heart made of hearts

The gift of material nonpublic information

July 11, 2018

Material nonpublic information – the perfect gift The gift of material nonpublic information always fits, is never returned, and can be regifted easily. It is the perfect way to say “I love you.” The SEC has filed an action against Robert Carr and Katherine Hanratty for illegal insider trading in the shares of Heartland Payment Systems, Inc. (“Heartland”), a New Jersey-based company, ahead of its December 15, 2016 announcement that it was to be acquired. 

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Uncle Sam

Securities Law in the Trump Administration – Has Anything Changed?

January 26, 2018

Please join the Chicago Bar Association Securities Law Committee on February 27, 2018 from 3-6 p.m. for three great panel discussions of what in securities law has changed and what has not during the first year of the Trump Administration while getting continuing legal education credits.

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mother rhino and baby

Insider traders who must love their mothers

September 27, 2017

Must be embarrassing for Zacks Investment Research to learn that not one, not two, but three of its employees were trading on illegal inside information for years! According to the SEC’s complaint — see link below — the three are Jason Napodano, Bilal Basrai, and Bryce Stirton. Two of the three were managers of Zacks divisions.

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Do as I say, not as I do – the new SEC motto?

September 22, 2017

According to the SEC, “Issuers and other market participants must take their periodic and current disclosure obligations regarding cybersecurity risks seriously, and failure to do so may result in an enforcement action.” So, brokers, mutual funds, public companies are required to make timely disclosures of material cybersecurity risk information or face an SEC enforcement action. OK SEC, show us how it is done.

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Enron logo

Financial reporting controls should be verified or why bother?

September 11, 2017

The president of NYSE Group (Tom Farley) is leading the chorus of industry folks complaining about having to ensure that public companies have adequate controls in place to make their financial statements meaningful.

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flashlight

Shine a little light on FINRA say industry and investor advocates

September 9, 2017

With members and investors unhappy with FINRA, it would appear to be time for the SEC to step in. Investor advocates have been complaining about FINRA for a long time. FINRA has made some modest changes but largely resisted changing anything.

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empty courtroom

SEC administrative law judges – constitutional or not?

September 7, 2017

The US Supreme Court may step in to resolve an issue that has been simmering for many years — does the SEC have the authority to bring enforcement actions before administrative law judges that it has appointed and who work for the agency. Opponents of SEC ALJs contend they are “inferior officers” whose appointment violates the “Appointments Clause” of the US Constitution. This argument has been rejected by SEC Commissioners, who are appointed by the president and who hear appeals of ALJ decisions. Federal appeals courts, however, are not in agreemen — some courts concluding the ALJs are properly appointed, others not. There is little evidence that SEC ALJs are in the pocket of the Division of Enforcement. Far from rubber stamping actions brought by the Division of Enforcement,  ALJs have ruled against the SEC Division of Enforcement in significant cases. The SEC’s success in administrative proceedings is similar to its success in federal court actions. The SEC doesn’t lose often because it has the ability to conduct investigations before bringing enforcement actions. As a result, by the time a case is filed, the SEC has a great deal of evidence supporting its charges. Requiring the SEC to file all cases in federal court might be a boon to investors. Investors can learn more about a case filed in federal court than an administrative action. SEC administrative proceedings are “public” in name only. Just try to attend an administrative proceeding and you will see how “public” they are. Not only do the ALJs often bar you from the hearing room, but the SEC makes it exceedingly difficult to obtain even some of the exhibits or transcripts of testimony in these so-called public proceedings. How is that public? https://www.nytimes.com/2017/09/05/business/dealbook/in-house-judges.html?em_pos=small&emc=edit_dk_20170906&nl=dealbook&nl_art=7&nlid=62722730&ref=headline&te=1&_r=1

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Everything old is new again – bribery of Haitian officials

September 4, 2017

As an SEC enforcement attorney, I investigated the CEO and senior executives of American Rice for bribing Haitian customs officials. Under the Foreign Corrupt Practices Act (FCPA), it is illegal for US companies to pay bribes to foreign officials. In addition, when companies fail to identify those bribes in their financial statements they violate other federal securities laws requiring proper disclosures — when is the last time you saw a line item for “bribes.” These guys were flying suitcases of cash to Haiti to be secretly handed off to Haitian customs officials. As a result of investigations by the SEC and DOJ, American Rice’s CEO and another senior executive were convicted of criminal FCPA violations. https://www.sec.gov/litigation/litreleases/lr18925.htm An SEC Litigation Release concerning the filing of the SEC enforcement action against Douglas K. Murphy and is available here: https://www.sec.gov/litigation/litreleases/lr17651.htm Bribes paid to Haitian officials are back in the news. A retired U.S. Army colonel was charged with involvement in a foreign bribery and money laundering scheme in connection with a planned $84 million port development project in Haiti. According to a DOJ press release (available below along with an FCPA Blog post), Joseph Baptiste was arrested Tuesday morning on a criminal complaint filed in federal court in Boston. He was charged with one count of conspiracy to violate the Foreign Corrupt Practices Act and to launder money. Baptiste is alleged to have solicited bribes from undercover FBI agents in Boston, who posed as potential investors in a port project in Haiti. Baptiste allegedly told the agents in a recorded meeting that he would funnel payments to Haitian officials through a Maryland non-profit he controlled. The complaint alleges that Baptiste took $50,000 from the undercover agents that was wired to the non-profit. Although Baptiste used that money for personal expenses, the DOJ said, “he intended to seek additional money from the undercover agents to use for future bribe payments in connection with the port project.” Things in Haiti have not changed much in the past 15 years. As sad as things are in Haiti, it has not always been like that. Here is a link to a “Crash Course” by John Green – an interesting video on the Haitian Revolution. https://www.justice.gov/opa/pr/retired-us-army-colonel-charged-conspiring-bribe-senior-officials-republic-haiti http://www.fcpablog.com/blog/2017/8/29/retired-us-army-colonel-charged-with-fcpa-conspiracy.html

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crumpled dollar bill

Almost 10 years ago – the beginnings of the Great Recession

August 24, 2017

Periodically I go back to one of the best financial podcasts ever – The Giant Pool of Money podcast produced by WBEZ’s This American Life. In this program, public radio journalists relate in a clear and interesting way the causes of the housing crisis and subsequent financial collapse of 2008. They address questions like, what did the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar mortgage loans to people with no job and no income? How did these risky no-doc (liar’s) loans get rolled into collateralized mortgage obligations (CMOs) that were marketed as low risk investments? As we are now approaching the ten year anniversary of the housing crisis/liquidity crisis/Great Recession, it is worth revisiting what happened and why Congress enacted Dodd-Frank. https://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money

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Spoofing is not new – it is illegal market manipulation

August 9, 2017

There is a great deal of consternation about the recent Seventh Circuit decision affirming the criminal conviction of a trader for “spoofing,” a type of market manipulation that has been illegal for a long time. While the criminal statute at issue is new, traders have long been on notice that this conduct violates Rule 10b-5. In the early 2000s, I supervised an investigation of traders engaged in spoofing, which is just one type of market manipulation. https://www.sec.gov/litigation/litreleases/lr18894.htm  The SEC brought Rule 10b-5 charges against the three traders. According to the SEC Litigation Release, The Commission’s Complaint alleges that approximately 75 times between September and December of 1999, Awdisho, Kundrat and Smolinski each manipulated the price of stock options by engaging in a scheme commonly referred to as “small lot baiting.” Small lot baiting or “spoofing” involves an order placed by a market participant with the intention of briefly triggering a market movement from which the participant or others may benefit by trading the opposite side of the original manipulative order. The Complaint further alleges that to carry out the scheme, Awdisho, Kundrat and Smolinski placed limit orders for a small number of options contracts on one options exchange to artificially raise or lower that exchange’s quoted bid or offer. Awdisho, Kundrat and Smolinski then purchased or sold much larger opposite positions on other exchanges that matched the artificially raised or depressed price displayed at the first exchange. After their larger orders were executed, the Awdisho, Kundrat and Smolinski immediately sent an order to cancel the initial bait order. As a result of the scheme, the Complaint alleges that Awdisho, Kundrat and Smolinski unfairly profited at least $25,000 by obtaining execution of their larger orders at more favorable prices than otherwise available in the market. This was a small case, but brought to send a message that this conduct is not legal. Apparently, the message did not get through. There have been other spoofing cases since then. http://www.businessinsider.com/what-is-spoofing-the-market-2015-4 Why is spoofing illegal? Because traders submit orders they intend to cancel before execution. The sole purpose of the orders is to change the price at which other orders the spoofers submit will be executed. That means spoofers are not arbitragers — whose activities make markets more efficient. Spoofers are engaged in illegal market manipulation. While the primary victims of this conduct are professional marketmakers, the practice undermines investor confidence in our capital markets. For an incredibly readable and interesting description of similar manipulations of complex financial markets read Michael Lewis’s best selling book, Flash Boys. https://www.goodreads.com/book/show/24724602-flash-boys The Seventh Circuit decision is available here: http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2017/D08-07/C:16-3017:J:Ripple:aut:T:fnOp:N:2006533:S:0          

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