So You Thought You Wanted To Be A Securities Lawyer

Posted by Joshua Horn on April 08, 2013

confusion.jpgLawyers have often been the brunt of cruel jokes. But now, a recent study reported on by the Bureau of National Affairs shows, lawyers are the target of securities regulators. Why the sudden interest?

For one, cooperation initiatives between regulators and those caught violating securities law convince these people to turn on their lawyer who may have been involved in the offering. After all, clients do not owe their lawyers a fiduciary duty.

Second, lawyers may have malpractice insurance that cover their actions. As such, there is a financial incentive for regulators to target lawyers.

So what can securities lawyers do to protect themselves? Unfortunately, there is no sure fire way to protect yourself as regulators will look in the direction of anyone associated with an offering that results in a securities violation.

The best protection for lawyers is to be vigilant when it comes to client selection. Also, be certain that you are comfortable with the content of the offering to avoid being accused in promulgating a fraudulent statement.

Be diligent and careful if you are a securities lawyer, and avoid being a trophy on a regulators' mantle.

 

* photo from freedigitalphoto.net

Energy Executives Convicted Of Sending False Reports To Industry Newsletters

Posted by Amit Shah on February 08, 2013

Its not often I write about criminal cases but this is one that all executives in the commodities industry need to know about.  In Brooks v. United States, 681 F.3d 678 (5th Cir. 2012), the Court affirmed the convictions of three executives in the natural gas industry for falsely reporting natural gas trades in violation of the Commodity Exchange Act.  The government claimed that the energy executives reported false data to two privately owned industry publications in a manner that would benefit their corporate financial positions.  According to the Court, market index prices for physical gas (meaning the gas is sold by physically delivering it to a particular location) are prominently published in two privately owned newsletters.  Both publications are highly influential to the market price for physical gas.

The CEA provides that it is unlawful for any person who knowingly delivers inaccurate reports concerning market information or conditions that affect or tend to affect the price of any commodity.  The issue in front of the Court was whether the reports to the publications were “reports” pursuant to the CEA.  The defendants argued that the term “reports” in the CEA refers only to formal reports under the statute that are submitted to regulators or customers.  In a matter of first impression, the Court held that the defendants’ communications to the industry publications constituted “reports” under the CEA.  The United States Supreme Court declined to review the Court’s ruling last month.

Energy executives should take note of the case and its potential impact.  As a result of the Court’s ruling, any false or fraudulent statements made to third parties could result in a potential criminal liability to the individual executives, and civil liability for the corporate entity.

CFTC's Record Enforcement Year And Record Budget Request

Posted by Amit Shah on October 05, 2012

The CFTC announced today that it had a record enforcement year.  The CFTC filed 102 enforcement actions in its fiscal year ended September 30, 2012, which is up slightly from the 99 actions it filed in fiscal year 2011.  Prior to the Dodd-Frank Act, the CFTC filed just 57 cases in fiscal year 2010.  The CFTC also opened 350 new investigations in 2012 and obtained orders imposing over $585 million in sanctions, including orders imposing more than $416 million in civil monetary penalties. 

Not surprisingly, the Dodd-Frank Act has had a profound effect on CFTC enforcement activities and it is likely that enforcement activities will continue to expand.  In fiscal year 2013, the CFTC is seeking to increase its overall budget by 49% and its enforcement budget by over 33%.  The CFTC wants to hire 48 new full time employees – an increase of over 28% in manpower – in its enforcement division.  In its request, the CFTC states that its workload will increase for a number reasons, including: 

  • new prohibitions targeting disruptive trading practices and conduct on registered entities;
  • establishment of anti-fraud and anti-manipulation authority over swaps;
  • new prohibitions against reporting false information;
  • increase in the number and types of registrants; and
  • new regulations applying to swaps and other intermediaries including those involving business conduct standards, fraud, record-keeping, reporting and trade practice;

Last year, Congress significantly cut the CFTC’s budget request.  This year, Congress passed a continuing resolution, with spending rates slightly higher than last year, to avoid the possibility of a government shutdown just before the November elections.  As a result, whether Congress provides the CFTC everything it wants will not be determined until early in 2013.  However, given the political landscape, there is a strong possibility that Congress will cut the CFTC’s budget request.

NFA Holds Webinar For CPOs Exempt Under Regulation 4.13(a)(4)

Posted by Amit Shah on August 17, 2012

In February, the CFTC issued a final rule amending Part 4 of the CFTC regulations to rescind the exemption from CPO registration for certain qualifying pools under Regulation 4.13(a)(4).  To read my blog about the new rule, click here.  On Wednesday, the NFA held a 90 minute webinar for CPOs that were previously exempt from registration under 4.13(a)(4).  To see the webinar and view the presentation slides, click here. 

SEC AND CFTC LAUNCH AN ANTI MONEY LAUNDERING GROUP

Posted by Ernest E. Badway on April 24, 2012

The SEC and CFTC launched a working group to discuss and identify money laundering vulnerabilities. 

These issues have lingered for awhile.  Both agencies believe that there is an opportunity to clarify their positions relating to money laundering and if their programs could potentially uncover such events.  This group will also include representatives from the Treasury Department, the Financial Crimes Enforcement Network, as well as a variety of self regulatory organizations and agencies.

This announcement demonstrates that the SEC and CFTC are very much interested in the effects of money laundering in their respective markets.  Time will tell if this will impact examinations and enforcement actions, but the SEC and CFTC will, likely, concentrate on some of these issues in their future programs. 

Dodd-Frank; Is It Doomed To Fail?

Posted by Joshua Horn on April 15, 2012

Much has happened in nearly one since since the Dodd-Frank Act became effective, and much more remains.  According to the recent thoughts of one commentator, Kyle Colona of Compliance EX, Dodd-Frank may be doomed to fail as it faces it first year of existence.

Colona noted five factors working against the full implementation of the law: (1) the CFTC and SEC are far behind schedule; (2) the regulatory authority under the Act is shared by too many entities; (3) recent comments from the Federal Reserve Bank suggest that the Volcker Rule may not become law because of its impossibility to implement; (4) the financial services industry has unleashed a full-scale effort to defeat the full implementation of the Act; and (5) certain banks are trying to influence the public that implementation of the Volcker Rule would be bad.

I think that there is now a sixth factor that may work against the full implementation of the Dodd-Frank Act; namely, a presidential election this fall.  With the politicalclimate becoming more and more focused on the election, it is only natural that there would be less attention devoted to a law that the financial services industry is committed to pealing back or doing away with altogether.  If the President loses the election, there are some who believe that Dodd-Frank may be in trouble.  Even if the President prevails, it is unlikely that there will be full implementation because attention will surely be focused elsewhere.

Although it is unlikely that there may ever be full implementation of the Act, we need to still anticipate that many provisions of the Act will come to pass.  For example, at some point, the SEC will finally commit to the adoption of the uniform fiduciary duty rule and there will be a decision on who will serve as the SRO for investment advisors.  Dodd-Frank is not dead; it just may limp along for the next year.

CFTC Revises Registration and Reporting Requirements for CPOs and CTAs

Posted by Amit Shah on March 09, 2012

On February 9, 2012, the CFTC issued a final rule regarding changes to Part 4 of the CFTC’s regulations involving registration and compliance obligations for commodity pool operators (“CPO”) and commodity trading advisors (“CTA”).  Among other things, the rule rescinds the exemption from registration provided in Rule 4.13(a)(4) and sets forth additional annual reporting requirements for CPOs and CTAs.

Section 4.13(a)(4) exempted operators of private funds offered solely to sophisticated investors from registering as a CPO.  To qualify, the interests in the pool must have been exempt from registration under the Securities Act of 1933 and each participant must be a qualified eligible person or an accredited investor.  Now that the exemption has been rescinded, any private fund operating under the Rule 4.13(a)(4) exemption must register with the CFTC prior to December 31, 2012.

The CFTC also adopted Rule 4.27, which requires CPOs and CTAs to periodically report certain information.  CPOs and CTAs must annually file Form CPO-PQR and Form CTA-PR, respectively.  These forms are analogous to Form PF adopted by the SEC for reporting by registered investment advisors. 

Depending on the aggregate asset value of the CPO, CPOs must complete Schedules A, B and/or C of Form CPO-PQR.  A CPO with over $5 billion in assets as of June 30, 2012 must complete Schedules A, B, and C by November 29, 2012.  A CPO with over $1.5 billion in assets must complete Schedules A, B and C within 60 days after the first calendar quarter ending after December 14, 2012.  A CPO with between $150 million and $1.5 billion in aggregate assets must complete Schedules A and B within 90 days after December 31, 2012.  Finally, a CPO with under $150 million in assets must complete Schedule A within 90 days after December 31, 2012.

The reporting requirements become effective on July 2, 2012 and will apply to all registered CPOs.  Registered CTAs must file Form CTA-PR annually, within 45 days after a CTA’s fiscal year.  The first compliance date is February 14, 2013.

SEC Issues guidelines for Form PF Reporting

Posted by Ernest E. Badway on March 05, 2012

The SEC published a small entity compliance guide for investment advisers relating to the new Form PF.  These new reporting requirements affect SEC registered investment advisers with at least $150 million dollars in assets under management.  Some of these new guidelines will also apply to CFTC commodity pool operators and commodity trading advisers.

The SEC registered advisers will be divided into 2 groups, small advisors and large advisers.  The definitional requirements for large advisers are specific and may require certain calculations, however.  Clearly, large advisers have assets under control of anywhere between a billion dollars and more.  For the purposes of the Form PF, all other advisers would be considered small private advisers.

Generally, an investment adviser is a small business pursuant to the Investment Advisers Act and the Regulatory Flexibility Act if it has assets under management of less than $25 million dollars.  As such, these advisers will, generally, have no reporting requirements on a Form PF.  However, for those advisers, who are not defined as a small business, there may be certain reporting requirements.  For example, advisers with over $150 million dollars in private fund assets under management, but are not large advisors must file a Form PF once a year within 120 days at the end of the fiscal year.  Large private advisers must file a Form PF within 60 days.  Moreover, the requirements for advisers with over $150 million dollars, but who are not large advisers, are less than those of large private fund advisers.  Essentially, the more money you have under management, the more information you must provide.

In short, advisers should consult with securities counsel to ensure accurate reporting in the future.

SEC Rule Making in 2012

Posted by Ernest E. Badway on February 27, 2012

Although the SEC’s rulemaking deferral regarding the uniform fiduciary standard has gained much press, the SEC's other rulemaking initiatives pursuant to the Dodd-Frank Act march on, and will have a significant effect on broker dealers and investment advisors in the upcoming year.

In particular, the SEC has scheduled a joint SEC-CFTC report to Congress on stable value contracts, and the adoption of rules pertaining to trade reporting, data elements and real time public reporting for security-based swaps.  Further, the SEC and CFTC will define key terms for swap products and intermediaries as well as security-based swap clearing agencies.  The SEC will also look to register and regulate security swap based data repositories and for mandatory clearing of security-based swaps.  Additionally, the SEC will look at the end user exceptions for the mandatory clearing of security-based swaps. 

The SEC will also consider a permanent rule to register municipal advisors this year.  However, certain controversial rules relating to conflict materials rule finalization and resource extraction disclosures as well as corporate governance rules relating to executive compensation claw backs, performance disclosure pay, compensation ratio and hedging policies have been pushed forward to the first part of this year.  Moreover, the SEC still has not set up certain offices that the Dodd-Frank Act required including, but not limited to, the credit ratings and municipal securities oversight function offices.  Currently, the SEC believes these functions are being performed by its Division of Trading and Market's Staff. 

In sum, the SEC’s Dodd-Frank Act rule making is still ongoing and will continue as it moves forward.

PSST!!! Want to Save Money on Your Legal Bills? Read on. . .

Posted by Ernest E. Badway on February 27, 2012

Late last week, one of my colleagues sent me an e-mail where he copied 8 other people, half of them I could not identify if my life depended upon it.  I then heard about the person who had a Twitter account with over 17,000 follwers, and was now being sued by his former employer over ownership of the account-- really, does anyone think the person knows 17,000 people?  Firms and persons working in financial services industries generate trillions of e-mails every year, encompassing the mundane to the critical. 

These firms and their employees also seem to be involved in numerous civil, regulatory and criminal investigations and litigations.  Much of the vast amount of money in legal fees paid to defend these firms and their employees (sums that sometimes greatly exceed the GDP of several developing countries) often relate to e-mail review and production.  General counsels and firm management looking for ways to save money on these bills should, initially, read my article that was published in the New Jersey Law Journal, outlining the "CC" problem and ways of clamping down on this terrible plague afflicting our society, http://www.foxrothschild.com/newspubs/newspubsArticle.aspx?id=4294970187.

Once read, please do your part in stopping this madness because the dollar you save maybe your own!!

Fox Rothschild Primer on Government Investigation-- All Invited

Posted by Ernest E. Badway on December 22, 2011

Please join us for this program on Thursday, January 5, 2012. 

C:\Documents and Settings\ebadway\Local Settings\Temporary Internet Files\OLK8F\cle_GovernmentAndInternalInvestigations.html

Josh Horn's Ponzi Scheme Response Road Map

Posted by Ernest E. Badway on November 08, 2011

My colleague, Josh Horn, has written an amazing article that should be on every compliance officer’s desk.  It details methods for investigating and responding to ponzi schemes. 

In this day and age, we are met with another Ponzi scheme occurring or being uncovered almost every day.  Josh’s article is an exceptional primer since it details the steps for a proper investigation, as well as, disseminating the investigation results to the appropriate authorities.  Further, Josh lays out an approach to avoid litigation, and, if litigation does strike, responding to it.  This article appeared in the September – October 2011 Special Edition for the National Society of Compliance Professionals, in its publication, N.S.C.P. Currents, and may be viewed at www.foxrothschild.com/newspub/newspubArticle. aspx?id=4294970030.

I hope everyone considers it.

CFTC's Record Enforcement Year

Posted by Amit Shah on November 03, 2011

The CFTC recently announced that it filed a record 99 enforcement actions in fiscal year 2011, which represented a whopping 74% increase over the prior fiscal year.  The CFTC charged individuals and corporations with a broad range of violations, including manipulation of commodity prices, perpetration of Ponzi schemes and other frauds, supervision and accounting failures, trading abuses and registration deficiencies.  The Division of Enforcement also opened more than 450 investigations in fiscal year 2011, which represents another program high.

During that same period, the CFTC obtained orders imposing over $290 million in civil monetary penalties, and directed payment of more than $160 million in restitution and disgorgement.  That represented more than double the prior fiscal year’s imposition of sanctions. 

The increase in enforcement actions, penalties and restitution orders are undoubtedly related to the passage of the Dodd-Frank Act and the political pressure on federal regulators to prevent improper behavior by financial institutions.  Assuming the CFTC stays on schedule, fiscal year 2012 will likely be another record year in enforcement actions due to the expanded enforcement authorities provided by the Dodd-Frank Act and the completion of the rulemaking pursuant to Act. 

Securities Podcast with Ernest Badway

Posted by Ernest E. Badway on October 28, 2011

Thought you might be interested in a recent podcast I did concerning my securities law practice.  http://web.me.com/cordpar/Client_Development_Tips/Law_Consulting_Coaching_Podcast/Entries/2011/10/28_Developing_a_Securities%2C_White_Collar_and_Complex_Litigation_Practice.html

The Volcker Rule: the Greatest and/or Worst Regulation Ever?

Posted by James Saksa on October 13, 2011

The SEC recently joined the FDIC, the OCC and the Federal Reserve in advancing the Volcker Rule for public comment.  The Volcker Rule is shaping up to be one of Dodd-Frank’s most contentious and confusing new regulations.

Volcker Rule proponents hope that it will, like the late-great Glass-Steagal Act before it, rein in risk-relishing bankers by prohibiting short-term proprietary trading of securities.  Opponents fear it will be overly broad, capturing market-making activities and needlessly raising the cost of capital.  Both want big changes, clouding any predictions on what the final version will look like. 

So, basically, Wall Street has a few months to respond to a 298-page rule proposal jointly issued by four Federal regulators that asks nearly 400 questions which could cost millions of dollars.  Hence the impression some folks get that the only thing certain about the Volcker Rule is the uncertainty surrounding it.  Some analysts seem terrified of this zombie regulation – once dead, now crawling out of the grave with a sickly hunger for brains profits.         

Then again, this resurrected rule might not be so scary.  Stock prices of the major US financial institutions that will fall under its purview remained steady despite the announcement.  The Volcker Rule really is just the watered-down second coming of the law from 1933 until 1999.  The uncertainty of the law is really only found around its margins – trying to determine exactly where market-making ends and proprietary trading begins.  In other words, the devil – that scary boogieman, uncertainty – remains in the details. 

Sure, it seems like everyone is unhappy with the proposal, which took over a year to draft but only minutes to attract detractors.  It has either too many exemptions or too few, depending on who you ask.  But I’ve found that when two groups that never seem to agree on anything suddenly agree on something, you should take that something and do the exact opposite.  A rule that upsets everyone for different reasons tends to be one that is moderate, sensible and likely to have a real and lasting impact.   

In the mean time, we will follow the developments closely.  Histrionics about how awful/amazing the finalized rule will look aside, it will be one of the more arcane of Dodd-Frank's new regulations.  Anyone falling under its penumbra would do well to tread cautiously and with counsel.

CFTC Issues Final Rules For Whistleblowers

Posted by Amit Shah on August 26, 2011

The CFTC recently issued its final rules outlining the procedures, forms and standards that a potential whistleblower must follow to make a claim and receive an award.  The rules will be located at 17 CFR Part 165 and will become effective October 24, 2011.  Here are the highlights:

  • the Commission harmonized its rules with those of the SEC; 
  • there is no requirement that the whistleblower report the information internally to be eligible for an award but the Commission may increase the award if the whistleblower complied with internal reporting requirements;
  • a whistleblower who complied with an entity’s internal reporting requirements could be eligible for an award if the entity later reports information to the Commission that leads to a successful Commission action; 
  • the Commission created a one step process for whistleblowers to submit claims and information, which requires filling out the new Form TCR (“Tip, Complaint or Referral”); 
  • a whistleblower may aggregate claims to meet the $1,000,000 threshold to receive an award; 
  • as a prerequisite to be considered for an award, a whistleblower must voluntarily provide information that led to a successful resolution of a covered Commission action, must comply with any additional staff requests for information, testimony or evidence and, if requested, enter into a confidentiality agreement with the Commission; 
  • whistleblowers with potential civil or criminal liability remain eligible for an award but a whistleblower who is criminally convicted is ineligible;   
  • to apply for an award that exceeds the $1,000,000 threshold, the whistleblower must file a Form WB-APP, which allows the whistleblower to “make his case” as to why he should be entitled to an award, within 90 calendar days after the Commission posts the imposition of sanctions on its website;   
  • the total aggregate award a whistleblower could receive equals 10 to 30 percent of the award; 
  • The criteria for determining the amount of an award include: character of the enforcement action, damages to customers, timeliness and reliability of the whistleblower, whether the whistleblower encouraged others to participate in the enforcement action, any unique hardships, the degree to which the whistleblower took steps to prevent violations from occurring or continuing, the efforts to remediate any harm, whether the information related only to a portion of the claim, the culpability of the whistleblower, whether the whistleblower unreasonably delayed the reporting and whether the whistleblower interfered or hindered internal compliance and reporting systems; and 
  •  a whistleblower may appeal an award to the appropriate U.S. Circuit Court of Appeals within 30 days after the Commission’s final order.

Are the SEC and CFTC Toothless Dragons?

Posted by Ernest E. Badway on August 19, 2011

The Wall Street Journal reported that the SEC and the CFTC are owed approximately $4.5 billion in fines and disgorgement.  These figures date back as far as 2005.

Interestingly, the SEC and CFTC have let this debt continue for so long, and it causes one to wonder why the fines were imposed initially.  That is, to impose fines and disgorgement on entities and persons, who are unable to pay such sums, makes no sense.  Instead, the SEC and CFTC should consider the practical aspects of its regulatory authority, and assess the ability to pay such fines and disgorgement before imposition.

Customarily, the SEC and CFTC impose fines and disgorgement on parties regardless of their financial ability to pay.  This results in these large debts accruing, and , periodically, the SEC and CFTC are taken to task for not collecting.  However, collections from "a stone" are not realistic. 

Further, the SEC and CFTC have repeatedly been unwilling to consider waivers of disgorgement or penalties.  Typically, although there are no formal standards, the SEC and CFTC have refused to consider waivers if parties are notorious violators or there is SEC policy involved with the particular violation.

As such, it is time for the SEC and CFTC to consider alternative forms of relief as opposed to the continuous imposition of debt that will never be paid.