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Index to Presentation

Index to Presentation . Introduction Foreign Corruption Case Studies The Next Wave: Insider Trading and Other Market Abuses Goldman Sachs: “Short” Heard ‘Round the World. Introduction. Expanding International Cooperation.

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Index to Presentation

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  1. Index to Presentation • Introduction • Foreign Corruption Case Studies • The Next Wave: Insider Trading and Other Market Abuses • Goldman Sachs: “Short” Heard ‘Round the World

  2. Introduction

  3. Expanding International Cooperation • “The [U.S. Securities and Exchange Commission’s] Office of International Affairs (OIA) promotes investor protection and cross-border securities transactions by advancing international regulatory and enforcement cooperation, promoting the adoption of high regulatory standards worldwide, and formulating technical assistance programs to strengthen the regulatory infrastructure in global securities markets. * * * OIA provides advice and assists with cross-border securities investigations and prosecutions, and negotiates international information-sharing arrangements with foreign securities regulators and law enforcement agencies.” – SEC Website • “The [U.S. Department of Justice’s] Office of Overseas Prosecutorial Development, Assistance and Training (OPDAT) was established to help harness the Department of Justice’s resources to strengthen foreign criminal justice institutions and enhance the administration of justice abroad. OPDAT supports the law enforcement objectives of the United States and the Department’s international law enforcement priorities by preparing foreign counterparts to cooperate more fully with the United States in combating transnational crime and terrorism, by improving foreign judicial assistance to the United States, and by promoting the rule of law and respect for human rights.” – DOJ Website

  4. Expanding International Cooperation (cont.) • “The International Organization of Securities Commissions (“IOSCO”) has supported efforts to enhance supervisory cooperation by creating a Supervisory Cooperation Task Force, which recently released a set of Principles on Cross Border Supervisory Cooperation.” – Remarks made by SEC Commissioner Elisse B. Walter, Supervisory Cooperation: The Next Frontier for International Securities Regulation (July 6, 2010) • “[The value of international regulatory coordination] is measured by the extent to which the policies endorsed or adopted promote fair, efficient and transparent capital markets and support capital formation while minimizing the costs and burdens of regulations associated with promoting these goals.” – Remarks made by SEC Commissioner Elisse B. Walter, The 14th Annual SEC Regulation Outside the United States Conference (June 10, 2010)

  5. Expanding International Cooperation (cont.) • “The SEC, AMF and OSC have a long history of cooperation, particularly in securities enforcement matters. This [Memorandum of Understanding (MOU)] would extend this cooperation beyond enforcement by setting forth a framework for consultation, cooperation and information-sharing related to the day-to-day supervision and oversight of regulated entities.” – Announcement from the Quebec Autorité des Marchés Financiers and Ontario Securities Commission (June 14, 2010) • “Since our markets have become so interrelated, and given the impact of the recent financial crisis, this MOU is an important step in ensuring that our markets are safe and that our investors are protected by optimum cooperation between the SEC and the AMF and OSC. It is essential that entities operating across borders be effectively regulated, and this cannot be achieved without the cooperation envisioned by this MOU.” – AMF President and CEO St-Gelais (June 14, 2010)

  6. U.S. Dodd-Frank Financial Reform Bill: SEC Enforcement Provisions • Jurisdiction Over Foreign Securities Transactions • Attempts to grant SEC jurisdiction over foreign transactions if “significant steps” taken in the U.S. to further the violation or if foreign misconduct had a “foreseeable substantial effect” in the U.S. • Passed in response to Supreme Court’s June 2010 “f-cubed” case. • Expanded Secondary Liability • Reduces required intent for aiding and abetting liability to a showing of “recklessness.” • Authorizes civil penalties for aiding and abetting under Advisers Act (injunctive actions). • Adds aiding and abetting liability under the Securities Act and Investment Company Act. • Clarifies SEC’s authority to bring “control person” claims.

  7. U.S. Dodd-Frank Financial Reform Bill: SEC Enforcement Provisions (cont.) • Whistleblower Bounty • Mandatory cash awards of 10% to 30% of total sanctions recovered by government (greater than $1 million) as a result of the whistleblower’s assistance. • Other Provisions • Increased funding, greater budget autonomy, streamlined hiring authority for market professionals. • Authorizes sharing of privileged information with other enforcement agencies, penalties in cease and desist proceedings, securities industry-wide bars, and nationwide SEC trial subpoenas. • Establishes deadlines for SEC enforcement actions, inspections and examinations. • Numerous studies required that could lead to further legislation or rulemaking.

  8. SEC Enforcement: Structural and Policy Changes • A Swifter Enforcement Division • Eliminating an entire layer of management and restricting the use of tolling agreements. • Delegating authority to obtain formal orders and issue subpoenas. • Streamlining the Wells process and other processes. • Increased Credit for Cooperation by Individuals • Formalized policy for entering cooperating agreements with individuals. • Utilizing DOJ-style deferred and non-prosecution agreements. • Expedited process for securing criminal immunity requests.

  9. SEC Enforcement: Structural and Policy Changes (cont.) • SEC’s Office of Compliance and Inspection Examinations • Support of Enforcement’s specialization initiative through sweep examinations. • New procedures for third-party verification of information obtained in examinations. • SEC Enforcement Manual (October 2008) • Greater transparency in investigative process and charging decisions. • Formalization of policies: privilege waivers, contact with senior staff during investigation, parallel proceedings, access to investigative files, closing process.

  10. SEC Enforcement: Structural and Policy Changes (cont.) • Other Madoff-Inspired Changes • Dedicated complaint center, Office of Market Intelligence. • New Division of Risk, Strategy and Financial Innovation.

  11. Leadership Commitment to Specialization • Comments of Director of Enforcement Robert Khuzami – August 5, 2009: “Units will be “proactive in deciding on an informed basis where to focus our investigations, as opposed to being more reactive to public information . . . .” Units will “attack problems systemically . . . on an industry-wide basis where appropriate . . . . More than ever, effective enforcement requires a comprehensive approach to these entities.” • September 10, 2009: Described as the “biggest reorganization in at least three decades. . . . [F]ive national specialized units that will be dedicated to high-priority areas of securities enforcement, with a particular emphasis on complex products, markets, transactions or practices.”

  12. Leadership Commitment to Specialization (cont.) • January 13, 2010: Specialized units provide “improved understanding of complex products and markets, earlier and better capability to detect emerging fraud and misconduct, greater capacity to file cases with strikeforce speed, and an increase in expertise throughout the Division.”

  13. Enhanced Specialization Within Enforcement • Five Specialized Units including: • Foreign Corruption Unit: Focus on new approaches to identifying violations; more cooperation with foreign counterparts. • Market Abuse Unit: Large scale market abuses and complex manipulation schemes by institutional traders and market professionals and others; new screening technology tools to analyze trading data across debt, equity, and derivatives. • Others are (i) Structured and New Products Unit;(ii) Asset Management Unit; and(iii)Municipal Securities and Public Pension Unit.

  14. Foreign Corruption Case Studies

  15. Legal Framework ofForeign Corruption Prosecution • U.S. Civil Enforcement • Regulatory Entity: U.S. Securities and Exchange Commission • Statutory Authority: Provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”) [15 U.S.C. §78dd] • U.S. Criminal Enforcement • Regulatory Entity: U.S. Department of Justice • Statutory Authority: Enforces substantive provisions of the FCPA pursuant to the U.S. Criminal Code [18 U.S.C. §2]. Also charges “conspiracy” to commit FCPA violations [18 U.S.C. §371].

  16. Legal Framework ofForeign Corruption Prosecution (cont.) • European Regulatory Bodies, among others • U.K.: Financial Services Authority • U.K.: Serious Fraud Office • Germany: Munich Public Prosecutors Office • Norway: National Authority for Investigations and Prosecution of Economic and Environmental Crime • Netherlands: Dutch Public Prosecutor

  17. Foreign Corrupt Practices Act: The Statute • Anti-Bribery / Improper Payments Provision: Section 30 • “It shall be unlawful for any [person or entity covered by the statute] to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to: • Any foreign official; • Any foreign political party or official thereof or any candidate for foreign political office; • Any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official, to any foreign political party or official thereof, or to any candidate for foreign political office.”

  18. Foreign Corrupt Practices Act: The Statute (cont.) • Anti-Bribery / Improper Payments Provision: (cont.) • “For purposes of: • (A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or • (B) inducing such foreign official, political party, party official, or candidate to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist [those covered by the statute] in obtaining or retaining business for or with, or directing business to, any person.”

  19. Foreign Corrupt Practices Act: The Statute (cont.) • Record-Keeping Provision: Section 13 • Requires U.S. issuers to: • “Make and keep books, records, and accounts which accurately and fairly reflect transactions and the distribution of the company’s assets [“books and records provisions”]; and • Devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are taken in accordance with management’s directives and are properly recorded [“internal controls provisions”].”

  20. Critical Settlement Terms • Entity Charged: Parent or Subsidiary • Civil Enforcement Only or Involvement of Criminal Authorities • Criminal Enforcement: Form of the Action • Guilty Plea • Deferred Prosecution Agreement • Non-Prosecution Agreement • Nature of the Charges • Books and Records / Internal Control Violations (Section 13) • Bribery / Corrupt Payment Violations (Section 30)

  21. Critical Settlement Terms (cont.) • Possible Monetary Sanctions • Criminal Fine • Civil Disgorgement (Proceeds of the Violation) • Civil Monetary Penalty • Other Terms • Oversight by Independent Monitor / Self-Monitoring • Inclusion of “Fresh Start” Provision

  22. Case Study: Siemens AG • Entity Charged: Parent company, Siemens AG, named in action by the SEC; parent company, Siemens AG, along with three subsidiaries (Siemens S.A.-Argentina; Siemens S.A.-Bangaledesh Limited; Siemens S.A.-Venezuela) (December 15, 2008). • Civil / Criminal / Home Country Enforcement: Actions brought by both civil (SEC) and criminal (DOJ) authorities, as well as proceedings instituted by Munich Public Prosecutors Office. • Criminal Enforcement: Guilty plea by parent company and subsidiaries.

  23. Case Study: Siemens AG (cont.) • Nature of the Charges • SEC: Settled civil injunctive action for foreign bribery (§30A), false books and records (§13(b)(2)(A)), and inadequate internal controls (Section 13(b)(2)(B)) • DOJ: Guilty plea by parent company for substantive violations of books and records (§13(b)(2)(A)) and internal control provisions (§13(b)(2)(B)); guilty pleas by subsidiaries for conspiracy to violate foreign bribery prohibition (§30A) and to violate books and records provision (§13(b)(2)(A)). • German Authority: Resolution of matter for “corporate failure to supervise its officers and employees;” resolution was with select operating group within parent entity.

  24. Case Study: Siemens AG (cont.) • Monetary Sanctions: (Total of $1.369 million) • SEC: Disgorgement of $350 million in profits. • DOJ: Criminal fine of $450 million. • German Authority: Corporate fine and disgorgement of profits totaling approximately $569 million. • Other Terms • SEC: Independent monitor for period of four years and other undertakings; acknowledgement of full cooperation and remedial steps.

  25. Case Study: KBR, Inc. (Halliburton Co.) • Entity Charged: Current and former parent companies, KBR, Inc. and Halliburton Co., respectively, named in action by the SEC; subsidiary Kellogg, Brown & Root, LLC named in parallel DOJ action (February 11, 2009). • Civil / Criminal / Home Country Enforcement: Actions brought by both SEC and DOJ. • Form of Criminal Enforcement: Guilty plea.

  26. Case Study: KBR, Inc. (cont.) • Nature of the Charges: • SEC: Settled civil injunctive action against KBR for foreign bribery (§30A), and records falsification (§13(b)(5); Rule 13b2-1) and for aiding and abetting violations of the books and records and internal control provisions (§§13(b)(2)(A) and (B)); settled civil injunctive action against Halliburton for aiding and abetting violations of the books and records and internal control provisions (§§13(b)(2)(A) and (B)). • DOJ: Guilty plea for violations for foreign bribery (§30A).

  27. Case Study: KBR, Inc. (cont.) • Monetary Sanctions: (Total of $579 million) • SEC: Disgorgement of $177.0 million in profits, jointly paid by KBR and Halliburton. • DOJ: Criminal fine of $402.0 million paid by KBR subsidiary. • Other Terms: • DOJ and SEC: Independent monitor for KBR for period of three years to review its FCPA compliance program; independent consultant for Halliburton to review its policies and procedures as they relate to compliance with the FCPA (SEC imposed); ongoing reporting obligations for companies.

  28. Case Study: BAE Systems plc • Entity Charged: Parent company, BAE Systems plc (February 5, 2010 / March 1, 2010). • Civil / Criminal / Home Country Enforcement: Action brought by U.S. criminal authorities (DOJ); parallel home country prosecution by U.K.’s Serious Fraud Office. • Criminal Enforcement: Guilty plea by parent company. • Nature of the Charges: • SEC: No action brought (lack of jurisdiction; possible lack of “issuer” status as required under the books and records and internal controls provisions). • DOJ: Guilty plea by parent for, among other things, conspiracy to make false statements about its FCPA compliance program. • U.K. Authority: Guilty plea by parent company for breach of duty to keep proper accounting records.

  29. Case Study: BAE Systems plc (cont.) • Monetary Sanctions: (Total of $449.6 million) • DOJ: Criminal fine of $400 million for assorted conduct, including conspiracy to make false statements regarding FCPA compliance program. • U.K. Authority: Criminal penalty (at the time) of £30 million (approx. $49.6 million). • Other Terms: • DOJ: Independent monitor for period of three years; ongoing reporting obligation.

  30. Case Study: Innospec, Inc. • Entity Charged: Parent company named, Innospec, Inc. (March 18, 2010). • Civil / Criminal / Home Country Enforcement: Actions brought by both SEC and DOJ, as well as proceedings instituted by U.K.’s Serious Fraud Office. • Criminal Enforcement: Guilty plea. • Nature of the Charges: • SEC: Settled civil injunctive action for foreign bribery (§30A), false books and records (§13(b)(2)(A)), and inadequate internal controls (§13(b)(2)(B)). • DOJ: Guilty plea for violations for foreign bribery (§30A), as well as kickbacks under the UN Oil for Food Program and violations of the trade embargo with Cuba. • U.K. Authority: Guilty plea for conspiracy to make corrupt payments to foreign officials.

  31. Case Study: Innospec, Inc. (cont.) • Monetary Sanctions: (Total of $40.2 million) • SEC: Disgorgement of $11.2 million in profits. • DOJ: Fine of $14.1 million. • Other US: Treasury’s Office of Foreign Asset Control also received $2.2 to resolve embargo violations. • U.K. Authority: Criminal penalty of $12.7 million. • Other Terms: • DOJ and SEC: Independent monitor for period of three years; payment to SEC spread over four installments; waiver by SEC of additional disgorgement ($48 million).

  32. Case Study: Daimler AG • Entity Charged: Parent company, Daimler AG named in action by the SEC; parent company, Daimler AG, along with three subsidiaries (DaimlerChrysler Automotive Russia SAO and its subsidiary Export and Trade Finance GmbH; DaimlerChrysler China Ltd.) (April 1, 2010) • Civil / Criminal / Home Country Enforcement: Actions brought by both civil (SEC) and criminal (DOJ) authorities; no home country prosecution. • Criminal Enforcement: Guilty plea by certain subsidiaries and deferred prosecution agreement (DPA) by parent and other subsidiary.

  33. Case Study: Daimler AG (cont.) • Nature of the Charges: • SEC: Settled civil injunctive action for foreign bribery (§30A), false books and records (§13(b)(2)(A)), and inadequate internal controls (§13(b)(2)(B)). • DOJ: Guilty plea by Russian subsidiaries for conspiracy and substantive violations for foreign bribery (§30A); parent entered DPA for conspiracy and substantive violation of false books and records (§13(b)(2)(A)); China subsidiary entered DPA for conspiracy and substantive violation for foreign bribery (§30A). • Monetary Sanctions: (Total of $185.0 million) • SEC: Disgorgement of $91.4 million in wrongful profits. • DOJ: Fines and penalties totaling $93.6 million.

  34. Case Study: Daimler AG (cont.) • Other Terms: • DOJ and SEC: Independent monitor for a period of three years; other undertakings; acknowledgement of cooperation.

  35. Case Study: Technip S.A. • Entity Charged: Parent company named Technip S.A. (June 28, 2010). • Civil / Criminal / Home Country Enforcement: Actions brought by both SEC and DOJ; no home country prosecution. • Form of Criminal Enforcement: Deferred prosecution agreement. • Nature of the Charges: • SEC: Settled civil injunctive action for foreign bribery (§30A), false books and records (§13(b)(2)(A)), and inadequate internal controls (§13(b)(2)(B)). • DOJ: DPA for conspiracy and substantive violation for foreign bribery (§30A).

  36. Case Study: Technip S.A. (cont.) • Monetary Sanctions: (Total of $338.0 million) • SEC: Disgorgement of $98.0 million in profits. • DOJ: Criminal penalty of $240.0 million. • Other Terms: • DOJ: Independent monitor for period of two years to review the design and implementation of Technip’s compliance program.

  37. Case Study: ENI S.p.A. / SnamprogettiNetherlands, B.V. • Entity Charged: Italian parent company, ENI S.p.A., and Dutch subsidiary Snamprogetti Netherlands, B.V., named in action by SEC; Snamprogetti named in parallel DOJ action (July 7, 2010). • Civil / Criminal / Home Country Enforcement: Actions brought by both SEC and DOJ; no home country prosecution. • Form of Criminal Enforcement: Deferred prosecution agreement.

  38. Case Study: ENI S.p.A. / SnamprogettiNetherlands, B.V. (cont.) • Nature of the Charges: • SEC: Settled civil action against Snamprogetti for foreign bribery (§30A), and records falsification (§13(b)(5); Rule 13b2-1); settled injunctive action against ENI S.p.A. for violations of the record keeping and internal control provisions (§§13(b)(2)(A) and (B)). • DOJ: DPA for conspiracy and aiding and abetting violations for foreign bribery (§30A).

  39. Case Study: ENI S.p.A. / Snamprogetti Netherlands, B.V. (cont.) • Monetary Sanctions: (Total of $365.0 million) • SEC: Disgorgement of $125.0 million in profits, jointly paid by ENI S.p.A. and Snamprogetti. • DOJ: Criminal penalty of $240.0 million. • Other Terms: • DOJ: Agreement to ensure compliance program meets certain standards (no monitor).

  40. Summary Chart of Settlement Terms

  41. Conclusion: Foreign Corruption Trends • Enhanced Global Scrutiny • Increased International Cooperation • SEC’s Specialized FCPA Unit • Enhanced Subject-Matter Expertise • Proactive “Sweep” Investigations • Use of New Investigative Techniques • Rigorous Investigative / Settlement Protocol • Consistent Settlement Terms Across the Program • SEC Unit Will Support / Drive DOJ Efforts

  42. The Next Wave: Insider Trading and Other Market Abuses

  43. Market Abuse / Insider Trading • Overview of the Fundamental Statutory Authority • Section 17(a) of the Securities Act of 1933 prohibits fraud or deceit in the sale of securities. • Section 10(b) of the Securities and Exchange Act of 1934 prohibits fraud or deceit in connection with the purchase or sale of securities. • SEC Rule 10b-5 provides in part: • One cannot, directly or indirectly, • Use any device or scheme, • To make any untrue statement of material fact or omit to state a material fact, or • Engage in a fraud upon any person. • Sections 9 and 10(a) of the 1934 Act prohibit market manipulation.

  44. Primer on Insider Trading • Legal Definition of “Insider Trading” • Buying or selling a security; • In breach of a fiduciary duty or other relationship of trust and confidence; and • While in possession of material, nonpublic information about the security. • Subjects of Insider Trading Charges • Corporate insiders, such as officers, directors, and employees; • Market professionals, including analysts, traders, and money managers; • Outside consultants, such as investment bankers, lawyers, and accountants; • Friends, business associates, family members, and other “tippees.”

  45. Primer on Insider Trading (cont.) • Classical vs. Misappropriation vs. Tippee • Classical Theory • Insider who trades in the securities of his or her company based on material, nonpublic information. • Liability based on fiduciary duty to the company. • Misappropriation Theory • Outsider who misappropriates confidential information. • Duty of confidentiality may be based on many factors. • Tippee Liability

  46. SEC’s Specialized Unit • Market Abuse Unit • Charged with prosecuting large-scale market abuses and complex manipulation schemes by institutional traders, market professionals, and others. • Pioneered use of new screening technology tools to analyze trading data across debt, equity, and derivatives. • Led by experienced and creative SEC prosecutor, with significant resources supporting him.

  47. Heightened Criminal Scrutiny • New Resources: The U.S. Attorney’s Office for the Southern District of New York has re-dedicated vast resources to insider trading cases originating on Wall Street. • New Techniques: Wire tapping and the use of informants – that had previously been used only in high-profile terrorism and drug cases – are now being employed in financial crimes investigations. • New Tools: Prosecutors now using sophisticated technology to analyze vast amounts of market data to identify suspicious trading patterns across traders and securities.

  48. Conclusion: Market Abuse Trends • Insider Dealing Now Recognized Globally as Unlawful Fraudulent Conduct • Sweeping U.K. Regulatory Scheme • Recent Example of Aggressive Response: • SEC v. Garcia and Sanchez, Lit. Rel. No. 21631 (August 25, 2010) (S.D.N.Y.) • SEC freezes assets of two Spain-based traders for trading surrounding the public announcement of BHP’s tender offer for Potash Corp. • Filed within three days of the announcement, U.S. District Court grants order freezing $1.1 million; also orders expedited discovery and directs defendants to preserve evidence.

  49. Conclusion: Market Abuse Trends (cont.) • Long History of “Unknown Purchasers” Cases • SEC files emergency asset freeze against unknown international traders. • Prevents assets from moving overseas. • Forces traders to either step forward to explain trading or forgo ill-gotten gains. • Raj Rajaratnam / Galleon Case Just the Beginning • Exemplifies use of aggressive investigative techniques (i.e., wire-tapping). • Next Up: Market Manipulation / High-Volume Trading Abuses / Derivatives

  50. Goldmans Sachs:“Short” Heard Round the World

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