This week, the SEC fined the Chicago Board Options Exchange $10 million for systemic regulatory compliance failures. The CBOE, successor to the Chicago Board of Trade, is the largest options exchange in the U.S. It is regulated through the SEC but acts as a self-regulatory organization.
As part of its self-regulatory obligations, the CBOE is required to comply -- and to actively enforce compliance among its members -- with federal securities law and its own rules. Those rules must be reported to the SEC, equitably allocate member fees and dues and, essentially, ensure that all issuers, customers, brokers and dealers get a level playing field with the same information and costs.
According to the SEC, the CBOE utterly failed in those responsibilities, "including a failure to enforce or even fully comprehend rules to prevent abusive short selling," or "naked short selling," a violation of Regulation SHO of the Exchange Act.
]]> The SEC accuses the CBOE of egregiously failing to investigate suspected naked short selling -- and not just as a matter of occasional oversight. Instead, the situation indicates a "systemic breakdown" in the CBOE's legal compliance responsibilities. For one thing, the exchange's surveillance program failed to detect a single instance of naked short selling despite numerous red flags.Even more serious, the agency contends the CBOE actively interfered with an SEC investigation and acted illegally on behalf of the accused short-seller. When that member received notice that it was under investigation for short-sale fraud, the SEC claims, CBOE officials provided defense information and even edited the member's response to the SEC. That response was inaccurate and misleading, the SEC says.
These accusations are extremely serious, as the SEC recognizes. If true, they indicate a fundamental breakdown in the fair dealing that allows our markets and exchanges to work correctly. If the regulatory compliance mechanisms in one of our largest exchanges has broken down to the point where fraud is going unnoticed, however, how can investors trust the market?
Source: Courthouse News Service Securities Law Review, "SEC Fines Chicago Options Board $6 Million," June 12, 2013
]]>Justice Anthony Kennedy wrote the 5-4 majority opinion approving the cheek-swab test. He reasoned that the involuntary collection of DNA profiles from people arrested for serious crimes is no more intrusive than the collection of fingerprints or photographs and serves the legitimate governmental purpose of cracking unsolved cases. Kennedy, however, did not at all define the phrase "serious crimes," leaving the question open as to whether those accused of white collar offenses or drunk driving might be forced to contribute their DNA to the database.
]]> The majority decided that since a cheek swab was not unduly painful or intrusive into the citizen’s bodily integrity, and since law enforcement has a legitimate interest in solving cold cases, the procedure does not violate the Fourth Amendment’s guarantee against unreasonable searches and seizures by law enforcement.The four dissenting justices, led by Antonin Scalia, argued that the court has never before allowed this degree of warrantless evidence gathering from people who are only suspected of crimes. Furthermore, these arrestees aren’t even suspected of the crimes a subsequent DNA match could allegedly tie them to. Therefore, a law enforcement effort to troll such a database for potential DNA matches is an outrageous “suspicionless search.”
Scalia also argued that the majority’s vague “serious crimes” limitation would never be followed, but would instead lead to a regime in which police routinely take DNA profiles from people accused of even the most minor offenses. “Your DNA can be taken and entered into a national DNA database if you are ever arrested, rightly or wrongly, and for whatever reason,” he wrote.
Unless a subsequent Supreme Court decision defines “serious crimes” more clearly, law enforcement is left with only vague guidance on who should be included in the massive DNA database. That leaves it with immense power to abuse the ruling -- or to develop a lucid sense of which of the hundreds of thousands of state and federal crimes are actually “serious.”
For example, law enforcement could decide that although white collar offenses are serious, white collar arrestees aren’t likely to have committed other offenses solvable by DNA. Law enforcement discretion could lead to a system in which cops decide DNA swabs are only required of those they already suspect.
Source: SCOTUSblog, "Opinion recap: Solving “cold cases” made easier," Lyle Denniston, June 3, 2013
]]>Neither Nix nor Dominik were allegedly aware of either how the call was orchestrated or that it was being recorded. Accordingly they reportedly did not provide their consent for the call to be recorded.
While the content of the call may have been amusing, the men are probably not feeling much like laughing now. Upon conviction, federal crimes often result in severe consequences. These federal charges are no exception to that. If convicted of the charges the men could face a fine of $500,000. In addition, the men could each be sentenced to a total of five years in prison.
Source: WKBW, "Two Men Charged in Buddy Nix Phone Call Prank," Mitch Simon, May 29, 2013
]]>Indeed not. Instead, the FBI initiated a criminal investigation, not only into the allegations against individual traders already believed to be involved, but apparently also into the activities of SAC's founder and the company itself. So far, no criminal charges have been filed, and SAC's founder and SAC as a company have not been accused of any wrongdoing. However, the case is clearly before a federal grand jury, the purpose of which is to determine if the government has enough evidence to bring those charges.
SAC was aware of the FBI investigation and was cooperating fully, as most companies choose to do in federal investigations. Nine current or former employees of SAC were tied to the alleged insider trading SAC thought it had resolved through the civil penalty. Of those, six were criminally charged and four have pled guilty.
When the grand jury subpoenas were sent to the founder and several executives, something changed. SAC decided not to cooperate unconditionally any longer.
]]> Generally, firms cooperate openly with federal investigations to minimize the legal risks -- and because cooperation looks better to the press, public and investors. Is it ever wise to refuse to cooperate?Yes -- if cooperation is not paying off. For example, SAC may have decided that criminal charges will be filed no matter what it does, so cooperation isn't effectively limiting the legal risk. Moreover, while individuals have the Fifth Amendment right against self-incrimination, entities do not. If SAC has information it doesn't want to provide to investigators for any reason -- proprietary information, for example -- halting cooperation now could give the fund a chance to invoke attorney-client privilege.
Finally, federal investigations can be onerous and expensive to comply with. After forking over $616 million in penalties earlier this year, the company may simply have decided it has spent enough money on a prosecutor that refuses to be appeased.
Basically, if SAC isn't likely to receive any concrete legal benefits from cooperating, the only reason to continue to do so is how it might appear to the press and investors. Here, SAC appears willing to take the risk.
Sources:
Others have recently been accused of hacking into payment processors for pre-paid debit cards. The FBI claims to have investigated numerous similar credit card and bank fraud cases that were not publicized.
Considering that background, it's no surprise that Homeland Security chief Janet Napolitano called cybercrime one of law enforcement's top priorities. To remedy the problem, Napolitano threw her support behind passage of the controversial Cyber Intelligence Sharing and Protection Act, or CISPA, and also called for government and large financial institutions to build closer relationships in order to share cybersecurity information amongst themselves.
]]> Others, however, have wondered whether a more cooperative relationship between federal law enforcement and banking giants is the best option. The CEO of one payment processor interviewed after the $45 million ATM theft indicated that part of the problem is that banks are focused on cost savings."Most banks in U.S. are trying to cut costs because of recession. So they will try to outsource, not just to India but to any other country or any other company," he told reporters. "For banks, it is completely a balance between security and costs."
Napolitano appeared to confirm that cybercrime isn’t restricted to the most devious hackers. "[The $45 million theft] demonstrates the kind and scope of financial crimes that are enabled in a network-connected world, particularly by those who have some skill although not necessarily the highest level of skill, quite frankly, but who can coordinate timing and the like," she said at a recent cybersecurity conference.
CISPA --and the kind of information sharing between the government and private sector Napolitano recommends -- has aroused heated opposition from privacy and civil rights groups. While the bill has been amended from the version that failed to pass last year, opponents say that the law’s language is so broad it would allow private sector, government and even military intrusions into individual citizens’ privacy for virtually any reason. The previous bill allowed intrusions for any “national security purpose”; the amended bill changed the wording to any “cybersecurity” purpose.
Nevertheless, when faced with the complex problem of cybercrime -- particularly when committed by international agents not under U.S. jurisdiction -- national security agencies and law enforcement appear to see new U.S. legislation as their standby position.
Source: Thomson Reuters News & Insight, “Reuters Summit: Napolitano says ATM heist sign of cyber crime scope,” Deborah Charles, May 14, 2013; Reuters, "After ATM heist, India's IT sector again in unwelcome spotlight," Swati Pandey and Harichandan Arakali, May 15, 2013; Electronic Frontier Foundation, “CISPA Amendments Passed Out of Committee—Here’s Why The New Version Still Threatens Online Privacy," Mark M. Jaycox and Rainey Reitman, April 12, 2013
]]>It's hard to claim with a straight face that the U.S. War on Drugs has been effective in preventing people from wanting or using illegal drugs. Until recently, however, the fact that it has been ineffective was the most common reason cited for ending it, and it wasn't getting much traction.
]]> After years of a recession that has drained state coffers dry, however, a new argument against the War on Drugs has arisen, and it may be changing minds. The decision in November by Washington and Colorado to decriminalize recreational marijuana possession is symptomatic of this argument. So is a bill currently before the Colorado legislature that would fundamentally change that state's criminal drug laws. What is this argument for ending the War on Drugs that has actually changed minds?We simply can't afford to do this anymore.
The Colorado bill would first separate those convicted of drug crimes from violent felony offenders in the prison system. Next, it gives even felony drug offenders the chance to have their convictions changed to Level 1 misdemeanors if they successfully complete drug treatment and probation.
One interesting development is that the law would prohibit prison sentences for drug crimes unless the offender has failed several drug treatment and probation efforts. Essentially, prosecutors would have to exhaust all other options before resorting to incarceration.
The Drug Policy Alliance estimates states spend $25 billion a year on efforts to suppress illegal drug use. A study by the Colorado Commission on Criminal and Juvenile Justice estimates that the change in the law would save the State of Colorado $5 million in prison costs next year alone, and that every dollar spent on drug treatment provides $7 in benefits to taxpayers.
All the aggressive, focused law enforcement we could conjure, all the harsh penalties we could devise, and all the public education programs we could develop haven't made a dent in the demand for drugs, but they have locked up shocking number -- an unconscionable number -- of people at our expense. Can we afford this?
Source: Colorado Watchdog, "CO considers major drug sentencing reform, $5 million in taxpayer savings," Calvin Thompson, March 3, 2013
]]>Even more surprising, the SEC didn't rely on the city's municipal securities disclosure documents alone, but also considered information gleaned from city budgets and even from the "State of the City" address. Basically, it found that city officials weren't accurately representing the city's finances.
The agency claims that public officials can be held liable for making fraudulent public statements that affect could the value of municipal securities. In fact, along with the charge announcement, it released a report on the potential for official liability in such cases.
]]> The SEC also made clear that this is no coincidence. After one SEC commissioner released a critical report last summer, the agency has stepped up enforcement of municipal securities fraud.Harrisburg is already in state receivership after repeatedly defaulting on bonds issued for a city incinerator. The city currently owes an estimated $340 million on the facility. In 2002, Harrisburg issued a new set of bonds meant to resolve the issues, but it announced on April 10 that it was again unable to make its monthly payment of $353,210. No payments have been made on the bonds since Nov. 2008.
A forensic audit in 2012 found that the $17 million in 2002 bonds issued in had primarily been used for operating costs and prior debt service -- which apparently did not resolve the facility's shaky finances.
The city did not issue annual financial reports or other documentation required by securities law to provide investors with the accurate information they need to evaluate investments. Therefore, investors were forced to rely on "inaccurate and stale information" about the city's financial position.
Harrisburg has agreed to settle the securities fraud allegations without admitting any liability. The SEC required, as a part of that agreement, the city to take "various remedial measures," which the city has already implemented.
Again, the message being sent to municipalities is that securities law is not to be ignored, even in times of financial trouble. Professional management of securities, including knowledgeable legal compliance counsel, is not the line-item to slash from the budget.
Sources:
The SEC's complaint claims that the airport authority, the underwriting firm, its owner, and an affiliate company committed securities fraud. It also contends that the city, the former assistant city manager, the former economic development director, the underwriting firm and its owner aided and abetted the fraud. If the agency can prove its case, it seeks permanent injunctions to keep the defendants from participating in future bond offerings along with the return of allegedly ill-gotten gains, financial penalties and interest.
]]> Essentially, the SEC alleges that the two city officials and the underwriting firm Kinsell, Newcomb & DeDios, or KND, issued municipal bonds in 2008 to undertake redevelopment projects for the Southern California Logistics Airport Authority, which is controlled by the City of Victorville. One of those projects was to construct four airplane hangars on a retired Air Force base. They used tax increment financing bonds, which were to be secured by property taxes expected from the newly-improved property's increasing value.Unfortunately, the SEC claims, the bonds stated that the airplane hangars were worth $65 million, but a county assessor had already valued them at only half that amount. The SEC alleges a variety of other financial improprieties by KND, its subsidiaries and its contractors, and its owner, as well.
It may come as a surprise to many people that cities and municipal agencies can be charged with crimes at all but, while it's unusual, it's not unprecedented. Just as with corporations, nonprofits and other organizations, municipalities can be charged with crimes when the allegedly illegal activity was undertaken with the full knowledge or at the behest of the organization, as opposed to being carried out by a few bad actors.
In this case, that may not be easy to prove. The allegations involve a former assistant city manager and a former director of economic development, who may not be high enough in the city hierarchy to implicate the city criminally. Nevertheless, the charges may serve as a stark warning for municipal officials trying to manage and improve their cities in the midst of the Great Recession.
Source: SEC News Release, "SEC Charges City of Victorville, Underwriter, and Others with Defrauding Municipal Bond Investors," April 29, 2013
]]>Then, he was summarily deported.
He was in the country legally and had no criminal history. Those facts didn't matter, according to the Department of Justice, because deportation is mandatory -- even for legal immigrants and green card holders -- after conviction for any aggravated felony. And, since a federal law meant to curb drug trafficking defines, for mandatory deportation purposes, "aggravated felony" as including any drug crime punishable by more than a year in prison, the Georgia man's state-level felony should count.
In October, the Justice Department argued that theory before the U.S. Supreme Court, which recently announced its decision. Considering the fact that the amount of marijuana in question was exceedingly small and there was no evidence that the Georgia man actually intended to sell the pot (he may have meant to share it with friends), the high court ruled that deportation should not have been mandatory.
]]> "Sharing a small amount of marijuana for no remuneration, let alone possession with intent to do so, does not fit easily into the everyday understanding of trafficking, which ordinarily means some sort of commercial dealing," wrote Justice Sonia Sotomayor for the court. Since Congress didn't clearly mean to make this low-level use subject to mandatory deportation, she reasoned, any ambiguity in the law should be read in favor of the defendant.As for the Justice Department's attempt to argue that a federal-level aggravated felony and a state-level non-aggravated felony are exactly the same thing? No, they're not, the justices held.
The federal government does have the authority to deport people for any criminal conviction, and it still does under this ruling. What the court's ruling clarifies is that the Justice Department is not required to deport people convicted of low-level marijuana offenses -- it has discretion in such cases.
Since the Georgia man has already been deported, it is unclear how much this ruling will help him personally. He may now have the option to apply for readmission, which would have been denied after a mandatory deportation. Still, the ruling is a very positive step toward limiting unduly harsh consequences for low-level marijuana offenders.
Source: The New York Times, "Court Rules for Immigrant on Deportation in Drug Case," Adam Liptak, April 23, 2013
]]>"I respect President Obama and love my country. I would never do anything to pose a threat to him or any other U.S. official," Curtis told reporters at a news conference after his release.
Unfortunately for Mr. Curtis, the fact that ricin-laced letters addressed to President Obama, Senator Roger Wicker and, possibly, a Mississippi judge, was national news. The first two letters were discovered by postal equipment before they were ever delivered, and it is unclear whether the third letter to the judge is related.
Curtis described being accused of a highly publicized, terrorism-related offense as "a nightmare for myself and my family."
]]> When the story broke, it's no surprise that only the most convincing evidence seeming to point at Curtis was widely reported. The two letters sent to the president and senator contained the same phrase about exposing a wrong, and both were signed "I am KC and I approve this message," which in fact is a way Curtis frequently used.However, the fact that Curtis used that signoff was known to others, and suspicions have been raised that one man with whom Curtis has a long-term enmity may have used the phrase to divert attention from himself and toward Curtis. Of course, the two men may both be completely innocent.
After Curtis' release, however, the FBI reportedly did search the second man's home. No details of what may have been found there have yet been released.
Mr. Curtis' case should serve as a reminder, not only to federal prosecutors and the press, but to all of us who follow the news. It is only too easy to condemn someone on a few choice bits of information revealed by investigators to the press. Federal charges are far too serious to be tried in the media.
Source: NBC News, "Ricin letter suspect released; FBI searching second Mississippi man's home," Elizabeth Chuck and Andrew Rafferty, April 24, 2013
]]>The FCPA prohibits U.S. organizations from participating in bribery or kickbacks when operating abroad, even should that activity be within the scope of ordinary business practices in the foreign country. No allegation has been made that Argentina particularly lacks strong enforcement of anti-bribery laws but, in many countries, bribery and kickbacks are considered ordinary and a simple cost of doing business, however destructive such practices may be to the economy as a whole.
The Justice Department and the Securities and Exchange Commission cited the company's "extensive" cooperation with the investigation when agreeing to settle the criminal and civil cases against Ralph Lauren. The Justice Department will receive the $882,000 penalty, while the SEC will receive the $730,000 in allegedly illicit profits facilitated by the claimed bribery scheme.
]]> Ralph Lauren will also be required to institute new training to discourage bribery among its employees, to perform an FCPA compliance risk assessment across its worldwide business, and to agree to other compliance and policy changes meant to prevent corrupt practices. Part of the reason the bribery scheme may have occurred, explained the Justice Department, is that employees of Ralph Lauren's Argentinean subsidiary had been given no anti-bribery training.According to Reuters reporters, both the Justice Department and the SEC have recently begun focusing a great deal of their enforcement energies on suspected violations of the Foreign Corrupt Practices Act.
As the Ralph Lauren case may illustrate, employees of foreign subsidiaries of U.S. companies may not be fully aware that the customary use of bribes in their local areas puts their employers at potential risk for prosecution in the United States. When companies enter into business in new countries, it is essential to ensure consistent FCPA compliance through policy, training and documentation. Legal counsel with specific experience with FCPA compliance can be highly valuable in this area, particularly when federal investigators are keeping a sharp eye out for violations.
Source: Thomson Reuters News & Insight, "Ralph Lauren to pay $1.6 mln to resolve Argentine bribery case," Aruna Viswanatha and Sarah N. Lynch, April 22, 2013
]]>In direct violation of that court order, and after promising the court it would not consummate the merger until the case was decided, Biolitec's CEO recently notified the judge that the merger had been finalized using Austrian courts.
Calling the misconduct the "most flagrantly offensive violation of a court order that this court has personally encountered," the federal judge has ordered Biolitec to pay $1 million every month -- which will rise to $8 million per month on Aug. 1 -- until it complies with the order not to merge.
That could be difficult, as the merger is complete.
]]> "It may indeed be impossible, as defendants' counsel suggested, technically to 'rescind' the merger at this time," the judge said, however. "The court makes no finding on this point, beyond the observation that defendants' general credibility about what it can or cannot do is subject to doubt. In any event, defendants concede that restoring the status quo ante would in fact not be impossible, but merely lengthy, burdensome, and onerous."In addition to the $1 million in civil contempt against Biolitec, the judge issued an arrest warrant against the company's CEO. That action may indicate the judge intends to hold him in criminal contempt, which could mean incarceration.
"The effectuation of the downstream merger by defendants...in the face of explicit reassurances to this court orally and in writing that defendants intended to comply - constitutes the most flagrantly offensive violation of a court order that this court has personally encountered," the judge wrote.
"The court asks the marshals to do everything possible to ensure that the warrant is effectuated internationally and [the CEO] is brought to stand before this court," he added, calling the defendants' actions "a challenge to the very foundation of the rule of law."
Source: Courthouse News Service, "Judge Sanctions Biolitec, Issues Warrant for CEO," Lorraine Bailey, April 18, 2013
Our law firm defends corporate officers and organizations accused of civil or criminal contempt and other federal offenses. For more information, please see our website.
]]>It is not clear that any employee of Goldman Sachs, Citigroup, JPMorgan Chase, Wells Fargo, Barclays or other recipients used the information to make trades or forwarded it to anyone else. The question has arisen, however: if they did use that information, was it insider trading?
Assuming for the moment that some of the email recipients did use the information to make trades, the Securities and Exchange Commission might consider bringing insider trading charges. In that decision, the SEC would take into account a number of things, such as whether the traders personally benefitted, whether they knew or should have known the information was secret -- or even whether the information was secret -- and whether they had a fiduciary duty to keep the information confidential.
]]> If brokers or traders only used the information themselves and shared it with all their client equally, it's hard to argue they violated any fiduciary duty, because they don't have any such duty toward the Fed itself. If they forwarded it to others, however, an argument could be made, depending on the circumstances, that they might have violated their fiduciary duties toward other clients, or toward the shareholders of other affected companies.In this case, the accidentally-released email was sent on Tuesday afternoon. It did have an attachment saying that the information was not to be released until 2 o'clock on Wednesday. If the traders didn't open the attachment, would they be in a position to know that they were among a tiny number of people receiving the Fed's meeting minutes early? Or could they reasonably assume this was the normal email the Fed uses to release the information?
Even if the traders knew or should have known the minutes were leaked, it would be fair to question whether the information could actually be considered secret anymore. It's not as if the information was furtively passed to one or two insiders -- it was relatively widely distributed, and emails can be forwarded.
"It would be hard to imagine liability if the early release were totally accidental and the recipient didn't know the release was early," said one former SEC attorney interviewed by Thomson Reuters News & Insight.
Source: Thomson Reuters News & Insight, "Analysis: To trade or not to trade, when the Fed sends you inside info," Jonathan Stempel, April 11, 2013
]]>In fact, it's a misdemeanor violation of the Computer Fraud and Abuse Act, although if the streaming TV industry uses the same accounts as the music industry, it could turn into a felony more quickly than you might think. If you shared your HBO password, for example, with enough people, you might reach that threshold. If the government could show the free TV you gave away was worth $5,000 or more, you could be charged with a felony CFAA violation. There's also a possibility that any sharing at all could expose you to federal identity theft charges.
The issue came up recently when a tech journalist with the New York Times wrote in her column that she and some friends were going to watch that network's enormously popular show "Game of Thrones," which happens to be the most commonly pirated show on the Internet. Only one of the friends had an HBO Go password, however, and the columnist admitted they planned to share it.
]]> HBO and the other companies were outraged and flooded the Times' staff with so many complaints that the newspaper felt compelled to address the issue. An editorial shortly appeared that discussed the ethical issue with password sharing.It wasn't until an online journal called Tech Dirt followed up on the story that anyone at the Times seems to have realized that password sharing is not just unethical, but also a violation of federal law.
The fact is, most people have never heard of CFAA. Tech Dirt points out the problematic fact that the CFAA "criminalize[s] things that most people don't really think are bad or illegal. That is, they often criminalize someone (or at least make them open to huge civil awards) for the types of things plenty of people do every day without thinking twice about it."
So far, neither the companies nor law enforcement has been focused on the issue, but that could change. So, if you're enjoying "Game of Thrones" on someone else's dime, don't tweet about it.
Source: Forbes, "Even New York Times Is Oblivious To Fact That Sharing 'HBO Go' Passwords To Watch 'Game Of Thrones' Breaks Law," Kashmir Hill, April 10, 2013
]]>A conviction for felon in possession is punishable by up to 10 years in prison, although if the person has previously been convicted of three or more violent crimes, the sentence is 15 years, minimum, without parole.
You can imagine that under those circumstances, a person who did have three prior violent crime convictions might want to be very careful. In a recent case heard by the 7th Circuit Court of Appeals, one such man had certainly been careful, if misguided. He allegedly assaulted a woman with a Hi-Point .380-caliber semi-automatic pistol -- which was so corroded and damaged that it couldn't be fired.
]]> Should that count as a gun? That was the question before the court, and a gun expert from the Bureau of Alcohol, Tobacco, Firearms and Explosives told the court that the gun was corroded and missing key parts. Not only could it not have been fired at the time of the alleged assault but also that it would take a professional gunsmith between an hour and two hours to fix it.A three-judge panel of the court acknowledged that the definition of "gun" for the purpose of the federal crime was not entirely clear. They considered a number of "gray-area" situations, such as:
Ultimately, the court decided that this man's broken pistol does meet the definition, because it was "[d]esigned to be a gun, never redesigned to be something else, not so dilapidated as to be beyond repair." The court affirmed the man's conviction and he will spend 15 years in federal prison, plus whatever penalty he may have received in the alleged assault.
Source: Courthouse News Service, "Felon's Damaged Gun Raises Definition Issues," Joseph Celentino, April 8, 2013
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