Pastore & Dailey has successfully represented a multi-billion dollar municipal bond trader in connection with his wrongful termination from a large multinational bank. This termination was based on allegations of violation of the Bank Secrecy Act. Pastore & Dailey settled a FINRA arbitration brought against the trader arising from these claims.
Tag: Joseph Pastore
IRS Seeks Leave from Court to Serve Sweeping Summons on Bitcoin Exchange
In an ex parte Application for Leave to Serve John Doe Summonses dated November 17, 2016, the Internal Revenue Service requested of the United States District Court for the Northern District of California the authority to obtain the records of Coinbase, Inc. a bitcoin exchange located in San Francisco.
By its own terms, the request is speculative, relying on an undefined “likelihood” that the resulting summons will yield information identifying persons who have not properly filed or paid taxes due the United States. The only defined term upon which the request is based is IRS Notice 2014-21, which described the Services views on virtual currencies and offered the position that bitcoin (and similar devices) are not “currency” but, rather, are property under 26 U.S.C. §1221. Although the Notice reached this conclusion without analysis or authority, it is probably correct, at least for the moment. Only because bitcoins neither circulate nor are they customarily used and accepted as money in the country in which they are issued, they do not meet the definition of currency in the Bank Secrecy Act. 31 CFR 1010.100(m). Presumably, Treasury adopts this definition for tax purposes.
The request has alarmed the cryptocurrency community because it comes in the wake of absolutely nothing. No criminal case, claims of interviews with only three taxpayers who said they has used virtual currencies as a means of evading taxes, and not even a named suspect in the summons request. The report of the Treasury Inspector General for Tax Administration dated September 21, 2016 observes three critical issues:
- The IRS has no strategy concerning virtual currency;
- The Criminal Investigation unit of the IRS has undertaken no effort to inquire in matters concerning the improper reporting of bitcoin; and
- Notice 2014-21, so far the IRS’s only formal articulation of its position regarding bitcoin, characterizes bitcoin as property, not as currency, although the device is commonly accepted as currency by over 100 major organizations including Subway, Microsoft, Reddit, and Expedia. Many users of bitcoin are likely unaware of the Notice or uncertain of its arcane meaning.
Thus, for the IRS to use as its opening salvo into the matter of virtual currency what is described by its target as a “sweeping fishing expedition” gives every participant in a cutting edge technology pause to consider if the IRS should be able to leverage that enterprise to make up ground in its own investigative dilemmas. In short, should Coinbase become an involuntary source of data for the government absent more evidence supporting a wholesale compromise of the privacy of their customers’ information?
Enforcement in the Second Circuit of FINRA Pre-Hearing Subpoenas and Discovery Orders
In a Financial Industry Regulatory Authority (“FINRA”) arbitration under either the Consumer or Industry Arbitration Rules, there are two mechanisms for seeking discovery. For parties and non-parties who are not FINRA members, FINRA Rules 12512 and 13512, authorize an arbitrator to issue a subpoena for production of documents. For parties and FINRA members, FINRA Rules 12513 and 13513, authorize an arbitrator to issue an arbitration order (not a subpoena) for the production of documents. However it is unlikely that a party seeking enforcement of either the subpoena or the order issued by a FINRA arbitration panel will find relief in the court system. But that doesn’t leave enforcement out of reach.
Parties and Non-Parties who are not FINRA members
FINRA Rules 12512 and 13512 authorize an arbitrator to issue subpoenas for the production of documents. FINRA Rules 12512(a)(1) and 13512(a)(1). If the subpoena is not complied with, the next step for most litigators would be to move to enforce the subpoena in Federal District Court. However such an action is unlikely to be successful.
There is split among the Circuits but the Second Circuit interprets the Federal Arbitration Act (“FAA”) Section 7 as prohibiting enforcement of subpoenas for pre-hearing discovery. See Life Receivables Trust v. Syndicate 102 at Lloyd’s of London, 549 F.3d 210, 212 (2d Cir. 2008). However the Second Circuit court made it clear that,
[i]nterpreting section 7 according to its plain meaning “does not leave arbitrators powerless” to order the production of documents. Hay Group v. E.B.S. Acquisition Corp., 360 F.3d 404, 413 (3d Cir. 2004) (Chertoff, J., concurring). On the contrary, arbitrators may, consistent with section 7, order “any person” to produce documents so long as that person is called as a witness at a hearing. 9 U.S.C. § 7. Peachtree concedes as much, admitting that “Syndicate 102 could obtain access to the requested documents by having the arbitration panel subpoena Peachtree to appear before the panel and produce the documents.” In Stolt-Nielsen, we held that arbitral section 7 authority is not limited to witnesses at merits hearings, but extends to hearings covering a variety of preliminary matters. 430 F.3d at 577-79. As then-Judge Chertoff noted in his concurring opinion in Hay Group, the inconvenience of making a personal appearance may cause the testifying witness to “deliver the documents and waive presence.” 360 F.3d at 413 (Chertoff, J., concurring). Arbitrators also “have the power to compel a third-party witness to appear with documents before a single arbitrator, who can then adjourn the proceedings.” Id. at 413. Section 7’s presence requirement, however, forces the party seeking the non-party discovery — and the arbitrators authorizing it — to consider whether production is truly necessary. See id. at 414. Separately, we note that where the non-party to the arbitration is a party to the arbitration agreement, there may be instances where formal joinder is appropriate, enabling arbitrators to exercise their contractual jurisdiction over parties before them. In sum, arbitrators possess a variety of tools to compel discovery from non-parties. However, those relying on section 7 of the FAA must do so according to its plain text, which requires that documents be produced by a testifying witness.
Life Receivables Trust v. Syndicate 102 at Lloyd’s of London, 549 F.3d 210, 218, (2d Cir. N.Y. 2008). To obtain the aid of the Court system, the Second Circuit quoting from the Third Circuit clearly indicates that the arbitrators must order an appearance in some fashion of the object of the subpoena. Accordingly if such an appearance is ordered, then Section 7 of the FAA is no longer a prohibition against the production of the documents even if it is a pre-hearing appearance.
Parties and FINRA Members
FINRA Rules 12513 and 13513 authorize an arbitrator to issue a discovery order for the production of documents. If the discovery order is not complied with there is no opportunity to turn to the court system for enforcement relief because there was no actual subpoena issued. However, turning to FINRA’s Department of Enforcement is likely to be successful.
Enforcement of a pre-hearing discovery order, issued to a non-party FINRA member under FINRA rule 13513, is largely an issue of first impression. By way of background, FINRA Rule 13513 went into effect in its current form on February 18, 2013. Since that time there does not appear to have been any enforcement action by the FINRA Department of Enforcement for its violation. However, there is at least one enforcement action for violation of a party’s discovery obligations in an arbitration proceeding. See In Re Westrock Advisors. It is a violation of FINRA Rule IM-13000 to fail to comply with any rule of the arbitration code and specifically for failure to produce a document:
It may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Rule 2010 for a member or a person associated with a member to:
… (c) fail to appear or to produce any document in his possession or control as directed pursuant to provisions of the Code;…
In Westrock Advisors failure to comply with discovery orders was censured and a $50,000 fine was imposed.
Conclusion
Accordingly, enforcement of a subpoena or discovery order without use of the Court system is both possible and likely to be successful in obtaining documents in pre-hearing discovery from parties, non-parties, FINRA members and Non-FINRA members alike.
P&D Joins Professional Service Firm IR Global
Pastore & Dailey LLC is a recently accepted member of IR Global as a Capital Markets Firm for New York and Connecticut. IR Global is the fastest growing professional service firm network in the world, providing legal, accountancy and financial advice to companies and individuals across 150 jurisdictions. Each Firm, passing a stringent vetting process upon joining and recommended exclusively by jurisdiction and area of practice. Pastore & Dailey LLC was announced as new members of the IR Global Group in their latest newsletter.
Prospector Theater in Ridgefield, Connecticut
Pastore & Dailey LLC was a proud sponsor of the Prospector Theater’s First Annual Sparkle Cup Golf Outing. The event took place at Ridgewood Country Club in Danbury, CT. Pastore & Dailey’s Law Clerk Leigh Wellington attended and played in the golf outing. The Prospector Theater is a non-profit organization dedicated to providing meaningful employment for adults with disabilities, including through the operation of its movie theater.
SEC Cuts Back on the Use of Administrative Law Judges
In the past two years, the SEC has drastically reduced the number of contested cases it has sent to its internal administrative law judges (“ALJs”). The number of cases sent to these judges had been increasing since 2010, when the SEC gained new powers under the Dodd-Frank Act.
From then on, and especially after the SEC decided in 2014 to expand the use of the ALJs to contested cases for crimes such as insider trading, members of the legal community have argued that it would be very hard for these judges to remain unbiased given the fact that one of the parties in every case they review is responsible for their income — in a much more direct way than a state or federal court judge. Additionally, the ALJs were generally appointed by a lower-level employee than one might expect (an issue which has led to Constitutional challenges, which are outside the scope of this article).
The Wall Street Journal analyzed the cases sent to the ALJs from October 2010 to March 2015, and found the SEC won 90% of these cases. While this could be attributed to the fact that the SEC does a thorough job investigating before charging defendants with a crime, the fact that the SEC was victorious only 69% of the time in federal courts casts some doubt on this. In fact, the Wall Street Journal has reported that in spring of 2015, the SEC director of enforcement, Andrew Ceresney, shifted the policy of the Commission back to putting contested cases in federal court. Since then, the SEC has been using the federal court system for contested charges. From October 2014 to September 2015, the SEC used the ALJs in 28% of the contested cases, whereas the year before ALJs heard 43%.
Representing Former Commodities Trader
Pastore & Dailey has represented a former commodities trader in connection with employment and illegal business practice claims against one of world’s largest commodities trading houses.
Pastore & Dailey Successfully Represents Proprietary Trading Firm
Pastore & Dailey attorneys successfully obtained emergency injunctive relief on behalf of a Manhattan-based proprietary trading firm in a dispute with a former C-level executive in New York State Court. After securing the injunctive relief, Pastore & Dailey successfully invoked an employment agreement provision to stay the court case and compel arbitration in AAA. The case settled on favorable terms shortly thereafter.
The Facebook-FTC Settlement and the Future of Privacy Regulation
In the wake of a landmark Federal Trade Commission (FTC) settlement imposed on the social media giant Facebook, it is fair to speculate whether other companies will be forced to pay hefty fines and prioritize compliance with privacy standards in order to escape punishing federal regulation. The settlement, which was announced on Wednesday, July 24th, compels Facebook to pay a five billion dollar fine, the largest ever penalty leveled on a social media company in connection with privacy violations.1 Though the fine is relatively trivial in the context of Zuckerberg and co.’s multi-billion dollar annual earnings, the settlement also forces Facebook to “submit to quarterly certifications from the FTC to acknowledge that the company is in compliance with the [settlement’s] privacy program,” a major defeat for a company whose business model revolves around the collection and analysis of user data.2 The settlement also forces Facebook to reform its corporate structure and submit to oversight from an internal “privacy committee” tasked with ensuring the integrity of user data, among other impositions.2
All in all, the settlement is important not so much for its impact on Facebook as its implications for legal scrutiny of other technology companies. Although the federal government lacks the congressional mandate required to more expansively scrutinize the privacy standards of technology companies, such a mandate may well be in the offing, especially considering that political interest in privacy violations is cresting among members of both parties. Moreover, even if Congress elects not to craft a comprehensive online privacy law, future settlements imposed by the FTC could cripple rival companies lacking the social media giant’s seemingly inexhaustible resources.
Although the FTC settlement represented a major shift in the regulatory landscape, social media companies innocent of the sort of grave violations committed by Facebook can rest easy for the moment, given that the agency must target offending companies one-by-one in the absence of a sweeping congressional privacy mandate. In fact, the sort of stringent legal protections for user data commonplace in the European Union have not yet been approved by American lawmakers, who have so far refrained from devising a tough privacy law in the mold of the E.U.’s General Data Protection Regulation. Specifically, the European regulation requires social media companies to “inform users about their data practices and receive explicit permission before collecting any personal information,” a level of government oversight unheard-of stateside.3 Without the sweeping powers afforded to their European counterparts, American regulators have chosen to target serious individual offenses – like the unauthorized collection of user data by third party programs that sparked the inquiry into Facebook.2
But it would be a mistake to assume that the legal and political landscape will become more favorable to technology companies in the foreseeable future. Conservatives and liberals alike have entered into an uneasy alliance to promote a stringent new privacy law,4 and both Marco Rubio and Ron Wyden – lawmakers on distinct poles of the ideological spectrum – have proposed new regulations on social media giants.5 As a consequence of broad-based political support for privacy restrictions, future settlements reached with technology companies are bound to be at least as costly as the one recently reached with Facebook – a prospect that should trouble smaller companies that lack the ability to maintain profitability in the wake of a federal crackdown. Although federal regulation may prove burdensome and costly, compliance seems to be the vastly more preferable alternative.
- https://www.ftc.gov/news-events/press-releases/2019/07/ftc-imposes-5-billion-penalty-sweeping-new-privacy-restrictions
- https://www.cnbc.com/2019/07/24/facebook-to-pay-5-billion-for-privacy-lapses-ftc-announces.html
- https://www.nytimes.com/2019/06/08/opinion/sunday/privacy-congress-facebook-google.html
- https://www.nytimes.com/2019/07/14/technology/big-tech-strange-bedfellows.html
- https://blog.malwarebytes.com/security-world/privacy-security-world/2019/03/what-congress-means-when-it-talks-about-data-privacy-legislation/
Pastore & Dailey Successfully Represents Fortune 500 Pharmaceutical Corporation
Pastore & Dailey successfully obtained a withdrawal of all claims brought in Connecticut State court against our Fortune 500 pharmaceutical client. Our client was accused of distributing an asbestos tainted product sold in the 1970s. Following discovery efforts and extensive discussions, we were able to satisfy plaintiffs that there was no evidence linking our client to a contaminated product.