SEC: 14,000 tips later, whistleblower award program has ‘transformed the agency’ - The FCPA Blog - The FCPA Blog

SEC: 14,000 tips later, whistleblower award program has ‘transformed the agency’ - The FCPA Blog 

After this week's $22 million award to a whistleblower, SEC leaders called the whistleblower program a game changer that has transformed the SEC's ability to protect investors.

More than $107 million has been awarded to 33 whistleblowers.

The biggest award was more than $30 million in 2014. This week's $22 million award was the second biggest.

Whistleblower tips have helped the SEC bring successful enforcement actions "where more than $504 million was ordered in sanctions, including more than $346 million in disgorgement and interest for harmed investors," the agency said.

Court Rules SEC In-House Judges "Likely Unconstitutional"

A federal judge ruled Monday that the Securities and Exchange Commission’s use of an in-house judge to preside over an insider-trading case was “likely unconstitutional,” a potential blow to the agency’s controversial use of its internal tribunal.

The decision provides an excellent overview of the SEC's administrative hearing process, with all of its warts and deficiencies.  The SEC actually argued that the federal court, which has jurisdiction over "all civil actions arising under the Constitution, laws, or treaties of the United States," (28 U.S.C. § 1331), could not hear the case because it lacked jurisdiction. The court dismissed that argument by reference to Section 1331 as well as 28 U.S.C. § 2201 which authorizes declaratory judgments. “[I]t is established practice for [the Supreme] Court to sustain the jurisdiction of federal courts to issue injunctions to protect rights safeguarded by the Constitution” and “injunctive relief has long been recognized as the proper means for preventing entities from acting unconstitutionally." The citations are in the decision, which is available at SECLaw.com -  Charles L. Hill, Jr. vs. Securities and Exchange Commission.

The decision is directed more toward the process of how the particular Administrative Law Judge in question was appointed, but hopefully it draws more attention to the SEC's use of its five administrative-law judges to hear its cases, rather than sending them to federal court. For those who have missed it, the SEC Commissioners decide to bring a case, in their own self-created "court" using rules that they wrote, a prosecutor that they pay, and try the case before a judge that they appoint and pay. And, when there is an appeal from the decision, THEY decide the appeal.

It is no surprise that the SEC has a win-rate of 90 to 100%, depending on the time frame examined. It is time for Andrew J.Ceresney, director of the SEC's Division of Enforcement, to admit that the abuse of the administrative law process is not "eminently proper, appropriate and fair," as he repeatedly claims, and for Mary Jo White, to stop this abuse.

For more information visit Federal Judge Rules SEC In-House Judge’s Appointment ‘Likely Unconstitutional’.

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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email to mja@sallahlaw.com.

Related articles

• SEC Sued For Unconstitutional Use of Its Own Judges 
• SEC's Use of Administrative Hearings Under Fire
• Former SEC ALJ Claims Bias 
• SEC Wins Big When Bringing Cases In Front of its Own Judges
• Judge Rakoff Questions the SEC's Overuse of Administrative Proceeding 
• How the SEC Avoids Judicial Oversight and the Constitution 

Secure that First Investor

Entreprenuer.com examines the concept that investors do not like to be alone. It's all about shared risk.

Calling it the "me, too" world of venture capital, where everyone appears to invest as part of a syndicate. Indeed, the typical first question out of a VC's mouth when talking to a startup about investing is, "Who's leading this?" The question points to a paradox about VCs in general. Everyone wants to tout that they're the best at sniffing out the next WhatsApp, but when it comes to putting money behind that startup, they want some other firm to have skin in the game first.

Nobody in the VC world likes to go it alone.

In the eyes of entrepreneurs, this makes VCs look like a scared bunch, but there is a rationale to this: It hedges risk. By syndicating an investment--even if the total amount invested is small enough for a firm to manage on its own--there is a bigger pool of funds available for future funding rounds or, alternatively, a reduction in losses should things go south. The more investors at the table, the more they can share the cost and time of conducting due diligence and hammering out term sheets.

Read the entire article at Secure That First Investor, and the Rest Will Come | Entrepreneur.com

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Oue clients at Sallah Astarita & Cox include  hedge funds, venture capitalists and individual investors. For  information regarding private investing, contact Mark Astarita at 212-509-6544 or email us.

Dark Pool Operator Charged With Failing to Safeguard Confidential Trading Information

The SEC has charged a New York-based brokerage firm that operates a dark pool alternative trading system with improperly using subscribers' confidential trading information in marketing its services.

Regulations require an alternative trading system (ATS) to establish and enforce safeguards and procedures to protect the confidential trading information of its subscribers. Among them is limiting access to subscribers' data to employees who operate the ATS or have a direct compliance role.

An SEC investigation found that Liquidnet Inc. violated its regulatory obligations and its own promises to its ATS subscribers during a nearly three-year period when it improperly allowed a business unit outside the dark pool operation to access the confidential trading data. Employees in that unit used the confidential information about Liquidnet's dark pool subscribers during marketing presentations and various communications to other customers. Liquidnet also used subscribers' confidential trading information in two ATS sales tools that it devised.

SEC examiners spotted potential data access problems during an examination of Liquidnet and referred the matter to the Enforcement Division for further investigation. Liquidnet has agreed to settle the SEC's charges and pay a $2 million penalty.

For more information :SEC Charges New York-Based Dark Pool Operator With Failing to Safeguard Confidential Trading Information

SEC To Remain Open During Government Shutdown

When is a government shut down not a government shut down? Quite frankly, we are confused. The SEC says it will remain open:

The SEC will remain open and operational in the event the federal government undergoes a lapse in appropriations on October 1. Any changes to the SEC's operational status after October 1 will be announced on this website. The SEC's current operational plan in the event of an SEC shutdown is available here.

But in the operational plan they say:

Under the Antideficiency Act (31 USC §1341, et seq.), officers and employees of the federal government cannot obligate funds in advance of appropriations or beyond appropriated levels. If there is a lapse in appropriations, the SEC will be able to continue only certain types of functionsthat qualify as exceptions to the Antideficiency Act restrictions, including those needed for a brief time to ensure the orderly shutdown of functions that will not continue during the lapse. The functions that qualify as exceptions include those related to emergencies involving the safety of human life or the protection of property, including law enforcement functions; those for which there is an express authority to continue during an appropriations lapse; and those for which authority to continue during an appropriations lapse arises by necessary implication. Accordingly, if there is a lapse in appropriations, the SEC must initiate the orderly shutdown of agency activities not considered essential to these functions.

Sounds like the SEC is shut down if there is a "lapse in appropriations."

My best guess - carry on as if they are open.

Qualcomm Exec and Merrill Lynch Broker Charged with Insider Trading

The SEC has charged a former Qualcomm executive and his Merrill Lynch broker with insider trading in an elaborate scheme involving family members and off shore brokerage accounts.

The Securities and Exchange Commission said that former Qualcomm executive Jing Wang and his advisor, Gary Yin, made illegal trades in his company’s stock and that of a company purchased by Qualcomm. From 2006 to 2012, Yin and Wang both set up offshore entities to disguise their trades and hide some $271,644 in total profit, according to a complaint filed in U.S. District Court for the Southern District of California.

According to the SEC, Yin helped Wang set up “sham brokerage accounts,” which were registered in the British Virgin Islands under family members’ names to disguise ownership. The complaint also alleges that Yin created his own offshore account in the British Virgin Islands under the name of his mother-in-law.

The two funneled money into those accounts in order to make trades based on information such as the announcement of a Qualcomm revenue revision and the company’s 2011 acquisition of Atheros Communications, the SEC alleges.

His Financial Advisor With Insider Trading For more information, see SEC.gov | SEC Charges Former Qualcomm Executive and His Financial Advisor With Insider Trading Through Secret Offshore Accounts

SEC Charges RIA For False Statements to Investors and Investigators - Parallel Criminal Charges Filed.

Why don't these defendants learn? When confronted by government investigators, either tell the truth or don't talk. Simple. But this basic concept seems to elude them.Case in point - the Securities and Exchange Commission charged the owner of a New York-based investment advisory firm with defrauding investors while grossly exaggerating the amount of assets under his management, and announced that the defendant has pled guilty to criminal charges which included charges that he lied to investigators.  

The SEC alleges that Fredrick D. Scott registered his firm ACI Capital Group as an investment adviser and then embarked on a series of fraudulent schemes targeting individual investors and small businesses.  Scott repeatedly touted ACI’s registration under the securities laws and falsely claimed the firm’s assets under management to be as high as $3.7 billion to bolster his credibility when offering too-good-to-be-true investment opportunities.  As Scott solicited funds from investors after promising them very high rates of return, he simply stole their money almost as soon as they deposited it with ACI.  Scott paid no returns to investors and illegally used their money to fund such personal expenses as his children’s private school tuition, air travel and hotels, department store purchases, and several thousand dollars in dental bills.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York announced Scott has pleaded guilty to criminal charges.  Among the charges to which Scott has pleaded guilty is making false statements to SEC examiners when they questioned whether Scott and ACI had accepted loans from investors. 

SEC examiners notified the agency’s Enforcement Division, which began investigating and referred the matter to criminal authorities. “Scott told brazen lies about the value of ACI’s assets under management and its ability to deliver huge returns on various investments,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Our examination and enforcement staff aggressively pursue investment advisers who flout the registration provisions of the securities laws for their personal gain, especially those who attempt to cover up their misdeeds by flat-out lying to our examiners.”

According to the SEC’s complaint filed in federal court in Brooklyn, one variation of Scott’s fraud was a so-called advance fee scheme – Scott promised investors that ACI would provide multi-million dollar loans to people seeking bank financing.  But investors were told that they first needed to advance ACI a percentage of the loan amount, and once they did so they would receive the remaining balance of the amount that Scott promised to pay.  Scott had no intention of ever returning the money, nor did he repay it.

The SEC alleges that in another iteration of his fraud, Scott offered investors the opportunity to make a bridge loan to a third-party entity.  The investor was told to fund one portion of the loan, and ACI would supposedly fund the remaining balance.  In exchange, the investor would supposedly receive a substantial return on his initial investment.  In this scheme as with each of his others, investors never received returns and Scott stole the money.

The SEC’s complaint charges Scott with violating Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5, Section 207 of the Investment Advisers Act for filing a false Form ADV, and aiding and abetting ACI’s improper registration in violation of Section 203A of the Advisers Act.

More information is available at the SEC's site and the complaint is also online.

JP Morgan Facing Criminal and Civil Charges For Mortgage Security Fraud

On the heels of the announcement of charges against Bank of America for fraudulently selling investors mortgage backed securities, JPMorgan Chase disclosed on Wednesday that it faced a criminal and civil investigation into whether it sold shoddy mortgage securities to investors in the run-up to the financial crisis,

According to the New York Times, JPMorgan has acknowledged fthe existence of the investigation — one of several mortgage-related problems looming for the bank — in a quarterly regulatory filing. It said that the civil division of the United States attorney’s office for the Eastern District of California, has “preliminarily concluded” that JPMorgan flouted federal laws with its sale of subprime mortgage securities from 2005 to 2007. The parallel criminal inquiry, according to one person briefed on the matter, is in a more preliminary stage.

Adding to scrutiny of the bank, the NYT is also reporting that federal prosecutors in Philadelphia are examining whether JPMorgan duped investors into buying troubled mortgage securities that later imploded, The prosecutors are investigating whether JPMorgan churned out the mortgage-backed securities without ensuring that the investments met underwriting standards,

Representatives for the bank and the federal prosecutors declined to comment.

For more information - JPMorgan Reveals It Faces Criminal and Civil Inquiries
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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the representation of individual and institutional investors who have been defrauded. We represent investors, financial professionals and investment firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at email us

DOJ Sues Bank Of America Over Mortgage-Backed Securities

The housing/banking/mortgage crisis may finally be catching up to Bank of America. The Feds have sued the bank for what the Justice Department and securities regulators said was a fraud on investors involving $850 million of residential mortgage-backed securities.

The Justice Department and the U.S. Securities and Exchange Commission filed the parallel suits in U.S. District Court in Charlotte, according to the court filings.

The securities date to about January 2008, the government said, putting them just at the beginning of the global financial crisis.

Apparently Bank of America is defending by claiming that its investors were all sophisticated and fully understood what was involved with the securities. Is that true? If you were an investor in mortgage backed securities sold by Bank of America, we would like to hear from you. Call me at 212-509-6544. We represent investors and financial professionals across the country, and have been doing so for decades.

DOJ Sues Bank Of America Over Mortgage-Backed Securities