New cryptocurrencies and tokens have been popping up all over the place, leading the SEC to set up an initial coin offering (ICO) section on its website and to promote recent enforcement actions in the digital currency space. The proliferation of new tokens offers a growing opportunity for cross-over and cooperation between different federal agencies. The SEC representative at a recent Bar Association of San Francisco panel last week noted that the SEC’s cyber unit is currently looking at dozens of new cryptocurrency or crypto market enforcement actions, including quite a few with the local U.S. Attorney’s office where fraud is implicated. Continue Reading Branding Concerns Rise Amid Cryptocurrency Proliferation

It always comes when you least expect it – a government inquiry to investigate your business. While it may instill a sense of panic, there are steps you can take to make sure you’re in the best position possible when the investigation begins.

This blog series developed by Chrysty Esperanza, Litigation Counsel at Square, Inc., will address this main question: When you receive a subpoena, CID, or informal request from the government, how should you respond?


Cooperation and Voluntary Disclosure Issues – Benefits + Risks of Self Reporting

The Foreign Corrupt Policies Act (FCPA) unit at the DOJ recently enacted its Corporate Enforcement Policy. According to the policy, if a company self-reports an FCPA violation and cooperates fully and timely, there is a presumption of declination of prosecution.  However, there is an exception – the presumption will not apply if there are aggravating circumstances that warrant a criminal investigation, Continue Reading Battling Government Investigations Series – Cooperation and Voluntary Disclosure

It always comes when you least expect it – a government inquiry to investigate your business. While it may instill a sense of panic, there are steps you can take to make sure you’re in the best position possible when the investigation begins.

This blog series by Chrysty Esperanza, Litigation Counsel at Square, Inc., will address this main question: When you receive a subpoena, CID, or informal request from the government, how should you respond?


When Civil and Criminal Investigations Collide

Civil and criminal investigations are not as separate as you may think, and it is quite possible they may blend together.  While an internal investigation may be launched in response to a civil request from a government agency, the degree of cooperation between civil and criminal government agencies means an open civil investigation can easily trigger a criminal inquiry. When parallel civil and criminal investigations occur jointly, the government agencies may share the work and information from their respective investigations.  For example, a subpoena from the Securities and Exchange Commission (SEC) will always note that information discovered during the investigation can be shared with multiple agencies, like the Department of Justice (DOJ).  Continue Reading Battling Government Investigations Series – Civil and Criminal Investigations

At a recent panel organized by San Francisco’s Federal Bar Association, the San Francisco Regional Director of the Securities and Exchange Commission (SEC), Jina Choi, confirmed that the agency continues to focus on investor fraud in the pre-IPO private market space. Highlighting enforcement actions against the non-public Zenefits, Credit Karma, and Theranos[1], Ms. Choi reiterated the SEC’s commitment to aggressive oversight over “unicorns,” or privately-held companies valued over $1 billion. The SEC first announced its intent to step up enforcement in this space in a March 2016 speech by previous SEC Chairwoman Mary Jo White, and Ms. Choi reported that the current SEC leadership, led by current Chairman Jay Clayton, is equally committed to policing this “beat.”

The Compliance Gap has been closely tracking SEC compliance enforcement at privately-held companies, which began in earnest last fall when the SEC announced that the non-public human resources company Zenefits and its founder, Parker Conrad had agreed to pay a combined $980,000 to settle claims that the company intentionally misled the company’s Series B and C investors. The SEC alleged Conrad and the company had misled investors about the degree to which Zenefits complied with state licensing laws, resulting in a lowered valuation when the compliance failures were revealed.

In March of this year the SEC reported a first-of-its-kind settlement with Credit Karma, in which the company agreed to pay $160,000 to settle claims that it failed to provide its employees with the disclosures required by Rule 701(e) of the Securities Act.  Rule 701 requires that a company compensating its employees with stock options provide detailed financial and risk disclosures before the date of sale. The SEC alleged that Credit Karma sold approximately $13.8 million in stock options to its employees without providing the information required by Rule 701.

Just two days after announcing the Credit Karma settlement, the SEC also filed a complaint against health care company Theranos, company founder Elizabeth Holmes, and former President and Chief Operating Officer Ramesh “Sunny” Balwani. In the complaints the SEC alleged that the company, Ms. Holmes, and Mr. Balwani made false claims about the capabilities of the company’s proprietary blood-test analyzers, regulatory approval of the proprietary blood-test analyzers, and the company’s business relationships with the U.S. Department of Defense.  Theranos and Ms. Holmes agreed to settle the claims made by the SEC, but Mr. Balwani has chosen to litigate what will surely be a closely watched case.

Ms. Choi also highlighted the SEC’s new approach to devising inventive ways to punish investor fraud in the private space. For example, Ms. Choi noted that the agency required both company and individual settlement payments in the Zenefits and Theranos resolutions (Ms. Holmes agreed to pay $500,000 and Mr. Conrad agreed to pay nearly that amount).  Ms. Holmes was also required to forfeit her ownership interest in Theranos, and was permanently banned from serving as an officer or director of any publicly-traded company.  Ms. Choi indicated that these remedies were arrived at through significant consultations with allegedly defrauded investors.  This approach indicates a shift towards creative remediation schemes that reflect the wishes of alleged victims, and the perceived need for individual punishments in the privately-held company space where founders can be interchangeable with the companies they build.

[1] Farella, Braun + Martel, LLP represents an individual in connection with the Theranos investigation. This report contains only publicly available information.

SEC magnifying glassThe prosecution of Martin Shkreli, whom the BBC has called “the most hated man in America,” reveals some important lessons about the Fourth Amendment protections against search and seizure in the digital corporate context: physical access to documents on a server may trump actual ownership of records. Continue Reading The Fourth Amendment Implications of Sharing Server Space

SEC magnifying glassRamapo, New York Town Supervisor Christopher St. Lawrence heads to trial this week on federal securities fraud charges. St. Lawrence is one of two city officials charged in the case; his codefendant N. Aaron Troodler pleaded guilty earlier last month. The SDNY U.S. Attorney’s Office promoted the Troodler conviction as the first time municipal bond fraud has been successfully prosecuted under federal securities laws. The St. Lawrence trial is expected to draw lots of attention; St. Lawrence is an elected official who has spent nearly two decades at the helm of his town. Continue Reading Municipal Bond Securities Fraud Case Heads to Trial

people talking at courthouseRecent corporate guilty pleas can be expected to have serious implications for the individual executives and employees alleged to have been involved in the conduct under scrutiny. But there are other factors at play in such cases that can make even more of a difference to the eventual outcomes for individuals than whether their corporate employer pleads guilty or pursues an alternative resolution. Key among these is the extent to which a cooperative relationship can be established between company counsel and individual counsel despite accusations of individual wrongdoing.

Read more in our article posted on Law360: Individual Defense in the Shadow of Corporate Guilty Pleas.

whistleblower

In a company with a robust compliance culture, potential whistleblowers can express their concerns without fear of retribution. By contrast, the penalty for a culture that silences whistleblowers just got steeper.  Companies caught punishing those who raise red flags, especially when they turn out to be lawyers, could be forced to confront documents otherwise inadmissible against the company due to attorney-client privilege.  Continue Reading Revenge of the Whistle-blower: Possible Consequences of Compliance Failures

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On December 6, 2016, after nearly twenty years of silence on insider trading, the U.S. Supreme Court unanimously affirmed the Ninth Circuit in holding that prosecutors need not show that a tipster received a pecuniary or other tangible benefit for providing inside information where the insider and trader are close friends or relatives. Salman v. United States, U.S. Supreme Court Case No. 15-628.

Salman was convicted for trading on information received from his friend, Michael Kara, who had in turn received the information from his brother and Salman’s brother-in-law, Maher Kara, a former Citigroup investment banker. Although Salman was not the insider, he was convicted based on so-called “tippee liability,” where the insider discloses nonpublic information to an outsider (a “tippee”) who then trades on the basis of the information, as established by the Supreme Court in its landmark Dirks decision. Dirks v. S.E.C., 463 U.S. 646 (1983).  Under Dirks, a tippee can be liable for insider trading provided the insider received a “personal benefit” from tipping the information, which benefit may be inferred where the tipper receives something of value in exchange for the tip or “makes a gift of confidential information to a trading relative or friend.”

Continue Reading Insider Trading Conviction in First Insider Trading Case in Nearly Two Decades Affirmed by Supreme Court

The announcement that San Francisco private company Hampton Creek faces an SEC inquiry related to their alleged “buyback” program of vegan mayo comes as no shock. See reporting on Bloomberg. As soon as the facts were initially reported it seemed only a matter of time until the regulators, who have been looking for a poster child (or rather, a whole class of poster children) of private company enforcement in the Bay Area, swooped in. Continue Reading Developments in SEC Private Company Enforcement: Sophisticated VC’s in the Role of Victim