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Apple v. the DOJ: the Fight Over the Company’s Role in Law Enforcement

The U.S. District Court for the Eastern District of New York is the latest forum for the Department of Justice’s battle with Apple over the company’s obligations to help law enforcement investigate criminal matters. On February 29, a magistrate judge ordered that Apple was not required to use existing technology to bypass the lock screen of a defendant Jun Feng’s IPhone, extract the data, and provide it to law enforcement, who seized the phone pursuant to a valid search warrant. The government appealed the order to the district judge, arguing that the All Writs Act of 1789 authorized the Court to compel Apple’s participation in the execution of the search warrant. The All Writs Act, 28 U.S.C. § 1651, permits federal courts to “issue all writs necessary or appropriate in the aid of their respective jurisdictions and agreeable to the usages and principles of law.” Per the government, it is “necessary and appropriate” to compel Apple to help the government execute its warrant and conduct a search of Feng’s phone. Moreover, Apple has voluntarily assisted law enforcement in this manner many times before. Apple has yet to file its response to the appeal.

It is natural to draw a connection between this matter and the more publicized dispute over whether Apple should be compelled to build a special device to allow the government access into the IPhone of the San Bernadino (California) gunman, Syed Rizwan Farook, who, with his wife killed 14 people in a presumed terrorist attack. To be sure, both cases support the general notion that Apple is pushing back against efforts that it views as governmental intrusion into its customers’ privacy. But while the Farook case, for obvious reasons, has captured the public interest, the Feng matter holds more importance for criminal defendants. This is so for at least three reasons.

First, the government is not seeking access to Feng’s phone to investigate his participation in a criminal matter. Feng already pleaded guilty to conspiracy to distribute methamphetamine. During his plea hearing, he admitted to selling methamphetamine “with other people.” The government is seeking access to his phone in order to learn about those “other people” and, presumably, whatever other criminal activity it reveals. This posture dispels the popular notion that the government stops investigating once it obtains a guilty plea. It will continue to look for evidence of other offenses and offenders – and, if possible, compel private companies to participate in its search.

Second, the Feng matter has nothing to do with terrorism. As noted above, it is a drug case, which seems to pose no risk to national security – or at least no risk beyond that of an ordinary drug case. The advancement of national security through the gathering of intelligence related to terrorism is the government’s justification in attempting to compel Apple to infiltrate Farook’s IPhone. In the Feng matter, that justification is non-existent. The government seeks private assistance with run-of-the-mill law enforcement.

Third, and perhaps most significantly, Apple has chosen to litigate the matter despite the fact that it presumably could assist the government with little cost or effort. Farook’s phone has an encrypted passcode, which Apple would have to develop a mechanism to crack. Feng’s phone, on the other hand, features no special technology. Apple need only bypass the standard lock screen, which, according to the government, it can do with ease. Because Apple could comply with the government’s demand without expending significant resources – and without the concern that building a new device could lead create a “back door” for use by rogue governments, terrorists, or criminals – its refusal to participate in the execution of the search is a noteworthy development. Apple’s posture indicates that it will no longer be so complicit with law enforcement. The question whether tech companies are responsible for assisting in the execution of search warrants in ordinary criminal cases now rests with the courts.


Former Microsoft Finance Manager Settles Insider-Trading Charges Arising Out of Nokia Acquisition

A former Microsoft senior finance manager agreed on Friday to settle charges that he traded on material nonpublic information about Microsoft’s acquisition of Nokia Corporation’s mobile phone business.  The insider-trading charges were outlined in a complaint filed on the same day in U.S. District Court in Seattle by the SEC.  The settlement, which includes a combination of disgorgement and civil penalties totaling nearly $380,000, is pending court approval.

According to the SEC’s complaint, John E. Hardy, III, was employed in Microsoft’s corporate financial planning and analysis group.  While employed there, Hardy purchased put options after learning from highly confidential internal Microsoft documents that the company’s fiscal-year 2013 financial results would not meet Wall Street analysts’ expectations.  On July 18, 2013, Microsoft issued an earnings release containing those financial results.  Following the issuance of that release, Microsoft’s stock price decreased by more than 11%.  Shortly after the announcement, Hardy sold the put options, realizing gains of approximately $9,000.  

The complaint also alleged that Hardy purchased Nokia call options in August of 2013 after learning in the course of his work in the financial planning and analysis group that Microsoft was planning to acquire Nokia’s mobile phone business.  The acquisition was announced publicly on September 2, 2013, resulting in the price of Nokia shares rising more than 30%.  Hardy sold is Nokia call options shortly thereafter, resulting in profits of approximately $175,000. 

The complaint asserted claims of violations of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Hardy consented to the entry of a judgment permanently enjoining him from violating those provisions of the securities laws.  In addition, he agreed to disgorge all of his ill – gotten gains of $184,132, pay a one-time civil penalty of $184,132, and pay prejudgment interest of $11,389, for a total payment of $379,653 to resolve charges.  He also agreed to a five-year bar from serving as an officer or director of a publicly-traded company.

On numerous occasions, Microsoft has publicly stated its “zero tolerance” of employees engaging in unauthorized insider trading.  In its complaint, the SEC made a series of allegations concluding that Hardy had breached his duties to Microsoft and its shareholders by violating the company’s insider trading policy, as set forth in the Microsoft Employee Handbook. 

As part of the settlement, Hardy neither admitted nor denied the SEC’s factual allegations.  A complete copy of the SEC’s complaint can be found here.



OIG: Use of “Preferred Hospital Network” with Medigap Policies Would Not Draw Sanctions

On Friday, HHS-OIG issued an advisory opinion (No. 16-3) regarding the use of a “preferred hospital network” as part of Medicare Supplemental Health Insurance (“Medigap”) policies.  At issue in the requested opinion was a proposed arrangement for two insurance companies (owned by the same parent) to indirectly contract with hospitals for discounts on Medicare inpatient deductibles for their policyholders. OIG determined that the proposed arrangement would not constitute grounds for sanctions under the civil monetary penalty provision of the Social Security Act, and that the arrangement would not provide a basis for sanctions under the Federal Anti-Kickback Statute.

The insurers making the request indicated that they planned to start offering Medigap policies in several states.  As part of that plan, they proposed to participate in an arrangement with a preferred hospital organization (“PHO”) that has contracts with hospitals throughout the country (“network hospitals”).  Under the proposal, the network hospitals would provide discounts of up to 100% on Medicare inpatient deductibles incurred by the insurers’ Medigap policyholders that otherwise would be covered by the insurers.  Each time the insurers received this discount from a network hospital, the insurers would pay the PHO a fee for administrative services.  If a policyholder were to be admitted to a hospital other than a network hospital, the insurers would pay the full Part A hospital deductible, as provided under the applicable Medigap plan.  The insurers indicated that they would return a portion of the savings resulting from the proposed arrangement by issuing a $100 premium credit directly to any policyholder who has an inpatient stay at a network hospital.  

OIG ultimately concluded that, although the proposed arrangement could potentially generate prohibited remuneration under the Anti-Kickback Statute if the requisite intent to induce referrals were present, the OIG would not impose administrative sanctions.  Moreover, although the OIG did not find that the proposed arrangement qualified for “safe harbor” protection, it did find that the proposed arrangement presented a sufficiently low risk of fraud or abuse under the anti-kickback statute.  Specifically, it noted that neither the discounts nor premium credits would increase or affect per-service Medicare payments.  It also found, among other things, that the proposed arrangements would operate transparently, and would be unlikely to increase utilization, affect competition or impact professional medical judgment.

OIG also found a sufficiently low risk of fraud or abuse under its civil monetary penalty analysis.  Based on that and the totality of facts and circumstances that it reviewed, it found that it would not impose administrative sanctions.

A complete copy of the advisory opinion can be found here.



Supervised Release 101

Once a client has pled or was found guilty, much of our focus as practitioners is naturally on the client’s potential exposure to a prison term or fine.  Accordingly, we may not be as familiar with computing the potential period of supervised release applicable to a particular case.  This issue came up in a recent case so I thought others might find the results of my research helpful, particularly in cases where the guideline range is not significant but imprisonment is nevertheless a significant possibility.  It is also helpful as a means to double-check the calculations concerning supervised release made by the federal prosecutor in a plea letter or by the probation officer in a presentence report are correct.

In white collar matters, both the term and the management of supervised release often play a significant role in the lives of individuals attempting to rehabilitate and reconstruct their business or professional careers.  The risk of action by the government to revoke supervised release for failure to meet conditions, which may include the payment of restitution and fines, is very real.  Unfortunately, conditions of supervised release can often present substantial impediments to a return to a productive life following terms of imprisonment.  Accordingly, it is critical for counsel to advocate for the most appropriate terms of supervisory status.

Similar to probation, supervised release is a period of monitoring by the federal probation office and includes various conditions and rules that a defendant must follow.  Unlike probation, however, supervised release directly follows a term of imprisonment.  After federal parole was abolished in 1984 as part of the enactment of the federal sentencing guidelines effective in 1987, supervised release replaced parole as the means for supervising defendants after their release from prison.  Violating a condition of release, including committing another violation of federal or state law, can return the defendant to federal prison in addition to any punishment imposed for the new federal or state law violation.

The maximum term of supervised release depends on the classification of the offense of conviction under 18 U.S.C. §3559.  Federal offenses are classified by their corresponding letter grades based on the maximum prison term, Class A felony to Class E felony and Class A misdemeanor to Class C misdemeanor.  For example, a false statement offense under 18 U.S.C. §1001 typically has a five-year maximum and thus is a Class D felony.  Likewise, the misdemeanor offense of interference with a law enforcement agent under 18 U.S.C. §118, which has a maximum prison term of 12 month, is a Class A misdemeanor.

Based on the letter grade of the federal offense, 18 U.S.C. §3583 provides the authorized terms of supervised release: For Class A or Class B felonies, not more than five years; for a Class C or Class D felonies, not more than three years; for Class E felonies or for misdemeanors (other than a petty offenses), not more than one year.  When determining whether to impose supervised release and the length of the term, trial courts are directed to consider the 18 U.S.C. §3553(a) factors in determining the length of the term of supervise release and the conditions to be imposed.  Most courts have standard conditions of release but routinely create and tailor additional conditions based on the needs of the defendant and his or her offense.


Uni-Pixel Settles Civil Charges with the SEC after Former Chairman Enters Into Deferred Prosecution Agreement

The government’s investigation of public statements about product development by Uni-Pixel, Inc., has culminated in the settlement of potential criminal charges against its former Chairman and civil charges against the company.  Civil litigation against two former executives will continue.  On Wednesday, the SEC filed civil charges in the U.S. District Court for the Southern District of Texas against Uni-Pixel, its former CEO, Reed Killion, and former CFO, Jeffrey Tomz.  On that that same day, Uni-Pixel agreed to pay $750,000 to settle charges against the company that it mislead investors about production status and sales agreements for a key product. 

In the civil complaint, the SEC alleged that Uni-Pixel, a manufacturer of engineered films used to enhance and protect electronic product touchscreens, began publicly touting sales of a touch screen sensor product supposedly in speedy high-volume commercial production.  According to the SEC, however, at the time of that announcement only a few samples had been manually completed.  The SEC focused its complaint on several public announcements by Uni-Pixel during 2012 and 2013, including the following:

  • The announcements in 2012 and 2013 that Uni-Pixel had entered into “multi-million dollar” sales agreements, without mentioning the material conditions the company would have to meet in order to actually receive those revenues.
  • The announcement in April 2013 that Uni-Pixel’s high volume production line was “qualified and production ready” and its capacity “started at 50s moving to 100s and then 1000s over the next several months,” when at the time it had yet to produce any functional sensors through the high-speed process.
  • The announcement in a November 2013 press release of a “purchase order” for its sensors that expected to ship an initial “commercial run” of sensors by year end.  With the announcement, Uni-Pixel concealed that the order referred to in the release was for a mere $10 worth of sensors for the customer to review as samples.

The government asserted that those misrepresentations caused Uni-Pixel’s stock price to more than double.  As a result of the movement of the stock price, Killion and Tomz made more than $2 million in personal profits from selling their own shares of company stock.  The complaint alleges that both Killion and Tomz knew the company’s statements were untrue and that Uni-Pixel’s manufacturing process was still incapable of mass producing commercial quantities of sensors. 

In a related matter, the company’s former board chairman, Bernard T. Marren, entered into a deferred prosecution agreement.  The agreement alleged that Mr. Marren became aware that the information in Uni-Pixel’s press releases was inaccurate but failed to ensure that the company corrected the releases.  Under the agreement, he is required to cooperate with the SEC’s continuing case, while complying with certain undertakings in order to avoid civil charges against him. 

The case against Killion and Tomz continues as a civil matter in the United States District Court for the Southern District of Texas.  In settling the civil charges against it, Uni-Pixel consented to entry of a final judgment, including a permanent injunction against violations of the Securities Act of 1933 and the Securities and Exchange Act of 1934.  Under the terms of the settlement, which is subject to court approval, Uni-Pixel neither admitted nor denied the SEC’s charges.

The deferred prosecution agreement with former Chairman Marren can be found here, and the complaint filed against Uni-Pixel, Killion and Tomz, can be found here.


“A Little Enron Accounting” Leads to SEC Charges Against Municipal Water District and Two Managers

On Wednesday, the SEC charged California’s largest agriculture water district, Westlands Water District, with misleading investors about its financial condition when it issued a $77 million bond offering.  On that same date, Westlands agreed to pay $125,000 to settle the charges, making it only the second municipal issuer in history to pay a financial penalty in an SEC enforcement action.  The SEC also charged Westlands’ General Manager, Thomas Birmingham, and former Assistant General Manager, Louis David Ciapponi.  Birmingham and Ciapponi also agreed to settle the charges against them by paying $50,000 and $20,000 respectively.

At the heart of the case were the SEC’s allegations that Westland made misleading statements about its financial condition through what the SEC described as “extraordinary accounting transactions.”    According to the SEC, Westlands agreed in prior bond offerings to maintain a 1.25 debt service coverage ratio, constituting the measure of an issuer’s ability to make future bond payments.  In 2010, Westlands learned that drought conditions and reduced water supply would prevent the Water District from generating enough revenue to maintain that ratio.  In order to meet the ratio, Westlands reclassified funds from reserve accounts to record additional revenue.  According to the SEC, the general manager, Birmingham, jokingly referred to the reclassification transactions as “a little Enron accounting” when describing the transactions to Westland’s Board of Directors.

Based in part on the extraordinary accounting transactions, when Westlands issued the $77 million bond offering in 2012, it represented to investors that it met or exceeded the 1.25 ratio for each of the prior five years.  Westlands did not disclose that it would not have been possible to meet that ratio without the extraordinary 2010 accounting transactions.  In addition, Westlands omitted separate accounting adjustments made in 2012 that would have negatively affected the ratio had they been done in 2010.  The difference was significant, as the SEC indicated that Westlands coverage ratio for 2010 would have been only 0.11 instead of the 1.25 reported to investors.  The SEC found that Birmingham and Ciapponi improperly certified the accuracy of those bond offering documents.

A complete copy of the SEC’s order settling the charges against Westlands can be found here.




Hundreds of False Diagnoses Result in Guilty Plea for Physician in Medicare Advantage Fraud Case

On Friday, a Florida physician admitted to making false diagnoses of Medicare Advantage beneficiary patients, and entered a plea of guilty to one count of healthcare fraud in the United States District Court for the Southern District of Florida.  The physician, Dr. Isaac Kojo Anakwah Thompson, is an internal medicine specialist who operated a medical clinic in Del Ray Beach, Florida.  He was a primary care physician (PCP) enrolled in Humana, Inc.’s Medicare Advantage Health Maintenance Organization (HMO).  He carried out the fraud by making false diagnoses of patients in order to receive excess capitation fees from Humana.    

The Medicare Advantage program, administered under Medicare Part C, allows beneficiaries to enroll in health insurance plans sponsored by private insurance companies.  Medicare pays the sponsoring insurance company a fixed monthly fee for each beneficiary who enrolls.  Unlike Medicare’s fee-for-service model, the Medicare Advantage fee is based on the beneficiary’s medical conditions.  Accordingly, the fee paid for beneficiaries with serious medical conditions is larger than the capitated fee paid for a healthier beneficiary.  Medicare determines the beneficiary’s medical conditions in part by using diagnoses submitted by the beneficiary’s physician.

According to the government, between 2006 and 2010, Dr. Thompson diagnosed 387 Medicare Advantage beneficiaries with ankylosing spondylitis, which is a rare chronic inflammatory disease of the spine.  Dr. Thompson reported these diagnoses to Humana, which in turn reported them to Medicare.  These reported conditions resulted in Medicare paying approximately $2.1 million in excess capitation fees for those patients.  According to the government, approximately 80% of those excess capitation fees went to Dr. Thompson.  At the plea hearing, Dr. Thompson acknowledged that all or almost all of the ankylosing spondylitis diagnoses were false.

The charge to which Dr. Thompson pleaded guilty to carries a maximum statutory prison sentence of 10 years.  In addition, he faces orders of restitution and potential fines.  Sentencing in this case is scheduled for May 18, 2016.

While the actions acknowledged by Dr. Thompson in his plea hearing demonstrated blatant disregard for the requirements of the Medicare Advantage program, all providers should be aware of the scrutiny that continues to be applied to program participants.  In its FY 16 Work Plan, HHS-OIG reaffirmed its commitment to review medical record documentation to ensure that it supports the diagnoses submitted by Medicare Advantage organizations for use in CMS’s risk-score calculations.  The Work Plan indicates that OIG reviews have shown that medical record documentation does not always support the diagnoses submitted to CMS by Medicare Advantage organizations. A link to the FY 16 Work Plan can be found here.


HCFAC Releases FY 2015 Health Care Fraud Enforcement Results – Community Mental Health, Electronic Health Records and Quality of Care Highlighted

On February 26, the National Health Care Fraud and Abuse Control Program (HCFAC) released its fiscal year (FY) 2015 statistics regarding enforcement actions and recoveries for federal health care programs.  According to the report, during FY 15 the federal government won or negotiated over $1.9 billion in health care fraud judgments and settlements, and additional administrative impositions.  These actions resulted in the return of approximately $2.4 billion to the federal government or to private persons.  The Medicare Trust Funds received the lion’s share ($1.6 billion), while $135.9 million in federal Medicaid money was transferred separately to the U.S. Treasury.
The FY 15 report provides highlights of criminal and civil investigations across a wide range of health care matters, including many of these categories covered in the FY 14 Report:

  • Ambulance and transportation services;
  • Clinics;
  • Device companies;
  • Drug companies;
  • Durable medical equipment;
  • Health maintenance organizations;
  • Home health providers;
  • Hospice care;
  • Hospitals and health systems;
  • Identity theft;
  • Nursing homes and facilities;
  • Pharmacies;
  • Physician practice;
  • Prescription drugs;
  • Psychiatric and psychological testing services. 

Five (5) categories highlighted in this year’s report were not covered in the FY 14 report.  To the extent the inclusion of the categories in the FY 15 report may indicate a trend, they are identified as follows:

  • Community Mental Health Centers:  Each of the three cases highlighted in this category involved convictions of individuals who participated in fraudulent billing for psychiatric services as being conducted as part of a partial hospitalization program (PHP).  In each of the cases, the individuals were involved to one degree or another in the funneling of patients into programs where Medicare was billed for PHP services in instances where the patients did not need, qualify for or receive PHP treatment.
  • Electronic Health Records:  The CFO of a medical center in Texas was sentenced to 23 months in prison after pleading guilty to having provided a false attestation that the hospital’s electronic health record (EHR) platform met “meaningful use” requirements in order to qualify for incentive payments under Medicare’s EHR incentive program.  The evidence demonstrated that the hospital used the EHR system sparingly and did not meet the criteria for CMS incentive payments, which in FY 12 totaled $785,655.
  • Laboratories:  Both of the highlighted laboratory cases involved kickback schemes for referrals.  In the first case, three physicians were sentenced after pleading guilty to charges relating to a test-referral kickback scheme.  In the other featured case, two laboratories resolved civil FCA allegations that they paid physicians kickbacks in exchange for patient referrals, and billed federal health care programs for medically unnecessary testing.
  • Patient Harm:  In one highlighted case, a New York cardiologist was sentenced to three years in prison and ordered to pay $2 million in restitution after pleading guilty to a charge of health care fraud, for having offered patients narcotic prescriptions in exchange for those patients undergoing unnecessary diagnostic tests and other medical procedures.  In the second case, a Detroit area hematologist-oncologist was sentenced to 45 years’ imprisonment and ordered to forfeit $17.6 million for health care fraud, money laundering and a kickback scheme.  In that case, the government demonstrated that the physician had administered medically unnecessary infusions and injections to 553 patients, including medically unnecessary chemotherapy, cancer treatments, and other infusion and injection therapies.
  • Quality of Care: Several California nursing and health care services companies entered into separate settlement agreements worth a combined $3.8 million to resolve allegations of false claims for materially substandard or worthless services.  The companies were alleged to have overmedicated elderly and vulnerable residents of their facilities, causing, among other things, infection, malnutrition, dehydration, fractures, pressure ulcers, and for some beneficiaries, premature death.

The results discussed in the FY 15 report demonstrate a continued trend of increased enforcement action and recoveries over the past six (6) years.  Specifically, of the $29.4 billion returned by the HCFAC since the inception of the Program in 1997, over $16.2 billion was returned between 2009 and 2015.  While the overall trend of increased enforcement continues, the report demonstrates that the major enforcement indices remained relatively flat or represented a slight reduction from the numbers reported by HCFAC for FY 14:


FY 15

FY 14

Total health Care Fraud Judgments or Settlements

$1.9 B

$2.3 B

Amount returned to the Federal Government

$2.4 B

$3.3 B

New Criminal Health Care Fraud Investigations Opened by DOJ



New Civil Health Care Fraud Investigations Opened by DOJ



Cases of Criminal Charges Filed



Health Care Fraud-Related Convictions



Individuals Excluded from Program Participation by HHS-OIG



Number of DOJ Civil Health Care Fraud Matters Pending at end of FY



The HCFAC annual report provides a significant amount of detailed data and further examples of enforcement actions.  The link to the full report can be found here.


Recent Decision Dismissing Charges Against Penn State Administrators Renews Focus On Conflict, Waiver, Upjohn, and The Yates Memo

The Pennsylvania Superior Court recently dismissed several criminal charges against three former Penn State administrators facing prosecution over their handling of the Jerry Sandusky child molestation investigation, after concluding that former University General Counsel Cynthia Baldwin improperly testified against them before the grand jury.

The three-judge panel dismissed perjury, obstruction of justice and conspiracy counts against Graham B. Spanier, the university’s former president, and Gary Schultz, a former senior vice president for business and finance, and also tossed charges of obstruction of justice and conspiracy charges against Tim Curley, the athletic director. The Superior Court held that Ms. Baldwin breached attorney-client privilege when she testified to a grand jury in 2012 about Spanier, Schultz and Curley and what she believed they knew about the allegations of abuse.

The Superior Court found that “Ms. Baldwin did not adequately explain to [Schultz and Spanier] that her representation of [them] was solely as an agent of Penn State and that she did not represent [their] individual interests.” Com v. Spanier, 2016 WL 286663, at *14 (Pa. Super. Ct. Jan. 22, 2016).  Ms. Baldwin had appeared with Spanier, Schultz and Curley before each testified on their own behalf before the grand jury, and they believed she was there representing their interests. However, because Ms. Baldwin solely represented Penn State and failed to provide Spanier, Schultz and Curley with adequate warnings about her limited representation, her conduct left the three administrators without the personal counsel they desired before the grand jury. 

This decision highlights the increased importance of engaging separate counsel for employees in the wake of the Department of Justice’s Yates Memo, which requires corporations to fully cooperate with the government investigators and disclose all relevant facts related to potentially culpable individuals. This increased focus on individual accountability in corporate investigations enhances the possibility that the interests of the corporation may become adverse to those of its employees. Corporations must decide at the outset of an internal investigation whether to engage separate, independent counsel for employees. If separate counsel is not retained, it is crucial that the attorney for the corporation makes clear that (1) he or she represents only the corporation, and not the employee; (2) that any information provided may be privileged but the privilege is held by and controlled by the corporation, not the employee; and (3) that it is up to the corporation to decide whether it will waive that privilege and share any information with a third party, such as the government.



Private Communications at Odds with Analyst’s Rating Result in SEC Charges

On February 17, the SEC charged a former Deutsche Bank research analyst with certifying a rating on a stock that was inconsistent with his personal view, in violation of Regulation AC.   On the same day, the analyst, Charles P. Grom, agreed to settle the charges by paying a $100,000 penalty, and consenting to suspension from the securities industry for one year.

According to the SEC, its investigation found that Grom certified that his March 29, 2012 research report about discount retailer Big Lots accurately reflected his own beliefs about the company and its securities.  In private communications with other Deutsche personnel, however, Grom indicated that he didn’t downgrade Big Lots from a “Buy” recommendation because he wanted to maintain his relationship with Big Lots management.

In announcing the charges and settlement, the SEC provided a summary of Grom’s actions, which included the following:

  • On March 28, 2012, at a non-deal road show hosted by Grom and Deutsche Bank, Grom became concerned by what he believed to be cautious comments by Big Lots executives;
  • After that road show, Grom communicated with a number of hedge funds clients about Big Lots, four of those hedge funds subsequently sold their entire positions in Big Lots stock;
  • The following day, Grom issued a research report in which he reiterated his buy rating;
  • During an internal conference call within hours after the publication of his report, Grom said to other Deutsche personnel, among other things, that he had maintained a buy rating on Big Lots because, “we just had them in town, so it is not kosher to downgrade on the heels of something like that.”
  • On April 24, 2012, during another internal conference call, Grom discussed disappointing first quarter sales figures at Big Lots and stated, “I think the writing was on the wall [that] we were getting concerned about it, but I was trying to maintain, you know, my relationship with them.”
  • According to the SEC, Grom consented to the entry of the SEC’s order finding that he willfully violated the analyst certification requirement of Regulation AC of the Securities and Exchange Act of 1934.  He neither admitted nor denied the SEC’s findings.

A link to the SEC’s order can be found here.

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