June 30, 2022

Volume XII, Number 181


June 30, 2022

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Bridging the Week by Gary DeWaal: May 7 to 11 and May 14, 2018 (Whistleblowing; Piling On; Mismarks; Insider Trading; Let’s Talk About ICOs) [VIDEO]

The chief executive officer of a major worldwide banking group agreed to pay the equivalent of US $870,000 as fines to two United Kingdom regulators, and had the equivalent of US $677,000 of prior pay clawed back by his employer because he tried to uncover the identity of a possible whistleblower. Separately, The Department of Justice announced a new policy aimed at minimizing “piling on” of penalties on corporations for wrongdoing where multiple sections of the DOJ are involved, as well as multiple domestic and foreign law enforcement agencies. However, there is a precondition – cooperation! As a result, the following matters are covered in this week’s edition of Bridging the Week:

  • UK Bank Head Sanctioned Over US $1.5 Million Equivalent by Regulators and Employer for Potentially Undercutting Firm’s Whistleblower Process (includes Legal Weeds and Culture and Ethics);

  • Department of Justice Announces New Policy Aimed at Minimizing “Piling On” (includes Legal Weeds);

  • Investment Adviser Agrees to Pay a Fine of More Than $4.7 Million to SEC for Asset Mismarking and Insider Trading by Privately Managed Hedge Funds and Portfolio Managers (includes Compliance Weeds); and more.

Article Version


  • UK Bank Head Sanctioned Over US $1.5 Million Equivalent by Regulators and Employer for Potentially Undercutting Firm’s Whistleblower Process: James Staley, chief executive officer of Barclays Group, agreed to pay a fine of GB £642,430 (approximately US $870,000) to the United Kingdom’s Prudential Regulation Authority and the Financial Conduct Authority as a result of his poor handling of an anonymous letter received by a member of the Group’s board of directors on June 21, 2016, that the Group’s compliance department regarded as a whistleblower matter. The regulators claimed that Mr. Staley failed to apply appropriate care when dealing with this letter in light of his own potential conflict of interest, and as a result, may have appeared to undercut the Group’s whistleblower process.

According to the regulators, the anonymous letter raised issues regarding the Group’s hiring of a certain, unnamed employee, including concerns of a “personal nature” about the employee, Mr. Staley’s knowledge and role in addressing these issues at a prior employer, and the “appropriateness” of the Group’s hiring process regarding the employee.

When Mr. Staley was subsequently told about the anonymous letter, he did not regard it as a whistleblower matter, said the regulators. This is because he believed the correspondence principally concerned events that did not occur at Barclays and that the source of the letter was likely someone who had worked with him and the unnamed employee at the former employer.

Barclays received a second letter on June 24 expressing similar concerns regarding the Group’s hiring of the unnamed employee as contained in the first letter. Although Mr. Staley regarded the second letter as likely subject to Barclay’s whistleblower policy because it appeared to be possibly drafted by Barclays’ employees, he considered that both letters were likely drafted by someone outside the Group, and determined to learn the identity of the author of the first anonymous letter, alleged the regulators.

On June 29, 2016, during a meeting with, among other persons, the Group’s head of compliance, general counsel and human resources director, Mr. Staley was expressly advised not to seek out the identity of the authors of the two letters, as both were being handled as whistleblower matters and being investigated pursuant to the firm’s whistleblower policies.

Later, on July 8, Mr. Staley was orally advised by the Group’s compliance department that the allegations in the letters appeared to be unsubstantiated. In response, Mr. Staley engaged the Group’s security department to try to identify the author of the first letter without consulting the Group’s board, or the compliance, legal or human resource departments. He mistakenly believed, said the regulators, that he had been told that the first letter was no longer regarded as a whistleblower matter, and he had authority as CEO to deal with it as he wanted. In response, Group security took affirmative steps to try to unmask the identity of the author of the first anonymous letter, but was unsuccessful.

In early 2017, the Group’s board became aware of Mr. Staley’s activities to identify the first letter’s writer and self-reported the matter to the PRA and FCA.

According to the regulators, Mr. Staley had a conflict of interest related to the first letter and “should have taken particular care to maintain an appropriate distance from the investigation into it,” including not looking into it personally. Moreover, beginning June 29, Mr. Staley was on notice that the first letter was being handled as a whistleblower matter, and he should have obtained express confirmation on July 8 or afterwards that this treatment had been ended before proceeding with his own inquiry. As a result, alleged the regulators, “Mr. Staley acted unreasonably in proceeding …and, in so doing, risked undermining confidence in Barclays’ whistleblowing policy and the protections its afforded whistleblowers.”

In response to this incident involving Mr. Staley, the PRA and FCA also imposed annual reporting requirements on Barclays related to its whistleblower program.

Separately, Barclays Group announced that, in light of this incident, it had determined to claw back GB £500,000 (approximately US $677,000) from Mr. Staley’s 2016 compensation. In a press release issued by Barclays, Mr. Staley said, “I have consistently acknowledged that my personal involvement in this matter was inappropriate, and I have apologised for mistakes which I made. I accept the conclusions of the Board, the FCA, and the PRA, following their respective investigations, and the sanctions which they have each applied.” (Click here to access the relevant Barclays’ press release.)

In fining Mr. Staley, neither the PRA nor FCA found that he acted without integrity or that he lacked the fitness to continue as CEO.

Legal Weeds: Earlier this year, the United States Supreme Court held that employee whistleblowers reporting potential securities law violations by their employers must expressly report such incidents to the Securities and Exchange Commission in order to benefit from a key anti-retaliation protection under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Solely reporting securities law violations to an employee’s employer is not enough. This key benefit is the right of a whistleblower claiming retaliation to sue an employer directly in a federal court at any time within six years.

This Supreme Court decision was not a favorable outcome for companies. No longer can an individual raise a concern with his/her employer regarding a potential securities law violation, knowing he/she has six years to file a lawsuit in a federal court if he/she subsequently believes that retaliatory measures were taken. Instead such potential violation must be identified to the SEC. This could discourage an employee from raising concerns exclusively with his/her employer. As a result, companies should consider this when adopting whistleblowing policies in order to encourage employees, notwithstanding the Supreme Court’s ruling, to raise potential securities law issues internally – although they must be careful not to engage in any activity or require the execution of any agreement – that limits employees’ federal law rights.

(Click here for further information and analysis regarding the Supreme Court’s decision in the article “Supreme Court Narrows Key Whistleblowing Protection” in the February 25, 2018 edition of Bridging the Week, including a discussion of whistleblower protections required by the Commodity Futures Trading Commission and the Securities and Exchange Commission.)

Culture and Ethics: The compliance culture of every company is set at the top by its most senior officers. As a result, senior officers must lead by example. It is in a company’s best interest that employees feel comfortable reporting all potential wrongdoing without fear of retaliation. If employees do not feel that level of comfort, it is more likely than not they will report incidents of wrongdoing in the first instance to government agencies where they can potentially be lucratively rewarded for their information. How firms sanction senior level wrongdoing also sends a critical message to employees. It is important for firms to apply the same standards and commensurable penalties in addressing wrongdoing by the most senior level officers as by the most junior staff.

  • Department of Justice Announces New Policy Aimed at Minimizing “Piling On”: In a speech last week before the New York City Bar White Collar Crime Institute, Rod Rosenstein, Deputy Attorney General of the United States, announced a new Department of Justice policy to better coordinate among law enforcement and regulatory agencies the potential assessment of penalties against corporate wrong-doers in order to minimize “piling on.”

Mr. Rosenstein observed that, in significantly regulated industries there is a risk that a corporation “may be accountable to multiple regulatory bodies [creating] …a risk of repeated punishments that may exceed what is necessary to rectify the harm and deter future violations.” Moreover, said Mr. Rosenstein, “piling on” can deny a company the benefit of certainty that ordinarily is derived from a complete settlement. This uncertainty harms employees, customers and investors, noted Mr. Rosenstein, and raises questions whether  expending additional resources for “additional enforcement against an old scheme is more valuable than fighting a new one.”

Under the DOJ’s new policy:

  • criminal enforcement should not be used for purposes unrelated to the investigation and prosecution of a possible crime. For example, said Mr. Rosenstein, the threat of criminal prosecution should not be used to encourage a corporation to pay a higher civil fine. This, in itself, he said is not a new policy; “it is a reminder of and commitment to principles of fairness and rule of law;”

  • within the DOJ, different sections are directed to better coordinate to effectuate an overall “equitable result;”

  • where possible, DOJ attorneys should coordinate with other federal, state, local and foreign law enforcement and regulatory agencies to resolve matters with a company involving the same conduct; and

  • factors that should guide the DOJ in determining whether penalties might be duplicative are the seriousness of the wrongdoing, the risk of delay in coming to a resolution, statutory directives regarding penalties, and the “adequacy and timeliness of a company’s disclosures and cooperation with the Department.” Mr. Rosenstein said that sometimes penalties that appear to be “duplicative” are in fact “essential to achieve justice and protect the public." 

The DOJ's new policy on corporate resolution penalties was officially included in the U.S. Attorneys' Manual as of May 9. (Click here to access the Manual; see Sections 1-12.100 and 9-28.1200.)

Legal Weeds: Last October, James McDonald the Director of Enforcement for the Commodity Futures Trading Commission, announced that potential wrongdoers who voluntarily self-report their violations; fully cooperate in any subsequent CFTC investigation; and fix the cause of their wrongdoing to prevent a re-occurrence will receive “substantial benefits” in the form of significantly lesser sanctions in any enforcement proceeding and “in truly extraordinary circumstances,” no prosecution at all. (Click here for details in the article, “New Math: Come Forward + Come Clean + Remediate = Substantial Settlement Benefits Says CFTC Enforcement Chief” in the October 1, 2017 edition of Bridging the Week.)

In recent settlements against Deutsche Bank AG and its wholly owned subsidiary Deutsche Bank Securities Inc., as well as UBS AG, the CFTC may have given an indication of how the CFTC’s new settlement math may work in practice. There, where both the Deutsche Bank entities and UBS appear to have uncovered incidents of spoofing within their organizations, both organizations appear to have fully cooperated with the CFTC’s investigation. However, UBS self-disclosed its issues prior to the CFTC discovering them. In the end, UBS paid a fine of US $15 million for its employees’ spoofing activities, while the Deutsche Bank entities paid $30 million for commensurate conduct. It appears that all things being equal, in this circumstance, pro-active, voluntary disclosure of potential wrongdoing was worth 50% off a settlement that was already likely reduced for full cooperation. (Click here for further details and analysis of these enforcement actions in the article, “CFTC Names Four Banking Organization Companies, a Trading Software Design Company and Six Individuals in Spoofing-Related Cases; the Same Six Individuals Criminally Charged Plus Two More” in the February 5, 2018 edition of Bridging the Week.)

  • Investment Adviser Agrees to Pay a Fine of More Than $4.7 Million to SEC for Asset Mismarking and Insider Trading by Privately Managed Hedge Funds and Portfolio Managers: Visium Asset Management LP, a registered investment adviser, agreed to pay a fine of approximately US $4.75 million to the Securities and Exchange Commission in connection with a scheme to falsely inflate the value of securities in one fund it managed – Visium Credit Master Fund, Ltd – and for benefiting from the insider trading of securities by its employees for another fund it managed – Visium Balanced Master Fund, Ltd., as well as by the Credit Fund. Visium also agreed to disgorge US $4.75 million of profits as well as to pay prejudgment interest of US $721,000 as part of its settlement.

According to the SEC, from at least January 2011 to December 2012, two Visium portfolio managers – Christopher Plaford and Stefan Lumiere – routinely used “sham” broker quotes to mismark the value of securities held by the Credit Fund, showing higher than warranted month-end net asset values. This caused the Credit Fund to pay Visium US $2.6 million in “ill-gotten” performance fees and US $533,700 in illicit management fees. To effectuate this mismarking, Mr. Plaford and Mr. Lumiere overrode prices of securities of the Credit Fund’s independent administrator with sham prices, often violating Visium’s valuation policies which recommended that Visium obtain three dealers’ quotes to support a price override; in 307 out of 308 instances of overrides, only one or two quotes were utilized.

In addition, the SEC claimed that two Visium portfolio managers – Sanjay Valvani and Mr. Plaford – traded on insider information for the Visium funds. The SEC charged that Mr. Valvani traded on securities of pharmaceutical companies for the Balanced Fund based on material, nonpublic information illicitly obtained from a former official of the US Food and Drug Administration’s Office of Generic Drugs, while Mr. Plaford traded on securities of home health-care providers for both the Credit and Balanced Funds based on material, nonpublic information illicitly obtained from a former official from the Centers for Medicare and Medicaid Services. Mr. Valvani’s activities generated US $6.98 million in illicit trading profits for the Balanced Fund, claimed the SEC, while Mr. Plaford’s activities resulted in US $284,939 in illegal profits for the Credit and Balanced Funds, charged the SEC.

Separately, Steven Ku, Visium’s former chief financial officer, agreed to pay a fine of US $100,000 and be suspended from any SEC registrant for 12 months for failing to act on red flags that should have alerted him to the scheme to falsely inflate the value of securities by the two Visium portfolio managers for the Credit Fund. The SEC said that Mr. Ku received monthly reports that showed that Mr. Plaford and Mr. Lumiere used overrides on approximately 25 percent of the positions in the Credit Fund and that more than 91 percent of the changes resulted in higher valuations.

The Department of Justice and SEC filed criminal and civil charges against Mr. Lumiere and Mr. Plaford, respectively, for their alleged mismarking activities in June 2016. Mr. Valvani and Mr. Plaford were also charged criminally for insider trading. Mr. Plaford pleaded guilty to his criminal charges, while Mr. Lumiere was sentenced to 18 months’ imprisonment in June 2017. (Click here for background in the article “DOJ and SEC Charge Former FDA Official With Obtaining Confidential Information to Fuel Insider Trading by Hedge Fund Managers” in the June 19, 2016 edition of Bridging the Week. Click here to access a United States Department of Justice press release regarding Mr. Lumiere’s sentencing.) Mr. Valvani committed suicide in 2016. (Click here for a newspaper article related to this incident.)

Last week, another SEC-registered investment adviser – Premium Point Investments LP – and three of its officers, including its chief executive officer, were also charged by the SEC for overvaluing securities in investment funds they managed (click here to access a copy of SEC’s complaint). The three individuals were additionally named in a criminal complaint filed by the U.S. Attorney’s office in New York City (click here to access a copy of the complaint).

Compliance Weeds: Investment advisers must ensure they have and enforce policies and procedures reasonably designed to prevent the use of material, nonpublic information. 

In August 2017, Deerfield Management Company, L.P., agreed to pay a fine of approximately US $3.95 million to the SEC to resolve charges that, from 2012 through 2014, it failed to have and enforce such policies and procedures. According to the SEC, during this time, the firm, an SEC-registered investment adviser, did not have policies and procedures that addressed the risk that its employees could use material, nonpublic information illicitly obtained from its research firms, particularly those specializing in political intelligence.

Moreover, the SEC claimed that, during the relevant time, Deerfield did not act on red flags that it was potentially receiving information regarding confidential government decisions before public announcement.

(Click here for further background in the article “Investment Adviser Agrees to Pay Almost US $5 Million to Resolve SEC Charges of Not Having Adequate Insider Trading Prevention Policies and Procedures” in the August 27, 2017 edition of Bridging the Week.)

More Briefly:

  • SEC Commissioner Encourages Greater Dialogue Regarding ICOs: Securities and Exchange Commissioner Hester Peirce recommended that the Commission establish a web page where Fintech innovators could submit questions and review answers regarding initial coin offerings, tokens, distributed ledgers and other “crypto concepts.” According to Ms. Peirce, “[i]t is unfortunate that, to date, most of the communications from the SEC on the topic have come from our Division of Enforcement.” She stated that she would prefer that market participants who are “not using the ICO label as an alluring way to steal money first meet us in a more neutral space.”

Unrelatedly, the Texas State Securities Board instituted two emergency cease and desist orders related to the sale of unregistered securities involving purported Fintech investment schemes. The Securities Board charged Bitcoin Trading & Cloud Mining Limited and four affiliated persons and Forex EA & Bitcoin Investment LLC and two affiliated persons with soliciting investments in cryptocurrency-related businesses involving high profits when the investment schemes were unregistered. The Securities Board has now brought nine total emergency cease and desist orders since December 2017 against promoters of unregistered investment schemes involving cryptocurrencies. (Click here for an investor alert by the Securities Board that summarizes such actions.)

  • CFTC Commissioner Blames Past Chairmen for Current Commission Budget Woes: Brian Quintenz, a Commissioner of the Commodity Futures Trading Commission, bemoaned the recent cut in yearly funding for the Commission in the 2018 federal budget, forcefully blaming the two prior CFTC chairmen, in particular Gary Gensler, for the Commission’s poor standing with Congress. According to Mr. Quintenz, Mr. Gensler’s decision to lease most of the CFTC’s current headquarters building in 2009 on unfavorable terms – anticipating an increase in responsibilities and more staff as a result of the then contemplated but not yet passed Dodd-Frank Wall Street Reform and Consumer Protection Act – “caus[ed] Congress to question the agency’s fiscal responsibility and annual requests for increased funding.” Mr. Quintenz claimed that “political gamesmanship with Congressional appropriations” also occurred under CFTC Chairman Timothy Massad, albeit to a lesser extent. The CFTC’s budget for 2018 was cut by US $1 million to US $249 million. Mr. Quintenz suggested that the current budget will only support 636 full-time employees by the end of 2018. He said the Commission employed 715 FTE as recently as 2016.

(Click here for background on the CFTC's issues with its headquarters' lease in the article, "Inspection Unit Criticizes CFTC's Renting of Unused Office Space" in the May 15, 2016 edition of Bridging the Week.)

  • Traders on NYMEX and ICE Futures U.S. Sanctioned for Purported Speculative Limits Violations: Condor Alpha Asset Management agreed to pay a fine of US $44,342 including disgorgement of US $29,342 to ICE Futures U.S., for possibly violating speculative limit positions in Henry LD 1 Fixed Price futures on 6 occasions in July 2016 and August 2017. Separately, Ruowen Chen was fined US $20,000 and ordered to disgorge profits of US $17,030 by a business conduct committee panel of the New York Mercantile Exchange for violating position limits as of the close of business on April 17, 2017, in the May 2017 Crude Oil futures contract. Chen was also suspended from trading on any CME Group market for six months. Mr. Chen apparently did not participate in NYMEX’s disciplinary process.

  • FX Trader Indicted for Conspiracy to Fix Prices: A criminal indictment was filed against Akshay Aiyer for purportedly conspiring to artificially fix prices and improperly coordinate bids and offers with other traders in Central and Eastern European, Middle Eastern and African currencies between approximately July 2006 through March 2015. According to the Department of Justice, Mr. Aiyer, a former trader for JPMorgan Chase, engaged in his conspiracy through “near-daily” communications with other traders in private electronic chat rooms, telephone calls and through text messages. Among information communicated was confidential customer information, including orders, alleged the indictment. Mr. Aiyer’s indictment was filed in a federal court in New York City.

In May 2015, five major international banks pleaded guilty to conspiring to manipulate the price of certain foreign exchange transactions, and agreed to pay fines to the United States in excess of US $2.7 billion, as well as other sanctions, to resolve criminal proceedings initiated by the DOJ. In general, the DOJ claimed that each of the five banks, at various times from December 2007 through January 2013, endeavored to help artificially impact the daily “fix” or settlement price of certain forex paired transactions for their own or other banks’ betterment and/or included markups or markdowns on trades without their clients’ consent. (Click here for background in the article “Five Banks Plead Guilty to Forex Manipulation Activities and Agree to Fines Totaling US $5.6 Billion and Other Sanctions” in the May 31, 2015 edition of Bridging the Week.)

  • NFA Issues Advisory on Update Regarding Jurisdictions with AML Deficiencies: The National Futures Association issued an advisory reminding members of a February 28 update by the Financial Action Task Force of the United State Department of Treasury regarding countries with anti-money laundering and combatting the financing of terrorism deficiencies. (Click here for background on the FATF advisory in the article “FinCEN Updates Lists of Problematic Jurisdictions” in the February 25, 2018 edition of Bridging the Week.)

©2022 Katten Muchin Rosenman LLPNational Law Review, Volume VIII, Number 134

About this Author

Gary DeWaal, Securities Attorney, Katten Law Firm, New York
Special Counsel

Gary DeWaal focuses his practice on financial services regulatory matters. He counsels clients on the application of evolving regulatory requirements to existing businesses and structuring more effective compliance programs, as well as assists in defending and resolving regulatory disciplinary actions and enforcement matters. Gary also advises buy-side and sell-side clients, as well as trading facilities and clearing houses, on the developing laws and regulations related to cryptocurrencies and digital tokens.

Previously, Gary was a senior...