter a great deal in the size of the award. Will it pay out the same percentage as for an enforcement action by the CFTC? Is there other language which could impact the decision to payout for a related action in this case?

The $30 million reward for the international whistleblower issued by the SEC in September 2014 involved an unspecified related action. However, the award proceeding order did not include any special discussion of how the process for the related action worked. The decision also did not discuss the size of the related action compared to the SEC enforcement.

Stay tuned.

CFTC Announces $1.4 Billion Forex Settlement – Wait for Whistleblower Award (If Any) Begins


This morning, the United Kingdom Financial Conduct Authority (FCA) and the U.S. Commodity Futures Trading Commission (CFTC) announced more than $3 billion in fines against five banks for manipulation of the foreign exchange market. As part of the settlement, the CFTC fined Citibank ($310 million), JPMorgan ($310 million), HSBC ($275 million), UBS ($290 million) and The Royal Bank of Scotland ($290 million), according to their press release.

The announcement by the FCA has been anticipated for a few weeks now as rumors swirled following bank announcements of funds set aside from earnings several weeks ago. The UK regulator reportedly offered banks a 30% discount for early settlement. Speculation over the course of the last few weeks has been that the CFTC would also participate.

This global settlement will not be the end of the announcements into forex manipulation, as there are additional banks and regulators who did not participate. There were rumors that Barclays would also participate in the settlement, but it reportedly pulled out of settlement discussions because of difficulties in reaching an agreement with New York’s Department of Financial Services. Bank of America has announced that it is in advanced discussions to resolve issues in its forex business with regulatory agencies. The Department of Justice is also reportedly pursuing a criminal investigation into conduct at JPMorgan Chase. And the Swiss Financial Market Supervisory Authority (FINMA), which fined UBS $139 million as part of this settlement, is investigating conduct by three additional Swiss banks as well.

What was happening?

Benchmark foreign exchange rates for 21 major currencies are set in London at 4 PM daily during a 60 second window of trading known as the “fix”. Known as the WM/Reuters benchmark rate, it is used to value investments held by pension funds and money managers across the world.

Traders at  the five banks named here, as well as potentially a few others, were sharing information about pending client orders ahead of the 4 PM fix. They were also sharing information about their trades, leading to agreements to collaboratively buy or sell currencies in a way that manipulated the price set during the fix. Because of the information sharing between banks, normal market forces of supply and demand were not at work. Although the relevant time period varied by bank, the conduct happened between 2009 and 2012.

The CFTC released sections of chat transcripts from the banks at issue to provide examples of the market manipulation at issue. The chat room talk clearly indicates traders were disclosing information about the size and direction of their net orders prior to the close of the fix period.

The fines also covered inadequate internal controls put on the use of electronic communication and insufficient training for traders around FX benchmark rates.

Previously, several banks (including UBS and RBS) had been fined for similar conduct in connection with manipulation of LIBOR and other interest rate benchmarks.

Will a whistleblower emerge?

The countdown to a record-breaking award, if any, begins.

The CFTC will next announce a notice of covered action. This will give whistleblowers 90 days from the announcement to file Form WB-APP to claim a reward. The CFTC will then evaluate all of the claims submitted and make its award.  This is spelled out in our section on their rewards procedure.

As we speculated last week, any payout could be substantial. The Dodd-Frank Act authorizes awards between 10 and 30 percent of the sanctions received by the CFTC. Although purely speculative, this raises the possibility of an award between $27 million and $420 million. There is also the potential for a higher award as the FCA fines could be considered a “related action” pursuant to section 165.11 of the CFTC rules. It seems likely that the FCA is a “foreign futures authority” under the rules.

To date, the CFTC Whistleblower program has lagged behind the Securities and Exchange Commission program, which was also authorized by Dodd-Frank. It receives less than 10% of the tips that the SEC does and has only announced one award to the ten from the SEC. However, the SEC’s largest award is only $30 million, and this settlement has the potential to lead to a reward well in excess of that one.

Are Banks Too Big to Jail?


The SEC and DOJ have stepped up enforcement against financial institutions in the past year. Now, several regulators are taking aim at two financial institutions based overseas, Credit Suisse and BNP Paribas. The settlement of these two cases has the potential to include fines over $1 billion each and guilty pleas to criminal charges.

BNP Paribas, the largest French bank, is accused of doing business in Cuba and Iran in violation of federal sanctions. The U.S. is seeking more than $3 billion from BNP Paribas.

Credit Suisse is under investigation for assisting U.S. citizens in tax evasion. The Justice Department and NYS Department of Financial Services are seeking a total of more than $2 billion in order for Credit Suisse to settle the claims against it.

In an effort to convince the Department of Justice, the Federal Reserve Bank of New York and the New York State Department of Financial Services to take the criminal charges off the table, the financial institutions have argued that a criminal conviction could threaten their ability to continue operating and result in substantial harm to the economy.

Perhaps they should have thought more about the potential consequences for their business before violating the law.

Neither case is an isolated incident in the industry. For violating U.S. sanctions, Credit Suisse, Barclays, ING Bank and the Royal Bank of Scotland have all faced penalties. For assisting in tax evasion, UBS agreed to pay $780 million to the U.S. government to avoid criminal prosecution in 2009. The government was aided in its investigation of UBS by whistleblower Brad Birkenfeld, who received more than $100 million.

If the threat of substantial monetary fines aren’t sufficient to deter misconduct by banks, then they need to know that criminal penalties are once again an option. The only way to do that is to convict one of them.

In the past, large businesses have been allowed to fail.

The guilty plea by Drexel Burnham Lambert to six counts of mail and securities fraud in 1989 resulted in their closure shortly thereafter. Drexel, which became famous for its role in high-yield junk bonds, admitted manipulating stock prices and defrauding shareholders. The firm also agreed to pay more than $500 million to the Government in connection with the settlement and establish a shareholder fund with an additional $150 million.

Accounting firm Arthur Anderson also closed following its 2002 felony conviction for obstructing the federal investigation into Enron. Although the conviction was overturned by the U.S. Supreme Court in 2005, the company had shut down its audit activities and was unable to recover.

Too big to fail, the popular Wall Street argument for government intervention during the financial crisis of 2008, was the precursor to too big to jail. Regulators allowed Lehman Brothers to fail in September of 2008 in order to show investment banks that they should not rely on the prospect of government intervention. The impact on investor confidence forced the government to intervene in the market and provide loans to major financial institutions because of concerns about liquidity problems. More than five years later, our nation is still struggling with the question of how to deal with large corporations when they become in legal or financial trouble.

Too big to jail, the public catch-phrase for the bank’s current argument, became widespread last year when British banks HSBC and Standard Chartered avoided criminal penalties for money laundering. At a news conference following their settlements, the head of the Justice Department criminal division, Lanny Breuer, indicated that they considered and rejected criminal prosecution of HSBC because of the risks to the bank’s viability and the American economy.

When violations of the law can be resolved by writing a large check, they become a strategic decision about whether it is better to pay the fine when caught or miss out on a potential business opportunity. If banks know that regulators cannot actually impose a greater punishment, they may be more willing to engage in risky behavior. That is why sending the message to large financial institutions that they need to respect the law is important.

Regulators appear to be moving in this direction.

Last year, the Securities and Exchange Commission announced that it was reviewing its practice of allowing defendants to settle cases without admitting wrongdoing. Mary Jo White, SEC Chairman, indicated that its new policy would most likely be applied to cases of significant investor harm and egregious fraud. When it negotiated a settlement of its charges against JPMorgan Chase in September 2013, it followed through. JPMorgan admitted it violated securities law in connection with a $6 billion loss by trader Bruno Iksil, known as the London Whale.

If the banks are right that they are too big to punish criminally without destroying the economy, it is time to take another look at how to deal with large corporations in America. They should not be able to get off the hook for serious violations of the law simply because they are large and important. As large and important institutions, it is critical that they actually are following the law.

Photo credit.

Government Receives $300 Million in Three Health Care Fraud Settlements


There have been a few notable settlements under the False Claims Act in the last month for those tracking fraud in the health care industry. Through the three lawsuits, the government has recovered more than $300 million.

Teva Pharmaceuticals and a subsidiary agreed to pay $27.6 million to resolve allegations it paid a Chicago doctor to switch to its generic clozapine, an anti-psychotic drug, rather than continue to prescribe Novartis’ Clozaril. The doctor became the largest prescriber in the country after signing a consulting agreement with Teva. The Anti-Kickback Statute prohibits payments to induce or reward the referral of business under Medicare and Medicaid.

Halifax Hospital will pay $85 million to settle claims it violated the False Claims Act and the Stark law when it billed Medicare for patients referred by nine doctors. The Stark law prohibits inappropriate financial arrangements between doctors and hospitals, including compensation for referrals. The Justice Department contended Halifax paid three neurosurgeons more than their fair market value. Halifax also provided an improper incentive bonus to six oncologists based on the value of work performed.

The settlement does not conclude the case against Halifax. The whistleblower lawsuit also alleges that the hospital unnecessarily admitted patients instead of treating them as outpatients. These allegations are set for trial in July.

At the end of February, Endo Pharmaceuticals agreed to pay $192.7 million to resolve allegations it engaged in off-label marketing of the prescription drug Liboderm. Liboderm was approved by the FDA only for the treatment of pain associated with a complication of shingles. Endo sales representatives were encouraged to suggest off-label uses of the product for other forms of pain and marketed the drug to physicians who were unlikely to see patients suffering from its approved indication, post-herpetic neuralgia pain.

Young Law Group represents health care whistleblowers reporting fraud through the False Claims Act. If you would like a free, confidential consultation with an attorney at the Young Law Group regarding reporting fraud, please call 1-800-590-4116 or complete our contact form.

Call Now ButtonCall Now