Criminal Law Finance & Banking Securities

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Was that trader really 'spoofing'? Focus on the statute’s words, not the regulator’s claims

Can trading pursuant to an algorithmic program properly be found to constitute “spoofing” in violation of CEA Section 4c(a)(5)(C): What constitutes “the intent to cancel the bid or offer before execution”? ...more

FCPA Compliance Report-Episode 280-Tim Hedley and Rich Girgenti on their new book The New Era of Regulatory Enforcement

In this episode, authors Tim Hedley and Rich Girgenti discuss their new book The New Era of Regulatory Enforcement. ...more

This Week In Securities Litigation

In the two weeks spanning the Labor Day weekend, the Commission continued bring cases arising from its inspection program. Two new actions alleging inadequate procedures regarding the disclosure of additional trading away fees incurred by customers in wrap fee programs were brought.more

New FinCEN Proposal Will Extend AML Rules to Currently Exempt Banks and Other Institutions

Seeking to close a perceived “gap” in regulations intended to facilitate the government’s efforts to curb money laundering and the financing of terrorism, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued on August 25, 2016 a new proposed rule that would extend Anti-Money Laundering (AML) and Customer Identification Program (CIP) requirements to banks and other institutions that are not currently required to comply with those rules. Although these institutions may already be subject to certain suspicious transaction reporting, record-keeping and other requirements, if finalized, the new rule in FinCEN’s enforcement arsenal will impose significant new compliance obligations and could have a substantial impact on previously exempt state-chartered banks and other institutions if they do not already have a robust AML program.more

Has the non-commercial trust relationship for the most part managed to avoid the cross hairs of the Financial Crimes Enforcement Network (FinCEN)?

FinCEN issued (05/11/2016) final rules under the Bank Secrecy Act “to clarify and strengthen customer due diligence requirements” for: Banks; brokers or dealers in securities; mutual funds; and futures commission merchants and introducing brokers in commodities. The rules contain explicit customer due diligence requirements and include a new requirement “to identify and verify the identity of beneficial owners of legal entity customers,” subject to certain exclusions and exemptions. One such identification exemption is a beneficial interest under a trust other than a “statutory trust created by a filing with a Secretary of State or similar office.” Why? The rationale may be found in the Rule’s preliminary section-by-section analysis: “…[B]cause, unlike the legal entities that are subject to the final rule, a trust is a contractual arrangement between the person who provides the funds or other assets and specifies the terms (i.e., the grantor or settlor) and the person with control over the assets (i.e., the trustee), for the benefit of those named in the trust deed (i.e., the beneficiaries).” While I have no quarrel whatsoever with the exemption, I find the expression of its rationale to be, shall we say, wanting, both grammatically and substantively. As to the latter, see Loring and Rounds: A Trustee’s Handbook §9.9.1 [pages 1525-1529 of the 2016 Edition] (trusts are not contracts), which section is reproduced in its entirety below. more

This Week In Securities Litigation

An investment banker who repeatedly tipped his father on about pending mergers was found guilty of insider trading by a jury this week. The Commission brought another action based on the whistleblower protections where the firm’s severance agreements impinged on the ability of a departing employee to file a claim. more

Trading and Markets Enforcement Report - August 2016

The last several years have seen law enforcement and regulatory bodies sharpen their focus on trading activity in the securities and derivatives markets. This focus has coincided with the advent of new and expanded reporting, surveillance, and enforcement powers that arose from responses to the financial crisis. Prosecutors and regulators are using those powers daily to enforce both newer and longstanding restrictions on trading activity. New developments and precedents emerge nearly every day, and the key events merit full attention in the design of trading strategies, the implementation of compliance programs, and—when necessary—the development of legal defenses. The following report serves as a practical guide intended to keep asset managers, broker-dealers, and other trading firms current on important legal developments in this area. Please see full Report below for more information. more

SEC Files Another Excessive Fee Case

The Commission brought another in a series of civil and criminal actions centered on charging excessive, undisclosed fees to clients transitioning their portfolios. SEC v. Place, Civil Action No. 2:16-c-4291 (E.D.Pa. Filed Aug. 8, 2016) is an action which names as defendants John Place, Paul Kirk, John Kirk, Global Transition Solutions, Inc. and Global Transition Solutions, LLC. more

Case Note: Crime Doesn’t Pay and Taxes are Still Due

In a case involving criminal forfeiture of stock option profits, the Court of Appeals for the Federal Circuit has held that no deduction is allowed for $44 million in forfeited stock option gains on which tax was previously paid. The court concluded that the forfeiture must be treated essentially as an after tax payment. more

First Circuit Affirms Another Insider-Trading Conviction

On July 26, 2016, the U.S. Court of Appeals for the First Circuit affirmed another conviction in a pair of appeals arising from insider-trading prosecutions. The decision in United States v. McPhail confirms that, under current First Circuit precedent, a tipper of inside information can receive “personal benefits” based on expectations of a free dinner, wine, and a massage parlor, on “kickbacks” from a tippee-friend’s trades, and on his tippee-friends’ “general gratitude for his largesse.”more

Bridging the Week - July 2016 #3

CME Group Proposes New Clearing Member Category to Help Customers Avoid Pro Rata Distribution Risk in Case of FCM Insolvency: CME Group filed proposed rule changes with the Commodity Futures Trading Commission that would create a new category of clearing membership, termed a “Direct Funding Participant.” Under CME Group’s proposal, a DFP could clear all of its eligible proprietary CME Group trades directly with the CME clearinghouse but would not be obligated to contribute to CME Group’s guaranty fund or otherwise be responsible in case of a default by another clearing member. Instead, all of a DFP’s obligations (except for obligations arising from disciplinary actions against a DFP) to CME Group would be guaranteed by at least one other clearing member – termed a “DFP Guarantor” – that must also be a CME Group clearing member and be registered with the CFTC as a futures commission merchant. A DFP Guarantor’s guarantee fund deposit would be adjusted to account for the activity of the DFP it guarantees. DFPs would settle their margin requirements directly with the clearinghouse; however, if they did not, their financial obligations would have to be met by their DFP Guarantor. DFP margin requirements would be 104 percent of ordinary margin requirements, and DFP guarantors would have additional regulatory capital requirements equal to 4 percent of a DFP’s margin requirement. A DFP Guarantor would be authorized to prescribe risk controls for its DFP at CME Group exchanges, including credit controls, increased margin levels and concentration limits, among others. A DFP Guarantor could perform back-office functions for its DFP. According to CME Group in its submission to the CFTC, the purpose of its proposed initiative is, among other things, to eliminate the possibility of a customer receiving a pro rata loss allocation in the case of an FCM bankruptcy where the FCM was left with insufficient resources to satisfy its obligations to all its customers in full. In addition, CME Group claimed that its proposal could help an FCM by eliminating the posting of cash by a DFP on the FCM's balance sheet and thus the possibility of a potential increase to the FCM’s regulatory leverage capital ratio. CME Group’s DFP proposal is scheduled to take effect on the earlier of September 23, 2016, or upon CFTC approval.more

This Week In Securities Litigation

Investment advisers were at the center of a number of actions brought by the Commission this week . Two proceedings involved a registered adviser and its COO that were involved in an unregistered and fraudulent offering; two other actions centered on undisclosed conflicts related to loans extended to the adviser through a new broker arrangement that were forgiven in whole or part; another was based on preferences given in redemption rights. The Commission also filed a settled action centered on extensive accounting errors.more

Career Securities Law Violator Pleads Guilty To Manipulation

The Manhattan U.S. Attorney’s Office secured a guilty plea in a stock manipulation case from a career securities law violator. The guilty plea is the fourth conviction for defendant John Galanis. U.S. v. Galanis, No. 1:15-cr-00643 (S.D.N.Y.). The case centers on a microcap fraud and the manipulation of shares of publicly traded Gerova Financial Group. more

New SFO Bribery Case: Can’t Pay? That Might Be Okay…

The UK Serious Fraud Office has entered its second deferred prosecution agreement (DPA) with a company accused of bribery. Links to the SFO press release, and the detailed preliminary and final judgments of the court are provided here for your reference. The name of the defendant company remains embargoed apparently to protect ongoing proceedings/investigations into individuals. The company is referred to in the judgment as “XYZ”.more

The UK’s second DPA: a hopeful judgment

The approval of the Deferred Prosecution Agreement (DPA) between the Serious Fraud Office (SFO) and XYZ Limited (XYZ) by Leveson LJ on 8 July 2016 has generated much breathless commentary, not least because it is only the second DPA to be approved in the UK under the new regime for the disposal of corporate criminality introduced by the Crime and Courts Act 2013. more

Orrick's Financial Industry Week in Review

Federal Reserve Announces Extension of Conformance Period under Section 13 of the Bank Holding Company Act - On July 7, 2016, the Federal Reserve announced that it will extend until July 21, 2017 the conformance period for banking entities to divest ownership in certain legacy investment funds and terminate relationships with funds that are prohibited under Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The Board had announced in December 2014 that it would make this extension to provide for orderly divestitures and to prevent market disruptions. This is the final of the three one-year extensions that the Board is authorized to grant.more

EU Proposal to Address Virtual Currency Exchanges & Wallet Providers in Anti-Money Laundering Laws

The European Commission recently published a proposal to amend the Fourth Anti-Money Laundering Directive, the legislation that specifies the anti-money laundering, or AML, and counter terrorist financing rules for EU Member States. The proposal seeks to introduce stricter rules on the reporting and identification around the users of virtual currencies, as well as anonymous prepaid cards. more

Bridging the Week - July 2016 #2

Michael Coscia Sentenced to Three Years’ Imprisonment for Spoofing and Commodity Fraud: Michael Coscia, the first person prosecuted and convicted under a law prohibiting spoofing that was enacted after the 2007-2008 financial crisis, was sentenced to three years’ imprisonment last week for illicit futures trading he engaged in during three months in 2011.more

New Frontier for Bank Secrecy Act Prosecutions: Trade-Based Money Laundering

Since the September 11, 2001, terrorist attacks, U.S. law enforcement and financial regulatory agencies have focused on disrupting the use of the financial system by terrorist groups, criminal organizations and tax evaders to hide illicit funds. As part of these efforts, the Department of Justice (DOJ) and the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) have been increasingly scrutinizing anti-money laundering (AML) compliance efforts and pursuing domestic and foreign banks for violations of the Bank Secrecy Act. Please see full Alert below for more information.more

Bridging the Week - July 2016

Government Seeks Maximum Sentence in Coscia Criminal Action: The United States Attorney’s Office in Chicago requested last week that the judge presiding over the criminal trial of Michel Coscia impose the maximum sentence recommended by applicable guidelines against Mr. Coscia of between 70 and 87 months in prison while Mr. Coscia’s counsel argued for a lesser term of between no more than 4 to 10 months imprisonment. (Last November, Mr. Coscia was convicted of six counts of commodities fraud and six counts of spoofing in connection with his trading activities on CME Group exchanges and ICE Futures Europe from August through October 2011 following a seven-day trial and approximately one hour of jury deliberation. (Click here for details regarding this conviction in the article, “Jury Convicts Michael Coscia of Commodities Fraud and Spoofing” in the November 8, 2015 edition of Bridging the Week.)) In making this recommendation, the government dismissed arguments made on behalf of Mr. Coscia, that he should be sentenced to a shorter term. Mr. Coscia’s counsel had argued that a lesser sentence was warranted because at the time of his purported breaches the text of the relevant law prohibiting spoofing did not provide any “reasonable guidance for identifying—or avoiding—prohibited conduct;” the nature of his trading was not unusual compared to other traders; and he already has sustained significant punishment for his offenses, through substantial fines, disgorgement of profits and a one-year trading suspension on any CME Group exchange. The government urged the presiding judge to reject Mr. Coscia’s arguments, noting that “[t]his Court now has the opportunity to send a message, loud and clear, that our financial markets operate on principles of honesty and transparency, and do not allow a select few traders to profit in the trading markets through illegal bait and switch schemes at the expense of other traders.”more

UK Market Abuse Regime Extends Its Reach: Implications for Market Participants

The new regime shares the same aims as its predecessor—to ensure the integrity of EU financial markets and enhance investor confidence—and keeps pace with market developments such as new trading platforms, new technology, and the upcoming overhaul of market regulation under MIFID II due early 2018.more

This Week In Securities Litigation

Just prior to the July 4th holiday a legend of the federal securities bar passed away. Irving Pollock, or Irv as he was known, was the father of the SEC’s Enforcement Division. A New Mexico jury handed the Commission a split verdict. In an action based on a market crisis financial fraud the jury found for the defendants on half of the counts. It was unable to reach a verdict on the most significant charges based on fraud and lying to the auditors allegations.more

Wall Street Executive Pleads Guilty In Investment Fraud

Andrew Caspersen, a former managing principal of Blackstone Group, and a partner at Park Hill Group which raises capital for private equity, pleaded guilty to one count of securities fraud and one count of wire fraud. U.S. v. Caspersen, No. 16-cr-0414 (S.D.N.Y.). The charges are based on claims that he raised millions of dollars using a shell company named to sound like a well known hedge fund. The SEC filed a parallel action. SEC v. Caspersen, Civil Action No. 16-cv-2249 (S.D.N.Y. Filed March 29, 2016).more

Jury Rejects SEC’s Key Claims While Deadlocking on Others

A jury rejected most counts brought by the SEC against two senior executives of Thornburg Mortgage, Inc., the second largest independent mortgage company in the country. The charges centered on a market crisis era scheme in which the Commission alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A, 13(b)(2)(B) and 13(b)(5) as well as control person liability under section 20(a).more

SEC Steps Up Cybersecurity Enforcement with $1 Million Fine Against Morgan Stanley

The Security and Exchange Commission’s (“SEC”) recent $1 million settlement with Morgan Stanley Smith Barney LLC (“MSSB”) marked a turning point in the agency’s focus on cybersecurity issues, an area that the agency has proclaimed a top enforcement priority in recent years. The MSSB settlement addressed various cybersecurity deficiencies that led to the misappropriation of sensitive data for approximately 730,000 customer accounts.more

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