Securities Industry Commentator by Bill Singer Esq

SEC Issues Record $114 Million Whistleblower Award (SEC Release)

When the Nail Fails -- Remarks before the National Society of Compliance Professionals by SEC Commissioner Hester Peirce

Goldman Sachs Charged in Foreign Bribery Case and Agrees to Pay Over $2.9 Billion (DOJ Release)

SEC Charges Goldman Sachs With FCPA Violations (SEC Release)

South Carolina Man Admits Running $900,000 Foreign Currency Ponzi Scheme (DOJ Release)

Head Of Merchant Bank Pleads Guilty In Connection With Multimillion-Dollar Securities Fraud Scheme (DOJ Release)

Maryland Woman Sentenced to Federal Prison After Obstructing Justice in Cyber Fraud Investigation (DOJ Release)

[In]Securities Guest Blog: A Different Kind of Truth By Aegis Frumento Esq (BrokeAndBroker.com Blog)

"Today's milestone award is a testament to the Commission's commitment to award whistleblowers who provide the agency with high-quality information," said SEC Chairman Jay Clayton. "Whistleblowers make important contributions to the enforcement of securities laws and we are committed to getting more money to whistleblowers as quickly and as efficiently as possible."

"The actions of the whistleblower awarded today were extraordinary," added Jane Norberg, Chief of the SEC's Office of the Whistleblower.  "After repeatedly reporting concerns internally, and despite personal and professional hardships, the whistleblower alerted the SEC and the other agency of the wrongdoing and provided substantial, ongoing assistance that proved critical to the success of the actions."

[W]e positively assessed the following facts: (1) Claimant 1's information was significant in that it caused Commission staff and Other Agency staff to open investigations and alerted the staff to wrongdoing Redacted (2) there is a close nexus between Claimant 1's information and the charges brought in the Covered Action concerning Redacted (3) Claimant 1 provided substantial and ongoing assistance to the Redacted Office staff throughout the investigation, which saved a considerable amount of time and resources; (4) Claimant 1 suffered serious personal and professional hardships as a result of Claimant 1's whistleblowing activities; and (5) Claimant 1 internally reported the concerns. The determination also reflects that a significant portion of the conduct charged in the Commission and Related Actions related to  Redacted about which Claimant 1 provided limiter information. 

Just because the Commission can do something under our rules does not mean that we should do it.  I cannot speak to this group without noting that your executive director made a very similar point five years ago in a letter to the Enforcement Director. Indeed, charging CCOs based on mere negligence could be harmful to our efforts to foster compliance because it dissuades people from taking jobs in compliance and can encourage dishonest efforts to "cover up" failings rather than openly correcting them.  As the National Society for Compliance Professional's code of ethics makes clear, compliance personnel play an important role in:

encourag[ing] their firms to create and implement appropriate systems of supervision; assist[ing] their firms in the development and documenting of appropriate policies and procedures; participat[ing] in appropriate testing and monitoring of the systems of compliance; assist[ing] their firms in identifying and developing appropriate mechanisms for identifying, reporting, and responding to compliance issues; and striv[ing] to enhance the systems and culture of compliance at their firms.

Compliance personnel are vital to a firm's compliance efforts, but an overly-aggressive approach to charging CCOs when something goes wrong shifts responsibility for compliance from the firm to the CCO.  In his 2015 speech, the Enforcement Director noted that "it is the business"-not the compliance officers-"that is primarily responsible for compliance with the law." I agree. 

Sometimes, however, our enforcement actions send a different message.  Compliance officers-precisely because their roles entail encouraging, assisting in, participating in, and striving for better compliance at their firms-may find themselves second-guessed when there is a compliance failure.  For example, in an enforcement action several months before the Enforcement Director's speech in 2015, the Commission concluded that because an adviser's CCO "was responsible for the design and implementation of [the adviser's] written policies and procedures" and "knew and approved of numerous outside activities" by the advisor's employees, but nonetheless "did not recommend written policies and procedures to assess and monitor those outside activities and to disclose conflicts of interest," the CCO "caused [the adviser's] failure to adopt and implement these policies and procedures." In response to that action and another similar one, then Commissioner Gallagher warned that "[a]ctions like these are undoubtedly sending a troubling message that CCOs should not take ownership of their firm's compliance policies and procedures, lest they be held accountable for conduct that, under Rule 206(4)-7, is the responsibility of the adviser itself."

According to Goldman's admissions and court documents, between approximately 2009 and 2014, Goldman conspired with others to violate the FCPA by engaging in a scheme to pay more than $1.6 billion in bribes, directly and indirectly, to foreign officials in Malaysia and Abu Dhabi in order to obtain and retain business for Goldman from 1MDB, a Malaysian state-owned and state-controlled fund created to pursue investment and development projects for the economic benefit of Malaysia and its people.  Specifically, the Company admitted to engaging in the bribery scheme through certain of its employees and agents, including Leissner, Ng, and a former executive who was a participating managing director and held leadership positions in Asia (Employee 1), in exchange for lucrative business and other advantages and opportunities.  These included, among other things, securing Goldman's role as an advisor on energy acquisitions, as underwriter on three lucrative bond deals with a total value of $6.5 billion, and a potential role in a highly anticipated and even more lucrative initial public offering for 1MDB's energy assets.  As Goldman admitted - and as alleged in the indictment pending in the Eastern District of New York against Ng and Low - in furtherance of the scheme, Leissner, Ng, Employee 1, and others conspired to pay bribes to numerous foreign officials, including high-ranking officials in the Malaysian government, 1MDB, Abu Dhabi's state-owned and state-controlled sovereign wealth fund, International Petroleum Investment Company (IPIC), and Abu Dhabi's state-owned and state-controlled joint stock company, Aabar Investments PJS (Aabar). 

Goldman admitted today that, in order to effectuate the scheme, Leissner, Ng, Employee 1, and others conspired with Low Taek Jho, aka Jho Low, to promise and pay over $1.6 billion in bribes to Malaysian, 1MDB, IPIC, and Aabar officials.  The co-conspirators allegedly paid these bribes using more than $2.7 billion in funds that Low, Leissner, and other members of the conspiracy diverted and misappropriated from the bond offerings underwritten by Goldman.  Leissner, Ng and Low also retained a portion of the misappropriated funds for themselves and other co-conspirators.  Goldman admitted that, through Leissner, Ng, Employee 1 and others, the bank used Low's connections to advance and further the bribery scheme, ultimately ensuring that 1MDB awarded Goldman a role on three bond transactions between 2012 and 2013, known internally at Goldman as "Project Magnolia," "Project Maximus," and "Project Catalyze." 

Goldman also admitted that, although employees serving as part of Goldman's control functions knew that any transaction involving Low posed a significant risk, and although they were on notice that Low was involved in the transactions, they did not take reasonable steps to ensure that Low was not involved.  Goldman further admitted that there were significant red flags raised during the due diligence process and afterward - including but not limited to Low's involvement - that either were ignored or only nominally addressed so that the transactions would be approved and Goldman could continue to do business with 1MDB. As a result of the scheme, Goldman received approximately $606 million in fees and revenue, and increased its stature and presence in Southeast Asia.

Under the terms of the agreements, Goldman will pay a criminal penalty and disgorgement of over $2.9 billion.  Goldman also has reached separate parallel resolutions with foreign authorities in the United Kingdom, Singapore, Malaysia, and elsewhere, along with domestic authorities in the United States.  The department will credit over $1.6 billion in payments with respect to those resolutions.

The department reached this resolution with Goldman based on a number of factors, including the Company's failure to voluntarily disclose the conduct to the department; the nature and seriousness of the offense, which included the involvement of high-level employees within the Company's investment bank and others who ignored significant red flags; the involvement of various Goldman subsidiaries across the world; the amount of the bribes, which totaled over $1.6 billion; the number and high-level nature of the bribe recipients, which included at least 11 foreign officials, including high-ranking officials of the Malaysian government; and the significant amount of actual loss incurred by 1MDB as a result of the co-conspirators' conduct.  Goldman received partial credit for its cooperation with the department's investigation, but did not receive full credit for cooperation because it significantly delayed producing relevant evidence, including recorded phone calls in which the Company's bankers, executives, and control function personnel discussed allegations of bribery and misconduct relating to the conduct in the statement of facts.  Accordingly, the total criminal penalty reflects a 10 percent reduction off the bottom of the applicable U.S. sentencing guidelines fine range. 

Low has also been indicted for conspiracy to commit money laundering and violate the FCPA, along with Ng, E.D.N.Y. Docket No. 18-CR-538 (MKB).  Low remains a fugitive.  The charges in the indictment as to Low and Ng are merely allegations, and those defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

US v. Goldman Sachs Group, Inc. (20-CR-00437)

Information https://www.justice.gov/criminal-fraud/file/1329911/download

Deferred Prosecution Agreement https://www.justice.gov/criminal-fraud/file/1329926/download

US v. Goldman Sachs (Malaysia) Sdn. Bhd. (20-CR-00438)

Information https://www.justice.gov/criminal-fraud/file/1329901/download

Deferred Prosecution Agreement https://www.justice.gov/criminal-fraud/file/1329901/download

[B]eginning in 2012, former senior employees of Goldman Sachs used a third-party intermediary to bribe high-ranking government officials in Malaysia and the Emirate of Abu Dhabi.  The order finds that these bribes enabled Goldman Sachs to obtain lucrative business from 1MDB, a Malaysian government-owned investment fund, including underwriting approximately $6.5 billion in bond offerings. 

Lanzana fraudulently solicited approximately $900,000 from at least 20 customers to invest in forex pools beginning as early as 2013. Lanzana misrepresented to prospective customers that he was a successful forex trader when, in fact, he was not. To keep his customers' trust, Lanzana, among other things, (1) sent false account statements to his customers, (2) posted false monthly account statements to his companies' websites showing balances and trading activity for forex trading accounts that did not exist, and (3) generated and sent false tax documents to customers reporting earnings that did not exist. Lanzana misappropriated approximately $350,000 in customer funds, using some to repay earlier investors in the manner of a Ponzi scheme, and to pay for his personal expenses, including purchases on Amazon.com, payments to a luxury car dealer and a jewelry retailer, and golf expenses. 

CRAIG ZABALA was the chairman, CEO, and president of various affiliated and intertwined purported financial services companies:  Holdings, Concorde Group, Inc. ("Group"), Blackhawk Capital Group BDC, Inc. ("Blackhawk"), DBL Holdings, LLC, d/b/a "Drexel Burnham Lambert" ("DBL"), Concorde Investment Managers, LLC ("CIM"), and Concorde Europe, Ltd. ("Concorde Europe").  In or about August 2019, FINRA barred ZABALA from the broker-dealer industry, including because of his failure to cooperate with a FINRA investigation.

Holdings was a Delaware corporation formed in or about 2015, with an office in Jersey City, New Jersey, and a mailing address in New York, New York.  Holdings purported to provide financial services, including merchant banking, investment banking, asset management, and securities brokerage services, to entrepreneurs, investors, and businesses in the middle market, meaning small to mid-sized companies with revenue and market capitalizations of less than $1 billion, in North America, Europe, and Asia.  Holdings' purported affiliates included Group, DBL, Blackhawk, CIM, and Concorde Europe.  ZABALA was a majority owner of Holdings.

Group was a Delaware corporation formed in or about 1995, based in New York, New York, that purported to provide the same types of financial services as Holdings.  Group's purported affiliates included DBL, Blackhawk, CIM, and Concorde Europe.  ZABALA was a majority owner of Group.  Between in or about 2001 and in or about 2014, Group purportedly raised approximately $18 million from investors.

From at least in or about 2015 through in or about 2020, ZABALA and others perpetrated a scheme to defraud at least approximately 17 investors out of at least approximately $4.38 million in Holdings notes, warrants, and equity, almost all of whom invested in a private offering by Holdings of $25 million in senior secured notes with attached warrants paying 13 percent interest (the "Holdings Offering"). 

ZABALA and others falsely represented that the proceeds from the offerings would be used to grow Holdings' purported business by investing in and buying other financial services companies.  In truth and in fact, and as ZABALA well knew, Holdings did not make any investments in or buy other companies.

ZABALA and others falsely represented to Holdings investors that Holdings had raised nearly $25 million in the Holdings Offering.  In truth and in fact, and as ZABALA well knew, Holdings only raised a few million dollars. 

ZABALA and others falsely represented to Holdings investors that the family office of a wealthy German family had invested millions of dollars in Holdings.  In truth and in fact, and as ZABALA well knew, this family office never invested in, and never committed to invest in, Holdings.

ZABALA and others falsely represented to Holdings Investors that Holdings would soon have an initial public offering ("IPO"), which would result in large profits to Holdings investors.  In truth and in fact, and as ZABALA well knew, Holdings was not close to an IPO.            

ZABALA converted at least approximately 70 percent of the approximately $4.38 million in Holdings investor funds in the form of cash withdrawals and other transfers to himself, payments to his girlfriend, payments of his personal credit card bills, and repayment of Group investors in a Ponzi-like fashion.

[I]n the underlying fraud, after the victim shipped tens of thousands of dollars' worth of its products to a customer in Amman, Jordan, the customer received a series of fraudulent e-mails directing it to send payment to an account at Wells Fargo Bank.  Relying on the messages and wiring instructions, the customer wired the requested funds to the account.  The Louisiana-based victim had not sent the e-mails, however, and unbeknownst to the customer, the wiring instructions were fraudulent.  The Export-Import Bank of the United States (EXIM Bank) had insured the underlying transaction, and the EXIM Bank's Office of Inspector General quickly began investigating the fraud.

The investigation eventually revealed that in July of 2016, after a series of transactions, the proceeds from the fraud were deposited into a Bank of America account that Sesay had opened in Maryland earlier that year.  In fact, between November 2015 and September 2016, across dozens of suspicious transactions, nearly $500,000 had passed through accounts maintained in the defendant's name.  Federal authorities contacted Sesay and made several attempts to secure truthful information from her about her knowledge of the scheme.  Instead, as Sesay has admitted, she knowingly obstructed the investigation, first by making numerous evasive and misleading statements in an interview with federal agents in January 2019, and then by providing false testimony before a federal grand jury in Baton Rouge in April 2019.  The defendant repeatedly minimized the extent of her relationship with one of the subjects of the investigation and provided false information intended to divert the federal investigation into the underlying cyber fraud.

• Securities Industry Commentator
• Bill Singer