Securities Compliance Sentinel - Analysis of Cutting Edge Securities Industry Issues

We wanted to share with you a great article co-authored y one of our partners, Alain Leibman, along with our colleague, Jana Volante.  The article's title is "Attacking Eyewitness Identification Testimony, in BNA's Criminal Law Reporter, and is located at http://www.foxrothschild.com/newspubs/newspubsArticle.aspx?id=4294971709.

Alain also composed an ensemble piece in the ABA's journal called, Litigation, and that peice is located at http://www.foxrothschild.com/newspubs/newspubsArticle.aspx?id=15032385703.

Recently, the Department of Justice and the Federal Bureau of Investigation indicated that they are working on enough insider trading cases regarding the hedge fund industry to take them five years or more to complete.  This clearly indicates that the DOJ and FBI are going to continue to find insider trading actions with hedge funds.  This appears to be a “growth industry” for lawyers. 

Additionally, although the DOJ has recently been  the subject of much criticism because certain FCPA cases have collapsed, it has indicated that it will vigorously continue to prosecute FCPA actions.  The DOJ believes that this is part of a broader issue requiring enforcement.

Thus, there is no relief for the weary on the horizon.

At a recent conference, federal regulators, including the DOJ and the SEC, stated that they are aggressively pursuing investigations into private equity and hedge funds and their FCPA compliance. 

Most likely, we  will see a spike in enforcement issues for these funds regarding the FCPA as the new year begins.  The government will undoubtedly look to see if these funds have significant FCPA compliance programs, and if there is any activity that implicates a violation of the FCPA. 

Although the SEC and DOJ have suggested a concern over compliance programs, the SEC and the DOJ will still look to prosecute if such a prosecution is merited.

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.

Ernest Badway will be speaking at a Citrin Cooperman event on October 27, 2011, on the topic of Advisors and Fund Managers. Please contact Alyssa Parrilla, 212.697.1000 Ext. 1838, aparrilla@citrincooperman.com, to RSVP. 

Recently, a bipartisan bill was introduced in the United States Senate that would require states to obtain the identity of persons who act behind corporations.  Essentially, this legislation would end the practice of unidentified persons forming corporations and remaining invisible. 

In particular, the legislation is designed to prevent hidden and faceless persons from running or hiding behind corporate entities.  The legislation would not require states to verify the information, but penalties would apply if any information was submitted falsely to the states.  The senators who introduced this legislation, specifically, are concerned about the potential for problems arising in shelf registrations as well as financial fraud.  Although the legislation has the support of a bipartisan group of senators, and a variety of law enforcement officials, it is not supported by regulated companies or financial services institutions. Further, the organization for Secretaries of State is against the legislation.  This organization claims the proposed legislation will increase burdens on their offices, who are already dealing with reduced state budgets.

In short, this bill may not ultimately succeed especially given that a prior version was defeated earlier.  However, one wonders if the states will take up this cause and require such information given the extent of the perceived issues relating to financial fraud in today’s markets.

Recently, the SEC charged an ex-board chairman, who bought shares in his company, prior to the company’s announcement that it intended on buying back said shares. 

The SEC charged him with fraud, alleging that he  purchased shares of his company stock prior to the announcement of the buy back, causing the company to overpay $36,000 to repurchase its own securities.  He allegedly realized a $124,000 profit, and, apparently, according to the SEC’s allegations, did not file a proper Form 4 so as to avoid SEC detection.  The SEC alleged that the former board chair’s broker had, actually, informed him that he needed to file such a form. 

This case demonstrates the SEC’s increased vigilance of corporate directors and officers, and the SEC will continue activity at regulating their conduct.

On June 15, 2011, the U.S. Court of Appeals for the Second Circuit overturned the securities fraud conviction of a former Credit Suisse broker claiming that venue in the EDNY was improper.  However, in the same decision, the Second Circuit affirmed the broker’s conviction on two conspiracy counts for alleged fraudulent activity relating to auction rate securities, stating that the venue in the EDNY was proper for those claims. 

In particular, the government had alleged that the EDNY venue was proper because the broker and his compatriot travelled through John F. Kennedy International Airport to meet investors.  The appeals court said that the government failed to offer any concrete proof of any act or transaction constituting the securities fraud violation in the EDNY.  The Second Circuit was clear that the government had offered no proof to suggest such an event.  Nonetheless, the Second Circuit did state that the use of the John F. Kennedy Airport to attend meetings was an overt act in furtherance of a conspiracy, and those face-to-face meetings were a regular part of the fraudulent conduct.  As such, the conspiracy convictions would be upheld. 

Later, once back at the trial level, EDNY Judge Weinstein suggested to the defendant that it may be in his best interest not to continue to object to venue on remand.  The broker accepted the sage advice of Judge Weinstein.

This case illustrates the government’s reach over various venues where individuals may find themselves engaging in business activity.  Although it is generally accepted that the district where criminal activity occurs will support venue, this case demonstrates that there are limits to the government’s “long-arm of the law” approach.