Welcome to Compliance Hot Spots, our briefing on compliance, enforcement and government affairs. The Justice Department’s new guidance on compliance monitors is making waves—we’ve got some observations below from the general counsel to the hedge fund Point72. Plus: the NYT dropped a big investigation spotlighting white-collar penalties in the Trump era. And more: a Democrat-controlled U.S. House could mean work on the lobby and white-collar fronts. We’ll all be watching the returns tonight.
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‘I Would Have Traded a $10M Penalty for a Monitor’
In 2016, when the hedge fund billionaire Steve Cohen struck a deal with the Securities and Exchange Commission resolving charges related to insider trading, he agreed to a two-year ban on managing outside money but avoided a civil penalty.
Two years later, the top lawyer at Cohen’s new firm, Point72, said the settlement still came with a steep cost, one that remains to this day: the requirement to retain a compliance monitor for up to four years.
“We settled an SEC case, got no penalty and everybody’s clapping and saying, ‘That’s a great result.’ It was a very good result. It was the right result on both sides. But we got a monitor. And I look back at it now and I say, ‘I would have traded a $10 million penalty for a monitor.’ And I have a good monitor,” said Point72 general counsel Kevin O’Connor, during a recent appearance at the Securities and Enforcement Forum in Washington.
“What people don’t appreciate about the monitor—it’s not the cost,” he added. “You have no control. They don’t work for you. So you have to just hope they’re going to be reasonable.”
(After the conference, O’Connor told me that he had taken some license to make a point about the cost of monitors and does not, in fact, wish that the settlement had included a civil penalty instead of a compliance monitor.)
O’Connor, a former U.S. attorney and associate attorney general, said during the conference that monitorships come with a “real hidden cost” to companies, requiring a “tremendous amount of time and effort” that isn’t necessarily given the weight it deserves in settlements. His comments came just weeks after the head of the Justice Department’s criminal division, Brian Benczkowski, issued new guidance urging prosecutors to consider the “projected costs and burdens” of monitors on companies.
“I don’t think there’s been any sort of self-examination by DOJ until now, or the SEC, as to exactly what these monitors are doing, what impact they’ve had, and whether it’s something they need to continue to do. It’s hard to believe, but you go back a decade, they didn’t exist,” O’Connor said.
“So one could say,” he added, “that it is time to really take a fresh look and either scale back or be a little bit more targeted in how we use them.”
O’Connor likened having a compliance monitor to dealing with an ongoing Justice Department investigation—”they’re asking for documents, they’re asking for witnesses,” he said—but with one key difference. With compliance monitors, he said, “you can’t really use outside counsel.”
“You think about it, I can’t bring in outside counsel to deal with my monitor. I suppose I could, but nobody does it,” he said.
Who Got the Work
>> Goldman Sachs has hired Kirkland & Ellis partner Mark Filip ”as part of a team arguing to DOJ lawyers that Goldman should not be prosecuted” in the 1MDB financial scandal, according to Financial Times. Filip is a former deputy U.S. attorney general, and one of his former Kirkland colleagues, Brian Benczkowski, now leads DOJ’s Criminal Division. The Justice Departmnet last week charged two former Goldman Sachs bankers in connection with the scandal.
>> “A divided federal appeals court on Monday overturned the insider trading conviction of a former Wall Street investment banker accused of passing tips about five mergers in the healthcare industry to his father, and ordered a new trial,” Reuters reports. The challenger, Sean Stewart, worked at JPMorgan Chase & Co. and Perella Weinberg Partners. Alexandra Shapiro of New York’s Shapiro Arato LLP argued for Stewart in the U.S. Court of Appeals for the Second Circuit. Read the ruling here.
>> The anti-retaliation provisions of the federal False Claims Act do not extend to alleged actions that occur after employment has ended, the U.S. Court of Appeals for the Tenth Circuit ruled Tuesday. Brandon Mark of Parsons Behle & Latimer, in Utah, argued for the former employee who said she was a whistleblower. Steven Gombos of Fairfax, Virginia’s Ritzert & Leyton P.C., argued for CollegeAmerica Denver Inc.
>> “A former JPMorgan Chase precious metals trader has pleaded guilty to spoofing charges in the latest action brought by US authorities as they attempt to clean up futures markets,” Financial Times reports. New York-based lawyer Joseph DiBenedetto represented the defendant, John Edmonds, who pleaded guilty in Connecticut federal court to commodities fraud and a spoofing conspiracy. “The Criminal Division is committed to prosecuting those who undermine the investing public’s trust in the integrity of our commodities markets through spoofing or any other illegal conduct,” DOJ’s Benczkowski said in a statement. Read the plea agreement here.
Compliance Headlines: Trump-Era White-Collar Penalties | Divided Government | Spoofing Spotlight
>> “Across the corporate landscape, the Trump administration has presided over a sharp decline in financial penalties against banks and big companies accused of malfeasance, according to analyses of government data and interviews with more than 60 former and current federal officials. The approach mirrors the administration’s aggressive deregulatory agenda throughout the federal government,” according to a New York Times investigative report. The piece attempts to quantify some of the shift in rhetoric from top political appointees at the Justice Department and SEC. Read the NYT’s four takeaways here.
The SEC pushed back against the NYT’s findings. “The article’s conclusion that enforcement of the federal securities laws has flagged rests on deeply flawed methodology,” Stephanie Avakian and Steven Peikin, co-leaders of the SEC’s enforcement division, told the NYT. “As the thorough analysis in our annual report makes clear, the division of enforcement’s performance, effectiveness and activity level during our tenure compares favorably with any period in the commission’s history.”
>> “Financial industry lobbyists say they will focus their efforts on moderate Democrats and regulatory agencies if Democrats take control of the House of Representatives after next week’s congressional elections,” according to Reuters. Politico has more about K Street’s observations on divided government: “That will throw off a lot of work for law firms” with lobbying practices, said Rich Gold, who leads Holland & Knight’s public policy and regulation practice.
>> A new paper looks at the functions and relationships of the law office and compliance officer. “[T]he problem of large corporations’ self-control of violations may not be resolved by COs, without the support of management, at the board and the divisional level. Most importantly, corporate culture may be a key to legality of corporate activities,” writes Tamar Frankel of Boston University School of Law in a post at the Harvard Law School Forum on Corporate Governance and Financial Regulation. Read the complete paper here.
>> “Federal regulators have ramped up their pursuit of traders who use a bluffing tactic known as spoofing to manipulate market prices, enforcement officials said, leading to a record number of manipulation cases,” The Wall Street Journal reports.
>> “Employees at one of the largest and fastest-growing credit unions in the U.S. told executives and regulators that it had a flawed program to prevent money laundering, according to people familiar with the matter and internal credit-union documents,” according to a report in The Wall Street Journal.
Notable Moves & New Hires (And One Departure)
>> Anna Richo will be Cargill Inc.’s general counsel, chief compliance officer and corporate secretary beginning Jan. 14, 2019. The company said in a statement that Richo is succeeding Laura Witte, who retired as the company’s top lawyer in May, my colleague Dan Clark reports at Corporate Counsel.
>> Valerie Dahiya, formerly a branch chief in the SEC’s division of trading and markets, has joined Perkins Coie as a partner in Washington focused on blockchain and digital currency. My colleague Ryan Lovelace reports the move comes “as the U.S. Securities and Exchange Commission and other regulators continue to increase their scrutiny of digital assets.”
>> Pain management and addiction pharmaceutical company BioDelivery Sciences International Inc. announced that industry veteran James “Jim” Vollins is taking over as general counsel, chief compliance officer and corporate secretary, according to my colleague Kristen Rasmussen.
>> Anthony Kelly, co-chief of the SEC enforcement division’s asset management unit, is leaving the agency this month after more than 18 years of service, the agency said Monday. “As Co-Chief of the Division’s Asset Management Unit, Anthony has spearheaded significant initiatives that protected investors and impacted the behavior of asset managers and investment advisers,” Steven Peikin, co-director of the SEC’s enforcement team, said in a statement.