RealPage Antitrust Consent Decree Proposed
In August 2024, the Department of Justice (DOJ) and eight states filed a civil antitrust lawsuit against RealPage Inc., alleging that its software was used to unlawfully decrease competition among landlords and maximize profits. Last week, the DOJ, now joined by ten states, filed an amended complaint alleging that landlords Greystar Real Estate Partners LLC, Blackstone’s LivCor LLC, Camden Property Trust, Cushman & Wakefield Inc., Pinnacle Property Management Services LLC, Willow Bridge Property Company LLC, and Cortland Management participated in the price-fixing scheme. These companies operate over 1.3 million residential units across 43 states and the District of Columbia.
According to the amended complaint, these landlords shared sensitive information through RealPage’s pricing algorithm to decrease competition and increase corporate profits. Jennifer Bowcock, RealPage’s Senior Vice President of Communications, rebutted the allegations, arguing that issues with housing affordability stem from the limited supply of residential units and that the government should “stop scapegoating RealPage – and now [its] customers – for the housing affordability problems.”
The DOJ also announced a proposed consent decree with Cortland Management, where the claims against Cortland would be resolved in exchange for agreeing to cooperate with the DOJ’s ongoing investigation against the remaining defendants. Under the terms of the proposed agreement, Cortland would be barred from using a competitor’s sensitive data to train a pricing model, pricing units with the assistance of an algorithm without court supervision, and soliciting or disclosing sensitive information with other companies to set rental prices. A spokesman for Cortland indicated that it is pleased with the outcome and is looking forward to “improv[ing the] resident experience” in 2025. Under the Tunney Act, P.L. 93-528, the proposed consent decree will be published in the Federal Register for a 60-day comment period, after which the court can enter final judgment. The case is United States v. RealPage Inc., dkt. no, 1:24-cv-00710 (LCB) (M.D.N.C. filed Aug. 23, 2024).
Promising Results from Groundbreaking FinCrime Data Sharing Project Between Seven UK Banks and the National Crime Agency
In 2024, the National Crime Agency (the “NCA”), which is the UK’s lead agency against organized crime; human, weapon and drug trafficking; cybercrime; and economic crime, announced its “groundbreaking” data sharing partnership with seven UK banks, namely Barclays, Lloyds, Metro Bank, NatWest, Santander, Starling Bank, and TSB.[1]
This new public-private partnership (“PPP”) was the largest of its kind anywhere in the world and the initial results of the project suggest it is revolutionizing the fight against financial crime.
Joint Analysis of Transactional Data that is Indicative of Potential Criminality
The project involved the seven banks voluntarily sharing customer and transactional data with the NCA with the aim of tackling criminality and kleptocracy, and preventing the flow of “dirty money” through the UK’s financial system. AML subject matter experts from the seven banks were then seconded to the NCA to work directly alongside the NCA’s own analysts in the scrutiny of banking data that is suggestive of criminal behavior, with the dual goals of identifying bad actors that are exploiting and misusing the financial system while ensuring that legitimate customers are left alone.
Promising Results
PPPs can be vastly effective in tackling the complexities of financial crime. Principally, this is because they help to bridge gaps in intelligence and enable more holistic or collaborative analytics. In the UK’s case, the NCA has reported that since the project went live in 2024, eight new criminal networks already have been confirmed. In addition, a further three suspicious networks have been identified and referred to the NCA’s intelligence division for further examination, while new leads have been uncovered related to 10 of the agency’s largest ongoing investigations. In sum, data sharing of this sort appears to be materially augmenting the ability of law enforcement to detect and disrupt criminality. The likely result will be the reduction of the financial crime risks that all banks have to manage on a daily basis and a consequential decrease in their “compliance costs.”
Data Protection Considerations
The major concern about data sharing initiatives of this sort relates to privacy, and banks have long been wary of sharing customer data with third parties for fear of contravening applicable data protection laws. On this, Andrew Searle, the Director of the NCA’s National Economic Crime Centre, has said, “the NCA and its banking partners have designed the [project’s] data sharing principles to ensure that only account data with multiple clear indicators of economic crime is included.” [2] Additionally, the banks have included in their terms and conditions the ability to share information without notification where the purpose of doing so is the fulfillment of the legal obligation to detect and prevent financial crime. Finally, the Financial Conduct Authority (the “FCA”), which regulates the UK’s financial services industry, is observing the project and providing an additional layer of oversight that has helped appease concern regarding inadvertent violations of data protection law.
Additional Considerations
A similar initiative has now been launched in Singapore: a digital platform called “COSMIC” (the “Collaborative Sharing of Money Laundering/Terrorism Financing (ML/TF) Information and Cases”) that allows six Singaporean banks, namely Citibank, Development Bank of Singapore (DBS), HSBC, Oversea-Chinese Banking Corporation (OCBC), Standard Chartered, and United Overseas Bank, to share information on customers exhibiting multiple red flags indicators of financial crime concern.[3] The major difference between the UK project and the Singaporean project is that the former is being led by the NCA, or UK law enforcement, while the latter, COSMIC, is a purely private sector initiative.
Given the promising results of the UK project and Singapore’s launch of COSMIC, we expect that other countries will follow suit in terms of facilitating the sharing of intelligence related to suspected money laundering, terrorism financing, and proliferation financing, whether it be via the PPP model or among only private sector participants. Either way, fostering true collaboration between multiple interested parties likely is going to be crucial in the effort to stay ahead of sophisticated criminals and emergent threats.
For that reason, it is incumbent upon public sector actors, from the perspective of preventing financial crime, to actively facilitate information sharing initiatives, for example by updating laws or supervisory instruments as necessary; making use of regulatory sandboxes and pilot programs; highlighting typologies or data types that would benefit from sharing; deploying secure platforms for sharing and oversight; promoting regular dialogue between data protection and AML/CFT authorities; and more.
Finally, banks around the world should remember that, even if currently they are not able to pool data with other stakeholders, for example because of applicable data protection laws or other jurisdiction-specific fundamental rights, they still need to do everything possible to mine the volumes of customer and transactional data that they already possess and/or can obtain from their correspondents, as well as the huge quantity of open source intelligence that is readily available online, for compliance purposes. This means not just performing real-time, list-based screening, but investing in additional headcount, advanced analytical solutions and experienced external counsel to conduct proactive investigations of post-transactional data, looking for suspicious typologies, actors, networks or other activities. Ever-increasing amounts of customer and transactional data need not be overwhelming; on the contrary, if viewed as a resource rather than a burden and if leveraged appropriately, they represent a material opportunity to better detect and prevent criminal activity, and to protect legitimate consumers.
FOOTNOTES
[1]Ground breaking public private partnership launched to identify criminality using banking data
[2] Ibid.
[3] MAS Launches COSMIC Platform to Strengthen the Financial System’s Defence Against Money Laundering and Terrorism Financing
DOJ Reports Substantial Procurement Fraud Recoveries in FY 2024
The Department of Justice (DOJ) recently announced that it obtained more than $2.9 billion in False Claims Act (FCA) settlements and judgments in the fiscal year ending Sept. 30, 2024.
DOJ reports that matters that involved the healthcare industry comprised the largest portion of these FCA recoveries in FY 2024, but that “procurement fraud” recoveries, once again, were significant for DOJ this past year.
Among the more notable procurement fraud recoveries from the past year were:
A large government contractor paid $428 million to resolve allegations that it knowingly provided false cost and pricing data when negotiating with the Department of Defense for numerous government contracts and double billed on a weapons maintenance contract, leading to the company receiving profits in excess of negotiated rates. This is the second largest government procurement fraud recovery under the False Claims Act in history.
A large federal contractor paid $70 million to resolve allegations they overcharged the U.S. Navy for spare parts and materials needed to repair and maintain the primary aircraft used to train naval aviators. The government alleged that these entities, which were owned by the same parent company, entered into an improper subcontract that resulted in the Navy paying inflated costs for parts.
A federal contractor paid $811,259 to resolve allegations that it knowingly supplied valves that did not meet military specifications. The government alleged that, under a U.S. Navy contract, the company invoiced for military-grade valves to be installed on certain combat ships when the company knew the valves had not met the testing requirements to be deemed military grade.
DOJ brought claims against a federal contractor and an individual estate of the founder, majority owner and chief operating officer of the company for allegedly causing the submission of false claims to the Department of Defense under contracts to provide Army combat uniforms. The government alleged that the company and the founder falsified the results of the insect repellant testing to conceal failing test results, including by inappropriately combining results from different rounds of testing, re-labeling test samples to hide the true origin of the samples, and performing re-tests of uniforms in excess of what the contract permitted.
A government contractor paid $55.1 million to satisfy a judgment that it made knowingly false claims to the United States when it misrepresented its commercial sales practices during the negotiation and subsequent performance of a General Services Administration (GSA) contract. The court found that the false disclosures induced GSA to accept and then continue to pay higher prices than it would have had it known of the company’s actual commercial pricing practices. The court also found that the company continuously violated the Price Reduction Clause, “a standard term in these types of contracts that requires the contractor throughout performance of the contract to maintain GSA’s price position in relation to an identified customer or category of customer agreed upon in contract negotiations.”
The City of Los Angeles paid $38.2 million to resolve allegations that it failed to meet federal accessibility requirements when it sought and used Department of Housing and Urban Development (HUD) grant funds for multifamily affordable housing. The government alleged that the city failed to make its affordable multifamily housing program accessible to people with disabilities. The government also alleged that the city failed to maintain a publicly available list of accessible units and their accessibility features, and the city, on an annual basis, falsely certified to HUD that it complied with related grant requirements.
A federal contractor paid $26.8 million to resolve allegations that Hahn Air failed to remit to the United States certain travel fees collected from commercial airline passengers flying into or within the United States.
A government contractor paid $18.4 million to resolve allegations that it billed for time not worked at the National Nuclear Security Administration’s Pantex Site near Amarillo, Texas.
A large federal contractor paid $11.8 million to resolve allegations that it submitted false claims to the Federal Emergency Management Agency for the replacement of certain educational facilities located in Louisiana that were damaged by Hurricane Katrina. The government alleged that the contractor submitted to FEMA fraudulent requests for disaster assistance funds and did not correct applications that included materially false design, damage and replacement eligibility descriptions. Combined with settlements with other entities involved in the alleged conduct, the government recovered over $25 million in connection with the disaster assistance applications prepared by the contractor.
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Regulatory Update and Recent SEC Actions January 2025
Recent SEC Administration Changes
SEC Chair Gensler to Depart Agency on January 20
The Securities and Exchange Commission (the “SEC”) announced, on November 21, 2024, that its Chair, Gary Gensler, will step down. Chair Gensler’s resignation from the SEC will be effective at 12:00 pm EST on January 20, 2025. On December 4, 2024, President-elect Trump stated his intention to nominate Paul Atkins as the Chair of the SEC. Mr. Atkins served as a Commissioner from 2002 to 2008 and on the SEC staff in the 1990s.
SEC Announced Departure of Trading and Markets Division Director
The SEC, on December 9, 2024, announced that Haoxiang Zhu, Director of the Division of Trading and Markets, would depart the agency effective December 10, 2024. David Saltiel, a Deputy Director who also heads the Division of Trading and Markets Office of Analytics and Research, will serve as Acting Director. Mr. Saltiel served as the Division of Trading and Markets Acting Director for several months in 2021.
SEC Announces Departure of Corporation Finance Division Director
The SEC, on December 13, 2024, announced that Erik Gerding, Director of the Division of Corporate Finance, would depart the agency effective December 31, 2024. Cicely LaMothe is now the Acting Director. Ms. LaMothe previously served as the Deputy Director, Disclosure Operations for the Division of Corporation Finance. Before joining the SEC, Ms. LaMothe worked in the private sector for six years, including as the financial reporting manager for a public company and as a senior associate with a national accounting firm.
SEC Rulemaking
SEC Adopts Rule Amendments and New Rule Addressing Wind-Down Planning of Covered Clearing Agencies
The SEC, on October 25, 2024, announced the adoption of rule amendments and a new rule to improve the resilience and recovery and wind-down planning of covered clearing agencies. The rule amendments establish new requirements regarding a covered clearing agency’s collection of intraday margin, as well as its reliance on substantive inputs to its risk-based margin model. The new rule requires a covered clearing agency to specify nine elements for its recovery and wind-down plan that address: (1) the identification and use of scenarios, triggers, tools, staffing, and service providers; (2) timing and implementation of the plans; and (3) testing and board approval of the plans.
SEC Modernizes Submission of Certain Forms, Filings, and Materials Under the Securities Exchange Act of 1934
The SEC, on December 16, 2024, adopted amendments to require the electronic filing, submission, or posting of certain forms, filings, and other submissions that national securities exchanges, national securities associations, clearing agencies, broker-dealers, security-based swap dealers, and major security-based swap participants make with the SEC. Prior to the adoption of these amendments, registrants filed with, or otherwise submitted to, the SEC many of the forms, filings, or other materials in paper form. Under the amendments, registrants will make these filings and submissions electronically using the SEC’s EDGAR system, in structured data format where appropriate, or by posting them online.
SEC Adopts Rule Amendment to Broker-Dealer Customer Protection Rule
The SEC, on December 20, 2024, adopted amendments to Rule 15c3-3 (the “Customer Protection Rule”) to require certain broker-dealers to increase the frequency with which they perform computations of the net cash they owe customers and other broker-dealers from weekly to daily. The amendments will become effective 60 days after the date of publication of the adopting release in the Federal Register. Broker-dealers that exceed the $500 million threshold using each of the 12 filed month-end FOCUS Reports from July 31, 2024, through June 30, 2025, must comply with the daily computations no later than December 31, 2025.
SEC Enforcement Actions and Other Cases
SEC Charges Market Makers and Nine Individuals in Crackdown on Manipulation of Crypto Assets Offered and Sold as Securities
The SEC, on October 9, 2024, announced fraud charges against three companies purporting to be market makers and nine individuals for engaging in schemes to manipulate the markets for various crypto assets. The SEC alleges that the companies provided “market-manipulation-as-a-service” which included generating artificial trading volume through trading practices that served no economic purpose and that they used algorithms (or bots) that, at times, generated “quadrillions” of transactions and billions of dollars of artificial trading volume each day.
SEC Charges Investment Adviser and Owner for Making False and Misleading Statements About Use of Artificial Intelligence
The SEC, on October 10, 2024, announced charges against an investment adviser (the “Adviser”) and two individuals, an owner and a director of the Adviser, with making false and misleading claims about the Adviser’s purported use of artificial intelligence (“AI”) to perform automated trading for client accounts and numerous other material misrepresentations. The SEC’s order states that the two individuals raised nearly $4 million from 45 investors for the growth of the Adviser that was falsely described as having an AI-driven platform. The Adviser and individuals were charged with fraudulent conduct in the offer or sale of securities under the Securities Act of 1933 and the Securities Exchange Act of 1934, and the Adviser was charged with fraudulent conduct by an investment adviser under the Investment Advisers Act of 1940, as amended.
SEC Charges Advisory Firm with Failing to Adhere to Own Investment Criteria for ESG-Marketed Funds
The SEC, on October 21, 2024, charged a New York-based investment adviser (the “Adviser”) with making misstatements and for compliance failures relating to the execution of the investment strategy of three exchange-traded funds (“ETFs”) that were marketed as incorporating environmental, social, and governance (“ESG”) factors. According to the SEC’s order, the Adviser represented in the prospectuses for the ETFs and to the board of trustees overseeing the ETFs, that the ETFs would not invest in companies involving certain products or activities, such as fossil fuels and tobacco. Further, the SEC order states that the Adviser used data from third-party vendors that did not screen out all companies involved in fossil fuel and tobacco-related activities. The SEC’s order further finds that the Adviser did not have any policies and procedures over the screening process to exclude such companies. The Adviser consented to the entry of the SEC’s order finding that the firm violated the antifraud provisions of the Investment Advisers Act of 1940 and the Investment Company Act of 1940 and the Compliance Rule of the Investment Advisers Act.
“At a fundamental level, the federal securities laws enforce a straightforward proposition: investment advisers must do what they say and say what they do,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “When investment advisers represent that they will follow particular investment criteria, whether that is investing in, or refraining from investing in, companies involved in certain activities, they have to adhere to that criteria and appropriately disclose any limitations or exceptions to such criteria. By contrast, the funds at issue in today’s enforcement action made precisely the types of investments that investors would not have expected them to based on the Adviser’s disclosures.”
Directors of Money Market Fund Sued Over Share Class Conversion
Two shareholders (the “Shareholders”) filed a lawsuit alleging that the directors of a money market fund (the “Directors”) breached their fiduciary duty by failing to automatically move fund investors’ assets from higher cost share classes of the fund to lower-cost share classes. The Shareholders allege that the board of the money market fund allowed certain fund investors to continue paying higher fees as retail class shareholders rather than auto-converting their holdings to the cheaper, but otherwise identical premium class, even though their holdings were eligible for the “auto-conversion”. The complaint states that “[the Directors’] inaction demonstrates gross neglect or reckless disregard for the best interest of the class shareholders… Either the [Directors] have been recklessly uninformed of these massive overcharges that cause significant losses to the shareholders, or have known about the issue and inexcusably failed to take action to remedy it.” The Shareholders seek damages, restitution, disgorgement, and an injunction preventing the Directors from continuing to engage in the alleged conduct.
Two Entities Affiliated with Major Institutional Organization to Pay $151 Million to Resolve SEC Enforcement Actions
The SEC, on October 31, 2024, charged two affiliated and commonly-owned investment advisers (each an “Adviser” and together, the “Advisers”) in five separate enforcement actions for compliance failures including misleading disclosures to investors, breach of fiduciary duty, prohibited joint transactions and principal trades, and failures to make recommendations in the best interest of customers. The enforcement actions related to:
Conduit Private Funds – An Adviser made misleading statements regarding its ability to exercise discretion over when to sell and the number of shares to be sold, despite disclosures representing that it had no discretion.
Portfolio Management Program – An Adviser failed to fully and fairly disclose the financial incentive that the firm and some of its financial advisors had when they recommended the Adviser’s own Portfolio Management Program over third-party managed advisor programs offered by the Adviser.
Clone Mutual Funds – An Adviser recommended certain mutual fund products, Clone Mutual Funds, to its retail brokerage customers when materially less expensive ETF products that offered the same investment portfolios were available.
Joint Transactions – An Adviser engaged in $3.4 billion worth of prohibited joint transactions, which advantaged an affiliated foreign money market fund for which it served as the delegated portfolio manager over three U.S. money market mutual funds it advised.
Principal Trades – An Adviser engaged in or caused 65 prohibited principal trades with a combined notional value of approximately $8.2 billion. In order to conduct these transactions, according to the SEC’s order, a portfolio manager directed an unaffiliated broker-dealer to buy commercial paper or short-term fixed income securities from the Adviser which the other Adviser then purchased on behalf of one of its clients.
SEC Charges Adviser for Making Misleading Statements About ESG Integration
The SEC, on November 8, 2024, charged an investment adviser (the “Adviser”) with making misleading statements about the percentage of company-wide assets under management that integrated ESG factors. The Adviser stated in marketing materials that between 70 percent and 94 percent of its parent company’s assets under management were “ESG integrated.” However, in reality, these percentages included a substantial amount of assets that were held in passive ETFs that did not consider ESG factors. Furthermore, the SEC’s order found that the Adviser lacked any written policy defining ESG integration.
SEC Charges Three Broker-Dealers with Filing Deficient Suspicious Activity Reports
The SEC, on November 22, 2024, announced that three broker-dealers (the “Broker-Dealers”) agreed to settle charges relating to deficient suspicious activity reports (“SARs”) filed by the Broker Dealers. The SEC alleged that multiple SARs filed by the Broker-Dealers failed to include important, required information. SARs must contain “a clear, complete, and concise description of the activity, including what was unusual or irregular” that caused suspicion of the use of funds derived from illegal activity or activity that has no apparent lawful purposes. The SEC’s orders alleged that each Broker-Dealer filed multiple deficient SARs over a four-year period.
SEC Charges Former Chief Investment Officer with Fraud
The SEC, on November 25, 2024, charged the former co-chief investment officer (the “CIO”) of a registered investment adviser with engaging a multi-year scheme to allocate favorable trades to certain portfolios, while allocating unfavorable trades to other portfolios (also known as “cherry-picking”). The SEC’s complaint alleges that the CIO would place trades with brokers but wait until later in the day to allocate the trades among clients in the portfolios he managed. According to the complaint, the CIO’s delay in allocating the trades allowed him to allocate trades at first-day gains to favored portfolios and trades at first-day losses to disfavored portfolios.
SEC Charges Wealth Management Company for Policy Deficiencies Resulting in Failure to Prevent and Detect Financial Advisors’ Theft of Investor Funds
The SEC, on December 9, 2024, charged a wealth management company (the “Company”) with (1) failing to reasonably supervise four investment advisers and registered representatives (the “Financial Advisers”) who stole millions of dollars of advisory clients’ and brokerage customers’ funds and (2) failing to adopt policies and procedures reasonably designed to prevent and detect the theft. Specifically, the SEC found that the Company failed to adopt and implement policies designed to prevent the Financial Advisers from using two forms of unauthorized third-party disbursements, Automated Clearing House payments and certain patterns of cash wire transfers, to misappropriate funds from client accounts.
SEC Charges Two Broker-Dealers with Recordkeeping and Reporting Violations for Submitting Deficient Trading Data to SEC
The SEC, on December 20, 2024, announced settled charges against two broker-dealers (each a “Broker-Dealer” and together, the “Broker-Dealers”). According to the SEC’s order, the Broker Dealers made numerous blue sheet submissions to the SEC that contained various deficiencies, including inaccurate or missing information about securities transactions and the firms or customers involved in the transactions. The SEC found that, one of the Broker-Dealers made 15 types of errors, that caused nearly 11,200 blue sheet submissions to have missing or inaccurate data for at least 10.6 million total transactions, while the other Broker-Dealer made 10 types of errors that caused 3,700 blue sheet submissions to have misreported or missing data for nearly 400,000 transactions.
International Bank Subsidiary to Pay $4 Million for Untimely Filing of Suspicious Activity Reports
The SEC, on December 20, 2024, charged a registered broker-dealer (the “Broker-Dealer”) for failing to file certain SARs in a timely manner. According to the SEC’s order, the Broker-Dealer received requests in connection with law enforcement or regulatory investigations, or litigation that prompted it to conduct SARs investigations. The SEC’s order found that in certain instances, the Broker-Dealer failed to conduct or complete the investigations within a reasonable period of time.
SEC Files Settled Charges Against Multiple Entities for Failing to Timely File Form D in Connection with Securities Offering
The SEC, on December 20, 2024, announced charges against three companies (for this section only, the “Companies”) for failing to timely file Forms D for several unregistered securities offerings in violations of Rule 503 of Regulation D of the Securities Act of 1933. The SEC found that one of the Companies, a registered investment adviser that controls two private funds, failed to ensure that such private funds timely filed Forms D in connection with offerings involving the sale of membership interest in such private funds. The SEC found that two other Companies, both privately held companies, failed to timely file Forms D in connection with unregistered securities offerings for which the Companies engaged in certain communications that constituted general solicitations.
“Form D filings are crucial sources of information on private capital formation, and compliance with the requirement to make such filings in a timely manner is vital to the Commission’s efforts to promote investor protection while also facilitating capital formation, especially with respect to small businesses,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “Today’s orders find that the charged entities deprived the Commission and the marketplace of timely information concerning nearly $300 million of unregistered securities offerings.”
Shareholders File Derivative Complaint Against Independent Directors and Fund Management Alleging Breach of Fiduciary Duties
In December 2024, a derivative complaint was filed against the independent directors and fund management, alleging that their breach of fiduciary duties was responsible for the “astonishing collapse” of several funds. In December 2021, the board of directors (the “Board”) approved a plan of liquidation involving transferring nearly all the $300 million in assets of four closed-end feeder funds and a master fund, along with several private funds, for unlisted preferred units from the buying company (the “Buyer”). Ultimately, the units converted into common shares worth eight dollars each when the Buyer went public through a merger with a special purpose acquisition company. Since going public, the value of the shares has fallen to 81 cents, or less than a penny after accounting for a one-for-80 reverse stock split. According to the lawsuit, fund management and the Board did not inform the shareholders of the liquidation plan until weeks after it happened, and the liquidation plan was never submitted to shareholders for approval.
Other Industry Highlights
SEC Division of Examinations Announces its Examination Priorities for Fiscal Year 2025
The SEC Division of Examinations (the “Division”), on October 21, 2024, published its Fiscal Year 2025 Examination Priorities which highlights the practices, products, and services that the Division of Examinations believes present heightened risk to investors or the overall integrity of U.S. capital markets. The report indicated that the Division would focus on:
Investment Advisers – (1) adherence to fiduciary standards of conduct, (2) effectiveness of advisers’ compliance programs, and (3) examinations of advisers to private funds.
Investment Companies – (1) fund fees and expenses, and any waiver or reimbursements, (2) oversight of service providers (both affiliated and third-party), (3) portfolio management practices and disclosures, for consistency with claims about investment strategies or approaches and with fund filings and marketing materials, and (4) issues associated with market volatility.
The report also indicated that the Division is going to continue examining advisers and funds that have never been examined or those that have not been examined recently, with a particular focus on newly registered funds. The full report can be found here.
SEC Announced Enforcement Results for Fiscal Year 2024
The SEC announced that it filed a total of 583 enforcement actions in fiscal year 2024 while obtaining orders for $8.2 billion in financial remedies. The 583 enforcement actions represent a 26 percent decline in total enforcement actions compared to fiscal year 2023. Key areas of focus by the SEC included:
Off-channel communications. In fiscal year 2024, the SEC brought recordkeeping cases against more than 70 firms resulting in more than $600 million in civil penalties.
Marketing Rule (Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”)) compliance. More than a dozen investment advisers were charged with non-compliance of the Advisers Act Marketing Rule including charges for advertising hypothetical performance to the general public without implementing policies and procedures reasonably designed to ensure hypothetical performance was relevant.
Misleading claims regarding AI. AI and other emerging technologies presented heightened investor risk from market participants using social media to exploit elevated investor interest in emerging investment products and strategies. These actions included multiple actions against advisers alleging the use AI in their investment processes.
SEC Risk Alert Highlights Examination Deficiencies Found in Core Focus Areas for Registered Investment Companies
The SEC’s Division of Examinations (the “Staff” or the “Division”) issued a risk alert (the “Alert”) regarding its review of certain core focus areas and associated document requests for registered investment companies (each a “Fund”, and collectively, the “Funds”). The Alert highlighted that examinations typically focus on whether Funds: (1) have adopted and implemented effective written policies and procedures to prevent violation of the federal securities laws and regulations, (2) provided clear and accurate disclosures that are consistent with their practices, and (3) promptly addressed compliance issues, when identified.
The Staff reviewed deficiency letters sent to Funds during the most recent four-year period and analyzed deficiencies and weakness related to the core areas of fund compliance programs, disclosures and filings, and governance practices. Below are some of the common deficiencies:
Fund Compliance Programs
Funds did not perform required oversight or reviews as stated in their policies and procedures or perform required assessments of the effectiveness of their compliance programs.
Funds did not adopt, implement, update, and/or enforce policies and procedures.
Policies and procedures were not tailored to the Funds’ business models or were incomplete, inaccurate, or inconsistent with actual practices.
Funds’ Codes of Ethics were not adopted, implemented, followed, enforced, or did not otherwise appear adequate.
Chief Compliance Officers did not provide requisite written annual compliance reports to Fund boards.
Fund Disclosures and Filings
Fund registration statements, fact sheets, annual reports, and semi-annual reports contained incomplete or outdated information or contained potentially misleading statements.
Sales literature, including websites, appeared to contain untrue statements or omissions of material fact.
Fund filings were not made or were not made on a timely basis.
Fund Governance Practices
Fund board approvals of advisory agreements appeared to be inconsistent with the requirements of the Investment Company Act of 1940, as amended, and/or the Funds’ written compliance procedures.
Fund boards did not receive certain information to effectively oversee Fund practices.
Fund boards did not perform required responsibilities.
Fund board minutes did not fully document board actions.
The full alert can be accessed here.
SEC’s Division of Investment Management’s Disclosure Review and Accounting Office Identifies Common Issues Found in Review of Tailored Shareholder Reports
As of July 24, 2024, open-end funds have been required to file more concise annual and semi-annual reports (“Tailored Shareholder Reports” or “TSRs”) that highlight information that the SEC deems “particularly important” to retail shareholders in assessing and monitoring their fund investments. After three months of TSR filings, on November 8, 2024, the Division of Investment Management’s Disclosure Review and Accounting Office (“DRAO”), which is responsible for reviewing TSR filings, published Accounting and Disclosure Information 2024-14 (the “ADI”) which flags common issues it has identified in its review of TSR filings and provides a reminder to funds of certain requirements.
Issues Regarding Expense Information
Annualizing expenses in dollars paid on a $10,000 investment in a semi-annual shareholder report, instead of reflecting the dollar costs over the period on a non-annualized basis.
Calculating expenses in dollars paid on a $10,000 investment by incorrectly multiplying the “Costs paid as a percentage of your investment” by $10,000, instead of multiplying the figure in the “Cost paid as a percentage of your investment” column by the average account value over the period based on an investment of $10,000 at the beginning of the period.
Presenting expenses in dollars paid on $10,000 investments to the nearest cent, when the figure must be rounded to the nearest dollar.
Funds might consider noting in their semi-annual reports that costs paid as a percentage of a $10,000 investment is an annualized figure.
Issues Regarding Management’s Discussion of Fund Performance
Disclosure by many ETFs of average annual total returns for the past one-, five-, and 10-year periods based on market value, instead of the ETF’s net asset value; additional disclosure of market value performance is not permitted to be included in the shareholder reports.
Failure by some funds to compare their performance to an appropriate broad-based securities market index both in their shareholder reports and in its prospectus.
Failure by some funds to include a statement to the effect that past performance is not a good predictor of the fund’s future performance, or to utilize text features to make the statement noticeable and prominent.
Other Issues
Including portfolio-level statistics, such as average maturity or average credit rating, under the heading “Graphical Representations of Holdings,” instead of under the heading “Fund Statistics.”
Disclosing holdings as a percentage without specifying the basis for the presentation of the information (i.e., net asset value, total investments, or total or net exposure).
Disclosing material fund changes while omitting the required cover page disclosure or including the cover page disclosure but failing to include any disclosure about the material fund changes.
Including broken links (to their websites) in their shareholder reports.
Including extraneous and sometimes lengthy disclosures such as disclaimers or risks that are not required or permitted.
For Inline XBRL structured data purposes, tagging all of their indexes as broad-based indexes instead of tagging their additional indexes with the separate tag intended for additional indexes.
For further information, the complete ADI may be accessed, here.
Does Your Company Discourage Employees from Being Whistleblowers? The SEC May Think So!
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in 2010 in response to the 2008 financial crisis, added protections for whistleblower activity to the Securities Exchange Act of 1934 (“Exchange Act”). Specifically, Section 21F of the Exchange Act and the related Securities and Exchange Commission (SEC) rules (collectively, “Section 21F”), provide protections to employees and other persons who report possible violations of securities laws to the SEC. Section 21F created a bounty program whereby, if a whistleblower’s tip leads to an enforcement action, then, in some cases, the whistleblower can receive a percentage of the sanctions collected by the SEC. Section 21F also prohibits any action that could “impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.”[1]
SEC Enforcement Activity
The SEC has brought over 32 enforcement actions against both public and private companies for violations of Section 21F, with many actions alleging that provisions in certain agreements between the companies and their employees impeded the employees from reporting possible violations to the SEC. For example:
In June 2022, the SEC settled with The Brink’s Company regarding the terms of its confidentiality agreements entered into as a part of the company’s onboarding process, which prohibited employees from sharing the company’s confidential information with any third party without the prior written authorization the company. The SEC found that this language violated Section 21F because it did not include a carveout that would permit confidential information to be shared with the SEC without the prior approval of the Company, which could impede an employee’s ability to report potential violations to the SEC.[2]
In September 2023, the SEC settled with privately-held Monolith Resources LLC regarding the terms of its separation agreements with former employees that required them to “waive their rights to monetary whistleblower awards in connection with filing claims with or participating in investigations by government agencies.” These agreements explicitly stated that the agreement was not intended to in any way prevent or limit the former employee from participating in any investigation, but the SEC found that the language still impeded employees from participating in the SEC’s whistleblower program “by having employees forego important financial incentives that are intended to encourage people to communicate directly with SEC staff about possible securities law violations.”[3]
In September 2024, the SEC settled Section 21F charges with seven public companies, including a charge against Acadia Healthcare Company Inc. over language in its employee separation agreements that required employees to represent that they had not filed any complaints or charges with any agency or court, and agree they would not file any complaints with an agency or court relating to events prior to the date of the agreement. The SEC found that this could be interpreted as preventing former employees from reporting suspected securities law violations to the SEC.[4]
An important note worth highlighting is that, in all of the above cases, the SEC did not find that any whistleblower had actually been (or even claimed to have been) deterred from making a report to the SEC by the language in question or that the company had ever tried to enforce such language – rather, the enforcement action was brought merely because the language existed.
What You Should Do Now
As evidenced by the seven settlements that the SEC entered into on a single day in September 2024, whistleblower language continues to be a focus of SEC enforcement actions. Additionally, a number of publicly-traded companies have received demand letters from shareholders requesting revisions to publicly-filed agreements that the shareholders assert violate Section 21F and seeking access to books and records to investigate whether other agreements or policies exist that would violate Section 21F.
Because of the SEC’s increased focus on whistleblower language and the rise of demand letters, all companies, but particularly public companies, should review their employment, separation, and similar agreements with employees and contractors, as well as equity incentive and severance plans and award or participation agreements, to ensure they do not contain any language that could potentially be interpreted as impeding whistleblower activity. While the SEC enforcement actions appear currently to be focused on employee agreements, we note that Section 21F applies to any person, not just employees, so companies may also wish to consider reviewing their customer, supplier, investor, and other agreements for similar problematic language.
Whether any specific language in an agreement violates Section 21F will depend on the specific scope and substance of the provision. However, a non-exhaustive list of potentially problematic provisions include those that:
Prohibit the use of the company’s confidential information for any reason without appropriate carveouts or limitations;
Prohibit an individual from making any potentially disparaging remarks to any third party without appropriate carveouts or limitations;
Prohibit an individual from filing a report or complaint about the company with the SEC;
Require an employee to provide notice (advance or otherwise) to the company before or after contacting, meeting with, or disclosing confidential information to, the SEC; or
Require an individual to waive the individual’s right to recover a monetary award for participating in an SEC investigation relating to a securities law violation.
[1] 17 CFR § 240.21F-17(a).
[2] The Brink’s Company, Securities Exchange Act Rel. No. 95138 (June 22, 2022).
[3] Monith Resources, LLC, Exchange Act Rel. No. 98322 (September 8, 2023).
[4] Acadia Healthcare Company, Inc., Exchange Act. Rel. No. 100970 (September 4, 2024).
FTC Secures $5.68M HSR Gun-Jumping Penalty From 2021 Deal
Go-To Guide
FTC announced a $5.68 million penalty against Verdun Oil Company II LLC, XCL Resources Holdings, LLC, and EP Energy LLC for premature control of EP Energy during their 2021 transaction.
FTC took issue with the exercise of certain consent rights and coordination of sales and strategic planning with EP Energy before the deal closed.
The settlement also requires that for the next decade, the companies appoint an antitrust compliance officer, conduct annual antitrust training, and use a “clean team” agreement in future transactions.
The case highlights that maintaining independent operations pre-close is critical, regardless of the merits review of a transaction by the antitrust authorities.
On Jan. 7, 2025, the Federal Trade Commission, in conjunction with the Department of Justice Antitrust Division (DOJ), settled allegations that sister companies Verdun Oil Company II LLC (Verdun) and XCL Resources Holdings, LLC (XCL) exercised unlawful, premature control of EP Energy LLC (EP) while acquiring EP in 2021. This alleged “gun-jumping” HSR Act violation involved Verdun and XCL exercising various consent rights under the merger agreement and coordinating sales and strategic planning with EP during the interim period before closing.
In settling, the parties agreed to pay a total civil penalty of $5.68 million, appoint or retain an antitrust compliance officer, provide annual antitrust trainings, use a “clean team” agreement in future transactions involving a competing product, and be subject to compliance reporting for a decade.
Background
Under the HSR Act,1 an acquiror cannot take beneficial ownership of a target prior to observing a waiting-period, which allows the DOJ and FTC to investigate the transaction’s potential impact on competition in advance of any integration. During the pre-close period, parties to a proposed transaction must remain separate, independent entities and act accordingly. Penalties for HSR Act violations are assessed daily, currently at a rate of $51,744 for each day a party is in violation (amount adjusted annually for inflation).
In July 2021, Verdun and XCL agreed to acquire EP’s oil production operations in Utah and Texas for $1.4 billion. The transaction was subject to the HSR Act’s notification and waiting-period requirements. The transaction closed in March 2022 after an FTC investigation, with a consent decree settlement that required divesting EP’s entire Utah operation (an area where XCL also operated as an oil producer).
The FTC’s current complaint asserts that immediately after signing, Verdun and XCL unlawfully began to assume operational control over significant aspects of EP’s day-to-day business during the HSR Act review period. The complaint alleged Verdun and XCL
required EP to delay certain production activities in return for an early deposit of a portion of the purchase price;
exercised consent rights to discontinue new wells EP was developing;
agreed to assume financial risk of production shortfalls arising from EP’s commitments to customers, and then began coordinating sales and production activity with EP, which included receiving detailed information on EP’s pricing, volume forecasts, and daily operational activity;
required changes to EP’s site design plans and vendor selection;
exercised consent rights for expenditures above $250,000, which the complaint alleged inhibited EP’s ability to conduct ordinary course activities, such as purchasing drilling supplies or extending contracts for drilling rigs; and
exercised consent rights for lower-level hiring decisions, such as for field-level employees and contractors for drilling and production operations.
The complaint also criticized EP for taking “no meaningful steps to resist” XCL and Verdun’s requests for competitively sensitive information and “making no effort” to limit XCL and Verdun employees’ access or use of information, including data room information.
The alleged gun-jumping conduct occurred for 94 days, from July to October 2021, when an amendment to the agreement allowed EP to resume independent operations.
Takeaways
Gun-Jumping Enforcement is a Bright-Line Issue. The FTC’s action against Verdun, XCL, and EP is consistent with the conduct and “bright-line” enforcement approach in past gun-jumping cases—meaning the agencies will bring an action regardless of the magnitude of the impact on commerce. For example, in 2024, the DOJ brought an action against a buyer involving pre-closing bid coordination;2 in 2015, the DOJ brought an action involving the closing of a target’s mill and transferring customers to the buyer pre-close;3 and in 2010, the DOJ brought an action involving the exercise of merger agreement consent rights with respect to three ordinary course input contracts, one of which represented less than 1% of capacity.4
Significant Penalties May Ensue Regardless of Closing. Even though the parties resolved substantive concerns about the merger with a divestiture, they will have to pay a significant penalty for the gun-jumping violation. Though parties settled for an estimated 40% discount off the statutory maximum penalty, the FTC assessed the penalty to both the buy-side and the sell-side, which, since the deal has closed, leaves the buyer with the full obligation. In the past, both sides have also been assessed in abandoned deals and the authorities also have sought disgorgement when there are financial gains because of the violation.5
Consider Covenants that Allow for Ordinary Course Activities. Sellers should ensure they retain the freedom to operate in the ordinary course of business in purchase agreement interim covenants, which in turn maintains the competitive status quo remains while the deal is pending. As illustrated by this case, parties should be concerned with both the conduct that is allowed—e.g., entering into ordinary contracts, maintaining relationships with customers, or making regular hiring or investment decisions—and the dollar thresholds for any consent rights (ensuring they are sufficiently high).
Clean Team Process Needed Pre- and Post-Signing with Overlap. The FTC criticized EP as the seller for failing to impose restraints on the information it provided for diligence and post-close integration planning. The consent decree settlement obligates the parties to use a “clean team” process for future transactions with product or service overlap that antitrust counsel supervises. It also specifies that information shared must be “necessary” for diligence or integration planning, and where competitively sensitive, not be accessible by those with “direct[] responsibil[ity] for the marketing, pricing, or sales” of the competitive product.
Consult Antitrust Counsel Before Exercising Consent Rights. Even where the parties have agreed to certain interim covenants to protect the acquired assets’ value, the facts and circumstances at the time of exercise should be carefully considered for their impact on the seller’s competitive activities. Accordingly, parties are best served to seek the advice of antitrust counsel prior to either seeking consent or responding to a request for consent. A proactive approach may help avoid delays to closing and penalties.
1 15 U.S.C. § 18a.
2 U.S. v. Legends Hospitality Parent Holdings, LLC.
3 U.S. v. Flakeboard America Limited, et al.
4 U.S. v. Smithfield Foods, Inc. and Premium Standard Farms, LLC.
5 See U.S. v. Flakeboard America Limited, et al.
Key Legal Developments on Enforcement of the Corporate Transparency Act
In recent weeks, significant developments have unfolded regarding the implementation of the Corporate Transparency Act (CTA) and its beneficial ownership information (BOI) reporting requirements to the Financial Crimes Enforcement Network (FinCEN), which remain subject to a nationwide injunction.
As discussed in our previous Alert, on December 3, 2024, the U.S. District Court for the Eastern District of Texas granted a nationwide preliminary injunction in Texas Top Cop Shop, Inc., et al. v. Garland, et al., temporarily halting enforcement of the CTA and its BOI reporting requirements, including the January 1, 2025, filing deadline. The U.S. Department of Justice (DOJ) appealed, requesting a stay of the injunction or, alternatively, a narrowing of the injunction to apply only to the named plaintiffs and members of the National Federation of Independent Business.
In a flurry of year-end decisions, a panel of the Fifth Circuit Court of Appeals granted DOJ’s emergency motion on December 23, 2024, lifting the injunction. Three days later, a separate Fifth Circuit panel reversed the earlier decision, vacating the stay and reinstating the nationwide injunction. As a result, FinCEN again updated its guidance, stating that reporting companies may voluntarily submit BOI filings but are not required to do so during the pendency of the injunction.
On December 31, 2024, DOJ filed an emergency “Application for a Stay of the Injunction” with the U.S. Supreme Court, seeking to stay the injunction pending the Fifth Circuit’s review of the matter. Alternatively, DOJ invited the Court to “treat this application as a petition for a writ of certiorari before judgment presenting the question whether the district court erred in entering preliminary relief on a universal basis.”
The ongoing legal challenges have left the status of the BOI reporting requirement in flux. For the time being, unless the Supreme Court intervenes, the nationwide injunction is likely to remain in place through at least March 25, 2025, the scheduled date for oral arguments before the Fifth Circuit. Businesses that have not yet complied with the reporting requirements should remain alert to any changes. If the injunction is lifted, or if the Supreme Court grants a stay, reporting companies may be required to submit their beneficial ownership information promptly, subject to any deadline extensions provided by FinCEN. In the meantime, voluntary submissions of BOI reports to FinCEN are still accepted, but companies should be prepared to meet any new deadlines should the situation change. The next few months could prove critical for the future of the CTA and its enforcement.
Keeping Fraud Out of Research: Government Grant Whistleblower Awarded Over $200,000
A whistleblower recently played a pivotal role in exposing research misconduct, leading to a $4 million settlement from Athira Pharma Inc. under the False Claims Act. This case highlights the importance of safeguarding government-funded research and enforcing transparency in scientific investigations. Whistleblowers contribute to protecting taxpayer dollars, and under the qui tam provision of the False Claims Act, they may be entitled to 15-25% of the government’s recovery.
The Case Against Athira Pharma Inc.
The Bothwell, Washington-based biotechnology company allegedly failed to disclose research misconduct to the National Institutes of Health (NIH) and the Department of Health and Human Services (HHS) Office of Research Integrity. Athira’s former CEO, Leen Kawas, allegedly manipulated scientific images in her dissertation and published works. These publications were then referenced in multiple grant applications submitted to the NIH, one of which led to a successful grant award in 2019. The timeline of the alleged misconduct spans from January 1, 2016, to June 20, 2021, during which Athira violated its regulatory obligations to disclose these concerns.
The Role of the Whistleblower in Exposing Fraud
Whistleblower Andrew P. Mallon, Ph.D. filed the case under the qui tam provisions of the False Claims Act. The False Claims Act allows private individuals to act on behalf of the U.S. government and bring attention to fraudulent claims submitted to government programs. For his role in uncovering the misconduct, Dr. Mallon is set to receive $203,434 as part of the settlement.
Taxpayer Dollars and the Impact of Research Misconduct
This case underscores the need for ethical conduct in government-funded research programs. When federal agencies such as the NIH distribute grants, they trust recipients to provide accurate and truthful information. Any form of fraud, including the manipulation of research data, not only undermines the scientific process but also wastes public funds. As the Principal Deputy Assistant Attorney General said about the case, “The partnership between the scientific community and the federal government is built on trust and shared values of ethical scientific conduct.”
Why the False Claims Act Matters
The False Claims Act remains one of the U.S. government’s most effective tools for recovering taxpayer funds lost to fraud. Originally enacted to combat fraud against military supplies during the Civil War, the False Claims Act has since evolved to encompass broader areas of misconduct, including government research grants, healthcare programs, and other federally funded activities.
The CTA Is Dealt Another Blow
As has been widely reported, U.S. District Court Judge Amos L. Mazzant in early December of last year preliminarily enjoined the CTA and its implementing regulations. Texas Top Cop Shop, Inc. v. Garland, 2024 WL 5049220 (E.D. Tex. Dec. 5, 2024). This led to an off again/on again series of decisions from the Fifth Circuit Court of Appeals and a pending application for a stay of the injunction to the U.S. Supreme Court. See Seriously, The CTA Imposes Only “Minimal Burdens”? A response was filed with the Supreme Court last Friday as well as a plethora of amicus briefs.
In a further wrinkle, U.S. District Court Judge Jeremy D. Kernodle in the Easter District of Texas has also issued an injunction, finding with respect to the risk of irreparable harm:
Compelling individuals to comply with a law that is unconstitutional is irreparable harm. BST Holdings, LLC v. OSHA, 17 F.4th 604, 618 (5th Cir. 2021) (“For individual petitioners, the loss of constitutional freedoms ‘for even minimal periods of time … unquestionably constitutes irreparable injury.’ ” (quoting Elrod v. Burns, 427 U.S. 347, 373, 96 S.Ct. 2673, 49 L.Ed.2d 547 (1976))); Carroll Indep. Sch. Dist. v. U.S. Dep’t of Educ., ––– F.Supp.3d ––––, ––––, 2024 WL 3381901, at *6 (N.D. Tex. July 11, 2024) (noting that “the potential to infringe on constitutional rights” is “per se irreparable injury”); Top Cop Shop, ––– F.Supp.3d at ––––, 2024 WL 5049220, at *15 (“[I]f Plaintiffs must comply with an unconstitutional law, the bell [of irreparable harm] has been rung.”). And, as noted above, Plaintiffs have demonstrated that the CTA is likely unconstitutional.
Additionally, incurring unrecoverable costs of compliance with federal law constitutes irreparable harm. Wages & White Lion Invs., LLC v. FDA, 16 F.4th 1130, 1142 (5th Cir. 2021). And, here, Plaintiffs must expend money to comply with the reporting requirements of the CTA, which is unlikely to be recovered since “federal agencies generally enjoy sovereign immunity for any monetary damages.” Id.; Docket No. 7-1 at 3–4; Docket No. 7-2 at 3–4. Compliance with the CTA also requires Plaintiffs to provide private information to FinCEN that they otherwise would not disclose. Docket No. 7-1 at 4; Docket No. 7-2 at 4. The disclosure of such information is a type of harm that “cannot be undone through monetary remedies.” See Dennis Melancon, Inc. v. City of New Orleans, 703 F.3d 262, 279 (5th Cir. 2012); Top Cop, ––– F.Supp.3d at ––––, 2024 WL 5049220, at *15 (“Absent injunctive relief, come January 2, 2025, Plaintiffs would have disclosed the information they seek to keep private …. That harm is irreparable.”).
Smith v. United States Dep’t of the Treasury, 2025 WL 41924, at *13 (E.D. Tex. Jan. 7, 2025). Stay tuned.
Government Outlines Qui Tam’s Constitutionality in Detailed Brief to Eleventh Circuit
On January 6, the U.S. federal government filed a brief in U.S. ex rel. Zafirov v. Florida Medical Associates urging the U.S. Court of Appeals for the Eleventh Circuit to reverse a district judge’s ruling in a qui tam whistleblower case. In September, the U.S. District Court for the Middle District of Florida ruled that the False Claims Act’s qui tam provisions are unconstitutional, threatening to undermine the United States’ number one anti-fraud law.
The district court ruling found that the qui tam provisions were unconstitutional because they violated the Appointments Clause of Article II. The court ruled that by filing a qui tam lawsuit alleging Medicare fraud, whistleblower Clarissa Zafirov was granted “core executive power” without any “proper appointment under the Constitution.”
In its brief, the government claims that “other than the district court here, every court to have addressed the constitutionality of the False Claims Act’s qui tam provisions has upheld them.” It therefore urges the Eleventh Circuit to “join that consensus and reverse the district court’s outlier ruling.”
The government points to the Supreme Court decision in the 2000 case Vermont Agency of Natural Resources v. United States ex rel. Stevens, which held that the False Claims Act’s qui tam provisions are consistent with Article III. This decision “makes clear that relators do not exercise Executive power when they sue under the Act,” the brief states. “Rather, they are pursuing a private interest in the money they will obtain if their suit prevails. As private litigants pursuing private interests, relators are not enforcing federal law in a manner inconsistent with the Vesting and Take Care Clauses and need not be appointed in the manner required by the Appointments Clause.”
The brief further clarifies that while a relator’s qui tam suit “may also vindicate a federal interest in remedying and deterring fraud on the United States” “they are distinct from the government’s enforcement efforts even though they can supplement those efforts.”
The government additionally argues that qui tam relators are not government officers; do not exercise significant government authority due in part to the numerous statutory constraints which allow the government to “ensure that qui tam actions are consistent with its own priorities for the enforcement of federal law;” and do not occupy a continuing position since their role “is limited in time and scope, confined to a particular case, and fundamentally personal in nature.’
Further referencing Stevens and the Supreme Court’s emphasis on the long history of qui tam statutes in that decision, the government details “the prevalence of early qui tam statutes and the body of evidence that such statutes were understood to be constitutional.”
“The historical record.. suggests that all three branches of the early American government accepted qui tam statutes as an established feature of the legal system,” the brief states.
Overall, the government provides a detailed and comprehensive overview of the constitutionality of the False Claims Act’s qui tam provisions, rooted in both prior court precedent and the historical record.
NYDFS Urges Companies to Exercise Caution Due to Threats Posed by Remote Workers with Ties to North Korea
The New York Department of Financial Services (“NYDFS”) recently cautioned regulated entities to be aware of individuals applying for remote technology-related positions due to an increase in reported threats from North Korea. Threat actors have repeatedly attempted to access company systems and illegally generate revenue for North Korea under the guise of seeking remote Information Technology jobs at U.S. companies.
According to the NYDFS, these applicants often pose as individuals from the U.S. and other countries, using false and stolen identities and proxy accounts that belong to U.S.-based individuals, some of whom may knowingly sell their identities, assist with account creation, and participate in required pre-employment drug screening tests. Applicants use a variety of other tactics to hide their location and/or identity, such as using virtual private networks (“VPNs”) to make it appear that they originate and reside in U.S.-based locations when applying for telework positions, avoiding video or in-person conferencing, and asking for devices to be shipped to different locations pre-employment.
The NYDFS urged companies to take several steps to protect their systems from threat actors, including:
Raising awareness of this threat among senior executives, information security personnel third-party service providers, and human resources through targeted training;
Conducting due diligence during the hiring process by implementing stringent background checks and identity verification procedures;
Utilizing technical and monitoring controls, including procedures to track and locate corporate laptops and cellphones to ensure that they are delivered and remain at the initially reported residence, and flagging events related to location (e.g., change of address);
Limiting remote employees’ access to systems and data necessary to perform their jobs; and
Notifying the FBI’s Internal Crime Complaint Center if the company suspects that a remote worker is engaging in a fraudulent remote work scheme.
The NYDFS guidance provides additional detail and examples for implementing each of these steps. Federal agencies are also pursuing the IT worker threat, including the U.S. Departments of State and Treasury, and the Federal Bureau of Investigation.
NHTSA Adopts Final Rule to Formalize its Whistleblower Program under the Motor Vehicle Safety Whistleblower Act
On December 17, 2024, the National Highway Traffic Safety Administration (“NHTSA” or “Agency”) adopted a final rule to formalize its whistleblower program under the Motor Vehicle Safety Whistleblower Act (Whistleblower Act).[1] Under the final rule, which adopts the April 14, 2023[2] proposed rule without significant changes, whistleblowers who share original information related to violations of NHTSA’s regulations could receive an award between 10% and 30% of any civil penalties over $1 million paid by the violating entity.
To qualify for this bounty, the whistleblower must provide original information – information that is derived from independent knowledge or analysis that is not already known to the U.S. Department of Transportation (U.S. DOT) or NHTSA. The information cannot be exclusively derived from an allegation made in a judicial or administrative proceeding or other outside source (such as a government report or investigation, or a media report). Whistleblowers must also first report the information through internal channels, except in limited circumstances, such as for good cause shown.
Therefore, manufacturers should act now to ensure they have internal policies in place that, among other things, provide reporting processes that include clear protections against retaliation for whistleblower actions. Fostering a culture of vehicle safety throughout the manufacturing process further reduces the risk of civil penalties and bounties for whistleblowers.
“Original Information”
Under the final rule, a whistleblower who submits “original information” to NHTSA related to violations of NHTSA’s regulations may receive a monetary award in the form of a percentage of any civil penalties over $1 million paid by the violating entity. NHTSA’s final rule clarified that any restitution required of the violating entity is not considered a “civil penalty” for purposes of determining the amount of civil penalties assessed against the violating entity.
Under the Whistleblower Act, Congress defined “original information” as information:
derived from the independent knowledge or analysis of an individual;
that is not known to NHTSA from any other source (unless the whistleblower is the original source); and
that is not exclusively derived from an allegation made in a judicial or an administrative action, in a governmental report, a hearing, an audit, or an investigation, or from the news media, unless the whistleblower is a source of the information.
However, whistleblowers are not required by the final rule to “have direct, first-hand knowledge of potential violations.” Rather, whistleblowers “may have ‘independent knowledge’ of information even if that knowledge derives from facts or other information that has been conveyed by third parties.”
NHTSA excludes from consideration certain categories of information submitted by whistleblowers, including information:
Derived solely from attorney-client privileged communications;
Derived solely from attorney work product; or
Obtained in violation of Federal or State criminal law, as determined by a court.
Therefore, manufacturers should properly mark all attorney-client privileged communications and any attorney work product to prevent them from forming the basis for whistleblower reporting.
Whistleblower Reporting Requirements
To be eligible for the bounty, a potential whistleblower must file a claim for a whistleblower award by completing the WB-AWARD form and submitting it to NHTSA no later than 90 calendar days from the date NHTSA publishes a “Notice of Covered Action,” which notifies the public of its intent to assess civil penalties against a violating entity.
The potential whistleblower must also first report original information through the violating entity’s internal procedures, when such procedures are in place, unless[3]:
The whistleblower reasonably believed that such an internal report would have resulted in retaliation, notwithstanding 49 U.S.C. 30171(a);
The whistleblower reasonably believed that the information: (A) was already internally reported; (B) was already subject to or part of an internal inquiry or investigation; or (C) was otherwise already known to the motor vehicle manufacturer, part supplier, or dealership; or
The Agency has good cause to waive this requirement.
Thus, manufacturers should take steps now to implement internal reporting procedures and foster a culture of vehicle safety to increase the likelihood that they will first receive reports of suspected violations and have an opportunity to act, reducing the potential for civil penalties assessments and whistleblower fees.
Next Steps for Manufacturers
Manufacturers should remember that the best defense against Safety Act violations and civil penalties is to foster a culture of vehicle safety throughout their organizations. Consistent and clear messages that vehicle safety is a priority, coupled with robust internal processes and procedures that encourage reporting and proper evaluation of potential safety issues, can mitigate a manufacturer’s risk on multiple fronts, including the emergent risk associated with NHTSA’s whistleblower program and the risk of civil penalties assessments.
Manufacturers should also ensure that they have internal policies that provide clear protections against retaliation (including protections for whistleblowers, such as an anonymous reporting option) for anyone that reports a potential violation, as well as an appropriate level of transparency for the reporter (such as confirming an issue is being investigated by the relevant safety team). These policies and messages are important steps for fostering a safety culture and should be part of the manufacturer’s regular training programs. Finally, all documents that are subject to the attorney-client privilege or protected under the work product doctrine should be properly marked and stored.
[1] The Whistleblower Act is part of the Fixing America’s Surface Transportation (FAST) Act, signed into law by President Obama in 2015.
[2] See NHTSA Publishes Proposed Rule to Formalize its Whistleblower Program under the Motor Vehicle Safety Whistleblower Act for a discussion of the proposed rule.
[3] See 49 C.F.R. 513.7(g)