May 2014

Insider trading enforcement actions continue as SEC’s top priority

Illegal insider trading generally occurs when a security is bought or sold in breach of a fiduciary duty or other relationship of trust and confidence while in possession of material, nonpublic information. In recent years, the SEC has filed insider trading cases against hundreds of entities and individuals, including financial professionals, hedge fund managers, corporate insiders, attorneys, and others. In 2014, examples of noteworthy cases include enforcement actions against the following:

Two husbands on March 31, 2014 – In two unrelated cases, the SEC charged two men with insider trading on confidential information they learned from their wives about Silicon Valley-based tech companies. Each agreed to financial sanctions to settle the charges.

Stockbroker and law firm clerk on March 19, 2014 – SEC charged two individuals who were linked through a mutual friend, with insider trading for $5.6 million in illicit profits based on nonpublic information that the clerk obtained by accessing confidential documents in law firm’s computer system.

Wall Street investment banker on February 21, 2014 – SEC charged an investment banker with making nearly $1 million in illicit profits by insider trading in a former girlfriend’s brokerage account to pay child support.

Chicago-based accountant – SEC charged an accountant with insider trading ahead of the release of financial results by the company where he worked. The individual made more than $250k in illicit profits.

|Fraud|

FinCEN issues advisory on Financial Action Task Force’s jurisdictions with strategic deficiencies

The Financial Crimes Enforcement Network (FinCEN) issued an advisory regarding the Financial Action Task Force’s updated list of jurisdictions with strategic anti-money laundering and counter-terrorist financing deficiencies. Financial institutions should consider this advisory when reviewing their obligations

|Educational Series|

Sixth Circuit affirms dismissal of EEOC’s suit regarding employment credit checks

Last month, the 6^th Circuit affirmed a lower court order granting summary judgment in favor of educational institution Kaplan (6th Cir. April. 9, 2014; No. 13-3408: EEOC v. Kaplan Higher Education Corp.) where the EEOC charged that Kaplan’s use of credit checks causes it to screen out more African-American applicants than white, creating a disparate impact in violation of Title VII of the Civil Rights Act. In granting summary judgment to Kaplan, the district court stated that “proof of disparate impact is usually statistical proof in the form of expert testimony, and here the EEOC relied solely on statistical data compiled by Kevin Murphy, a PhD in industrial and organizational psychology.” The court excluded Murphy’s testimony on grounds that it was unreliable, as the EEOC presented “no evidence” that Murphy’s methodology satisfied any of the factors that courts typically consider in determining reliability under Federal Rule of Evidence 702; and, as Murphy himself admitted, his sample was not representative of Kaplan’s applicant pool as a whole. The EEOC argued that the district court “erred” when it excluded Murphy’s testimony.

This case was decided on narrow grounds, based on its particular facts and circumstances. Accordingly, employers still should review their screening policies to ensure that credit and (criminal history) checks are consistent with Title VII as interpreted by the EEOC. Additionally, ten states (California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington) and several municipalities already have legislation that limits the use of credit reports for employment purposes

|Employment Decisions, Judgment|

Reminder that EEOC’s guide on criminal checks extends to contractors and subcontractors

The guidance issued in 2012 by the Equal Employment Opportunity Commission’s (EEOC) on using criminal checks in employment decisions was also incorporated into the directive of Office of Federal Contract Compliance Programs (the “OFCCP”). As provided in the EEOC guidance, the OFCCP discourages the use of blanket hiring exclusions against individuals with criminal records, and recommends that contractors follow the EEOC’s best practices for employers to avoid liability for discrimination. The OFCCP advises that contractors, as a general rule, refrain from inquiring about convictions on job applications, and if such inquires are made, “limit the inquiries to convictions that demonstrate unfitness for the particular position.”

|Employment Decisions|

Class actions against employers for violations of the FCRA are increasing

An auto parts company (CA USDC Case No. 2:14-cv-3470) and a hotel chain (CA USDC Case No. 3:14-cv-01089) are just the latest employers that have been slapped with class action lawsuits for alleged violations of the Fair Credit Reporting Act (the “FCRA”) charging willful non-compliance with the FCRA’s disclosure, authorization, and/or notice requirements. And the payouts in such lawsuits can be in the millions. Within the past three years, a national trucking company reached a settlement for $4.6 million, a national retail chain for $3 million and a national pizza maker for $2.5 million.

The FCRA allows an applicant or employee to bring a private right of action against an employer who negligently or willfully fails to comply with any of the FCRA’s requirements. Under the statute of limitations, an action must be brought by the earlier of (1) two years after the date of violation discovery by the plaintiff, or (2) five years after the date on which the violation occurred. The employer’s liability for negligent non-compliance is actual damages sustained by the applicant/employee, and reasonable attorneys’ fees and costs. A willful violation carries actual or statutory damages ranging between $100 and $1,000, punitive damages, and attorneys’ fees and costs.

Below are general FCRA compliance reminders to employers when procuring and using background check reports prepared by a consumer reporting agency (“CRA”):

Provide disclosure to the applicant/employee in a standalone document that a consumer report may be obtained and used for employment purposes (language must be clear, with no superfluous information or liability waiver, and separate from the employment application);
Provide to the applicant/employee a summary of rights under the FCRA and applicable state notices;
Obtain the applicant/employee’s authorization for the consumer report;
Before taking adverse action based on the report (1) provide a pre-adverse action notice to the applicant/employee along with a copy of the report, and notices of rights, if not given previously, (2) wait a reasonable period of time (at least 5 days) before taking the adverse action, and (3) after deciding to take the adverse action, provide a notice that contains the FCRA required information, such as the name, address, and telephone number of the CRA that provided the report.

|Employment Decisions, Judgment, Lawsuit|