May 2012 Archives | Securities Law & Corporate Counsel Blog
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May 2012 Archives

FINRA Enhances BrokerCheck Capabilities

Enhancements to make FINRA's BrokerCheck and Investment Advisor Public Disclosure (IAPD) systems more user-friendly went live last week. FINRA's press release announcing the changes notes that they were implemented to ease investors' access to information concerning brokers, investment advisers and their firms. Many of the improvements address recommendations from a 2011 SEC report, mandated by Dodd-Frank, which outlined ways to improve investor access to information about financial professionals. Through the updated system, investors can now:

Reuters Releases Report Detailing HSBC’s Deficient Policing of Money Laundering Risks

Earlier this month Reuters issued a special report detailing confidential documents from investigations by two U.S. Attorney offices into violations by HSBC of the Bank Secrecy Act and other anti-money laundering laws.In April 2003 the Federal Reserve Bank of New York and New York state bank regulators ordered HSBC to do a better job of monitoring suspicious activity by its clients and customers. As a result, the bank allegedly improved its internal monitoring capabilities and hired a federal prosecutor to over-see its anti-money laundering activities. The documents uncovered by Reuters, however, indicate that these actions were merely window-dressing. In the years after the 2003 settlement with regulators, HSBC continued to violate anti-money laws by failing to adequately review “hundreds of billions of dollars in transactions for any that might have links to drug trafficking, terrorist financing and other criminal activity.” Reuters also reports that in addition to investigations by the U.S. Justice Department, HSBC is currently facing scrutiny by the Federal Reserve, the Office of the Comptroller of the Currency, the Manhattan District Attorney, the Office of Foreign Assets Control and the Senate Permanent Subcommitee on Investigations for its lack of adequate oversight.According to the reporters who reviewed the confidential documents, the Justice Department uncovered “anti-money laundering lapses of extraordinary breadth.” The reporters highlighted a number of specific shortcomings identified by the prosecutors, including:
  • Understaffing its anti-money laundering compliance division, including staffing the division with incompetent personnel;
  • Failing to review internal anti-money laundering alerts and failing to generate SARs on transactions that the bank’s internal monitoring systems picked up; and
  • Management intentionally deciding to not review alerts of suspicious activity and altering risk ratings on clients to avoid the detection of suspect transactions by the firm’s internal monitoring systems.
The Reuter report highlights the need for adequate compliance policies in this highly regulated area. Perhaps more importantly, however, the investigations by regulators into HSBC’s conduct underscore the importance of implementing sufficient procedures and testing mechanisms to ensure anti-money laundering procedures are actually followed.For additional information about anti-money laundering laws and regulation, or any other compliance concern please contact Sarah Weber at sarah.weber@jackolg.com or (619)298-2880.

New York High Court Rejects Unlawful Termination Claim by Hedge Fund Compliance Officer

On Wednesday, New York’s highest court rejected a claim by the former Chief Compliance Officer of Peconic Partners, LLC – a New York based hedge fund – that he was wrongfully terminated for confronting the fund’s majority owner, CEO and President, William Harnisch, for front-running. Sullivan v. Harnisch, et al., No. 82, NYLJ 1202552974182, at *1 (Ct. of App., Decided May 8, 2012). The complaint filed by the CCO, Joseph Sullivan, alleges he was terminated within days of objecting to sales by Harnisch in his personal account and the accounts of his family members in Potash Corp. (POT) the day before selling shares of the stock in the hedge fund’s accounts. The court noted that Sullivan, as CCO, had a duty to ensure that Peconic followed its legal and ethical obligation under state and federal securities laws, as well as its own Code of Ethics, to avoid such conduct. Notably, the court found that those “legal and ethical duties of a securities firm and its compliance officer [do not justify the recognition] of a cause of action for damages when the compliance officer is fired for objecting to misconduct.” An important factor in the reaching this decision seemed to be the fact that Sullivan was not a full-time compliance officer; rather, he held four other titles at the firm, including Executive Vice President and Chief Operating Officer.The high court also noted the limits of the recent protections afforded whistleblowers under the Dodd-Frank Act, stating a “private right of action for double-back pay for employees who are fired for furnishing information about violations of the securities laws to the SEC,” and no private right of action for termination that results in reporting violations internally. The opinion’s author, Hon. Robert S. Smith, Jr., stated Dodd-Frank “does not apply to conduct like that alleged in Sullivan's complaint; Sullivan does not claim to have blown a whistle…but only to have confronted Harnisch himself. Nothing in federal law persuades us that we should change our own law to create a remedy where Congress did not.”Two of the court’s seven judges, included the court’s Chief Judge, Hon. Jonathan Lippman, disagreed with the ruling. Judge Lippman’s scathing dissenting opinion observed:  “The majority's conclusion that an investment adviser like defendant Peconic has every right to fire its compliance officer, simply for doing his job, flies in the face of what we have learned from the Madoff debacle, runs counter to the letter and spirit of this Court's precedent, and facilitates the perpetration of frauds on the public.”For additional information about the Sullivan case or any other securities compliance concern please contact the author, Sarah Weber at sarah.weber@jackolg.com or (619)298-2880.