Gibson Dunn | Client Alert

Client Alert

January 22, 2021

Year-End and Fourth Quarter 2020 Update on Class Actions

Click for PDF Our year-end 2020 report provides an update on the application of Article III in class and other complex litigation. First, we discuss the significance of the Supreme Court’s recent grant of certiorari in TransUnion LLC v. Ramirez, No. 20-297, __ S. Ct. __, 2020 WL 7366280 (U.S. Dec. 16, 2020), which concerns the propriety of certifying class actions with uninjured class members. Second, we review recent cases in which courts have continued to grapple with issues of Article III standing in the wake of Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), often reaching divergent conclusions in similar cases involving claims under consumer credit, privacy, and related laws. I. The Supreme Court Will Resolve Whether Uninjured Class Members Can Be Part of a Certified Class Action On December 16, 2020, the Supreme Court granted certiorari in TransUnion LLC v. Ramirez to resolve a very important class action issue that has split the federal courts of appeals for years: “whether either Article III or Rule 23 permits a damages class action where the vast majority of the class suffered no actual injury, let alone an injury anything like what the class representative suffered.” In Ramirez, the plaintiff asserted that TransUnion violated the Fair Credit Reporting Act (FCRA) by inaccurately labelling class members as potential terrorists, drug traffickers, and other threats to national security on their consumer credit reports. See Ramirez v. TransUnion LLC, 951 F.3d 1008, 1017 (9th Cir. 2020). After a jury awarded $60 million in damages, TransUnion appealed, arguing that the verdict “cannot stand because only Sergio Ramirez, the representative plaintiff, suffered a concrete and particularized injury as a result of TransUnion’s unlawful practice.” Id. As discussed in a prior update, the Ninth Circuit agreed with TransUnion on this point and held that “each member of a class certified under Rule 23 must satisfy the bare minimum of Article III standing at the final judgment stage of a class action in order to recover monetary damages in federal court.” Id. at 1023. Citing Chief Justice Roberts’s observation that “‘Article III does not give federal courts the power to order relief to any uninjured plaintiff, class action or not,’” the Ninth Circuit reasoned that a contrary rule would “transform the class action—a mere procedural device—into a vehicle for individuals to obtain money judgments in federal court even though they could not show sufficient injury to recover those judgments individually.” Id. at 1023–24 (quoting Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1053 (2016) (Roberts, C.J., concurring)); see also Castillo v. Bank of Am., NA, 980 F.3d 723, 730 (9th Cir. 2020) (reiterating that a district court has the duty to ensure that any proposed “class is not defined so broadly as to include a great number of members who for some reason could not have been harmed by the defendant’s allegedly unlawful conduct”). Nonetheless, the Ninth Circuit upheld the verdict upon finding that each class member had Article III standing. Ramirez, 951 F.3d at 1017. The court reasoned that even though plaintiff had stipulated that more than 75% of the absent class members did not have a credit report disseminated to any third party during the class period, FCRA was enacted to protect consumers’ concrete interests and “the fact that TransUnion made the reports available to numerous potential creditors,” along with “the highly sensitive and distressing nature of the [Office of Foreign Assets Control] alerts,” was “sufficient to show a material risk of harm to the concrete interests of all class members.” Id. at 1027. In a separate opinion, Judge McKeown disagreed with the certification of absent class members’ claims. In particular, she was troubled by the lack of evidence that any absent class members were injured at all: although the named plaintiff and “a limited number of class members” had their “credit report[s] disclosed to third parties, there was no evidence of any harm or damages to remaining class members.” Id. at 1038 (McKeown, J., concurring-in-part and dissenting-in-part). Thus, not only did the named plaintiff’s “stark atypicality as the lone class representative” “strain Rule 23’s typicality requirements,” but the absence of evidence regarding the actual experiences of the absent class members made the “harm as to the bulk of the class … conjectural,” and therefore falling far short of showing a constitutionally cognizable injury. Id. at 1038–40. The disagreement between the majority panel’s decision in Ramirez and Judge McKeown’s dissent highlights an issue that frequently arises in class litigation: whether and to what extent (including at what stage of the case) absent class members must satisfy Article III standing requirements. Different courts have reached different conclusions on this question. Compare Denney v. Deutsche Bank AG, 443 F.3d 253, 264 (2d Cir. 2006) (“[N]o class may be certified that contains members lacking Article III standing.”), with Kohen v. Pac. Inv. Mgmt. Co., 571 F.3d 672, 676 (7th Cir. 2009) (“[A]s long as one member of a certified class has a plausible claim to have suffered damages, the requirement of standing is satisfied.”). By agreeing to review Ramirez, the Supreme Court will have an opportunity to address this important issue and provide guidance on whether uninjured class members can be part of a certified class action. II. Courts Continue to Reach Diverging Results on What Constitutes a Concrete Injury Sufficient to Establish Standing Under Spokeo, Inc. v. Robins As reported in our second quarter 2019 update, in Muransky v. Godiva Chocolatier, Inc., a three-judge panel of the Eleventh Circuit held that a retailer’s failure to truncate a credit card number on a receipt in violation of the Fair and Accurate Credit Transactions Act (FACTA) was sufficient to create standing. 922 F.3d 1175 (11th Cir. 2019). In October 2020, the Eleventh Circuit reversed that decision en banc, holding that a bare procedural violation of FACTA, devoid of any claim of individual injury, is insufficient to confer Article III standing. Muransky v. Godiva Chocolatier, 979 F.3d 917 (11th Cir. 2020) (en banc). The panel had noted that Congress set forth the remedial procedures in FACTA to minimize a risk of harm to a concrete interest (namely, preventing identity theft), and held that any violation presenting even a marginal risk of harming that interest should be “sufficient to constitute a concrete injury.” 922 F.3d at 1188. The en banc Eleventh Circuit disagreed, and criticized the panel’s standard as essentially adopting a presumption that statutory injury alone can constitute Article III injury, which was what the Supreme Court had rejected in Spokeo. 979 F.3d at 930. Instead, the en banc court focused on whether the violation in question caused actual harm or posed a material risk of harm to the plaintiff. The en banc court concluded that even though the plaintiff had received a noncompliant receipt that contained his private information, he had not alleged any actual harm more concrete than time spent “safeguarding” his receipt and experiencing a “breach of confidence.” Id. at 931. The court rejected both theories. As for “safeguarding” the receipt, the court noted that under Clapper v. Amnesty International USA, 568 U.S. 398, 416 (2013), self-inflicted harm alone cannot constitute injury under Article III. Id. at 931. As for the “breach of confidence,” the court was skeptical that the analogy to the common law breach of confidence was appropriate, and even if it were, it would require third-party disclosure of private information, and the plaintiff had not alleged that anyone else had seen the receipt. Id. at 931–32. The Sixth Circuit took a markedly different approach when addressing similar facts in Donovan v. FirstCredit, Inc., 983 F.3d 246 (6th Cir. 2020). The plaintiff alleged that a creditor sent a letter inside an envelope with an envelope window that revealed language describing the plaintiff as a debtor. Id. at 249. The plaintiff sued under the Fair Debt Collection Practices Act’s (FDCPA) provisions regulating the language and symbols debt collectors may employ on envelopes when communicating with consumers, alleging that the letter had violated these provisions by revealing the plaintiff’s status as a debtor. Id. The Sixth Circuit held that the exposure of information through an envelope window, even if “benign,” created a sufficient risk that the plaintiff’s status as a purported debtor would be disclosed, which established an injury-in-fact under the FDCPA. Id. at 252–53. The court reasoned that because the letter had actually been sent in the mail, and an invasion of privacy is a “harm that has traditionally been regarded as providing a basis for a lawsuit,” the mailing of the letter with the exposed information provided “a degree of risk sufficient to meet the concreteness requirement” under Spokeo. Id. at 253. The Seventh and Ninth Circuits this past quarter also addressed standing in putative class actions. In Fox v. Dakkota Integrated Systems, LLC, 980 F.3d 1146 (7th Cir. 2020), the Seventh Circuit addressed allegations that the defendant had failed to develop, publicly disclose, and comply with a data-retention schedule and guidelines for the permanent destruction of biometric data under the Illinois Biometric Information Privacy Act (BIPA). In particular, the plaintiff alleged that the defendant had retained her biometric data after her employment ended, in violation of BIPA’s requirements. Id. at 1149. The Seventh Circuit acknowledged that in a prior related case, it had held that merely alleging the non-disclosure of data-retention and data-destruction policies was insufficient to show injury-in-fact under Article III. Id. at 1153–54 (citing Bryant v. Compass Grp. US, Inc., 958 F.3d 617, 619 (7th Cir. 2020)). But the court noted that in this specific case, the defendant’s alleged failure to disclose those policies had led to an unlawful retention of the plaintiff’s handprint and also to her biometric data being unlawfully shared with a third party. Id. at 1154. Analogizing this unlawful retention of data to the unlawful collection of data (which the court had previously found conferred standing in Bryant), the court reasoned that “the invasion of a legally protected privacy right, though intangible, is personal and real,” and therefore sufficient to plead an injury in fact. Id. at 1155. The Ninth Circuit addressed standing in McGee v. S-L Snacks National, 982 F.3d 700 (9th Cir. 2020), a putative consumer class action. The plaintiff alleged that she had purchased and consumed defendant’s popcorn containing trans fats, despite the FDA’s determination that trans fats are no longer “generally recognized as safe,” and she brought claims under both California’s Unfair Competition Law and for present and future physical injury from the ingestion of trans fats. Id. at 703. In support of her claim for physical injury, the plaintiff estimated that she had consumed 0.2 grams of trans fats per day, and cited studies showing a link between consuming trans fats and organ damage. Id. at 709. The Ninth Circuit held that the plaintiff did not have standing to bring claims for her alleged physical injury. Id. at 710. Even though the plaintiff’s cited studies showed a connection between trans fats and organ damage, they did not show that the consumption of trans fats invariably lead to such damage, which is required to establish concrete injury without any individual medical evidence of harm. Id. at 708. As for future injury, the court noted that the plaintiff cited studies involving far greater levels of trans fats consumption, such that the plaintiff had alleged no substantial risk of future health consequences to her. Id. at 710. The following Gibson Dunn lawyers contributed to this client update: Christopher Chorba, Theane Evangelis, Kahn Scolnick, Bradley Hamburger, Lauren Blas, Jillian London, Wesley Sze, Jessica Pearigen, and Jonathan Haderlein. Gibson Dunn attorneys 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 in the firm’s Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers: Theodore J. Boutrous, Jr. – Co-Chair, Litigation Practice Group – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com) Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Theane Evangelis – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Kahn A. Scolnick – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com) Bradley J. Hamburger – Los Angeles (+1 213-229-7658, bhamburger@gibsondunn.com) Lauren M. Blas – Los Angeles (+1 213-229-7503, lblas@gibsondunn.com) © 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Read More

January 21, 2021

Urgent Clarification Sought by European Supervisory Authorities on the Application of the Sustainable Finance Disclosure Regulation

Click for PDF On 7 January 2021, the Joint Committee of the European Supervisory Authorities (“ESAs”) wrote to the European Commission, requesting “urgent” clarification on several important areas of uncertainty in the application of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (the “SFDR”) prior to the application of the majority of its requirements on 10 March 2021. One such area raised, which will be of particular importance to a number of fund managers, is whether the SFDR will apply to non-EU alternative investment fund managers (“AIFMs”) when marketing funds in the EU under applicable national private placement regimes. Application to non-EU AIFMs To date, the industry has generally taken the view that non-EU AIFMs will be caught by the product level disclosure requirements of the SFDR, when marketing their funds in the EU. This is primarily as a result of the cross-reference in the SFDR to Article 4(1)(b) of the Alternative Investment Fund Managers Directive (2011/61/EU), which itself includes non-EU AIFMs. The posing of this question by the ESAs, however, casts doubt on the presumption by many non-EU AIFMs that they will fall within the scope of the SFDR. The industry will be watching very closely in the coming days and weeks to see how the European Commission responds. In the interim, this uncertainty clearly presents a challenge for non-EU AIFMs, which will need to think about whether to continue with implementation for now, on the assumption that they will be caught, so as not to be on the “back foot” should the European Commission confirm they are within scope. Other key priority areas identified The ESAs have also asked for clarification in relation to a further four areas (set out below at a high level): application of the 500-employee threshold for principal adverse impact reporting on parent undertakings of a large group – this is particularly significant in light of the fact that where the threshold is met, from 30 June 2021, firms will have to consider adverse impacts of their investment decisions on sustainability factors (rather than use a “comply or explain” approach); the meaning of “promotion” in the context of products promoting environmental or social characteristics – the ESAs noted that, in general, clarification on the level of ambition of the characteristics through the provision of examples of different scenarios that are within, and outside, the scope of Article 8 of the SFDR would assist with the orderly application of the SFDR. Fund managers will need to determine whether the fund falls within Article 8, as additional disclosure obligations apply where that is the case; the application of Article 9 of the SFDR – the ESAs asked for further clarification on what would constitute an Article 9 product. For example, they asked whether a product to which Article 9(1), (2) or (3) of the SFDR applies must only invest in sustainable investments as defined in Article 2(17) of the SFDR. If not, is a minimum share of sustainable investments required (or would there be a maximum limit to the share of “other” investments)? As above, in relation to Article 8 products, fund managers will need to make additional disclosures if the fund in question falls within Article 9 of the SFDR; and the application of the SFDR product rules to portfolios and dedicated funds – one question asked by the ESAs was whether, for portfolios, or other types of tailored financial products managed in accordance with mandates given by clients on a discretionary client-by-client basis, the disclosure requirements in the SFDR apply at the level of the portfolio only or at the level of standardised portfolio solutions. This is clearly another area in which further clarification from the European Commission would be very welcome. Conclusion It is, to say the least, far from ideal that there is so much uncertainty surrounding the application of the SFDR so close to 10 March. This is particularly the case given that these areas are by no means peripheral – there will, for instance, be a significant number of non-EU AIFMs holding their breath at the moment. The industry will be waiting with great interest to see how the European Commission responds. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  If you wish to discuss any of the matters set out above – whether issues raised or potential solutions – please contact the Gibson Dunn UK Financial Services Regulation team: Michelle M. Kirschner (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com) Martin Coombes (+44 (0) 20 7071 4258, mcoombes@gibsondunn.com) Chris Hickey (+44 (0) 20 7071 4265, chickey@gibsondunn.com) © 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Read More

January 21, 2021

Biden Administration Issues Rulemaking Freeze and New Orders Governing the Regulatory Process

Click for PDF On January 20, 2021, the inaugural day of the new presidency, the Biden administration issued a series of across-the-board regulatory directives. These directives press pause on federal rulemakings, rescind Trump-era executive orders on the regulatory process, and set a framework for “modernizing” review of regulatory actions. First, the new administration issued a memorandum freezing rulemakings pending review. Covered agencies are not to “propose or issue” any rule “until a department or agency head appointed or designated” by President Biden “approves the rule,” unless the rule falls into an exception “for emergency situations or other urgent circumstances relating to health, safety, environmental, financial, or national security matters,” as permitted by the Director of the Office of Management and Budget (“OMB”). For rules that have been published in the Federal Register but have not yet taken effect, agencies should consider “postponing the rules’ effective dates for 60 days” and opening a new “30-day comment period” to evaluate the rules further. After the 60-day delay, if a rule raises “substantial questions of fact, law, or policy,” agencies should “take further appropriate action in consultation” with the Director of OMB. This memorandum applies broadly to all “substantive action by an agency” that is anticipated to lead to “a final rule or regulation.” It does not appear to include independent agencies, though there is some ambiguity; while the memorandum is addressed to executive departments and agencies, its definition of “rule” is expansive enough that it could be read to cover actions by independent agencies such as the SEC. Either way, this memorandum will likely cause reconsideration of a wide variety of rules proposed or issued in the final days of the Trump administration. This memorandum is similar to the regulatory freeze put in place on the first day of the Trump administration four years ago, though there are notable differences. For example, the Trump administration left agencies with no choice but to postpone by 60 days the effective date of any regulations published in the Federal Register that had not yet taken effect. By contrast, and as noted above, the Biden administration’s freeze instructs agencies to “consider” instituting this 60-day delay for such rules, which gives them more flexibility. Even with this added flexibility, it is still expected that many agencies will exercise the option to delay rules. Second, President Biden issued an Executive Order revoking a number of Trump-era orders on the regulatory process, including: Executive Order 13771 “Reducing Regulation and Controlling Regulatory Costs” (Jan. 30, 2017), which created the 2-for-1 rule requiring agencies to repeal two regulations for every one new regulation they issued. This order also established a budgeting process that required agencies to limit the incremental cost of new regulations under supervision of the OMB Director. Executive Order 13777 “Enforcing the Regulatory Reform Agenda” (Feb. 24, 2017), which required each agency to designate a Regulatory Reform Officer and establish a Regulatory Reform Task Force to oversee regulatory reform initiatives and recommend regulations to be repealed. The order further required agencies to measure and report their progress in implementing these reforms. Executive Order 13875 “Evaluating and Improving the Utility of Federal Advisory Committees” (June 14, 2019), which required each executive department and agency (independent regulatory agencies excepted) to review, reduce, and limit the number of federal advisory committees, terminating at least one-third of these committees by September 30, 2019. The order also capped the government-wide total number of advisory committees at 350. Executive Order 13891 “Promoting the Rule of Law Through Improved Agency Guidance Documents” (Oct. 9, 2019), which required agencies to treat guidance documents as “non-binding both in law and in practice,” maintain an online database of all guidance documents, rescind outdated guidance documents, and establish procedures for issuing new guidance documents, including a clear statement of their non-binding effect, opportunities for the public to petition for withdrawal or modification of guidance documents, and a 30-day period of notice and comment for certain significant guidance documents. Executive Order 13892 “Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication” (Oct. 9, 2019), which limited agencies’ ability to enforce standards of conduct that were not publicly stated or issued in formal rulemakings. It also provided that agencies issuing notices of noncompliance provide an affected party the opportunity to be heard, encouraged “self-reporting of regulatory violations . . . in exchange for reductions or waivers of civil penalties,” and imposed requirements governing administrative inspections and certain statutory obligations. Executive Order 13893 “Increasing Government Accountability for Administrative Actions by Reinvigorating Administrative PAYGO” (Oct. 10, 2019), which sought to ensure compliance with the “pay-as-you-go” requirement (“PAYGO”) first adopted in 2005. PAYGO mandates that agencies propose ways to reduce mandatory spending whenever they undertake a discretionary action that would increase mandatory spending. Executive Order 13893 required agencies to submit proposed discretionary actions and proposals for compliance with PAYGO to the OMB Director for review. In sum, this sweeping order undoes many of the reforms implemented by the Trump administration that were designed to reduce regulatory burdens, cut costs, shrink the size of government, and increase agency transparency. Third, the Biden Administration issued a memorandum on “Modernizing Regulatory Review,” which instructs the Director of OMB to make “recommendations for improving and modernizing” review of regulations. Such recommendations should provide “concrete suggestions” on how to “promote public health and safety, economic growth, social welfare, racial justice, environmental stewardship, human dignity, equity, and the interests of future generations” in the regulatory process. Specifically, these recommendations should ensure that policies “reflect new developments in scientific and economic understanding,” account for “regulatory benefits that are difficult or impossible to quantify,” and do not cause detrimental “deregulatory effects.” OMB is also instructed to evaluate ways that the Office of Information and Regulatory Affairs (“OIRA”) can partner with agencies to support “regulatory initiatives that are likely to yield significant benefits” and to identify reforms that further the “efficiency” and “transparency” of the interagency review process. * * * * We will continue to monitor changes to the regulatory and rulemaking process taken by the new administration and keep you apprised of significant developments. The following Gibson Dunn lawyers assisted in the preparation of this client update: Helgi C. Walker, Lucas Townsend, Michael Bopp, Jessica Wagner, Matt Gregory, Robert Batista, and Matthew Butler. Gibson Dunn’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, any member of the firm’s Administrative Law and Regulatory Practice Group or Congressional Investigations Practice Group, or the following authors: Helgi C. Walker – Chair, Administrative Law and Regulatory Practice, Washington, D.C. (+1 202-887-3599, hwalker@gibsondunn.com) Michael D. Bopp – Chair, Congressional Investigations Practice, Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Lucas C. Townsend – Member, Administrative Law and Regulatory Practice, Washington, D.C. (+1 202-887-3731, ltownsend@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Read More

January 20, 2021

UK Employment Update – January 2021

Click for PDF In this update, we look back at the key developments in UK employment law over the course of 2020 and look forward to anticipated developments in 2021. A brief overview of developments and key cases which we believe will be of interest to our clients is provided below, with more detailed information on each topic available by clicking on the links. 1.   Coronavirus Job Retention Scheme (“CJRS”) (click on link) In this update we describe the current offering under the CJRS, which is set to remain operational until 30 April 2021. 2.   Vicarious Liability (click on link) We consider two decisions of the UK Supreme Court in 2020, which consider vicarious liability in relation to: (i) the actions of a doctor who was found to be an independent contractor; and (ii) the criminal actions of an employee who leaked the personal data of almost 100,000 employees. The “employer” was not held to be vicariously liable in either case. 3.   Transfer of Undertakings (click on link) We consider two important decisions from the last year related to the operation of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (“TUPE”) which protect the rights of employees in situations such as the sale of a business as a going concern. 4.   Post-termination Restrictive Covenants (click on link) We consider two decisions looking at the enforceability of post-employment restrictive covenants, including a Court of Appeal decision which considered the circumstances in which a new employer would be liable for inducing a breach of contract by a new hire. We also consider a recent High Court decision which considered the enforceability of restrictive covenants against a recent joiner who left during her probationary period. 5.   Forthcoming Changes (click on link) We briefly outline changes to the off-payroll and IR35 system, designed to prevent workers from avoiding tax by operating as contractors, and report on developments in gender and ethnicity pay gap reporting and racial and ethnic diversity in business as well as notable government consultations for employment contracts. APPENDIX 1.   Coronavirus Job Retention Scheme (“CJRS”) We have addressed the introduction of and updates to the UK government’s CJRS mechanism to support employment levels through the COVID-19 pandemic in past publications; these updates are available on the Gibson Dunn website – March 20, 2020, March 27, 2020, May 18, 2020, June 2, 2020, and webcast of December 1, 2020. If employers cannot maintain their UK workforce because their operations have been affected by COVID-19, they can put their employees onto “furlough”, a temporary leave of absence, and apply for a government grant to cover a portion of the usual wages. There have been various alterations to the finer detail of the CJRS (including the level of contribution to be made by employers as opposed to under grant, changes which took place between August and October 2020) but the essential position at the time of writing is: Employees can be put on full-time furlough or “flexible furlough”, when employees work part-time and are regarded as being on furlough when they are not working. Employers have to pay for hours worked but can claim the grant for hours not worked. The grant amounts to the lower of 80% of wage costs or £2,500 per calendar month for those hours. Employers must pay for employer national insurance contributions and employer pension contributions on all amounts paid to the employee, including the amount paid by the grant. Employers are still free to top up wages, above the level of the grant, if they wish. Since 1 December 2020, the CJRS cannot be used for employees who are under notice of termination. The CJRS is set to run until 30 April 2021. This month the government is due to determine whether employers should contribute more towards employee costs. The government will shortly begin publishing information about employers who claim under the CJRS, in order to deter fraudulent claims. 2.   Vicarious Liability As reported previously, the boundaries to the law on vicarious liability, which determines the circumstances in which an employer will be deemed liable for the acts of its officers and employees, have been expanding. However, two decisions of the UK Supreme Court in 2020 signal limits to this expansion and some helpful clarity for employers. 2.1   Vicarious Liability and Employment Status In Barclays Bank plc (Appellant) v Various Claimants (Respondents), a bank had engaged a doctor to conduct medical examinations of prospective employees as part of the bank’s recruitment process. The Supreme Court held that the doctor was acting as an independent contractor rather than an employee, therefore the bank was not vicariously liable for sexual assaults he was alleged to have committed during these examinations. The key question for the court was whether the doctor was acting as an independent contractor, carrying on business on his own account, or if his relationship to the bank was akin to employment. In circumstances where the doctor had other clients, remained free to refuse examinations, did not receive a retainer from the bank and carried his own medical liability insurance, it was clear that he was an independent contractor. 2.2   Vicarious Liability and Data Protection In WM Morrison Supermarkets plc (Appellant) v Various Claimants (Respondents), the UK Supreme Court held that Morrison was not liable for data breaches by an employee who leaked the personal data of almost 100,000 employees. The employee was authorised to transmit payroll data for Morrison’s workforce to its external auditors. He did so, but kept a copy of the data on a USB stick, which he later shared online. The employee has since been criminally convicted for his actions. Some of the affected individuals brought claims against Morrison for misuse of private information, breach of confidence and breach of its statutory duty under the Data Protection Act 1998, for which they alleged Morrison was either primarily or vicariously liable. The question for the Supreme Court was whether the employee’s wrongful disclosure of the data was so closely connected with the task(s) that he was authorised to do that it could fairly and properly be considered to have been done whilst acting in the course of his employment. The Court found that this was not so and that, as a consequence, the employer was not vicariously liable for his actions: the disclosure was part of a personal vendetta by the employee, and the employee was not furthering his employer’s business when he committed the wrongdoing. What this means for employers Employers will take some comfort from these Supreme Court decisions. The Barclays Bank decision confirms that employers are unlikely to be held vicariously liable for the actions of true third party contractors. The Morrison Supermarkets decision also makes clear that employers are unlikely to be held liable for employees’ wrongful acts where they are the result of a personal vendetta; the mere opportunity to commit wrongful acts, provided by employment, is insufficient alone to render employers vicariously liable. However, employers should continue to be mindful of the potential vicarious liability under data protection legislation for employees’ activities that do satisfy the “close connection” test. Safeguarding personal data and keeping risk of data breaches to a minimum should remain a priority. 3.   Transfer of Undertakings The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) protect: (i) employees working in a business or undertaking that is in the UK, that is sold or transferred; (ii) employees in Great Britain who carry out activities that are subject to insourcing, outsourcing or transfer to a different outsourced contractor (a so-called “service provision change”); and (iii) those employees who are otherwise affected by that sale, transfer, insourcing or outsourcing. In essence, these employees’ contracts of employment are transferred to the recipient of the business, undertaking, or service provision change, who steps into the shoes of the previous employer and must, generally speaking, continue to employ them on their pre-transfer terms and conditions of employment. TUPE also provides other protections for affected employees, including the right to be informed and consulted in advance of a transfer. 3.1   Contractual Changes Under regulation 4(4) of TUPE, variations to a contract of employment for which the sole or principal reason is the relevant transfer are void (unless certain specific exceptions apply). In Ferguson and others v Astrea Asset Management Ltd, the Employment Appeal Tribunal (“EAT”) held that regulation 4(4) applies to such variations, irrespective of whether they are beneficial or detrimental to the employee. In this case, two months prior to the transfer by way of service provision change from one property management company to another, the owner-directors of the first company varied their own employment terms to their advantage (in particular, guaranteed bonuses of 50% of salary, termination payments of a month’s salary for each year worked, and enhanced notice periods). The EAT held that regulation 4(4) rendered these variations void; the second company was not bound by them. In arriving at its decision, the EAT cited the aim of the Acquired Rights Directive (2001/23/EC) (on which TUPE is based) as safeguarding employees’ rights, rather than improving them, and distinguished earlier case law on the bases that the variation occurred post-transfer and before regulation 4(4) was in force, and the Court of Appeal had not said that advantageous changes could not be declared void. What this means for employers In the context of TUPE transfers, the EAT decision provides helpful clarity to transferees on the enforceability of transfer-related contractual changes, confirming that where senior executives attempt tactical pre-transfer changes to their own terms and conditions, transferees will not be bound by the new terms. Difficult questions about whether such a variation is to the benefit or detriment of the employee are not necessary. However, outsourcing agreements should continue to contain provisions to render void any changes to terms and conditions made by the service provider once notice has been served to terminate the contract. 3.2   Long-term disability benefits In ICTS (UK) Limited v Visram, the Court of Appeal considered whether an employee was entitled to benefit from a long-term disability benefits (“Disability Benefit”) policy when he could not restart his old job, as opposed to taking another appropriate role. Under the terms of an insurance-backed Disability Benefit scheme, during periods of illness the employee was entitled to two thirds of his salary, with payment being conditional on the employee remaining employed, and to continue until the earlier of his return to work, death or retirement. The Court held that on closer inspection of the terms of the scheme, “return to work” was properly construed as return to the work the employee did before he became sick; had the parties intended that the benefit be available until the employee could return to any remunerated full-time work they could have specified this in the terms. The case also raises the issue of liability for Disability Benefit where an employee has transferred to a new employer under TUPE. The claimant in this case had transferred to a new employer during his long-term sick leave; since employees who transfer under TUPE do so on their existing terms and conditions, including contractual benefits, the transferee employer was liable to provide the benefit until the employee’s return to his prior role, his death, or his retirement. The transferee employer had dismissed the employee during his sickness absence. The employee then succeeded in claims for unfair dismissal and disability discrimination, hence the Employment Tribunal awarded compensation on the basis that benefits under the Disability Benefit plan should have continued until death or retirement. The EAT and Court of Appeal both upheld this finding. What this means for employers This case serves to remind employers and their advisors of the importance of specificity in drafting contractual benefit entitlement provisions, and the need to consider the nature of employee’s benefits and impact any termination may have on them prior to taking action. It is also a reminder of the full reach of contractual burden transferee employers take on in the context of TUPE transfers and the need to conduct full due diligence to identify potential liabilities around employees off sick and Disability Benefit. 4.   Post-Termination Restrictive Covenants 4.1   Restrictive Covenants and Breach of Contract Post-termination restrictive covenants are commonly included in the contracts of employment of senior and other key employees. Should that employee commit a breach of their restrictive covenants, for example, by joining a competitor in breach of a non-compete covenant then the new (competitor) employer will not ordinarily be liable to the former employer in respect of that employee’s breach. However, should that new (competitor) employer induce that employee to breach the terms of their former contract of employment then both the new (competitor) employer and employee may be liable to the former employer.   To bring a claim for inducing a breach of contract, a claimant must show that the third party knowingly and intentionally induced and procured the breach without reasonable justification. The Court of Appeal in Allen t/a David Allen Chartered Accountants v Dodd & Co, held that an accountancy firm was not liable for inducing breach of contract when it recruited a tax adviser in breach of his 12-month contractual post-termination restrictions, where the firm had received legal advice in advance of the recruitment that the employee’s restrictive covenants were unlikely to be enforceable. The firm was advised that the covenants were unenforceable due to lack of consideration and an unreasonably long duration and that the non-solicitation and non-dealing restrictions “probably” and “on balance” failed, allowing the tax adviser to contact the clients of David Allen, his former employer. In the High Court the judge found that parts of the restrictive covenants were enforceable and the employee had breached them. However, the accountancy firm had been entitled to rely on the legal advice it had received. David Allen appealed on the grounds that the legal advice received by the accountancy firm had been equivocal, and therefore the new employer was aware that there was a risk that the restrictive covenants would turn out to be enforceable. In reaching its decision to dismiss the appeal, the Court of Appeal noted that the fact that the legal advice had been equivocal did not prevent the firm from honestly relying on it. It acknowledged that lawyers rarely provide unequivocal advice, and therefore responsibly sought legal advice should be able to be relied upon, even if it later turns out to be incorrect. Further, the required level of knowledge for inducement was that of knowledge of a legal outcome, not just knowledge of a fact. This level of knowledge could not be proven where the numerous breach of contract cases in the courts have shown that it is often difficult to predict legal outcomes. The Court did not opine on legal advice that merely states that it is arguable no breach will be committed, but advice that states it is more probable than not that there will be no breach is enough to rely upon. What this means for employers Employers can take comfort in this decision which confirms that they are entitled to rely on legal advice even where it is equivocal. Unless it can be proven that they knew their actions would breach the contract, as opposed to “might” breach the contract, liability for inducement to breach will not be made out. 4.2   Restrictive Covenants as Unlawful Restraint of Trade Post-termination restrictive covenants will only be enforceable in the UK to the extent that they protect a legitimate business interest (such as an employer's trade connections with customers or suppliers, confidential information and maintaining the stability of its workforce) and do so in a manner which is reasonable (lasting no longer and being no wider in scope than is reasonably necessary to protect the employer’s legitimate business interest). Restrictive covenants commonly take the form of “non-competes” (the most onerous form of restrictive covenant, which prevent the employee from working in a competing business for a restricted period of time), “non-solicit” and “non-dealing” restrictions which prevent an employee from soliciting and/or dealing with certain clients or customers of the business during a restricted period after leaving and “non-poaching” restrictions which prevent an employee from poaching or attempting to poach former colleagues during a restricted period after leaving. In Quilter Private Client Advisers Ltd v Falconer and another, the High Court found that the non-compete, non-solicitation and non-dealing clauses in a financial adviser’s employment contract were an unreasonable restraint of trade and therefore invalid. Whilst the Court did find that the adviser had breached her employment contract in a number of ways, including via misuse of confidential information, her 9-month non-compete was unreasonable in the context of leaving employment within a six month probation period. In addition, her 12-month non-dealing and non-solicitation clauses, which covered anyone who had been a client of the employer at any time in the 18 months prior to termination, were held to be unreasonable and excessive given the nature of her client relationships during her period of employment. What this means for employers This case serves to highlight the importance of tailoring the drafting of restrictive covenants to both the circumstances of the business and the restricted employee. Particular care should be taken as to the scope and duration of restrictive covenants which an employer would seek to enforce against an employee who leaves during their probationary period. 5.   Forthcoming Changes 5.1   Off-payroll working and IR35 We have previously reported that changes to the IR35 legislation (which governs the payroll tax arrangements for certain individuals who supply services through an intermediary, usually a personal service company (“PSC”)) were due to take place in April 2020 (link). However, these changes have been postponed until April 2021 in recognition of the COVID-19 disruption. On 1 July 2020, MPs voted against a proposed amendment to the Finance Bill to delay the changes until 2023-2024. Should the changes now go ahead as expected in a matter of months, medium and large sized end-user clients will take over responsibility from the intermediary for assessing whether, but for the intermediary’s presence, the individual would be deemed an employee of the end-user client for tax purposes and, if so, for paying such taxes. 5.2   Gender Pay Gap Similarly to the IR35 postponement, as we previously noted in March 2020 (link), the Government Equalities Office and the Equality and Human Rights Commission (EHRC) suspended enforcement of the gender pay gap deadlines for the reporting year 2019/20 due to the pressures of the COVID-19 pandemic. The requirement to report for 2020/21 has not yet been suspended, and on 14 December 2020 the government published a new set of guidance for employers, though the reporting requirements remain unchanged. 5.3   Ethnicity Pay Gap and racial and ethnic diversity in the boardroom Amid a global surge in debate on racial equality, a petition to the UK Parliament calling for mandatory ethnicity pay gap reporting for UK firms with 250 or more staff has obtained enough signatures to mean it ought to be debated in Parliament. The government had said it would respond by the end of 2020 in light of the consultation it ran between 2018 and 2019, but we still await a response. In a leaked report obtained by the BBC in December from the government’s 2018 pay gap reporting consultation exercise, three quarters of employers (of 321 responders) wanted large firms to be forced to release ethnicity pay gap data. Whilst gender pay gap reporting was enacted through regulations, the government would need to pass a new Act of Parliament to create any new ethnicity pay reporting scheme. Despite reporting not yet being mandatory, two in three UK companies surveyed recently by PwC (link) are now collecting data on ethnicity, with over one fifth now calculating their ethnicity pay gap; those not collecting data or calculating were concerned about data protection, systems capabilities, low response rates, or unease about posing the questions. Given how multifaceted information about ethnicity can be, it is not yet clear exactly what information would need to be provided under any new mandatory scheme. Legal and General Investment Management (“LGIM”) has urged FTSE 100 boards to include at least one black, Asian or other minority ethnic member by January 2022 or suffer “voting and investment consequences” – LGIM would vote not to re-elect their nomination committee chair. It will also demand more transparency around race and ethnicity data, including ethnicity pay data and inclusive hiring policies. LGIM is the largest fund manager in the UK, holding an interest in most FTSE 100 companies. Meanwhile, the Confederation of British Industry has announced a new campaign, “Change the Race Ratio”, in partnership with a number of firms and charitable and academic organisations. This incorporates commitments: (i) to ensure FTSE 100 and 250 boards have at least one racially and ethnically diverse member (by end 2021 and by 2024 respectively); (ii) to increase racial and ethnic diversity in senior leadership, by setting and publishing targets; (iii) to increase transparency, via published target action plans and progress reports and with ethnicity pay gaps disclosed by 2022; and (iv) to create an inclusive, open and supportive environment through recruitment, development and support processes, more diversity in suppliers/partners, and use of data. The campaign offers support to businesses to sign up to the commitments and thereby increase inclusion in business. In December, Liz Truss MP, Minister for Women and Equalities, gave a speech at the Centre for Policy Studies setting out the government's new approach to tackling inequality, consisting of the "biggest, broadest and most comprehensive equality data project yet", to look across the UK and identify where people are held back and what the biggest barriers are. This will not be limited to the Equality Act 2010's nine protected characteristics (which include sex and race). While Ms. Truss acknowledged that people in these groups suffer discrimination, she suggested that the focus on protected characteristics has led to a narrowing of the equality debate that overlooks socio-economic status and geographic inequality. Initial findings will be reported this summer. 5.4   Government consultations for employment contracts On 4 December 2020, the government launched two consultations, both of which are expected to close on 26 February this year. One pertains to measures to extend the ban on exclusivity clauses in employment contracts for employees under the Lower Earnings Limit (currently £120 per week), which would prevent employers from contractually restricting low earning employees from working for other employers – it appears this stems from the fact low earners have been particularly adversely affected by the COVID-19 pandemic and many employers are currently unable to offer their employees sufficient hours. The second consultation relates to measures to reform post-termination non-compete clauses in employment contracts (previously discussed at section 4 of this update), including proposals to: (i) require employers to confirm in writing to employees the exact terms of a non-compete clause before their employment commences; (ii) introduce a statutory limit on the length of non-compete clauses; and (iii) ban the use of post-termination non-compete clauses altogether. We will report in due course on any developments following the government consultations. Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these and other developments. Please feel free to contact the Gibson Dunn lawyer with whom you usually work or the following members of the Labor and Employment team in the firm's London office: James A. Cox (+44 (0)20 7071 4250, jcox@gibsondunn.com) Georgia Derbyshire (+44 (0)20 7071 4013, gderbyshire@gibsondunn.com) Charlotte Fuscone (+44 (0)20 7071 4036, cfuscone@gibsondunn.com) Heather Gibbons (+44 (0)20 7071 4127, hgibbons@gibsondunn.com) © 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Read More

January 20, 2021

What the CFTC’s Settlement with Vitol Inc. Portends about Enforcement Trends

Click for PDF On December 3, 2020, the Commodity Futures Trading Commission (“CFTC” or the “Commission”) Division of Enforcement (the “Division”) announced a settlement with Vitol Inc. (“Vitol”), an energy and commodities trading firm in Houston, Texas. This is the first public action coming out of the CFTC’s initiative to pursue violations of the Commodity Exchange Act (“CEA”) involving foreign corruption. The CFTC’s action rests on an aggressive theory that seeks to approach allegations of corruption through its historic ability to pursue fraud and manipulation, which has not yet faced a serious legal challenge. It is an enforcement area we expect will continue to be a priority for the CFTC. This settlement involved cooperation between U.S. and Brazilian regulators in what appears to be another significant corporate resolution associated with the Operation Car Wash corruption investigations in Brazil. We expect to see the continued convergence of enforcement by a variety of U.S. enforcement authorities and regulators approaching aspects of alleged foreign corruption from a range of angles corresponding to their primary focus of interest. Depending on the facts, the same conduct that the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”)—the principal FCPA investigation authorities—investigate for violations of the Foreign Corrupt Practices Act (“FCPA”) already may face scrutiny by DOJ’s Money Laundering and Asset Recovery Section (“MLARS”) on a money laundering basis (including its Kleptocracy Asset Recovery initiative where foreign plutocracy is involved and its Bank Integrity Unit where banks are involved), by the CFTC for violations of the CEA where commodities trading is involved, and by the Federal Reserve for violations of banking regulations. And in the Biden Administration, this convergence may accelerate as the Administration aligns with more vigorous corporate enforcement anticipated in the new era. Navigating the expanding investigations field will become more complex, even more so to the extent that agencies flexing their muscles do not coordinate their efforts. Given the CFTC’s aggressive approach to bringing enforcement actions involving foreign corruption, and its stated intention to continue to do so, it is particularly important that companies regulated by the CFTC assess and update their compliance programs to meet the standards set forth in the guidance on evaluating compliance programs that the CFTC issued in September 2020.[1] Moreover, in light of the multi-agency targeting of conduct involving foreign corruption, such companies should also make sure that their compliance programs meet the standards of other agencies, such as DOJ.[2] The Vitol Settlement The CFTC asserted that from 2005 to early 2020, Vitol engaged in manipulative and deceptive conduct involving foreign corruption and physical and derivatives trading in the U.S. and global oil markets.[3] Specifically, the CFTC’s order found that Vitol violated the CEA [4] in a few different ways, using for the first time the alleged foreign corrupt conduct as a basis for a finding of manipulative or fraudulent acts cognizable under the statute.[5] First, it allegedly made corrupt payments, such as bribes and kickbacks, to employees and agents of certain state-owned entities (“SOEs”) in Brazil, Ecuador, and Mexico to obtain preferential treatment and access to trades with the SOEs to the detriment of the SOEs and other market participants.[6] Vitol, according to the CFTC, concealed this conduct by funneling the payments through offshore bank accounts or to shell entities, and by issuing deceptive invoices.[7] Second, it allegedly made corrupt payments to employees and agents of the Brazilian SOE in exchange for confidential information about trading in physical oil and derivatives, such as the specific price at which Vitol would win a supposedly competitive bidding or tender process.[8] Additionally, Vitol attempted to manipulate two Platts fuel oil benchmarks in order to benefit Vitol’s physical and derivatives positions.[9] If Vitol’s attempts to manipulate the benchmarks had been successful, charged the CFTC, it would have harmed those market participants who held opposing positions and those who rely on the benchmarks as an untainted price reference for U.S. physical or derivative trades.[10] The same day, the Fraud Section of the DOJ and the United States Attorney’s Office for the Eastern District of New York announced a parallel action in which they entered a Deferred Prosecution Agreement (“DPA”) with Vitol on charges of conspiracy to violate the FCPA.[11] Vitol agreed to pay a criminal penalty of $135 million under the DPA, and the DOJ noted that it would credit $45 million against the amount Vitol agreed to pay to resolve an investigation by the Brazilian Ministério Público Federal (“MPF”) for conduct related to the company’s bribery scheme in Brazil.[12] Specifically, on December 3, 2020, the MPF entered into a leniency agreement with Vitol Inc. and Vitol do Brasil Ltda. in connection with Operation Car Wash. In a December 29, 2020 securities filing, Brazilian state-run oil company Petrobras announced that it received 232.6 million reais (or $44.65 million) as a result of this leniency agreement.[13] The CFTC ordered Vitol to pay more than $95 million in civil monetary penalties and disgorgement.[14] Notably, it recognized Vitol’s cooperation during the investigation in the form of a reduced civil monetary penalty.[15] It also recognized and offset a portion of the criminal penalty that Vitol agreed to pay to the DOJ in the parallel criminal action.[16] CFTC’s Foreign Corrupt Practices Initiative The CFTC launched its foreign corrupt practices initiative on March 6, 2019, when the Division issued an advisory on self-reporting and cooperation for CEA violations involving foreign corrupt practices (the “Enforcement Advisory”).[17] It announced that it would apply a presumption, absent aggravating circumstances, that it would not recommend imposing a civil monetary penalty in a CFTC action involving foreign corrupt practices where a company or individual not registered or required to be registered with the CFTC (i) voluntarily discloses violations of the CEA involving foreign corrupt practices, (ii) provides full cooperation, and (iii) appropriately remediates.[18] The CFTC bolstered its initiative in May 2019 by issuing a whistleblower alert targeting foreign corrupt practices in the commodities and derivatives markets.[19] To date, this is only the fourth area of potential misconduct regarding which the CFTC has proactively sought tips from would-be whistleblowers. Implications of Settlement First, we expect the CFTC to continue pursuing more cases involving foreign corruption in the future. This is the first case brought by the CFTC involving foreign corruption, but it is unlikely to be the last. There are public reports of at least two additional foreign corruption investigations undertaken by the CFTC involving commodities traders. The Enforcement Advisory was issued on the heels of a voluntary disclosure by Switzerland-based mining company Glencore, in April 2019, that it was the subject of an investigation by the CFTC involving foreign corruption claims. Glencore also has announced anti-corruption investigations by the DOJ for potential violations of the FCPA and U.S. money laundering statutes, Brazilian authorities, and Swiss prosecutors,[20] and it disclosed that the CFTC’s investigation had a similar scope as the ongoing DOJ investigation.[21] No settlement or charges have been announced with respect to the Glencore investigations. News sources also report that Trafigura Group Pte. Ltd., a Singapore-based commodity trading company, is under investigation by the CFTC and Brazilian authorities for similar allegations.[22] The CFTC’s 2019 issuance of a whistleblower alert soliciting tips about foreign corrupt practices further shows that it is serious about bringing enforcement actions in this area. The CFTC’s whistleblower program pays a qualified tipster 10 to 30 percent of any fine over $1 million levied against a firm for violations of CFTC regulations, and it has significantly enhanced the CFTC’s enforcement program. Whistleblowing is likely to increase, not just because there may be conduct to report, but because those aware of it and lawyers working to facilitate reporting will see the benefit of doing so through the CFTC’s initiative. Just as the Dodd-Frank whistleblowing award program has significantly increased FCPA tips to the SEC (and DOJ), we expect the CFTC’s whistleblowing push could significantly increase the amount of information the CFTC receives and, in turn, the CFTC’s ability to bring enforcement actions relating to foreign corruption. With the announcement of the Vitol settlement, the CFTC has reaffirmed its interest in pursuing CEA violations involving foreign corruption. The CFTC has identified the following examples of foreign corrupt practices that could constitute violations of the CEA and thus be the focus of a CFTC enforcement action: The use of bribes to secure business in connection with regulated activities like trading, advising, or dealing in swaps or derivatives; Manipulation of benchmarks that serve as the basis for related derivatives contracts; Reporting prices that are the product of corruption to benchmarks; and Corrupt practices that might alter the prices in commodity markets that drive U.S. derivatives prices.[23] Second, the CFTC will continue to coordinate closely with other regulators in its pursuit of foreign corruption. The CFTC frequently coordinates with the DOJ, SEC, and other law enforcement partners, often bringing parallel enforcement actions in areas such as spoofing, misappropriating funds, violations of registration provisions of the federal securities laws, and the manipulation of benchmark interest rates (e.g., the LIBOR cases).[24] The Vitol settlement underscores that this cooperation will continue in its foreign corruption initiative. We expect the CFTC to continue to utilize its partnerships with other regulators to pursue foreign corruption, with commodities trading serving as the CFTC’s entry point to police foreign corruption under the CEA. That Gary Gensler, formerly the CFTC Chair from 2009 to 2014, is expected to be nominated to serve as the next SEC Chair may smooth the way for the two regulators to collaborate more in foreign corruption (and other) investigations and bringing parallel enforcement actions.[25] While the CFTC has stated publicly that it is not trying to enforce the FCPA or “pile on” when it comes to penalties,[26] if there is a commodities trading component to a foreign corruption scheme, the CFTC has made clear it has a role to play in investigating and charging such conduct. In announcing the CFTC’s foray into foreign bribery, the former Director of Enforcement emphasized the agency’s intention to coordinate closely with DOJ, SEC, and other regulators, including foreign authorities, so that it is “investigat[ing] in parallel with other enforcement authorities” to “avoid duplicative investigative steps,” account for penalties imposed by other authorities, and give “credit for disgorgement or restitution payments in connection with other related actions.”[27] But the CFTC’s involvement creates an added layer of liability and a potentially expanded universe of relevant conduct that companies with international operations must be mindful of going forward. As we have seen with navigating other multi-agency investigations where conflicting investigative approaches and duplicative penalty demands occur too frequently, early and careful coordination between investigations is critical to ensuring outcomes are proportionate. Third, going forward, we expect that foreign corruption allegations involving commodities-related business will continue to be investigated and pursued by multiple agencies, domestic and foreign, approaching the issue from different angles. In other words, as the growing number of multi-jurisdictional and agency anti-corruption resolutions suggest, the FCPA units of the DOJ and SEC are not the only cops on the beat, and they have not been for quite some time. As a growing number of regulators in the U.S. and abroad get involved in anti-corruption enforcement, the enforcement landscape only becomes more complex. By way of domestic examples, DOJ’s Money Laundering and Asset Recovery Section (“MLARS”) has repeatedly teamed up with its FCPA colleagues to pursue foreign corruption through the lens of the anti-money laundering statutes, both to recover huge sums through its Kleptocracy Program and in prosecuting companies and individuals involved in moving tainted bribery proceeds. In the financial sector, the Federal Reserve has demonstrated its resolve to pursue banks for similar conduct under its authority to supervise banks’ financial controls and oversight functions.[28] Not to be outdone, the CFTC has joined the fray, making clear it will aggressively pursue foreign corruption under the CEA where commodities or related derivatives are involved.[29] Finally, energy firms in particular should be aware of this development. Although they will not be the CFTC’s only focus, energy trading firms are squarely in the CFTC’s sights. They have historically engaged in transactions that fall under the CEA and often involve contact with risky counterparties. The Vitol settlement makes clear that energy is one industry the CFTC is monitoring with respect to foreign corruption. We expect to see the CFTC under the Biden Administration focus on energy trading cases involving foreign corrupt practices, including assertions that such conduct in energy pricing has disadvantaged the consumer. In sum, the CFTC will likely become increasingly active in using the CEA as a tool to go after perceived foreign corruption in the commodities markets, claiming such conduct constitutes manipulation or even fraud, while working in parallel with the DOJ and possibly other domestic and foreign regulators intent on vindicating their particular enforcement mandate. Businesses that are involved in cross-border derivatives work should be prepared for potential scrutiny of their transactions, particularly those involving contact with foreign officials or sovereign wealth funds. The CFTC previously has launched broad industry initiatives (for example, with regard to LIBOR interest rate benchmarks), and it remains to be seen whether the CFTC will take such an approach, or pursue foreign corruption on a company-by-company basis as evidence surfaces. Either way, as the CFTC made clear in its 2020 compliance guidance, the CFTC expects companies to address potential corrupt behavior that may harm commodities markets through compliance program enhancements. ______________________    [1]   CFTC, Guidance on Evaluating Compliance Programs in Connection with Enforcement Matters (Sept. 10, 2020), https://www.cftc.gov/media/4626/EnfGuidanceEvaluatingCompliancePrograms091020/download.    [2]   Dep’t of Justice, Evaluation of Corporate Compliance Programs (June 3, 2020), https://www.justice.gov/criminal-fraud/page/file/937501/download.    [3]   CFTC Press Release Number 8326-20, CFTC Orders Vitol Inc. to Pay $95.7 Million for Corruption-Based Fraud and Attempted Manipulation (Dec. 3, 2020), https://www.cftc.gov/PressRoom/PressReleases/8326-20.    [4]   The CFTC relied on allegations involving corruption to establish fraud under the CEA, even though corruption and fraud are distinct acts with different harms. The CFTC appears to believe that the corruption in this case was a form of deceptive practice and that it need only prove that such corruption infected the market. This is an aggressive theory to which there may be defenses.    [5]   Order Instituting Proceedings, In re Vitol Inc., CFTC Docket No. 21-01 (Dec. 3, 2020), https://www.cftc.gov/media/5346/enfvitolorder120320/download.    [6]   Id. at 4.    [7]   Id.    [8]   Id. at 5.    [9]   Id. at 6-7. [10]   Id. [11]   Dep’t of Justice, Press Release, Vitol Inc. Agrees to Pay over $135 Million to Resolve Foreign Bribery Case (Dec. 3, 2020), https://www.justice.gov/opa/pr/vitol-inc-agrees-pay-over-135-million-resolve-foreign-bribery-case. [12]   Id. [13]   Petróleo Brasileiro S.A. – Petrobras Form 6-K (Dec. 29, 2020), here; see Petrobras receives $45 million in Vitol corruption settlement, Reuters (Dec. 29, 2020), https://www.reuters.com/article/us-petrobras-vitol-settlement/petrobras-receives-45-million-in-vitol-corruption-settlement-idUSKBN294043. [14]   Id. at 11-12. [15]   Id. at 3, 8. [16]   Id. at 11, 12, 14. [17]   See CFTC Enforcement Advisory: Advisory on Self-Reporting and Cooperation for CEA Violations Involving Foreign Corrupt Practices (Mar. 6, 2019) (“Enforcement Advisory”); CFTC Press Release Number 7884-19, CFTC Division of Enforcement Issues Advisory on Violations of the Commodity Exchange Act Involving Foreign Corrupt Practices (Mar. 6, 2019), https://www.cftc.gov/PressRoom/PressReleases/7884-19; Remarks of CFTC Director of Enforcement James M. McDonald at the American Bar Association’s National Institute on White Collar Crime (Mar. 6, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/opamcdonald2 (“McDonald Remarks”). [18]   Registrants are not eligible for the presumptive recommendation of no penalty. However, registrants who self-report, cooperate, and remediate will continue to be eligible for a “substantial reduction in penalty” under the existing Enforcement Advisories. See McDonald Remarks. [19]   CFTC Whistleblower Alert: Blow the Whistle on Foreign Corrupt Practices in the Commodities and Derivatives Markets (May 2019), https://www.whistleblower.gov/whistleblower-alerts/FCP_WBO_Alert.htm. [20]   Glencore, Update on subpoena from United States Department of Justice (July 11, 2018), https://www.glencore.com/media-and-insights/news/Update-on-subpoena-from-United-States-Department-of-Justice; Jeffrey T. Lewis et al., Brazil’s Car Wash Probe Eyes Glencore, Vitol, Trafigura for Paying Millions in Bribes, The Wall Street Journal (Dec. 5, 2018), https://www.wsj.com/articles/brazils-car-wash-probe-eyes-glencore-vitol-trafigura-for-paying-millions-in-bribes-1544021378; Glencore, Investigation by the Office of the Attorney General of Switzerland (June 19, 2020), https://www.glencore.com/media-and-insights/news/investigation-by-the-office-of-the-attorney-general-of-switzerland. [21]   Glencore, Announcement re the Commodity Futures Trading Commission (Apr. 25, 2019), https://www.glencore.com/media-and-insights/news/announcement-re-the-commodity-futures-trading-commission. [22]   Rob Davies, Trafigura investigated for alleged corruption, market manipulation, The Guardian (May 31, 2020), https://www.theguardian.com/world/2020/may/31/trafigura-investigated-for-alleged-corruption-market-manipulation; Dave Michaels and Dylan Tokar, Energy Trader Vitol Paying $163 Million to Settle Corruption, Manipulation Charges, The Wall Street Journal (Dec. 3, 2020), https://www.wsj.com/articles/energy-trader-vitol-to-pay-90-million-to-settle-u-s-corruption-charges-11607023519. [23]   McDonald Remarks. [24]   See, e.g., CFTC Press Release Number 7884-19; CFTC Press Release Number 8074-19, CFTC Orders Proprietary Trading Firm to Pay Record $67.4 Million for Engaging in a Manipulative and Deceptive Scheme and Spoofing (Nov. 7, 2019), https://www.cftc.gov/PressRoom/PressReleases/8074-19; CFTC Press Release Number 8120-20, CFTC Charges Investment Firm and VP with Commodity Pool Fraud (Feb. 20, 2020), https://www.cftc.gov/PressRoom/PressReleases/8120-20; Press Release, Securities and Exchange Comm’n, SEC Charges Bitcoin-Funded Securities Dealer and CEO (Nov. 1, 2018), https://www.sec.gov/litigation/litreleases/2018/lr24330.htm; CFTC Press Release Number 7159-15, Deutsche Bank to Pay $800 Million Penalty to Settle CFTC Charges of Manipulation, Attempted Manipulation, and False Reporting of LIBOR and Euribor (Apr. 23, 2015), here. [25]   See Andrew Ackerman and Dave Michaels, Biden Is Expected to Name Gary Gensler for SEC Chairman, Wall Street Journal, https://www.wsj.com/articles/biden-is-expected-to-name-gary-gensler-for-sec-chairman-11610487023. [26]   McDonald Remarks. [27]   Id. [28]   See Board of Governors of the Federal Reserve System, Press Release, Federal Reserve Board orders JPMorgan Chase & Co. to pay $61.9 million civil money penalty (Nov. 17, 2016), https://www.federalreserve.gov/newsevents/pressreleases/enforcement20161117a.htm; Board of Governors of the Federal Reserve System, Press Release, Federal Reserve Board fines the Goldman Sachs Group, Inc. $154 million for failure to maintain appropriate oversight, internal controls, and risk management with respect to 1Malaysia Development Berhad (1MDB) (Oct. 22, 2020), https://www.federalreserve.gov/newsevents/pressreleases/enforcement20201022a.htm. [29]   While it is difficult to predict whether other U.S. regulators will prioritize focusing on foreign bribery conduct, the statutory support may already be there for other banking regulators, as well as even FinCEN. For example, FinCEN has authority under the Bank Secrecy Act (“BSA”) and AML laws to hold U.S. financial institutions accountable for weak controls. And, notably, on January 1, 2020, the Senate passed the Anti-Money Laundering Act of 2020 (“AMLA”), which is the most comprehensive set of reforms to the AML laws in the United States since the USA PATRIOT Act in 2001. See William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, H.R. 6395. The AMLA has a number of provisions that could result in significantly increased civil and criminal enforcement of AML violations, including, among others, a significantly expanded whistleblower award program that parallels that of the CFTC. See AMLA, § 6314 (adding 31 U.S.C. § 5323(b)(1)). The AMLA is discussed in detail in a separate Gibson Dunn client alert: Gibson Dunn, The Top 10 Takeaways for Financial Institutions from the Anti-Money Laundering Act of 2020 (Jan. 1, 2021), https://www.gibsondunn.com/the-top-10-takeaways-for-financial-institutions-from-the-anti-money-laundering-act-of-2020/. Gibson Dunn’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, any member of the firm's Derivatives, Securities Enforcement or White Collar Defense and Investigations practice groups, or the following authors: Joel M. Cohen – New York (+1 212-351-2664, jcohen@gibsondunn.com) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) Patrick F. Stokes  – Washington, D.C. (+1 202-955-8504, pstokes@gibsondunn.com) Lawrence J. Zweifach – New York (+1 212-351-2625, lzweifach@gibsondunn.com) Emily A. Cross – New York (+1 212-351-4068, ecross@gibsondunn.com) Darcy C. Harris – New York (+1 212-351-3894, dharris@gibsondunn.com) Please also feel free to contact any of the following practice leaders: Derivatives Group: Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) Securities Enforcement Group: Barry R. Goldsmith – New York (+1 212-351-2440, bgoldsmith@gibsondunn.com) Richard W. Grime – Washington, D.C. (+1 202-955-8219, rgrime@gibsondunn.com) Mark K. Schonfeld – New York (+1 212-351-2433, mschonfeld@gibsondunn.com) White Collar Defense and Investigations Group: Joel M. Cohen – New York (+1 212-351-2664, jcohen@gibsondunn.com) Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com) Charles J. Stevens – San Francisco (+1 415-393-8391, cstevens@gibsondunn.com) F. Joseph Warin – Washington, D.C. (+1 202-887-3609, fwarin@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Read More

January 19, 2021

2020 Year-End Securities Enforcement Update

Click for PDF I.   Introduction: Themes and Notable Developments This year’s update marks the end of the Trump administration and the beginning of the Biden administration. The change in leadership of the Securities and Exchange Commission has already begun. In December, Jay Clayton stepped down as Chairman, and this week the Biden administration nominated Gary Gensler to be the new Chairman. Mr. Gensler was Chairman of the Commodity Futures Trading Commission in the Obama administration and presided over a period of heightened financial regulation and aggressive enforcement against major financial institutions. The Wall Street Journal predicts that Mr. Gensler could give Wall Street its “most aggressive regulator in two decades.”[1] In addition to a new Chairman, 2021 will also bring new senior leadership to the Division of Enforcement, as the Division’s Co-Directors have also left the agency. In this update, we look back at the significant enforcement actions and developments from the last six months of 2020, and consider what to expect from new leadership at the Commission and the Enforcement Division. In sum, it is safe to say that the next four years will see a return to increasing regulatory oversight and escalated enforcement of market participants. A.   Back to the Future: A Look Back and the View Ahead During the last six months of 2020, the SEC’s enforcement program continued to follow the priorities emphasized by Chairman Clayton over the last four years, while also navigating the challenges presented by the pandemic. In the last few months, there has also been a nearly complete departure of the senior-most leadership of the Division of Enforcement. In August and December, respectively, Division Co-Directors Steven Peikin and Stephanie Avakian, departed the agency. And in January, Marc Berger, who had been appointed Deputy Director and then Acting Director also announced that he will be leaving at the end of January. In one of his last speeches, Chairman Clayton reflected on his tenure and echoed the theme that has defined enforcement during the last administration, namely a focus on “Main Street” investors.[2] In practice, and as the Chairman noted, this has translated into a significant number of enforcement actions against fraudulent securities offerings – Ponzi schemes, affinity frauds and other offering frauds – that targeted individual investors. Of course, one of the notable challenges for the Enforcement Division this year was created by the COVID-19 pandemic. After overcoming the initial hurdles of conducting investigations remotely, the Enforcement staff continued to pursue investigations and bring enforcement actions. Nevertheless, from a numerical standpoint, the number of enforcement actions was off from the prior year. For fiscal 2020, the SEC brought a total of 715 enforcement actions (of which 405 were stand-alone enforcement actions), a significant decline from 862 actions in fiscal 2019 (of which 526 were stand-alone enforcement actions) – a decline of 23% in stand-alone enforcement actions.[3] There was also a change from last year in the types of cases the SEC brought. For fiscal 2020, the largest single category of cases involved securities offerings, typically offering frauds or unregistered securities offerings. This category accounted for nearly one-third, or 32%, of the stand-alone enforcement actions, compared to 21% of the actions brought in 2019 (and compared to only 16% of the cases in the last year of the Obama administration). Other major categories of cases in fiscal 2020 included cases against investment advisers, which comprised 21% of the total (compared to 36% of the total in fiscal 2019) and cases involving public company financial reporting and disclosure, which comprised 15% of the total in fiscal 2020 (compared to 17% of the total in fiscal 2019). Despite the decline in the number of cases, there was an increase in the amount of financial remedies (disgorgement and penalties) ordered in enforcement actions. For fiscal 2020, financial remedies totaled $4.68 billion, representing an increase of approximately 8% over the amount ordered in 2019. However, it should be noted that a substantial portion of the 2020 financial remedies was attributable to one case – a settlement with Telegram Group Inc. – in which the company was ordered to pay $1.2 billion in disgorgement, but was credited in full for returning the same amount to investors that had purchased the company’s unregistered digital tokens. Removing this settlement from the financial remedies for fiscal 2020 would reduce the total amount recover to an amount well below the amount ordered in 2019. Notwithstanding the challenges of the pandemic, the SEC brought a number of significant enforcement actions in the last half of 2020 that we discuss in greater detail in other sections of this update. In particular, the SEC brought a number of cases against public companies for financial reporting and disclosure issues. Three of these cases were the result of the Enforcement Division’s “EPS Initiative,” in which the staff used risk-based data analytics to identify potential earnings management practices. Other significant cases were the result of the Enforcement Division’s focus on cases related to the pandemic. In particular, the SEC brought the first enforcement action based on disclosures concerning a company’s ability to operate sustainably despite the pandemic. This year also saw a number of enforcement actions in the area of crypto-currency and other digital assets. In particular, shortly before the end of the year, the SEC filed a complaint against Ripple Labs for alleged violation of the securities registration provisions. The outcome of this litigation will have a significant impact on enforcement and regulation of the digital asset market in the future. Another highlight of the last year has been the continued growth of the SEC’s whistleblower program. This year is the tenth anniversary of the program and was also a year of record awards both in number and size. Increased efficiency in the award process is also ensuring that the program has become, and will continue to be, an important source of investigations for the future. Looking ahead, there is little doubt that the new administration will bring a heightened level of enforcement activity. But more important, we can expect a shift in focus and priorities away from retail investors and securities offering frauds and an increased emphasis on the conduct of institutional market participants – investment advisers and broker-dealers, as well as public company accounting, financial reporting and disclosure. Assuming Mr. Gensler is confirmed by the Senate to be the next SEC Chairman, his experience, both at the helm of the CFTC and since, confirm expectations for increased regulation and enforcement. Mr. Gensler oversaw the implementation of an entirely new regime for the regulation of the markets for derivatives as well as the adoption of numerous regulations pursuant to the Dodd-Frank Act. The CFTC under his leadership also took aggressive enforcement actions against financial institutions in connection with the alleged manipulation of LIBOR. Mr. Gensler will also bring a strong interest in, and familiarity with, the market for crypto-currency and other digital tokens. This will ensure that the market for digital assets will receive particular attention in the coming years. The last time there was a transition to a Democratic administration in 2008, the SEC confronted the financial crisis and the collapse of the mortgage-backed securities market. In the wake of the financial crisis, the SEC had a defined focus for investigation in distressed financial institutions and participants in the market for mortgage-backed securities. The SEC also adopted a number of initiatives to empower the enforcement program – some based in statute, such as the whistleblower program; others based in policy and practice, such as the encouragement of witness cooperation and the imposition of admissions on certain settling defendants. The current transition in administrations follows a year of extreme market volatility caused by the pandemic, but also ending with the markets continuing to set records, benefiting from government stimulus and continued low interest rates. There is anticipation that as the COVID-19 crisis abates, the economy and markets will experience significant growth in the coming year. New Enforcement Division leadership will endeavor to identify areas of risk that they deem worthy of heightened scrutiny. In addition, oversight by a Democratic controlled House and Senate may further escalate pressure on the SEC to demonstrate its aggressiveness. The takeaway from all of this is that the next four years will put a premium on legal and compliance departments and financial reporting functions of financial institutions, investment advisers, broker-dealers and public companies. B.   Commissioner and Senior Staffing Update As the Trump administration wound down, there were a number of significant changes in the leadership of the Commission and the Enforcement Division. Looking ahead to the coming months, there will be further developments as a new Chairman is confirmed and new leadership of the Enforcement Division is appointed. Simultaneous with Chairman Clayton’s departure, the White House appointed Republican Commissioner Elad Roisman as Acting Chairman of the Commission. During the interim period following the inauguration of President-elect Biden, but before a new Chairman is nominated and confirmed, the White House could substitute the senior Democratic Commissioner, Allison Herren Lee, as Acting Chairman. Also during the second half of 2020, the other two Commissioners were sworn in: Democrat Commissioner Caroline Crenshaw filled the vacancy left by former Commissioner Robert Jackson, and Republican Commissioner Hester Peirce was sworn in for a second term, after her original term (for which she filled a vacancy in 2018) ended. There were also significant changes in the leadership of the Enforcement Division. With the departure of the Co-Directors Peikin and Avakian, Marc Berger was appointed Acting Director of the Enforcement Division in December. This month, Mr. Berger also announced his departure. No Acting Director has been appointed as of this writing. Other changes in the senior staffing of the Commission include: In August, Scott Thompson was appointed Associate Regional Director of Enforcement in the SEC’s Philadelphia Regional Office. Mr. Thompson succeeds Kelly Gibson, who was appointed Director of the Philadelphia office in February 2020. Mr. Thompson has worked at the SEC since 2007, first as a trial attorney in the Enforcement Division and most recently as Assistant Regional Director from 2013 until his promotion in August 2020. Also in August, Richard Best was appointed Director of the SEC’s New York Regional Office, succeeding Mr. Berger in the role. Mr. Best has worked at the SEC since 2015, serving in two other Regional Director roles—Salt Lake and Atlanta—before becoming the Director of the New York office. He also previously worked in FINRA’s Department of Enforcement and as a prosecutor in the Bronx District Attorney’s Office. In early December, Nekia Hackworth Jones was appointed Director of the SEC’s Atlanta Regional Office. She joins the SEC from private practice where she specialized in government investigations and white collar criminal defense. Ms. Jones also previously served as an Assistant U.S. Attorney in the Northern District of Georgia and in DOJ’s Office of the Deputy Attorney General. C.   Legislative Developments: Disgorgement With little fanfare, the SEC achieved a significant legislative success at the end of 2020, cementing its ability to obtain disgorgement in civil enforcement actions. On January 1, 2021, Congress voted to override the President’s veto of the National Defense Authorization Act (“NDAA”), a military spending bill passed each year since 1961.[4] Buried in the $740.5 billion bill was an amendment to the Securities Exchange Act of 1934, which gives the SEC explicit statutory authority to seek disgorgement in federal court.[5] Under Section 6501 of the NDAA, the SEC is authorized to seek “disgorgement . . . of any unjust enrichment by the person who received such unjust enrichment.”[6] Perhaps more significant, the amendment establishes a ten-year statute of limitations for obtaining disgorgement for scienter-based violations of federal securities laws, doubling the 5-year standard previously established by the Supreme Court. The amendment applies to any action or proceeding that is pending on, or commenced after its enactment (i.e., January 1, 2020). As discussed in a previous alert, the amendment is a response to two recent Supreme Court decisions which limited the SEC’s authority to seek disgorgement, although the agency has a long history of seeking and receiving disgorgement: Kokesh v. SEC, 137 S. Ct. 1635 (2017) (imposing a five-year statute of limitations on disgorgement), and Liu v. SEC, 140 S. Ct. 1936 (2020) (which imposed equitable limitations on disgorgement, such as the limitation to net profits). The extension of the statute of limitations to ten years is a significant enhancement to the SEC’s remedies since many cases involve conduct that extends more than five years before an action is filed. However, notably, the amendment does not expressly reverse the equitable limitations that the Supreme Court imposed on the disgorgement remedy in Liu. Accordingly, the SEC will continue to confront defenses grounded in equitable principles, such as deduction for legitimate expenses and the elimination of joint and several liability for disgorgement. D.   Whistleblower Awards 2020 marked the 10-year anniversary of the SEC’s whistleblower program. It also marked a record year for the number of whistleblower awards, the total amount of money awarded and the largest single whistleblower award.[7] During fiscal 2020, the Commission issued awards totaling approximately $175 million to 39 individual whistleblowers. As of the end of 2020, the SEC has awarded a total of approximately $736 million to 128 individual whistleblowers in the program’s 10-year history.[8] Perhaps equally notable, enforcement actions attributed to whistleblower tips have resulted in more than $2.5 billion in ordered financial remedies. The increase in the number of awards is the result of the SEC’s efforts to increase the efficiency of the claim review and award process. In September, the SEC also adopted amendments to the Whistleblower Rule to promote efficiencies in the review and processing of whistleblower award claims. The amendments aim to provide the Commission with tools to appropriately reward individuals, and include a presumption of the statutory maximum award for certain whistleblowers with potential awards of less than $5 million.[9] For further discussion of the amendments to the Whistleblower Rule, see our prior alert on the subject. The amendments also made one modification to the Whistleblower Rule that has proven to be controversial. As originally proposed in 2018, the amendment would have given the Commission authority to reduce the dollar amount of awards in cases with large monetary sanctions (in excess of $100 million). In the face of opposition from whistleblower advocates, the final rule dropped that amendment, and instead clarified that in determining the appropriate award, the Commission has discretion to consider both the percentage and the dollar amount of the award a discretion the Commission. In the adopting release, the Commission explained the modification as merely clarifying the discretion that the Commission always had in determining the appropriate award. One whistleblower advocate has already filed a suit against the SEC challenging the validity of the amendment under the Administrative Procedure Act.[10] In October, the SEC also announced the largest award in the program’s history—a payment of over $114 million to a whistleblower who provided information and assistance leading to successful enforcement actions.[11] The award, which consists of a $52 million award in connection with the SEC matter and a $62 million award arising out related actions by another agency, comes on the heels of the SEC’s previous record-breaking $50 million whistleblower award in June.[12] This year also saw a record level of tips received by the Office of the Whistleblower, as well as other complaints and referrals received by the Enforcement Division as a whole. The Office of the Whistleblower received over 6,900 tips in fiscal year 2020, a 31% increase over the second-highest tip year in fiscal year 2018.[13] More broadly, the Enforcement Division received over 23,650 tips, complaints and referrals in fiscal 2020, a more than 40% increase over the prior year. Inevitably, the increase in tips this past year is likely to lead to an increase in the number of investigations in the years to come. The SEC’s whistleblower awards also emphasize the assistance whistleblowers contribute to investigations through industry expertise or simply expediting an investigation. For example, in November, the SEC made a payment of over $28 million to an individual who provided information that prompted a company’s internal investigation, and who provided testimony and identified a key witness.[14] Likewise, the SEC announced an award of over $10 million in October to a whistleblower, emphasizing the individual’s substantial ongoing assistance, including help deciphering communications and distilling complex issues.[15] Also of importance to the Commission is a whistleblower’s efforts to reduce ongoing harm to investors. In December, the SEC announced an award of over $1.8 million to a whistleblower who took immediate steps to mitigate harm to investors.[16] Additionally, the announcement noted the whistleblower’s ongoing assistance, which saved time and resources of SEC staff.[17] Other significant whistleblower awards granted during the second half of this year include: An award in July of $3.8 million to a whistleblower for information that allowed the SEC to disrupt an ongoing fraud scheme and led to a successful enforcement action.[18] An award in August of over $1.25 million for information leading to a successful enforcement action, resulting in the return of millions of dollars to investors.[19] Eleven awards in September, including a notable award of $22 million to an insider whistleblower whose tip led the SEC to open an investigation, and who provided ongoing assistance; and a $7 million award to another whistleblower who provided what the SEC deemed “valuable” information regarding the investigation.[20] Additional awards in September included an award of over $2.5 million to joint whistleblowers for a tip based on an independent analysis of a public company’s filings, and for the whistleblowers’ ongoing assistance in the SEC’s investigation;[21] a $10 million payment to an individual who provided information and assistance that were described as of “crucial importance” to the SEC’s successful enforcement action;[22] a $250,000 award to joint whistleblowers who raised concerns internally and whose tip to the SEC spurred the opening of an investigation and a successful enforcement action;[23] payment of $2.4 million to a whistleblower who provided information and assistance that ultimately stopped ongoing misconduct;[24] awards to totaling over $2.5 million to two whistleblowers who reported misconduct overseas;[25] an award of $1.8 million for information regarding ongoing securities law violations;[26] and four awards totaling almost $5 million for “critical information” resulting in a successful enforcement action.[27] An award in October of $800,000 for information that caused the SEC to open an investigation leading to two successful enforcement actions.[28] Four awards in November, including a payment of $3.6 million to a whistleblower who provided information and ongoing assistance to enforcement staff regarding misconduct abroad;[29] a $750,000 payment to an individual who met with enforcement staff and provided information regarding an ongoing fraud;[30] an award of over $1.1 million to a whistleblower who provided what the SEC described a “exemplary assistance,” and led the staff to look at new conduct during an ongoing investigation;[31] and a payment of over $900,000 to an individual who provided importantly information regarding securities law violations occurring overseas.[32] Six awards in December, including payments totaling of over $6 million to joint whistleblowers who provided information, submitted documents, participated in interviews, and identified key witnesses leading to a successful enforcement action;[33] a payment of nearly $1.8 million to a company insider who provided information that would have otherwise been difficult to detect;[34] an award of approximately $750,000 to two whistleblowers who provided tips and substantial assistance to the staff, including participating in interviews and providing subject matter expertise;[35] a payment of almost $400,000 to two individuals who provided information that prompted the opening of an investigation and ongoing assistance to SEC staff;[36] an award of more than $300,000 to a whistleblower with audit-related responsibilities who provided “high-quality” information after becoming aware of potential securities law violations;[37] a payment of more than $1.2 million for a whistleblower who provided information leading to a successful enforcement action, but whose “culpability and unreasonable delay” impacted the award amount; and a $500,000 payment to a whistleblower who provided significant information and ongoing assistance, which led to a successful enforcement action.[38] II.   Public Company Accounting, Financial Reporting and Disclosure Cases Public company accounting and disclosure cases comprised a significant portion of the SEC’s cases in the latter half of 2020, and included a range of actions concerning earnings management, revenue recognition, impairments, internal controls, and disclosures concerning financial performance. A.   Financial Reporting Cases EPS Initiative In September, the SEC announced the Enforcement Division’s “Earnings Per Share (EPS) Initiative” and the settlement of its first two investigations arising from the Initiative. According to the press release announcing the settled actions, the SEC described the EPS Initiative as using “risk-based data analytics to uncover potential accounting and disclosure violations.”[39] Based on the facts described in the two settled actions, the EPS Initiative is focused at least in part on detecting a practice known as “EPS smoothing,” i.e., questionable accounting to achieve EPS results consistent with consensus analyst estimates. According to the SEC, the first company, a carpet manufacturer, made unsupported and non-GAAP-compliant manual accounting adjustments to multiple quarters in order to avoid EPS results falling below consensus estimates. The second company, a financial services company, used a valuation method that was inconsistent with the valuation methodology described in its filings, in order to appear to have consistent earnings over time. Without admitting or denying wrongdoing, the carpet manufacturer agreed to pay a $5 million penalty to settle the charges; the financial services company agreed to pay a $1.5 million penalty. Based on our experience representing clients in such matters, the SEC’s attention can be drawn simply by consistent EPS performance, even in the absence of any basis to suspect misconduct. In such circumstances, it is important to demonstrate to the Staff the integrity of accounting and financial reporting controls that negate the potential for improper accounting. Other Financial Reporting Actions In August, the SEC instituted a settled action against a motor vehicle parts manufacturer for failing to estimate and report over $700 million in future asbestos liabilities.[40] The SEC alleged that, from 2012 to 2016, the company failed to perform quantitative analyses to estimate its future asbestos claim liabilities, despite having decades of raw historical claims data. Instead, the company incorrectly concluded that it could not estimate these liabilities and therefore did not properly account for them in its financial statements. The company agreed to pay a penalty of $950,000 to settle the action, without admitting or denying the SEC’s allegations. Also in August, the SEC announced a settled action against a computer server producer and its former CFO related to alleged violations of the antifraud, reporting, books and records, and internal accounting controls provisions of the federal securities laws.[41] According to the SEC’s order, among other violations, the company incentivized employees to maximize revenue at the end of each quarter without implementing and maintaining sufficient internal accounting controls, resulting in a variety of accounting violations related to prematurely recognized revenue. Without admitting or denying wrongdoing, the company agreed to pay a $17.5 million penalty; the CFO agreed to pay more than $300,000 as disgorgement and prejudgment interest and $50,000 as a penalty. Additionally, the company’s CEO, who was not charged with misconduct, consented to reimburse the company $2.1 million in stock profits he received during the period when the accounting errors occurred under the Sarbanes-Oxley Act’s clawback provision. In September, the SEC instituted a settled action against an engine manufacturer that allegedly inflated its revenue by nearly $25 million by recording its revenues in a manner inconsistent with GAAP.[42] The SEC alleged that the company overstated its revenue by improperly recognizing revenue from incomplete sales, from products that customers had not agreed to accept, and from products with falsely inflated prices, among other violations of GAAP. Without admitting or denying the allegations, the company agreed to pay a $1.7 million penalty, and to undertake measures aimed at remediating alleged deficiencies in its financial reporting internal controls. Also in September, the SEC announced a settled action against a lighting manufacturer and four of its current and former executives for allegedly inflating the company’s revenue from late 2014 to mid-2018, by prematurely recognizing revenue.[43] According to the complaint, using a variety of improper practices, the company recognized sales revenue earlier than allowed by GAAP and by the company’s own internal accounting policies. The company also allegedly provided backdated sales documents to the company’s auditor in order to cover up the improper practices related to premature revenue recognition. Without admitting or denying wrongdoing, the company agreed to pay a $1.25 million penalty, and the executives agreed to pay penalties as well. The same month, the SEC also instituted a settled action against an automaker and two of its subsidiaries related to charges that the automaker disclosed false and misleading information related to overstated retail sales reports.[44] According to the SEC, the automaker inflated its reported retail sales using a reserve of previously unreported retail sales to meet internal monthly sales targets, regardless of the date of the actual sales. The company also allegedly paid dealers to falsely designate unsold vehicles as demonstrators or loaners so that the vehicles could be counted as having been sold, even though they had not been sold. The company and its subsidiaries agreed to pay a joint penalty of $18 million without admitting or denying the SEC’s allegations. Also in September, the SEC instituted settled actions against a heavy equipment manufacturer and three of its former executives for allegedly misleading the company’s outside auditor about nonexistent inventory in order to overstate its income.[45] According to the SEC, the company improperly accounted for nonexistent inventory and created false inventory documents, which it later provided to its outside auditor. The company also allegedly deceived its outside auditor about approximately $12 million in revenue that it improperly recognized. Without admitting or denying the SEC’s allegations, the company and its executives agreed to pay a total of $485,000 in penalties. In October, the SEC filed a complaint against a seismic data company and four of its former executives for accounting fraud for concealing theft by the executives, and for falsely inflating the company’s revenue.[46] According to the complaint, the company improperly recorded revenue from sales to a purportedly unrelated client (that was actually controlled by the executives), with the company recording roughly $100 million in revenue from sales that it knew the client would be unable to actually pay. The U.S. Attorney’s Office for the Southern District of New York also brought a criminal action against the company’s CEO. In November, in a case related to previously settled charges against a large bank, the SEC filed a complaint against the bank’s former Senior Executive Vice President of Community Banking alleging that disclosures concerning the bank’s “cross-sell” metric were misleading and that the defendant knew or should have known was improperly inflated.[47] The SEC also instituted a settled action against the bank’s former chairman and CEO for certifying statements that he should have known were misleading arising from the bank’s inflated cross-sell metric. The SEC alleged that the executives knew or should have known that the cross-sell metric was “inflated by accounts and services that were unused, unneeded, or unauthorized.” The litigation against the vice president remains pending; the CEO agreed to pay a $2.5 million penalty to settle the charges, without admitting or denying the SEC’s allegations. In December, the SEC instituted a settled action against a China-based coffee company, alleging that the company defrauded investors by misstating its revenue, expenses, and net operating losses.[48] According to the complaint, among other things, the company recorded approximately $311 million in false retail sales transactions, as well as roughly $196 million in inflated expenses to conceal the fraudulent sales. The company agreed to pay a $180 million penalty to settle the action, without admitting or denying the SEC’s allegations. B.   Disclosure Cases Disclosures Related to the COVID-19 Pandemic In March 2020, the SEC’s Division of Enforcement formed a Coronavirus Steering Committee to oversee the Division’s efforts to actively look for COVID-19 related misconduct. Since the Steering Committee’s formation, there have been at least five enforcement actions for alleged disclosure violations related to COVID-19. As discussed in our mid-year 2020 alert, there was an initial flurry of disclosure-related enforcement actions at the onset of the pandemic. These actions tended to involve microcap companies whose stock was suspended from trading after sky rocketing on the back of allegedly false statements about these companies’ ability to distribute or access highly coveted protective equipment or technology that could detect or prevent the coronavirus.[49] In the second half of 2020, the SEC has continued to bring enforcement actions against companies for allegedly making false statements about their ability to detect COVID-19. For example, in September, the SEC filed an action against a President and Chief Science Officer (“CSO”) alleging he issued false and misleading statements about the company’s development of a COVID-19 blood test.[50] According to the complaint, the President and CSO incorrectly stated that (i) the company had purchased materials to make a test, (ii) the company had submitted the test for emergency approval, and (iii) there was a high demand for the test. The SEC’s complaint also alleged that the defendant failed to provide necessary documents and financial information to the company’s independent auditor to update the company’s delinquent financial statements for 2014 and 2015. More recently, the SEC announced charges against a biotech company and its CEO for making false and misleading claims in press releases that the company had developed a technology that could accurately detect COVID-19 through a blood test.[51] According to the complaint, the company and CEO made false and misleading statements about the existence of the physical testing device and the status of FDA emergency use authorization while advisors warned that the testing kit would not work as the company publicly described. The SEC is also starting to bring enforcement actions against companies for alleged misstatements concerning how their financials were affected by the coronavirus. For example, in December, the SEC announced a settled order against a publicly traded restaurant company for allegedly incomplete disclosures in a Form 8-K about the financial effects of the pandemic on the company’s business operations and financial condition.[52] In brief, according to the SEC’s settled order, the company disclosed that it expected to be able to operate “sustainably, ” but did not disclose that it was losing $6 million in cash per week, it only had 16 weeks of cash remaining, it was excluding expenses attributable to corporate operations from its claim of sustainability, and it was not going to pay rent in April 2020. Without admitting or denying the SEC’s findings, the company agreed to pay a $125,000 penalty and to cease-and-desist from further violations of the reporting provisions in Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20. See our prior alert on this case for additional analysis and commentary on this case. Other Disclosure Cases In December, the SEC instituted a settled action against a U.S. based multinational company for allegedly failing to disclose material information about the company’s power and insurance businesses in three separate situations.[53] First, according to the SEC, the company misled investors by disclosing its power business’s increased profits without also disclosing that between one-quarter and one-half of those profits were a result of reductions in the company’s prior cost estimates. Second, the company failed to disclose that its reported increase in cash collections came at the expense of future years’ cash and was derived principally from internal sales between the company’s own business units. Third, the company lowered projected costs for its future insurance liabilities without disclosing uncertainties about those projected costs due to a general trend of rising long-term health insurance claim costs. Without admitting or denying wrongdoing, the company agreed to settle the allegations and pay a $200 million penalty. The settlement also contained a relatively unique undertaking by which the company agreed to self-report to the SEC regarding certain accounting and disclosure controls for one year. In September, the SEC announced a settled action against an automaker for allegedly misleading disclosures about its vehicles’ emissions control systems.[54] According to the SEC, the automaker stated in a February press release and annual report that an internal audit had confirmed its vehicles complied with emissions regulations, without disclosing that the internal audit had a narrow scope and was not a comprehensive review, and also without disclosing that the Environmental Protection Agency and California Air Resource Board had expressed concerns to the automaker about some of its vehicles’ emissions. The automaker agreed to pay a $9.5 million penalty without admitting or denying the SEC’s allegations. In September, the SEC instituted a settled action against a hospitality company for failing to fully disclose executive perks by omitting disclosure of approximately $1.7 million in executive travel benefits.[55] The benefits at issue related to company executives’ stays at the company’s hotels, and to the CEO’s personal use of corporate aircraft from the period 2015 to 2018. The company agreed to pay a $600,000 penalty to settle the action, without admitting or denying the SEC’s allegations. C.   Cases Involving Both Misleading Disclosures and Financial Reporting In July, the SEC announced a settled action against a pharmaceutical company and three of its former executives for misleading disclosures and accounting violations.[56] According to the SEC, the company made misleading disclosures related to its sales to a pharmacy that the company helped establish and subsidize. For example, the company announced it was experiencing double-digit same store organic growth (a non-GAAP financial measure) without disclosing that much of that growth came from sales to the subsidized pharmacy and without disclosing risks related to that pharmacy. The SEC also alleged that the company improperly recognized revenue by incorrectly allocating $110 million in revenue attributable solely to one product to over 100 unrelated products. Without admitting or denying the allegations, the company agreed to pay a $45 million penalty; the former executives agreed to pay penalties ranging from $75,000 to $250,000 and to reimburse the company for previously paid incentive compensation in amounts ranging from $110,000 to $450,000. Additionally, the Controller agreed to a one-year accounting practice bar before the SEC. In August, the SEC settled instituted a settled action against the former CEO and Chairman of a car rental company alleging that he aided and abetted the company in filing misleading disclosures and inaccurate financial reporting.[57] According to the SEC, the former CEO lowered the company’s depreciation expenses by lengthening the period for which the company planned to hold rental cars in its fleet, from holding periods of twenty months to holding periods of twenty-four and thirty months; the CEO did not fully disclose the new, lengthened holding periods, and did not disclose the risks associated with an older fleet. The complaint also alleged that, when the company fell short of forecasts, the former CEO pressured employees to “find money,” mainly by reanalyzing reserve accounts, resulting in his subordinates making accounting changes that left the company’s financial reports inaccurate. Without admitting or denying the SEC’s allegations, the former CEO agreed to pay a $200,000 penalty and reimburse the company $1.9 million. The car rental company had already agreed to pay a $16 million penalty to settle related charges, in December 2018. In September, the SEC announced a settled action against a charter school operator engaged in a $7.6 million municipal bond offering, and its former president alleging that the defendants provided inaccurate financial projections and failed to disclose the school’s financial troubles.[58] According to the complaint, the school’s offering document included inaccurate profit and expense projections that indicated the school would become profitable in the next year when, according to the SEC, the school knew or should have known that these projections were inaccurate. The complaint also alleged that the school failed to disclose that it was operating at a sizable loss and had made repeated unauthorized withdrawals from its reserve accounts to pay its debts and routine expenses. Without admitting or denying wrongdoing, the school and its former president agreed to a settlement enjoining them from future violations; the former president also agreed to be enjoined from participating in future municipal securities offerings and to pay a $30,000 penalty. Also in September, the SEC instituted a settled action against a technology company for inflating reported sales by prematurely recognizing sales expected to occur later and for failing to disclose these practices.[59] According to the SEC’s order, the company allegedly failed to disclose a practice used to increase monthly sales in which some regional managers would accelerate, or “pull-in,” to an earlier quarter’s sales that they expected to occur in later quarters. The company also allegedly failed to disclose that some regional managers sold to resellers known to violate company policy by selling product outside their designated territories in order to increase monthly sales. Finally, the SEC’s order alleged that the company made misleading disclosures by disclosing information related to its channel health that only included channel partners to which the company sold directly, without disclosing that this information did not include channel partners to which the company sold indirectly. The company agreed to pay a $6 million penalty, without admitting or denying wrongdoing. In December, the SEC announced the settlement of an action filed in February against an energy company and its subsidiary for making misleading statements by claiming that the company would qualify for large tax credits for which the company knew it likely would not be eligible.[60] According to the SEC, the company represented that its project to build two new nuclear power units was on schedule, and therefore, would likely qualify for more than $1 billion in tax credits, when the company knew its project was substantially delayed and, resultingly, would likely fail to qualify for these tax credits. Without admitting or denying the allegations, the company agreed to pay a $25 million penalty; the company and its subsidiary also agreed to pay $112.5 million in disgorgement and prejudgment interest. The settlement remains subject to court approval. The litigation against two of the company’s senior executives remains ongoing. Also in December, the SEC filed a complaint against a brand-management company with violations of the federal securities laws’ related to the company’s alleged failure to account for and disclose evidence of goodwill impairment.[61] The complaint alleged that the company unreasonably concluded that its goodwill was not impaired based on a qualitative impairment analysis, without taking into account and also without disclosing two internal quantitative analyses showing that goodwill was likely impaired. The litigation against the company remains ongoing. D.   Internal Controls Increasingly, the SEC has demonstrated a willingness to resolve investigations of public companies on the basis of violations of the internal controls provisions of the Exchange Act. One recent example of an internal controls settlement provided a rare window into a significant divergence of opinion among the Commissioners concerning the appropriateness of such settlements based on a broad application of the internal controls provision. In October, the SEC instituted a settled action against an energy company related to charges that the company failed to maintain internal controls that would have provided reasonable assurance that the company’s stock buyback plan would have complied with its own buyback policies.[62] According to the SEC’s order, the company implemented a $250 million stock buyback while in possession of material nonpublic information (MNPI) about a potential acquisition, in spite of the company’s policy prohibiting repurchasing stock while in possession of MNPI. In addition to detailing the litany of factors illustrating that the probability of the acquisition was sufficiently high as to have constituted MNPI, the SEC’s order focused on the company’s insufficient process for evaluating whether the acquisition discussions were material at the time it adopted a 10b5-1 plan for the buyback. Specifically, the process did not include speaking with the individuals at the company reasonably likely to have material information about significant corporate developments. As a result, the SEC’s order alleged that the company’s legal department did not consult with the CEO about the prospects of the company being acquired, even though the CEO was the primary negotiator. The company’s legal department thus “failed to appreciate” that the transaction’s probability was high enough to constitute MNPI. Despite these findings, the SEC did not bring insider trading charges, but instead alleged that the company’s internal controls were insufficient to provide reasonable assurance that the company’s buyback transactions would comply with its buyback policy. Without admitting or denying the allegations, the company agreed to pay a $20 million penalty. Notably, Republican Commissioners Roisman and Peirce dissented from the Commission’s decision to institute the enforcement action. In a public statement explaining their dissent, the Commissioners argued that the internal controls provision, Section 13(b)(2)(B) of the Exchange Act, applies to “internal accounting controls,” and thus does not apply to internal controls to ensure a company does not repurchase stock in compliance with company policies. III.   Investment Advisers In the second half of 2020, the SEC instituted a number of actions against investment advisers. We discuss notable cases below. A.   Payment for Order Flow In August, the SEC instituted a settled action against two affiliated investment advisers in connection with their alleged misrepresentations to certain mutual fund and exchange-traded fund clients regarding “payment for order flow” arrangements, i.e., payments the investment adviser received for sending client orders to other brokerage firms for execution.[63] According to the SEC, on multiple occasions, the investment advisers made misleading statements that the payment for order flow arrangements did not adversely affect the prices at which the clients’ orders were executed, when in fact the executing brokers adjusted the execution prices to recoup those payments. Without admitting or denying the findings in the SEC’s order, the firms agreed to a cease-and-desist order, and to pay a combined total of $1 million in penalties. B.   Mutual Fund Share Classes In August, the SEC instituted a settled action against a California-based investment advisory firm based on allegations that it engaged in practices that violated its fiduciary duties to clients.[64] According to the SEC, the firm failed to disclose a conflict of interest in selecting mutual fund share classes that charged certain fees instead of available lower-cost share classes of the same funds. The firm’s affiliated broker received the associated fees in connection with these investments. Additionally, the SEC alleged that the firm failed to disclose its receipt of revenue sharing payments from its clearing broker in exchange for purchasing or recommending certain money market funds to clients. The SEC further alleged that these practices resulted in a violation of the firm’s duty to seek best execution for those transactions. Without admitting or denying the findings in the SEC’s order, the firm agreed to a cease-and-desist order and to pay disgorgement of $544,446, plus prejudgment interest of $22,746, and a penalty of $200,000, all for distribution to investors. C.   Exchange-Traded Products In November, the SEC announced the first enforcement actions resulting from the Division of Enforcement’s “Exchange-Traded Products Initiative.” The SEC instituted settled actions against five firms registered as investment advisers and/or broker dealers in connection with their alleged unsuitable sales of complex, volatility-linked exchange-traded products to retail investors.[65] According to the SEC, representatives of the firms recommended that their clients buy and hold exchange-traded products for long periods of time, contrary to the warnings in the products’ offering documents, which made clear that they were intended to be short-term investments. The SEC further alleged that the firms failed to adopt or implement policies and procedures to address whether their registered representatives sufficiently understood the products to be able to form a reasonable basis to assess suitability or to recommend that their clients buy and hold the products. The firms agreed to pay a total of $3,000,000 in civil penalties among the five firms. D.   Puerto Rico Bonds In December, the SEC filed a complaint in federal court in Puerto Rico against a Florida-based individual operating as an unregistered investment adviser.[66] According to the SEC’s complaint, the individual promised municipal officials in Puerto Rico an annual return of 8-10% on their approximately $9 million investment in the municipality’s funds, with no risk to principal. To convince officials to invest in the municipality’s funds, the individual allegedly falsified bank correspondence and brokerage opening documents. The SEC further alleged that the individual failed to execute the promised investment strategy, instead misappropriating $7.1 million of taxpayer funds by transferring the funds to himself, entities he controlled, and his associates. The SEC’s complaint seeks permanent injunctive relief, disgorgement of alleged ill-gotten gains plus prejudgment interest, and a civil penalty. E.   Disclosure Violations In December, the SEC instituted a settled action against a UK-based investment adviser based on allegations that the company failed to make complete and accurate disclosures relating to the transfer of its highest-performing traders from its flagship client fund to a proprietary fund, and the replacement of those traders with a semi-systematic, algorithmic trading program.[67] The SEC alleged that the algorithmic trading program underperformed compared to the firm’s live traders, generating less profit with greater volatility. Additionally, the investment adviser allegedly failed to adequately implement policies and procedures reasonably designed to prevent the violations of the Investment Advisers Act under the particular circumstances described above. Without admitting or denying the findings in the SEC’s order, the firm agreed to a cease-and-desist order and to pay disgorgement and penalties totaling $170 million, all to be distributed to investors. F.   Single Broker Quotes In December, the SEC instituted a settled action against a New York-based investment adviser and global securities pricing service based on allegations that the firm failed to adopt and implement policies and procedures reasonably designed to address the risk that the single broker quotes it delivered to clients did not reasonably reflect the value of the underlying securities.[68] The SEC further alleged that the firm failed to effectively or consistently implement quality controls for prices delivered to clients based on the single broker quotes. Without admitting or denying the findings in the SEC’s order, the firm agreed to cease and desist from future violations, to a censure, and to pay an $8 million penalty. G.   Cherry Picking In December, the SEC filed a complaint in federal court in Texas against a Dallas-based investment adviser and its principal, charging the defendants with violations of the antifraud provisions of the federal securities laws.[69] The SEC’s complaint alleges that the principal placed options trades in the investment adviser’s omnibus account early in the trading day, but waited until near or after market close to allocate the trades to either his personal account or to specific client accounts. As alleged in the complaint, the principal disproportionately allocated profitable trades to his personal accounts and unprofitable trades to advisory clients, while representing to clients that all trades would be equitably allocated. The SEC’s complaint seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties. IV.   Broker-Dealers and Financial Institutions Although not as numerous as prior years, there were nevertheless notable cases involving the conduct of broker-dealers in the latter half of 2020. A.   Financial Reporting and Recordkeeping In August, the SEC instituted a settled action against a broker-dealer for neglecting to file over 150 suspicious activity reports (SARs) relating to microcap securities that the firm traded on behalf of its customers.[70] The purpose of SARs is to identify and investigate potentially suspicious activity, and the SEC’s order alleged that the broker-dealer failed to do so, even when suspicious transactions were identified by compliance personnel. The allegedly suspicious activity included numerous instances where customers either deposited and sold large blocks of microcap securities before quickly withdrawing the resulting proceeds from the respective accounts, sold enough of a particular microcap security on given days to account for over 70% of the daily trading volume for that security, or deposited microcap securities that were subject to SEC trading suspensions. The broker-dealer agreed to pay an $11.5 million penalty to the SEC, without admitting or denying the findings, and additionally agreed to pay penalties of $15 million and $11.5 million to FINRA and the CFTC respectively. In September, the SEC instituted a settled action against a broker-dealer subsidiary of a global financial services firm for alleged violations of Regulation SHO.[71] Regulation SHO governs short sales and, among other things, generally prohibits broker-dealers from separately marking their long and short positions in a given security, instead requiring order aggregation to determine and mark one net position for each security. The SEC’s order alleged that the broker-dealer had a “Long Unit” that purchased equity securities to hedge short synthetic exposure, which should have been aggregated with a separate “Short Unit” that sold equity securities to similarly hedge long synthetic exposure for the purposes of order marking. The broker-dealer agreed to pay a $5 million penalty without admitting or denying the SEC’s findings. B.   Trade Manipulation In September, the SEC instituted a settled action against a broker-dealer subsidiary of a global financial services firm for allegedly using trading techniques that artificially depressed or boosted the price of securities that it intended to buy or sell.[72] Specifically, the SEC’s order alleged that traders at the broker-dealer entered bona-fide buy-or-sell orders for particular securities, while simultaneously entering non bona-fide orders on the opposite side of the market to create a false appearance of buy or sell interest. In a settlement, the broker-dealer admitted to the SEC’s findings and agreed to pay a $25 million penalty and $10 million in disgorgement. C.   Best Execution and Payment for Order Flow In December, the SEC instituted a settled action against a retail broker-dealer for alleged misstatements concerning revenue streams and execution quality, and for alleged best execution violations.[73] Specifically, the SEC’s order alleged that the broker-dealer did not disclose that it received revenue from order flow, i.e. routing its customers’ orders to principal trading firms, and further alleged that its statements concerning execution quality were inaccurate, even after accounting for customer savings from not having to pay a commission. Without admitting or denying the Commission’s findings, the broker-dealer agreed to pay a $65 million penalty and to obtain an independent consultant to review its relevant policies. V.   Cryptocurrency and Digital Assets The Commission continued to bring enforcement actions in the area of digital assets during the second half of 2020. As in the first half of the year, these actions primarily were based on alleged failures to comply with the requirement to register an offering of assets deemed to be securities or allegations of fraud in the offer and sale of digital assets. A.   Significant Developments Significantly, the SEC closed the year by bringing two enforcement actions involving digital assets. On December 22, the SEC charged Ripple Labs Inc. (“Ripple”) and two of its executives—its co-founder and board chairman and its CEO—with raising $1.3 billion through the sale of unregistered digital asset securities.[74] In particular, the SEC alleged that the native digital currency of Ripple, XRP, which has been sold by Ripple and others and trading in secondary markets, including on cryptocurrency exchanges for seven years, is a security (not merely a currency) under the Howey test, which defines a security as an investment of money in a shared enterprise with an expectation of profits from others’ work.[75] Additionally, the SEC alleged that the two executives personally made $600 million worth of unregistered sales of the digital asset. In the press release announcing the action, the SEC stressed that all public issuers “must comply with federal securities laws that require registration of offerings unless an exemption from registration applies.” Six days later, on December 28, the SEC obtained an emergency asset freeze against Virgil Capital LLC and its affiliates due to an alleged fraud perpetrated by the company’s owner.[76] The complaint alleged that the owner and his companies had been fraudulently misrepresenting to investors that their funds were to be used only for digital currency trading, when in reality those funds were used for personal expenses or other high-risk investments. Another notable development demonstrates the increasing emphasis the SEC is placing on the protection of investors in the context of FinTech innovation. On December 3, 2020, the Commission announced that it was elevating the Strategic Hub for Innovation and Financial Technology (“FinHub”), to a stand-alone office. Previously, the FinHub, which was initially established in 2018, had been a unit within the Division of Corporation Finance.[77] Since its inception, FinHub has “spearheaded agency efforts to encourage responsible innovation in the financial sector, including in evolving areas such as distributed ledger technology and digital assets, automated investment advice, digital marketplace financing, and artificial intelligence and machine learning,” and provided industry players and regulators with a forum to engage with SEC Staff. The establishment of FinHub as a stand-alone office—which will continue to be led by current director Valerie A. Szczepanik—signals that the Commission will continue to focus on digital assets in the years to come. Although the end of the year arguably was a high-water mark concerning the SEC’s enforcement of actions involving digital assets, the Commission consistently brought similar actions throughout the second half of the year, as discussed below. B.   Registration Cases In July, the SEC instituted a settled action against a privately-owned California-based company and a related Philippine company for offering and selling U.S.-based securities without registration via an app and for trading in the related swap transactions outside of a registered national exchange.[78] The app allowed individuals to enter into a contract in which they would choose specific securities to “mirror,” and the value of their contracts would fluctuate according to the price of the underlying security. The Commission determined that the contracts constituted security-based swaps, and therefore were subject to U.S. securities laws. Without admitting or denying to the findings in the order, the two companies agreed to pay a penalty of $150,000. Additionally, the companies entered into a separate settlement with the CFTC arising from similar conduct. In September, the SEC instituted a settled action against an operator of an online gaming and gambling platform for conducting an unregistered initial coin offering (“ICO”) of digital assets.[79] The order found that the company raised approximately $31 million through the offering of its digital token, and promised investors that it would develop a secondary market for trading in its tokens. The SEC determined that the tokens were sold as investment contracts, thereby constituting securities, the offering of which should have been registered. The company agreed to pay a $6.1 million penalty, without admitting or denying the Commission’s findings, and further agreed to disable the token and remove it from all digital asset-trading platforms. The Washington State Department of Financial Institution separately entered into a settlement agreement in connection with this offering. C.   Fraud Cases In August, the SEC instituted a settled action against a Virginia-based company and its CEO, in connection with the company’s $5 million ICO to raise funding to develop an internet-based job-posting platform.[80] The SEC found that the offering of sale of the coin constituted the sale of unregistered securities, and that the company and its CEO made false and misleading statements to investors relating to the stability of its digital asset and its scalability compared to its competitors. Without admitting or denying the findings in the order, the company agreed to disgorge the $5 million raised and pay over $600,000 in prejudgment interest; the CEO was barred from serving as an officer or director of a public company and agreed to pay a $150,000 penalty; and the company and CEO both agreed to cease trading in (and destroy existing) coins and refrain from participating in any offerings of any digital asset securities. In September, the SEC instituted a settled action against four individuals, and brought non-settled charges against another individual—an Atlanta-based film producer—and their two companies in connection with the misappropriation and theft of funds that were raised via ICOs.[81] The producer allegedly used the misappropriated funds and proceeds of manipulative trading to buy a Ferrari, a home, jewelry, and other luxury items. Three of the settling defendants agreed to pay a penalty of $25,000 and are prohibited from participating in the issuance of or otherwise transact in digital assets for five years. The fourth settling defendant agreed to pay a $75,000 penalty and is subject to a similar injunction. The U.S. Attorney’s Office for the Northern District of Georgia has also brought a criminal action against the non-settling defendant. In October, the SEC filed an action against a software magnate and computer programmer for fraudulently promoting investments in ICOs to his thousands of Twitter followers.[82] The Complaint alleges that the programmer failed to disclose that he was paid more than $23 million to promote the investments and made other false and misleading statements, such as that he was advising some of the issuers and personally invested in some of the ICOs. The SEC also brought charges against the programmer’s bodyguard, alleging that he received over $300,000 to help with the scheme. The SEC also alleged that the programmer secretly amassed a large holding in another digital asset while promoting it on Twitter, with the intention of selling his holding at an inflated price. The DOJ’s Tax Division has separately brought criminal charges against the computer programmer. VI.   Insider Trading Insider trading is another area in which the number and size of cases was diminished from prior years. Nevertheless, insider trading enforcement remains a significant focus for the SEC. Below we note some of the more significant actions. The SEC announced two insider trading cases in September, and brought a third in December. In the first case, the SEC filed charges against a senior manager at an index provider and his friend, for allegedly obtaining more than $900,000 by trading on inside information.[83] According to the SEC, the manager used information regarding which companies were to be added or removed from the market index to place call and put options using the friend’s brokerage account. The SEC’s complaint seeks injunctive relief and civil penalties; the U.S. Attorney’s Office for the Eastern District of New York filed parallel criminal charges against the manager. In the second case, the SEC settled insider trading charges against a former finance manager at an online retailer and two family members.[84] According to the SEC’s complaint, the employee allegedly tipped her husband about the company’s financial performance in advance of earnings announcements; the employee’s husband and his father used the information to trade in the company’s shares. The three individuals consented to the entry of a judgment enjoining future violation ordering payment of approximately $2.65 million in disgorgement and penalties. The U.S. Attorney’s Office for the Western District of Washington filed parallel criminal charges against the employee’s husband. Most recently, the SEC filed insider trading charges against an individual in the Eastern District of New York.[85] According to the SEC’s complaint, the individual obtained information regarding a private equity firm’s interest in a publicly traded chemical manufacturing company in advance of a press release announcing the news. The individual traded on the information and additionally tipped others to trade for a collective profit of $1 million once the news broke. The SEC’s complaint seeks injunctive relief and civil penalties. VII.   Actions Against Attorneys It is rare for the SEC to bring enforcement actions against attorneys for conduct in their capacity as lawyers. Thus, when the SEC does bring such cases, it is notable. In December, the SEC filed a partially settled action against two attorneys: one licensed attorney and one disbarred attorney with fraud related to the licensed attorney’s reliance on the disbarred attorney for the preparation of attorney opinion letters for the sale of shares in microcap securities to retail investors.[86] The SEC alleged that the licensed attorney knew the disbarred attorney was disbarred during all relevant times. According to the complaint, the disbarred attorney prepared for the licensed attorney’s signature at least thirty attorney opinion letters, on which the licensed attorney falsely stated that he had personal knowledge of the bases for the opinions in the letters. The complaint also alleged that the disbarred attorney submitted over 100 attorney opinion letters in which he falsely claimed to be an attorney. Without admitting or denying the allegations, the licensed attorney agreed to a partial settlement to an injunction and penny-stock bar, with the potential for other remedies, including penalties, reserved. The SEC’s litigation against the disbarred attorney remains ongoing, as does a criminal action against both attorneys. VIII.   Offering Frauds The SEC continued to bring offering fraud cases, which often contain charges against individuals and companies that target particular groups of investors. A.   Frauds Targeting Senior Citizens and Retirees In July, the SEC filed a complaint against an aviation company and its owner, alleging that the company raised $14 million, largely from retired first responders, by representing that it would use the funds to purchase engines and other aircraft parts for leasing to major airlines.[87] The SEC’s complaint alleges that, instead, the company and its owner diverted most of the money for unauthorized purposes, including Ponzi-scheme like payments to other investors. In September, the SEC charged the former president of a real estate company with violating antifraud provisions of the securities laws in connection with a $330 million alleged Ponzi-like scheme that impacted seniors.[88] In a second September case, the SEC announced settled charges against two individuals charged in connection with the sale of unregistered stock, following up on a 2019 action by the SEC against the company’s former CEO and two previously barred brokers.[89] According to the SEC, the three recently-charged individuals received undisclosed commissions totaling nearly $500,000 in connection with the sale of nearly $1.4 million in stocks to retail investors, most of whom were seniors. In a recent case, the SEC filed civil charges against an individual in the Eastern District of New York for operating a Ponzi-like scheme that raised over $69 million from current and retired police officers and firefighters, among other investors.[90] The SEC’s complaint alleges that the individual represented that the investments would be used to acquire jewelry for a business that he operated, but instead were diverted to perpetuate and conceal the fraudulent scheme. The individual has pleaded guilty to related criminal charges. B.   Frauds Targeting Affinity Groups In August, the SEC charged three principals and their companies in connection with a Ponzi-like scheme targeting African immigrants.[91] According to the SEC, the investors believed that the funds would be used for foreign exchange and cryptocurrency trading. The CFTC also filed civil charges, and the DOJ filed criminal charges. In September, the SEC filed a complaint in the Eastern District of New York against a Swedish national in connection with a purportedly “pre-funded reversed pension plan” that was largely marketed online and attracted over 800 investors from the Deaf, Hard of Hearing and Hearing Loss communities.[92] Finally, in December, the SEC brought an emergency action against a real estate development company and its owner in connection with a $119 million round of fundraising that predominantly targeting South Asian investors.[93] C.   Fraud Related to Online Retailers and Technology Providers The SEC has also focused on companies engaged in or making representations about emerging technologies and e-commerce. For example, the SEC charged an e-commerce startup and its CEO in Northern California with misrepresenting the extent of the company’s contracts with more well-known retailers and brands in order to attract investment.[94] The SEC filed another complaint against the founder and CEO of a machine-learning analytics company in California, alleging that the founder misrepresented the company’s prior financial performance and its client list.[95] In the Eastern District of Virginia, the SEC filed charges alleging that the founder and CEO of an online marketplace in connection with the offering and selling of over $18.5 million in securities, some of which were sold to corporate investors.[96] Both the U.S. Attorney’s Office and the Fraud Section of the Department of Justice have also announced criminal charges based on similar allegations. Finally, a court in the Southern District of New York froze over $35 million in assets[97] in connection with allegations by the SEC that the former CEO of a fraud detection and prevention software company misled investors by providing investors with erroneous financial statements.[98] According to the SEC, the former CEO altered bank statements supplied to the company’s finance department and incorporated into investor materials over the course of two years, during which the company raised approximately $123 million. ________________________     [1]     Paul Kiernan and Scott Patterson, “An Old Foe of Banks Could Be Wall Street’s New Top Cop,” Wall Street Journal, Jan. 16, 2021, available at https://www.wsj.com/articles/an-old-foe-of-banks-could-be-wall-streets-new-top-cop-11610773211.    [2]     Speech by Chairman Jay Clayton, “Putting Principles into Practice, the SEC from 2017-2020,” Remarks to the Economic Club of New York, Nov. 12, 2020, available at https://www.sec.gov/news/speech/clayton-economic-club-ny-2020-11-19.    [3]     See 2020 Annual Report of U.S. SEC Division of Enforcement, available at https://www.sec.gov/files/enforcement-annual-report-2020.pdf.    [4]     National Defense Authorization Act for Fiscal Year 2021, H.R. 6395, 116th Cong. (2020).    [5]     Id.    [6]     Id.    [7]     Whistleblower Program, 2020 Annual Report to Congress, available at https://www.sec.gov/files/2020%20Annual%20Report_0.pdf.    [8]     SEC Press Release, SEC Awards Over $1.6 Million to Whistleblower (Dec. 22, 2020), available at https://www.sec.gov/news/press-release/2020-333.    [9]     SEC Press Release, SEC Adds Clarity, Efficiency, and Transparency to Its Successful Whistleblower Award Program (Sept. 23, 2020), available at https://www.sec.gov/news/press-release/2020-219.    [10]    Lydia DePhillis, “The SEC Undermined a Powerful Weapon Against White-Collar Crime,” ProPublica (Jan. 13, 2021), available at https://www.propublica.org/article/the-sec-undermined-a-powerful-weapon-against-white-collar-crime.    [11]    SEC Press Release, SEC Issues Record $114 Million Whistleblower Award (Oct. 22, 2020), available at https://www.sec.gov/news/press-release/2020-266.    [12]    SEC Press Release, SEC Issues Record $114 Million Whistleblower Award (Oct. 22, 2020), available at https://www.sec.gov/news/press-release/2020-266.    [13]    Whistleblower Program, 2020 Annual Report to Congress, available at https://www.sec.gov/files/2020%20Annual%20Report_0.pdf.    [14]    SEC Press Release, SEC Awards Over $28 Million to Whistleblower (Nov. 3, 2020), available at https://www.sec.gov/news/press-release/2020-275.    [15]    SEC Press Release, SEC Awards Over $10 Million to Whistleblower (Oct. 29, 2020), available at https://www.sec.gov/news/press-release/2020-270.    [16]    SEC Press Release, SEC Issues Multiple Whistleblower Awards Totaling Over $3.6 Million (Dec. 18, 2020), available at https://www.sec.gov/news/press-release/2020-325.    [17]    SEC Press Release, SEC Issues Multiple Whistleblower Awards Totaling Over $3.6 Million (Dec. 18, 2020), available at https://www.sec.gov/news/press-release/2020-325.    [18]    SEC Press Release, SEC Issues $3.8 Million Whistleblower Award (July 14, 2020), available at https://www.sec.gov/news/press-release/2020-155.    [19]    SEC Press Release, SEC Awards Over $1.25 Million to Whistleblower (Aug. 31, 2020), available at https://www.sec.gov/news/press-release/2020-199.    [20]    SEC Press Release, SEC Awards Almost $30 Million to Two Insider Whistleblowers (Sept. 30, 2020), available at https://www.sec.gov/news/press-release/2020-239.    [21]    SEC Press Release, SEC Awards Over $2.5 Million to Joint Whistleblowers for Detailed Analysis That Led to Multiple Successful Actions (Sept. 1, 2020), available at https://www.sec.gov/news/press-release/2020-201.    [22]    SEC Press Release, SEC Awards More Than $10 Million to Whistleblowers (Sept. 14, 2020), available at https://www.sec.gov/news/press-release/2020-209.    [23]    SEC Press Release, SEC Awards Almost $250,000 to Joint Whistleblowers (Sept. 17, 2020), available at https://www.sec.gov/news/press-release/2020-214.    [24]    SEC Press Release, SEC Issues $2.4 Million Whistleblower Award (Sept. 21, 2020), available at https://www.sec.gov/news/press-release/2020-215.    [25]    SEC Press Release, SEC Issues Two Whistleblower Awards for High-Quality Information Regarding Overseas Conduct (Sept. 25, 2020), available at https://www.sec.gov/news/press-release/2020-225.    [26]    SEC Press Release, SEC Issues $1.8 Million Whistleblower Award to Company Outsider (Sept. 28, 2020), available at https://www.sec.gov/news/press-release/2020-231.    [27]    SEC Press Release, SEC Whistleblower Program Ends Record-Setting Fiscal Year With Four Additional Awards (Sept. 30, 2020), available at https://www.sec.gov/news/press-release/2020-240.    [28]    SEC Press Release, SEC Awards $800,000 to Whistleblower (Oct. 15, 2020), available at https://www.sec.gov/news/press-release/2020-255.    [29]    SEC Press Release, SEC Awards More Than $3.6 Million and $750,000 in Separate Whistleblower Awards (Nov. 5, 2020), available at https://www.sec.gov/news/press-release/2020-278.    [30]    SEC Press Release, SEC Awards More Than $3.6 Million and $750,000 in Separate Whistleblower Awards (Nov. 5, 2020), available at https://www.sec.gov/news/press-release/2020-278.    [31]    SEC Press Release, SEC Awards Over $1.1 Million to Whistleblower for Independent Analysis (Nov. 13, 2020), available at https://www.sec.gov/news/press-release/2020-283.    [32]    SEC Press Release, SEC Awards Whistleblower Over $900,000 (Nov. 19, 2020), available at https://www.sec.gov/news/press-release/2020-288.    [33]    SEC Press Release, SEC Awards Over $6 Million to Joint Whistleblowers (Dec. 1, 2020), available at https://www.sec.gov/news/press-release/2020-297.    [34]    SEC Press Release, SEC Issues Multiple Whistleblower Awards Totaling Nearly $3 Million (Dec. 7, 2020), available at https://www.sec.gov/news/press-release/2020-307.    [35]    SEC Press Release, SEC Issues Multiple Whistleblower Awards Totaling Nearly $3 Million (Dec. 7, 2020), available at https://www.sec.gov/news/press-release/2020-307.    [36]    SEC Press Release, SEC Issues Multiple Whistleblower Awards Totaling Nearly $3 Million (Dec. 7, 2020), available at https://www.sec.gov/news/press-release/2020-307.    [37]    SEC Press Release, SEC Awards More Than $300,000 to Whistleblower with Audit Responsibilities (Dec. 14, 2020), available at https://www.sec.gov/news/press-release/2020-316.    [38]    SEC Press Release, SEC Issues Multiple Whistleblower Awards Totaling Over $3.6 Million (Dec. 18, 2020), available at https://www.sec.gov/news/press-release/2020-325.    [39]         SEC Press Release, SEC Charges Companies, Former Executives as Part of Risk-Based Initiative (Sept. 28, 2020), available at https://www.sec.gov/news/press-release/2020-226.    [40]    SEC Press Release, SEC Charges BorgWarner for Materially Misstating its Financial Statements (Aug. 26, 2020), available at https://www.sec.gov/news/press-release/2020-195.    [41]    SEC Press Release, SEC Charges Super Micro and Former CFO in Connection with Widespread Accounting Violations (Aug. 25, 2020), available at https://www.sec.gov/news/press-release/2020-190.    [42]    SEC Press Release, Engine Manufacturing Company to Pay Penalty, Take Remedial Measures to Settle Charges of Accounting Fraud (Sept. 24, 2020), available at https://www.sec.gov/news/press-release/2020-222.    [43]    SEC Press Release, SEC Charges Lighting Products Company and Four Executives with Accounting Violations (Sept. 24, 2020), available at https://www.sec.gov/news/press-release/2020-221.    [44]    SEC Press Release, SEC Charges BMW for Disclosing Inaccurate and Misleading Retail Sales Information to Bond Investors (Sept. 24, 2020), available at https://www.sec.gov/news/press-release/2020-223.    [45]    SEC Press Release, SEC Charges Manitex International and Three Former Senior Executives with Accounting Fraud (Sept. 29, 2020), available at https://www.sec.gov/news/press-release/2020-237.    [46]    SEC Press Release, SEC Charges Seismic Data Company, Former Executives with $100 Million Accounting Fraud (Oct. 8, 2020), available at https://www.sec.gov/news/press-release/2020-251.    [47]    SEC Press Release, SEC Charges Former Wells Fargo Executives for Misleading Investors About Key Performance Metric (Nov. 13, 2020), available at https://www.sec.gov/news/press-release/2020-281.    [48]    SEC Press Release, Luckin Coffee Agrees to Pay $180 Million Penalty to Settle Accounting Fraud Charges (Dec. 16, 2020), available at https://www.sec.gov/news/press-release/2020-319.    [49]    See, e.g., Praxsyn Corp., Applied Biosciences Corp., and Turbo Global partners Inc.    [50]     SEC Press Release, SEC Orders Top Executive of California Microcap Company for Misleading Claims Concerning COVID-19 Test and Financial Statements (Sept. 25, 2020), available at https://www.sec.gov/news/press-release/2020-224.    [51]     SEC Press Release, SEC Charges Biotech Company and CEO with Fraud Concerning COVID-19 Blood Testing Device (Dec. 18, 2020), available at https://www.sec.gov/news/press-release/2020-327.    [52]     SEC Press Release, SEC Charges the Cheesecake Factory for Misleading COVID-19 Disclosures (Dec. 4, 2020), available at https://www.sec.gov/news/press-release/2020-306.    [53]    SEC Press Release, General Electric Agrees to Pay $200 Million Penalty for Disclosure Violations (Dec. 9, 2020), available at https://www.sec.gov/news/press-release/2020-312.    [54]    SEC Press Release, Fiat Chrysler Agrees to Pay $9.5 Million Penalty for Disclosure Violations (Sept. 28, 2020), available at https://www.sec.gov/news/press-release/2020-230.    [55]    SEC Press Release, SEC Charges Hospitality Company for Failing to Disclose Executive Perks (Sept. 30, 2020), available at https://www.sec.gov/news/press-release/2020-242.    [56]    SEC Press Release, Pharmaceutical Company and Former Executives Charged with Misleading Financial Disclosures (July 31, 2020), available at https://www.sec.gov/news/press-release/2020-169.    [57]    SEC Press Release, SEC Charges Hertz’s Former CEO with Aiding and Abetting Company’s Financial Reporting and Disclosure Violations (Aug. 13, 2020), available at https://www.sec.gov/news/press-release/2020-183.    [58]    SEC Press Release, SEC Charges Charter School Operator and its Former President with Fraudulent Municipal Bond Offering (Sept. 14, 2020), available at https://www.sec.gov/news/press-release/2020-208.    [59]    SEC Press Release, SEC Charges HP Inc. with Disclosure Violations and Control Failures (Sept. 30, 2020), available at https://www.sec.gov/news/press-release/2020-241.    [60]    SEC Press Release, Energy Companies Agree to Settle Fraud Charges Stemming from Failed Nuclear Power Plant Expansion (Dec. 2, 2020), available at https://www.sec.gov/news/press-release/2020-301.    [61]    SEC Press Release, SEC Charges Sequential Brands Group Inc. with Deceiving Investors by Failing to Timely Impair Goodwill (Dec. 11, 2020), available at https://www.sec.gov/news/press-release/2020-315.    [62]    SEC Press Release, SEC Charges Andeavor for Inadequate Controls Around Authorization of Stock Buyback Plan (Oct. 15, 2020), available at https://www.sec.gov/news/press-release/2020-258.    [63]     SEC Press Release, SEC Charges Affiliated Advisers for Misrepresentations About Payment for Order Flow Arrangements (Aug. 5, 2020), available at https://www.sec.gov/news/press-release/2020-175.    [64]     SEC Press Release, Advisory Firm Settles Charges of Defrauding Investors, Agrees to Refund Allegedly Ill-Gotten Gains to Harmed Clients (Aug. 13, 2020), available at https://www.sec.gov/news/press-release/2020-182.    [65]     SEC Press Release, SEC Charges Investment Advisory Firms and Broker-Dealers in Connection with Sales of Complex Exchange-Traded Products (Nov. 13, 2020), available at https://www.sec.gov/news/press-release/2020-282.    [66]     SEC Press Release, SEC Charges Unregistered Investment Adviser with Defrauding Puerto Rico Municipality (Dec. 1, 2020), available at https://www.sec.gov/news/press-release/2020-299.    [67]     SEC Press Release, SEC Orders BlueCrest to Pay $170 Million to Harmed Fund Investors (Dec. 8, 2020), available at https://www.sec.gov/news/press-release/2020-308.    [68]     SEC Press Release, Global Securities Pricing Service to Pay $8 Million for Compliance Failures (Dec. 9, 2020), available at https://www.sec.gov/news/press-release/2020-310.    [69]     SEC Litig. Rel. No. 24990, SEC Charges Texas-Based Investment Adviser and Its President for Conducting Fraudulent “Cherry-Picking” Scheme (Dec. 21, 2020), available at https://www.sec.gov/litigation/litreleases/2020/lr24990.htm.    [70]     SEC Press Release, SEC Charges Interactive Brokers with Repeatedly Failing to File Suspicious Activity Reports (Aug. 10, 2020), available at https://www.sec.gov/news/press-release/2020-178.    [71]     SEC Press Release, Morgan Stanley Agrees to Pay $5 Million for Reg SHO Violations in Prime Brokerage Swaps Business (Sept. 30, 2020), available at https://www.sec.gov/news/press-release/2020-238.    [72]     SEC Press Release, J.P. Morgan Securities Admits to Manipulative Trading in U.S. Treasuries (Sept. 29, 2020), available at https://www.sec.gov/news/press-release/2020-233.    [73]     SEC Press Release, SEC Charges Robinhood Financial with Misleading Customers About Revenue Sources and Failing to Satisfy Duty of Best Execution (Dec. 17, 2020), available at https://www.sec.gov/news/press-release/2020-321.    [74]    SEC Press Release, SEC Charges Ripple and Two Executives with Conducting $1.3 Billion Unregistered Securities Offering (Dec. 22, 2020), available at https://www.sec.gov/news/press-release/2020-338.    [75]     SEC v. W.J. Howey Co., 328 U.S. 293 (1946).    [76]    SEC Press Release, SEC Obtains Emergency Asset Freeze, Charges Crypto Fund Manager with Fraud (Dec. 28, 2020), available at https://www.sec.gov/news/press-release/2020-341.    [77]    SEC Press Release, SEC Announces Office Focused on Innovation and Financial Technology (Dec. 3, 2020), available at https://www.sec.gov/news/press-release/2020-303.    [78]    SEC Press Release, SEC Charges App Developer for Unregistered Security-Based Swap Transactions (July 13, 2020), available at https://www.sec.gov/news/press-release/2020-153.    [79]    SEC Press Release, Unregistered ICO Issuer Agrees to Disable Tokens and Pay Penalty for Distribution to Harmed Investors (Sept. 15, 2020), available at https://www.sec.gov/news/press-release/2020-211.    [80]    SEC Press Release, SEC Charges Issuer and CEO With Misrepresenting Platform Technology in Fraudulent ICO (Aug. 13, 2020), available at https://www.sec.gov/news/press-release/2020-181.    [81]    SEC Press Release, SEC Charges Film Producer, Rapper, and Others for Participation in Two Fraudulent ICOs (Sept. 11, 2020), available at https://www.sec.gov/news/press-release/2020-207.    [82]    SEC Press Release, SEC Charges John McAfee With Fraudulently Touting ICOs (Oct. 5, 2020), available at https://www.sec.gov/news/press-release/2020-246.    [83]     SEC Press Release, SEC Charges Index Manager and Friend With Insider Trading (Sept. 21, 2020), available at https://www.sec.gov/news/press-release/2020-217.    [84]     SEC Press Release, SEC Charges Amazon Finance Manager and Family With Insider Trading (Sept. 28, 2020), available at https://www.sec.gov/news/press-release/2020-228.    [85]     SEC v. Peltz, 20-cv-6199 (E.D.N.Y. Dec. 22, 2020), ECF 1.    [86]    SEC Press Release, SEC Charges Disbarred New York Attorney and Florida Attorney with Scheme to Create False Opinion Letters (Dec. 2, 2020), available at https://www.sec.gov/news/press-release/2020-300.    [87]     SEC Press Release, SEC Charges CEO and Company With Defrauding First Responders and Others Out of Millions (July 30, 2020), available at https://www.sec.gov/news/press-release/2020-167.    [88]     SEC Press Release, SEC Charges Former Real Estate Executive With Misappropriating $26 Million in Ponzi Scheme (Sept. 29, 2020), available at https://www.sec.gov/news/press-release/2020-236.    [89]     SEC Press Release, SEC Charges Unregistered Brokers in Penny Stock Scheme Targeting Seniors (Sept. 29, 2020), available at https://www.sec.gov/news/press-release/2020-234; see also SEC Press Release, SEC Halts Penny Stock Scheme Targeting Seniors (Nov. 27, 2019), available at https://www.sec.gov/news/press-release/2019-245.    [90]     SEC Press Release, SEC Charges Jewelry Wholesaler with Fraudulent Securities Offering Targeting Current and Retired Police Officers and Firefighters (Dec 30, 2020), available at https://www.sec.gov/news/press-release/2020-343.    [91]     SEC Press Release, SEC Charges Ponzi Scheme Targeting African Immigrants (Aug. 18, 2020), available at https://www.sec.gov/news/press-release/2020-198.    [92]     SEC Press Release, SEC Charges Swedish National with Global Scheme Defrauding Retail Investors, Including Deaf Community Members (Sept. 21, 2020), available at https://www.sec.gov/news/press-release/2020-232.    [93]     SEC Press Release, SEC Charges Company and CEO for $119 Million Securities Fraud Targeting Members of the South Asian American Community (Dec. 21, 2020), available at https://www.sec.gov/news/press-release/2020-329.    [94]     SEC Press Release, SEC Charges E-Commerce Startup and CEO With Defrauding Investors (Nov. 23, 2020), available at https://www.sec.gov/news/press-release/2020-291.    [95]     SEC Press Release, SEC Charges Silicon Valley Start-Up and CEO With Defrauding Investors (July 20, 2020), available at https://www.sec.gov/news/press-release/2020-160.    [96]     SEC Press Release, SEC Charges Trustify Inc. and Founder in $18.5 Million Offering Fraud (July 24, 2020), available at https://www.sec.gov/news/press-release/2020-162.    [97]     SEC v. Rogas, No. 20-cv-7628 (S.D. Cal. Sept. 24, 2020), ECF No. 21.    [98]     SEC Press Release, SEC Charges Former CEO of Technology Company With Raising $123 Million in Fraudulent Offerings (Sept. 17, 2020), available at https://www.sec.gov/news/press-release/2020-213. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Mark Schonfeld, Barry Goldsmith, Richard Grime, Jeff Steiner, Tina Samanta, Brittany Garmyn, Zoey Goldnick, Rachel Jackson, Jesse Melman, Lauren Myers, Jaclyn Neely, Jason Smith, Mike Ulmer, Timothy Zimmerman, and Marie Zoglo. 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 Director of the SEC’s New York Regional Office, 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’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: Securities Enforcement Practice Group Leaders: Barry R. Goldsmith – New York (+1 212-351-2440, bgoldsmith@gibsondunn.com) Richard W. Grime – Washington, D.C. (+1 202-955-8219, rgrime@gibsondunn.com) Mark K. Schonfeld – New York (+1 212-351-2433, mschonfeld@gibsondunn.com) Please also feel free to contact any of the following practice group members: New York Zainab N. Ahmad (+1 212-351-2609, zahmad@gibsondunn.com) Matthew L. Biben (+1 212-351-6300, mbiben@gibsondunn.com) Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Mary Beth Maloney (+1 212-351-2315, mmaloney@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Avi Weitzman (+1 212-351-2465, aweitzman@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Tina Samanta (+1 212-351-2469, tsamanta@gibsondunn.com) Washington, D.C. Stephanie L. Brooker (+1 202-887-3502, sbrooker@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Jeffrey L. Steiner (+1 202-887-3632, jsteiner@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) San Francisco Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tadavis@gibsondunn.com) Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8234, mwong@gibsondunn.com) Palo Alto Michael D. Celio (+1 650-849-5326, mcelio@gibsondunn.com) Paul J. Collins (+1 650-849-5309, pcollins@gibsondunn.com) Benjamin B. Wagner (+1 650-849-5395, bwagner@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) Los Angeles Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas M. Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) Nicola T. Hanna (+1 213-229-7269, nhanna@gibsondunn.com) © 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Read More