Industries

Financial Services

Financial services professionals understand their industry is subject to ever-increasing
scrutiny. So do we. New initiatives like the Justice Department’s Financial Fraud
Enforcement Task Force and the Consumer Financial Protection Bureau highlight this
reality.

Ifrah Law offers financial services professionals industry know-how and legal
exceptionalism. We have a track record for trying and winning cases across venues
and successfully concluding matters with, for instance, the Department of Justice, the
Securities Exchange Commission and the Commodities Futures Trading Commission.
Our clients include individual brokers, hedge fund managers, financial advisers to
financial companies, community banks and national lenders.

Ifrah Lawyers welcome the challenge of complex matters, so often the mark of financial
services cases. Our team consists of a former special assistant U.S. Attorney, a
former assistant U.S. Attorney and Manhattan Assistant District Attorney, and highly
experienced veterans from some of the nation’s largest and most respected law firms.

As important as our legal prowess is our understanding of your business and your
concerns. We keep in mind the collateral consequences to your professional life and to
your company. We know how to balance aggressive legal tactics with practical concerns
in order to represent you most effectively, and recommend strategies that put you at the
least personal and professional risk. And we stay with you and your case throughout the
entire process, representing you from start to finish.

Clearing SEC Charges Against a Former Securities Broker

When the U.S. government pushed Frederick O’Meally, the former Prudential Securities Inc. broker pushed back – and won.

Ifrah Law partner David Deitch acted as co-lead counsel in obtaining a jury verdict, rejecting claims by the U.S. Securities and Exchange Commission that O’Meally defrauded 60 mutual fund companies. The jury also rejected the SEC’s negligence claims with respect to 54 of the funds and found only that O’Meally was negligent in his conduct with respect to six of the funds.

Mr. O’Meally had fought the SEC for eight years, claiming his innocence and sticking up for his rights. The SEC asserted that the mutual fund companies had tried to prevent O’Meally from market timing on behalf of his clients, and that he had continued doing so through deception involving multiple account numbers and numerous financial advisor identifying numbers used in trades. But after a four-week trial, the jury found that the defendant did not commit any intentional fraud against the mutual fund companies. Evidence at trial showed that O’Meally had not misused these tools and that, in fact, all of his trading practices had been approved multiple times by his supervisors, by Prudential Securities lawyers and compliance personnel, and even by outside regulators.

The O’Meally case was one of the very small number of SEC compliance cases that go to trial each year, and one of an even smaller number of cases in which a jury has completely rejected SEC claims of fraud. While Prudential Securities and a number of other brokers targeted by the SEC negotiated settlements, Ifrah Law was part of the team that helped Frederick O’Meally vindicate his claims that he was innocent of the SEC’s fraud accusations.

(Securities and Exchange Commission v. O’Meally, No. 06-Civ-6483 (LTS) (S.D.N.Y.), No. 13-1116 (2d Cir.) )

 

Obtaining a Reversal of Conviction and Sentence Reduction for Securities Fraud

Ifrah Law represented a former Homestore.com executive, Stuart Wolff, who was indicted for securities fraud. During a six-year battle with the U.S. Attorney’s Office for the Central District of California, the trial and appellate teams worked together
to secure a reversal of the client’s conviction and a new trial.

In the months leading up to the second trial, the defense team, which included Jeff Ifrah of Ifrah Law, leveraged irregularities with discovery to obtain dismissal of all charges related to PricewaterhouseCoopers, Homestore’s former accounting firm. As a result, the sentence on remand was reduced by 70 percent relative to the sentence imposed after the first trial.

Jeff Ifrah was the only attorney Mr. Wolff retained from the beginning of the case to its conclusion. Mr. Ifrah began managing the legal team after the first trial, continued through the appellate process, and also in the team’s preparation for trial on remand.

Jeff Ifrah was responsible for formulating and executing the strategy that resulted in the 70 percent reduction of Mr. Wolff’s sentence.

(U.S. v. Wolff, Case No. 2:05-cr-00398 (U.S. District Court, Central District of California))

 

Obtaining a Winning Verdict After a Business Relationship Dissolves

Our client, Learning Annex, is a national leader in the post-secondary education industry. In three decades of business success, it has established many professional relationships. After Learning Annex created a unique strategy to promote the business of a financial self-help guru through free preview seminars and found a perfect partner for the execution of that strategy, those parties then cut Learning Annex out of the deal. Ifrah Law was part of the legal team that helped Learning Annex vindicate its rights.

David Deitch of Ifrah Law was co-counsel in a lengthy jury trial in the United States District Court for the Southern District of New York in which Learning Annex sought to recover the value of the services it had provided under theories of quantum meruit and unjust enrichment. The jury found in favor of Learning Annex and awarded damages of over $14 million, which together with pre-judgment interest totaled over $20 million. The court upheld the verdict on liability, but ordered a new trial on damages. After a retrial of damages in April 2012, a second jury awarded Learning Annex even more: $15.8 million plus interest.

(Learning Annex Holdings, LLC v. Whitney Education Group, Inc., No. 09- Civ-4432 (SAS) (S.D.N.Y.))

 

‘Tis the Season of Giving: Supreme Court Expands Insider Trading Liability to Recipients of “Gift” Stock Tips

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Just in time for the holiday season, the Supreme Court has ruled that gift-giving is truly its own reward.  But far from embodying the spirit of generosity that typically goes with that saying, the Court has ruled that the warm feeling one gets from giving to others can give rise to criminal insider trading liability. This ruling will extend insider trading liability for the recipients of tips, who were previously thought to be protected where they obtained information from an insider that was not the result of a quid pro quo exchange.

The case, Salman v. United States, dealt with a defendant who had received tips second-hand from a friend, Michael Kara, whose brother Maher was a trader at Citigroup.  Maher had initially turned to his brother for help understanding technical issues he encountered in his job but, eventually, began to share inside information with Maher with knowledge that Maher intended to trade on it.  Unknown to Maher, Michael shared some of these tips with his own friends, including Bassam Salman.  After making a significant amount of money trading on those tips, Salman was charged with insider trading and convicted following a jury trial.

Under a major 2014 ruling from a federal court in New York, Michael and Salman would have been protected from liability because they did not buy any stock tips from Maher or give him a share of their gains.  That 2014 case, United States v. Newman, emphasized the legal requirement that an insider receive a “personal benefit” from the recipient of a tip before the tippee could be charged with insider trading.  This requirement offered powerful protections for innocent parties who traded on tips they received without doing anything wrong.

But the Supreme Court ruled today that the personal gratification that a tipper enjoys when giving free information as a gift to a friend or relative is enough of a “personal benefit” to satisfy insider trading laws.  This all but does away with the personal benefit requirement, since it presumes that an insider benefits even when he receives nothing for information that he shares with another.

At one level, this may seem to make sense on the facts of Salman’s case.  One of the Court’s concerns was that a free stock tip may be no different from an insider trading on his own behalf and then giving the money away.  And that concern applied with particular force to Maher and Michael, since on one occasion Maher actually offered his brother money but was asked to give him inside information instead.

But the Court easily could have ruled narrowly on that basis; it did not.  Instead, by ruling that “the benefit one would obtain from simply making a gift of confidential information to a trading relative” is sufficient to satisfy insider trading laws, it has essentially removed one of the key limitations to the scope of insider trading laws, allowing for even an unthinking tip to a friend or relative to be the basis for criminal prosecution.  And although the Court left open the possibility that some gifts may not be meaningful enough to give rise to criminal liability, the breadth of today’s ruling suggests that exception is likely to be both small and difficult to prove.

That means that we should all be particularly careful as we get together with our families this December, particularly if a relative in the finance industry—or, indeed, in the corporate sector at all—offers up a stock tip at a family gathering.  Because the joy of giving can now lead to criminal exposure for the whole family.

The post ‘Tis the Season of Giving: Supreme Court Expands Insider Trading Liability to Recipients of “Gift” Stock Tips appeared first on Crime In The Suites.

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What the Payday Proposal Would Do

The Consumer Financial Protection Bureau (CFPB) has proposed a new rule to regulate payday lending and auto-title loan companies. Right now, it is merely a proposal, meant to undergo the notice and comment period until September 14, 2016. But if the rule goes into effect, it would be a significant imposition on the lending business.

The CFPB has been studying the effects of payday lending on consumers for years and found that many consumers struggle. They cannot repay their loans, so they take out new ones and incur significant penalties and fees. Or, they default on repayment altogether. The new rule tries to reduce this by regulating the people who issue those loans.

In theory, the rule would affect two types of loans: those with a term of 45 days or less, and those with a term of more than 45 days but with certain specifications, like an all-in annual percentage rate above 36% and a consumer’s bank account or vehicle for collateral. Before issuing either loan, a lender would have to determine if the borrower can repay it without re-borrowing in the following 30 days. To determine this, a lender would assess the borrower’s income, debt obligations, and housing costs; project them over the life of the loan; and forecast non-housing living costs.

The rule would also restrict how lenders can collect repayment. Today, lenders are allowed unlimited tries to withdraw from an indebted borrower’s bank account, but the new rule would stop them after the second attempt that fails due to insufficient funds.

Because the rule has not been approved yet, affected borrowers and lenders can speak out against or in favor of it. Richard Cordray, the director of the CFPB, has promised that the Bureau “will continue to listen and learn” as comments come in. Sourcing from the industry is the best way to create a rule that protects consumers and helps lenders continue to provide so vital a lifeline.

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Online Poker: A New Way to Bank?

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In light of Tax Day (note that it’s on the 18th of April this year due to a holiday on the 15th) we want to point out a curious ramification from a federal case concerning online gambling, tax reports, and foreign accounts.

In United States v. Hom [1], the defendant, John C. Hom, was an online poker player who had money in player accounts situated outside America. Accounts such as these are used for depositing funds, wagering them on the site, and withdrawing whatever remains; they are not generally treated as “bank accounts” proper, and Hom did not bother to file a tax return on them. Surprisingly, the court said he should have.

As explained by the court in its decision, an individual is mandated to file an FBAR (a Report of Foreign Bank and Financial Accounts) for a reporting year if all of these requirements are satisfied:

(1) he or she is a United States person;

(2) he or she has a financial interest in, or signature or other authority over, a bank, securities, or other financial account;

(3) the bank, securities, or other financial account is in a foreign country; and

(4) the aggregate amount in the accounts exceeds $10,000 in U.S. currency at any time during the year.

Id. at 1178.

In Hom’s case, three of the requirements were clearly satisfied: the defendant was a U.S. citizen (1), the accounts, like the gaming companies holding them, were located in a foreign country (3), and the aggregate amount in those accounts exceeded $10,000 (4).

Requirement (2) was the sticking point. Could an online poker account really clear the definition of “other financial account,” thus compelling Hom to file an FBAR? His team argued that it didn’t: the funds weren’t held in a bank or securities account and the defendant’s actions were limited to making deposits and withdrawals. Strikingly, the court ruled that it was a financial account because “he opened up all three accounts in his name, controlled access to the accounts, deposited money into the accounts, withdrew or transferred money from the accounts to other entities at will, and could carry a balance on the accounts.” Id. at 1179. The ability to deposit and withdraw at will sufficed to make the gaming companies “function as institutions engaged in the business of banking. Accordingly, defendant’s accounts are reportable even under the current regulations.” Id.

This is a very broad expansion of what passes for a financial institution, and it begs the question of how far it can go. For example, are funds in an attorney escrow account, or other escrowed accounts for a foreign transaction, FBAR reportable? After all, they, too, permit the client to make withdrawals and deposits and carry a balance—and possibly even control access.

Hom is only one case; other courts aren’t bound by it. However, they could still be influenced by this decision. It is therefore prudent to file an FBAR on gambling accounts located overseas that exceed $10,000. Furthermore, one should wonder whether other courts will borrow this reasoning and apply it to other forms of escrow accounts. These questions are very pertinent in light of the IRS’s continuing emphasis on the disclosure of foreign accounts.

[1] United States v. Hom, 45 F. Supp. 3d 1175 (N.D. Cal. 2014)

 

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What Expats Need to Know Now about their Taxes, FATCA and the IRS

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Are you an American abroad living in perpetual fear of the IRS? Do you wake up every morning wondering if today you’ll receive a formidable notice that the taxman cometh? You are not alone. Expats around the world are facing (and fearing) the painful reality that the IRS’s global tax enforcement effort is underway. While you may want to stick your head in the sand, a brief review of where we are and how we got here may encourage you to confront your IRS situation.

It started in 2010 with the passage of the Foreign Account Tax Compliance Act. FATCA was billed as an effective way to tackle offshore tax evasion. The legislation requires foreign financial institutions (FFIs) to report on U.S. taxpayers’ accounts or face hefty withholding penalties on transactions passing through the U.S. Affected institutions include not only banks, but any entities substantially engaged in holding or investing financial assets for others. These institutions are required to comply with the law regardless of conflict with the laws of their home country. That means FFIs have been put in the position of potentially violating local data privacy or bank secrecy laws or getting hit with significant penalties on funds passing through the States.

While the PR for the legislation presented it as an important means to tackle rich and greedy tax cheats, the reality is that FATCA impacts a lot more people than Swiss banking billionaires. The legislation has plenty of repercussions for the seven million plus U.S. citizens living abroad. Suddenly, dual citizens with negligible ties to the U.S. (say, they were born in the States but haven’t lived in the U.S. since infancy) realize they are supposed to be reporting their income and assets to the IRS, regardless of foreign location. Many of the unwitting lawbreakers and quiet law deniers have been waiting out the storm, not seeking resolution with the IRS as they think FATCA is not a fixed reality.

There is good reason why some people have hoped FATCA would be repealed, overturned, or perhaps ignored by other countries: (1) the conflicts between local laws and FATCA reporting requirements, (2) the significant costs to FFIs to implement FATCA compliance programs, (3) the unintended consequences to average expats that makes the legislation politically unpopular. The Alliance for the Defense of Canadian Sovereignty launched a legal challenge to FATCA in the Canadian courts. U.S. super lawyer, James Bopp Jr., has helped Republicans Overseas launch a challenge to the law in U.S. courts. And Senator Rand Paul has reintroduced legislation to effectively repeal the law. One would think Senator Paul’s efforts should get traction since there is a Republican-controlled Congress and the party has made FATCA repeal a part of the Republican National Committee platform. But power assumed is hard to retract.

Meanwhile, implementation of the law has trudged on. After a few delays, the law took effect July 1, 2014, and reporting has begun. More than 100 countries have entered treaties (intergovernmental agreements) with the U.S. to facilitate reporting and to get around local law conflicts. Countries with data privacy laws have agreed to have FFIs report to local tax authorities who in turn will report to the IRS. Even countries known for bank privacy protection and bank secrecy (like Switzerland, Hong Kong, and Austria) have agreed to comply with FATCA, eliminating secrecy for U.S. taxpayers.

Paving the way for large scale reporting, the IRS recently launched its web application, the International Data Exchange Service (IDES), for FFIs and foreign tax authorities. IDES is supposed to allow these FFIs and tax authorities to submit U.S. taxpayer information efficiently and securely by an encrypted pathway.

With treaties in play, reporting underway, and technological platforms built, the chances of FATCA getting repealed, overturned, or ignored are dissolving. This is especially true as more countries take their cues from FATCA and consider their own global tax enforcement efforts. Moving in this direction, the Organization for Economic Cooperation and Development has issued a new standard to facilitate intergovernmental sharing of financial data.

Expats that are behind on their IRS reporting need to face this fact and bite the bullet before they shoot themselves in the foot. It is important to address options, like whether or how to use the IRS’s Online Voluntary Disclosure Program or whether and how to renounce U.S. citizenship (note, you’ll still have to pay up for past deficiencies). But the reality is that FATCA is in force and the IRS is invested in ensuring all U.S. taxpayers comply. You may disagree in principle and you may (and perhaps should) advocate for repeal or revision. But in the meantime, find a way to face Uncle Sam.

 

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More Money, More Problems – Another Billion Dollar Settlement for the DOJ

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This summer BNP Paribas, one of the five largest banks in the world, agreed to a $9 billion settlement with the U.S. Department of Justice. The settlement figure may seem nothing short of economic shock and awe; indeed it was the largest criminal penalty in U.S. history. What could justify such a staggering fine and was the DoJ too heavy-handed in its tactics against the French-based bank?

The $9 billion figure was not created out of thin air. It correlates to the value of transactions that BNPP helped to push through the U.S. financial system on behalf of Sudanese, Cuban and Iranian interests. These countries have been subject to U.S. sanctions under the U.S. International Emergency Economic Powers Act (IEEPA). The sanctions restrict, among other things, trade and investment activities involving the U.S. financial systems, including processing U.S. dollar transactions through the States. BNPP chose to ignore those sanctions. What’s worse, the Statement of Facts that the DoJ published with its press release states that BNPP used cover payments to conceal the transactions it processed through its New York location and other U.S.-based banks. It also removed identifying information about the sanctioned entities and used complicated payment structures in order to prevent the transactions from being blocked when transmitted through the U.S. BNPP helped to finance oil and petrol exports for both Sudan and Iran. And the bank’s involvement in Sudan has been instrumental to the country’s foreign commerce market. All told, BNPP’s actions effectively undermined the U.S. sanctions, opening the U.S. financial system to those countries.

BNPP’s actions justify DoJ prosecution as U.S. authorities certainly have jurisdiction over U.S.-based activities. A stiff penalty also seems in order, given the bank’s blatant disregard for both the legal violations and their ramifications. The DoJ quotes a May 2007 BNPP Paris executive memorandum: “In a context where the International Community puts pressure to bring an end to the dramatic situation in Darfur, no one would understand why BNP Paribas persists [in Sudan] which could be interpreted as supporting the leaders in place.”

But did the DoJ go too far when it imposed $9 billion in sanctions? As of the date of the settlement, the fine more than doubled the enforcement agency’s highest criminal penalty on record. (Of course, big settlements with banks are becoming the norm: the DoJ recently settled with Bank of America for $16.5+ billion and with JP Morgan Chase for $13 billion.) The $9 billion penalty may not have had the desired impact of shock and awe the U.S. may have sought. Instead of being perceived as a show of force with a deterrent effect, some of the international community has reacted with disdain. Not surprisingly, this includes the French, who have been quite vocal about their feelings. The French Foreign Minister, Laurent Fabius, said the fine was an unfair and unilateral decision.” The French Finance Minister Michel Sapin questioned its legality by pointing out that the offending transactions were not illegal under French law.

It is not as though the U.S. is jumping across the pond and punishing a French bank on French soil for activity in France.  The actions in question took place through U.S. markets and therefore make U.S. prosecution justifiable.  But the French finance minister’s statement demonstrates the U.S.’s waning credibility abroad. Sapin did not stop at the BNPP settlement – he went on to question the entire monetary regime based upon the U.S. dollar: “Shouldn’t the euro be more important in the global economy?” The U.S. should not ignore this growing antipathy. Nor should we take for granted our economic or political authority. Examples like this settlement, or the largely resented Foreign Account Tax Compliance Act, may not be seen as a show of force but rather as an act of bullying. As we throw our weight around, others are considering whether the cost of doing business with us is just too high. If we keep it up, we could find ourselves at a table of one.

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