According to Goldman’s letter of acceptance to FINRA, it was charged with violating FINRA Rule 3110(a) and its predecessor, NASD Rule 3010(a) which requires banks to “establish and maintain a system” for the purpose of ensuring that each of its employees complies with the applicable securities laws and regulations. A violation of these rules is also a violation of FINRA Rule 2010, which requires members “to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business”.

According to FINRA, Goldman failed to include warrants, rights, units, and certain equity securities in nine surveillance reports designed to identify potentially manipulative proprietary and customer trading. “The firm failed to detect that nine surveillance reports for potentially manipulative trading excluded various securities types,” FINRA said. “By failing to have a reasonably designed supervisory system, Goldman violated NASD Rule 3010 and FINRA Rules 3110 and 2010.”

Goldman’s System Failures

As a result of the gaps in its surveillance reports, Goldman could not perform reasonable monitoring of trading activity for potential manipulation. The nine affected reports would have identified approximately 5,000 alerts for potentially manipulative trading activity in those securities from February 2009 through mid-April 2023. Goldman added the missing securities to the surveillance reports either in response to FINRA’s investigation or through the firm’s adoption of new surveillance reports. By April 2023, Goldman had finished remediating all surveillance reports.

Goldman’s supervisory system, including its written procedures, also did not require a review of its automated surveillance reports to ensure they included all relevant securities traded as part of the firm’s business. Because of this, the bank did not notice that nine surveillance reports, which could have indicated manipulative trading, overlooked warrants, rights, units, and specific equity securities.

Goldman Sachs encountered additional scrutiny from both FINRA and the U.S. Securities and Exchange Commission (SEC) due to lapses in reporting. In September, the firm settled with FINRA and the SEC, agreeing to pay a total of $12 million. The allegations centered on Goldman’s failure to fulfill its recordkeeping and reporting duties, as it provided inaccurate trading data in response to numerous regulatory requests.

The SEC and FINRA asserted that for approximately ten years, Goldman provided regulators with securities trading records containing inaccuracies or omissions related to millions of transactions involving the firm.  

Jacob Horowitz is a contributing editor at Compliance Chief 360°

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According to the SEC’s Feb. 14 cease-and-desist order, from at least July 2013 through January 2017, Roadrunner manipulated its financial reports to hit prior earnings guidance and analyst projections. Specifically, Roadrunner “hid incurred expenses by improperly deferring them and spreading them over multiple quarters to minimize their impact on Roadrunner’s net earnings, avoided writing down assets that were worthless and receivables that were uncollectable, and manipulated earnout liabilities related to Roadrunner’s acquisitions which, in practical effect, created an income ‘cushion’ that could be accessed in future quarters to offset expenses,” the SEC’s order stated.

In January 2018, following a yearlong internal investigation into the allegations, Roadrunner announced in a regulatory filing that it had materially misstated its financial results in its earnings releases, earnings calls, and quarterly and annual reports from at least the second quarter of 2013 through the third quarter of 2016.

Roadrunner’s investigation “identified accounting errors that impacted substantially all financial statement line items and disclosures and identified material weaknesses in its internal control over financial reporting,” the SEC order stated. Roadrunner overstated its net income by at least $66 million and had to re-evaluate its goodwill and other intangibles resulting in non-cash impairment charges of $373.7 million, the order added.

Roadrunner disclosed to the SEC that it had concealed the fraud from its independent directors, the audit committee, and independent auditor. It also shared with SEC staff the results of its internal investigation and provided information regarding its remedial efforts, the SEC said.

Roadrunner’s remedial efforts included terminating those responsible for the misconduct and enhancing its internal controls. “Among other things, pursuant to Roadrunner’s agreement with its current lender, Roadrunner has retained an outside consulting firm to provide additional financial oversight, with a focus on accounts receivable and payables,” the SEC order stated.

“Roadrunner also implemented a new compliance program that includes a whistleblower hotline, employee policy and training updates, a new bad debt review process, and monthly reconciliation of accounts receivable aging to the general ledger balance,” the SEC order continued.

In September 2019, the U.S. District Court for the Eastern District of Wisconsin approved a class-action settlement against Roadrunner, alleging securities law violations arising from Roadrunner’s restatements. Roadrunner paid $20 million, $16.4 million of which was distributed to shareholders.

CFO Found Guilty

In July, 2021, a federal jury convicted Roadrunner’s former chief financial officer, Peter Armbruster, for his role in the complex securities and accounting fraud. The former CFO was convicted on four counts of violating federal securities laws for his role in scheme. Armbruster was convicted of one count of securities fraud, one count of misleading the company’s auditors and two counts of falsifying Roadrunner’s books and records. He was found not guilty on 11 additional charges.

The Wisconsin jury found former controllers for Roadrunner’s truck loading division, Mark Wogsland and Brett Naggs, not guilty on all charges.

Without admitting or denying the findings, Roadrunner agreed to cease and desist from committing or causing any future violations of these provisions and to pay disgorgement of $7 million and prejudgment interest of $2.5 million, which the SEC deemed satisfied by the 2019 class-action settlement. 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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BVAL provides daily price valuations for fixed-income securities to financial services entities. “Since at least 2016, Bloomberg has disclosed to customers that its independent valuations of fixed income securities are derived by using proprietary algorithmic methodologies,” the SEC order stated.

From at least 2016 through October 2022, Bloomberg failed to disclose to its BVAL customers that “valuations for certain thinly traded fixed-income securities could, in certain circumstances, be largely driven by a single data input, such as a broker quote,” the SEC order continued. Bloomberg knew its customers—including mutual funds, money managers, and hedge funds— “may utilize BVAL prices to determine fund asset valuations, including for valuing fund investments in government, supranational, agency, and corporate bonds, municipal bonds and securitized products,” the SEC said.

“BVAL prices, which customers may use when valuing their fixed income positions and making offers and sales of securities, therefore can impact the price at which securities are or were offered or sold to investors and prospective investors or purchased from investors,” the SEC order continued. Thus, according to the order, “the omission that valuations could be largely driven by a single data input made the statements to customers regarding valuation methodologies materially misleading.”

In a statement, Osman Nawaz, Chief of the Division of Enforcement’s Complex Financial Instruments Unit, said, “Bloomberg has assumed a critical role as a pricing service to participants in the fixed-income markets, and it is incumbent on Bloomberg, as well as on other pricing services, to provide accurate information to their customers about their valuation processes. This matter underscores that we will hold service providers, such as Bloomberg, accountable for misrepresentations that impact investors.”

The SEC found that Bloomberg violated section 17(a)(2) of the Securities Act. Bloomberg did not admit or denying the findings.

In determining to accept the Offer, the SEC said it considered Bloomberg’s remedial acts, “including its voluntary retention of an outside expert to examine and make enhancements to its BVAL line of business.” Additionally, in October 2022, Bloomberg published additional disclosures “with respect to its valuation methodologies, including with respect to the incorporation of single broker quotes in its valuation methodologies,” the SEC said. 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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In a Nov. 1 quarterly filing, Leidos cryptically said “through its internal processes, the company discovered in late 2021 activities by its employees, third-party representatives and subcontractors, raising concerns related to a portion of our business that conducts international operations.”

Leidos added that it is conducting an internal investigation that is being “overseen by an independent committee of the board of directors, with the assistance of external legal counsel,” to determine whether the identified conduct may have violated the company’s Code of Conduct, the FCPA, and other applicable laws.

“The company has voluntarily self-reported this investigation to the Department of Justice and the Securities and Exchange Commission and is cooperating with both agencies,” Leidos said in regulatory filing.

Leidos further disclosed that it received a federal grand jury subpoena in September 2022 related to the criminal investigation by the U.S. Attorney’s Office for the Southern District of California, in conjunction with the DoJ’s Fraud Division.

“The subpoena requests documents relating to the conduct that is the subject of the company’s internal investigation,” Leidos said. “The company is in the process of responding to the subpoena.”

Antitrust Investigation

The subpoena that Leidos received in September 2022 was the second one received in a span of a month. In August 2022, the company received a federal grand jury subpoena in connection with a criminal investigation being conducted by the DoJ’s Antitrust Division.

“The subpoena requests that the company produce a broad range of documents related to three U.S. government procurements associated with the company’s Intelligence Group in 2021 and 2022,” the company said.

“We intend to fully cooperate with the investigation, and we are conducting our own internal investigation with the assistance of outside counsel,” Leidos added. “It is not possible at this time to determine whether we will incur, or to reasonably estimate the amount of, any fines, penalties, or further liabilities in connection with the investigation pursuant to which the subpoena was issued.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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“The discussions with U.S. and Danish authorities related to the Estonia matter are now at a stage where Danske Bank can reliably estimate the total financial impact of a potential coordinated resolution amounting to a total of DKK 15.5 billion,” said Danske Bank Chief Executive Officer Carsten Egeriis. In addition to booking a provision of DKK 1.5 billion in 2018, Danske Bank booked an additional provision of DKK 14 billion (US $1.9 billion) in the third quarter of 2022.

While the bank did not rehash details of its alleged criminal conduct in its Oct. 27 interim financial report for the first nine months of 2022, it is widely known to have engaged in one of the largest money laundering scandals in the world. It ranks third, after Wachovia Bank’s $390 billion money-laundering scandal and Standard Chartered’s $265 billion money-laundering scandal.

In Danske Bank’s case, the criminal activity occurred from February 2007 through January 2016, in which the bank allowed 200 billion euros (US$228 billion) of illicit funds to be laundered from several countries, including Russia, Azerbaijan, and Moldova, and Russia.

For several years, the bank at the group level believed it had robust AML procedures in place, until receiving a whistleblower report from the Estonia branch in 2013 and audit letters from group internal audit in 2014 concerning “insufficient and inadequate” processes in all three lines of defense, including compliance and internal audit.

These findings and more were revealed in a damning report published in 2018 by law firm Bruun & Hjejle, which had been commissioned by the bank to look into the allegations. That report described in detail the bank’s “major deficiencies in controls and governance that made it possible to use Danske Bank’s branch in Estonia for criminal activities such as money laundering.”

Among the findings described in the report, the whistleblower’s allegations were never properly investigated; there was insufficient knowledge of customers, their beneficial owners and controlling interests, and of sources of funds; screening of customers and payments had mainly been done manually and had been insufficient; and there had been lack of response to suspicious customers and transactions.”

As for the current state of the investigation, “Our dialogue with the authorities is ongoing,” said Egeriis, “and while there is still uncertainty that a resolution will be reached, we hope that a resolution will be concluded before the end of this year.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

PHOTO BY RICHARD LAWRENCE, USED UNDER CC BY-SA 4.0.

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The SEC had reopened its comment period in June concerning the proposed clawback rule, which the SEC initially proposed in 2015 to implement Section 954 of the Dodd-Frank Act. On Oct. 26, the SEC approved the final rule, with a divided 3 to 2 vote.

“I believe that these rules will strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors,” said SEC Chair Gary Gensler.

The final rule, which takes effect 60 days after publication in the Federal Register, requires U.S. securities exchanges to adopt listing standards requiring public companies to “develop and implement” policies that provide broadly for the recovery of “incentive-based compensation” received by current and former executive officers that was “erroneously awarded during the three years preceding the date such a restatement was required,” according to an SEC Fact Sheet.

The SEC defines “recoverable amount” in the Fact Sheet as “the amount of incentive-based compensation received in excess of the amount that otherwise would have been received had it been determined based on the restated financial measure.” The final rule also broadly requires public companies to claw back compensation based on stock price and total shareholder return.

The SEC indicated in the final rules that most companies’ compensation policies are not in compliance. Specifically, citing findings from several studies, the SEC said in its final rule that most companies “disclose having recovery policies that require compensation recovery from a narrower range of individuals than a recovery policy that would comply with the final rule requirements.”

Broad Scope

The SEC further stressed that the final rule would be triggered “regardless of issuer or executive misconduct or the role of the executive officer in preparing the financial statements.” That means an executive officer can have their compensation clawed back whether or not they engaged in the underlying securities law violation itself.

Speaking on a Sept. 9 panel at SEC Speaks, Sam Waldon, chief counsel of the SEC’s Division of Enforcement, cited as recent examples the SEC’s settlements with Granite Construction and Synchronoss Technologies, in which the CEOs of each company agreed to reimburse their respective companies more than $1 million each in bonuses and stock sale profits due to financial reporting fraud, even though they themselves were not charged with misconduct.

The final rule also extends beyond the requirements of the 2015 proposed rule, which would have triggered a claw back only in the event a material noncompliance resulted from an error that was “material to previously issued financial statements” (so-called “Big R” restatements).

Comparatively, the final rule explicitly also triggers clawbacks based on so-called “little r” restatements, where material noncompliance “results from an error that is material to the current period financial statements if left uncorrected or if the correction were recorded only in the current period,” the final rule states.

The final rule further establishes new reporting and disclosure obligations, requiring companies to disclose their compensation recovery policies, including providing the information in tagged data format. Companies that fail to develop and implement claw back policies in line with the SEC’s requirements could be delisted, the SEC said in the Fact Sheet.

Commissioner Peirce Dissents

In a dissenting statement, SEC Commissioner Hester Peirce said she opposed the final rule for it being too broad in several respects. Specifically, she argued the final rule should not have applies to “little r” restatements; that the final rule applies to too many employees, and that the scope of listed issuers and incentive-based compensation is too broad as well.

Commissioner Peirce added that the final rule’s “prescriptive” language may be more harmful to shareholders than intended. “Had we built flexibility into the rule, listing exchanges and companies could have developed sensible approaches to achieving the laudable goal of clawing back compensation paid on the basis of subsequently restated financial metrics,” Commissioner Peirce said. “The adopting release, however, fails to permit listing exchanges to craft workable listing standards and enforce them in a common-sense manner.”

“Likewise, the final rule does not permit company boards, guided by their fiduciary duty, to determine when clawing back compensation makes sense,” Commissioner Peirce added. “Such an approach would have served shareholders by ensuring that companies claw back erroneously awarded compensation when doing so yields a net benefit to shareholders.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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The SEC advised that all those who submitted comments online between June 2021 and August 2022 to check the relevant comment file on SEC.gov to determine whether their comment was received and posted, and to resubmit if it was not.

The following rule proposals were affected, and comment periods have been reopened for:

• Reporting of securities loans
• Prohibition against fraud, manipulation, or deception in connection with security-based swaps; prohibition against undue influence over chief compliance officers; position reporting of large security-based swap positions
• Money market fund reforms
• Share repurchase disclosure modernization
• Short position and short activity reporting by institutional investment managers
• Cybersecurity risk management, strategy, governance, and incident disclosure
• Private fund advisers; documentation of registered investment adviser compliance reviews
• Enhancement and standardization of climate-related disclosures for investors
• Special purpose acquisition companies, shell companies, and projections
• Investment company names
• Enhanced disclosures by certain investment advisers and investment companies about environmental, social, and governance investment practices

Additionally, the SEC has reopened its request for comment on certain information providers acting as investment advisers.

“The technological error also may have affected certain comments with respect to self-regulatory organization matters listed in the reopening release,” the SEC said. “The Commission will evaluate any comments resubmitted with respect to these matters and consider whether further action is warranted.”

The SEC said it is reopening the comment periods for the affected releases “until 14 days following publication of the reopening release in the Federal Register.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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According to the FCA’s Oct. 6 final notice, many of Sigma’s failings resulted from inadequate governance and oversight provided by Sigma’s board of directors. Thus, the FCA additionally fined three Sigma directors a total of £200,000 ($223,000).

Specifically, Sigma’s ex-chief executive Simon Tyson and former director Stephen Tomlin each have been fined £67,900 ($75,704) and £69,600 ($77,600), respectively, and were also banned from holding senior positions in firms regulated by the FCA. Matthew Kent, a current director, was fined £83,600 ($93,200).

Case details
According to the FCA’s final notice, between 2008 and late 2014, Sigma’s core business was offering its customers futures and options trading. In December 2014, however, Sigma expanded its business to include, amongst other products, contracts for difference (CFDs) and spread-bets referenced to the share-price of listed companies, by recruiting several brokers and establishing a CFD desk, which provided these products to its customers.

Both CFDs and spread-bets are high-risk, complex financial products and are “particularly attractive to those seeking to commit market abuse, including insider trading,” the FCA said in its final notice.

Compliance failures
“Despite being aware of the significant change to the risk profile of its business, Sigma did not perform an adequate risk assessment, or engage in any other meaningful preparations to ensure its compliance with regulatory standards prior to expanding its business into these new areas,” the FCA said.

Additionally, the FCA said in the final notice, Sigma’s board of directors “failed to take fundamental steps, such as holding regular board meetings where directors were provided with adequate management information and ensuring the board’s decisions were recorded by written minutes, to enable it to perform its governance role effectively.”

The board further “failed to establish, oversee and resource an effective compliance function, and failed to identify and address serious and systemic failures in relation to Sigma’s market abuse systems and controls and transaction reporting obligations, in respect of the CFD desk,” the FCA said.

“Sigma’s compliance department operated without clear reporting lines, apportionment of responsibilities or appropriately qualified staff and failed to ensure that the firm had adequate policies and procedures in place in relation to the conduct of its CFD desk brokers,” the FCA continued. “Such policies as were in place were not properly communicated to, or adequate steps taken to ensure their observance by, its brokers.”

Consequently, between December 2014 and August 2016, Sigma did not report or failed to report accurately 56,000 CFD transactions to the FCA and failed to identify 97 suspicious transactions or orders that it should have reported, the FCA stated.

“Firms must accurately report their transactions and bring any suspicious activity to our attention,” said Mark Steward, FCA Executive Director of Enforcement and Market Oversight. “Sigma failed to do this, which left potential market abuse undetected.”

Because Sigma agreed to resolve this matter, it qualified for a 10 percent discount under the FCA’s executive settlement procedures. Otherwise, the fine would have been £590,700 ($658,370). 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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In addition to the censure and fine, UBS must submit a written certification “by one or more principal(s) and officer(s) of UBS with supervisory authority … that, as of the date of the certification, the firm’s supervisory systems and written procedures are reasonably designed to achieve compliance with Rule 204 of Regulation SHO,” the FINRA order states.

Reg SHO is intended to address concerns regarding persistent failures to deliver and potentially abusive “naked” short selling. Naked short selling is the illegal practice of selling shares a short seller has neither borrowed, owns, nor intends to buy, resulting in a “failure to deliver” (FTD).

Reg SHO requires firms to take affirmative action to close out FTD positions resulting from short sales in equity securities by borrowing or purchasing the securities by the beginning of regular trading hours the day after the settlement date. “Limit orders or other delayed orders do not satisfy the close-out requirement,” FINRA said. “When a firm does not close out a failure to deliver, the rule prohibits the firm from accepting additional short sale orders in the security without first borrowing or arranging to borrow the security (commonly known as the “penalty box”).”

Case details
From 2009 to 2018, UBS did not timely close out at least 5,300 FTD positions and routed or executed more than 73,000 short sales in securities with an unsatisfied close-out requirement without first borrowing or arranging to borrow the shares, FINRA said.

According to FINRA, UBS’s violations of Rule 204 of Reg SHO resulted from several long-running issues, including:

• Using revocable volume weighted average price (VWAP) transactions or limit orders to address buy-in obligations for failures to deliver;
• Considering shares released from segregation in connection with customer long sales available to close out a failure to deliver; and
• Certain order management systems not always restricting short sales in securities with an unsatisfied close-out requirement.

From 2009 to August 2022, UBS’s supervisory systems, including its written procedures, were “not reasonably designed to achieve compliance with the requirements of Rule 204 of Reg SHO. Although UBS conducted annual reviews of its Rule 204 systems, it failed to identify its improper treatment of shares associated with a customer long sale,” FINRA stated.

UBS further “failed to detect red flags present in the firm’s books and records indicating that its VWAP algorithm routed certain buy-in orders as limit orders,” FINRA stated. “UBS also identified its failure to fully enforce Rule 204’s penalty box only after a system malfunctioned.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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On Sept. 29, the SEC ordered Barclays and Barclays Bank to pay a $200 million civil penalty and ordered Barclays Bank to pay disgorgement of $149.7 million and prejudgment interest of $11.5 million, deemed satisfied by an offer of rescission made to investors in the unregistered offerings.

According to the SEC order, from 2019 to March of this year, Barclays Bank “offered and sold approximately $17.7 billion of securities in unregistered transactions,” because it failed to implement internal controls to track such transactions in real-time. “This case highlights why it is essential for firms like Barclays to have robust internal controls over their offers and sales of securities,” said SEC Division of Enforcement Director Gurbir Grewal.

The SEC’s order states that, following a previously settled SEC action against Barclays in May 2017, the bank lost its “well-known seasoned issuer” (WKSI) status. Consequently, the bank was required to quantify the total number of securities it anticipated offering and selling and pay registration fees for those offerings upon the filing of a new registration statement.

Given this requirement, Barclays Bank personnel understood the firm needed to track actual offers and sales of securities against the amount of registered offers and sales on a real-time basis, the SEC said. Yet, it failed to establish any internal controls for this purpose.

The filing fees for the bank’s 2019 maximum covered the offer or sale of approximately $20.8 billion of securities for a period of three years. On March 9, 2022, an internal review found the bank had offered and sold well over the amount registered with the SEC. The first over-issuance occurred around January 2021, when the bank offered and sold approximately $16.37 billion of securities in excess of the amount registered with the SEC, according to the order.

The broader compliance lesson is this: “All issuers should maintain robust internal controls to prevent offering and selling securities in unregistered transactions,” said Sheldon Pollock, Associate Regional Director of the SEC’s New York Regional Office. “We encourage any firms that have lost WKSI status to ensure the stability of their internal controls and to self-report any over-issuances, should any be found.”

According to the SEC order, Barclays Bank self-reported its over-issuances to regulators, provided meaningful cooperation during the SEC staff’s investigation, and subsequently commenced a rescission offer. “While we acknowledge Barclays’ efforts to identify, disclose and remediate this conduct, the control deficiencies and the scope of the conduct at issue here was simply staggering,” Grewal said.

The SEC’s order finds that Barclays Bank violated provisions of the Securities Act of 1933 and that both firms violated provisions of the Securities Exchange Act of 1934. Without admitting or denying the SEC’s findings, both firms agreed to cease-and-desist from violating the charged provisions and to comply with certain undertakings designed to effect compliance with Section 5 of the Securities Act. 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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