Personal Liability for CCOs?

Transcription

1 Personal Liability for CCOs? Chicago Regional Compliance & Ethics Conference April 8, 2016 Steven J. Pearlman What We ll Cover Key statistics regarding CCO personal liability High-profile cases Guidance / comments from SEC officials Hypos demonstrating areas where personal liability has been imposed upon CCOs Methods of paring the risks Compliance Officers as whistleblowers 2 1

2 Key Causes of CCO Liability 3 1. Participating in the wrongdoing - Often occurs where CCOs wear more than one hat and where activities go outside the traditional work of CCOs. 2. Hindering an SEC examination or investigation - E.g., misstatements to the SEC or submitting knowingly false documents. 3. Wholesale failures - E.g.: failure to report a conflict of interest; failing to design written policies and procedures for outside business activities; failure to conduct annual reviews. 4. Failure to supervise Key Statistics Percentages SEC Claims Brought Against CCOs

3 High-Profile Cases 5 High-Profile Cases (cont d) Former MoneyGram CCO fined $1 million (12/18/14) - Thomas Haider, Former CCO of MoneyGram International, was fined $1M for failing to ensure that the company abided by the AML provisions of the Bank Secrecy Act. - U.S. Attorney s Office for S.D.N.Y. filed a federal complaint that seeks to enforce the penalty and bar Haider from future employment in the financial industry. Case transferred to Dist. Minnesota, and this January, the court denied Haider s motion to dismiss, affirming that a compliance officer in charge of developing and overseeing an AML program can be held individually liable. 6 3

4 High-Profile Cases (cont d) Former MoneyGram CCO fined $1 million (12/18/14) (cont d) - In a 2012 settlement, MoneyGram paid $100M to compensate fraud victims. 7 High-Profile Cases (cont d) Former AML Compliance Officer Fined $25,000 (2/5/14) - FINRA fined Brown Brothers Harriman & Co. (BBH) $8M for AML compliance failures including its failure to have an adequate AML program in place to monitor and detect suspicious penny stock transactions. BBH did not have an adequate supervisory system to prevent the distribution of unregistered securities. - The former Global AML Compliance Officer, Harold Crawford, was fined $25,000 and suspended for one month. 8 4

5 High-Profile Cases (cont d) FINRA Fines Compliance Officer $25,000 (5/8/13) - FINRA fined Atlas One Financial Group $350,000. It also fined Napoleon Arturo Aponte, the former CCO and AML Compliance Officer, in the amount of $25,000 (joint and severally with the firm), and suspended him for three months in a principal capacity. - Mr. Aponte allegedly failed to identify and monitor suspicious account activity and disregarded to investigate adequately numerous AML red flags by filing a suspicious activity report (SAR). 9 High-Profile Cases (cont d) SEC Fines CCO $60,000 (4/20/15) - The SEC brought charges against Bartholomew Battista, the former CCO of BlackRock Advisors, and fined him $60,000 for failing to report a material compliance failure to the firm s board of directors. Blackrock agreed to a related $12 million penalty. This was based on a failure to disclose a portfolio manager s conflict of interest. 10 5

6 Comments From the SEC 11 Comments From the SEC Commissioner Daniel M. Gallagher: - The Commission must take a hard look at Rule 206(4)-7 and consider whether amendments, or at a minimum staff or Commission-level guidance, are needed to clarify the roles and responsibilities of compliance personnel under the rule so that these individuals are not improperly held accountable for the misconduct of others. The status quo simply will not do. As it stands, the Commission seems to be cutting off the noses of CCOs to spite its face. (Statement on Recent SEC Settlements Charging Chief Compliance Officers With Violations of Investment Advisers Act Rule 206(4)-7 (June 18, 2015).) 12 6

7 Comments From the SEC (cont d) Commissioner Luis A. Aguilar: - The vast majority of these cases involved CCOs who wore more than one hat, and many of their activities went outside the traditional work of CCOs, such as CCOs that were also founders, sole owners, chief executive officers, chief financial officers, general counsels, chief investment officers, company presidents, partners, directors, majority owners, minority owners, and portfolio managers. Many of these cases also involved compliance personnel who affirmatively participated in the misconduct, misled regulators, or failed entirely to carry out their compliance responsibilities. (The Role of Chief Compliance Officers Must Be Supported (June 29, 2015).) 13 Comments From the SEC (cont d) 14 Chair Mary Jo White: - It is not our intention to use our enforcement program to target compliance professionals. We have tremendous respect for the work that you do. You have a tough job in a complex industry where the stakes are extremely high. That being said, we must, of course, take enforcement action against compliance professionals if we see significant misconduct or failures by them. Being a CCO obviously does not provide immunity from liability, but neither should our enforcement actions be seen by conscientious and diligent compliance professionals as a threat. We do not bring cases based on second-guessing compliance officers good faith judgments, but rather when their actions or inactions cross a clear line that deserve sanction. (Opening Remarks at the Compliance Outreach Program for Broker-Dealers) (July 15, 2015).) 7

8 Comments From the SEC (cont d) 15 SEC ALJ Elliot: - There is one additional consideration: the fact that Wolf worked in compliance. Obviously, compliance professionals are subject to the securities laws like everyone else. But Wolf is correct to complain that in compliance, the risk is much too high for the compensation. (In the matter of Judy K. Wolf, Administrative Proceeding File No (Initial Decision, Aug. 5, 2015.) Stephen Cohen (Associate Director of the SEC s Division of Enforcement): - I can promise you we are not sitting around looking for ways to charge chief compliance officers. In my opinion, we re in the same line of work; we re partners in ensuring sound and effective compliance cultures are part of the business. (Compliance Week 2015.) Hypotheticals 16 8

9 Hypo #1 ABC, Inc. is an SEC-registered investment adviser. Chuck is its CCO. Billy Blank is a managing director and co-portfolio manager for energy sector assets held in ABC registered funds, private funds and separately managed accounts. While employed by ABC, Blank founded Blank Energy, a Blank family-owned-and-operated oil and natural gas production company. Blank was the General Partner and personally invested $50M in the company. 17 Hypo #1 (cont d) 18 Blank Energy formed a joint venture with Alpha Energy, a publicly traded coal company whose stock was held in ABC funds and in accounts managed by Blank. Chuck was aware of Blank s involvement with Blank Energy and the joint venture with Alpha Energy. This was not disclosed to the ABC funds boards of directors or to ABC s advisory clients. Blank told ABC that he wanted to serve on the board of directors of the joint venture between Blank Energy and Alpha Energy. ABC told him that doing so would create an impermissible appearance of a conflict of interest. 9

10 Hypo #1 (cont d) ABC allowed Blank to continue his involvement with Blank Energy while continuing to serve as an ABC portfolio manager. ABC also allowed Blank to continue managing the Alpha Energy stock positions held in the ABC funds that Blank managed, provided that he not participate in any decision with respect to the joint venture. ABC did not maintain policies concerning the outside activities of its employees, including how they should be assessed and monitored for conflict purposes and when an employee s outside activity should be disclosed to the ABC funds board of directors or to ABC advisory clients. 19 Hypo #2 20 Chuck was the Associate General Counsel and Corporate Integrity Program Director at ABC Healthcare, Inc., and he eventually became ABC s General Counsel. The Corporate Integrity Program had been implemented as part of a settlement between ABC and the Government. Chuck personally signed the civil settlement agreement and the Corporate Integrity Agreement. In early 2012, an ABC business executive told Chuck that an ABCowned hospital was billing Medicare for referrals from 12 employee physicians who were making substantial referrals to ABC and receiving excessive compensation. He referred to the Stark Statute in support of his concerns. 10

11 Hypo #2 (cont d) The Stark Statute prohibits a hospital from submitting Medicare claims for payment for certain designated health services based on patient referrals from physicians having an improper financial relationship with the hospital (42 U.S.C. 1395nn). - Such a relationship between a hospital and a physician will only be acceptable if the amount of remuneration paid to the doctor (1) is consistent with the fair market value of the doctor s services, (2) would be commercially reasonable even if no referrals were made to the hospital, and (3) is not determined in a manner that takes into account the volume or value of any referrals by the referring physician. 21 Hypo #2 (cont d) 22 Doe directed ABC s outside counsel to investigate, and outside counsel confirmed that a number of the physician employment contracts did in fact violate the Stark Statute. In 2012, Doe issued a directive asking the business to implement the corrective action namely, terminating the offending employment contracts and he requested a written report on the status of the corrective action within 30 days. However, the contracts remained intact for two more years and no other steps were taken to address the alleged violations of the Stark Statute; ABC continued to bill Medicare for referrals from the physicians at issue. 11

12 Hypo #2 (cont d) In May of 2012, Doe signed and provided to the Government declarations in 2012 and 2013 that stated that to the best of her knowledge and belief, ABC was in material compliance with all federal program legal requirements. 23 Hypo #3 Chuck is the CCO of ABC, Inc., a broker-dealer. ABC hired Billy Blank as a registered representative in its retail sales division. Blank brought a number of clients to ABC, including Chip White and his fund, called the XYZ Fund. 24 Blank and White developed large positions in InvestCo. White traded shares of InvestCo. through XYZ Fund. And Blank purchased shares in InvestCo. through his other retail customer accounts, without disclosing the trades to the account holders. Through the XYZ Fund and customer accounts, White and Blank controlled a substantial block of InvestCo. stock. 12

13 Hypo #3 (cont d) ABC s Compliance Department became concerned about a possible manipulation. Chuck halted trading in InvestCo. until certain Exchange Act filings were submitted. Chuck also expressed concern to senior management over a lack of supervision over Blank. However, the trading in InvestCo. continued. Chuck eventually wrote a memorandum to senior management recommending that Blank s employment be terminated. 25 Hypo #3 (cont d) Derek Ray, the head of retail sales, stepped in and recommended that Blank be placed on special supervision, and his recommendation was adopted. Ray was powerful within ABC he had virtually unquestioned authority over retail sales and it was understood that other senior officials at ABC would not interfere with his decisions. Chuck believed that challenging Ray at the Board level would have been futile. Ray also had an acrimonious relationship with the Compliance Department. 26 Blank eventually left the firm and he and White pled guilty to securities fraud. 13

14 Hypo #3 (cont d) On organization charts, there is no specific, direct reporting between Blank and Chuck. ABC does not have any policies, documents or communications specifying when one is considered a supervisor within the Company. 27 Paring the Risks Red Flags: - Respond to all red flags of possible misconduct. - Pay particular attention to whistleblower reports. Escalate all material issues to senior management. Request permission to obtain advice from independent legal counsel if there is a disagreement with senior management

15 Paring the Risks (cont d) Supervisor issues: - SEC provides a list of questions to ask when considering whether a person is a supervisor, including: - Has the person clearly been given, or otherwise assumed, supervisory authority or responsibility for particular business activities or situations? - Do the firm s policies and procedures, or other documents, identify the person as responsible for supervising, or for overseeing, one or more business persons or activities? - Did the person have the power to affect another s conduct? - Did the person, for example, have the ability to hire, reward, or punish that person? 29 Paring the Risks (cont d) Supervisor issues: (cont d) - Did the person otherwise have authority and responsibility such that he or she could have prevented the violation from continuing, even if he or she did not have the power to fire, demote, or reduce the pay of the person in question? - Document clear lines of supervision. - Develop a clear job description and a clear mission statement for the compliance group

16 Paring the Risks (cont d) Supervisor issues: (cont d) - CCO should not have supervisory responsibilities over business-line activities. - Review compliance policies and procedures to designate the appropriate person to have supervisory responsibilities over the relevant business functions of the firm. - Periodically meet with designated supervisors to inquire whether the supervisor is conducting the proper supervisory review of the business he or she is responsible for overseeing. 31 CCOs As Whistleblowers General Rule: Under the SEC bounty program s implementing regulations, the SEC generally will not regard information as derived from independent knowledge or independent analysis if the whistleblower obtained the information because of the individual s position as an employee whose principal duties involve compliance or internal audit responsibilities. 17 C.F.R. Part F-4(b)(4)(iii)(B)

17 CCOs As Whistleblowers (cont d) 1st SEC Bounty Award: On August 29, 2014, the SEC granted a whistleblower award in the amount of $300,000 to a compliance and audit professional. According to the SEC, the individual reported concerns to a supervisor and went to the SEC when the company took no action after 120 days passed. 33 CCOs As Whistleblowers (cont d) 34 2nd SEC Bounty Award: On April 22, 2015, the SEC announced that it would pay a compliance officer a whistleblower bounty award between $1.4 and $1.6 million. According to the SEC, the compliance officer had a reasonable basis to believe that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial financial harm to the company or investors. The Director of the SEC s Division of Enforcement stated that the compliance officer reported misconduct after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it. 17

18 CCOs As Whistleblowers (cont d) Former Olympus USA Compliance Officer, John Slowik, recently (in or around March 2016) received $51M in a qui tam action. Olympus settled for $646M; case filed in New Jersey federal court include allegations of violations of the Anti- Kickback Statute. 35 Proskauer s Global Presence 36 18

19 Chicago Regional Compliance & Ethics Conference April 8, 2016 Steven J. Pearlman The information provided in this slide presentation is not, is not intended to be, and shall not be construed to be, either the provision of legal advice or an offer to provide legal services, nor does it necessarily reflect the opinions of the Firm, our lawyers or our clients. No client-lawyer relationship between you and the Firm is or may be created by your access to or use of this presentation or any information contained on them. Rather, the content is intended as a general overview of the subject matter covered. Proskauer Rose LLP (Proskauer) is not obligated to provide updates on the information presented herein. Those viewing this presentation are encouraged to seek direct counsel on legal questions. Proskauer Rose LLP. All Rights Reserved. 19