Why it matters: Who says there is a government slowdown in August? Not for the SEC. August 2015 turned out to be very busy indeed for the agency, which announced charges and settlements in a number of high-profile enforcement actions. Your recap is here.
Cyber Hackers: On August 11 the SEC announced that it had unsealed a complaint against 32 defendants for “taking part in a scheme to profit from stolen nonpublic information about corporate earnings announcements.” The complaint charged “two Ukrainian men who allegedly hacked into newswire services to obtain the information and 30 other defendants in and outside the U.S. who allegedly traded on it, generating more than $100 million in illegal profits” in over a five-year period. The SEC further charged that the two Ukrainian nationals created a “secret Web-based location to transmit the stolen data to traders in Russia, Ukraine, Malta, Cyprus, France, and three U.S. states, Georgia, New York, and Pennsylvania,” who then allegedly used the nonpublic information “in a short window of opportunity to place illicit trades in stocks, options, and other securities, sometimes purportedly funneling a portion of their illegal profits to the hackers.” In parallel actions, the U.S. Attorneys’ Offices for the District of New Jersey and the Eastern District of New York announced that they were bringing criminal charges against several of the same defendants. SEC Enforcement Director Andrew J. Ceresney noted, “Our use of innovative analytical tools to find suspicious trading patterns and expose misconduct demonstrates that no trading scheme is beyond our ability to unwind.”
Insider Trading: On August 25 the SEC announced that it had charged a former JP Morgan analyst with illegally tipping his close friend with confidential information regarding impending mergers and acquisitions of client technology companies. The tippee friend and another individual were also charged with trading on the inside information, which allegedly netted them over $600,000 in illegal profits. In a parallel action, the DOJ announced criminal charges against all three individuals.
Citigroup Global Markets: Citigroup Global Markets Inc. (CGMI) was the focus of two of the SEC enforcement actions announced in August 2015.
- Hedge Fund Fraud: On August 17 the SEC announced that CGMI and another Citigroup affiliate, Citigroup Alternative Investments LLC (CAI), agreed to pay nearly $180 million to settle charges that they defrauded investors in the ASTA/MAT and Falcon hedge funds (which later collapsed during the financial crisis) by claiming that they were “safe, low-risk, and suitable for traditional bond investors.” The SEC’s investigation found that, from 2002 through 2007, employees at CGMI and CAI made “false and misleading representations” and failed to disclose the “very real risks” to investors in the two hedge funds, which “collectively raised nearly $3 billion in capital from approximately 4,000 investors before collapsing.” The findings further show that, even as the funds began to collapse, nearly $110 million in additional investments were accepted and the CGMI and CAI employees continued to assure investors. Without admitting or denying the SEC’s findings, CGMI and CAI consented to an SEC order finding that they had willfully violated the relevant provisions of the Securities Act of 1933 (’33 Act) and the Investment Advisers Act of 1940 and its Rules (Advisers Act and Rules). In addition to the $180 million penalty, CGMI and CAI agreed to be censured and to cease and desist from committing future violations of these laws.
- Compliance and Surveillance Failures: On August 19 the SEC announced that CGMI agreed, without admitting or denying the SEC’s findings, to pay $15 million to settle charges that it had failed to enforce policies and procedures to “prevent and detect securities transactions that could involve the misuse of material, nonpublic information.” The SEC also charged CGMI with failing to “adopt and implement policies and procedures to prevent and detect principal transactions conducted by an affiliate.” The findings noted that, from 2002 through 2012, CGMI employees failed to adequately review thousands of trades executed by several of CGMI’s trading desks because the electronically generated reports used to review trades on a daily basis omitted several sources of information about the trades. The findings further noted that CGMI “inadvertently routed more than 467,000 transactions on behalf of advisory clients to an affiliated market maker, which then executed the transactions on a principal basis by buying or selling to the clients from its own account.” In addition to the $15 million penalty, CGMI agreed to be censured and to cease and desist from future violations of these laws. CGMI also agreed to retain a consultant to “review and recommend improvements to its trade surveillance and advisory account order handling and routing.” Enforcement Director Ceresney said in the press release that “[t]oday’s high-speed markets require that broker-dealers and investment advisers manage the convergence of technology and compliance. . . . Firms must ensure that they have devoted sufficient attention and resources to trade surveillance and other compliance systems.”
BNY Mellon: On August 18 the SEC announced that the Bank of New York Mellon Corporation (BNY Mellon) agreed to pay an aggregate of $14.8 million (consisting of $8.3 million in disgorgement, $1.5 million in prejudgment interest and a $5 million penalty) to settle charges that it violated the anti-bribery and internal controls provisions of the Foreign Corrupt Practices Act (FCPA) in 2010 and 2011 by providing “valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.” An SEC investigation found that the internships were a form of illegal payment in violation of the FCPA because “BNY Mellon did not evaluate or hire the family members through its existing, highly competitive internship programs that have stringent hiring standards and require a minimum grade point average and multiple interviews. The family members did not meet the rigorous criteria yet were hired with the knowledge and approval of senior BNY Mellon employees in order to corruptly influence foreign officials and win or retain contracts to manage and service the assets of the sovereign wealth fund.” The SEC further found that the sovereign wealth fund officials initiated the requests for the family member internships, with repeated follow-up communications to BNY Mellon regarding status, timing and details, and that BNY Mellon provided the internships because they were viewed as important to keeping the sovereign wealth fund’s business. While BNY Mellon had an FCPA compliance program in place, the findings show that there were few controls specifically relating to the hiring of customers (including foreign government officials) or their family members and that BNY Mellon thus lacked sufficient internal controls to prevent and detect the improper hiring practices. BNY Mellon sales staff and client relationship managers were found to have wide discretion in such hiring decisions, with human resources personnel not adequately trained to spot such problematic hires and no mechanism for legal or compliance review. In consenting to the SEC’s order, BNY Mellon did not admit or deny the SEC’s findings. Enforcement Director Ceresney said in the press release that “[t]he FCPA prohibits companies from improperly influencing foreign officials with ‘anything of value,’ and therefore cash payments, gifts, internships, or anything else used in corrupt attempts to win business can expose companies to an SEC enforcement action. . . . BNY Mellon deserved significant sanction for providing valuable student internships to family members of foreign officials to influence their actions.” Added Kara Brockmeyer, Chief of the Enforcement Division’s FCPA unit, “Financial services providers face unique corruption risks when seeking to win business in international markets, and we will continue to scrutinize industries that have not been vigilant about complying with the FCPA.”
Investment Technology Group: The SEC announced on August 12 that Investment Technology Group Inc. (ITG) and its affiliate AlterNet Securities Inc. (AlterNet) agreed to pay $20.3 million to settle charges that they operated a “secret trading desk and misused the confidential trading information of dark pool subscribers.” The findings show with respect to ITG that, despite advertising that it was an “agency-only” broker whose interests didn’t conflict with those of its customers, ITG operated “an undisclosed proprietary trading desk known as ‘Project Omega’ for over a year” commencing in 2010. The SEC also found that, while ITG claimed to protect the confidentiality of its dark pool subscribers’ trading information, during an eight-month period in 2010 Project Omega “accessed live feeds of order and execution information of its subscribers and used it to implement high-frequency algorithmic trading strategies, including one in which it traded against subscribers in ITG’s dark pool called POSIT.” The SEC’s order found that ITG violated the relevant provisions of the ’33 Act in connection with Project Omega “by engaging in a course of business that operated as a fraud and by failing to make disclosures about Project Omega and its proprietary trading activities.” ITG was also found to have violated “Rules 301(b)(2) and 301(b)(10) of Regulation ATS by failing to amend its Form ATS filings in light of Project Omega’s trading activities in POSIT, failing to establish adequate safeguards, and failing to implement adequate oversight procedures to protect the confidential trading information of POSIT subscribers.” ITG and AlterNet admitted to the findings contained in the SEC’s order and acknowledged that their conduct violated the federal securities laws.
Guggenheim Partners Investment Management: On August 10 the SEC announced that Guggenheim Partners Investment Management LLC (Guggenheim) agreed to, without admitting or denying the SEC’s findings, pay $20 million to settle charges that it breached its fiduciary duty by failing to disclose a $50 million loan that one of its senior executives (identified in the SEC’s order solely as “GPIM Executive”) received from an unidentified advisory client (referred to in the SEC’s order solely as “Client A”). The findings set forth in the SEC’s order show that the GPIM Executive obtained the loan in question from Client A in July 2010 to enable the GPIM Executive to fund a personal investment in a corporate acquisition led by Guggenheim’s parent company, Guggenheim Partners LLC (GP). In August 2010 Guggenheim invested some of its other advisory clients—on different terms—in two transactions in which Client A had also invested. The findings further show that the GPIM Executive and Client A discussed the two transactions, and that the GPIM Executive provided advice as to how the transactions should be structured. The SEC found that “multiple senior officials” at Guggenheim and GP knew of the loan, but none of them brought it to the attention of Guggenheim’s compliance department, nor did Guggenheim disclose the loan or the potential conflict of interest to its other clients involved in the transactions. The SEC’s order found that Guggenheim’s compliance program “was not reasonably designed to prevent violations of the federal securities laws” and that Guggenheim “failed to enforce its code of ethics, including with respect to Guggenheim employees taking dozens of unreported trips on clients’ private airplanes.” In addition to the $20 million penalty, Guggenheim consented in the SEC’s order to engage an independent compliance consultant, to be censured, and to cease and desist from committing future violations of the Advisers Act and Rules.
Click here to read the 8/11/15 SEC press release titled “SEC Charges 32 Defendants in Scheme to Trade on Hacked News Releases.”
Click here to read the 8/25/15 SEC press release titled “SEC Charges Former Investment Bank Analyst and Two Others With Insider Trading in Advance of Client Deals.”
Click here to read the 8/17/15 SEC press release titled “Citigroup Affiliates to Pay $180 Million to Settle Hedge Fund Fraud Charges.”
Click here to read the 8/19/15 SEC press release titled “SEC Charges Citigroup Global Markets for Compliance and Surveillance Failures.”
Click here to read the 8/18/15 SEC press release titled “SEC Charges BNY Mellon With FCPA Violations.”
Click here to read the 8/12/15 SEC press release titled “SEC Charges ITG With Operating Secret Trading Desk and Misusing Dark Pool Subscriber Trading Information.”
Click here to read the 8/10/15 SEC press release titled “Guggenheim Partners Investment Management LLC Settles Charges It Failed to Disclose Conflict to Clients.”