I read about a new red flag in the Securities and Exchange Commission’s exam process for investment advisers. Examiners are looking for Chief Compliance Officers with web-based email addresses. So, if your CCO uses a gmail, or yahoo.com email address on your Form ADV filing, the SEC will treat that as a red flag.
This comes from a story in IA Watch. According to the story, a senior person in the SEC’s Office of Compliance Inspections and Examinations mentioned the email address as part of the red flags for cybersecurity sweeps.
I would guess the alternate address for a contact on the Form ADV is subject to this same red flag.
Personally, I’m not sure I completely understand why this is a red flag. Some of the web-based email are just as secure as firm-run email server. For smaller shops, it may be even more secure. I feel certain that Gmail has better tech than a small IA shop.
I can see the web-based email as indicator of an outsourced CCO. Of course, the Form ADV now requires a firm to flag that it has an outsourced CCO. Perhaps it’s a red flag to see web-based email and not state that the firm has outsourced CCO. I can also see searches of “compliance” in the email address as another way to potentially find firms that did not state their CCO role was outsourced.
We have an interesting enforcement action from the Securities and Exchange Commission this week, where the agency dinged a telecom company and its former executives $1.9 million for misleading statements on revenue projections.
The kicker: it looks like the company’s own sales automation software created the audit trail that painted the company into an enforcement corner. [More…]
Investigations are one of the more difficult and riskier activities of an E&C program. Poorly-conducted investigations can create serious legal risks for an organization. In addition, the mishandling of investigations can damage the way in which employees perceive E&C programs, in particular where the report was initially made to the E&C department, through a hotline or otherwise. The mishandling of E&C investigations can corrode the sense of organizational justice and the culture of ethics and compliance at an organization. In short, E&C-related investigations are a serious business, and assessing them is therefore an important component of assessing an E&C program. [More…]
I agree with Martin’s premise that through too much standardization, we might lose the best compliance resource we have: our gut. He’s right to warn that a myopic focus on “running searches and ticking the boxes” can divert our attention from the atmospherics of transactions, where a hunch might lead to hitting the pause button, even if we’re not sure exactly why. [More…]
As summer heads into its final stretch, Securities Regulation Daily will continue bringing all the legal and regulatory news for the financial markets fit to print. As always … stay tuned. [More…]
In a startling announcement, the Department of Justice and the Securities and Exchange Commission filed charges against Congressman Christopher Collins from New York.
There has long been controversy around lawmakers and their staff trading on information obtained during their government service. That resulted in the passage of the Stop Trading on Congressional Knowledge (STOCK) Act in 2012. That law prohibits the use of non-public information for private profit, including insider trading by members of Congress and other government employees. Members of Congress are no longer allowed to use information garnered through official business for personal reasons
That is separate from Congressman who gain material non-public information outside the scope of their governmental jobs. They are still bound by the complex web of what is illegal insider trading.
Congressman Collins, a U.S. Congressman representing, the 27th Congressional District of New York sat on the board of Innate Immunotherapeutics, Ltd. Innate was developing a drug to treat multiple sclerosis. The results of the drug’s clinical trial were to be released between June 5 and July 11 and the board members were instructed not to trade during this period. On June 22, the CEO told the board there was bad news. The results indicated a clinical failure.
According to the SEC complaint, the email with this news came as Congressman Collins was attending an official event on the south lawn of the White House. While still at the event, he began calling his son, Cameron Collins. He knew his son had invested in millions of Innate shares. That night Cameron, his girlfriend, and his girlfriend’s parents all entered orders to sell shares in Innate. Their selling volume accounted for more than half of the trading volume that day and exceeded the 15-day average trading volume by more than 1,454%.
It’s a very clear cut case of trading on material non-public information. Christopher Collins, as a member of the board of directors clearly knew he was not supposed to share this material non public information.
Was the trading illegal insider trading?
Under Newman the U.S. Court of Appeals for the 2nd Circuit said that the insider must “also receive something of a ‘pecuniary or similarly valuable nature’ to prove illegal insider trading. The US Supreme Court, in Salman v. US, made it clear that the passing material non public information to a friend or relative is still illegal insider trading.
“In these situations, the tipper personally benefits because giving a gift of trading information to a trading relative is the same thing as trading by the tipper followed by a gift of the proceeds. Here, by disclosing confidential information as a gift to his brother with the expectation that he would trade on it, Maher breached his duty of trust and confidence to Citigroup and its clients—a duty acquired and breached by Salman when he traded on the information with full knowledge that it had been improperly disclosed.”
That leaves the case against Collins as being clearly illegal insider trading, assuming the SEC and DOJ have the evidence to back up their complaint and indictment.
Congressman Collins would not be the first sitting Congressman to be indicted. There have been been more than two dozen indicted since 1980. Looking back at charges, Cogressman Collins may be the first indicted on insider trading.
A new program from the Securities and Exchange Commission will always (hopefully) catch my attention. I paused for a minute when I saw a press release for the SEC’s update of PAUSE, the “List of Firms Using Inaccurate Information to Solicit Investors.” That sounded interesting. The list even had a catchy acronym. PAUSE stands for Public Alert: Unregistered Soliciting Entities.
For me, interesting turned into a groan, like hearing a bad pun.
Bad acronym aside, I applaud any program that makes investors more aware of bad people trying to take their money away.
The PAUSE list comes from consumer complaints about firms claiming to be registered with the SEC, but are not. Feel free to browse through the list. I found dead links on the first few I tried to check out.
In addition to the PAUSE list, there is also Impersonators of Genuine Firms. This is a list of entities that use a name that is the same as, or similar to, the name of a US registered securities firm, notwithstanding the fact that the soliciting persons are not affiliated with a US registered securities firm. The SEC provides some detail to distinguish the fake firms from the registered firms.
My favorite additional list was the one of Fictitious Regulators. This is a list of entities that claim an endorsement, approval or other support by a governmental agency or international organization that does not exist or does not really lend support to the entity or the investments it is offering. Most of the websites for these scam agencies are dead.
In light of the challenges associated with taking enforcement action against such operations, the Commission believes that it is useful to devise a complementary approach that serves to empower prospective investors. The goal of the PAUSE Program is to provide prospective investors with relevant information about unregistered soliciting entities before they invest.
I don’t remember hearing much about PAUSE in the last 11 years.
As you’re reading this Friday, I’m somewhere between the New York state line and Sturbridge, Mass. for an extra day of riding before the official Pan Mass Challenge starts on Saturday. A huge number of supporters of Compliance Building have donated in support of the ride, with 100% of that money going to the Dana-Farber Cancer Institute to help fight cancer.
I’m leaving this one last request to donate. If you donate by Sunday morning, the bonus is that I will get the notification about your donation while I’m on the bike ride, providing some extra motivation to my tired legs. Donate Here: http://profile.pmc.org/DC0176
Disclosure regulation is a cornerstone of modern securities markets. Its economic consequences have been extensively studied and heavily debated. A widely recognized benefit of mandatory disclosure is that it levels the playing field by publicly disclosing to everyone what is known only to sophisticated investors. This leveling reduces trading costs and consequently reduces the firm’s cost of capital.
In our recent paper, available here, we show that this reduced informational advantage of sophisticated investors is not unambiguously desirable. In particular, when sophisticated investors stop trading in a firm’s stock, there is a reduction in the ability of firm managers to glean decision-relevant information from the stock price. In other words, mandatory disclosure impedes the feedback effect of stock prices on managerial decisions, which in turn could harm investment efficiency. [More…]
How does one measure the impact of a corporate compliance program? One of the key metrics of a corporate compliance program is to demonstrate the effectiveness of corporate compliance programs. Slowly but surely a body of work is being built up to demonstrate that companies which invest in greater compliance are more profitable. Recently the Ethics & Compliance Initiative (ECI) added to the growing body of work in the release of their report entitled “Measuring the Impact of Ethics and Compliance Programs” (the ECI Report). [More…]
Peirce’s social media exposure got a boost from a Reddit user who goes by lamb0x, who called for readers on the site to “show her some love from the Crypto Community.” She’s not the first buttoned-down American official to win Twittersphere adoration—the chairman of the Commodity Futures Trading Commission, J. Christopher Giancarlo, had his turn in February after he gave senators an unexpected education on crypto slang during a hearing. [More…]
At issue is the court’s ruling a year ago in Kokesh v. Securities and Exchange Commission. The decision imposed a five-year window on the agency to seek repayment of any ill-gotten gains. Already, the decision has resulted in the dismissal of an overseas bribery case because the S.E.C. took too long to file the charges and has spurred a lawsuit demanding that the agency repay billions of dollars it has recovered in other cases.
The challenge for the S.E.C. will be whether it can adjust to the restrictions without their hindering its enforcement. If the agency can’t, it will have to persuade Congress to give it more time to pursue charges when the underlying misconduct might not come to light until years later. [More…]
Howard M. Appel is a bad guy who has been convicted of securities fraud multiple times. This time it was for actions in 2010 through 2013. He secretly acquiring large blocks of stock in three publicly traded companies and then manipulated the market for those shares with co-conspirators. It was classic pump and dump schemes.
He assembled a team of associates to hold shares on his behalf. He created liquidity by conducting matched trades, increasing the volume of trades but with no economic effect. Then the associates would start raising the trading price through their trading activity. Meanwhile, Appel would convince 3rd parties to buy the stock with the story of its rising price. Then he would have his associates sell the stock for a big profit. As he walked away, the stock price would crash.
What caught my attention in this case was Appel’s criminal history. He was in jail from June 2008 to June 2010 for conspiracy and money laundering in connection with a previous pump an dump scheme. He was on supervised release from June 2010 until June 2013.
He was running the new pump and dump schemes while under supervised release.
It was a brutal year for the cyclists in this year’s edition of the Tour de France. It’s always a brutal three weeks of racing, but teamwork helps separate the winners from the rest. Geraint Thomas came across the finish line in Paris as the first winner from Wales. His teammate and favorite to win, Chris Froome came in third. Tom Dumoulin came in second place which is the position he finished in earlier this year in the Giro d’Italia.
The big suffering came in the group of the fast men competing for stage wins and the green jersey competition during the Tour de France. Mark Cavendish, Andre Greipel, Fernando Gaviria, Dylan Groenewegen, and Marcel Kittel never made it to Paris. Peter Sagan had a huge margin of victory in the green jersey competition, but a crash on stage 17 descending the Col de Val Louron-Azet in excess of 40 mph left him battered and bruised.
I would give the award for the most suffering to the American Lawson Craddock. He crashed hard on the first day and fractured his scapula. He finished riding that day and got on his bike every day to reach the streets of Paris. He used his suffering for good, raising money for his favorite charity, by asking donors to pledge money for each day he continued to ride.
It’s teamwork that gets the riders to the finish line. Geraint Thomas had Team Sky pacing him up the mountains for as long as they could, burying themselves to give the yellow jersey as much help as possible, then leaving him to finish strong over his rivals.
The team mechanics have the bikes in perfect condition. When a flat occurs or a crash happens, the mechanics quickly jump to help and get the rider back into the race.
The team chefs get needed nutrition into the cyclists for the brutal three weeks. Just keeping calories in your body and recharging your body for another day on the bike is a huge task.
Compliance is the same way. The lone cyclist on the road is unlikely to achieve success. It takes a team to be successful. Not just a team of compliance personnel, but a multi-disciplinary team across the whole organization.
One failing of the Tour de France is not having a female equivalent. That didn’t stop Donnons des elles au Velo Jour-1 from riding the entire route of the Tour de France. J-1 are a group of high-level amateurs riding the day before. There is a short La Course for professional racers. But it was just a single day of racing on a much shorter route than the men. It’s time to change this.
I realize that only a handful of you have likely read this far. The venn diagram between cycling and compliance is very small. (Hello Tom!)
Like Lawson Craddock, I too will be biking for charity. I’m riding across Massachusetts to raise money in the fight against cancer. I’m only riding 300 miles over 3 days, compared to the 2,082 miles in the Tour de France. Donations can be made here: http://profile.pmc.org/DC0176
The SEC has extended a stay of pending administrative proceedings for an additional 30 days. The initial order was issued on June 21, 2018 and stayed pending administrative proceedings until July 23, 2018, or further order. The Commission stated that it finds it prudent to extend the stay until August 22, 2018, or further order of the Commission (In re Pending Administrative Proceedings, Release No. 33-10522, July 20, 2018). [More…]
This is a column for insider trading junkies—a special breed who love all the nuances in this very nuanced subject. Late last month, a Second Circuit panel did something fairly unusual: It withdrew a 2017 decision and substituted a new opinion with a new rationale (but still with the same 2-1 division on the panel). The new decision in United States v. Martoma[1] has a less sweeping and more defensible rationale but still deviates from the law in other circuits. In addition, it has some nuances that future cases are certain to explore. Chief among these is the status of gossip: Can it be viewed as a “gift” with the tipper constructively trading and distributing the proceeds to the tippees? [More…]
Movie mogul Samuel Goldwyn famously said “I’ll take fifty percent efficiency to get one hundred percent loyalty.” But too much loyalty may be bad for reasons that go beyond inefficiency, as indicated by President Trump’s call for then FRI director Comey to be loyal to him. [More…]
Yet all was forgotten and forgiven with the World Series win. It also turns out my razzing had very little impact on the Astros as now the story of how the Astros went from literally the worst team ever in baseball to World Series Champions has been chronicled by Sports Illustrated writer Ben Reiter in his book “Astroball: The New Way to Win It All”. The book tells the story of how two persons had a vision of using data analytics to literally change the game of baseball. The two men were Jeff Luhnow, the former Director of Scouting for the St. Louis Cardinals, and former NASA rocket scientist Sig Mejdal, who became Luhnow’s assistant at the Astros. Team owner Jim Crane had the foresight to buy into Luhnow’s vision and the wherewithal to put up with people like me who were unpitying in their criticism of the Astros and their plan. It turns out they did have a plan and, more importantly, they executed it. [More…]
Ms. Snyder has been with the SEC for 15 years. She has served as the Co-National Associate Director of OCIE’s Investment Company/Investment Adviser examination program since August 2016 and as the Associate Regional Director for Examinations in the SEC’s San Francisco office since November 2011. She will continue in both of these roles while also assuming this additional leadership role in OCIE. As Deputy Director, Ms. Snyder will oversee many of the office’s strategic initiatives and serve as the regional advisor to OCIE Director Peter B. Driscoll. [More…]
With the EU General Data Protection Regulation (“GDPR”) in force for less than two months, many companies are already experiencing an increase in requests from individuals seeking to obtain a copy, or request correction or erasure, of their personal data under Articles 15 to 17 of the GDPR.
Do we have to respond?
Yes. A response is required even if the response is that the company will not honour the request because a relevant exemption applies.
Pan Mass Challenge
On Pan-Mass Challenge weekend, August 3 – 5, I will bike across Massachusetts to raise money for life-saving cancer research and treatment at Dana-Farber Cancer Institute. 100% of your donation will go to cancer research and treatment at Dana-Farber Cancer Institute through its Jimmy Fund. I have made a personal commitment to raise $8000.00. I hope, that as a reader of Compliance Building, you will support my fundraising effort. You can donate through any of the following links:
According to a story by Franco Ordonez, the United States has been selectively using its sanctions regime in Venezuela in an effort to destabilize the government.
“For over a year, Diosdado Cabello, the former military commander and vice president of Venezuela’s governing United Socialist Party, escaped sanctions that hit more than 50 other Venezuelan officials, including [President] Maduro, on corruption and other charges.”
The plan was to plant seeds in Venezuela that Cabello was taking to the United States or, worse, acting as agent of the US. The plan was eventually abandoned after Senator Rubio pressed the administration to subject Cabello to sanctions.
I find this story interesting from a diplomatic perspective, but troubling from an ALM/KYC perspective.
That period of time where a foreign person should have been on the sanctions list, but was not placed due to some Washington trickery, means that companies may have been doing business with him. When he is suddenly added to the list, those companies are then in trouble.
Of course, he likely would have been identified as Politically Exposed Person. But that just means caution, not a ban on a business relationship.
What may have been a fun exercise for Foggy Bottom spies, creates a minefield for ALM/KYC practitioners.
I found the two recent cases of insider trading to be clear violations that should be easy to spot. Matthew Brunstrum worked at a company with specific restrictions on trading the company’s stock. Yao Li worked a different company, but one that also had restrictions on trading the company’s stock.
In both cases, the two employees learned of negative news about the company that would most likely cause the stock price to drop. Both avoided losses by selling their holdings of the company stock before the news became public. They each made some money through derivatives or short selling the company stock.
Matthew Brunstrum was a second generation employee of Stericycle. His dad was executive at the company and his mother held a bunch of Stericycle stock. In April 2016, Matthew learned of material, non-public information about Stericycle. To avoid insider trading or even the perception of insider trading, Stericycle imposes a blackout period for trading around the company’s earnings announcements.
Brunstrum went ahead and sold his stock and bought out-of-the-money puts. Based on drop in stock price and his trading, he avoided losses and made money on the puts. He also convinced his mother to sell her stock and buy puts.
Yao Li worked at Alliance Fiber Products. The company had an insider trading policy that imposed black out periods around earnings announcements and prohibited short selling. But that did stop Li from doing just that in Q2 2014, Q3, 2015 and Q4 2015. Li sold his stock holdings ahead of bad earnings announcements and short sold stock to earn cash from the decline in stock price.
These are both easy to spot, problematic trading patterns that the brokerage compliance groups should have spotted and flagged for FINRA and the SEC.
I found it interesting that in the Li case, the SEC claims that its Market Abuse Unit’s Analysis and Detection Center discovered Li’s trades and started the case. I think it would be great if the SEC had that capability. But I found it curious that the claim relates to activities that happened so long ago. The Brunstrum trades happened in 2016 with no mention of the SEC’s fancy analysis capability. Li’s first suspicious trades happened two years prior to that.
Pan Mass Challenge
On Pan-Mass Challenge weekend, August 3 – 5, I will bike across Massachusetts to raise money for life-saving cancer research and treatment at Dana-Farber Cancer Institute. 100% of your donation will go to cancer research and treatment at Dana-Farber Cancer Institute through its Jimmy Fund. I have made a personal commitment to raise $8000.00. I hope, that as a reader of Compliance Building, you will support my fundraising effort. You can donate through any of the following links:
