Securities Industry Commentator by Bill Singer

February 21, 2018

Big Island Capital Fraudster Sentenced To 110 Months In Prison For Million Dollar Ponzi Scheme  (DOJ Press Release)
From around December 2014 until May 2017, Jeremy Richard Lundin claimed to conduct "options trading" through his company Big Island Capital while soliciting  over $1 million from at least 51 investors. The raised funds were diverted from options trading and spent on Lundin's and his wife vacations, clothes, vehicles, and boat. Pursuant to his guilty plea to one count each of mail fraud and money laundering in the United States District Court for the District of Minnesota, Lundin was sentenced to 110 months in prison, three years of supervised release, and ordered to pay $969,788.96 in restitution.

Daspin Death Star Battles SEC and a Lone ALJ Jedi Knight ( Blog)
Let it be known to all who here read these words that Jedi Knight Bill Singer took a knee in the galactic fight and surrendered. In doing so, Jedi Singer offers a nod of admiration to ALJ Grimes who, despite all reason, battles on as the Force awakens . . . or reawakens . . . or rises from a slumber to take a leak or whatever. I mean, just to be clear, I'm fed up with this whole Daspin saga and pretty much gave up following it in December 2015, which is over two years in Earth time or whatever it is in Star Wars time. Truly, my heart goes out to ALJ Grimes and if it's okay with the SEC, like, you know, I'd like to buy Grimes a few rounds of drinks and have a loooooong off-the-record conversation with him.

Securities Trader Indicted In Scheme That Netted Tens Of Millions Of Dollars In Illicit Profits (DOJ Press Release)
Joseph Taub was charged in a 13-count indictment filed in the United States District Court for the District of New Jersey. 
As set forth in part in the DOJ Press Release:

From 2014 to 2016, Taub and others conspired to manipulate securities prices of numerous public companies by coordinating trading in dozens of brokerage accounts that they secretly controlled. As part of the scheme, Taub and others engaged in a series of near simultaneous transactions in targeted securities that were designed to artificially influence the market price of the securities and induce other market participants to trade based on the false impression that there was real market interest.

Taub and others allegedly used "straw accounts" that were held in their names, the names of their family members, and the names of entities they controlled. Many of the accounts were opened in the names of individuals who neither controlled the accounts nor traded the securities held in the accounts. Taub funded many of these accounts and used the straw account holders to conceal the scheme from regulators and law enforcement.

Operator Of Bitcoin Investment Platform Charged With Perjury And Obstruction Of Justice / Jon E. Montroll Allegedly Lied Repeatedly to SEC Staff During Testimony to Conceal Substantial Customer Losses Due to a Software Exploit (DOJ Press Release)
Jon E. Montroll a/k/a "Ukyo" was named in a Complaint filed in the United States District Court for the Southern District of New York for his alleged giving of false sworn testimony and false documentation to the staff of the New York Regional Office of the Securities Exchange Commission. Montroll purportedly operated the online bitcoin services WeExchange Australia, Pty. Ltd. and, the former of which allegedly functioned as a bitcoin depository and currency exchange service; and the latter allegedly facilitated the purchase and trading of virtual shares of business entities listed on its platform.
READ the FULL TEXT Complaint.
As set forth in part in the DOJ Press Release:

During the summer of 2013, one or more individuals (the "Hackers") exploited a weakness in the BitFunder programming code to cause BitFunder to credit the Hackers with profits they did not, in fact, earn (the "Exploit").  As a result, the Hackers were able to wrongfully withdraw from WeExchange approximately 6,000 bitcoins, with the majority of those coins being wrongfully withdrawn between July 28, 2013, and July 31, 2013.  In today's value, the wrongfully withdrawn bitcoin were worth more than $60 million.  As a result of the Exploit, BitFunder and WeExchange lacked the bitcoins necessary to cover what MONTROLL owed to users.

In November 2013, MONTROLL provided sworn testimony to the SEC's New York Regional Office in connection with their investigation into the Exploit and BitFunder's activities. In that testimony, MONTROLL denied that the Exploit had been successful, testifying that, "When [the Hackers] went to withdraw, the system stopped them because the amount was obviously causing issues with the system."  MONTROLL later added that the software issue "was corrected immediately, whenever the system started having the problems, and I caught on to what was happening I'd say within a few hours."

MONTROLL also produced to the SEC a screenshot purportedly documenting, among other things, the total number of bitcoins available to BitFunder users in the WeExchange Wallet as of October 13, 2013 (the "Balance Statement").  The Balance Statement reflected "6,679.78 BTC" on hand as of that date.  In discussing the Balance Statement in his sworn testimony, MONTROLL explained that it represented "the collective pool of funds held for users on BitFunder. The collective pool of BTC held for users on BitFunder - users who transfer bitcoins to BitFunder, this is the total amount that's being held by BitFunder of those users."

Contemporaneous digital evidence, including chat logs and transaction data, revealed that the Balance Statement was a misleading fabrication.  Three days into the Exploit, MONTROLL had participated in an internet relay chat with another person ("Person-1") in which he sought help in tracking down "Stolen coins."  When that did not work, MONTROLL transferred some of his own bitcoin holdings into WeExchange to conceal the losses.  The Exploit, however, continued.  By the time of the Balance Statement, WeExchange actually held thousands of bitcoins less than MONTROLL had asserted through the false Balance Statement.

When confronted with that evidence during subsequent testimony, MONTROLL lied to SEC staff again.  While MONTROLL admitted that the Balance Statement was the product of his manual intervention in the WeExchange system, he claimed to have discovered the success of the Exploit only after the SEC had asked him about it during his first day of testimony and to have no knowledge of the chat with Person-1.

Securities and Exchange Commission Statement and Guidance on Public Company Cybersecurity Disclosures (SEC Release Nos. 33-10459; 34-82746)
The SEC published its interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents.
As set forth in part in the SEC Guidance:

Given the frequency, magnitude and cost of cybersecurity incidents, the Commission believes that it is critical that public companies take all required actions to inform investors about material cybersecurity risks and incidents in a timely fashion, including those companies that are subject to material cybersecurity risks but may not yet have been the target of a cyber-attack. Crucial to a public company's ability to make any required disclosure of cybersecurity risks and incidents in the appropriate timeframe are disclosure controls and procedures that provide an appropriate method of discerning the impact that such matters may have on the company and its business, financial condition, and results of operations, as well as a protocol to determine the potential materiality of such risks and incidents.8 In addition, the Commission believes that the development of effective disclosure controls and procedures is best achieved when a company's directors, officers, and other persons responsible for developing and overseeing such controls and procedures are informed about the cybersecurity risks and incidents that the company has faced or is likely to face

Supreme Court Narrows Definition of Whistleblower

Real Estate Investment Trust Digital Realty Trust, Inc. employed Paul Somers as a Vice President from 2010 to 2014.  Somers alleged that shortly after he reported suspected securities-laws violations by the company to its senior management, he was terminated. Somers did not report his suspicions to the Securities and Exchange Commission and did not file an administrative complaint within 180 days after his termination. Somer filed a federal lawsuit in the United States District Court for the Northern District of California alleging, inter alia, a claim of whistleblower retaliation under Dodd-Frank. Digital Realty moved to dismiss that claim, arguing that Somers did not meet the statutory definition of a "whistleblower." The District Court denied the motion in part upon its finding that Somers was not required to have reported his concerns to the Securities and Exchange Commission in order to be deemed a Dodd-Frank "whistleblower." A divided United States Court of Appeals for the Ninth Circuit affirmed.

On appeal to the United States Supreme Court, the "Question Presented" was

Whether the anti-retaliation provision for ''whistleblowers" in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 extends to individuals who have not reported alleged misconduct to the Securities and Exchange Commission and thus fall outside the Act's definition of a ''whistleblower."

Digital Realty Trust, Inc. v. Somers (Opinion, United States Supreme Court, No. 16-1276 / February 21, 2018) 

Ginsburg, J., delivered the Opinion of the Court; 
Roberts, C. J., And Kennedy, Breyer, Sotomayor, and Kagan, JJ., joined. 
Sotomayor, J., filed a Concurring Opinion, in which Breyer, J., joined; 
Thomas, J., filed an Opinion concurring in part and concurring in the Judgment in which Alito And Gorsuch, JJ., joined.    

As set forth in the "Syllabus" of the Opinion:  

Endeavoring to root out corporate fraud, Congress passed the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Both Acts shield whistleblowers from retaliation, but they differ in important respects. Sarbanes-Oxley applies to all "employees" who report misconduct to the Securities and Exchange Commission (SEC or Commission), any other federal agency, Congress, or an internal supervisor. 18 U. S. C. §1514A(a)(1). Dodd-Frank defines a "whistleblower" as "any individual who provides . . . information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission." 15 U. S. C. §78u- 6(a)(6). A whistleblower so defined is eligible for an award if original information provided to the SEC leads to a successful enforcement action. §78u-6(b)-(g). And he or she is protected from retaliation in three situations, see §78u-6(h)(1)(A)(i)-(iii), including for "making disclosures that are required or protected under" Sarbanes-Oxley or other specified laws, §78u-6(h)(1)(A)(iii). Sarbanes-Oxley's anti-retaliation provision contains an administrative-exhaustion requirement and a 180-day administrative complaint-filing deadline, see 18 U. S. C. §1514A(b)(1)(A), (2)(D), whereas Dodd-Frank permits a whistleblower to sue an employer directly in federal district court, with a default six-year limitation period, see §78u-6(h)(1)(B)(i), (iii)(I)(aa). 

SEC's regulations implementing the Dodd-Frank provision contain two discrete whistleblower definitions. For purposes of the award program, Rule 21F-2 requires a whistleblower to "provide the Commission with information" relating to possible securities-law violations. 17 CFR §240.21F-2(a)(1). For purposes of the antiretaliation protections, however, the Rule does not require SEC reporting. See §240.21F-2(b)(1)(i)-(ii). Respondent Paul Somers alleges that petitioner Digital Realty Trust, Inc. (Digital Realty) terminated his employment shortly after he reported to senior management suspected securities-law violations by the company. Somers filed suit, alleging, inter alia, a claim of whistleblower retaliation under Dodd-Frank. Digital Realty moved to dismiss that claim on the ground that Somers was not a whistleblower under §78u-6(h) because he did not alert the SEC prior to his termination. The District Court denied the motion, and the Ninth Circuit affirmed. The Court of Appeals concluded that §78u-6(h) does not necessitate recourse to the SEC prior to gaining "whistleblower" status, and it accorded deference to the SEC's regulation under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837. 

Held: Dodd-Frank's anti-retaliation provision does not extend to an individual, like Somers, who has not reported a violation of the securities laws to the SEC. Pp. 9-19. (a) A statute's explicit definition must be followed, even if it varies from a term's ordinary meaning. Burgess v. United States, 553 U. S. 124, 130. Section 78u-6(a) instructs that the statute's definition of "whistleblower" "shall apply" "[i]n this section," that is, throughout §78u-6. The Court must therefore interpret the term "whistleblower" in §78u-6(h), the anti-retaliation provision, in accordance with that definition. 

The whistleblower definition operates in conjunction with the three clauses of §78u-6(h)(1)(A) to spell out the provision's scope. The definition first describes who is eligible for protection-namely, a "whistleblower" who provides pertinent information "to the Commission." §78u-6(a)(6). The three clauses then describe what conduct, when engaged in by a "whistleblower," is shielded from employment discrimination. An individual who meets both measures may invoke Dodd-Frank's protections. But an individual who falls outside the protected category of "whistleblowers" is ineligible to seek redress under the statute, regardless of the conduct in which that individual engages. This reading is reinforced by another whistleblower protection provision in Dodd-Frank, see 12 U. S. C. §5567(b), which imposes no requirement that information be conveyed to a government agency. Pp. 9-11. 

(b) The Court's understanding is corroborated by Dodd-Frank's purpose and design. The core objective of Dodd-Frank's whistleblower program is to aid the Commission's enforcement efforts by "motivat[ing] people who know of securities law violations to tell the SEC." S. Rep. No. 111-176, p. 38 (emphasis added). To that end, Congress provided monetary awards to whistleblowers who furnish actionable information to the Commission. Congress also complemented the financial incentives for SEC reporting by heightening protection against retaliation. Pp. 11-12. 

(c) Somers and the Solicitor General contend that Dodd-Frank's "whistleblower" definition applies only to the statute's award program and not, as the definition plainly states, to its anti-retaliation provision. Their concerns do not support a departure from the statutory text. Pp. 12-18. 

(1) They claim that the Court's reading would vitiate the protections of clause (iii) for whistleblowers who make disclosures to persons and entities other than the SEC. See §78u-6(h)(1)(A)(iii). But the plain-text reading of the statute leaves the third clause with substantial meaning by protecting a whistleblower who reports misconduct both to the SEC and to another entity, but suffers retaliation because of the latter, non-SEC, disclosure. Pp. 13-15. 

(2) Nor would the Court's reading jettison protections for auditors, attorneys, and other employees who are required to report information within the company before making external disclosures. Such employees would be shielded as soon as they also provide relevant information to the Commission. And Congress may well have considered adequate the safeguards already afforded to such employees by Sarbanes-Oxley. Pp. 15-16. 

(3) Applying the "whistleblower" definition as written, Somers and the Solicitor General further protest, will allow "identical misconduct" to "go punished or not based on the happenstance of a separate report" to the SEC. Brief for Respondent 37-38. But it is understandable that the statute's retaliation protections, like its financial rewards, would be reserved for employees who have done what Dodd Frank seeks to achieve by reporting information about unlawful activity to the SEC. P. 16. 

(4) The Solicitor General observes that the statute contains no apparent requirement of a "temporal or topical connection between the violation reported to the Commission and the internal disclosure for which the employee suffers retaliation." Brief for United States as Amicus Curiae 25. The Court need not dwell on related hypotheticals, which veer far from the case at hand. Pp. 16-18. 

(5) Finally, the interpretation adopted here would not undermine clause (ii) of §78u-6(h)(1)(A), which prohibits retaliation against a whistleblower for "initiating, testifying in, or assisting in any investigation or . . . action of the Commission based upon" information conveyed to the SEC by a whistleblower in accordance with the statute. The statute delegates authority to the Commission to establish the "manner" in which a whistleblower may provide information to the SEC. §78u-6(a)(6). Nothing prevents the Commission from enumerating additional means of SEC reporting, including through testimony protected by clause (ii). P. 18. 

(d) Because "Congress has directly spoken to the precise question at issue," Chevron, 467 U. S., at 842, deference is not accorded to the contrary view advanced by the SEC in Rule 21F-2. Pp. 18-19.
850 F. 3d 1045, reversed and remanded.  

Also SEE: "SEC Takes on Federal Court In Dispute Over Whistleblowing Interpreatation" ( Blog, August 14, 2015):

Bill Singer's Comment

Under the circumstances, it is appropriate for me to clearly disclose my bias: I am an ardent advocate of whistleblowing, I have represented several whistleblowers and achieved an Award in excess of $1.5 million for one, and I oppose any retaliation against such informants. That being said, I am also highly critical of the SEC's Whistleblower process: "SEC Whistleblower Program Is A Black Hole Of Despair" ( BlogApril 9, 2015).

Strictly from the perspective of which organization makes the more compelling legal argument here -- the 5Cir or the SEC -- I must admit that the Court seems on firmer footing. Given the contentious history surrounding Dodd-Frank and the often testy battle over the SEC's drafting of the necessary rules to implement the Act, it is apparent that Rule 21F doesn't say what the SEC says it means.

Congress and the SEC engaged in some dubious wordsmithery when drafting the whistleblower laws and rules, and, as a result, the definition of a "whistleblower" (and, as a consequence, a whistleblower entitled to anti-retaliation protection) is narrowly proscribed to only those who properly file their original information with the SEC.

I've never been a big fan of this interpretation nonsense because it too often amounts to questionable attempts to rewrite laws and rules without actually going through the draft-to-approval route. Ultimately, I'm not sure that the SEC can simply wave a wand here, mumble a few words, and cast a spell that will satisfy any future federal courts to which this same issue is presented. In the absence of formally revising 21F, this issue may yet wind up enmeshed in further federal court appeals until, perhaps, it comes before the Supreme Court.