Good morning! Here’s what’s up.
Clips ✂️
Robinhood Markets Inc. said regulators are investigating the firm’s compliance with recordkeeping requirements, including employees’ use of “off-channel communications.”
The firm is cooperating with probes by the enforcement divisions of the Securities and Exchange Commission and Financial Industry Regulatory Authority, Menlo Park, California-based Robinhood said Wednesday in a quarterly filing.
The SEC is also looking into whether the brokerage followed rules about trade reporting related to securities lending and fractional share trading, according to the filing.
A judge questioned whether the SEC will “open the floodgates” to law firm data demands if Covington & Burling is forced to release names of 298 publicly-traded clients whose information may have been exposed in a cyberattack.
The Securities and Exchange Commission lawsuit to compel Covington to release the names in the 2020 firm attack presents “challenging” questions, District Judge Amit Mehta said Wednesday.
But it’s also not clear what privacy standard would constrain the SEC, Mehta acknowledged. He urged Covington and the SEC to try to reach an agreement, even as attorneys from both parties said they wouldn’t compromise on their positions.
👉 The NLJ reports that 83 law firms “including Am Law 100 firms Kirkland & Ellis, Latham & Watkins, Cravath, Swaine & Moore and DLA Piper, have backed Covington in the case, arguing that a judgment in favor of the SEC could have chilling effects on the historical standards of the attorney-client privilege.”
A new report suggests that the U.S. Securities and Exchange Commission is putting more muscle into ferreting out nitty-gritty accounting shenanigans by public companies.
The report by Cornerstone Research found that the SEC publicly disclosed 68 accounting and auditing enforcement actions in its fiscal year ending Sept. 30, a 55% increase from the prior year.
Notably, more than half of all actions were against individuals, which report co-author Alison Forman said comports with Chair Gary Gensler’s priorities.
“Under Chair Gensler’s leadership, the SEC has identified ‘holding individuals accountable’ as a ‘key priority area’ in its enforcement program,” said Forman, a principal at Cornerstone. “So, it is not a surprise that the percentage of actions initiated against individual respondents in FY 2022 was notably higher than those actions initiated during Jay Clayton’s administration.”
👉 A copy of the Cornerstone report is here.
The United States Internal Revenue Service (IRS) has filed claims worth nearly $44 billion against the estate of bankrupt crypto exchange FTX and its affiliated entities.
According to bankruptcy filings dated April 27 and 28, the IRS put forth 45 claims against FTX companies, which include West Realm Shires (the legal entity of FTX.US), Ledger Holdings (the parent company of LedgerX and LedgerPrime) and Blockfolio, among others.
The largest of the claims includes a $20.4 billion and a $7.9 billion claim against Alameda Research LLC and two claims totaling $9.5 billion against Alameda Research Holdings Inc.
A nearly $280 million award issued by the U.S. Securities and Exchange Commission is leading corporate lawyers to warn clients and could make the work of whistleblower attorneys even more busy in the face of a historically aggressive agency.
The award, announced Friday in connection with a multiagency, unnamed enforcement action, sent shock waves through the securities law world, according to multiple lawyers who spoke with the NLJ. It’s more than double any single previous whistleblower award from the SEC, and it’s about $50 million more than the total awards issued by the agency in 2022.
“It’s remarkable the SEC just made someone a quarter billionaire,” said one securities attorney who declined to be quoted by name.
But for lawyers who work with companies on the receiving end of such investigations, they hope it serves as a wake-up call for those they serve.
The important point here is that courts in Delaware — where many US public companies are incorporated — do not want to be in the business of deciding whether any particular business decision is terrible. So Delaware has a “business judgment rule,” in which courts try not to second-guess the business judgments of corporate directors….
Delaware is proud of this rule; this rule is not just “whaddarya gonna do sometimes boards do bad stuff,” but a positively good thing. Letting boards “make a terrible business decision without any meaningful threat of liability” allows companies to take risks, to make business decisions based on their honest assessment of what is best for shareholders rather than on fear of liability.
And so when a Delaware judge — here, Chancellor Kathaleen McCormick — gets a case like this, and decides that the directors should not be liable, she does not write an opinion saying “ehh this was all fine, it’s not as bad as you think.” She writes an opinion saying “lol this was all ridiculous, but even so I’m going to allow it, because around here we defer to independent boards of directors.”
Securities and Exchange Commission Chair Gary Gensler on Wednesday warned that a failure by Democrats and Republicans in Washington to reach a deal on raising the US debt ceiling would impact trading, the ability of businesses to raise money, and investors. Gensler, a Democrat who was appointed by President Joe Biden, said the standoff has already affected short-dated US Treasury bills.
“If the U.S. Treasury as an issuer were actually to default, it would have very significant, hard to predict, and likely lasting effects on investors, issuers, and markets alike,” Gensler said in prepared remarks for a conference hosted by the International Swaps and Derivatives Association in Chicago. “It would make the Cyclone Roller Coaster at the 1933 Chicago World’s Fair look like a kiddie ride.”
Bitcoin miner Marathon Digital Holdings said it received another subpoena from the US Securities and Exchange Commission related to an investigation of a Montana data center that may involve potential violations of securities laws.
“The Company received an additional subpoena from the SEC on April 10, 2023, relating to, among other things, transactions with related parties. We understand that the SEC may be investigating whether or not there may have been any violations of the federal securities law. We are cooperating with the SEC,” Marathon said in a filing Wednesday. A spokesperson declined to comment beyond the filing.
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