Tag: Parallel Investigations

DOJ and CFTC Bring Actions Against Precious Metals Traders

Recently, the Department of Justice indicted three precious metals traders in the Northern District of Illinois, charging each them with violating the Racketeer Influenced and Corrupt Organization Act (“RICO”), committing wire and bank fraud, and conspiring to commit price manipulation, bank fraud, wire fraud, commodities fraud, and “spoofing.” Two of those traders were also charged with committing commodities fraud, spoofing, and attempted price manipulation and were named as defendants in a civil suit brought by the CFTC in the same court, alleging violations of the Commodity Exchange Act and CFTC Regulations.

Both the indictment and the civil complaint contend that over the course of approximately seven years, the defendants intentionally manipulated the price of precious metals futures contracts by “spoofing,” or “placing orders to buy or sell futures contracts with the intent to cancel those orders before execution.” Specifically, both the indictment and the CFTC complaint detailed numerous instances in which the defendants allegedly placed “genuine orders” to either buy or sell futures contracts that they intended to execute, some of which were “iceberg” orders placed without publically displaying their full size. According to the indictment and complaint, after such orders were placed, defendants then quickly placed one or more opposite orders, sometimes “layering [them] at different prices in rapid succession” in order to give the impression that demand for such contracts was rising or falling, depending on the nature of the trader’s genuine orders. Once genuine orders were fulfilled, defendants would allegedly cancel the opposite orders prior to execution. The DOJ and CFTC contend that such conduct allowed the defendants “to generate trading profits and avoid losses for themselves” and others, including their employer and its precious metals desk.

According to the indictment, which also relied upon electronic chat conversations between defendants and other co-conspirators (both named and unnamed) and the submission of allegedly false annual compliance certifications, these actions constituted RICO violations as well as fraud. Likewise, the civil complaint alleged that such actions violated the Commodity Exchange Act’s prohibition on spoofing, and seeks monetary penalties, injunctions, and trading and registration prohibitions.

Federal Prosecutor Faces Accusations that it Used the SEC to Collect Evidence for its Criminal Investigation

In a ruling handed down on Tuesday, a Southern District of New York judge ordered the U.S. Attorney’s Office for the Southern District of New York (“USAO”) to submit a full account of their communications with the SEC after defendant Jason Rhodes accused the USAO of using the SEC to develop its criminal case against him.

Rhodes was charged with four counts, including conspiracy to commit securities fraud and wire fraud, securities fraud, wire fraud, and investment advisor fraud, in what the government alleges was an elaborate $19.6 million scheme to defraud investors. Notably, the charges against Rhodes were brought almost two years after the government charged all other co-conspirators. During that time, the SEC initiated an investigation involving Rhodes.

In a motion filed back in March of this year, Rhodes argued that the USAO may have violated his due process rights by using the SEC civil process to further its criminal investigation against him. During the SEC’s investigation, it used its investigatory authority to obtain documents from Rhodes, including communications and data from his cellphone. These documents were then turned over to the USAO and the substance of certain of those documents was subsequently included in the criminal complaint against him. Rhodes asserted in his motion, as soon he was arrested, the SEC stopped investigating him.

Given that timeline, the court insisted the USAO submit an affidavit outlining its relationship with the SEC regarding its civil investigation and its criminal charges against Rhodes. After one AUSA submitted an affidavit, the court held that as of now, Rhodes had not shown the government acted in bad faith. The court went on to say, however, that the submitted affidavit “d[id] nothing to advance the ball.” While the AUSA insisted that he did not request the issuance of the SEC subpoena, the affidavit was silent regarding the involvement of others in the USAO. As a result, the court ordered that the USAO submit a new affidavit “detailing, with specificity, the nature and extent of any and all communications between the SEC and those involved in the criminal investigation of Rhodes.” Only then will the court determine whether the materials should be turned over to Rhodes.

The SEC and U.S. Attorney’s Office across the country often conduct parallel investigations and the SEC regularly shares the information it gathers with those offices. While there is nothing to prevent the government from conducting parallel investigations, the government must act “in good faith and with the proper procedures.” See United States v. Kordel, 397 U.S. 1, 6(1970). Indeed, the SEC warns in its “Form 1662” that it may share the information and documents produced pursuant to a subpoena (or voluntarily) to a host of other agencies, including, but not limited to, state and federal criminal authorities. It is, however, well-settled law at this point that the criminal authorities cannot direct the SEC’s investigation and that any action taken by the SEC, including subpoenas for documents, testimony and other evidence, must be supported by the SEC’s independent decision making and must be in furtherance of its investigation; not the criminal authority’s investigation. See, e.g., United States of America v. Stringer, 408 F. Supp. 2d 1083 (Dist. Or. 2006); United States of America v. Scrushy, 366 F. Supp. 2d 1134, 1140 (N.D. Ala. 2005.

11th Circuit Nixes CPA’s Claim That SEC Sanctions Preclude Criminal Prosecution

On February 3, 2017, the United States Court of Appeals for the Eleventh Circuit rejected an accountant’s argument that the imposition of both criminal charges and SEC sanctions on the basis of the same alleged conduct violated the Fifth Amendment’s Double Jeopardy Clause. This appellate court ruling illustrates that defendants in SEC investigations and enforcement proceedings must be mindful that the imposition of civil penalties, disgorgement, and permanent bars do not preclude the prospect of criminal prosecution.

Thomas D. Melvin (“Melvin”), a certified public accountant, agreed in April 2013 to pay the SEC a civil penalty of $108,930 and disgorgement of $68,826 to settle alleged violations of Sections 10(b) and 14(e) of the Securities and Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. According to the SEC, Melvin purportedly had disclosed confidential insider information that he received from a client that pertained to the pending sale of a publicly traded company. A Rule 102(e) administrative proceeding in September 2015 also permanently barred Melvin from practicing before the SEC as an accountant. Exchange Act. Rel. No. 75844.

The Department of Justice instituted a parallel criminal proceeding against Melvin that involved the same alleged wrongful activity. Melvin moved to dismiss the eventual indictment on the ground that the collective sanctions the SEC had levied upon him constitutionally precluded a criminal prosecution under the Double Jeopardy Clause. After a federal district court denied his motion to dismiss, Melvin pleaded guilty to six counts of securities fraud pursuant to a written plea agreement. He then appealed the district court’s denial of his motion to dismiss.

In United States v. Melvin, No. 16-12061 (11th Cir. Feb. 3, 2017), the Eleventh Circuit conducted two inquiries to determine whether the imposition of the civil penalty, disgorgement and professional debarment against Melvin were so punitive that they rose to the level of a criminal penalty. For the initial inquiry, the court found that Congress intended the sanctions imposed by the SEC to be a form of civil punishment because monetary penalties are expressly labeled as “civil penalties” and the legislative branch empowered the SEC to prohibit an individual from appearing or practicing before it.

As to the second inquiry, the circuit court examined seven “useful guideposts” articulated by the United States Supreme Court in Hudson v. United States, 118 S. Ct. 488, 493 (1997). These guideposts included whether:

  1. “the sanction involves an affirmative disability or restraint”;
  2. “it has historically been regarded as a punishment”;
  3. “it comes into play only on a finding of scienter”;
  4. “its operation will promote the traditional aims of punishment—retribution and deterrence”;
  5. “the behavior to which it applies is already a crime”;
  6. “an alternative purpose to which it may rationally be connected is assignable for it”; and
  7. “it appears excessive in relation to the alternative purpose assigned.”

Applying these guideposts, the Eleventh Circuit believed that the sanctions at issue “constitute no affirmative disability or restraint approaching imprisonment” and observed that “neither money penalties nor debarment have historically been viewed as punishment.” It also noted that “penalties for security fraud serve other important nonpunitive goals, such as encouraging investor confidence, increasing the efficiency of financial markets, and promoting the stability of the securities industry.” As such, the appellate court concluded that Melvin’s criminal prosecution did not constitute a violation of the Double Jeopardy Clause.

This ruling is the most recent cautionary reminder that, even in this era of headline-grabbing civil penalties that far exceed those the SEC sought and obtained just a few years ago, defendants should never lose sight that the resolution of SEC charges does not preclude the prospect of a parallel criminal proceeding. Indeed, any time the SEC’s prosecutorial theory is potentially fraud-based, defendants and their counsel must remain extremely cautious to the possible involvement of criminal authorities and develop their legal strategies accordingly.

The SEC’s Form 1662 underscores this point. This form, which is provided to all persons requested to supply information voluntarily to the SEC or directed to do so via subpoena, states:

It is the policy of the Commission … that the disposition of any such matter may not, expressly or impliedly, extend to any criminal charges that have been, or may be, brought against any such person or any recommendation with respect thereto. Accordingly, any person involved in an enforcement matter before the Commission who consents, or agrees to consent, to any judgment or order does so solely for the purpose of resolving the claims against him in that investigative, civil, or administrative matter and not for the purpose of resolving any criminal charges that have been, or might be, brought against him.

The disposition of an SEC proceeding also does not prevent the SEC from sharing any information it has accumulated with criminal authorities. Instead, as Form 1662 warns, the SEC “often makes its files available to other governmental agencies, particularly United States Attorneys and state prosecutors” and there is “a likelihood” that the SEC will provide this information confidentially to these agencies “where appropriate.”

©2024 Faegre Drinker Biddle & Reath LLP. All Rights Reserved. Attorney Advertising.
Privacy Policy