Investigations and Enforcement

In Securities & Exchange Comm’n v. Fowler, No. 20-1081, 2021 WL 3083655 (2d Cir. July 22, 2021), the United States Court of Appeals for the Second Circuit upheld a lower court judgment awarding the Securities and Exchange Commission (“SEC”) civil penalties, disgorgement, and injunctive relief in a securities fraud action against a broker engaged in unsuitable and unauthorized high-frequency trading.  The district court entered its judgment following a jury trial finding the defendant guilty of violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933.  On appeal, defendant asserted that the action was subject to a five-year statute of limitations imposed by 28 U.S.C. § 2462 despite the parties having entered into tolling agreements.  Defendant also argued that the civil penalties assessed against him were excessive, and the disgorgement award failed to properly account for legitimate business expenses as required by Liu v. Securities & Exchange Comm’n, 140 S. Ct. 1936 (2020).  After reviewing its text and legislative history, the Second Circuit concluded in this matter of first impression that § 2462 is non-jurisdictional and, therefore, the district court had the power to hear the case in light of the parties’ tolling agreements.  The decision is important because it reaffirms the enforceability of tolling agreements between the SEC and its investigative quarries.  The court also rejected defendant’s arguments alleging improper civil penalty and disgorgement calculations.

Continue Reading Second Circuit Upholds Enforceability of SEC Tolling Agreements

In Van Buren v. United States, No. 19-783, 2021 WL 2229206 (U.S. June 3, 2021), the United States Supreme Court issued an opinion drastically limiting the application of the Computer Fraud and Abuse Act (CFAA) (18 U.S.C. § 1030 et seq.), holding that the “exceeds authorized access” clause of the Act applies only to those who obtain information from particular areas in the computer—such as files, folders, or databases—to which the individual is not authorized to access under any circumstances. However, the Supreme Court excluded application of the clause to individuals who misuse their access to obtain information otherwise available to them for an unauthorized purpose. The Court’s Van Buren decision resolves a long-standing circuit split over the meaning of this key phase of the CFAA, and simultaneously creates new challenges for employers seeking to hold liable employees who misuse company information to the employer’s detriment.
Continue Reading Supreme Court Resolves Circuit Split Over CFAA

During a May 19, 2021 webcast at the Financial Industry Regulatory Authority’s (“FINRA”) annual conference, Amy Sochard, FINRA’s Vice President of Advertising Regulation, indicated that the organization will seek public feedback on gamification practices utilized by some stock trading platforms to attract investors with a view toward issuing new rules or guidance.  “Gamification” refers to the application of typical elements of game playing, such as point scoring, competition with others, and rules of play, by trading platforms, online retailers or vendors to encourage engagement with a product or service.
Continue Reading Game On: FINRA Hints at Upcoming Gamification Sweep

During a March 9, 2021 industry conference, one of the four current U.S. Securities and Exchange (“SEC”) commissioners floated a new approach to calculating penalties for corporate misconduct.  Caroline A. Crenshaw, who was tapped by President Donald Trump last June to fill one of the Democratic slots on the Commission, told attendees at the Council of Institutional Investors virtual conference that the SEC needed to revisit its approach to assessing corporate penalties, and implement a new approach that tailored penalties to the “egregiousness of the actual misconduct,” accounted for all benefits of the misconduct that accrued to the corporation, and eliminated consideration of potential adverse impacts on shareholders.  If ultimately accepted by the Commission, Crenshaw’s proposed approach would likely result in materially greater penalties for corporate misconduct.
Continue Reading SEC Commissioner Calls for a Brave New Approach to Corporate Penalties

On March 4, 2021, the Securities and Exchange Commission announced the formation of a Climate and ESG Task Force in the Division of Enforcement (the “Task Force”).  The Task Force will be aimed at detecting ESG-related misconduct so that investors can fully consider these issues in their investment decisions.
Continue Reading SEC Going Cyber-Hunting for ESG-Related Misconduct

The Office of New York State Attorney General Letitia James (“NYAG”) has filed a lawsuit to shut down technology company Coinseed.  The state has accused the firm of selling unregistered securities in the form of digital tokens and operating as an unregistered broker-dealer while making material misrepresentations about the company, its management team, and fees charged to investors in connection with cryptocurrency trades.
Continue Reading New York Attorney General Sues to Shutter Cryptocurrency Trading Firm Coinseed

On December 1, 2020, the Commodities Futures Trading Commission (CFTC) Division of Enforcement published its annual report for Fiscal Year 2020.  According to the report, the Division filed a record number of enforcement actions in 2020 and achieved a number of firsts, despite the unprecedented challenges presented by the COVID-19 pandemic.  In addition, the report provides a number of key insights into the Division’s enforcement concerns in several key areas, including compliance, digital assets, anti-money laundering (AML), market surveillance and its whistleblower program.    
Continue Reading CFTC’s Enforcement Division Announces Record-Breaking 2020 and Outlines Priorities for 2021

A recent enforcement action offers a glimpse of the Financial Industry Regulatory Authority’s (“FINRA”) expectations for firms conducting anti-money laundering (“AML”) due diligence and transaction monitoring.  On July 27, 2020, FINRA settled with broker-dealer JKR & Company (“JKR”) over allegations that the firm failed to detect, investigate, and report suspicious activity in four customer accounts in violation of FINRA Rules 3310(a) and 2010.  JKR agreed to a $50,000 fine and a censure to resolve the matter.  The settlement is notable in that FINRA applied transaction monitoring and due diligence expectations common in the banking industry to a broker-dealer.  It also serves as a reminder that FINRA expects member firms to not only establish written AML policies and procedures, but also to put their AML programs into practice in order to meet their regulatory obligations.
Continue Reading FINRA Settlement Highlights Importance of Anti-Money Laundering Due Diligence and Monitoring

The United States Department of Justice (DOJ) released updated guidance regarding its evaluation of corporate compliance programs on June 1, 2020.  The release comes just over a year since the guidance was last updated in April 2019.  While these latest changes are less extensive than the most recent ones, there are some key differences that suggest the DOJ may be shifting some areas of focus when it comes to its approach to assessing the effectiveness of corporate compliance programs.
Continue Reading DOJ Updates Corporate Compliance Guidance

On May 26, 2020, the Financial Crimes Enforcement Network, (“FinCEN”) issued a notice in the Federal Register updating cost estimates related to compliance with filing suspicious activity reports (SARs).  Under the Bank Secrecy Act, 31 U.S.C. § 5311 et seq., certain businesses providing financial services are required to file SARs upon suspicion that a crime or violation was committed by, at, or through that financial institution (so long as certain dollar thresholds are met), or upon suspicion of insider abuse of any kind.
Continue Reading FinCEN Issues Notice on SARs Filing Figures

In Securities & Exchange Comm. v. Gentile, No. 18-1242, 2019 WL 4686251 (3d Cir. Sept. 26, 2019), the United States Court of Appeals for the Third Circuit took up the question of whether Securities and Exchange Commission (“SEC”) injunctions constitute penalties subject to a five-year statute of limitations. In vacating a district court decision holding that they do, the Third Circuit held in this case of first impression that injunctions properly tailored to prevent future harm are not penalties. However, the opinion did not reach a determination as to whether the specific relief at issue had been so tailored, remanding that decision to the lower court along with the admonition that relief extending beyond the preventative into the punitive may not issue as an injunction. While the Third Circuit’s decision shielded the SEC’s injunctive powers from wholesale subjection to a five-year statute of limitations, it charted what qualifies as appropriate injunctive relief and, ultimately, may operate to curtail unduly broad injunctions.       
Continue Reading Third Circuit Reversal a Pyrrhic Win for SEC in Ongoing Statute of Limitations Saga