A look forward – a look back:
Is the first change in the SEC’s approach to crypto on the horizon? To date is has been built on traditional securities laws principles tied to the Supreme Court’s Howey decision. Last week Commissioner Hester Peirce suggested consideration of a safe harbor period that would give firms an initial period before having to assess the questions presented by the application of the federal securities laws. The idea is to solve what the Commissioner called a “regulatory Catch 22” with a temporary safe harbor (here).
The Council of Institutional Investors continued to raise questions regarding the Commission’s proposed rules on proxy advice and shareholder proposals this week. Essentially the Council argues that “its not broke” so there is no need to fix it, referring to the existing approach (here).
SEC enforcement this week continued to revisit one of its favorite issues. This time it was ADRs. Another case was filed. That filing was supplemented by a chart lising all of the ADR cases to date. Two other new cases were filed this week. One involved one involving unprofessional conduct by an audit firm during an engagement. The second focused on compliance, an issue critical to the future not just for market professionals but all issuers.
Finally, Enforcement prevailed at trial this week. A jury returned a verdict in favor of the Commission in an insider trading case.
Meeting: The Commission announced it will hold a public meeting on February 27, 2020 of its Investor Advisory Committee. Two topics will be discussed. The first is accounting and auditing trends. The second will focus on the impact of the LIBOR transition.
SEC Enforcement – Litigated Actions
Insider trading: SEC v. Chen, Civil Action No. 1:18-cv-10657(D. Mass. Verdict Feb. 3, 2020). See Lit. Rel. No. 24733 (Feb. 5, 2020). Charlie J. Chen and his wife were long time close friends with a Couple that lived in the same town. Each family had two daughters that attended school together. Husband was employed at VistaPrint N.V., a Dutch issuer with U.S. operations based initially in Lexington, Massachusetts and later in Waltham. Husband was employed at VistaPrint from late 2005 until early 2015. As a result of his position at the firm, Husband regularly had access to material non-public information regarding its financial position during at least a two year period beginning in July 2012.
Mr. Chen, according, to the SEC’s complaint, traded in the shares of VistaPrint in advance of eight earnings announcements over the two year period cited above, generally purchasing options. The trades were profitable with only two exceptions. In those instances, Mr. Chen had correctly predicted the movement of the stock price, but the return was very small. Overall, he had trading profits of $952,082. In March 2016 FBI agents questioned Mr. Chen about his trading. During the conversation he denied knowing anyone at VistaPrint. When the agents identified Husband, Mr. Chen downplayed the relationship, claiming that he knew the man through his daughters’ school but they were not close. Two months later he invoked the Fifth Amendment during testimony before the Commission staff.
Mr. Chen elected to proceed to trial. On February 3, 2020 the jury returned a verdict in favor of the Commission, finding that he violated Securities Act Section 17(a) and Exchange Act Section 10(b). The Court will determine remedies at a later date.
SEC Enforcement – Filed and Settled Actions
The Commission filed no civil injunctive actions and 3 administrative proceedings last week, exclusive of 12j and tag-along actions.
ADRs: In the Matter of ABN AMRO Clearing Chicago LLC, Adm. Proc. File No. 3-19693 (Feb. 6, 2020) is a proceeding which names as a respondent the registered broker dealer, a wholly owned indirect subsidiary of ABN AMRO Clearing Bank N.V. Over a two year period, beginning in January 2013, Respondent obtained pre-release ADRs from pre-release brokers that had been issued by Depositaries where those brokers had not taken reasonable steps to satisfy the obligations under the pre-release Agreements. At the time of entering into these transactions, Respondent understood the obligations of pre-release brokers. The firm also understood the conduit nature of the securities lending business which, under the circumstances here, should have indicated that the pre-release brokers did not own the underlying ordinary shares, according to the Order. The Order alleges violations of Exchange Act Section 15(b)(4)(e) regarding a failure to supervise. The Commission considered the cooperation of ABN. Respondent was censured and directed to pay disgorgement of $26,096.87, prejudgment interest of $80,970.35 and a penalty of $179,353.27. Respondent acknowledged that a higher penalty was not imposed based on its cooperation.
Unprofessional conduct: LBB& Associates LTD. LLP, Adm. Proc. File No. 3-18967 (Feb. 6, 2020) names as respondents the PCAOB registered audit firm and Carlos Lopez, its managing partner and majority owner. The Order centers on certain claimed failures to comply with the applicable standards of professional conduct. Specifically, with regard to the 2012, 2013 and 2014 audits of Behavioral Recognition Systems, Inc. Respondents failed to properly apply the standards regarding related party transactions, choosing instead to at times rely on the oral representations of management. They also failed to properly asses the risk involved despite the apparent red flags. The Commission concluded that there were violations of Rule 102(e)(1)(ii). Respondents were each denied the privilege of appearing and practicing before the Commission as accountants. After two years each Respondent may request that the Commission consider his reinstatement by submitting an application.
Compliance: In the Matter of Cannell Capital, LLC, Adm. Proc. File No. 3-19689 (Feb. 4, 2020) is an action against the registered investment adviser for failure to maintain and implement an effective insider trading policy. Specifically, the Order alleges that the firm failed to properly implement its insider trading policy by maintaining the required list of securities which could not be traded when the firm had inside information. In addition, the policy failed to address firm specific risks and lacked guidance regarding when trading in securities should be restricted. The firm undertook a series of remedial efforts. To resolve the proceedings, which alleged violations of Advisers Act Section 204A, the firm consented to the entry of a cease and desist order based on that section and to a censure. In addition, Respondent will pay a penalty of $150,000.
Airbus SE, a France based global provider of civilian and military aircraft, agreed to resolve corruption charges with authorities in the United States, France and the U.K tied to a multi-year corruption scheme. The company agreed to pay fines totaling over $3.9 billion.
Beginning in 2008, and continuing for the next seven years, the company engaged in a global corruption scheme that utilized the payment of bribes to, among others, foreign officials, to obtain business advantages. With respect to the FCPA, the DOJ papers focus on China and agreements entered into in conjunction with the purchase and sale of aircraft by private and state-owned enterprises. Emails and other actions that were part of the scheme were undertaken in the United States. There were also violations of The Arms Control Act or AECA and the International Traffic in Arms Regulations or ITAR. The court papers state that the firm failed to provide the Department of State’s Directorate of Defense Trade Controls or DDTC with accurate information related to commissions paid to third party brokers retained to solicit, promote and otherwise secure the sale of defense articles and defense services to foreign armed forces. Airbus falsely reported information about its conduct to the U.S. government for over five years. This permitted the firm to gain valuable licenses to export U.S. military technology. Such conduct creates a national security risk, according to the papers.
Airbus resolved the issues with the DOJ, which had limited jurisdiction and less of an interest than France or the U.K. according to the court documents, by entering into a deferred prosecution agreement tied to a criminal information. The action charged conspiracy to violate the anti-bribery provisions of the FCPA and conspiracy to violate the AECA and its implementing regulations, the ITAR. The firm will pay $527 million for the FCPA and ITAR violations, and an additional 50 million Euros or about $55 million, as part of a civil forfeiture agreement for the ITAR related conduct. The DOJ agreed to credit a portion of the amount paid by the company to the Parquet National Financier or PNF in France under Airbus’ agreement with that regulator. Airbus will also pay a $10 million penalty to the State Department’s DDTC of which the DOJ is crediting $5 million.
In resolving matters with the DOJ, Airbus was not given credit for self-reporting with respect to the FCPA violations since those were revealed in a U.K. investigation. The company did receive credit for its cooperation during the investigation and its remedial efforts and for reporting the other violations.
Airbus also resolved charges with the PNF by agreeing to pay more than 2 billion Euros or about $2.29 billion pursuant to an agreement with that regulator. The company settled, in addition, with the U.K. Serious Fraud Office related to bribes in Malaysia, Sri Lanka, Taiwan, Indonesia and Ghana. Airbus agreed to pay about 990 million Euros or approximately $1.09 billion. The PNF and the SFO investigated the company as part of a joint investigative team.
Offering fraud: U.S. v. Hafen, (S.D.N.Y. Sentencing Feb. 5, 2020) is an action in which former investment banker Herbert Hafen was sentenced to serve 30 months in prison followed by 3 years of supervised release and was directed to forfeit $806,750. Mr. Hafen previously pleaded guilty to one count of investment adviser fraud. The plea was based on a scheme he implemented over a seven year period beginning in 2011 in which he convinced advisory clients that investments outside his firm paid guaranteed high returns. Mr. Hafen supported his claims with falsified records. About $1.6 million was raised from investors.
Offering fraud: U.S. v. Finn, No. 2:13-cr-00439 (D. Nev. Verdict Feb. 4, 2020) is an action which named as a defendant broker Sean Finn. Mr. Finn was found guilty by a jury of one count of conspiracy to commit wire fraud and securities fraud, four counts of wire fraud and four counts of securities fraud. He was acquitted on one count of wire fraud. The underlying conduct is tied to a scheme in which Mr. Finn and others solicited investments for a firm named Malcom Group AG (Make lots of Money) supposedly based in Switzerland. Potential investors were shown bank documents recording millions of dollars in assets. Investors had to make an initial payment of $100,000 to $1 million. When the funds were wired, they were disbursed to those participating in the fraud – the investment was completely fictitious. Sentencing is set for May 12, 2020. See also SEC v. Brandel, Civil Action No. 2:13-cv-02279(D. Nev.); SEC v. Malom Group, Civil Action No. 2:13-cv-02280 (D. Nev.).
Finance: The European Securities and Markets Authority issued a release discussing its strategy on sustainable finance (Feb. 6, 2020). The strategy centers on embedding environmental, social and governance factors in its work (here).
Remarks: Mark Steward, Executive Director of Enforcement and Market Oversight, FCA, delivered remarks at the 19th Annual Institute on Securities Regulation in Europe (Feb. 6, 2020, London). Mr. Steward emphasized not fragmenting markets and the reduction in the “market cleaniness metric (a measure of abnormal activity around M&A deals) which has fallen from about 30% two days prior to an announcement to about 6.5% (here).
Data connectivity: The United States and Singapore issued a Joint Statement On Financial Services Data Connectivity, February 6, 2020. Key points from the statement center on the ability to transmit data across boarders by electronic means for business, the opposition to restricting data where it is stored and ensuring that the financial service suppliers have the opportunity to remediate the lack of access before being required to use or locate computing facilities locally (here).