Compliance Bricks and Mortar for August 18

Sorry for the lack of posts this week. I was attending and speaking at the Boston Investment Adviser Compliance Symposium. I needed to earn some continuing education credits for the my IACCP designation.

While I was sitting it conferences, here are some of the compliance-related stories that caught my attention.

Accredited Investors vs. Qualified Clients vs. Qualified Purchasers: Understanding Investor Qualifications by Alexander Davie in Strictly Business

The three most common types of investors referenced in these laws and the regulations adopted by the Securities and Exchange Commission (SEC) are 1) accredited investors, 2) qualified clients, and 3) qualified purchasers. While the terms may sound familiar, there are crucial distinctions between each category that have a significant impact on issues like whether a fund qualifies for the private placement exemption, whether a fund’s manager will be entitled to receive performance-based compensation, and whether the fund will be required to register as an investment company. [More…]

Dentist, Claiming Tip Was a Rumor, Wins Insider Trading Case by T. Gorman in SEC Actions

The defense claimed that Mr. Roberts relied on his research but not a rumor of a transaction he received from his brother-in-law, according to a report by Law 360 (Aug. 15, 2017). While Mr. Roberts chose not to testify, his version of the trading transactions was put in evidence by the FBI to whom he had given statements.

Mr. Robert’s claim about rumors regarding the transaction appears to draw support from the other insider trading cases that swirled around the Shaw transaction. For example, SEC v. Trahan, Civil Action No. 17-cv-731 (W.D. LA. Filed June 6, 2017), is another action based on the deal. It named as defendants Michael Trahan, the owner of engineering consulting company Petra Consultants, Inc. Mr. Trahan was a consultant to Shaw. During his engagement, and before the July 30, 2012 announcement date, an employee of the firm told him about the merger. Mr. Trahan purchased 5,600 shares of Shaw common stock which he sold after the deal announcement for a profit of $69,735.00. The complaint alleged violations of Exchange Act Section 10(b). To resolve the case Mr. Trahan consented to the entry of a permanent injunction prohibiting future violations of Section 10(b). In addition, he agreed to pay disgorgement of $69,735.00, prejudgment interest and a penalty equal to his trading profits.

[More…]

Selfie Time: What Could Go Wrong? by By Margaret Scavotto, Director of Compliance Services at Management Performance Associates

A nurse aide, lab tech, medical assistant – or any other healthcare employee  – is new on the job. They are excited about their new position and decide to take a selfie to memorialize the occasion, then send it off to Facebook, Instagram, Twitter and Snapchat, with the click of a button, in under 20 seconds. What could go wrong? [More…]

Federal Spoofing Conviction by Lewis J. Liman, Jonathan S. Kolodner and Matthew Solomon in the CLS Blue Sky Blog

Coscia was the first trader to be convicted under the anti-spoofing provision of the Commodity Exchange Act (“CEA”), 7 U.S.C. § 6c(a)(5).  The Seventh Circuit’s decision upholding Coscia’s conviction marks the first time a federal appellate court has provided guidance on the scope of the anti-spoofing prohibition, and the Circuit’s comprehensive rejection of Coscia’s constitutional challenge fortifies the government’s ability to conduct additional investigations and prosecutions in an environment of increasingly aggressive regulation of the listed futures and derivatives markets. [More…]

SEC Views on Valuation

The Securities and Exchange Commission regulations for investment advisers does not contain any specific requirements on how valuations should be conducted. That means operating under the general anti-fraud provisions. That is, valuations should not be misleading, deceptive or fraudulent. Although there are no specific regulations, there are enforcement actions from the SEC against advisers that the SEC found to have failed in their valuations. Here are four recent cases.

In the Matter of Pacific Investment Management Company LLC (December 1, 2016)
www.sec.gov/litigation/admin/2016/ia-4577.pdf

PIMCO Total Return-Exchange-Traded Fund (“BOND”) was one of PIMCO’s first actively managed exchange-traded funds. PIMCO employed an “odd lot” strategy
using non-agency mortgage-backed securities. This strategy involved (1) purchasing odd lot positions that traded at a discount to the round lot prices; (2) valuing those positions in BOND at the higher pricing for institutional round lots; and (3) as a result, obtaining immediate positive returns for BOND.

The securities as a pool should all have the same value. But on exit, PIMCO would have to sell at a discount because part of the sale would be odd lots. I find this a tough call. The problem is that the SEC discovered an email that said “[We] can find you several odd lot positions in the coming days that trade well below round lot levels and therefore pricing marks which will help with performance out of the gate.” I assume the SEC found this statement to indicate an intent to be manipulative.

In the Matter of Equinox Fund Management LLC (January 19, 2016)
www.sec.gov/litigation/admin/2016/ia-4315.pdf

An SEC investigation found that Equinox Fund Management LLC calculated management fees contrary to the method described in registration statements for a managed futures fund called The Frontier Fund (TFF), and the firm also deviated from its disclosed valuation methodology for some TFF holdings.

TFF’s registration statements disclosed that Equinox charged management fees based upon the net asset value of each series.  But Equinox actually used the notional trading value of the assets, which is the total amount invested including leverage.  Equinox consequently overcharged the fund $5.4 million in fees from 2004 to 2011.

SEC v. Summit Asset Strategies Investment Management, and LLC Chris Yoo (September 2015)
https://www.sec.gov/litigation/complaints/2015/comp-pr2015-178.pdf

Summit and its owner Yoo were entitled to a share of profits from an investment fund that Summit advised. Yoo falsely claimed that the fund had purchased 500,000 shares of an entity called Prime Pacific Bank in December 2012 when in reality, the fund did not own this security. Because the Prime Pacific Bank security was purportedly illiquid, Yoo developed a financial model to value this asset. This model showed that the fund’s interest in Prime Pacific Bank had more than tripled in value from the shares’ purchase price of $1.00 per share on December 28, 2012, to $3.81 per share on December 31, 2012. Yoo revised the model to reflect that Prime Pacific Bank had slightly decreased, but still generated a gain from its initial purchase price. Yoo relied on these cumulative gains to justify taking over $2.5 million in fees from the fund.

In the Matter of Alpha Bridge Capital Management (July 1, 2015)
https://www.sec.gov/litigation/admin/2015/ia-4135.pdf

When the Alpha Bridge fund was started in 2001, the adviser told the funds’ investors, administrator, and auditor that the adviser obtained independent, market-grounded price quotes for the securities at issue from registered representatives of two reputable broker-dealers. AlphaBridge’s written valuation policy, stated that AlphaBridge obtained monthly price quotes for certain types of less liquid securities from two independent and reputable broker-dealers and used the arithmetic average of these quotes as AlphaBridge’s price for these securities. However, by 2010, AlphaBridge was providing its valuations to those registered
representatives of the broker-dealers who in turn provided those valuation to the fund’s administrator.

Compliance Bricks and Mortar for August 11

These are some of the compliance-related stories that recently caught my attention.

Fiduciary Duty Claims of Start-up Co-Founder Denied by Francis Pileggi in Delaware Corporate & Commercial Litigation Blog

A recent Delaware Court of Chancery opinion analyzed claims that are not uncommon: one of two founders of a start-up, that failed to launch, claimed that the other co-founder breached fiduciary duties by launching another start-up venture with a third-party who then pursued the business plan of the original start-up, but without the original co-founder.  In McKenna v. Singer, C.A. No. 11371-VCMR (Del. Ch. July 31, 2017), the court disagreed that the original co-founder of the original start-up entity had any right to an interest in the separate start-up venture later launched with a different third-party. [More…]

First U.S. Trader Prosecuted for ‘Spoofing’ Sees Conviction Upheld by Dave Michaels in the Wall Street Journal

The decision by the U.S. Court of Appeals for the Seventh Circuit in Chicago also buttressed the seven-year-old provision in the Dodd-Frank Act that criminalized spoofing. The court rejected Michael Coscia’s claim that his conviction should be overturned because the law is too vague to be enforced. The three-judge panel found that Mr. Coscia “engaged in 10 weeks of trading” during which his conduct clearly crossed the line drawn by Dodd-Frank.[More…]

Delaware entices corporations with blockchain law by Anne Sherry, J.D. in Jim Hamilton’s World of Securities Regulation

In an effort to continue to attract corporations to the state and curb costly recordkeeping errors, Delaware governor John Carney signed a law to allow corporations in the state to keep records, including the stock ledger, in distributed ledgers, or blockchain. Supporters of the amendments to the Delaware General Corporation Law believe the technology could avert issues like those faced in the Dell appraisal and Dole Food class action. [More…]

Secretary Mattis’ Insights on Ethics by Matt Kelly in Radical Compliance

The message isn’t long: five staccato paragraphs squeezed onto one typewritten page. I haven’t found a copy of the memo posted on the Defense Department website, but it seems authentic, and credible military news organizations such as the U.S. Naval Institute have posted the full text online. [More…]

Should we stop the ‘revolving door’? by Brian Wallheimer in the Chicao Booth Business Review

In a study of SEC lawyers, University of Washington’s Ed deHaan, Rutgers University’s Simi Kedia, Nanyang Technological University’s Kevin Koh, and Columbia University’s Shivaram Rajgopal find that lawyers who left the agency for private law firms were more aggressive than their peers, as evidenced by settlements. DeHaan says that instead of a quid pro quo, those lawyers fall under the human-capital hypothesis. [More…]

And congratulations to Tom Fox on publishing his 2,000th blog post this week.

All Things (Compliance) Considered – Reflections on 2000 Blogs

I began my own blogsite, the FCPA Compliance and Ethics Blog, while continuing to contribute to the FCPA Blog. I also began blogging for Compliance Week and the SCCE Blog. Last month I made it through my 2000th blog posting. To say that I ever thought I would see this day or this many blog posts, would portend a level of clairvoyance that even Carnac the Great could not conceive of pontificating upon. [More…]

 

 

Report on Access to Capital and Market Liquidity

Many people seem to think that the new commissioner of the Securities and Exchange Commission, Jay Clayton, is likely to focus more on capital formation issues than the previous commissioner. The recent report on Access to Capital and Market Liquidity from the SEC’s Division of Economic and Risk Analysis caught my attention.

From the signing of Dodd-Frank in 2010 through the end of 2016, the DERA notes $20.20 trillion in capital formation, of which $8.8 trillion was raised through registered offerings, and $11.38 trillion was raised through unregistered offerings. More money is being raised through private placements, than through public offerings. From 2012 to 2016 the amount raised was 26% greater. From 2009 through 2011 it was only 21.6% greater.

That data should be a caution to regulators who want to make changes to Regulation D and the “accredited investor” standard.

“When combined, the capital raised through Regulation D and Rule 144A offerings in a year is consistently larger than the total capital raised via registered equity and debt offerings. Most Regulation D offerings (over 66%) include equity securities; by contrast, in the Rule 144A market, the vast majority of issuers are financial institutions and over 99% of securities are debt securities.”

The report also looks at the new public private-placement offerings under 506(c). Only 3% of the capital raised under Regulation D since rule 506(c) went into effect has been through issuances claiming the 506(c) exemption. The report also noted that the average amount raised in a 506(c) offering is only half of that raised in Rule 506(b) offering, $13 million to $26 million. “Overall, it is not clear whether offerings under Rule 506(c) are indicative of new capital formation or a reallocation from other offering types.”

What is one of the reasons for a private placement over a public offering? It seems cheaper.

“Nonfinancial issuers paid on average about 6% in total fees for Regulation D offerings in 2009-2016. In comparison, a company going public pays an average gross spread of 7% to its IPO underwriters, while a reporting company raising equity through a follow-on (seasoned) equity offering pays an average gross spread of about 5.4%.”

There is a lot more detail in the report. More than I’m ready to digest (or want to digest).

Sources:

Cybersecurity Wrap Up – Take Two

The  Securities and Exchange Commission’s Office of Compliance Inspections and Examinations issued a new Risk Alert this week on cybersecurity. The risk alert summaries observations from their phase 2 cybersecurity examinations conducted in 2015 and 2016. In phase 2, OCIE examined 75 firms, including broker-dealers, investment advisers, and registered funds.

The examinations focused on written policies and procedures regarding cybersecurity and testing the implementation of those procedures. The exams also sought to better understand how firms managed their cybersecurity preparedness by
focusing on

  1. governance and risk assessment;
  2. access rights and controls;
  3. data loss prevention;
  4. vendor management;
  5.  training; and
  6. incident response.

What are firms doing right?

  • Conducting periodic risk assessments of critical systems to identify cybersecurity threats, vulnerabilities, and the potential business consequences of a cyber incident.
  • Conducting penetration tests and vulnerability scans on systems that the firms considered to be critical
  • Using some form of system, utility, or tool to prevent, detect, and monitor data loss as it relates to personally identifiable information.
  • Ensuring regular system maintenance, including the installation of software patches to address security
    vulnerabilities.
  • Having business continuity plans and response plans.
  • Identifying cybersecurity roles and responsibilities for the firms’ workforce.
  • Verifying customer identification before transferring funds
  • Conducting vendor risk assessments

What are firms doing wrong?

  • Policies and procedures were not reasonably tailored to the organization.
  • Not conducting annual reviews
  • Not reviewing security protocols at least annually
  • Inconsistent instructions on remote access
  • Not making sure that all employees received cybersecurity training
  • Not fixing problems found in penetration tests

The risk alert finishes with the elements the OCIE sees as indicative of a firm implementing robust cybersecurity controls. I think most CCOs should grab a copy of the risk alert and sit down with their policies and CTOs to see how they stack up against those elements.

Sources:

Compliance Bricks and Mortar – Pan Mass Challenge Edition

When this story publishes on Friday morning, I’ll be on my bike riding from Boston to Sturbridge for Day Zero of the Pan Mass Challenge. (I’m adding an extra day of cycling before the First and Second Day of the PMC.) Thanks to so many of you who read Compliance Building for your generous donations and kind words. I have my donor list and those kind words printed and tucked into the back pocket of my jersey. I’ll keep them with me over the 250+miles of cycling I have to complete this weekend.

If you have not contributed, there is still plenty of time to make a donation to fight cancer. I love seeing donation messages pop up while I’m riding. Donate here: http://pmc.org/egifts/DC0176

As for compliance-related matters, here are some of the stories that recently caught my attention.

SEC Whistleblower Award Sends Message to Government Employees by Samuel Rubenfeld in the Wall Street Journal

A $2.5 million award announced by the SEC last week didn’t include the name of the agency where the person worked, the company involved in the misconduct or the nature of the conduct involved, but lawyers representing tipsters and companies in whistleblower cases drew lessons from a footnote attached to the order. The footnote delineated who, among government employees, is eligible: Anyone who works for a local, state or federal agency, other than those at regulatory agencies or a law-enforcement organization. [More…]

Main Street and Premium Listings by Matt Levine

I think we are up to the Seventh Law of Insider Trading. The first six are: (1) don’t do it, (2) don’t do it by buying short-dated out-of-the-money call options on undisclosed merger targets, (3) don’t text or email about it, (4) don’t do it in your mother’s account, (5) don’t do it by planting bombs at a company and shorting its stock, and (6) don’t do it while employed at the Securities and Exchange Commission. I hereby declare the Seventh Law: (7) If you are going to insider trade, don’t Google “how to insider trade without getting caught” before or after you trade. [More…]

Mentoring Compliance Professionals by Roy Snell in the SCCE Blog

Call someone you know who could use a little mentoring. Call today. Call again in a week or two. Don’t wait for someone to match you up. It doesn’t work that way. Pick someone you would enjoy working with. Pick someone who is a “personality match.” Pick someone you think has potential. Pick someone you would be proud to say you helped. Ask them how they are doing. Think about what they need help with and send them an article or a link to a website. Tell them where you received your best compliance and ethics training. Encourage them to be involved in and hang out with the profession. Go onto social media and answer a few questions or make a comment about something you recently discovered. Write an article or blog post. Speak at a conference.  Or better yet, invite your mentee to co-present or co-author a post or article. We don’t need much of your time. We just need a little bit of time from a lot of people. [More…]

More about Crime Coverage and Social Engineering Fraud by Kevin LaCroix in The D&O Diary

Just days after a Southern District of New York judge ruled in the Medidata Solutions decision that the Computer Fraud section of a commercial crime policy covered losses from social engineering fraud  (as I discussed in a post last week), a judge in the Eastern District of Michigan has held that a crime policy’s computer fraud section did not apply to social engineering fraud.  [More…

The Ethics of Opposition Research by Hana Callaghan in the Markkula Center for Applied Ethics blog

Opposition research per se isn’t unethical, but there are boundaries. Starting with the premise that the goal of our political process is to create an informed electorate that can make educated choices come election day, we can assess whether those boundaries have been crossed. An ethically informed electorate requires that all information researched and used by a political campaign be true, fair, and relevant.  [More…]

Was there a Housing Price Bubble? Revisited by Alex Tabarrok in Marginal Revolution

Let’s go back to the Shiller graph, now updated to 2017. Over the entire 20th century real home prices averaged an index value of about 110 (and were quite close to this value over the the entire 1950-1997 period). Over the entire 20th century, housing prices never once roce above 131, the 1989 peak. But beginning around 2000 house prices seemed to reach for an entirely new equilibrium. In fact, even given the financial crisis, prices since 2000 fell below the 20th century peak for only a few months in late 2011. Real prices today are now back to 2004 levels and rising. As I predicted in 2008, prices never returned to their long-run 20th century levels. [More…]

 

Stick The Landing

I saw this picture and it made think about compliance. At its most basic, the plane did land, the aviators did not die, and the aircraft carrier is still floating.

But it was a not a compliant landing.

The plane, the aircraft carrier, and the pilot are all damaged to some extent. That it was not fatal to any of them does mean it was good. Although, better than the alternative.

Compliance is not a success if merely sticks the landing. It needs to monitor the entire flight plan, to make sure things are on track for a good landing. You need reporting along the way and a judgment on the final result. Merely noting that something landed misses the point.

I don’t know what lead to this landing. Obviously, something went wrong. So perhaps this landing was a good result given the circumstances. Being able to walk away from a situation could be considered a success if things were really bad.

In the business world that more likely means that you ended up talking the lawyers instead of the compliance group. The lawyers figure out how to get you out of trouble. Compliance tries to keep you from getting into trouble. Both want you to stick the landing.

Sources:

I’m raising money for the Dana-Farber Cancer Institute by participating in the Pan-Mass Challenge. 100% of your donation is passed through to DFCI. I’m riding my bike for three days and 250+ miles. I appreciate the generous support I have received from so many of the readers of Compliance Building. You can donate through any of the links below.

Thank you,
Doug

Initial Coin Offerings and the Securities Laws

Regulators have been trying to figure out what to do with the new currencies coming to the marketplace. Bitcoin was the vanguard, bringing its blockchain technology into the public’s view. The Securities and Exchange Commission has issued a Report of Investigation that provides some insight into when these currencies and their rollouts are going to violate securities law.

I find Bitcoin’s distributed ledger technology called the blockchain to be intriguing. Bitcoin as a currency has its problems. The wild swings in its conversion rate make it look more like a commodity than the steady values expected of a currency. In the US we have distinct regulatory structures between commodities and securities.

(Speaking of currency, if you have some extra currency then use it to fight cancer. Support my Pan-Mass Challenge Ride.)

The SEC took a close look at the initial coin offering of DAO Tokens to see if it violated securities laws. The first test was whether the DAO Tokens were securities. The short answer is yes.

The hurdle with rolling out new virtual currencies is getting enough into circulation at launch to make them useful of enough to act like a currency. Bitcoin has been out long enough and is widely used enough that it has passed this hurdle. But the first person with a Bitcoin couldn’t do much with it.

I think it’s important to note that the DAO Tokens that are the subject of the report are not the virtual currency. The DAO Tokess were used to fund the enterprise that was intended to fund projects involving the Ether currency and the Etherium blockchain.

The DAO was essential a venture capital organization and the DAO tokens were the capital commitments. Fund managers will tell you right off the bat that the partnership interests in a venture capital fund are securities.

In looking at the DAO tokens, the SEC went right to the Howey test.

Participants invested money. Of course, cash is not the only way to invest. For the DAO tokens, the investors used Ether which has value and easily meets this prong of the test.

Participants had a reasonable expectation of profits. The DAO organization was set up as a venture capital endeavor and explicitly stated that DAO token holders would share in profits from any of the projects that generated revenue.

The difficult part of the prong was the “managerial efforts of others.” DAO token holders had voting rights but the promoter, Slock.it, was key to moving the enterprise forward according to the SEC. DAO would have “Curators” instead of managers who would chose the projects for voting by the DAO token holders.

Slock.it chose the initial batch of Curators.  Token Holders could vote to replace a Curator. But the decision to send the proposal to a vote is subject to approval of the Curators.  Curators had the responsibility and power to “(1) vet Contractors; (2) determine whether and when to submit proposals for votes; (3) determine the order and frequency of proposals that were submitted for a vote; and (4) determine whether to halve the default quorum necessary for a successful vote on certain proposals. Thus, the Curators exercised significant control over the order and frequency of proposals, and could impose their own subjective criteria for whether the proposal should be whitelisted for a vote by DAO Token holders.”

The SEC went on further to conclude that the DAO Token voting rights are closer to those of corporate shareholder, than an active participant in the management.

If the DAO Tokens are securities then the whole securities law regulatory regime applies unless there is an exemption for the offering of the DAO Tokens. The sponsors took no steps to limit the offering in a manner consistent with a offering exemption.

In the end, it was not the initial coin offering that was a problem, it was the offering of interests in the organization behind the coins that was a problem.

Sources:

The Pan Mass Challenge has many choices for those looking to participate and raise money to fight cancer. I have a friend who is a virtual rider. Due to injuries she is not ready to spend hours on a bike. I’m not a virtual rider. Not only am I riding the two days of the Pan Mass Challenge, I’m adding an extra Day Zero and riding 75+ miles just to get to the start of the Pan Mass Challenge.

Help me fight cancer by donating your real currency through one of the links below.

Thank you,
Doug

The One With The Fake Cancer Detection

The product sounds great: “The Gold Standard to monitor metastic breast cancer. Our Serum-2 test provides a more accurate representation of HER-2 status, facilitating more appropriate treatment strategies.” NanoMolecularDX is “executing a commercialization strategy” for this test and others.  In July is closed on $1 million of seed funding.

I’m an advocate for cancer research and raising money to fight cancer, so this sounds like a good thing. It also has an affiliated entity, MetaboRX that is a “preclinical stage biopharmaceuticals enterprise based on pioneering research in fatty acid metabolism.”

So why did NanoMolecularDX list as its general character of business “serving food; restaurant” on its filing with the Massachusetts Secretary of the Commonwealth? And why did MetaboRX list as its general character of business “serving food; restaurant” on its filing with the Massachusetts Secretary of the Commonwealth

The Securities and Exchange Commission also wants to know. The SEC filed a complaint against NanoMolecularDX  and its manager, Patrick Muraca.

“According to the SEC’s complaint, Patrick Muraca established two pharmaceutical development companies and raised nearly $1.2 million by representing to investors that their money would be used to develop products to detect cancer and other diseases. The SEC has traced the flow of investor funds into Muraca’s personal bank account and alleges that at least $400,000 has been used to pay rent for the restaurants and fund other purchases by Muraca, including payments to a casino, automotive shop, and cigar shop.”

According the SEC complaint Mr. Muraca used the money he raised for personal expenses: mortgage, groceries, and gas. He also used $45,000 of the investors’ money to pay the rent and expenses for his fiancee’s restaurant business. Once that went out of business he spent another $30,000+ to start a new restaurant.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Muraca.

“As alleged in our complaint, we’re intervening to protect investors because Muraca has veered from his stated intentions and has been using their money for purposes other than the fight against cancer and other diseases.” – Paul Levenson, Director of the SEC’s Boston Regional Office

Great job by the SEC’s Boston Office to identify the fraud and shut it down before Muraca was able to scam any more investors.

What compliance lessons can we learn from the case?

Corporate filings do matter. Any investor could have pulled up the filing Massachusetts filing and noticed that strange purpose. I generally don’t find the filings with the secretary of state to be incredibly useful. But sometimes you do find a red flag like this to stop you in your tracks.

Sources:

As I mentioned above, I’m raising money for the Dan-Farber Cancer Institute for the Pan-Mass Challenge. 100% of your donation is passed through to DFCI. I’m riding my bike for three days and 250+ miles. I appreciate the generous support I have received from so many of the readers of Compliance Building. You can donate through any of the links below.

Thank you,
Doug

 

Compliance Bricks and Mortar – John McCain Edition

Here are some of the compliance-related stories that recently caught my attention.

Standardizing IRR Calculations and Related Disclosures – The SEC Continues to Focus on Private Equity Practice by Vivek Pingili, Esq.

In recent years the SEC has closely examined private equity fund performance and reporting during routine exams. The importance of this topic came to the forefront in December 2016 when the SEC subpoenaed Apollo Global Management, LLC (“Apollo”) for additional information on Apollo’s IRR calculation methodologies.[1] This SEC enquiry has caused a number of private equity firms to review their IRR calculations and disclosures. [More…]

SEC’s Reg Flex Agenda: Where Did Those Dodd-Frank Rules Go? by Broc Romanek in The CorporateCounsel.net

Normally – as I have blogged many times (here’s one) – the SEC’s Reg Flex Agendas tend to be “aspirational.” But perhaps this time is different.

As part of a federal agency-wide reveal of the new Administration’s plans for rulemaking, the SEC posted the latest version of its Reg Flex Agenda last week. This agency coordination is the Administration’s “unified agency regulatory agenda.”

This Reg Flex Agenda is notable for what it omits – get a load of what’s not on the list: …. [More…]

Cheating the Algorithm: The New “Pump and Dump” Fraud by John C. Coffee, Jr. in the CLS Blue Sky Blog

Today, an analogous new technological development is inviting new forms of fraud. The new development is algorithmic trading (which by some estimates now accounts for 30 percent of stock trading[1]). Computers are programmed to trade in a micro-second once they detect certain triggering quantitative data. Obviously, this is how high frequency traders have come to dominate the market.

But can the computer be duped? The answer is: definitely and sometimes easily. A pending SEC litigation shows how the contemporary financial world in its hunt for quantitative “Big Data” exposes itself to fraudsters. In SEC. v. Lidingo Holdings, LLC,[2] a pending action in the Southern District of New York, the defendant described itself as a “social media consultant,” but the SEC characterized it instead as a “stock promotion firm” that received high fees for commissioning and posting articles (and even tweets) about its clients written by a variety of ghost writers whom the firm commissioned and paid.  [More…]

Are We in a Compliance Arms Race? by Azish Filabi in Compliance & Enforcement

Over the past few decades, while companies have invested in building and expanding their compliance programs, researchers, practitioners and employees in some companies attest to a lack of corresponding reduction in misbehavior.[1]   Some even believe that the compliance programs may be a cause of increasing misbehavior.  This begs the question: Are we in a compliance arms race?  Mind Gym, Inc., a behavioral science oriented training firm has coined this term to refer to the cycle of increasing investment in compliance programs, which increases the demand for competent professionals, and the cost of doing business, while the levels of misbehavior remain unchanged, thus spurring calls for additional internal compliance controls.[2] [More…]

On Pan-Mass Challenge weekend, August 4 – 6, I will saddle up to ride with 6,200 other cyclists 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:

Thank you,
Doug