The original lawsuit alleged that multiple Whole Food managers regularly transferred costs from one department to another in order to circumvent its “Gainsharing” program, which provides bonuses to employees whose departments come in under budget. The managers effectively reallocated expenses from deficit-running teams to those with surpluses in order to reduce the reported surpluses and avoid triggering bonus payments tied to them.

After the lawsuit was filed, Whole Foods fired nine managers in Washington D.C., Maryland, and Virginia who were alleged of engaging in the cost transfers. The lawsuit additionally claimed that the grocery chain’s unlawful practice ranged nationwide and “a decision made at the executive level … to pad company profits.” While Whole Foods admitted to wrongdoing tied to the nine managers, it denied the claim that such actions occurred nationwide.

This settlement comes after the judge of the case denied the workers’ request to certify a class of all employees that had not received proper compensation under the Gainsharing program. The class was to consist of more than 5,000 employees from the nine stores and more than 147,000 employees nationwide. The judge ultimately denied the request stating that it would be too difficult to certify the class since each employee had his or he own individual issue. Additionally, the workers did not show that all potential class members were not properly paid by Whole Foods alleged practice.

The workers and Whole Foods requested 60 days in order to finalize the terms of the settlement as they have not done so already.  

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According to the new rule, Nasdaq will require that companies raise at least $15 million in order to list on its exchange. Nasdaq appears to have set an exceptionally high standard for microcap companies and other firms seeking to provide liquidity to their investors.

Nasdaq is changing the way it calculates public float, which refers to shares available for trading that are not held by insiders or restricted due to lockups. Previously, Nasdaq included shares registered for resale by existing investors at the time of an IPO in these calculations. Under the new rule, only newly issued IPO shares will be counted.

In its letter to the SEC, Nasdaq stated that “it has observed that the companies that meet the applicable Market Value of Unrestricted Publicly Held Shares requirement through an IPO by including Resale Shares have experienced higher volatility on the date of listing than those of similarly situated companies that meet the requirement with only the proceeds from the offering.”

As a result, Nasdaq is now only including newly issued IPO shares when making calculations in connection to its listing requirements as opposed to additionally including resale shares. The Exchange hopes that by doing so, it will not list companies exposed to high volatility. “As such, it is appropriate to modify the rules to exclude the resale shares from the calculation of market value,” Nasdaq told the SEC.

According to many in the capital markets industry, this rule could revive the dying Special Purpose Acquisition Company (SPAC) market. With the newly set bar, many companies will look to engage in reverse mergers which provides an alternate pathway towards an IPO.

Furthermore, companies seeking to uplist from over-the-counter markets, such as those operated by OTC Markets Group Inc., must now raise at least $5 million through a firmly underwritten public offering to list on the Nasdaq Capital Market, or $8 million to list on the Nasdaq Global Market. Previously, Nasdaq’s public offering requirement for both tiers was $4 million.

Ultimately, Nasdaq is implementing this rule to reduce the listing of highly volatile companies on its exchange. By excluding certain insider shares from its calculations, Nasdaq has established a higher threshold for companies seeking to qualify for listing.  

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UFP’s primary business is providing brokerage and research services to institutional customers. As part of its compliance procedures, the firm requires its chief compliance officer to review the outside brokerage account statements of the firm’s representatives. However, Dickerson did not consistently do so.

“As a result of Dickerson’s failure to reasonably monitor and review outside brokerage accounts, Respondents failed to detect and investigate trading by three employees in securities covered by the firm’s research group during the period April 2019 to June 2022,” FINRA said in its cease-and-desist order.

According to FINRA, Dickerson employed a manual process to request the outside brokerage account statements from time to time. She did not have a regular practice of tracking which statements she requested and she did not verify that she received the account statements that she requested. Although the firm’s manual compliance verifications required associated persons to disclose new outside brokerage accounts, Dickerson did not consistently review those verifications, and she failed to obtain annual compliance questionnaires from any firm representatives in 2021.

UFP and Dickerson Failed to Restrict Information Flow and Report Certain Transactions

UFP and Dickerson also allegedly engaged in additional violations, specifically in connection to FINRA Rule 5280(b). This rule provides that “a member must establish, maintain and enforce policies and procedures reasonably designed to restrict or limit the information flow between research department personnel, or other persons with knowledge of the content or timing of a research report, and trading department personnel, so as to prevent trading department personnel from utilizing non-public advance knowledge of the issuance or content of a research report for the benefit of the member or any other person.”

FINRA alleges that UFP and Dickerson did not implement procedures in line with Rule 5280(b). FINRA claims that the firm and Dickerson permitted unrestricted interactions between UFP’s research analysts and its sales and trading staff. The firm’s research analysts regularly circulated pre-publication draft research reports to sales and trading staff to obtain their input, including on the recommendations of the reports. Dickerson was copied on these communications, but she did not restrict the pre- publication review of the reports by sales and trading staff.

Additionally, FINRA Charged UFP for its failure to report TRACE-eligible transactions and failed to establish and maintain a reasonable supervisory system related to TRACE reporting. TRACE facilitates the mandatory reporting of over-the-counter transactions in certain fixed income securities and provides increased price transparency to market participants and investors.

The charges claim that UFP did not report any of its at least 223 TRACE-eligible transactions from April 2019 through April 2021. Until June 2021, the firm neither addressed its TRACE reporting obligations nor conducted any supervisory review related to TRACE reporting.

As a result of these allegations, UFP agreed to a $215,000 fine as well as an undertaking of reviewing and implementing certain supervisory policies and procedures. Dickerson agreed to a one-month job suspension and pay a fine of $5,000. Both UFP and Dickerson did not admit or deny any wrongdoing.  

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The CTA was developed in 2021 as a way to restrict the use of shell companies to conceal flows of illicit money. Under the law, eligible businesses were initially required to file beneficial ownership information (BOI) which consisted of any owner who either has a major influence on the reporting company’s decisions or operations, owns at least 25% of the company’s shares, or has a similar level of control over the company’s equity.

With the Treasury’s announcement, domestic reporting companies are now relieved from compliance obligations under the CTA. As a result, such companies are no longer required to file BOI reports.

This announcement comes shortly after the Financial Crimes Enforcement Network notice to companies that it would not issue fines or penalties for noncompliance of the March 21^st deadline to file beneficial ownership reports. FinCEN specifically said that it intends to issue a temporary rule that extends BOI reporting deadlines, “recognizing the need to provide new guidance and clarity as quickly as possible, while ensuring that BOI that is highly useful to important national security, intelligence, and law enforcement activities is reported.”

Treasury Announces that the Modified CTA will Only Apply to Foreign Businesses

Although the announcement suspends enforcement of the CTA, the Treasury emphasized that it will issue a proposed modification to the CTA so that the reporting requirements would solely apply to foreign companies. “The Treasury Department will further be issuing a proposed rulemaking that will narrow the scope of the rule to foreign reporting companies only,” according to the Department. “Treasury takes this step in the interest of supporting hard-working American taxpayers and small businesses and ensuring that the rule is appropriately tailored to advance the public interest.”

The Treasury’s announcement comes at a time in which President Donald Trump expressively seeks to rid the country of “burdensome regulations.” Shortly before the Treasury’s statement, the President said that the Treasury would soon be suspending the CTA and the “economic menace of BOI reporting will soon be no more.”

While some view this suspension as a positive step toward supporting the economy, others see it as an opportunity for foreign criminals to operate within the United States. “This decision threatens to make the United States a magnet for foreign criminals, from drug cartels to fraudsters to terrorist organizations,” according to Scott Greytak, director of advocacy for anticorruption organization Transparency International U.S. “Inexplicably, it tells foreign criminals–fentanyl traffickers, illegal arms dealers, corrupt foreign officials—that they can evade the most powerful anti-money laundering law passed since the PATRIOT Act by choosing to set up their criminal operations inside the United States.”

The enforcement of the CTA has been subject to ongoing uncertainty. While opinions remain divided, only time will tell whether the Treasury and FinCEN have the authority to implement such regulations, as these actions are certain to face legal challenges.  

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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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