The Supreme Court, by unanimous decision, has held that “whistleblower” status under the 2010 Dodd-Frank Act, with its cash award and enhanced anti-retaliation benefits, is limited to individuals who report violations to the SEC and does not include people who internally report at a company but fail to report to the SEC. The decision is likely to increase call volume on the SEC’s whistleblower hotline, as well as costs and headaches for legal and compliance personnel at regulated companies.
Although an individual who reports internally (and not to the SEC) may still get the anti-retaliation benefits afforded under the 2002 Sarbanes-Oxley Act, that individual would not be entitled to the enhanced anti-retaliation benefits (e.g., double back pay) or the potential cash payout (10-30 percent of any SEC monetary penalties) under Dodd-Frank. Accordingly, individuals with information that could lead to SEC charges are now more likely to report out to the agency than try to resolve things internally.
Consequently, compliance and legal personnel at Pubcos, RIAs, and BDs should consider reviewing their policies and procedures to ensure that they are striking the correct balance between motivating employees to report potential problems internally and not limiting an employee’s ability to report out. This is especially true given the SEC’s focus (through enforcement actions) on entities who limit such reporting by requiring employees to sign restrictive confidentiality agreements that may have the effect of “chilling” an employee’s desire to report out.
Will Haddad’s article, “EB-5 Visa Fraud, What You Need to Know,” was published in The Champion Magazine. The article reviews recent legislative, legal and other issues related to these highly desirable “fast track” visas. Such developments include a number of securities fraud cases brought by the SEC, as well as some federal criminal cases.
A copy of the article is reproduced here, with the written permission of the publisher, the National Association of Criminal Defense Lawyers.
On June 5, 2017, by unanimous decision, the U.S. Supreme Court determined that disgorgement – a remedy that generated $3 billion in 2015 – is a “penalty” thereby subjecting it to the 5-year statute of limitations that applies to any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.” Kokesh v. SEC,No. 16-529, slip op. at 1 (June 5, 2017) (quoting 28 U.S.C. §2462). The Court’s decision relieved Kokesh of a $30 million disgorgement order entered in the lower court.
The SEC had argued that disgorgement is a different animal – it simply places the defendant in the same position as he or she would have been but for the offense. The Court strongly disagreed noting the deterrent qualities of disgorgement, which is a hallmark of a penalty, “[s]anctions imposed for the purpose of deterring infractions of public laws are inherently punitive.” Id. at 8. The Court observed that the victims (if there are any) of a securities law violation need not participate in the enforcement action and may not even support it. In addition, money that is disgorged to the Treasury often stays there; i.e., there is no absolute requirement that the money that is recovered be distributed to the purportedly aggrieved investors.
Going forward, the SEC is faced with having to speed up its investigations and charging decisions. That can be a challenge, especially in complex cases where the Enforcement Division would prefer to thoroughly build out a case in advance.
The SEC has announced that an Idaho man who operated an EB-5 regional center has agreed to settle a case against him alleging that he took millions of dollars to pay for luxury cars and investments unrelated to the purpose of the particular EB-5 program at issue, i.e., to develop luxury real estate and invest in gold mining ventures in Idaho and Montana.
The EB-5 program is a special expedited path to a green card for foreign investors who provide a set minimum of investment capital that creates at least 10 U.S. jobs within 2 years of the investment. The program is designed to incentivize investment in rural areas (e.g., Idaho) or high unemployment areas. Whereas the minimum for such “targeted employment areas” is $500,000, the minimum for more affluent areas is $1 million.
The respondent, Serofim Muroff, and his assistant and bookkeeper are alleged to have diverted about $5.5 million of the $140.5 million in investment money provided by Chinese investors. In addition to disgorging the allegedly diverted proceeds, Muroff has agreed to a $2 million penalty plus interest, and to be barred from conducting further EB-5 offerings. Neither Muroff nor his assistant admitted or denied the allegations in the SEC’s complaint.
Under a Senate bill, the SEC would be able to administratively impose a maximum $1 million per violation penalty on individuals and a maximum $10 million per violation penalty on financial firms for the most serious (e.g., fraud, deceit) violations. The current levels are substantially lower — at $181,071 for individuals and $905,353 for firms — though the SEC is empowered to go to federal court to get the equivalent of the ill-gotten gains in a given case.
Under the proposed measure, the SEC would not have to go to federal court to get large remedies, though the total remedy per violation would be capped – the maximum penalty for an individual could not exceed, for each violation, the greater of (i) $1 million, (ii) three times the gross pecuniary gain, or (iii) the losses incurred by victims as a result of the violation. The maximum amount that could be obtained from entities could not exceed, for each violation, the greater of (i) $10 million, (ii) three times the gross pecuniary gain, or (iii) the losses incurred by victims as a result of the violation.
In addition, individuals and firms that were found civilly or criminally liable for securities law violations in the 5 years leading up to a new violation could face up to three times the new caps, e.g., penalties of $3 million/$30 million.
It is important to note that SEC administrative or “in-house” courts have faced substantial constitutional challenges recently and are often considered subject to agency bias. At a minimum, it is clear that the SEC courts lack some of the procedural safeguards provided in federal court. If the Senate bill becomes law, the SEC will have significantly increased leverage in negotiations with respondents not only because of the amounts involved but because the Enforcement staff would not need to go to federal court to get such amounts.
The DOL has issued a temporary policy stating that it will not bring enforcement actions against firms that are not Rule compliant by April 10. In other words, DOL will not bring enforcement actions against advisers for the “gap” period between April 10 and the date on which the DOL officially delays the Rule (if it, in fact, delays the Rule). If the DOL decides to not delay the Rule at all, firms have a “reasonable” period of time in which to send out the required disclosures and otherwise get compliant.
RIAs serving customers on a percentage of assets under management (% AUM) basis, or for some other non-variable form of comp (e.g., flat fees), need to be aware that it is not “business as usual” under the DOL Fiduciary Rule, some version of which is likely to go into effect in 2017. While such advisers are not subject to the full Best Interest Contract Exemption Requirement with its onerous contract and disclosure requirements, they must comply with a lesser requirement, sometimes called “BIC Lite”.
Many RIAs are surprised to learn that they will have this additional requirement because they are already fiduciaries under the 1940 Investment Advisers Act and are often fiduciaries under ERISA and DOL guidance when providing regular advice to Plans. The DOL Rule, however, extends ERISA and Tax Code fiduciary status to one-off investment advice about rollovers from 401ks to IRAs and from commissioned IRA accounts to fee IRA accounts. RIAs who are deemed to be giving (even limited) “investment advice” to Plans and IRA owners will have to comply with BIC Lite.
Specifically, advisers will have to provide a written acknowledgement of fiduciary status to Plan and IRA clients and state that they will abide by certain Impartial Conduct Standards. Under those standards, advisers must act in the client’s best interest, receive only reasonable compensation, and not make misleading statements to clients. RIAs must also document the advice given (including apprising customers of the pluses and minuses of staying where they are versus rolling over) and the reasons for that advice.
In sum, the biggest changes under the DOL Rule apply to folks charging variable compensation (e.g., commissions) to Plans and IRA owners. That said, RIAs should not assume that their current policies and practices bring them into full compliance with BIC Lite. RIAs should check those policies and practices, including documentation procedures, and make sure they are up to snuff.