by T. GormanPosted on Posted in SECActions

Whistleblowers are an important source of information for the Commission’s enforcement program. This is reflected by the periodic monetary awards handed out by the agency. It is also evidenced by the increasing number of actions brought by the SEC to protect the ability of would-be whistleblowers to assist its enforcement efforts. The most recent action in this regard involved a firm that tried to bar employees from acting as whistleblowers while retaliating against an employee who raised concerns about misconduct. In the Matter of SandRidge Energy, Inc., Adm. Proc. File No. 3-17739 (December 20, 2016).

SandRidge Energy, based in Oklahoma City, was listed on the NYSE but was delisted. Later the firm filed for bankruptcy protection, emerged from Chapter 11, and again had its shares listed on the NYSE.

Beginning prior to August 12, 2011 when the Commission issued rules implementing Exchange Act Section 21F, SandRidge used a form of separation agreement for departing employees that contained three provisions that impeded whistleblowers. First, the agreements contained a Future Activities provision. This section stipulated that former employees could not voluntarily cooperate with any government agency in any complaint or investigation concerning the company. Second, a Confidential Information clause prohibited the former employee from making any use of, or disclosing to anyone including a government agency, any confidential company information without written consent. Third, the ageement contained a Preserving Name and Reputation section that prohibited the former employee from disparaging, embarrassing or harming the firm or its employees to any government or regulatory agency or in the media.

Following the enactment of the Commission’s whistleblower rule SandRidge would agree to modify the restrictive provisions on request. In some instances the firm agreed to remove part of the restrictive language. In a few agreements all of the provisions were eliminated. The company, however, continued to use the clauses in most of its agreements. For example, on and after April 1, 2015, the date of the Commission’s first enforcement action charging a violation of Rule 21F-17, the firm implemented a planned reduction in force as to 113 employees. The severance agreements contained the restrictive clauses. After receiving a number of client alerts about the SEC action, SandRidge modified its form of separation agreements but not those from the reduction in force.

On May 11, 2015 the staff contacted SandRidge regarding its agreements based on copies attached to Commission filings. The firm agreed to remediate the issue and undertook amendments. Former employees were told of the remediation. Nevertheless, when a former employee was contacted in February 2016 the person refused to speak with the staff, citing the terms of the severance agreement.

On March 31, 2015 the company terminated an employee identified only as Whistleblower. Senior executives of the firm decided to terminate Whistleblower because the person was expressing concerns regarding the process by which the company calculated oil and gas reserved. Whistleblower had a history of raising such concerns which traced back to the time he was hired in 2012.

The senior executives considered restructuring Whistleblower’s reporting. A review of his emails was made using key word searches based on his complaint. The company decided to terminate Whistleblower because he was disruptive. At the time, no investigation of his claims had been made. The Order alleges violations of Exchange Act Section 21F and Rule 21F-17.

To resolve the matter the firm consented to the entry of a cease and desist order based on the Section and Rule cited in the Order. The firm also agreed to pay a penalty of $1.4 million.

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by T. GormanPosted on Posted in SECActions

Automated trading, alternative trading venues, high speed trading, the proliferation of order types and dark pools have been discussed in news articles and popular literate. The Commission has brought enforcement actions involving dark pools, alternative trading venues and order types, frequently tied to a failure to protect proprietary customer data or disclosure issues. The latest case brought by the agency in this area centers on a proprietary order routing system that was supposed to analyze order routing data to prioritize venues and, when coupled with other data, aid venue selection for clients placing trades. The system did that, according to the SEC, but not in the manner told to clients. In the Matter of Deutsche Bank Securities Inc., Adm. Proc. File No. 3-17730 (December 16, 2016).

Deutsche Bank, the broker-dealer – investment adviser affiliate of the international banking giant, has smart order routers known as SuperX+. It primarily routes orders to dark pools and some non-displayed orders to exchanges. In connection with this routing system Deutsche Bank began marketing a component of SuperX+ called the “Dark Pool Ranking Model,” or DRPM. The component was designed to assist in measuring the performance of potential trading venues. The system was supposed to measure the price movement from the time an order was routed to execution. Based on this information, the component ranked venues. The ranking was then combined with other data which measured the probability of execution based on historical information. In essence, DPRM Rankings determined if the venue was eligible to receive an order while the probability of fill determined if the venue would receive an order.

Deutsche Bank touted DPRM to clients and potential clients in conjunction with SuperX+. In some statements the firm touted it as the “quantitative core of [SuperX+]” while others noted that the tool was “a sophisticated dark pool ranking model that profiles dark pools” based on a variety of data. Since the data used for the rankings had to be updated periodically to be effective, the DPRM component was designed to periodically update its information.

Despite the necessity of updates, from December 20, 2011 through February 19, 2013 Deutsche Bank did not update the DPRM Rankings and the fill probability calculations. Clients were not told about the lack of updates – the firm did not tell them that potentially stale information was used in its routing system for millions of trades.

Clients were also not told that when SuperX+ was connected to seven new venues during the same period the rankings supposedly done by DPRM were determined subjectively by firm personnel rather than by the component. This is because there was no historical data available regarding the venues as required by DPRM to generate its rankings. Indeed, in some instances Deutsche Bank overrode the DPRM determinations such as when its own dark pool venue was given a low ranking which excluded it from receiving orders. While Deutsche Bank continued to tout DPRM, and the firm managed to update the data for the component in February 2013 – but the standard procedures were not followed — over a year long period beginning in February 2013 there were no new calculations of rankings or fill probability. In fact, the firm did not successfully update the component until 2014.

In February 2014 Deutsche Bank implemented a new statistical methodology for calculating the DPRM Ranking. The new method was based on price changes for orders routed by Deutsche Bank to the venue. A few months later the firm discovered the reason for its difficulties with updating the component. The systems had corrupted the data input for the DPRM and made it impossible for the firm’s computers to process the proper execution quality data.

Finally, beginning prior to the difficulties with DPRM, and continuing until early 2015, Deutsche Bank also failed to attach a copy of the SuperX subscriber manual and other materials to its Form ATS as required. The Order alleges violations of Securities Act Section 17(a)(2) and Rule 301(b)(2) of Regulation ATS.

In resolving the proceeding the Commission considered the remedial efforts of the firm. Deutsche Bank admitted the facts on which the Order was based and consented to the entry of a cease and desist order based on the Section and Rule cited as well as to a censure. In addition, the firm will pay a penalty of $18.5 million.

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