Securities Mosaic® Blogwatch
February 5, 2016
PwC discusses Ten Key Points from Basel's Fundamental Review of the Trading Book
by Dan Ryan, Mike Alix, Adam Gilbert and Armen Meyer

On January 14th, the Basel Committee on Banking Supervision (BCBS) published its revised capital requirements for market risk. The final standard, also known as the Fundamental Review of the Trading Book (FRTB), is intended to harmonize the treatment of market risk across national jurisdictions and will generally result in higher global capital requirements. BCBS estimates a median capital increase of 22% and a weighted-average capital increase of 40%. However, we believe this impact can be somewhat mitigated by portfolio re-optimization.

  1. Standardized approaches continue to gain regulatory favor. The final framework allows banks to calculate their capital requirements using a new standardized approach (SA) or, for certain qualifying trading desks, a regulator-approved internal model-based approach. However, the framework's requirements are clearly designed to push firms toward the new SA, which is consistent with the overall regulatory trend of moving away from internal model-based approaches.[1] This is evidenced by the framework's more stringent requirements applicable to the use of internal models (e.g., around regulatory model approval and desk-level reporting).
  2. The new standardized approach is more risk sensitive. The new SA for capital calculation relies on a bank’s pricing models to capture more granular and complex risk factors across different asset classes in the trading book. It is more risk sensitive than the currently effective Basel II SA and is likely to result in significantly higher capital charges for certain businesses due to its inclusion of residual and basis risks that are not captured by the Basel II SA. The new SA is also likely to increase regulatory capital due to the removal of capital credits for diversification within an asset class.
  3. The new boundary between the trading book and banking book will limit the potential for regulatory arbitrage. The final framework imposes stringent rules for internal transfers between the trading and banking books, defining a new boundary based on a bank’s intent to trade an asset or to hold it to maturity. The framework also introduces a presumptive list of assets that should be placed in the trading book unless a justifiable reason exists not to do so. These provisions are intended to limit an institution's ability to move illiquid assets from its trading book (where assets must be marked to market) to its banking book, thereby avoiding higher capital charges. It is not clear that the revised boundary will be effective in reducing such positioning in all jurisdictions, as national regulators are given discretion in defining their asset lists.
  4. Internal models attract more regulatory scrutiny. Internal models will be subject to regulatory approval at the trading desk-level,[2] supported by granular performance measures. This desk-level approval process will be primarily driven by verification of model accuracy through P&L attribution tests and backtesting using daily model results. In addition, compared to the 2014 proposal, the final framework’s treatment of models that generate inaccurate results is more stringent, as evidenced by the more punitive multiplier which increases regulatory capital requirements after a given number of exceptions are encountered during desk-level backtesting of a model. The final framework's daily P&L attribution and backtesting requirements will necessitate substantial technology infrastructure development by many institutions, and further challenge internal model review and governance.
  5. A new, costly measure to capture internal models' tail risk. The final framework replaces Value at Risk (VaR) and Stressed VaR (SVaR) measures for capturing risk with a new Expected Shortfall (ES) measure for the internal model-based approach. As the new ES measure captures tail risk (unlike VaR and SVaR), capital requirements will likely be higher under the final framework. Furthermore, tail risk capture comes at a significant cost, as data requirements and operational complexities of the ES measure are likely to
    be extensive.
  6. More granular liquidity horizons for the internal model-based approach. The final framework increases the granularity of liquidity horizons (i.e., the time needed to sell or hedge an asset during market stress without adversely affecting prices) by stipulating specific liquidity horizons by asset class. The overall impact of this change is again likely to be higher capital requirements – many assets will become subjected to longer liquidity horizons and therefore will face higher capital charges. However, the final framework brings some good news for the industry, as liquidity horizons across some asset classes have been reduced from those earlier proposed by approximately 30% to 50%. This change responds to industry comments that the proposed horizons were not representative of historical performance during the financial crisis.
  7. Capital requirements likely to also increase due to the introduction of non-modellable risk factors (NMRFs) in the internal model-based approach. Under the final framework, only risks that meet strict data availability and quality requirements are deemed modellable. All other risks (i.e., NMRFs) must be accounted for by a catch-all capital charge which is calculated for each NMRF based on a risk-specific stress scenario. The results from the BCBS’s 2015 quantitative impact study suggest that this capital charge will not be trivial.
  8. Credit migration risk no longer double counted with the introduction of the Default Risk Charge (DRC). The final framework replaces the capital charge for incremental risk (IRC) in the internal model-based approach with the DRC. This change reflect concerns that credit migration risk (i.e., the risk of credit deterioration over time) was previously double-counted, once as part of credit risk volatility and once as a stand-alone modelled risk. While this is good news for the industry, the mandatory inclusion of equity products in the DRC calculation will bring new challenges due to the large number of issuers and low correlation in performance between various equities.
  9. Correlation trading positions (CTPs) no longer allowed to be measured using internal models. Under the final standard, CTPs must be captured using the SA, similar to other securitization positions. This is due to regulatory concerns around the ability of internal models to adequately capture CTPs' risk.
  10. Banks will need more data and stronger data analysis to meet new risk measurement and reporting requirements. The final standard imposes new internal and external reporting requirements, including monitoring market risk on an intraday basis and measuring market risk capital as of the end of the previous day. Furthermore, banks that continue to use internal models face even stricter requirements, as they have to report risk capital under both the SA and internal model-based approach. These banks will also have to report their key modelling assumptions to regulators in order to facilitate a better understanding of the variations between standardized and internal model-based results.

What's next?

BCBS calls for the adoption of FRTB by each jurisdiction before January 2019 and for compliance to begin by December 2019. We do not expect US regulators to adopt the standard until 2018 because they are likely to wait for any changes to the framework that may result from the impact of other evolving global standards and recalibration by BCBS.[3]


Appendix – Key FRTB changes from existing standard, and implications

Changes from existing standard Implications
Standardized approach

Mandatory capital calculation under SA

Correlation trading positions capitalized only under SA

New risk factor definitions

Correlation or disallowance factor methods to capture basis risk

Diversification limited within an asset class

Revised treatment of optionality

Significant increase in the cost of capital for certain businesses due to changes to SA

Ambiguity in risk factor definitions can lead to variation in measurement of risks across trading desks and firms

Infrastructure and other implementation challenges (e.g., to capture and analyze complicated risk metrics)

Internal model-based approach

ES to replace VaR and SVaR to capture
tail risk Introduction of granular, asset-class specific liquidity horizons (LH) Introduction of non-modellable risk factors DRC to replace IRC
Tail risk is captured through ES but will require extensive modelling efforts

Longer LH resulting in higher capital charges

Fewer risks deemed modellable due to rigorous data requirements

Migration risk modelling no longer required under DRC

Trading & banking book boundary Stringent requirements on risk transfers between the trading book (TB) and banking book (BB) to limit regulatory arbitrage

"Presumptive list" of TB-eligible assets with focus on trading intent

Pass-through approach for risk transfer pertaining to equity/credit risk trades

Hedging recognition based on stress period hedge effectiveness

Limited ability to move illiquid positions between TB and BB

Maintenance of non-core mandate risks in BB

Potential variation in national implementation of presumptive lists of TB-eligible assets

Increased operational costs due to multifaceted process and technology infrastructure changes

Scope Desk-level model review and approval requirements

Desk-level P&L attribution and backtesting to be performed daily

Intra-day monitoring and measurement of market risk

More granular assessment of model performance

Significantly higher volumes of model outputs for each desk

Substantial technology infrastructure development necessary for most firms

Implementation challenges for daily
P&L attribution

Potential discrepancies between backtesting (VaR-based) and capital calculations
(ES-based) due to different drivers

Reporting Enhanced public disclosures on market risk capital charges including mandatory calculation under SA

Consistent approach to reporting by banks across jurisdictions

Disclosure of explanation on variability of market risk-related risk-weighted assets

Desk-level disclosure of SA capital charges

Extensive infrastructure changes to support reporting requirements

P&L attribution and backtesting results required to be reported


[1] See PwC's First take, Basel's re-proposed standardized approach for credit risk (December 2015).

[2] Desk-level regulatory approval of internal models is already in effect in several countries, including the US.

[3] BCBS anticipates further refinement and recalibration of market risk measures due to the impact of related evolving frameworks including credit valuation adjustments standards, capital requirements for credit risk, treatment of sovereign exposures, and interest rate risk in the banking book. BCBS has also indicated that it would provide additional guidance pertaining to market risk disclosures.

The preceding post is based on a memorandum produced by PwC dated January 19, 2016 and available here.

February 4, 2016
Enforcement Action Possible Against Those Who Rely on Safe Harbor to Transfer Information from the EU to the United States
by David S. Turetsky, Davina Garrod, Natasha G. Kohne, Michelle A. Reed, et al.

Wednesday, February 3, brought additional developments pertaining to the transfer of personal data from the EU to the U.S. consistent with EU privacy law. Just one day prior, we reported on the announcement by the EU and U.S. of an agreement called the EU-U.S. Privacy Shield (Privacy Shield), which is intended to replace the Safe Harbor arrangements struck down by the Court of Justice of the EU in the Schrems decision. We noted that the "reaction of the Data Protection Authorities will also be watched, and important developments may come quickly." Consistent with that advice, Working Party 29 (WP29), which includes the Data Protection Authorities (DPAs) from across the EU that conduct relevant enforcement, met on Wednesday and issued a statement affecting companies that have continued to depend on Safe Harbor to transfer data during this period while an agreement was being negotiated and reported several times to have been close at hand.

The new WP29 statement made clear that Safe Harbor no longer provides a lawful basis to transfer data to the U.S. and that it is possible that enforcement action may be taken against those who rely on it: "The WP29 recalls that, since the Schrems judgment, transfers to the U.S. cannot take place on the basis of the invalidated Safe Harbor decision. EU data protection authorities will therefore deal with related cases and complaints on a case-by-case basis." Some companies, therefore, may find a gap in compliance in the period, which could be a few months, until the Privacy Shield is finalized, adopted and implemented. At the same time, the DPAs will have different views about bringing enforcement actions in this period and will have limited resources, and may not necessarily have viable complaints before them. For example, some of the regional German DPAs have taken an aggressive enforcement approach in recent months, whereas other DPAs have preferred to wait until the EU-U.S. framework has been renegotiated and finalized.

The WP29 statement also sets forth a set of principles – or "essential guarantees" – that must be respected on cross-border data transfers. These principles include guarantees on the part of intelligence agencies that processing is based on clear, precise and accessible rules, and that effective remedies should be available to anyone, and that this is all subject to an independent oversight mechanism. The DPAs will use and apply these principles at a special session they are convening next month when they review the documentation pertaining to the Privacy Shield, and assess compatibility with Schrems and these principles. At that session, they will also review whether the other means currently available to transfer personal information from the EU to the U.S. remain viable: "whether transfer mechanisms, such as Standard Contractual Clauses and Binding Corporate Rules, can still be used for personal data transfers to the U.S." In the meantime, the WP29 has made clear that Standard Contractual Clauses and Binding Corporate Rules can still be used for existing transfer mechanisms.

While the Privacy Shield agreement is very important, it has certainly not immediately ended the uncertainty that U.S. and EU businesses continue to face over data transfer arrangements, as Wednesday’s developments underscored.

February 5, 2016
2015 Year-End Activism Update
by Barbara Becker, Eduardo Gallardo, Gibson Dunn
Editor's Note:

Barbara L. Becker is partner and co-chair of the Mergers and Acquisitions Practice Group at Gibson, Dunn & Crutcher LLP, and Eduardo Gallardo is a partner focusing on mergers and acquisitions, also at Gibson Dunn. The following post is based on a Gibson Dunn M&A Client Alert. The full publication, including charts and survey of settlement agreements, is available here.

This post provides an update on shareholder activism activity involving domestically traded public companies with market capitalizations above $1 billion during the second half of 2015, together with a look back at shareholder activism throughout 2015. While many pundits have suggested shareholder activism peaked in 2015, shareholder activism continues to be a major factor in the marketplace, involving companies of all sizes and activists new and old. Activist funds managed approximately $122 billion as of September 30, 2015 (vs. approximately $32 billion as at December 31, 2008).[1] In 2015 as compared to 2014, we saw a significant uptick in the total number of public activist actions (94 vs. 64), involving both a higher number of companies targeted (80 vs. 59) and a higher number of activist investors (56 vs. 34).[2]

In this edition of Activism Update, our survey covers 44 public activist actions involving 38 different companies by 29 different activist investors during the period from July 1, 2015 to December 31, 2015. Five of those companies faced advances from at least two activist investors, including two companies that faced coordinated actions by two investors. [3] Market capitalizations of the targets ranged from just above our study's $1 billion minimum to approximately $294 billion.

While change in board composition, including gaining representation on the board, predictably continued to be a common goal of activist investors (66%) in 2015, over half of the activist actions we reviewed in 2015 included goals related to M&A, including pushing for spin-offs and advocating both for and against sales or acquisitions (59%). High market caps continue to not deter activists from making advances, as 23% of the companies included in our 2015 surveys had market capitalizations above $20 billion. Though proxy solicitations in the second half of 2015, outside of proxy season, were less common than in the first half of the year (5% in H2 vs. 25% in H1), the second half of 2015 saw nearly as many publicly filed settlement agreements as 2015’s first six months (10 in H2 vs. 12 in H1).

Overall in 2015, proxy solicitations took place in only 19% of campaigns, and settlement agreements were publicly filed in 23% of campaigns. Within such settlement agreements, non-disparagement clauses, standstill periods and voting agreements all remained nearly ubiquitous, but expense reimbursements have grown increasingly rare (10% in H2 2015 vs. 37.5% in 2014 and H1 2015). We delve further into the data and the details in the following pages.

While proxy campaigns by activists and formal settlement agreements continue to be the exception rather than the rule, companies do appear to be taking proactive measures in anticipation of or in response to activists, including board or management changes, corporate governance reviews, stock buybacks and strategic initiatives.

* * *

The full publication, including charts of the activist campaigns covered by our survey, the survey of settlement agreement terms with breakdowns of settlement agreements publicly filed during the second half of 2015, and updated statistics on key settlement terms from 2014 through the end of 2015, is available here.


[1] Hedge Fund Research
(go back)

[2] Several companies faced actions from multiple activist investors, some of whom were acting in concert while others were acting independently vis-à-vis the target.
(go back)

[3] The other three companies were subject to multiple activists acting independently.
(go back)

February 5, 2016
Chancery Determines that Electronically Stored Information and Personal Emails of Directors Must be Provided to Stockholders
by Francis Pileggi

The Delaware Court of Chancery published an opinion this week that includes electronically stored information as part of the "books and records" that a stockholder can demand from a corporation and its directors and officers. Amalgamated Bank v. Yahoo!, Inc., C.A. No. 10774-VCL (Del. Ch. Feb. 2, 2016). It also addresses the duties of directors in connection with reviewing and approving executive compensation packages. (Plus: it features quotations from a law review article I co-authored on Section 220, as noted below.)

The treasure trove of corporate law jewels in this opinion, weighing in at 74 pages, can easily justify commentary of similar length. Those who want to keep abreast of key Delaware corporate law principles need to make the time to read the opinion in its entirety, but for present purposes I will provide bullet points with highlights.

  • Although this decision includes a comprehensive analysis of the prerequisites for demands under Section 220 of the Delaware General Corporation Law (DGCL) regarding the right of a stockholder to obtain books and records of a company, a fuller understanding of this opinion can be be obtained by comparing it to other recent decisions on Section 220, including the recent Delaware Supreme Court ruling in Abbvie which rejected a Section 220 request based on an exculpatory clause in the corporate charter in that case, and which was highlighted on these pages. The Yahoo decision should also be juxtaposed with a decision a day earlier by Vice Chancellor Noble which limited the scope of records that were demanded by a director. See Chammas v. NavLink, Inc., C.A. No. 11265-VCN (Del. Ch. Feb. 1, 2016). The Chammas opinion directly addresses the rights of a director to books and records but is not as expansive in ordering emails or records of individual officers, and does not address ESI as the parties appear to have agreed on that issue. The Yahoo opinion should also be contrasted with the Supreme Court decision in the Wal-Mart case, highlighted on these pages, which required the production of extensive information regarding board deliberations, including an exception to the attorney/client privilege.
  • One of the most important reasons why this case is destined to be often cited, and deserves a prominent position in the pantheon of seminal Delaware decisions, is because, to my knowledge, it remains the first Delaware opinion to directly interpret DGCL Section 220 in a manner that explicitly requires the production of electronically stored information (ESI) based on the statutory language. Although the court lists quite a number of Delaware decisions in footnote 42 that have ordered the production of emails in connection with Section 220 requests based on the facts of those cases, as far as I am aware, this is the first Delaware opinion that expressly addresses the obligation of a company pursuant to Section 220 to produce ESI as compared to requiring the production of just emails. But I don’t think that prior cases explicitly interpreted the statute to require ESI production (which is broader than emails).
  • This opinion, consistent with it statutory interpretation, rejected the argument by Yahoo that inspection rights under Section 220 are limited to paper records. See page 20. In doing so, I am happy to say that the court in this opinion quoted from a law review article co-authored by yours truly which argued that the court should include ESI as part of the obligation to produce records under Section 220. See 37 Del. J. Corp. L. 163, 165 (2012), highlighted on these pages here.
  • Although the Wal-Mart decision referred to above required the production of various emails, that decision as I recall, is fact specific and did not expressly include in the same direct and comprehensive fashion as this opinion, with the detailed analysis and supportive reasoning that this opinion did, an interpretation of Section 220 as requiring ESI (which is broader than email only) to be included in a production of "books and records."
  • Importantly for those needing to understand the scope of Section 220, this opinion also required the production of relevant personal emails by officers and directors to the extent that they were responsive to the demand (i.e., emails on a non-business, personal email account). See footnote 43.
  • Although there are hundreds of Delaware decisions interpreting Section 220, many of them highlighted on these pages over the last ten years, this opinion describes the prerequisites of Section 220 and the nuances and scope of Section 220 demands more thoroughly than any other Section 220 opinion that I can recall. If a person interested in learning about Section 220 were to read only one opinion on Section 220, in an effort to understand all of its nuances as requirements, this should be that opinion.
  • In connection with its discussion of Section 220, the court also provides advice to directors regarding their fiduciary duties when reviewing and approving an executive compensation proposal. See pages 42 and 43.
  • The court also clarifies that the prerequisite of needing a credible basis to allege mismanagement as a threshold requirement for Section 220 is not the same as requiring or assuming that one will prevail on such a claim, nor is the Section 220 standard whether it is reasonably conceivable that one could prevail on such a claim, as in a Rule 12(b)(6) motion.
  • Lastly, the court imposed a condition on the production that all the documents that the court ordered Yahoo to produce in this opinion will be incorporated by reference into any plenary complaint that is filed by the plaintiffs.
February 5, 2016
This Week In Securities Litigation (Week ending February 5, 2016)
by Tom Gorman

This Week In Securities Litigation (Week ending February 5, 2016)

The Commission filed another group of settled actions under its initiative regarding municipal bond underwriters. This time a group of fourteen actions were filed. Each centered largely on claims that the underwriter failed to properly assess past performance by the issuer regarding required updates to the offering materials. Each was settled with a cease and desist order tied to Securities Act Section 17(a)(2) and a penalty of up to $500,000 depending on the facts of the particular case.

The agency also filed three settled actions centered on the operation of dark pools. Central to each case was the claim that subscribers would be protected from aggressive trading when in fact the safeguards were at best inconsistent. The SEC also filed three settled FCPA actions and a proceeding based on AML violations by a broker.

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 1 civil injunctive case and 20 administrative proceeding, excluding 12j and tag-along proceedings.

AML: In the Matter of E.S. Financial Services, Inc., Adm. Proc. File No. 3-17099 (February 4, 2016) is a proceeding which names the broker dealer as a Respondent. The firm is a subsidiary of a Portuguese bank. Over a ten year period prior to 2013 the broker-dealer maintained an account for a Central American bank which initially was an affiliate. While the account was ostensibly for the bank only, in fact 13 entities which had accounts at the bank had subaccounts. The accounts were beneficially owned by 23 non-U.S. citizens who interfaced directly with the registered representatives at the broker. The broker failed to maintain the proper records as required by the PATRIOT Act. The Order alleges violations of Exchange Act Section 17(a). The account was used to effectuate about $23 million in securities transactions. To resolve the proceeding Respondent agreed to implement a series of undertakings which include the retention of a consultant and consented to the entry of a cease and desist order based on the Section cited in the Order and to a censure. The broker will also pay a penalty of $1 million.

Offering fraud: SEC v. American Growth Funding II, LLC, Civil Action No. 16-cv-00828(S.D.N.Y. Filed February 3, 2016) is an action which names as defendants American Growth; Portfolio Advisors Alliance, Inc., a registered broker dealer; Ralph Johnson, the managing member of the AGF entities; Howard Allen III, a registered representative and an indirect owner of PAA; and Kerri Wasserman, President of PAA. The complaint alleges that American Growth, which supposedly provides loans to businesses, raised about $8.6 million from 85 investors through the sale of its units under a private placement memo from early 2011 through the end of 2013 based on a series of misrepresentations. During the period the primary asset of American Growth was a loan from an affiliate that had greatly deteriorated in value and for which the likelihood of repayment was imperiled. Nevertheless, investors were promised 12% returns. The complaint alleges violations of Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). The case is pending. See Lit. Rel. No. 23459 (February 3, 2016).

Municipal bonds: In the Matter of Barclays Capital Inc., Adm. Proc. File No. 3-17084 (February 2, 2016). Respondent is a registered broker-dealer, investment adviser and municipal advisor. It acted as either a senior or sole underwriter in a number of municipal securities offerings. In the offerings involved here Respondent essentially represented that the issuer had not failed to comply in all material respects with any prior continuing disclosure obligations. In fact that representation was incorrect. The Order alleged violations of Securities Act Section 17(a)(2). To resolve the proceeding Respondent, whose cooperation was considered by the SEC, agreed to implement a series of undertakings. Those included the retention of an Independent Consultant to review the firm's policies and procedures regarding municipal securities underwriting due diligence. Essentially, Respondent will adopt the recommendations of the consultant. The firm also consented to the entry of a cease and desist order based on the Section cited in the Order and will pay a penalty of $500,000. This is one of 14 actions filed this week by the Commission under its Initiative for municipal underwriters. To date 72 underwriters have self-reported under the program.

Insider trading; SEC v. Dubovoy, Civil Action No. 2:15-cv-06076 (D.N.J.) is a previously filed action which initially named as defendants 32 persons and entities (later amended to 34) alleged to have been part of an international hacking-insider trading ring which included Concorde Bermuda Ltd. The complaint alleged that the defendants used press releases obtained by hacking news agencies to trade. Concorde is alleged to have made about $3.6 million. The SEC entered into a settlement with the entity, subject to court approval. Concord consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The firm will also pay $4.2 million in disgorgement. See Lit. Rel. No. 23458 (February 2, 2016).

Pyramid scheme: SEC v. eAdGear, Inc., Civil Action No. 14-cv-04294 (N.D. Cal.) is a previously filed action which named as defendants eAdGear Holdings Limited, eAdGear, Inc., Charles Wang, Francis Yuen and Quian Zhang. The complaint alleged an international pyramid scheme which raised over $129 million from investors. The defendants resolved the matter. Each defendant consented to the entry of a permanent injunction based on Securities Act Sections 5(a), 5(c) and 17(a) as well as Exchange Act Section 10(b). In addition, the two companies will pay disgorgement of $21 million, prejudgment interest and a penalty of $1 million; Messrs. Wang and Zhang will pay disgorgement of $2,019,000 and prejudgment interest while Mr. Zhang will pay a penalty of $200,000; Messrs. Yuen and Chan will pay disgorgement of $1,571,000 and prejudgment interest and Messrs. Wang, Yuen and Zhang will be barred from serving as an officer or director and are enjoined from participating in the issuance, offer or sale of any securities from any issuer under the control of anyone in this action. See Lit. Rel. No. 23457 (February 1, 2016).

Dark pools: In the Matter of Barclays Capital Inc., Adm. Proc. File No. 3-17077 (January 31, 2016). Barclays Capital Inc. is a registered broker-dealer. Since 2008 the firm has operated LX, an ATS that operates under Regulation ATS. The proceeding focuses largely on protections subscribers were told the venue provided from aggressive traders but which in fact did not work as represented. Key to those protections was LX product Liquidity Profiling. Available only to subscribers, it was touted as a protector from predatory trading. In fact the tools claimed to have been regularly used by LX to protect subscribers were not. Liquidity Profiling also evaluated the manner in which venue subscribers traded, according to Barclays, ranking them by how aggressive they were so subscribers could block trading with those assigned to certain categories. What subscribers were not told was that Barclays used overrides to move certain subscribers from more aggressive to less aggressive categories. That resulted in some subscribers interacting with those in the most aggressive categories. Finally, LX represented that it had direct feeds from major exchanges to calculate NBBO. In fact it did not have one from the NYSE. The Order alleged violations of: Securities Act Section 17(a)(2), Exchange Act Section 15(c)(3) and the related rules and Rules 301(b)(2) and 301(b)(10) of Regulation ATS. As part of the resolution of the proceeding, the firm agreed to implement a series of undertakings regarding the recommendations of the third-party consultant and its procedures and controls. Barclays also consented to the entry of a cease and desist order, based on admitting the facts in the Order and that the firm violated the securities laws, and on each of the Sections cited in the Order. The firm will pay a $35 million penalty.

Dark pools: In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-17079 (January 31, 2016). Credit Suisse Securities is a registered broker dealer and investment adviser. It operated an ATS and ECN known as Light Pool. The proceeding centered on a product called "Alpha Formula/Scorecard." Effectively this was another system that was designed to identify "opportunistic" traders. In fact the product was not implemented when Light Pool began trading in NMS stocks in June 2011 and the representations regarding it were not accurate. The venue also "backed away" from orders. The Order alleged violations of Securities Act Section 17(a)(2), Rule 301(b)(2) of Regulations ATS, and Rule 602(b) of Regulation NMS. To resolve this proceeding Respondent consented to the entry of a cease and desist order based on the Section and rules cited in the Order, to a censure and to pay a penalty of $10 million.

Dark pools: In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-17078 (January 31, 2016). This proceeding centered on an ATS operated as a dark pool that was a private execution venue, Crossfinder. For approximately a two year period Crossfinder accepted and ranked orders in increments smaller than one-cent – it accepted and prioritized sub-penny orders. This violated Rule 612 of Regulation NMS. Crossfinder also made misrepresentations regarding a proprietary methodology called "alpha scoring" that placed order flow from subscribers into various categories and was intended to address concerns regarding high frequency trades. Confidential subscriber information also was not adequately protected and the venue unreasonably limited several functionalities in an unfair or discriminatory manner. The Order alleged violations of Securities Act Section 17(a)(2), Rule 301(b)(2), Rule 301(b)(5)(ii)(B), Rule 301(b)(5)(ii)(D) and Rule 301(b)(10) of Regulation ATS, and Rule 612 of Regulation NMS which prohibits sub-penny pricing. To resolve the proceeding Respondent consented to the entry of a cease and desist order based on Sections cited in the Order. The firm also agreed to pay disgorgement of $20,675, 510.52, prejudgment interest and a penalty of $20 million.


In the Matter of SciClone Pharmaceuticals, Inc., Adm. Proc. File No. 3-17101 (February 4, 2016) is a proceeding which names the pharmaceutical firm as a Respondent. The Order alleges that over a five year period beginning in 2007 the firm, while conducting business in China, repeatedly gave money, gifts and other things of value to foreign officials, including healthcare professionals employed at state-owned hospitals, to secure business. The transactions were incorrectly recorded in the books and records of the firm as expenses. SciClose also failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anti-corruption compliance program. The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). The company undertook remedial efforts, improving its systems. It also agreed to undertakings which include reporting to the staff over a three year period. To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The company will also pay disgorgement of $9,426,000, and prejudgment interest as well as a civil penalty of $2.5 million.

In the Matter of Ignacio Cueto Plaza, Adm. Proc. File No. 3-17100 (February 4, 2016) is a proceeding which names Mr. Cueto, the CEO of LAN Airlines S.A., as a Respondent. In 2006 and 2007 Mr. Cueto authorized the payment of $1.15 million to a third party consultant in Argentina in connection with an attempt by the airlines to settle a labor dispute. Mr. Cueto understood there was some possibility that a portion of the funds would be passed to officials in Argentina. The payments were improperly booked. Mr. Cueto is now subject to enhanced compliance procedures since the firm was acquired. He also takes anti-corruption training. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, he was directed to pay a penalty of $75,000.

In the Matter of SAP SE, Adm. Proc. File No. 3-17080 (February 1, 2016). SAP SE is a European Union corporation based in Waldorf, Germany whose ADSs are registered with the SEC and traded on the NYSE. The firm operates through 272 subsidiaries, selling software licenses. It serves customers in 188 countries using 11,500 partners. From 2008 through early 2014 Vincente Garcia served as Vice-President of Global and Strategic Accounts. He was responsible for sales in Latin America. Technically Mr. Garcia was employed by a subsidiary but was frequently presented as an SAP employee. This tended to blur his reporting lines. Mr. Garcia learned through a business associate in 2009 that there were opportunities for the sale of software to the government of Panama. The associate, a lobbyist in Panama, claimed to have an existing relationship with the newly elected government. To secure the business bribes would have to be paid to three government officials.

There was a potential for business at the Panamanian social security agency. Mr. Garcia and others finalized an arrangement with the social security agency through a local partner using their bribery plan. That plan was implemented by causing SAP to sell the software to the local partner at an 82% discount. The partner could then mark it up and pay the bribes from the increased price. Mr. Garcia was able to arrange for the discount through his knowledge of how the firm provided them. Thus the social security agency awarded a contract to the local partner who had purchased software at an 82% discount, marked it up in the sale to the agency and used the profits to create a slush fund to pay bribes. The contract was awarded in January 2011 to the local partner on a bid of $14.5 million for software he had acquired for $2.1 million. Between June 2012 and December 2013 the Panamanian government awarded three additional contracts that included SAP products valued at about $13.5 million. The contracts were the result of the same bribe scheme. The contracts generated revenues of about $3.7 million for SAP.

The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceeding the firm consented to the entry of a cease and desist order based on the Sections cited in the Order. It also agreed to pay disgorgement of $3.7 million and prejudgment interest. A penalty was not imposed based on extensive cooperation, although the firm did not self-report.


Insider trading: The Australian Securities Investment Commission charged Steven Noske with insider trading in connection with the purchase of 750,000 shares of WestSide Corporation Ltd. shares through a trading account of another in February 2012. As a result he had a notional profit of $182, 430.

Insider trading: The ASIC initiated an action against Hochtief Aktiengesellschaft, alleging insider trading. Specifically, the firm is alleged to have acquired a block of Leighton Holdings Limited on January 29, 2014 while in possession of inside information about the 2013 financial results of the firm which had yet to be released.

Hong Kong

Take-overs: The Securities and Futures Commission censured Goldman Sachs (Asia) LLC for breaches of the Code on Takeovers and Mergers while acting as a financial advisor to Wing Hang Bank in relation to a voluntary general offer for the bank. During the time Goldman Sachs executed 111 trades in the securities of the bank without making the requisite dealing disclosures. No prior consent was obtained for 26 of the trades. The firm also failed to comply with the restrictions on issue and distribution of research reports regarding the bank.

February 5, 2016
More Congressional Action Coming for the Securities Laws?
by Broc Romanek

The ink is barely dry from the FAST Act – which had been tucked into a transportation bill and the mashup of numerous bills that had been floated in the US House of Representatives last year – than the House passes three more bills that would changes the federal securities laws, as noted by Andrew Kuettel in this blog. Also see this MoFo blog – and this other blog by Andrew Kuettel...

By the way, Mike Gettelman has been posting a bunch of notes from the recent San Diego conference in his blog – including some analysis of the FAST Act...

Yahoo! Compensation Litigation: Parallels to Disney Case

Here's a blog by Stinson Leonard Street’s Steve Quinlivan: The Delaware Court of Chancery has issued an opinion on a Section 220 demand made against Yahoo! No complaint has yet been filed, and although Vice Chancellor Laster speculates on some inferences that can be drawn, no one has proven anyone has done anything wrong.

The allegations in the case have eerie parallels to the Disney compensation litigation. The Vice Chancellor notes:

Mark Twain is often credited (perhaps erroneously) with observing that history may not repeat itself, but it often rhymes. The credible basis for concern about wrongdoing at Yahoo evokes the Disney case, with the details updated for a twenty-first century, New Economy company. Like the current scenario, Disney involved a CEO hiring a number-two executive for munificent compensation, poor performance by the number-two executive, and a no-fault termination after approximately a year on the job that conferred dynastic wealth on the executive under circumstances where a for-cause termination could have been justified. Certainly there are factual distinctions, but the assonance is there.

While noting the decision does not hold the Yahoo directors breached their fiduciary duties, the Vice Chancellor observed:

Based on the current record, the Yahoo directors were more involved in the hiring than the Disney directors were, but the facts still bear a close resemblance to the allegations in Disney III. The directors' involvement appears to have been tangential and episodic, and they seem to have accepted Mayer's statements uncritically. A board cannot mindlessly swallow information, particularly in the area of executive compensation: -While there may be instances in which a board may act with deference to corporate officers' judgments, executive compensation is not one of those instances. The board must exercise its own business judgment in approving an executive compensation transaction.‖ Haywood v. Ambase Corp., 2005 WL 2130614, at *6 (Del. Ch. Aug. 22, 2005). Directors who choose not to ask questions take the risk that they may have to provide explanations later, or at least produce explanatory books and records as part of a Section 220 investigation.

Transcript: "Pat McGurn's Forecast for 2016 Proxy Season"

We have posted the transcript for the webcast: "Pat McGurn's Forecast for 2016 Proxy Season."

– Broc Romanek

February 5, 2016
SEC Moves Against Alleged Pyramid Scheme in Colorado
by Austin Chambers

In Securities and Exchange Commission v. Johnson  No. 1:15-cv-00299-REB (D. Colo. Feb. 12, 2015), the Securities and Exchange Commission (“SEC”) alleged Kristine Johnson, Troy Barnes, and Work With Troy Barnes, Inc. (collectively, the “Defendants”) operated a fraudulent Ponzi scheme and misappropriated investor funds. Achieve International, LLC (“AI”) was named as a Relief Defendant.

According to the allegations in the SEC’s complaint (at least some based “on information and belief”), Johnson or Barnes incorporated Work With Troy Barnes, Inc. (“WWTB”) in March 2014. WWTB was later rebranded as The Achieve Community (“TAC”), described in the complaint as “trade name of d/b/a [doing business as] for WWTB.”  TAC allegedly offered and sold “positions” to potential investors at $50 each.  Investors were “promised” a pay-out of $400, or a 700% return.  TAC claimed that it was “able to pay out these investment returns as a result of a “triple algorithm” and “matrix” that Johnson and Barnes created.”

The SEC alleged that the Defendants operated a Ponzi scheme.  As the complaint stated:

Contrary to TAC’s explicit representation, TAC is a pure Ponzi and pyramid scheme. Earlier investors are paid their returns from the funds of newer investors. Similarly, investors must wait to progress through the “matrix” before their returns are paid to them.

The SEC also alleged that “Defendants have misappropriated investor funds for Johnson and Barnes’ own personal use.” 

The Complaint alleged violations of Section 17(a) of the Securities Act of 1933 and Rule 10b-5 of the Securities Exchange Act of 1934.  Achieve International has been named as a relief defendant “for the purpose of recovering ill-gotten gains from the scheme in its accounts.”

The primary materials for this post can be found on the DU Corporate Governance website.

View today's posts

2/5/2016 posts

CLS Blue Sky Blog: PwC discusses Ten Key Points from Basel's Fundamental Review of the Trading Book
AG Deal Diary: Enforcement Action Possible Against Those Who Rely on Safe Harbor to Transfer Information from the EU to the United States
HLS Forum on Corporate Governance and Financial Regulation: 2015 Year-End Activism Update
Delaware Corporate & Commercial Litigation Blog: Chancery Determines that Electronically Stored Information and Personal Emails of Directors Must be Provided to Stockholders
SEC Actions Blog: This Week In Securities Litigation (Week ending February 5, 2016) Blog: More Congressional Action Coming for the Securities Laws?
Race to the Bottom: SEC Moves Against Alleged Pyramid Scheme in Colorado

Blog posts are subject to copyrights held by the authors and are republished here with permission. Views expressed are those of the authors alone. Infringement Notification.