Category: Records Management

Investment Advisers Hit with Texting Fines

Twelve firms were hit with fines for off-channel communications. I’ve been waiting for these cases to come out. A couple of these firms have publicly traded securities and there have been notes that they are working through enforcement actions for off-channel communications.

  • Blackstone Alternative Credit Advisors LP, together with Blackstone Management Partners L.L.C. and Blackstone Real Estate Advisors L.P., agreed to pay a combined $12 million penalty;
  • Kohlberg Kravis Roberts & Co. L.P. agreed to pay a $11 million penalty;
  • Apollo Capital Management L.P. agreed to pay a $8.5 million penalty;
  • Carlyle Investment Management L.L.C., together with Carlyle Global Credit Investment Management L.L.C., and AlpInvest Partners B.V., agreed to pay a combined $8.5 million penalty;
  • TPG Capital Advisors LLC agreed to pay an $8.5 million penalty;
  • Charles Schwab & Co., Inc. agreed to pay a $10 million penalty;
  • Santander US Capital Markets LLC agreed to pay a $4 million penalty;
  • PJT Partners LP, which self-reported, agreed to pay a $600,000 penalty.

Santander and PJT are broker-dealers and subject to the strict record-keeping of that regulatory regime. Schwab is duly registered. The rest are pure investment advisers.

My reading of the orders indicates that those firms were subject to a sweep examination by the SEC focused on off-channel communications. The SEC asked for review of mobile devices. They found messages that were required to be retained as business records under Rule 204-2(a)(7).

Here are the four areas the SEC mentioned in the orders:

(a) any recommendation made or proposed to be made and any advice given or proposed to be given;
(b) any receipt, disbursement or delivery of funds or securities;
(c) the placing or execution of any order to purchase or sell any security; or
(d) predecessor performance and the performance or rate of return of any or all managed accounts, portfolios, or securities recommendations.

Let’s see if the those orders give us any insight into the SEC’s take on off-channel communications for investment advisers.

Blackstone:

For example, a Blackstone Alternative Credit Advisors senior managing director exchanged messages with multiple colleagues on an unapproved platform concerning proposed investment advice for a client. Similarly, a Blackstone Management Partners senior managing director exchanged messages with a colleague on an unapproved platform concerning proposed investment advice for a client. Additionally, a Blackstone Real Estate Advisors senior managing director exchanged messages with multiple colleagues on an unapproved platform concerning investment advice for a client.

TPG:

For example, a TPG Capital Advisors principal exchanged multiple messages with a colleague and with personnel at another investment adviser on an unapproved platform concerning a proposed investment by a client fund in a target company.

For example, a TPG Capital Advisors partner exchanged messages with a colleague on an unapproved platform concerning potential trades on behalf of a client fund.

KKR:

For example, two KKR partners exchanged messages on an unapproved platform concerning the specific pricing, within the range previously approved by the investment committee responsible for a client’s investments, at which KKR should bid for the client to participate in a transaction.

As another example, the two KKR partners exchanged messages on an unapproved platform concerning whether KKR should offer to have one or more of its private fund clients buy into the junior tranche of a transaction.

Apollo:

For example, an Apollo partner exchanged a number of messages on an unapproved platform with Apollo colleagues about a proposed recommendation to increase a position for a client. Another partner exchanged messages with a colleague on an unapproved platform about the terms and execution of a securities transaction for a client.

Carlyle:

For example, a managing director affiliated with Carlyle Credit exchanged several messages with an insurance company regarding the disbursement of funds related to a transaction. In another example, a partner associated with Carlyle exchanged messages with another partner about the performance of a Carlyle investment vehicle.

The big question is whether these off-channel communications investigations are going to continue under the new SEC Chair. These seem like relatively easy wins for the SEC. And they keep compliance officers up at night.

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Another $49 Million in Fines for Texting

The Securities and Exchange Commission continues its relentless assault on firms that have allowed employees to use text messages, WhatsApp, private email, or other “off-channel communications.”  Last week, six rating agencies were caught in regulatory crosshairs. 

Moody’s, S&P, Fitch, HR Ratings, A.M. Best, and Demotech had to pay $49 million in fines to the SEC. 

The SEC’s off-channel task force is tracing messages from one firm to another and slapping fines on each link in the chain for violations. There are no findings of frauds. These fines are merely for record-keeping violations.  

These cases do mark a new segment of record-keeping violations. These six firms are Nationally Recognized Statistical Rating Organizations and are subject to Rule 17g-2(b)(7) applicable to NRSROs.

More reading:

Another Half-Billion in Fines for Texting

The Securities and Exchange Commission and the Commodity Futures Trading Commission levied another $475 million in fines against broker-dealers, investment advisers and commodities firms. Ameriprise, Edward D. Jones, LPL and Raymond James each paid a $50 million fine. Millions in fines because firm employees were texting with clients and business partners.

The order against P. Schoenfeld Asset Management LP provided some insight on the SEC’s approach toward investment advisers and fund managers. PSAM is registered as an investment adviser. It is not broker-dealer or dually registered as a BD-IA.

The SEC points out four areas of records that are required under the IA record-keeping requirements:

(a) any recommendation made or proposed to be made and any advice given or proposed to be given;
(b) any receipt, disbursement, or delivery of funds or securities;
(c) the placing or execution of any order to purchase or sell any security; or
(d) predecessor performance and the performance or rate of return of any or all managed accounts, portfolios, or securities recommendations.

PSAM’s policy was that ’employees were “prohibited from conducting PSAM business using any other electronic communication services . . . or accounts not provided by PSAM”’. That is probably broader than the SEC record-keeping rule requires.

Even with its stricter policy, PSAM appears to have breached the record-keeping requirements. The Order refers to “pervasive off-channel communications.” The SEC examiners found records in these other platforms that were required to be retained. As an example, off-channel communications were sent to and from PSAM clients, counterparties, and other financial industry participants.

It sounds to me like SEC examiners looked at personal devices.

More Reading:

Off-Channel Communications Enforcement Comes to Private Funds

Over the past 2.5 years the Securities and Exchange Commission has charged 60 investment advisory firms and broker-dealers with violations of the record-keeping requirements and collected penalties approaching $2 billion. Those were all broker-dealers, dual-registered investment advisers, or affiliated investment advisers. Broker-dealers have strict communications retention mandates. Investment adviser requirements are not as strict. Private fund managers are thought to be a bit more uncertain. Everyone agrees that substantive business communications need to be captured and retained.

The first fund manager to fall into the Off-Channel Communications net is Senvest Management in New York. The firm had to pay a $6.5 million fine because employees were texting business-related messages.

Senvest has policies and procedures that required business communication to be retained, has the platforms to do so, and prohibits off-channel business communication. Senvest employees did not comply with the policies and sent thousands of business-related messages through non-firm systems. Even worse, some of these off-channel communications were on platforms that automatically deleted messages after a few months.

The take away is that private funds need to step up the monitoring of Off-Channel Communications. Senvest employees sent and received “thousands of business-related messages” using off-channel communications. Some of those included “communications concerning recommendations made or proposed to be made and advice given or proposed to be given about securities.” Those seem to be core records to be retained.

The other problem is that Senvest’s compliance manual said that the firm would “retain all electronic communications that it sends and receives.” The compliance manual also provided that employees were “strictly prohibited from using non-Senvest electronic communication services for any business purpose.”

Those compliance manual provisions might be more strict than required by the Investment Advisers Act.

Senvest was also penalized because it did not check employee devices to determine if they were complying with the firm’s policies and procedures. I think we need to take that message. Sounds to me that the SEC is laying down a requirement that compliance needs to run periodic checks of personal devices.

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Email Smoking Guns

Martin Lomasney created a famous saying on the importance of discretion:

“Never write if you can speak; never speak if you can nod; never nod if you can wink.”

At the time of Lomasney, it was not email or Twitter, but telegrams that were the principal method of electronic communication.

In the case of President Trump and his son, it’s email and Twitter that are causing them problems. Donald Trump Jr. gave us all an unexpected lesson on the subject by releasing what appear to be incriminating emails on Twitter. Those emails are about his meeting with a Russian operative who was offering him dirt on Hillary Clinton.

The Trump campaign has been denying collusion with Russia during the campaign. These emails clearly show that the campaign was at least tried to collude with Russia.

 “if it’s what you say I love it”

According to Junior, there was no substance to the meeting and no actual collusion. But now the burden is back on the Trump campaign to show that there was no substance, after this documented willingness to do so. Junior’s emails are the first concrete evidence that the Trump campaign was aware of Russian government effort to help elect Donald Trump. On July 24, Junior  appeared on CNN to decry the Clinton campaign’s claims that the Russians were helping Trump as “disgusting” and “phony.”

I’m not saying there was or was not a crime.

There clearly was a lack of discretion and a failure to follow Mr. Lomasney’s sage advice.

The proper response should have been “Let me check with the legal team and I’ll call you back.”

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The Obnoxious LIBOR Emails

compliance and email

It seems clear that the LIBOR figures were subject to manipulation. Many banks are under investigation. The Royal Bank of Scotland agreed to pay $610 million in fines to UK and U.S. regulators for its role in the Libor rate-rigging scandal. As part of that settlement, the U.K.’s Financial Services Authority released emails and other communications between traders, employees who submitted Libor rate information, and in some cases, traders and other employees outside the three banks. They tell a sad tale of manipulation and fraud.

Trader C: “The big day [has] arrived… My NYK are screaming at me about an unchanged 3m libor. As always, any help wd be greatly appreciated. What do you think you’ll go for 3m?”
Barclays Submitter: “I am going 90 altho 91 is what I should be posting”.
Trader C: “[…] when I retire and write a book about this business your name will be written in golden letters […]”.
Submitter: “I would prefer this [to] not be in any book!”

Rarely do you find the email that exonerates you. It’s always the email with something stupid that makes you and your company look bad. Sometimes, the communication is out of context. Sometimes, it’s just the stupidity of the sender who thinks the message is as ephemeral as a nod in the hallway.

Martin Lomasney created a famous saying on the importance of discretion: “Never write if you can speak; never speak if you can nod; never nod if you can wink.”

From one trader to another broker:

“if you keep 6s [i.e. the six-month Japanese Libor rate] unchanged today… I will f***ing do one humongous deal with you … Like a 50, 000 buck deal, whatever. I need you to keep it as low as possible … if you do that … I’ll pay you, you know, 50,000 dollars, 100,000 dollars … whatever you want … I’m a man of my word.”

He may have been a man of his word. But he was not a man of honor or ethics. He sought blatant market manipulation for his own gain. Foolishly, we wrote it down, leaving his mark of dishonor for all to see.

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Revisiting the Fabulous Fab

Last summer, Fabrice Tourre didn’t turn around fast enough to see the bus coming at him. Goldman Sachs had given him a big push and put him in the front and center of their big bet on a crash in the residential mortgage securities market.

Tourre ended up as the Fabulous Fab after giving himself that nickname in a series of colorful emails. In one he wrote, “The whole building is about to collapse anytime now,” according to the complaint. “Only potential survivor, the fabulous Fab.”

I still use Tourre as part of my records management policy and education.

The Fabulous Fab Rule: Don’t write emails so provocative that they wind up reproduced on the front page of the Wall Street Journal.

What has happened to Tourre and his colleagues at Goldman Sachs?

Goldman settled the matter for $550 million, with $250 million going to investors and $300 million going to the SEC.

Louise Story and Gretchen Morgenson of the New York Times took another look at the Goldman mortgage desk and the prosecutions against it: S.E.C. Case Stands Out Because It Stands Alone.

According to the article, the SEC looked at Jonathan M. Egol who worked closely with the Fabulous Fab. “But Mr. Egol, now a managing director at the bank, was not named in the case, in part because he was more discreet in his e-mails than Mr. Tourre was, so there was less evidence against him, according to a person with knowledge of the S.E.C.’s case.” That just seems to reinforce the Fabulous Fab Rule.

Also, the story points out that Torre’s trading desk was using a shared email account or listserv to share the messages with the larger group.

The story about the Fabulous Fab Rule gets worse. The New York Times obtained additional information from a lost laptop.

[The information was] provided to The New York Times by Nancy Cohen, an artist and filmmaker in New York also known as Nancy Koan, who says she found the materials in a laptop she had been given by a friend in 2006.  The friend told her he had happened upon the laptop discarded in a garbage area in a downtown apartment building. E-mail messages for Mr. Tourre continued streaming into the device, but Ms. Cohen said she had ignored them until she heard Mr. Tourre’s name in news reports about the S.E.C. case.  She then provided the material to The Times.

That just makes the nightmare worse. An employee is sending out provocative emails, they are going to mass distribution list, and an unsecured laptop is getting the messages.

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The Fabulous Fab Rule

Don’t write emails so provocative that they wind up reproduced on the front page of the Wall Street Journal.

With many fund managers having to register under the Investment Advisers Act, they will now be subject to more extensive record-keeping requirements. That means more emails will be saved for a longer period of time.

Those questionable emails will preserved for litigants and federal regulators to see, long after you hit the delete button in Outlook.

E-mails from Goldman Sachs Group Inc. director Fabrice Tourre are the center of the case saying Goldman misled investors. In one he wrote, “The whole building is about to collapse anytime now,” according to the complaint. “Only potential survivor, the fabulous Fab.”

(I need to give credit to Kevin LaCroix of The D&O Diary for the new name for this rule: The Essential Lessons of the “Faithless Servant”.)

Here is another great email quote from the Fabulous Fab:

“When I think that I had some input into the creation of this product (which by the way is a product ofpure intellectual masturbation, the type of thing which you invent telling yourself: “Well, what if we created a “thing”, which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price ?”) it sickens the heart to see it shot down in mid-flight. .. It’s a little like Frankenstein turning against his own inventor;)”

The other detrius that ended up in front of the Senate Subcommittee on Investigations were the email love letters from Fab to his girlfriend. Another reminder to keep personal email off the company’s network and company time.

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Are Facebook and MySpace Messages Subject to Discovery?

In the recent case of Crispin v. Audigier, a California judge ruled that Facebook and MySpace messages that aren’t publicly available are protected information under the Stored Communications Act, and therefore can’t be subpoenaed for use in civil litigation.

Buckley Crispin sued clothing maker Christian Audigier for copyright infringement, alleging that Audigier used his artistic material outside the scope of a license agreement. Audigier issued a subpoena to Facebook, MySpace, and two other third parties seeking communications by Crispin about Audigier.

Crispin’s lawyers argued that such communications fell under the Stored Communications Act, which prevents providers of communication services from divulging private communications to certain entities and individuals. A magistrate judge rejected the argument and found that Facebook and MySpace were not Electronic Communications Services and therefore not subject to the protections of the Stored Communications Act. Because the magistrate judge thought the websites’ messaging services are used solely for public display, he found that they did not meet this definition.

Judge Morrow of the US District Court for the Central District of California disagreed and laid out some thoughts about the use of the sites and how they relate to civil litigation. (Law enforcement can always use a warrant to get the information, assuming it is related to a crime.)

The Judge noted that the Stored Communications Act distinguishes between a remote computing service and an electronic communications service.

“electronic communication service” means any service which provides to users thereof the ability to send or receive wire or electronic communications (18 U.S.C. § 2510(15)) With certain enumerated exceptions, the Stored Communications Act prohibits an electronic communication service provider from “knowingly divulg[ing] to any person or entity the contents of a communication while in electronic storage by that service.” (18 U.S.C. §§ 2702(a)(1), (b))

“remote computing service” means the provision to the public of computer storage or processing services by means of an electronic communications system (18 U.S.C. § 2711(2)) The Stored Communications Act prohibits an remote computing service provider from “knowingly divulg[ing] to any person or entity the contents of any communication which is carried or maintained on that service.” (18 U.S.C. §§ 2702(a)(2)).

In the end, the decision about whether a particular message is subject to disclosure is dependent on security settings. Different messages in Facebook and MySpace (and other web 2.0 sites) will be subject to different standards.

The judge found that webmail and private messages are inherently private and quashed the subpoena for those messages. With respect to the subpoenas seeking Facebook wall postings and MySpace comments, the decision will be dependent on the person’s privacy settings and the extent of access allowed. If the general public had access to plaintiff’s Facebook wall and MySpace comments then presumably they are subject to discovery in civil litigation.

The Stored Communications Act was passed as part of the Electronic Communications Privacy Act in 1986. This was obviously well before the development of the current internet applications and technology. Courts, including the one in this Crispin case, have found that the application of this nearly 25-year-old statute presents challenges in application to the current use of the internet.

As Facebook changes the privacy settings in its platform, those changes will affect the discoverability of messages in civil litigation.

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Zubulake Revisited: Six years Later

A new treatise has been written on field of electronic stored information and sanctions for spoliation. In the Amended Opinion and Order for The Pension Committee of the University of Montreal Pension Plan et al., v. Banc of America Securities, LLC, et al. Judge Shira A. Scheindlin of the Southern District of New York, addressed the issues of parties’ preservation obligations and spoliation in great detail.

The order identified several actions (or failures to act) which would result in a finding of gross negligence in upholding discovery obligations:

“After a discovery duty is well established, the failure to adhere to contemporary standards can be consi-dered gross negligence. Thus, after the final relevant Zubulake opinion in July, 2004, the following failures support a finding of gross negligence, when the duty to preserve has attached:

  • to issue a written litigation hold;
  • to identify all of the key players and to ensure that their electronic and paper records are preserved;
  • to cease the deletion of email or to preserve the records of former employees that are in a party’s possession, custody, or control; and
  • to preserve backup tapes when they are the sole source of relevant information or when they relate to key players, if the relevant information maintained by those players is not obtainable from readily accessible sources.”

The order establishes that sanctions for evidence spoliation require proof that: (i) the party had control over the evidence and an obligation to preserve it at the time it was lost or destroyed; (ii) acted with a culpable state of mind; and (iii) the lost or destroyed evidence was not only relevant to the innocent party’s claims or defenses, but also that party suffered real prejudice as a result.

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Adriana Linares of LawTech Partners supplied the image: http://www.flickr.com/photos/lawtechpartners/438634521/. Used with permission.