Session VI: UK and US
Enforcement Update and Lessons
from Some Key Cases
Mark Amorosi, Partner, K&L Gates Washington. D.C.
Robert Hadley, Partner, K&L Gates London
David Savell, Senior Associate, K&L Gates London
© Copyright 2015 by K&L Gates LLP. All rights reserved.
SEC Enforcement Activities
Mark Amorosi, Partner, K&L Gates Washington. D.C.
© Copyright 2015 by K&L Gates LLP. All rights reserved.
SEC Division of Enforcement – New Regime
 SEC Chair Mary Jo White
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First SEC chair who was a criminal prosecutor
Get-tough stances (Madoff, financial crisis)
“First and foremost a law enforcement agency”
“Broken windows” speech
 Enforcement Director, Andrew Ceresney
 Also a criminal prosecutor
 Long-time colleague of Chair White
 Case production during White and Ceresney’s first year
 Seven hundred and fifty five cases (up from 686) with $4.2 billion
awarded (up from $3.4 billion)
 Asset Management Unit
 Continuing huge case production since creation in 2010
 Former deficiency letters can now be enforcement cases
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SEC Division of Enforcement – Asset
Management Unit
 Created in 2010 and is the largest of the specialised units
 60+ lawyers, five industry specialists, access to HO and 11 regional
offices
 Coordinated approach with co-chiefs in D.C. and L.A.
 Specialisation and training
 AMU leadership change
 Julie Riewe (D.C. based) – joined SEC in 2005
 Notable recent speech entitled “Conflicts, Conflicts, Conflicts”
 Has stated that there are “no shades of grey”
 Marshall Sprung (L.A. based) – joined SEC in 2003
 Four other units created as well: (1) Complex Financial Instruments Unit
(formerly, Structured and New Products), (2) Foreign Corrupt Practices Act
Unit, (3) Market Abuse Unit, and (4) Municipal Securities and Public Pension
Unit
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SEC Division of Enforcement – New
Approaches
 Risk identification initiatives – e.g. aberrational performance
 Partnerships with other divisions
 Division of Economic Risk Analysis for risk assessment
 OCIE for surveillance
 Investment Management for theory
 No more silos
 Gatekeeper focus: attorneys, accountants, compliance professionals
 Requiring admissions in settlements
 Started by Chair White and is an outlier among federal agencies
 Problem: Criteria unclear as to what admissions in what kind of cases
 Whistleblower Program gaining momentum
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SEC Division of Enforcement – New Approaches
 Shift to in-house administrative proceedings
 Dodd-Frank Act substantially expanded SEC’s power to bring cases
before its own administrative law judges instead of in federal court
 FYE 30 September 2014, 57% in court vs. 43% as administrative
cases – trend is approaching 50%-50%
 AMU’s rationale for preferring in-house proceedings
 Issues for defendants
 Limited discovery
 Time to trial
 No jury
 No evidence rules (hearsay allowed)
 Appeal is to the SEC Commissioners
 Further federal court of appeals review is limited
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SEC Division of Enforcement – AMU Priorities
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“Hedge Fund Aberrational Performance Initiative”
“Mutual Fund Fee Initiative”
“Bond Fund Valuation Initiative”
“Problem Adviser Initiative”
Adequacy of risk disclosure (e.g., subprime exposure)
Misrepresentations concerning performance or strategies
Conflicts issues (e.g., nondisclosure)
Books and records; Form ADV issues
Special Issues
 Private equity: “Zombie” funds
 Mutual funds
 Investment advisers
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UK and US Enforcement
Update and Lessons from
Some Key Cases
Robert Hadley, Partner, K&L Gates London
David Savell, Senior Associate, K&L Gates London
© Copyright 2015 by K&L Gates LLP. All rights reserved.
FCA Enforcement 2014/15
 Credible deterrence
 Market abuse insider dealing
 Criminal prosecution
 Higher fines – £700 million so far in 2015, resources
focused on LIBOR and FX manipulation
 More prohibitions
 Senior management/individual responsibility
 Compensation for consumers
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FCA Enforcement 2014/15 (Cont.)
More cases on…
 CASS client money – £180 million
 (£126 million after 30% discount)
 Anti-money laundering controls – £3 million
 (£2.1 million after 30% discount)
 More thematic and enforcement work
 Transaction reporting – £18.979 million
 (£13.285 million after 30% discount)
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FCA Enforcement 2014/15 (Cont.)
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Process
 Thematic review
 Skilled person’s report
 Attestation
 Enforcement
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Senior Management
 Attestations
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2014 – 59
Wholesale and Investment Management – 21
Q1 2014/15 – 38
Wholesale and Investment Management – 27
 Senior Managers Regime for banks
 Banking Reform Act 2013, regime comes into force 7 March 2016
 Senior managers to submit ‘statement of responsibilities’ – FCA will be
able to clearly identify individuals responsible for breaches as part of the
aim to bring more successful enforcement cases against individuals
 Senior managers will be liable to disciplinary action unless they can prove
that they took reasonable steps to prevent or stop the breach
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Individual Responsibility
 Anthony Wills, compliance officer at Bank of Beirut
 £28,000 (£19,600 after 30% discount)
 Statement of Principle 4 (open and co-operative with regulators)
 Senior management pressure does not excuse misconduct:
‘uniquely placed to understand the full position in relation to Bank
of Beirut’s regulatory compliance and as such should have
resisted any senior management influence’
 No prohibition
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Individual Responsibility
 LIBOR/EURIBOR
 Martin Brokers (UK) Limited – £3.6 million (though reduced to £600,000
for financial circumstances and 30% discount)
 David Caplin, CEO – £300,000 (£210,000 after 30% discount).
Prohibition from SIF
 Jeremy Kraft, compliance officer – £150,000 (£105,000 after 30%
discount). Prohibition from SIF
 Ensure effective oversight, remedy Martins’ lack of controls, compliance
culture
 Broker supervision assumed by CEO/delegated by compliance officer
 NIPS Code
 Entertainment
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LIBOR/EURIBOR
 Global approach to enforcement
 On 20 May 2015, six banks agreed to pay a combined $5.6 billion
to regulators, including the DoJ, CFTC and Federal Reserve, in
the US and to the FCA in relation to FX and LIBOR manipulation
 Paul Robson pleaded guilty to DOJ indictment of conspiracy to
manipulate JPY LIBOR in August 2014. Subsequently, the FCA
made a prohibition order against him in February 2015
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Conflicts of Interest
 Aviva Investors Global Services Limited
 £25.15 million (£17.6 million after 30% discount). Principle 3
(Systems and Controls) Principle 8 (Conflicts of interest)
 Allocation of trades – ‘cherry picking’
 Thematic review. ‘Dear CEO letter’
 Identify, assess and manage the risk of inherent conflicts of
interest associated with side-by-side management
 Systems and controls to record and allocate client orders (COBS
11.3.2, 11.5.2)
 Co-operation ‘far beyond the level expected’
www.fca.org.uk/static/pubs/other/conflicts-of-interest.pdf November 2012
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Conflicts of Interest
 Barclays Bank PLC
 £355,540,000 (£284 million after 20% discount)
 Principle 3 (systems and controls)
 FX
 Policies relating to conflicts of interest were not specific
to the FX business
 Widespread use of chatrooms – unmonitored
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Individual Responsibility
 Tariq Carrimjee v FCA – Upper Tribunal
 Adviser to Mr Goenke
 Firm principal, including compliance officer
 Blind eye = lack of integrity
 Approved persons should remain alive to the risk of
market abuse by clients and deal with these
appropriately
 Overturned finding of lack of integrity
 £89,000
 Prohibition? New Tribunal powers
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Systems and Controls
 AML: Bank of Beirut (UK) Limited
 £3 million (£2.1 million after 30% discount). Restriction on new
customers from high-risk jurisdictions 180 days (reduced 30% to
126 days)
 Had failed to carry out adequate risk assessments of higher-risk
customers and verify the identity and source of funds of higherrisk customers
 Develop, implement and conduct an adequate compliance
monitoring plan specific to financial crime
 Remediation exercise of its customer files
 Inaccurate assurances to the FCA
 De-risking
 FCA has stated in its 2015/2016 Business Plan that it expects
firms to avoid denying services to particular services or customer
categories
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AML/ABC
 Thematic Review
 Senior management oversight
 Challenge/controls/risk assessment new customers
 Fourth Money Laundering Directive
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Enforcement 2015
 Thematic review of how asset management firms control the risk of
market abuse (February 2015):
 Firms need to increase and improve post-trade surveillance to
investigate potentially suspicious trades
 Although firms had generally good controls to identify insider
information in clear situations, practices to avoid inside
information or identify its receipt when it is not expected were
often informal and inconsistently applied
 www.fca.org.uk/static/documents/thematic-reviews/tr15-01.pdf
 Middle management:
 New thematic review planned on culture change programmes with
a particular focus on remuneration, appraisal and promotion
decisions of middle management
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Enforcement 2015/16
 LIBOR/FX
 Individuals/senior management
 Higher fines
 Conflicts of interest
 Market abuse systems and controls
 Friends with US
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