The Fifth Circuit overturned a U.S. District Court’s approval of a settlement between Ralph Janvey, the Receiver for Stanford International Bank, and various insurance company Underwriters, under which the Underwriters had agreed to pay $65 million to the Stanford Receivership estate.  Writing for the Court, Judge Edith H. Jones held that the District Court abused its discretion in approving the settlement because the injunction issued by the District Court (referred to as a “bar order”) nullified claims by third-party coinsureds to policy proceeds without an alternative compensation scheme.  The settlement also improperly released third-party tort and statutory claims against the Underwriters that the estate did not own.

The Stanford Financial Ponzi scheme defrauded more than 18,000 investors who collectively lost over $5 billion.  The proposed settlement was intended to end years of litigation between the Receiver and the Underwriters with respect to insurance coverage under policies issued to Stanford entities.  The Underwriters disputed the amount of available coverage and also contended that various policy exclusions applied.  The proposed settlement contained the following terms:
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An opinion this week from the Southern District of New York, SEC v. Alderson[1] [click here], held that an RIA’s communications with lawyers associated with its third-party compliance consultant were not protected by the attorney-client privilege or the attorney work-product doctrine. As a result, the district court compelled disclosure of over 230 communications passing between the RIA’s in-house counsel and its third-party compliance firm (staffed with licensed attorneys) before and during the course of an examination of the RIA by the Securities and Exchange Commission (“SEC”).[2] This ruling raises important considerations for an RIA or broker-dealer when engaging outside compliance consultants and lawyers, especially if the firm intends for certain of or all of those communications to be cloaked with privilege.

Background

In Alderson, the SEC accused two IARs of violating § 206 of the Investment Advisors Act by misrepresenting the tax consequences, failing to disclose a conflict of interest about compensation, and other acts or omissions, concerning the transfer of U.K. pension assets to overseas retirement plans that qualified under the U.K. tax authority’s regulations as a Qualified Recognized Overseas Pension Scheme (“QROPS”).[3] The two IARs had previously worked for the RIA and invested clients into the RIA’s QROPS program, but were no longer affiliated with RIA at the time of the lawsuit filing.
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KPMG must pay $50 million after the Securities and Exchange Commission charged the accounting giant with cheating on training exams and using purloined information concerning audit inspections to be conducted by the Public Company Accounting Oversight Board (PCAOB).  KPMG agreed to the $50 million penalty and also accepted a public censure as part of the settlement.

The findings in the SEC’s cease-and-desist order—which KPMG has admitted—are that now-former members of KPMG’s Audit Quality and Professional Practice Group improperly obtained lists of particular audit engagements that the PCAOB planned to inspect.  KPMG obtained the confidential information from multiple individuals who had worked in the PCAOB’s inspections group, some of whom joined KPMG after leaving the PCAOB.  KPMG personnel then used the information to revise audit work papers to minimize the chances that the PCAOB’s inspections would turn up deficiencies.  These misdeeds resulted in a substantial improvement to KPMG’s 2016 inspection results.  The SEC charged six accountants individually, including these former KPMG personnel, in January 2018 for this conduct.
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Celadon Group Inc. announced a settlement with the SEC and the DOJ over allegations of accounting fraud.[1]  The company agreed to pay restitution of over $42 million in connection with a Deferred Prosecution Agreement with the DOJ, and to pay disgorgement of roughly $7.5 million in a parallel SEC settlement.  The disgorgement obligation is

Securities litigation frequently raises the question of what conduct constitutes a primary violation of the federal securities laws, specifically, Rule 10b-5 and the various other antifraud provisions.  Must one make a false statement in order to be primarily liable?[1]  The Supreme Court held in Janus Capital Group, Inc. v. First Derivative Traders that only those who “make any untrue statement of material fact” may violate Rule 10b5-(b).[2]  Other questions include whether one who merely disseminates a false statement, without actually writing or “making” the statement, can be primarily liable.  And what are the contours of “scheme” liability under Rules 10b-5(a) and (c)?  The Supreme Court recently clarified some of these difficult questions in Lorenzo v. SEC. [3]

Background: Janus and Primary Liability of “Makers” of Untrue Statements

As mentioned, the Supreme Court held in Janus that only those who “make any untrue statement of material fact” may violate Rule 10b5-(b).[4]  The Court wrote that the “maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.”[5]  For example, the Court noted, a speechwriter does not control the content of the speech; that content is exclusively within the control of the person who delivers it.  Under this analysis, the speechwriter is not a “maker” of the speech and therefore could not be held primarily liable under Rule 10b5-(b), even if all other elements of the violation were satisfied.[6]  Left undecided in Janus was whether one who disseminates a statement, with scienter but without control over its content, may be liable under any part of Rule 10b-5.
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The Financial Industry Regulatory Authority (“FINRA”) recently published its Risk Monitoring and Examination Priorities Letter (the “Letter”) for 2019 and signaled its intent to expand the scope of its priorities and exam program. Unlike previous years, FINRA’s 2019 Letter took a “somewhat new approach” by identifying materially new areas of emphasis.[1] Admittedly, FINRA will continue to examine longstanding priorities detailed in prior letters,[2] but in adding “Risk Monitoring” to the title to the Letter, FINRA notified the industry it planned to broaden its exam program into three materially new priorities: (1) online distribution platforms, (2) fixed income mark-up disclosure, and (3) regulatory technology.[3]  These three new areas of focus are buttressed by other highlighted items in FINRA’s 2019 Letter: sales practice risks, operational risks, market risks, and financial risks.  At the same time, FINRA cautioned industry recipients that “[u]nlike previous Priorities Letters, we do not repeat topics that have been mainstays of FINRA’s attention over the years.”  Thus these “mainstays” are also given consideration.  The following briefly summarizes many of the important and emerging issues highlighted by FINRA:

Mainstay Areas of Exam Focus

FINRA’s 2019 Priorities Letter makes clear its exams will continue to focus on what it terms “mainstay” topics.  In fact, FINRA highlights this admonition in the first paragraph of its 2019 Letter.  And as to be expected protection of securities customers will continue to be a bedrock exam principle.  Thus protections for the customer vis-à-vis the transaction process or relative to the strength of the firm remain key areas of inquiry.  Firms should focus then on compliance obligations related to suitability, complex products, mutual fund and variable annuities share classes and break points; use of margin; OBAs and especially disclosures about such activities; private securities transactions; private placements; communications with the public; AML; best execution; fraud (including microcap fraud), insider trading and market manipulation; net capital and customer protection; trade and order reporting; data quality and governance; recordkeeping, risk management and supervision related to these and other areas.
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The SEC recently announced insider-trading charges against the former senior lawyer at Apple specifically tasked with ensuring insider-trading compliance at the company.[1]  The Department of Justice also addressed this case of “the fox guarding the hen house” by filing criminal charges against the former Apple attorney.  The defendant, Gene Daniel Levoff, denies all charges and vows to defend himself.

The SEC alleges that Levoff received material non-public information about Apple’s quarterly earnings announcements through his role as a reviewer of draft earnings materials before their public distribution.  Armed with this confidential information, Levoff allegedly traded Apple securities just ahead of three separate quarterly earnings announcements in 2015 and 2016, reaping some $382,000 in profits and losses avoided.  The SEC contends that Levoff conducted his trading during blackout periods, selling Apple securities when he knew Apple was going to miss analysts’ estimates, and buying when he knew Apple stood to beat estimates.
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A former broker at a national brokerage firm was recently sanctioned by FINRA after accepting instructions to transfer assets out of a client account. The problem? The instructions were actually sent by an imposter who had obtained access to the client’s account, presumably through some form of cyber-crime.  Unfortunately, the broker unwittingly contributed to the imposter’s malfeasance by not only accepting the instructions but by also taking pro-active steps to circumvent his brokerage firm’s controls.

This action joins a list of actions taken by FINRA and state securities regulators on similar issues, which we suspect will continue to grow as regulators continue to increase their scrutiny of cybersecurity controls and practices at financial service firms.  Thus, broker-dealers and investment advisers would be wise to review and enhance, if needed, their systemic controls and incorporate training elements to reinforce their representatives’ ability to identify suspicious conduct and act appropriately to avoid becoming victims themselves.
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On September 28, 2018, the U.S. Congress passed an appropriations bill that extended the EB-5 Immigrant Investor Program (the “EB-5 Program”) in its current form through December 7, 2018.[1] Thus, the EB-5 Program will expire on December 7, 2018, unless it is renewed once again for another couple of months to a year.

Although the