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SEC considers revision of two amendments
On August 2, the SEC announced it will review two recent amendments to its whistleblower rules adopted in September 2020 in response to concerns that they would discourage whistleblowers from coming forward. According to SEC Chair Gary Gensler, “one amendment would preclude the Commission in some instances from making an award in related enforcement actions brought by other law-enforcement and regulatory authorities if a second, alternative whistleblower award program might also apply to the action.” The second amendment, on the other hand, may be utilized by a future Commission to decrease an award due to the size of the award in absolute terms. As previously covered by InfoBytes, these amendments were designed to “provide greater transparency, efficiency and clarity, and to strengthen and bolster the program.”
SEC issues whistleblower awards totaling nearly $4 million
On August 2, the SEC announced whistleblower awards to four individuals totaling nearly $4 million for information provided in two separate enforcement actions. According to the first redacted order, the SEC awarded a whistleblower nearly $2 million for voluntarily providing original information to the Commission, which initiated an investigation. The whistleblower also provided ongoing assistance, participated in interviews, and identified key witnesses, which led to a successful enforcement action. In the same enforcement action, the SEC awarded over $150,000 to another whistleblower, whose information helped SEC staff expand its investigation. In the second redacted order, the SEC awarded approximately $1.1 million to an individual for reporting misconduct internally and notifying the SEC of the violations, in addition to more than $500,000 to another whistleblower for providing important, but not sufficiently timely, information.
The SEC has awarded approximately $946 million to 190 individuals since issuing its first award in 2012.
District Court finds that investors qualify for SEC whistleblower protections
On July 21, the U.S. District Court for the Southern District of New York ruled that the SEC’s whistleblower protection rule extends to investors. In June 2020, a Nevada-based company and its owner (collectively, “defendants”) filed a motion to dismiss, strike portions of, and enter judgment on the pleadings of an amended complaint filed by the SEC which alleged, among other things, that the defendants violated Rule 21F-17 of the Securities Exchange Act. Rule 21F-17 “prohibits any ‘person’ from taking ‘any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.’” The defendants argued that the SEC’s rulemaking authority extends only to “whistleblower-employees,” claiming they “were not in an employer-employee relationship with those individuals whom the SEC claims were impeded (that is, investor-victims),” and objected to a magistrate judge’s report and recommendation (R&R) “as it relates to the SEC’s claim for impermissible impeding of Rule 21F-17 in violation of the Exchange Act.” The SEC countered that “Section 21F is not limited to protecting whistleblowers in the employee-employer relationship, and as such, Rule 21F-17’s application to any ‘person’ is a proper exercise of its rulemaking authority.”
On review, the court sided with the SEC in finding that Section 21F broadly defines “[w]histleblower” as “any individual who provides . . . information relating to a violation of the securities laws” to the SEC, ruling that Rule 21F-17 “falls squarely within the SEC’s statutory authority to issue ‘necessary and appropriate’ regulations to implement Section 21F of the Exchange Act.” The court further held that “[w]hile certain portions of Section 21F provide anti-retaliation protections specific to those whistleblowers who are employees, nothing in the statute’s text nor the supporting documents indicates that Congress intended to protect only those whistleblowers who are employees.”
SEC settles with company over ETP implementation failure
On July 19, the SEC announced a settlement with a financial services company for its role in alleged compliance failures connected to volatility-linked-exchange traded products (ETPs). According to the order, the issuer of the ETP, which was designed to track short-term volatility expectations in the market as measured against derivatives of a volatility index, warned the company that it was not suitable to hold the product for extended periods of time, and that the product’s offering documents proved that the product’s value was likely to decline. The SEC alleged that the company violated the Advisers Act and Advisers Act Rule, such as Section 206(4), because the company failed to adopt reasonably designed written policies and procedures directed at ETPs and failed to implement its existing policies and procedures. The order includes allegations that the company prohibited brokerage representatives from soliciting sales of the product and placed other sales restrictions of the product, but did not place similar restrictions on some financial advisers’ use of the product in discretionary managed client accounts. The order further noted that the company allegedly adopted a concentration limit on ETPs but failed to implement a system for monitoring and enforcing that limit for five years. The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of approximately $8 million and $96,344 in disgorgement, and requires the company to cease and desist from committing or causing any future violations of Section 206(4) of the Advisers Act and Advisers Act Rule.
SEC obtains TRO and asset freeze against investment scam
On July 19, the SEC announced that it had obtained a temporary restraining order and asset freeze to halt an ongoing fraud offering by a Las Vegas-based company and two individual defendants, including a recidivist, (collectively, “defendants”) that allegedly raised more than $12 million from nearly 300 retail investors. According to the complaint, the defendants violated several provisions of securities laws by allegedly promising investors that their money would be invested in securities, bitcoin, and other cryptocurrencies based on recommendations made by an “[a]rtificial intelligence supercomputer,” which allegedly “consistently generate[d] enormous returns” and allowed the defendants to guarantee fixed returns of 20-30 percent annually with compounding interest. However, the SEC alleged that over 90 percent of the defendants’ funds came from investors, and that the defendants did not use these funds for the stated purposes. Rather, defendants transferred millions of dollars to one of the individual defendant’s personal bank accounts, paid millions of dollars to promoters who led investors to the defendants, and made “Ponzi-like” payments to other investors. The complaint seeks permanent injunctions, disgorgement, prejudgment interest, and civil penalties.
SEC announces whistleblower awards totaling approximately $4 million
On July 21, the SEC announced that it awarded a whistleblower approximately $3 million for providing information that, according to the redacted order, led to a successful SEC enforcement action. The SEC noted that the whistleblower helped open the investigation and conserved resources by giving valuable information and ongoing assistance, such as providing documents that helped staff understand key components in the investigation.
Earlier on July 15, the SEC announced that it awarded a whistleblower more than $1 million for providing information that, according to the redacted order, also led to a successful SEC enforcement action. The SEC noted that the whistleblower helped conserve significant staff time and resources by giving valuable information and ongoing assistance, such as participating in interviews with enforcement staff, and providing documents that helped staff understand key components in the investigation.
The SEC has awarded approximately $942 million to 186 individuals since issuing its first award in 2012.
SEC settles with company over misrepresentation of ICO
On July 14, the SEC announced a settlement with the owners and operators of a software platform provider, resolving allegations that the company violated anti-touting provisions by failing to disclose the compensation it received from issuers of the digital asset securities it profiled. According to the order, the company’s website, which was accessible in the U.S. from 2016 to August 2019, publicized offerings for digital tokens. The platform claimed to “list” or profile the “best” token offerings, such as so-called initial coin offerings (ICOs) and initial exchange offerings. The company also allegedly claimed that its “mission [was] to make it easy and safe for people around the world to join ICOs.” According to the order, the platform profiled more than 2,500 different token offerings, which compromised fundraising of over $10 billion. The SEC alleged that the company violated provisions of the Securities Act, such as Section 2(a), because the digital tokens publicized by the company included those that were offered and sold as investment contracts, and 17(b), because the company promoted a security without disclosing that they received compensation for doing so. The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of $154,434 and $43,000 in disgorgement, and provides that the company must cease and desist from committing or causing any future violations of the anti-touting provisions of the federal securities laws. SEC Commissioners Hester M. Peirce and Elad L. Roisman dissented from the settlement, stating they agreed that “touting securities without disclosing the fact that you are getting paid, and how much, violates Section 17(b)” but “[they] are disappointed that the Commission’s settlement with [the company] did not explain which digital assets touted by [the company] were securities[.]”
FinCEN issues first government-wide AML/CFT priorities
On June 30, the Financial Crimes Enforcement Network (FinCEN) issued the first government-wide priorities for anti-money laundering and countering the financing of terrorism (AML/CFT) policy (AML/CFT Priorities) pursuant to the Anti-Money Laundering Act of 2020 (AML Act). The AML/CFT Priorities were established in consultation with the Treasury Department’s Office of Foreign Assets Control, SEC, CFTC, IRS, state financial regulators, law enforcement, and national security agencies, and highlight key threat trends as well as informational resources to assist covered institutions manage their risks and meet their obligations under laws and regulations designed to combat money laundering and counter terrorist financing. According to the AML/CFT Priorities, the most significant AML/CFT threats currently facing the U.S. (in no particular order) are corruption, cybercrime, domestic and international terrorist financing, fraud, transnational criminal organization activity, drug trafficking organization activity, human trafficking and human smuggling, and proliferation financing. FinCEN further noted it will update the AML/CFT Priorities to highlight new or evolving threats at least once every four years as required under the AML Act, and issued a separate statement providing additional clarification for covered institutions.
Separately, the Federal Reserve Board, FDIC, NCUA, OCC, state bank and credit union regulators, and FinCEN also issued a joint statement providing clarity for banks on the AML/CFT Priorities. The statement emphasized that the publication of the AML/CFT Priorities “does not create an immediate change to Bank Secrecy Act (BSA) requirements or supervisory expectations for banks.” Rather, within 180 days of the establishment of the AML/CFT Priorities, FinCEN will promulgate regulations, as appropriate, in consultation with the federal functional regulators and relevant state financial regulators. The federal banking agencies noted that they intend to revise their BSA regulations as needed to address how the AML/CFT priorities will be incorporated into BSA requirements for banks, adding that banks will not be required to incorporate the AML/CFT Priorities into their risk-based BSA compliance programs until the effective date of the final revised regulations. However, banks may choose to begin considering how they intend to incorporate the AML/CFT Priorities, “such as by assessing the potential related risks associated with the products and services they offer, the customers they serve, and the geographic areas in which they operate.” Moreover, the statement confirmed that federal and state examiners will not examine banks for the incorporation of the AML/CFT Priorities into their risk-based BSA programs until the final revised regulations take effect.
Global engineering company subsidiary agrees to $43 million FCPA settlement
On June 25, the DOJ entered into a deferred prosecution agreement (DPA) with the subsidiary of a UK-based global engineering company, in which the subsidiary agreed to pay a fine of approximately $18.3 million related to a conspiracy to violate the FCPA’s anti-bribery provisions. Together with resolutions by a related subsidiary with the SEC, and various foreign authorities, the total resolution will reach over $43 million.
According to the DOJ, between 2011 and 2014, the subsidiary participated in a scheme to bribe officials in Brazil to win an approximately $190 million contract from Petrobras to design a gas-to-chemicals complex in the country. The DOJ stated that the subsidiary admitted to paying bribes in Brazil to win the contract, which involved the participation of an Italian sales agent affiliated with a Monaco-based intermediary company. The DOJ further noted that the subsidiary “took acts in furtherance of the scheme while located in New York and Texas, and earned at least $12.9 million in profits from the corruptly obtained business.”
As part of the DPA, the subsidiary agreed to cooperate with the DOJ’s ongoing or future investigations, to improve its compliance program, and to report to the DOJ on those improvements. The subsidiary’s criminal penalty reflected a 25 percent discount off the bottom of the applicable U.S. Sentencing Guidelines due largely to its cooperation and remediation. The DOJ noted that in addition to cooperation and remediation the resolution reflects a number of factors including, (i) the subsidiary’s “failure to voluntarily and timely disclose the conduct that triggered the investigation”; and (ii) “the nature and seriousness of the offence, which spanned multiple years and involved a high-level executive.”
The SEC simultaneously announced a resolution of a related matter, in which a related subsidiary consented to a cease-and-desist order finding violations of the FCPA’s anti-bribery, books and records, and internal accounting controls provisions. According to the SEC, the subsidiary paid approximately $1.1 million in bribes to obtain the Brazilian contract. Under the terms of the order, the subsidiary agreed to pay $22.7 million in disgorgement and prejudgment interest, in which up to $12.6 million will be offset by disgorgement paid to foreign authorities.
In related proceedings, the subsidiary received provisional court approval for a settlement with the UK’s Serious Fraud Office and settled with several Brazilian authorities. Under the terms of the DPA, the DOJ will credit up to approximately $10.7 million of the criminal penalty to payments the subsidiary makes to the SFO and to Brazilian authorities.
SEC awards $1 million to whistleblower
On June 24, the SEC announced that it awarded a whistleblower more than $1 million for providing information that, according to the redacted order, led to multiple successful SEC enforcement actions. The SEC noted that the whistleblower provided valuable information and ongoing assistance, participated in interviews with enforcement staff, and helped staff understand key players in the investigation. The whistleblower also helped conserve significant staff time and resources by providing information that was otherwise inaccessible to staff and suffered personal and professional hardships. The SEC added that there was also “substantial law enforcement interest in the information.”
The SEC has awarded approximately $938 million to 179 individuals since issuing its first award in 2012.