2015 Mid-Year Securities Enforcement Update

July 13, 2015

Midway through the 2015 calendar year, the SEC Enforcement program has often been finding itself garnering more public attention for the manner in which it sources, litigates, and resolves cases than for the cases themselves.  The Division of Enforcement’s increased reliance on administrative proceedings rather than federal court actions for contested enforcement actions, a topic of discussion in these alerts throughout the current administration, became, if anything, even more contentious in recent months.  Litigants filed a number of constitutional challenges to the SEC’s administrative process, and while, as in the past, most were unsuccessful, one federal court stepped in and blocked an administrative proceeding in its tracks.

Similarly, the SEC’s reliance on paid whistleblowers in the wake of Dodd-Frank has continued to pick up steam.  Most notably, the SEC filed a high-profile action penalizing a public company for the use of employee confidentiality agreements which, in the eyes of the SEC, could have deterred potential whistleblowers from coming forward.

In terms of the SEC’s enforcement case mix, after switching gears in 2013 and pledging to bring more attention to public company reporting, the number of financial reporting cases remains relatively small, though a few significant cases were filed in recent months.  Instead, the Division remains focused on cases against investment advisers and brokers, while the steady flow of cases against financial institutions arising out of the financial crisis appears, somewhat surprisingly, to still be bearing fruit even at this late date.

I.    Significant Developments

            A.    Use of Administrative Proceedings Continues to Stoke Controversy

The controversy over the SEC’s growing use of administrative proceedings (APs) as an alternative to federal court actions continued unabated in the first half of 2015.[1]  A number of respondents in SEC APs filed civil injunctive actions seeking to block the proceedings, raising a number of constitutional and fairness challenges.  Most of these efforts have proved unsuccessful; some courts have found they lacked jurisdiction to interfere in an ongoing SEC AP, requiring that any constitutional questions be addressed within the confines of the AP itself,[2] while other courts have rejected the constitutional claims on the merits.[3] 

However, bucking this trend, an Atlanta court in June enjoined an ongoing SEC AP.  In Hill v. SEC, an individual alleged by the SEC to have engaged in insider trading filed a lawsuit in the Northern District of Georgia challenging as unconstitutional the SEC’s decision to bring its case against him in an AP.  The court held that the individual had shown a likelihood of success on the merits and temporarily enjoined the AP because the SEC administrative law judge (ALJ) hearing his case was an "inferior officer" improperly appointed in violation of the Appointments Clause of the Constitution.[4]  Although this decision constituted a defeat for the SEC, its long-term impact on the SEC’s use of APs is questionable, as the court in Hill rejected a number of more fundamental constitutional challenges to the SEC’s use of APs and acknowledged that its Appointments Clause holding "may seem unduly technical, as the ALJ’s appointment could easily be cured by having the SEC Commissioners issue an appointment or preside over the matter themselves."  The SEC has since filed a motion to stay the district court injunction pending an appeal.

Recent reports questioning the impartiality of SEC ALJs have further inflamed the controversy.  A May 6 Wall Street Journal article discussing the SEC’s high success rate in APs quoted a former SEC ALJ as saying that the SEC’s Chief ALJ had "questioned my loyalty to the SEC" after finding too often in favor of defendants.[5]  According to the former ALJ, the SEC ALJs were expected to put "the burden [] on the people who were accused to show that they didn’t do what the agency said they did."  The article noted that one current SEC ALJ had held defendants liable on at least some charges in every case that had come before him.  Notably, an investment adviser who recently lost a litigated AP before that ALJ appealed his decision, arguing in part that the SEC’s administrative forum lacked impartiality.  While the SEC did not grant the respondent’s request to depose the ALJ, the agency "invited" the ALJ to "submit an affidavit addressing whether he has had any communications or experienced any pressure similar to that" alleged by the former ALJ in the Wall Street Journal article.[6]  On June 9, the ALJ responded in a single-sentence email, "I respectfully decline to submit the affidavit requested."[7]

Perhaps in response to some of the public discussions surrounding the agency’s use of APs, the Division of Enforcement released written guidance in May addressing the factors considered in determining whether an action will be brought in an AP or in federal court.  The four factors that the SEC stated that it considers are (1) the availability of the desired claims, legal theories, and forms of relief in each forum; (2) whether any charged party is a registered entity or an individual associated with a registered entity; (3) the cost-, resource-, and time-effectiveness of litigation in each forum; and (4) the fair, consistent, and effective resolution of securities law issues and matters.[8]  While the guidance does represent an important first step in introducing some degree of transparency into the forum selection process, it does not go very far in addressing many of the fairness and other key concerns associated with the SEC’s growing use of APs, and is therefore unlikely to dampen the continued controversy surrounding this issue.

            B.    Whistleblowers

The SEC’s whistleblower program continued to grow in prominence in the first half of the year.  While no recent awards have approached the massive $30 million award to a single claimant announced in late 2014, there have been many "firsts" in the realm of whistleblower claims–the first award to an officer where compliance personnel learned of a fraud and failed to act; the first award to a whistleblower alleged to have been retaliated against for making a complaint; and the first enforcement action against a company for language in its confidentiality agreements that could impede the whistleblowing process.

On March 2, the SEC announced the first whistleblower award to a company officer.[9]  Typically, officers and directors are ineligible to receive a whistleblower award where they obtain information about potential misconduct through the report of another employee.  However, the whistleblower here was able to collect between $475,000 and $575,000 because of an exception to the rule that permits an officer who reports a wrongdoing to the SEC to recover where at least 120 days have passed since compliance personnel learned of the allegations and failed to take steps to address them. 

The following month, a compliance officer received over $1.4 million in connection with whistleblowing that resulted in an enforcement action against the compliance officer’s company.[10]  The SEC announcement did not provide details on the nature of the enforcement action resulting from the tip.  This is the second whistleblower award the SEC has made, since the 2011 launch of the whistleblower program, to an employee with either compliance or audit responsibilities.

Also in April, the SEC announced its first award to a whistleblower who experienced retaliation.[11]  Upon learning that the whistleblower had reported potential misconduct to the SEC, the company was alleged to have retaliated against the whistleblower in various ways, such as removing the whistleblower from their position, changing the whistleblower’s job function, and paring down the whistleblower’s job responsibilities. 

These recent awards bring the number of whistleblowers who have received awards to 17, with payouts exceeding $50 million.

One of the more noteworthy SEC actions so far this year was an enforcement action filed in April against a company for its use of restrictive language in its confidentiality agreements.[12]  According to the SEC, in the midst of an internal investigation, the company required witnesses to sign agreements that they would not discuss the subject matter of their interview with anyone without prior authorization of the company’s legal department.  This "pre-notification requirement" was found by the Commission to be a violation of Rule 21F-17, promulgated under Dodd-Frank, which prohibits any actions to impede whistleblowers from communicating with the SEC about potential securities law violations.  Notably, the SEC expressly noted that there were no instances in which the agreements had been invoked to prevent whistleblowers from coming forward; nonetheless, the company (which had already modified its agreements) agreed to settle the charges, without admitting or denying wrongdoing, by paying a $130,000 penalty.[13]

Public reports suggest that the SEC has since broadened its review of company confidentiality agreements, sending letters to numerous entities seeking copies of employment contracts, non-disclosure agreements, and similar documents.  The initiative has led many public companies and financial institutions to review their own agreements, while precipitating some industry concern that the SEC’s actions represent an overly broad interpretation of the Dodd-Frank whistleblower provisions and constitute regulation through enforcement.[14]  While SEC Chair Mary Jo White has pushed back on such criticism by stating that the SEC’s actions are not a wholesale attack on the use of confidentiality agreements,[15] significant concern remains about the scope of the SEC’s ongoing review of such documents.

            C.    Corporate Waivers

The issue of waivers for large financial institutions which would otherwise be subject to regulatory disqualifications based on settlements with the government grew increasingly heated in the first half of 2015.  Under various federal securities laws, companies charged by the SEC, the Department of Justice, or other regulators may be automatically precluded from availing themselves of certain exemptions from regulatory requirements.  For example, under the "bad actor" rule, parties to SEC enforcement actions may be denied exemptions from registering private securities offerings; similarly, public companies could lose their "well-known seasoned issuer" ("WKSI") designation, which permits them to bypass SEC approval for various capital-raising activities.  Waivers of these regulatory bars, historically viewed as somewhat routine, have become tremendously divisive among the Commissioners.

In February, Commissioners Luis Aguilar and Kara Stein issued a joint statement expressing their disagreement with the SEC’s decision to grant a waiver from the bad actor rule following a firm’s settlement of an SEC proceeding relating to improper sales of penny stocks.[16]  In their dissent, Commissioners Aguilar and Stein noted that the firm had faced prior regulatory action and the grant of a waiver based on its promise to hire an independent compliance consultant, which the SEC’s order did not require, was "a dangerous precedent."

A few months later, Commissioner Stein wrote a sharply worded dissent in response to the agency’s grant of various regulatory waivers to multiple banks who settled with the Department of Justice in the wake of an investigation into the alleged manipulation of exchange rates in the global foreign currency spot market.[17]  She highlighted the number of waivers the banks had been granted over the past nine years, stating: "This type of recidivism and repeated criminal misconduct should lead to revocations of prior waivers, not the granting of a whole new set of waivers." 

Meanwhile, it has been reported that one financial institution withdrew its request for a waiver it had sought following a settlement relating to tax law violations after ostensibly being informed by the SEC staff that such a waiver would not be approved.[18]

II.    Public Company Reporting and Accounting

            A.    Financial Fraud and Internal Controls Cases

Two years after the Enforcement Division’s public roll-out of its Financial Fraud Task Force, the number of public company accounting fraud cases remains relatively low, but does appear to be climbing.

On May 12, the SEC announced fraud charges against ITT Educational Services Inc., as well as its CEO and CFO, alleging that they concealed from investors and auditors the poor performance of ITT’s student loan programs and resulting repayment obligations amounting to hundreds of millions of dollars.[19]  The defendants are litigating the matter in federal court. 

In June, the SEC settled charges against Computer Sciences Corp. for allegedly concealing the impact of losses on a multi-billion dollar contract by inappropriately adjusting its accounting models.[20]  The SEC also alleged that the company had engaged in earnings management by using "cookie jar" reserves and failing to appropriately record expenses. Without admitting or denying the allegations, the company agreed to pay a $190 million penalty.  Its former CEO agreed to a clawback of $3.7 million in compensation, and the former CFO agreed to a clawback of $369,100 in compensation and a $175,000 penalty.  Six other individuals were charged as well, with three settling and three opting to litigate.

In April, the SEC brought charges against the former controller of the Japanese subsidiary of a Chicago electronics manufacturer, alleging that he engaged in unauthorized equity trading using the company’s brokerage accounts that resulted in losses of over $110 million.[21]  In a scheme that spanned almost two decades, the individual is alleged to have concealed massive trading losses by taking out unauthorized and undisclosed loans, while using the proceeds to replenish account balances.  The trader entered into a settlement agreement with the SEC in which he admitted wrongdoing and was permanently barred from serving as an officer or director of a publicly traded company.  The SEC also instituted settled administrative proceedings against the company for its inadequate internal controls.

The SEC also filed a number of smaller accounting and disclosure cases.  On February 5, the SEC settled charges against Chicago-based Broadwind Energy, its former CEO, and its CFO for several improper revenue recognition practices and inadequate disclosures, including the delayed recording of a $58 million impairment resulting from reduced business from two key customers.[22]  During the delay, the company conducted a public offering of stock; after the impairment was recorded, the company’s stock price fell by 29 percent.  The company agreed to pay a $1 million penalty, and the two executives paid a total of $700,000 in disgorgement and penalties.

In March, the SEC filed a settled proceeding against the former VP of Finance of a specialty food distributor, alleging that he had improperly adjusted accounting entries for inventory amounts in order to increase reported profit margins to be consistent with historical margins.[23]  The same month, the SEC filed a litigated action against a Chinese construction company and two of its officers, alleging that they failed to disclose the resignation of the company’s CFO, and forged his signature in various filings.[24]  And on April 1, the SEC filed a settled action against the CEO of a North Carolina telecommunications company for fraudulently inflating the company’s revenues and earnings to command a higher purchase price in an acquisition.[25]  The executive agreed to be barred from serving as a public company officer or director for 10 years. 

            B.    Executive Perks and Compensation

In the early months of 2015, the SEC addressed several instances of alleged misappropriation and fraudulent concealment by corporate officers.  One of the more attention-grabbing cases was the SEC’s March action against the former CEO of technology firm Polycom Inc., alleging that he used nearly $200,000 of corporate funds for undisclosed perks, including extensive travel, entertainment, meals and gifts.[26]  In addition to the litigated case against the executive, the SEC brought a settled action against the company, alleging that it had failed to maintain sufficient internal controls over its expenses.  Polycom agreed to pay $750,000 to settle the charges, without admitting or denying the SEC’s findings.

In February, the SEC brought a settled action against a biotechnology company and its CEO, alleging that the CEO issued millions of shares of the company’s stock to accounts he secretly controlled, netting over $600,000 for himself and his family, and falsely recorded the sales in the company’s accounting records.[27] 

Finally, on the remedies front, the SEC brought another of its periodic stand-alone clawback cases, demanding the return of compensation from corporate executives even in the absence of charges of wrongdoing by the individuals.  In February, the SEC announced a settlement with two former CFOs of Saba Software, a company charged in 2014 with accounting fraud.  In the follow-up action, the two financial officers agreed to return bonuses and stock sale profits even though neither had been personally accused of misconduct by the SEC.[28]  In related news, the SEC inched forward in its rulemaking under Dodd-Frank requiring the agency to craft regulations regarding clawbacks of incentive-based compensation.  Under the proposed rule, national securities exchanges and associations would be required to establish listing standards mandating companies to adopt clawback policies.[29]

            C.    Financial Crisis Cases

Some seven years after the 2008 mortgage crisis, the SEC has continued to roll out yet more actions against public companies for their reporting of crisis-related losses.  In January, First National Community Bancorp Inc. and its former principal financial officer agreed to pay penalties totaling $195,000 to settle claims that the holding company materially understated losses for its investment securities portfolio for certain annual and quarterly reports filed in 2010.[30]  In a settled proceeding instituted in April, the SEC required the former CEO and CFO of a now-defunct financial holding company, both CPAs, to pay a total of $60,000 in penalties for allegedly underreporting significant 2009 loan losses for three large loans.[31]  And in May, a global bank settled the SEC’s charges that, in 2008 and 2009, it overstated the value of a derivatives portfolio by understating the "gap risk" posed by certain leveraged trades.  The SEC charged that this leverage left the bank exposed to a higher degree than it had disclosed.[32]  As part of the settlement, the bank agreed to pay a penalty of $55 million.

            D.    Auditor and Accountant Cases

The SEC took a number of actions involving auditors in recent months.  For example, in February, the SEC charged an audit firm and its owner with failing to adhere to professional standards in the audit of a broker-dealer’s financial statements that overstated the firm’s net capital by over 350%.[33]  According to the SEC, the financial statements overstated the firm’s assets by inflating the size of its positions in some securities and understated the firm’s liabilities by omitting negative balances in its account with a clearing broker. 

Also in February, the SEC finally settled its long-running case against China-based affiliates of the "Big Four" accounting firms, based on their refusal to produce workpapers related to various Chinese issuers under SEC investigation.  Notwithstanding Chinese law limiting the ability of the firms to provide the documents, an SEC administrative law judge issued a blistering ruling against the auditors in 2014, among other things ordering the firms suspended from practicing before the Commission for six months.[34]  Recognizing the agency’s recent progress in obtaining the documents, the SEC settled with the firms, which each agreed to pay $500,000 and admit their refusal to turn over documents (without admitting or denying the SEC’s findings).[35] 

Finally, also during the course of a busy February, the SEC initiated several proceedings to sanction accountants for violating prior disciplinary orders.  The SEC filed applications in the U.S. District Court for the Eastern District of New York against David Rivard, alleging that Rivard violated a prior order suspending him from practicing before the SEC as an accountant and seeking to hold him in contempt of a related monetary judgment.[36]  Rivard had been suspended for his role in the 2014 Computer Associates accounting fraud case.  The Commission also instituted administrative proceedings against a CPA for violating the Sarbanes-Oxley Act by working for an issuer as a contract CFO after the PCAOB barred her from practicing as an accountant or financial manager.  In addition, the Commission charged the issuer and its CEO for their association with the barred CPA.[37]

III.    Investment Advisers and Funds

            A.    Conflicts of Interest

In the investment adviser space, the SEC has continued to focus on disclosures around conflicts of interest.  In January, the SEC instituted settled proceedings against a public pension fund adviser which failed to properly disclose a loan made to its chief executive officer by a third party investment adviser it had recommended to certain of its public pension clients.[38]  The SEC further alleged that the firm made false and misleading disclosures regarding the loan once it was discovered by the firm’s in-house compliance team.  The firm agreed to pay $150,000 to settle the charges.

Similarly, in March, the SEC charged New York private fund manager Stilwell Value and its principal with failing to adequately disclose conflicts of interest presented by inter-fund loans of approximately $20 million made between certain private funds under their management.[39]  Without admitting or denying the allegations, the parties agreed to settle the charges by paying $350,000 in penalties and $239,157 in disgorged management fees, while Mr. Stilwell also agreed to a one-year bar from association with any broker or investment adviser.[40]

In April, the SEC instituted a settled administrative proceeding against BlackRock Advisors LLC and its former chief compliance officer.[41]  The agency alleged that the firm had failed to disclose a conflict of interest created by the outside business activity of a top-performing portfolio manager.  Without admitting or denying the allegations, BlackRock agreed to pay a $12 million penalty and to retain an independent compliance consultant to conduct an internal review.

In May, the SEC charged the principal of venture capital firm Oak Investment Partners with illegally profiting by arranging for funds managed by the firm to pay inflated prices for two investments and by failing to disclose his beneficial interest in a company with which an Oak fund transacted business.[42]  The SEC alleged that the defendant transferred approximately $27.5 million in illegal profits to accounts under his control at the expense of his firm’s investors.  The SEC also obtained a $55 million asset freeze.  In a similar matter, the SEC in June filed a litigated action against a Massachusetts adviser and its owner for investing over $17 million in client assets in four Canadian penny stock companies in which the owner had undisclosed financial interests.[43]

And in late June, the SEC lodged "cherry-picking" claims against a Wisconsin investment adviser and its owner, alleging that they allocated profitable trades to proprietary accounts while allocating less favorable trades to client accounts.[44]  The SEC reported that the case arose out of a "data-driven enforcement initiative" aimed at using statistical analysis to identify incidents of improper cherry-picking; the matter is being litigated.

            B.    Fees, Expenses, and Other Disclosures

Expense disclosures remained a priority issue for the SEC’s investment adviser enforcement docket.  In April, the SEC instituted settled administrative proceedings against a Southern California hedge fund advisory firm, two of its associates, and its auditor.[45]  The SEC alleged that, notwithstanding disclosures that the fund would bear all of the expenses incurred by it or on its behalf, the firm had failed to adequately disclose that the fund had paid for the advisor’s rent, salaries and benefits.  The parties agreed to settle the charges without admitting or denying the SEC’s allegations.  And in late June, the SEC instituted settled proceedings against a large private equity firm, alleging that it misallocated expenses associated with broken deals.[46]  The action came despite the SEC’s recognition that the allocation practices had changed in 2011, and the firm had made a partial repayment to fund investors.  The firm neither admitted nor denied the allegations.

In March, the SEC brought litigated administrative proceedings against the advisers to several distressed company funds over allegations that they hid the poor performance of loan assets in three of their collateralized loan obligation (CLO) funds.[47]  The SEC alleged that the advisers failed to value fund assets using the methodology described to investors in the funds’ offering documents, resulting in inflated valuations and advisory fees. 

In February, the SEC brought a settled administrative action against Logical Wealth Management, Inc. and its owner.[48]  The SEC alleged that over a five-year period, the Wyoming-based adviser overstated its assets under management in filings with the Commission, thereby creating the false appearance that it qualified for registration with the SEC.  In addition, the adviser allegedly failed to adopt and implement compliance policies and procedures and to maintain books and records and make them available to the Commission’s staff.  Under the settlement, the adviser’s registration was revoked and its owner was barred from the industry.

Notably, in a rare defeat for the SEC’s Division of Enforcement, an ALJ in June dismissed administrative proceedings against an investment adviser stemming from the firm’s alleged failure to disclose a fee arrangement to its clients.[49]  Judge James E. Grimes ruled that the Division failed to show that the respondents had violated the Investment Advisers Act by failing to tell certain clients about a commission the firm had received from the custodian for their clients’ assets.  In particular, the ALJ cited the co-owners’ "honest" demeanor under cross-examination and observed that it was "difficult to imagine them trying to defraud anyone, let alone their investment clients."

            C.    Mutual Fund Cases

In February, the SEC charged Water Island Capital LLC, an investment adviser to several alternative mutual funds, for maintaining approximately $247 million in cash collateral at broker-dealer counterparties instead of the funds’ custodial bank, as required by the Investment Company Act.[50]  The firm agreed to pay a $50,000 penalty to settle the charges. 

In May, the SEC initiated settled proceedings against Nationwide Life Insurance Company for violating pricing rules in its daily processing of purchase and redemption orders for variable insurance contracts and underlying mutual funds.[51]  The agency alleged that Nationwide intentionally delayed the delivery of customer orders in order to process the orders at the next day’s prices, in violation of Rule 22c-1 under the Investment Company Act.  In particular, the SEC found that Nationwide arranged for a private courier to travel to the post office three times a day to retrieve mail for its other lines of business, but specifically instructed the courier not to retrieve variable contract mail at those times.  Without admitting or denying the violation, Nationwide agreed to a settlement that included an $8 million penalty.

In June, the SEC instituted a settled administrative proceeding against Commonwealth Capital Management ("CCM"), a mutual fund adviser, as well as the firm’s majority owner and three former trustees of a mutual fund that CCM advised, for providing incomplete or inaccurate information to two mutual fund boards, including information relating to advisory fees paid by comparable funds.[52]  The former trustees allegedly requested such information from the adviser but approved advisory contracts without having all of the information they requested as reasonably necessary to evaluate the contracts.  The adviser and its principal agreed to pay a $50,000 penalty, and the trustees each agreed to pay penalties in the amount of $3,250. 

            D.    Compliance Deficiencies

The SEC has continued to stress the importance of developing and abiding by effective compliance programs with a number of enforcement actions in the first half of 2015.  In January, the SEC charged Du Pasquier & Co. with failing to maintain adequate investment advisory compliance policies and procedures and to ensure proper disclosure of its investment advisory business from 2007 until July 2014, when it ceased operations.[53]  Specifically, the agency faulted the firm for "relying on an ‘off-the-shelf’ template for a compliance manual without modifying certain sections" to reflect the nature of its own business, as well as for failing to adequately review personal securities transactions.  The adviser agreed to pay a penalty of $50,000 to settle the charges.  

Similarly, in June, the SEC brought settled claims against a Chicago adviser to high net worth individuals, alleging that the firm failed to conduct timely annual compliance program reviews and failed to implement and enforce provisions of its compliance policies and code of ethics.[54]  The SEC further alleged that the firm’s president failed to dedicate sufficient resources to compliance.  The firm agreed to pay penalties and to engage in various remedial measures.

In March, the SEC charged two affiliated investment advisers, their Chief Operating Officer, and their outsourced chief compliance officer with failing to file timely and accurate reports and failing to maintain required books and records.[55]  The SEC alleged that in addition to maintaining unsegregated records that were mixed together with those of affiliated entities, the firms overstated their assets under management by 190%, and their total number of client accounts by over 340%.  And in June, the SEC brought settled claims against an auditor to an investment adviser for failing to complete annual surprise examinations of the adviser as required by the custody rule.[56]  (The SEC had previously sued the adviser for various antifraud and registration violations.)  The principal of the audit firm settled the proceedings, agreeing to pay a penalty and to be barred from appearing before the SEC as an accountant, while the firm agreed to a 3-year bar from appearing before the SEC.

Another June enforcement action generated significant debate among the Commissioners themselves.  In addition to suing the former president of a DC-based investment adviser for allegedly stealing client funds, the SEC brought settled proceedings against the firm and its Chief Compliance Officer for, among other compliance deficiencies, failing to supervise the firm’s president and review client cash flows.[57]  The matter precipitated a public dissent from Commissioner Daniel Gallagher, who voiced concern about recent enforcement actions against CCO’s, noting that the Commission’s stance was overly aggressive.[58]  This drew a public response from fellow Commissioner Luis Gallagher, who countered that the Commission was supportive of the role of CCOs and recent actions should not be interpreted as sending a contrary message.[59]

Finally, in an action emphasizing the importance of its bar orders, the SEC in February denied a former hedge fund manager’s request to associate with a registered investment adviser.[60]  Pursuant to an April 2014 settlement stemming from misappropriation allegations, the SEC had barred adviser Matthew D. Sample from the industry.  Just two months later, Sample applied for the Commission’s consent to associate with the investment adviser for which he had previously worked.  According to the application, Sample sought employment in order to make "full and complete restitution to all of his investors."  The Commission denied Sample’s application, finding that a barred individual’s ability to earn more if employed in the securities field did not qualify as an extraordinary circumstance supporting a grant of relief.

IV.    Brokers and Financial Institutions

            A.    Myriad Trading and Disclosure Issues

The SEC’s Division of Enforcement endeavored to bring a wide variety of cases challenging increasingly complex securities trading practices, typically alleging various disclosure failures.

In January, the SEC instituted settled proceedings against two stock exchanges for allegedly failing to describe certain features of their order types in sufficient detail.[61]  The exchanges published rules that described a single process for handling buy and sell orders.  However, the exchanges evidently offered three variations on this process, two of which may have been disclosed only to certain members.  Without admitting or denying the allegations, the exchanges agreed to pay a penalty and to develop new policies relating to the development and communication of information regarding order types.

Also in January, the SEC instituted settled proceedings against UBS Securities LLC relating to the operation and marketing of the firm’s private stock trading system.[62]  The SEC alleged that UBS allowed certain traders to place orders in increments of less than one cent, a practice prohibited under Regulation NMS.  Further, it was alleged that these orders were placed ahead of orders submitted at whole-cent increments, and that UBS failed to adequately disclose the functionality of this order type to all subscribers.  Without admitting or denying the allegations, UBS agreed to pay around $14 million to settle the charges.

Also falling under the nondisclosure umbrella was the SEC’s first-ever action against a major ratings firm.  In January, the agency filed a settled action against Standard & Poor’s Ratings Services ("S&P") for false and misleading statements in connection with its ratings of mortgage-backed securities.[63]  The firm agreed to pay over $58 million to settle charges that it loosened its rating criteria and then obscured these changes from investors.  In three separate orders, the SEC accused S&P of: 1) misrepresenting its methodology for rating "conduit fusion" commercial mortgage-backed securities transactions: 2) publishing an article about a 2012 overhaul of the firm’s ratings criteria that relied on flawed and outdated data; and 3) failing to implement effective internal controls in the surveillance of residential mortgage-backed securities ratings.  The SEC noted that S&P self-reported the RMBS-related conduct and cooperated with that investigation, resulting in a reduced penalty.

In February, the SEC charged New York broker VCAP Securities and its CEO with misconduct in connection with auctions to liquidate collateralized debt obligations ("CDOs").[64]  According to the SEC, the broker was contractually prohibited from bidding in the CDO auctions it managed, but they fraudulently engaged a third-party to secretly bid just above the prices offered by other bidders in order to secure valuable bonds for a related entity.  Once the auctions were won by the secret bidder, the CDOs were sold back to VCAP’s investment adviser affiliate.  VCAP and its CEO agreed to pay nearly $1.5 million to settle the charges, and the CEO agreed to be barred from the securities industry for at least three years.

Finally, in June, the SEC announced settled claims against a Silicon Valley firm that was offering and selling security-based swaps contracts without adhering to the regulatory requirements for a derivatives exchange.[65]

            B.    Life Settlements

The SEC confirmed its aggressive stance in policing the sales of "life settlement" investments, insurance policy interests which allow investors to receive a share of a policy holder’s death benefit.  In April, the SEC charged Pacific West Capital and its owner with fraud in the sale of life settlement investors by allegedly making the investments appear more successful than they actually were, exaggerating annual returns, and minimizing the risks of these investments (such as increased premium payments when insured individuals lived longer than anticipated).[66]  The SEC further charged several sales agents with failing to register as securities brokers.

Further, in May, the SEC brought charges against a Texas firm for falsely telling purchasers of life settlement interests that the investments were "guaranteed," as "safe as CDs," and "federally insured."[67]  According to the SEC, the firm’s principals, who hosted a financial talk radio show, created a "net worth calculator" which inflated potential investors’ net worth so that they would qualify for the investments.

            C.    Penny Stock Sales

The SEC settled charges with Oppenheimer & Co. related to its role in a previously-charged penny stock matter.[68]  The SEC charged that Oppenheimer missed red flags that its Bahamian customer was improperly executing penny stock sales in the United States without properly registering as a broker.  The SEC further alleged that the firm failed to file the required Suspicious Activity Reports ("SARs") to report potential misconduct by its customer.  In settling the case, Oppenheimer admitted wrongdoing, and agreed to pay a total of $20 million ($10 million to the SEC and $10 million in a parallel proceeding brought by FINCEN). 

Similarly, the SEC settled charges with a Chicago-area company and its executives after they sold more than nine billion shares of penny stocks through stock-based loans, block trades, and other transactions without registering with the SEC as a broker-dealer.[69]  Without admitting or denying the charges, International Capital Group, its two co-founders, and its former chief operating officer, agreed to pay more than $4.3 million to settle the charges.

            D.    Registration Violations

As noted in some of the above cases, the SEC spent much of 2015 scrutinizing the registration status of various brokers.  In March, the SEC charged nearly two dozen companies and individuals for allegedly trading securities without registering as broker-dealers.[70]  According to the SEC, a Chicago-based trading firm entered into agreements with third parties to buy corporate bonds, which it re-sold for a small profit, without such firms being properly registered.  Without admitting or denying the allegations, the parties agreed to pay nearly $5 million in disgorgement plus approximately $1 million in penalties.

And in June, the SEC charged two firms with brokering more than $79 million in foreign investments without registering as securities brokers.[71]  According to the SEC, the firms solicited investments in the government’s EB-5 Immigrant Investor Program, which provides foreign investors who invest in U.S. businesses a path to legal residency.

            E.    Compliance and Supervision

In a June case stemming from short-selling deficiencies, Merrill Lynch agreed to implement further internal compliance and controls in order to more timely update its easy-to-borrow lists ("ETB").[72]  The ETB list, which is updated each day, contains the names of stocks that a broker believes can be easily borrowed by prospective short sellers.  The SEC alleged that Merrill Lynch’s electronic systems continued executing trades based on the morning’s ETB list, even though the information had become stale.  Without admitting or denying the allegations, Merrill Lynch agreed to pay more than $9 million and to engage an independent compliance consultant to conduct a comprehensive review of the firm’s policies, procedures, and practices for dealing with short sale execution.

In March, the SEC charged a Texas-based brokerage firm, H.D. Vest Investment Securities, with failing to have proper policies in place to monitor its registered representatives’ outside business activities.[73]  In certain instances, the representatives, who functioned as independent contractors and maintained outside tax businesses in addition to their securities activities, were alleged to have defrauded their brokerage customers.  H.D. Vest was required under applicable regulatory provisions to make certain calculations and, if necessary, deposit funds into a reserve account for the benefit of any customers who were subject to fraud, but the firm failed to do so.  The firm agreed to pay a $225,000 penalty and retain an independent compliance consultant to improve its supervisory controls. 

V.    Insider Trading

            A.    Classical Insider Trading and Tipping

After several years of high-profile cases involving large-scale hedge fund trading rings and expert networks, the SEC returned to its roots, focusing primarily on more traditional cases against corporate insiders and smaller circles of friends or family members.

For example, in February, the SEC brought charges against the vice president of construction operations at a Baton Rouge-based Fortune 500 company who allegedly tipped his brother-in-law about an impending acquisition.[74]  The vice president settled the case, agreeing to pay disgorgement and penalties and to be barred from serving as an officer or director of a publicly-traded company for ten years.  Both were also charged criminally by the U.S. Attorney’s Office for the Middle District of Louisiana. 

Keeping with the brother-in-law theme, the SEC in June charged the IT Director of a biotech company with tipping his brother-in-law, a stockbroker, about two pharmaceutical trials, a licensing agreement for a cancer drug, and, later, the forthcoming acquisition of the company.[75]  The brother-in-law in turn tipped another friend, also a stockbroker.  The tips netted about a half-million dollars.  All three agree to settle with the SEC, with the two brokers being barred from the securities industry and also facing related criminal charges.

Also in June, a former board member or a Rhode Island bank was charged with tipping friends and business associates with inside information about the bank’s potential acquisition.[76] Two tippees settled the SEC’s charges, with the remaining parties litigating.

And in yet another case filed in June, the SEC announced a $2.8 million settlement with a Swiss trader who had received nonpublic information regarding the acquisition of AuthenTec Inc., a fingerprint scanning technology company, by Apple Inc. from a corporate insider.[77]  The SEC did not identify the source of the information.  

Of course, the SEC continues to highlight cases involving broader insider trading schemes.  In February, the SEC charged four defendants for participating in a years-long insider trading ring.[78]  According to the SEC, an individual who had worked in the finance department of two different Silicon Valley companies repeatedly tipped his friend, an investment banker, with nonpublic information about earnings results and acquisitions.  They are alleged to have concealed the conduct by trading in other friends’ brokerage accounts and using disposable cell phones.  The defendants agreed to settle, paying more than $1.6 million in disgorgement, interest, and penalties.

In May, the SEC charged a managing director at an investment bank with allegedly tipping his father, a certified accountant and CFO of a technology company, about planned mergers and acquisitions involving the bank’s clients.[79]  According to the SEC, the father and son generated $1.1 million by trading in a half-dozen companies over a four-year period, exchanging information through coded email messages (ostensibly about golf) and trading through a third person’s brokerage account.  The father purportedly recruited a colleague to hide the illicit profits in the colleague’s trading account, from which the colleague provided small payments to the father to avoid detection.  The U.S. Attorney’s Office for the Southern District of New York also brought parallel criminal charges against the father and son.

And in a more high tech scheme, the SEC in January charged two former employees of a credit card issuer with running an insider trading scheme over several years based on searches of their employer’s confidential customer database.[80]  According to the SEC, the defendants were able to analyze aggregated sales data based on credit card activity and use the information to trade in the shares of various retail companies.  The SEC later froze the assets of the traders, reporting at the time that they had netted over $2.8 million in profits by placing thousands of trades in the stock of over 170 companies.[81]  

            B.    Misappropriation Cases

The SEC filed several cases involving the misappropriation of confidential information for trading purposes, sometimes from significant others.  In April, the SEC charged two longtime friends with misappropriating information about an impending acquisition of one tire company by another.[82]  According to the SEC, the husband of Apollo Tyres’ general counsel allegedly told his friend of the planned purchase of Cooper Tire after learning of the deal from his wife.  The friend purportedly bought stock in the target corporation, netting over $1.1 million in proceeds once the deal was announced.  In its complaint, the SEC alleges that the friend diverted $220,000 to a charity controlled by the husband as payment for the tip.  The U.S. Attorney’s Office for the District of Massachusetts brought a parallel criminal prosecution across against both of the individual defendants.

Earlier this year, the SEC sued a Pennsylvania resident for misappropriating information about a pending insurance company merger from his son, who had in turn learned the information from his girlfriend, a legal assistant at a law firm advising on the transaction.[83]  The father traded on the information and tipped several others.  He settled the matter, agreeing to pay both his own and his tippees’ gains, plus a penalty equaling the disgorgement amount.

The same month, the SEC commenced a litigated administrative proceeding against an Atlanta man accused of netting about $740,000 in trading profits after learning about an impending tender offer for IT provider Radiant Systems.[84]  According to the SEC, the trader knew that his friend who had shared the information in confidence was a close friend of a Radiant senior executive.

The SEC also instituted settled proceedings against an accountant who was engaged by a corporate executive to estimate his personal tax liability flowing from the potential sale of his company.[85]  According to the SEC, the executive told his friend and personal accountant that his company was potentially going to be acquired at a 50% premium; the accountant purchased shares in the company, netting around $130,000 when the acquisition was later announced.  The accountant, a licensed CPA, agreed to pay disgorgement and penalties in excess of $250,000.

            C.    Emergency Actions

In June, the SEC filed another of its periodic emergency actions to freeze the account of foreign traders based on suspiciously-timed trading, filing suit before it had identified the source of the allegedly insider information.  In this instance, the SEC froze the assets of a Chinese trader who allegedly reaped more than $1 million in profits after trading on the stock of a China-based company prior to its announcement of a buyout offer.[86] 

            D.    Post-Newman Decisions

Finally, there have been a number of developments in the wake of 2014’s Second Circuit decision in US v. Newman, in which the court narrowed the scope of tipper-tippee liability.[87]  In an April 2015 order, Judge Jed Rakoff of the Southern District of New York denied the motion to dismiss filed by two downstream tippees who had allegedly traded in advance of a merger they learned about from the roommate of a lawyer working on the transaction.[88] The defendants argued that they had no knowledge or awareness of any benefit flowing to the original tipper.  However, the court ruled that "[w]hile a person is guilty of criminal insider trading only if that person committed the offense ‘willfully,’ i.e., knowingly and purposely, a person may be civilly liable if that person committed the offense recklessly, that is, in heedless disregard of the probable consequences."  

An SEC ALJ also confronted the scope of Newman, declining to grant respondents’ motion for summary judgment in a case where the SEC did not allege any pecuniary gain to the tipper, but rather that the tipper received "friendship" and occasional "career advice" from the tippee.[89]  The ALJ ruled that, "[a]lthough mere friendship, particularly of a casual or social nature, will not be enough for the Division to prevail . . ., it is in my mind an open question whether and what sort of friendship may satisfy the personal benefit element in this matter."   

Most recently, in early July (as this report was going to press), the Ninth Circuit Court of Appeals (with the above-referenced Judge Rakoff sitting by designation) issued a ruling apparently at odds with Newman.  In US v. Salman, the court held that a "gift" of nonpublic information to the alleged tipper’s brother constituted sufficient personal benefit to the tipper to support an insider trading charge; the Ninth Circuit noted that, to the extent that Newman required a more pecuniary benefit, the Ninth Circuit declined to follow suit.[90]

VI.    Municipal Securities and Public Pensions Cases

After a busy 2014, the SEC’s actions involving municipal securities offerings appears to have slowed somewhat.  However, the first half of the year did see the fruits of a high-profile initiative.  On June 18, the SEC announced its first cases against underwriters under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.[91]  The Initiative, launched in March 2014, encourages municipal bond underwriters and issuers to self-report material misstatements and omissions in municipal bond offering documents in exchange for favorable settlement terms.  The SEC’s June 2015 announcement related to 36 underwriting firms that, between 2010 and 2014, had allegedly sold "municipal bonds using offering documents that contained materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations."  The firms had also allegedly failed to conduct adequate due diligence in connection with the bond offerings.  In settling the charges, each of the 36 firms agreed to pay civil penalties ranging from $40,000 to $500,000 and to retain an independent consultant to review its municipal securities underwriting due diligence policies and procedures.

Finally, the SEC’s Municipal Securities and Public Pensions Unit announced fraud charges against investment advisor Gray Financial Group and two of its executives for allegedly steering pension funds for Atlanta’s municipal workers, including its police and firefighters, into alternative investment funds offered by the investment advisor despite knowing that the investments did not comply with Georgia law regulating public pension fund investments.[92]  The SEC also alleged that the investment advisor and one of the executives made material misrepresentations to at least one client regarding the investments’ compliance with the law.  The SEC alleged that the investment advisor earned more than $1.7 million in improper fees from the pension fund clients.  The matter is being litigated in an administrative proceeding.


   [1]   This issue has been discussed at length in previous updates.  See, e.g., Gibson Dunn, 2014 Year-End Securities Enforcement Update (Jan. 12, 2015), available at www.gibsondunn.com/publications/Pages/2014-Year-End-Securities-Enforcement-Update.aspx.

   [2]   See, e.g., Tilton v. SEC, No. 15-CV-2472 (S.D.N.Y. June 30, 2015).

   [3]   See, e.g., Duka v. SEC, No. 15-CV-357 (S.D.N.Y. Apr. 15, 2015).

   [4]   See Hill v. SEC, No. 1:15-CV-1801-LMM (N.D. Ga. June 8, 2015).

   [5]   Jean Eaglesham, SEC Wins With In-House Judges, Wall St. J. (May 6, 2015), available at www.wsj.com/articles/sec-wins-with-in-house-judges-1430965803.

   [6]   In re Timbervest, Order Concerning Additional Submission, Admin. Proc. File No. 3-15519 (June 4, 2015), available at www.sec.gov/litigation/opinions/2015/ia-4103.pdf..

   [7]   Jean Eaglesham, SEC Judge Declines to Submit Affidavit of No Bias, Wall St. J. (June 11, 2015), available at blogs.wsj.com/moneybeat/2015/06/11/sec-judge-declines-to-submit-affidavit-of-no-bias/.

   [8]   Division of Enforcement Approach to Forum Selection in Contested Actions, available at www.sec.gov/divisions/enforce/enforcement-approach-forum-selection-contested-actions.pdf; see also Joel Cohen and Bennett Rawicki, Op-Ed: Welcome News from the SEC on Forum Selection, Nat’l Law Journal (June 1, 2015), available at www.gibsondunn.com/publications/Pages/Op-Ed-Welcome-News-from-the-SEC-on-Forum-Selection.aspx.

   [9]   SEC Press Release, Former Company Officer Earns Half-Million Dollar Whistleblower Award for Reporting Fraud Case to SEC (March 2, 2015), available at www.sec.gov/news/pressrelease/2015-45.html.

  [10]   SEC Press Release, SEC Announces Million-Dollar Whistleblower Award to Compliance Officer (April 22, 2015), available at www.sec.gov/news/pressrelease/2015-73.html.

  [11]   SEC Press Release, SEC Announces Award to Whistleblower in First Retaliation Case (April 28, 2015), available at www.sec.gov/news/pressrelease/2015-75.html.

  [12]   SEC Press Release, SEC: Companies Cannot Stifle Whistleblowers in Confidentiality Agreements (April 1, 2015), available at www.sec.gov/news/pressrelease/2015-54.html.

  [13]   For a more in-depth analysis, see Gibson Dunn, SEC Brings First Enforcement Action Challenging Employee Confidentiality Agreement Alleged to Impede Whistleblowers (Apr. 2, 2015), available at www.gibsondunn.com/publications/Pages/SEC–First-Enforcement-Action-Challenging-Employee-Confidentiality-Agreement-Alleged-to-Impede-Whistleblowers.aspx.

  [14]   See Letter from the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (Apr. 9, 2015), available at www.centerforcapitalmarkets.com/wp-content/uploads/2015/04/2015.-4.8-SEC-Whistleblower.pdfSee also Eugene Scalia, Op Ed: Blowing the Whistle on the SEC’s Latest Power Move, Wall St. J. (Apr. 5, 2015), available at www.wsj.com/article_email/eugene-scalia-blowing-the-whistle-on-the-secs-latest-power-move-1428271250-lMyQjAxMTI1NTEzMjAxMzI0Wj.

  [15]   SEC Speech, Mary Jo White, The SEC as the Whistleblower’s Advocate (Apr. 30, 2015), available at www.sec.gov/news/speech/chair-white-remarks-at-garrett-institute.html.

  [16]   SEC Public Statement, Dissenting Statement in the Matter of Oppenheimer & Co., Inc. (Feb. 4, 2015), available at www.sec.gov/news/statement/dissenting-statement-oppenheimer-inc.html.

  [17]   SEC Public Statement, Dissenting Statement Regarding Certain Waivers Granted by the Commission (May 21, 2015), available at www.sec.gov/news/statement/stein-waivers-granted-dissenting-statement.html.

  [18]   Sarah Lynch, Exclusive: Credit Suisse dropped SEC waiver request amid opposition – sources (May 4, 2015), available at www.reuters.com/article/2015/05/04/us-sec-se-waiver-idUSKBN0NP26820150504.

  [19]   SEC Press Release, SEC Announces Fraud Charges Against ITT Educational Services (May 12, 2015), available at www.sec.gov/news/pressrelease/2015-86.html.

  [20]   SEC Press Release, SEC Charges CSC and Former Executives With Accounting Fraud (June 5, 2015), available at www.sec.gov/news/pressrelease/2015-111.html.

  [21]   SEC Press Release, SEC Announces Fraud Charges Against Former Accounting Executive at Japanese Subsidiary (Apr. 9, 2015), available at www.sec.gov/news/pressrelease/2015-65.html.

  [22]   SEC Press Release, SEC Charges Chicago-Area Alternative Energy Company for Accounting and Disclosure Violations (Feb. 5, 2015), available at www.sec.gov/news/pressrelease/2015-24.html.

  [23]   In re Robert W. Elliot, Admin. Proceeding File No. 3-16413 (Mar. 2, 2015), available at www.sec.gov/litigation/admin/2015/34-74401.pdf.

  [24]   SEC Press Release, SEC Charges Chinese Issuer and Two Officers with Fraud (Mar. 4, 2015), available at www.sec.gov/litigation/litreleases/2015/lr23214.htm.

  [25]   SEC Press Release, SEC Charges North Carolina Executive With Fraud (Apr. 1, 2015), available at www.sec.gov/news/pressrelease/2015-55.html.

  [26]   SEC Press Release, SEC Charges Former Polycom CEO With Hiding Perks From Investors (Mar. 31, 2015), available at www.sec.gov/news/pressrelease/2015-53.html.  For more on the case, see Marc Fagel and Shailey Jain, SEC Hits Hard on Executive Perks, NYSE Governance Services (Apr. 30, 2015), available at www.gibsondunn.com/publications/Pages/SEC-Hits-Hard-on-Executive-Perks.aspx.

  [27]   SEC Press Release, SEC Charges New Jersey Biotechnology Company and Its Chief Executive Officer with Securities Fraud (Feb. 19, 2015), available at www.sec.gov/litigation/litreleases/2015/lr23201.htm.

  [28]   SEC Press Release, SEC Announces Half-Million Dollar Clawback from CFOs of Silicon Valley Company That Committed Accounting Fraud (Feb. 10, 2015), available at www.sec.gov/news/pressrelease/2015-28.html.

  [29]   SEC Press Release, SEC Proposes Rules Requiring Companies to Adopt Clawback Policies on Executive Compensation (July 1, 2015), available at www.sec.gov/news/pressrelease/2015-136.html.

  [30]   In re First National Community Bancorp Inc. and William Lance, Admin Proceeding No. 3-16363 (Jan. 28, 2015), available at www.sec.gov/litigation/admin/2015/33-9714.pdf.

  [31]   In re Donald J. Torbert, CPA and Nicole S. Stokes, CPA, Admin Proceeding No. 3-16513 (Apr. 27, 2015), available at www.sec.gov/litigation/admin/2015/34-74816.pdf.

  [32]   SEC Press Release, SEC Charges Deutsche Bank With Misstating Financial Reports During Financial Crisis (May 26, 2015), available at www.sec.gov/news/pressrelease/2015-99.html.

  [33]   In re Halpern & Associates LLC and Barbara Halpern, CPA, Admin. Proceeding No. 3-16399 (Feb. 23, 2015), available at www.sec.gov/litigation/admin/2015/34-74350.pdf.

  [34]   In re BDO China Dahua et al., Admin. Proc. Nos. 3-14872, 3-15116, Initial Decision (Jan. 22, 2014), available at www.sec.gov/alj/aljdec/2014/id553ce.pdf.

  [35]   SEC Press Release, SEC Imposes Sanctions Against China-Based Members of Big Four Accounting Networks for Refusing to Produce Documents  (Feb. 6, 2015), available at www.sec.gov/news/pressrelease/2015-25.html.

  [36]   SEC Litigation Release No. 23190, SEC Charges Accountant with Violating Commission Suspension Order (Feb. 6, 2015), available at www.sec.gov/litigation/litreleases/2015/lr23190.htm.

  [37]   In re Traci J. Anderson, CPA, Timothy W. Carnahan, and CYIOS Corporation, Admin. Proceeding No. 3-16386 (Feb. 13, 2015), available at www.sec.gov/litigation/admin/2015/33-9725.pdf.

  [38]   In re Consulting Services Group, LLC, Admin. Proceeding File No. 3-16345 (Jan. 16, 2015), available at www.sec.gov/litigation/admin/2015/ia-4000.pdf.

  [39]   In re Joseph Stilwell and Stilwell Value LLC, Admin. Proceeding File No. 3-16444 (Mar. 16, 2015), available at www.sec.gov/litigation/admin/2015/ia-4049.pdf.

  [40]   The Stilwell investigation had resulted in several legal challenges by the respondents.  In September 2014, a federal court ordered Joseph Stilwell to comply with an SEC subpoena seeking his testimony.  SEC v. Stilwell, 1:14-mc-257 (S.D.N.Y. Sept. 11, 2014).  Stilwell had also sued the SEC seeking to enjoin the agency from filing an administrative proceeding, but dismissed the claim as part of his settlement with the agency.  See Max Stendahl, Stilwell Settles SEC In-House Case, Drops Legal Challenge, Law360 (Mar. 17, 2015).

  [41]   SEC Press Release, SEC Charges BlackRock Advisors With Failing to Disclose Conflict of Interest to Clients and Fund Boards (Apr. 20, 2015), available at www.sec.gov/news/pressrelease/2015-71.html.

  [42]   SEC Litigation Release, SEC Charges Connecticut-Based Investment Professional with Fraud and Self-Dealing (May 13, 2015), available at www.sec.gov/litigation/litreleases/2015/lr23260.htm.

   [43] SEC Press Release, SEC Charges Investment Adviser with Fraudulently Funneling Client Assets to Companies in Owner’s Interest (June 17, 2015), available at www.sec.gov/news/pressrelease/2015-122.html.

   [44] SEC Press Release, SEC Announces Cherry-Picking Charges Against Investment Manager (June 29, 2015), available at www.sec.gov/news/pressrelease/2015-132.html.

  [45]   SEC Press Release, SEC Charges Santa Barbara-Based Hedge Fund Firm, Executives, and Auditor for Improper Expense Allocations (Apr. 29, 2015), available at www.sec.gov/news/pressrelease/2015-76.html.

  [46]   SEC Press Release, SEC Charges KKR with Misallocating Broken Deal Expenses (June 29, 2015), available at www.sec.gov/news/pressrelease/2015-131.html.

  [47]   SEC Press Release, SEC Announces Fraud Charges Against Investment Adviser Accused of Concealing Poor Performance of Fund Assets from Investors (Mar. 30, 2015), available at www.sec.gov/news/pressrelease/2015-52.html.

  [48]   In re Logical Wealth Management, Inc. and Daniel J. Gopen, Admin. Proceeding File No. 3-16390 (Feb. 19, 2015), available at www.sec.gov/litigation/admin/2015/ia-4027.pdf.

  [49]   In re The Robare Group, LTD., Admin. Proceeding No. 3-16047, Initial Decision (June 4, 2015), available at www.sec.gov/alj/aljdec/2015/id806jeg.pdf.

  [50]   SEC Press Release, SEC Charges Mutual Fund Adviser in Connection with Improper Handling of Fund Assets (Feb. 12, 2015), available at www.sec.gov/news/pressrelease/2015-31.html.

  [51]   SEC Press Release, SEC Charges Nationwide Life Insurance Company with Pricing Violations (May 14, 2015), available at www.sec.gov/news/pressrelease/2015-89.html.

  [52]   SEC Press Release, SEC Charges Investment Adviser and Mutual Fund Board Members with Failures in Advisory Contract Approval Process (June 17, 2015), available at www.sec.gov/news/pressrelease/2015-124.html.

  [53]   In re Du Pasquier & Co., Inc., Admin. Proceeding File No. 3-16350 (Jan. 21. 2015), available at www.sec.gov/litigation/admin/2015/ia-4004.pdf.

   [54] In re Pekin Singer Strauss Asset Management, Admin. Proceeding File No. 3-16646 (June 23, 2015), available at www.sec.gov/litigation/admin/2015/ia-4126.pdf.

  [55]   In re Aegis Capital, LLC et al., Admin. Proceeding File No. 3-16463 (Mar. 30, 2015), available at www.sec.gov/litigation/admin/2015/34-74608.pdf.

   [56] In re Michael S. Wilson, CPA, Admin. Proceeding File No. 3-16652 (June 25, 2015), available at www.sec.gov/litigation/admin/2015/34-75298.pdf.

  [57]   SEC Press Release, Investment Advisory Firm’s Former President Charged With Stealing Client Funds (June 15, 2015), available at www.sec.gov/news/pressrelease/2015-120.html.

  [58]   Commissioner Daniel M. Gallagher, Statement on Recent Settlements Charging Chief Compliance Officers (June 18, 2015), available at www.sec.gov/news/statement/sec-cco-settlements-iaa-rule-206-4-7.html.

  [59]   Commissioner Luis A. Aguilar, The Role of Chief Compliance Officers Must be Supported (June 29, 2015), available at www.sec.gov/news/statement/supporting-role-of-chief-compliance-officers.html.  See also Alison Frankel, SEC’s Aguilar, Gallagher Split on Policing Advisers’ Compliance, Reuters (June 30, 2015), available at blogs.reuters.com/alison-frankel/2015/06/30/secs-aguilar-gallagher-split-on-policing-advisers-compliance/.

  [60]   In re Application Filed Under Rule 193 of the Commission’s Rules of Practice on Behalf of Matthew D. Sample, Admin. Proceeding File No. 3-15850 (Feb. 4, 2015), available at www.sec.gov/litigation/admin/2015/ia-4021.pdf.

  [61]   SEC Press Release, SEC Charges Direct Edge Exchanges With Failing to Properly Describe Order Types (Jan. 12, 2015), available at www.sec.gov/news/pressrelease/2015-2.html.

  [62]   SEC Litigation Release, SEC Charges UBS Subsidiary With Disclosure Violations and Other Regulatory Failures in Operating Dark Pool (Jan. 15, 2015), available at www.sec.gov/news/pressrelease/2015-7.html

  [63]   SEC Press Release, SEC Announces Charges Against Standard & Poor’s for Fraudulent Ratings Misconduct (Jan. 21, 2015), available at www.sec.gov/news/pressrelease/2015-10.html.

  [64]   SEC Press Release, SEC Charges New-York Based Brokerage Firm and CEO with Committing Fraud During CDO Liquidation Auctions (Feb. 19, 2015), available at www.sec.gov/news/pressrelease/2015-36.html.

  [65]   SEC Press Release, SEC Announces Enforcement Action for Illegal Offering of Security-Based Swaps (June 17, 2015), available at www.sec.gov/www.sec.gov/news/pressrelease/2015-123.html.

  [66]   SEC Press Release, SEC Charges L.A.-Based Pacific West Capital Group with Fraud in Sale of Life Settlement Investments (Apr. 7, 2015), available at www.sec.gov/news/pressrelease/2015-60.html.  

  [67]   SEC Press Release, SEC Sues Retirement Planners for Making False Claims to Investors (May 11, 2015), available at www.sec.gov/news/pressrelease/2015-85.html.

  [68]   SEC Press Release, SEC Charges Oppenheimer with Securities Law Violations Related to Improper Penny Stock Sales (Jan. 27, 2015), available at www.sec.gov/news/pressrelease/2015-14.html.

  [69]   SEC Press Release, SEC Charges Stock-Based Lender with Selling Billions of Penny Stock Shares as Unregistered Broker-Dealer (Jan. 29, 2015), available at www.sec.gov/news/pressrelease/2015-18.html.

  [70]   SEC Press Release, SEC Charges Nearly Two Dozen Unregistered Broker-Dealers (Mar. 26, 2015), available at www.sec.gov/news/pressrelease/2015-50.html.

[71] SEC Press Release, SEC Charges Unregistered Brokers in EB-5 Immigrant Investor Program (June 23, 2015), available at www.sec.gov/news/pressrelease/2015-127.html.

  [72]   SEC Press Release, Merrill Lynch Admits Using Inaccurate Data for Short Sale Orders, Agrees to $11 Million Settlement (June 1, 2015), available at www.sec.gov/news/pressrelease/2015-105.html.

  [73]   SEC Press Release, SEC Charges Texas-Based Brokerage Firm with Violating Supervisory and Customer Protection Rules (March 4, 2015), available at www.sec.gov/news/pressrelease/2015-46.html.

  [74]   SEC Press Release, SEC Charges Brothers-in-Law in Louisiana With Insider Trading (Feb. 9, 2015), available   at www.sec.gov/news/pressrelease/2015-37.html.

  [75]   SEC Press Release, SEC Charges Biotech Employee, Two Stockbrokers With Trading on Nonpublic Information About Pharmaceutical Trials and Merger (Jun. 9, 2015), available at www.sec.gov/news/pressrelease/2015-116.html.

  [76]   SEC Litigation Release, SEC Charges Director of Rhode Island Bank and Three Others with Insider Trading, (Jun. 8, 2015), available at www.sec.gov/litigation/litreleases/2015/lr23278.htm.

  [77]   SEC Press Release, Swiss Trader to Pay $2.8 Million to Settle Insider Trading Charges (Jun. 15, 2015), available at www.sec.gov/news/pressrelease/2015-119.html.

  [78]   SEC Press Release, SEC Charges Four in California Insider Trading Ring (Feb. 5, 2015), available at www.sec.gov/news/pressrelease/2015-23.html.

  [79]   SEC Press Release, SEC Charges Father and Son in $1.1 Million Insider Trading Scheme (May 14, 2015), available at www.sec.gov/news/pressrelease/2015-90.html.

  [80]   SEC Press Release, SEC Charges Two Employees of a Credit Card Company with Insider Trading (Jan. 22, 2015), available at www.sec.gov/litigation/litreleases/2015/lr23179.htm.

  [81]   SEC Press Release, SEC Obtains a Preliminary Injunction Against Two Former Employees of Capital One Financial Corporation for Insider Trading (Mar. 2, 2015), available at www.sec.gov/litigation/litreleases/2015/lr23216.htm.

  [82]   SEC Press Release, SEC Charges Friends With Insider Trading on Acquisition of Cooper Tire (April 2, 2015), available at www.sec.gov/news/pressrelease/2015-56.html.

[83]   SEC Litigation Release, SEC Charges Pennsylvania Man with Insider Trading, (Feb. 3, 2015), available at www.sec.gov/litigation/litreleases/2015/lr23187.htm 

[84] SEC Press Release, SEC Announces Charges Against Atlanta Man Accused of Insider Trading in Advance of Tender Offer (Feb. 11, 2015), available at www.sec.gov/news/pressrelease/2015-29.html.

[85]   In re Robert A. Ramsay, CPA, Admin. Proceeding File No. 3-16351 (Jan. 21, 2015) available at www.sec.gov/litigation/admin/2015/34-74108.pdf.

  [86]   SEC Press Release, SEC Obtains Asset Freeze Against China-Based Trader for Suspicious Activity Last Week (June 23, 2015), available at www.sec.gov/news/pressrelease/2015-128.html.

[87]   For more on Newman, see our 2014 Year-End Securities Enforcement Update (available at www.gibsondunn.com/publications/Pages/2014-Year-End-Securities-Enforcement-Update.aspx) as well as Avi Weitzman and Daniel P. Chung, U.S. v. Newman: Second Circuit Ruling Portends Choppier Waters for Insider Trading Charges against Downstream Tippees (Dec. 15, 2014), available at www.gibsondunn.com/publications/Pages/US-v-Newman–Second-Circuit-Ruling-Portends-Choppier-Waters–Insider-Trading-Charges-Against-Downstream-Tippees.aspx.

[88]   SEC v. Payton, 14 Civ. 4644, Opinion and Order (S.D.N.Y. April 6, 2015), available at blogs.reuters.com/alison-frankel/files/2015/04/secvpayton-MTDopinion.pdf.

[89] In re Bolan, Admin. Proc. File No. 3-16178, Order on Motions for Summary Disposition (Feb. 25, 2015), available at www.sec.gov/alj/aljorders/2015/ap-2350.pdf.

[90] US v Salman, No. 14-10204 (9th Cir. July 6, 2015).

  [91]   SEC Press Release, SEC Charges 36 Firms for Fraudulent Municipal Bond Offerings (June 18, 2015), available at www.sec.gov/news/pressrelease/2015-125.html.

  [92]   SEC Press Release, SEC Announces Charges Against Investment Firm and Two Executives Accused of Defrauding Police and Firefighter Pension Funds (May 21, 2015), available at www.sec.gov/news/pressrelease/2015-98.html. 

Gibson, Dunn & Crutcher LLP    

Gibson Dunn is one of the nation’s leading law firms in representing companies and individuals who face enforcement investigations by the Securities and Exchange Commission, the Department of Justice, the Commodities Futures Trading Commission, the New York and other state attorneys general and regulators, the Public Company Accounting Oversight Board (PCAOB), the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange, and federal and state banking regulators.

Our Securities Enforcement Group offers broad and deep experience.  Our partners include the former Directors of the SEC’s New York and San Francisco Regional Offices, the former head of FINRA‘s Department of Enforcement, the former United States Attorneys for the Central and Eastern Districts of California, and former Assistant United States Attorneys from federal prosecutors’ offices in New York, Los Angeles, San Francisco and Washington, D.C., including the Securities and Commodities Fraud Task Force.

Securities enforcement investigations are often one aspect of a problem facing our clients. Our securities enforcement lawyers work closely with lawyers from our Securities Regulation and Corporate Governance Group to provide expertise regarding parallel corporate governance, securities regulation, and securities trading issues, our Securities Litigation Group, and our White Collar Defense Group.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following:

New York
Reed Brodsky (212-351-5334, rbrodsky@gibsondunn.com)
Joel M. Cohen (212-351-2664, jcohen@gibsondunn.com)
Lee G. Dunst (212-351-3824, ldunst@gibsondunn.com)
Barry R. Goldsmith (212-351-2440, bgoldsmith@gibsondunn.com)
George A. Schieren (212-351-4050, gschieren@gibsondunn.com)
Mark K. Schonfeld (212-351-2433, mschonfeld@gibsondunn.com)
Alexander H. Southwell (212-351-3981, asouthwell@gibsondunn.com)
Lawrence J. Zweifach (212-351-2625, lzweifach@gibsondunn.com)

Washington, D.C.
David P. Burns (202-887-3786, dburns@gibsondunn.com
Richard W. Grime (202-955-8219, rgrime@gibsondunn.com)
F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com)

San Francisco
Winston Y. Chan (415-393-8362, wchan@gibsondunn.com)
Thad A. Davis (415-393-8251, tadavis@gibsondunn.com)
Marc J. Fagel (415-393-8332, mfagel@gibsondunn.com)
Charles J. Stevens (415-393-8391, cstevens@gibsondunn.com)
Michael Li-Ming Wong (415-393-8234, mwong@gibsondunn.com)

Palo Alto
Paul J. Collins (650-849-5309, pcollins@gibsondunn.com)

Denver
Robert C. Blume (303-298-5758, rblume@gibsondunn.com)
Monica K. Loseman (303-298-5784, mloseman@gibsondunn.com)

Los Angeles
Michael M. Farhang (213-229-7005, mfarhang@gibsondunn.com
Douglas M. Fuchs (213-229-7605, dfuchs@gibsondunn.com

© 2015 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.