D.C. Circuit rejected petition to review “Appointments Clause” Article II constitutional challenge to SEC “in house” administrative proceedings: On August 9, 2016, the D.C. Circuit in Lucia v. SEC denied petitioner Raymond J. Lucia’s petition for review of the SEC administrative proceeding pursuant to which an SEC administrative law judge (ALJ) imposed liability and sanctions against him for violations of the Investment Advisors Act of 1940 (the ALJ’s decision was later affirmed by formal order of the full Commission). Lucia had argued in his petition for review to the D.C. Circuit that the SEC’s administrative proceedings are unconstitutional because its ALJs are “Constitutional Officers” that must be appointed under Article II of the Constitution (Appointments Clause). In denying Lucia’s petition for review, the Court rejected Lucia’s argument and ruled, among other things, that ALJs cannot be considered “Constitutional Officers” because their decisions only become final after they are affirmed by the full Commission with a formal order. We discussed the constitutional challenges to the SEC’s administrative proceedings in our October 2015 newsletter under “ ‘Wherefore Art Thou, Due Process?’ Part III.” See below in “New rulemaking” for a discussion of the SEC’s recent amendment to its rules of practice to make them more parallel to rules of practice in state and federal courts, perceived as an effort by the SEC to dispel allegations of “home court advantage” and stanch further constitutional challenges to the SEC’s “in house” proceedings.

Federal whistleblower programs (see our May 2016 newsletter under “Still Whistling While You Work—Whistleblower Programs Update”):

  • On August 10, 2016, the SEC announced that BlueLinx Holdings, Inc. (BlueLinx), an Atlanta-based buildings products distributor, agreed to pay a $265,000 penalty for violating securities laws by using severance agreements that required outgoing employees to waive their rights to any whistleblower awards or other monetary recovery in the event they file a complaint or charges against BlueLinx with the SEC or other federal agencies. The SEC said that “BlueLinx’s restrictive language forced employees leaving the company to waive possible whistleblower awards or risk losing their severance payments and other post-employment benefits.” In addition to paying the penalty, BlueLinx (which did not admit or deny liability) agreed “(1) to amend its severance agreements to make clear that employees may report possible securities law violations to the SEC and other federal agencies without BlueLinx’s prior approval and without having to forfeit any resulting whistleblower award, and (2) to make reasonable efforts to contact former employees who had executed severance agreements after Aug. 12, 2011 to notify them that BlueLinx does not prohibit former employees from providing information to the SEC staff or from accepting SEC whistleblower awards.”
  • On July 26, 2016, the CFTC announced that it had paid its fourth award under its Whistleblower Program in the amount of approximately $50,000 to an unnamed whistleblower who “voluntarily provided key original information that led to a successful CFTC enforcement action.”

Eye on the courts—a brief recap of recent noteworthy cases:

  • National Association of Criminal Defense v. Department of Justice: On July 19, 2016, the DC Circuit affirmed a district court ruling that the internal DOJ publication known as the Federal Criminal Discovery Blue Book falls within the attorney work-product privilege and therefore is exempt from disclosure under the Freedom of Information Act’s Exemption 5 (which exempts from disclosure certain agency records that would be privileged from discovery in a lawsuit with the agency).
  • Louisiana Municipal Police Employees’ Retirement Fund v. Wynn: On July 18, 2016, the Ninth Circuit affirmed the dismissal of a shareholder derivative lawsuit alleging that the Wynn Resorts board breached its fiduciary duties and committed corporate waste by, among other things, approving a $135 million donation to the University of Macau (the subject of FCPA scrutiny in 2012 but no investigation), which donation caused the company to incur legal expenses and be exposed to potential FCPA liability. Applying Nevada law, the Court held that the shareholders failed to prove that a demand on the board would have been futile.
  • Microsoft v. United States: On July 14, 2016, the Second Circuit reversed a district court ruling and found that Microsoft was not required to comply with a U.S. warrant for customer emails stored on a server in Dublin. The Court held that the Stored Communications Act does not have extraterrestrial application and does not authorize U.S. courts to issue and enforce warrants for the seizure of emails stored exclusively on foreign servers.
  • U.S. v. Nosal: On July 5, 2016, the Ninth Circuit held that the defendant, a former employee whose computer access credentials were revoked, knowingly and with intent to defraud accessed a protected computer without authorization in violation of the Computer Fraud and Abuse Act (CFAA) when he or his former employee co-conspirators used the login credentials of a current employee to gain access to computer data owned by the former employer and to circumvent the revocation of access. In a strong dissent, Judge Stephen Reinhardt wrote that the case was about nothing more than password sharing, and that the CFAA was not intended to make the millions of people who engage in this “ubiquitous, useful, and generally harmless” conduct into unwitting federal criminals.

New rulemaking:


  • On July 17, 2016, in an effort to dispel allegations of “home court advantage,” the SEC approved amendments to its rules of practice for its “in-house” administrative hearings to make them more parallel to rules of practice in state and federal courts. The new rules provide, among other things (1) that parties in complex cases will be permitted to take depositions of three persons in single respondent cases and five persons in multiple-respondent cases, and will be permitted to request two additional depositions in each case under an expedited process, (2) for three types of dispositive motions—i.e., motions for ruling on the pleadings, motions for summary judgment and motions for ruling as a matter of law—and detail the standards and procedures for such motions, and (3) for the establishment of other rules of practice, such as standards for when an initial decision must be issued following completion of post-hearing or dispositive motions, and when evidence may be excluded (e.g., irrelevant, immaterial, unduly repetitious or unreliable) and the limited situations when hearsay can be admitted. We last discussed the status of cases challenging the constitutionality of the SEC’s in-house administrative proceedings in our October 2015 newsletter under “ ‘Wherefore Art Thou, Due Process?’ Part III.”
  • On June 28, 2016, the SEC proposed new Rule 206(4)-4 under the Investment Advisers Act of 1940 that would require registered investment advisers to adopt and implement written business continuity and transition plans. The plans must be “reasonably designed to address operational and other risks related to a significant disruption in the investment adviser’s operations.” The SEC also proposed amendments to existing Rule 204-2 that would impose recordkeeping and other compliance requirements related to business continuity and transition plans.
  • On July 27, 2016, the Financial Crimes Enforcement Network (FinCEN) expanded its Geographic Targeting Orders (GTOs) to cover six major metropolitan areas in the United States. FinCen renewed the GTOs currently in effect in the Manhattan and Miami-Dade county metropolitan areas (which were set to expire on July 27, 2016), and expanded its money-laundering vigilance to establish GTOs for high-end real estate purchases in the metropolitan areas of Los Angeles, San Francisco, San Diego, and San Antonio, Texas. We covered FinCen’s initial institution of the GTOs in Manhattan and Miami in our February 2016 newsletter under “FCPA and Anti-Money Laundering Enforcement Review—‘Follow the Money.’ ”
  • On June 30, 2016, the New York Department of Financial Services (NYDFS) issued the final rule that establishes the minimum requirements for transaction monitoring and filtering programs that must be used by regulated institutions to monitor for potential Bank Secrecy Act/anti-money laundering violations, suspicious activity reporting and sanctions violations. The final rule imposes the new reporting requirement that regulated institutions annually submit to the NYDFS a board resolution or a senior officer’s certification that all necessary steps have been taken to ensure compliance. The final rule will become effective on January 1, 2017 and regulated institutions must commence filing the required annual compliance certification on April 15, 2018. We reported on the rule in its proposed stage in our January 2016 newsletter under “DFS and FinCen—The Rise of the New Enforcers.”

In brief—other enforcement matters of note:

  • On July 22, 2016, the DOJ announced that the owner of more than 30 Miami-area skilled nursing and assisted living facilities, a hospital administrator and a physician’s assistant were charged with conspiracy, obstruction, money laundering and healthcare fraud in connection with a $1 billion scheme involving numerous Miami-based healthcare providers. In the press release, Assistant Attorney General Leslie Caldwell described the case as “the largest single criminal health care fraud case ever brought against individuals by the Department of Justice.”
  • On July 7, 2016, the DOJ announced that the U.S. government was returning approximately $1.5 million to Taiwan, the proceeds of the sale of a forfeited New York condominium and a Virginia residence that the U.S. alleged were purchased with the proceeds from $200 million in bribes paid in 2004 by Yuanta Securities Co. Ltd. to the family of Taiwan’s former President Chen Shui-Bian. The return of funds was part of the U.S. Kleptocracy Initiative.
  • On July 4, 2016, the U.K. Serious Fraud Office (SFO) announced that, after an 11-week trial, three former employees of Barclays Bank plc (including an American) were convicted by a London jury of manipulating the U.S. Dollar LIBOR. The SFO said that the jury failed to reach verdicts for two other defendants (one of which was an American), as to which it is anticipated that the SFO will seek retrial.