by T. GormanPosted on Posted in SECActions

Blue sheets are an important tool for the SEC. Named for the fact that the form at one time was printed on blue paper, the information request requires the immediate production of key information regarding a securities transaction by the broker. Failure to furnish full and complete information can have significant consequences for an investigation. The SEC has emphasized this point by requiring that firms settling actions for failing to comply with such a request admit to the facts in the administrative Order. This same approach was used to resolve the SEC’s latest blue sheet case. In the Matter of Citigroup Global Markets, Inc., Adm. Proc. File No. 3- 17338 (July 12, 2016).

Citigroup, a registered broker dealer and FINRA member, wrote an electronic program in the mid-1990s to respond to blue sheet requests. In 1998 the firm introduced the use of certain codes in view of its expanding business. That code contained an error which caused the exclusion of certain transactions.

The error was not discovered until April 2014. The firm was responding to a Commission request seeking a large number of options series. The size and complexity of the request caused the internal group working on the response to seek assistance from the technical support team. During the work the technical support team discovered the coding error. It was promptly corrected.

The error was not reported to the compliance department until July 2014. After evaluating the error that department forwarded the matter to another committee charged with determining if it needed to be reported. On January 27, 2015 the error was reported to the SEC staff. By that time the firm had determined that the coding error impacted 3,528 submissions between May 1999 and April 2014 – 2,382 submissions to the Commission and 753 to FINRA. A total of 34,412 trades had been omitted. During the period the firm did not have in place a reasonable process to check the accuracy and completeness of the blue sheet submissions. The Order alleged violations of Exchange Act Section 17(a).

To resolve the proceeding Citigroup admitted to the facts detailed in the Order and consented to the entry of a cease and desist order based on the Section cited in that Order. The firm also agreed to pay a penalty of $7 million.

This is the fourth case brought since 2014 by the Commission for a failure to provide full and complete information in response to a blue sheet request. Previously, Scottrade, OZ Management and Credit Suisse Securities resolved similar proceedings. In each instance the firm admitted to the facts in the Order. Deutsche Bank Securities settled a similar case but with FINRA.

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by T. GormanPosted on Posted in SECActions

Well designed compliance systems coupled with solid internal controls can be instrumental in preventing violations of the FCPA. Despite best of efforts, there is no doubt that even a well-constructed compliance system can be circumvented. Johnson Controls, a global firm which sold marine products in China through subsidiary China Marine, is a good example of this point. Fortunately, its cooperation mitigated the violations. In the Matter of Johnson Controls, Inc., Adm. Proc. File No. 3-17337 (July 11, 2016).

Johnson Controls acquired York International in 2005. At the time the firm was the subject of an FCPA investigation. Two years later York settled with the Commission in an action which alleged violations of the FCPA bribery, books and records and internal control provisions. The action centered on improper payments made at least in part through agents in China at shipyards to obtain and/or retain business. A monitor was installed. Following the merger York’s China operations were merged into China Marine.

Johnson Controls devoted additional resources to its compliance programs in the wake of the York action. Additional compliance personnel were hired, training was conducted and risk-based procedures were implemented. A new managing director was hired for China Marine. The use of agents was restricted in view of their involvement in the York action and all sales were routed through a China based sales team. Audits were conducted. China Marine reported to Johnson Marine’s Denmark subsidiary which oversaw the Global Marine business in multiple countries.

Nevertheless, the bribery scheme at China Marine continued. The new employees circumvented the procedures installed and the steps taken to prevent a repetition of the wrongful conduct:

  • The scheme involved virtually everyone in the office;
  • Vendors were used in place of agents because they were considered low risk but local employees failed to disclose that in some instances sales managers had an interest in the firm;
  • Sales managers added bogus costs for parts and services;
  • The dollar value of the transactions was set to fall below certain minimums to avoid scrutiny; and
  • A slush fund was created.

Despite a new manager and supervision by the Danish subsidiary, China Marine operated with little oversight. The new manager had significant autonomy and reliance was put in self-policing. Even in instances when those in Denmark reviewed transactions they did not understand some of the highly customized transactions at China Marine or the projects involving sham vendors. Not only did the managing director craft the scheme to make improper payments, China Marine employees were instructed to be cautious regarding their discussion of vendor payments with firm attorneys, accountants and auditors. From 2007 through 2013 Johnson Marine obtained the benefit of about $11.8 million as a result of over $4.9 million in improper payments made through eleven problematic vendors.

Johnson Marine finally learned about the misconduct in December 2012 when it received the first of two anonymous hotline reports about certain employees in China Marine. The reports arrived shortly after China Marine’s managing director left the company. John Controls self-reported and undertook an extensive series of steps to cooperate with the Commission’s investigation detailed in the Order. The Order alleges violations of Exchange Act Section 13(b)(2)(A).

To resolve the action the firm consented to the entry of a cease and desist order based on the Section cited in the Order. Johnson Controls agreed to pay disgorgement of $11,800,000 and prejudgment interest. In addition, the firm will pay a penalty of $1,180,000 or 10% of the disgorgement. The DOJ declined prosecution.

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