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Top Ten SEC and CFTC Recoveries of 2018

Posted  January 18, 2019

The SEC and CFTC were busy in 2018. In addition to its robust FCPA enforcement, the SEC recovered hundreds of millions of dollars from companies accused of defrauding investors, breaching fiduciary duties, and violating SEC rules. The SEC also awarded its largest-ever whistleblower awards in 2018. Likewise, the CFTC spent the last year cracking down on market manipulators, rooting out commodities fraud, and halting regulatory violations, while also issuing “game-changing” awards under its own whistleblower program.

Here are the Top Ten SEC and CFTC penalties of 2018 in cases other than FCPA enforcement, with links to more information about each of the cases:

  1. Société Générale S.A.– In June 2018, Paris-based financial services company Société Générale S.A. agreed to pay over $1 billion to U.S. and French authorities as part of a multi-faceted settlement that included $475 million in regulatory penalties and disgorgement to the CFTC. The CFTC order against Société Générale found that numerous executives – from the CFO to the Head of Corporate Investment Banking – directed the filing of false LIBOR and Euribor submissions, which concealed the bank’s difficulty in borrowing unsecured funds to increase profit on its trading positions and protect its commercial reputation.
  2. The ADR Cases – In multiple cases across 2018, the SEC cracked down on the improper “pre-release” of American Depository Receipts (ADRs) by major financial institutions. ADRs are U.S. securities that represent foreign shares of a foreign company and require a corresponding number of foreign shares to be held in custody at a depository bank. The SEC found that JPMorgan Chase, Bank of New York Mellon, Citibank, and Deutsche Bank all engaged in thousands of improper pre-release transactions when neither the broker nor its customers had the required foreign shares. These transactions opened the flood gates for inappropriate short selling and dividend arbitrage that should have been avoided. In total, the SEC recovered over $300 million from these settlements.
  3. The ISDAFIX Cases – In another series of cases, the CFTC halted widespread attempts to manipulate the U.S. Dollar International Swaps and Derivatives Association Fix (ISDAFIX), a leading global benchmark referenced in a range of interest-rate products, by Deutsche Bank Securities Inc., JPMorgan Chase, and Bank of America. The CFTC found that the banks used false and misleading submissions and strategic timing to manipulate the rate in their favor. The CFTC also targeted ICAP Capital Markets for knowingly aiding and abetting the banks’ use of its trading platforms to manipulate ISDAFIX. In total, the CFTC recovered approximately $215 million in the ISDAFIX cases.
  4. The Precious Metals Cases – In January 2018, the CFTC, along with DOJ, announced settlements with Deutsche Bank, UBS, and HSBC, ending their commodities fraud and spoofing schemes related to precious metals futures contracts traded on the Commodity Exchange. According to the CFTC, the banks placed large bids with the intent to cancel before execution (spoof orders) to signal fake market conditions that would manipulate the price of precious metals futures contracts, often to the banks’ benefit. The CFTC recovered over $46 million through the settlements.
  5. Tesla & Elon Musk – In October 2018, Elon Musk and Tesla agreed to pay $40 million in penalties to resolve allegations that Musk engaged in securities fraud and that Tesla lacked adequate controls to prevent his misconduct. The charges stemmed from Musk tweeting that he had secured funding to take Tesla private at $420 per share-a significant premium over its publicly traded price-when he had not discussed specific terms or price with any potential funders. According to the SEC, the tweet caused a 6% rise in Tesla’s stock price. Musk also stepped down as Tesla’s Chairman for at least three years, while Tesla agreed to appoint new independent board members and to place additional controls on Musk’s tweets.
  6. Yahoo! – In June 2018, the entity formerly known as Yahoo! agreed to pay $35 million to resolve SEC claims that it defrauded investors by failing to disclose a data breach that compromised the personal data of hundreds of millions of users. According to the SEC, Yahoo! senior management knew that hackers had stolen the company’s “crown jewels” – personal and account information, passwords, and security answers – but failed to disclose the breach for more than two years.  The settlement marks the first time that the SEC brought an enforcement action based on a registrant’s failure to disclose a data breach.
  7. Clovis Oncology In September 2018, Clovis Oncology, along with its CEO Patrick Mahaffy and former CFO Erle Mast, settled fraud allegations with the SEC for over $20 million. The SEC accused Clovis and its executives of misleading the public about the efficacy of a lung cancer drug in development, suggesting it was more than twice as effective as internal data showed, to raise nearly $300 million dollars during a public offering. Once Clovis stopped development of the drug, its stock plummeted approximately 70%.
  8. Merrill Lynch – In June 2018, Merrill Lynch, Pierce, Fenner & Smith Inc.agreed to pay more than $15 million to resolve SEC claims that its salespeople and traders misled customers into overpaying for residential-mortgage-backed securities (RMBS) by misrepresenting what Merrill Lynch paid for them. The SEC also accused Merrill Lynch of charging excessive undisclosed markups and failing to adequately supervise the employees committing the fraud.
  9. PNC Investments, Securities America Advisors, and Geneos Wealth ManagementIn June, the SEC reached settlements with PNC Investments, Securities America Advisors, and Geneos Wealth Management for their alleged failure to disclose conflicts of interests and other breaches of fiduciary duties. The SEC accused the three firms of violating the Investment Advisors Act by steering clients into higher-cost funds that generated millions in improper fees for the firms. The SEC recovered approximately $15 million in fees and disgorgement.
  10. New York Stock ExchangeIn June 2018, the SEC charged the New York Stock Exchange and its affiliated exchanges NYSE American and NYSE Arca in connection with five separate investigations into numerous regulatory failings, including the first-ever charge based on a violation on Regulation Systems Compliance and Integrity (Reg SCI) requirements. The violations included negligently representing that quotations were automated when they were not, erroneously suspending trading, failing to publish required information, and failure to comply with Reg SCI’s business continuity and disaster recovery obligations for over a year after they became effective. In settlement, the exchanges agreed to pay a $14 million penalty.

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Tagged in: CFTC Whistleblower Reward Program, Financial and Investment Fraud, Fraud in CFTC-Regulated Markets, SEC Whistleblower Reward Program, Securities Fraud, Top 10,


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