All bitcoin transactions are smart contracts, points out Chris DeRose on AmericanBanker.com. “Many institutions, which are increasingly exploring the use of blockchains for value settlement, have been similarly dabbling in the application and uses of smart-contract technology,” writes the community director of the Counterparty Foundation.

“Smart contract” essentially means “programmable money” or self-automated computer programs that can carry out the terms of any contract.

“The finer points of what programmable money is are still being worked out by enthusiasts, but most agree that it is a financial security held in escrow by a network that is routed to recipients based on future events, and computer code,” writes DeRose.

Read the article.

A class-action suit has been filed in federal court in Portland against two daily fantasy sports sites, FanDuel and DraftKings, alleging both businesses are operating illegal online sports betting, reports The Oregonian.

“Brandon Peck, a resident of Polk County, brought the suit on behalf of himself and more than 100 other Oregon players who lost money in the past three years while placing wagers online through the two sites, Draftkings.com and FanDuel.com,” according to the report.

The plaintiff is asking the court to halt the companies’ operations and have each business pay players back double the amount they’ve “wrongfully lost,” seeking more than $5 million.

Read the article.

At least six banks targeted in Switzerland’s investigation into Libor-rigging are in settlement talks with the country’s competition regulator, according to two people familiar with the negotiations, as the four-year probe moves closer to wrapping up, reports Bloomberg Business.

“Comco, as the Swiss Competition Commission is known locally, is trying to reach a so-called ‘accord amiable’ with the banks as it aims to complete the probe by July, one of the people said. They asked not to be identified because the negotiations are continuing.” the report says.

If a settlement in Switzerland goes through, it could result in the conclusion of nearly all the global investigations into this rate-rigging case.

Read the article.

By Rob Scott
Scott & Scott

I am a technology attorney representing financial institutions in transactions with service providers. The Gramm-Leach-Bliley (GLB) Act is a federal law that requires financial institutions take steps to ensure the security and confidentiality of customer data. As part of its implementation of the GLB Act, the Federal Trade Commission (FTC) requires financial institutions under its jurisdiction to safeguard customer records and information. This requirement is known as the Safeguards Rule.

The Safeguards Rule applies to organizations that are significantly engaged in providing financial products or services to consumers, including check-cashing businesses, data processors, mortgage brokers, nonbank lenders, personal property or real estate appraisers, and retailers that issue credit cards to consumers.

According to the Safeguards Rule, financial institutions must develop a written information security plan that describes their program to protect customer information. All programs must be appropriate to the financial institution’s size and complexity, the nature and scope of its activities, and the sensitivity of the customer information at issue. Covered financial institutions must among other things, select appropriate service providers and require them (by contract) to implement the safeguards.

From a transactional perspective, the Safeguards rule requires due diligence to insure that all service providers are “appropriate.” Once a service provider has been selected, appropriate contract language must be added in order to be in compliance with the Act.

Pursuant to Section 501(b) of GLBA, financial regulators have published the Interagency Guidelines for Establishing Information Security Standards and have established audit protocols to gauge compliance during routine audits.

Service Provider Definition

Under the regulations, a service provider is any party that is permitted access to a financial institution’s customer information through the provision of services directly to the institution. Examples of service providers include a person or corporation that tests computer systems or processes customers’ transactions on the institution’s behalf, document-shredding firms, transactional Internet banking service providers, and computer network management firms.

Overseeing Service Providers

The Security Guidelines establish specific requirements that apply to a financial institution’s contracts with service providers. An institution must:

• Exercise appropriate due diligence in selecting its service providers;
• Require its service providers by contract to implement appropriate measures designed to meet the objectives of the Security Guidelines; and
• Where indicated by its risk assessment, monitor its service providers to confirm that they have satisfied their obligations under the contract described above.

Sample Language for Monitoring and Oversight

Here is the language I like to use to make sure that the financial institution is in compliance with the requirement to oversee the service provider.

Use of Subcontractors. Vendor may use subcontractors in connection with this agreement provided that Vendor’s use of subcontractors is in compliance with the requirements set forth in 501(b) of GLBA. Upon request Vendor must certify that its vendors and subcontractors are in compliance with GLBA.

Oversight. Upon request, Vendor shall provide BANK with copies of audits, summaries of test results, or equivalent evaluations to confirm that Vendor is in compliance with its obligations under GLBA.

Requiring Service Providers to Implement Appropriate Security Measures

The contract provisions in the Security Guidelines apply to all of a financial institution’s service providers. After exercising due diligence in selecting a company, the institution must enter into and enforce a contract with the company that requires it to implement appropriate measures designed to implement the objectives of the Security Guidelines.

In particular, financial institutions must require their service providers by contract to:

• Implement appropriate measures designed to protect against unauthorized access to or use of customer information maintained by the service provider that could result in substantial harm or inconvenience to any customer; and
• Properly dispose of customer information.

Sample Language for Safeguards Rule

I use this language to make sure that that the service provider is contractually bound to implement appropriate measures.

Compliance With Laws. Vendor represents and warrants that the Services will be performed consistent with all applicable laws, rules and regulations, and that it will promptly re-perform at its expense any Services that fail to meet that standard. Vendor acknowledges that BANK is subject to the GLB Act, Title V, (“GLBA”) and that Vendor is considered a service provider under GLBA. During the term of this agreement, Vendor shall have, adequate administrative, technical, and physical safeguards designed to protect against unauthorized access to or use of customer information maintained by it or its subcontractors or vendors that could result in substantial harm or inconvenience to BANK or any customer, as set forth in GLBA to (i) ensure the security and confidentiality of such BANK Data; (ii) help protect against any anticipated or reasonably likely threats or hazards to the security or integrity of such BANK Data; (iii) help protect against unauthorized access to or use of such BANK Data; and (iv) ensure the proper disposal of BANK Data.

Incident Response Rule

In addition, the Incident Response Guidance requires a service provider to take appropriate actions to address incidents of unauthorized access to the financial institution’s customer information, including notification to the institution as soon as possible following any such incident.

Sample Language for Incident Response

Here is the sample language I like to use to use for the incident response rule.

Incident Response. Vendor will take appropriate actions to address incidents of unauthorized access to BANK’s customer information, including notifying BANK as soon as possible following any such incident.

When representing financial institutions in transactions with service providers, it is critically important to understand the regulatory framework and how it impacts the transaction. I rarely see vendor contracts that comply with these regulations. Failure to comply with the GLBA safeguards rules and contracting requirements with services providers can result in adverse audit findings by regulators and potentially increase liability for privacy and security claims for damages.

Schiff Hardin LLP announces that Domenick Pugliese has joined the firm’s New York office as a partner in the Financial Markets and Products Group. With more than 25 years of experience, Pugliese focuses on the investment management business. He advises investment companies, investment advisers, and independent directors of investment companies. He joins the firm from Paul Hastings LLP, where he was a partner.

A former deputy general counsel for the Alliance Mutual Funds and in-house counsel to the Prudential Mutual Funds, Pugliese has broad experience regarding all aspects of Investment Company Act and Investment Advisers Act regulation. Dom focuses his practice on representing mutual funds and independent trustees and directors of mutual funds, as well as variable annuity trusts. He works with funds and fund boards of all types of investment companies, including mutual funds, closed-end funds, exchange-traded funds, and business development companies.

“With his experience both in-house and in private practice, Dom is a great addition to our firm as we grow our financial markets offerings,” said Marci A. Eisenstein, Schiff Hardin’s Managing Partner. “Clients participating in the U.S. securities and futures markets will value Dom’s insight as they maneuver increasingly complex legal and regulatory challenges.”

Paul E. Dengel, leader of the firm’s Financial Markets and Products Group, said, “Beyond investment management, Dom has invaluable experience in mergers and acquisitions of investment companies, and in fund structuring and creation. His versatile background is a strong addition to our group.”

In addition to his practice, Pugliese is a frequent speaker at industry conferences, particularly those relating to the roles and responsibilities of independent trustees. He also serves on the advisory board of the Investment Company Institute’s Independent Director Counsel Roundtable.

“As the SEC continues to impose new duties and responsibilities on mutual fund independent directors, clients need adept counsel more than ever,” said Pugliese. “My practice is dedicated to advising these clients. By joining Schiff Hardin, I am joining colleagues whose experience both complements and expands my practice.”

He graduated from the George Washington University Law School, earning his J.D. with honors and serving as a member of the George Washington University Law Review. He earned his B.S. from the State University of New York Binghamton.

Legal technology company Everlaw Inc. has closed an $8.1M Series A funding round, led by top venture capital firm Andreessen Horowitz.

This funding comes five years after Everlaw’s launch and will enable the company to accelerate its mission to bring cutting-edge computer science and modern design principles to the legal field, the company said in a release. Everlaw’s eponymous ediscovery software is used by international law firms, corporations, and government agencies to prepare for litigation. The investment underscores the potential both of the company and of the legal technology field.

Legal software has lagged behind other industries. Lawyers have struggled with difficult-to-use tools and relied on antiquated manual approaches. Everlaw’s software changes that: it provides user-friendly, tech-advanced tools to help lawyers work more effectively. This allows legal teams to find evidence and construct the narrative needed to win in court.

2015 was a year of growth for the company:
● Named a “Vendor to Watch” in ediscovery by Gartner
● Powered major General Motors Ignition Switch litigation
● Released 24 new features and feature improvements
● Named a “101 Best Company to Work For” in the San Francisco Bay Area
● Grew team by 33 percent

Andreessen Horowitz, a leading Silicon Valley venture capital firm, has also invested in such companies as Facebook, Twitter, Airbnb, Box, Slack, Optimizely, and Zenefits. Andreessen Horowitz Partner Steven Sinofsky will be joining the Everlaw Board of Directors.

“This investment fuels our vision of a unified litigation platform with advanced artificial intelligence and data visualization, a beautiful user experience, and rich collaboration from discovery to the courtroom,” said Everlaw CEO AJ Shankar.

“At Andreessen Horowitz, we are always incredibly excited to see technology founders taking on the hard work of re-imagining an industry. It is super clear that mobile, machine learning, and cloud delivered via SaaS will revolutionize every vertical, including legal. We love the work that the Everlaw team has done to bring such high-powered efforts to an incredibly important part of the economy,” said Andreessen Horowitz Partner Steven Sinofsky.

Goldman Sachs Group on Thursday agreed to pay $5.1 billion to end an investigation into its packaging of residential mortgage-backed securities in the run-up to the financial crisis, reports Forbes.

“Thursday’s agreement with the RMBS Working Group of the U.S. Financial Fraud Enforcement Task Force, still subject to finalization with the Justice Department and other authorities, includes a $2.4 billion civil monetary penalty and calls for $875 million in cash payments and $1.8 billion in ‘consumer relief’ such as forgiving principal for borrowers whose homes are worth less than their remaining mortgage obligations and supporting foreclosure prevention,” Forbes reports.

The bank said the settlement would knock $1.5 billion off its after-tax earnings from the fourth quarter of 2015.

Read the article.

Citigroup said Friday that its profits jumped sharply in the fourth quarter, helped by lower legal and regulatory costs that hammered the bank in the fourth quarter of 2014, according to a report on ABC News.

The report says the financial conglomerate had a profit of $3.34 billion in the three-month period ending in December, or $1.02 per share. That’s compared to a profit of $344 million, or 6 cents per share. In the corresponding quarter in 2014, Citigroup incurred $3.5 billion in legal costs tied to settling several high-profile investigations, including allegations of currency trading and interest rate manipulation.

Read the article.

Strong economic growth coupled with low interest rates resulted in a perfect storm for acquisition finance, with plenty of cheap debt available to fund deals, MergerMarket reports in its Global M&A roundup for 2015 for legal advisors.

During 2015 the value of cash & equity transactions increased to US$ 699.8bn, up 43.5 percent, compared to 2014’s annual total (US$ 487.7bn), reflecting a balance between cheap loans and cash piles on balance sheets.

Law firm Skadden Arps Slate Meagher holds on to the number one spot for deal value for another year while Latham & Watkins jumps from fourth to second last year. Cravath, Swaine & Moore makes an enormous leap from thirteenth place in 2014 to third in 2015, the report says.

“Attractive tax laws have resulted in Ireland and the UK becoming the most targeted countries by US companies in 2015. Ireland (36 deals, US$ 190.7bn) received the bulk of investment from the Allergan/Pfizer deal, whilst the UK (244 deals, US$ 61.8bn) benefited from the US$ 18.2bn acquisition of Visa Europe by US-based Visa Inc.,” according to the report.

Read the report.

The Consumer Financial Protection Bureau has proposed prohibiting application of pre-dispute arbitration agreements to class litigation involving certain consumer financial products, according to a report published by Carlton Fields on its website.

“Citing concerns that such agreements ‘effectively prohibit’ class litigation and prevent consumers from obtaining remedies for harm caused by providers of consumer financial products or services, the proposal would apply to most products subject to Bureau oversight,” the report says.

“The Bureau’s proposal would prohibit inclusion of arbitration clauses that block class action claims in contracts with consumers for credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans.”

Read the report.

The recently signed FAST Act was conceived as a federal transportation bill, but it also contains a number of provisions targeted toward the financial services industry, which will have a considerable impact on the strategy and operations of community banks, reports Bracewell & Giuliani.

The report includes sections covering using Federal Reserve resources to offset the cost of the legislation, regulatory relief measures for small to medium sized banks, equalizing the registration threshold for holding companies, and codifying the “4(1½)” exemption.

The FAST Act includes several other capital markets provisions that facilitate access to the capital markets for emerging growth companies and smaller reporting companies, according to the authors, Sanford Brown, Lauren Bourke Chase, Justin Long and Joshua McNulty.

Read the article.

Will you or your law firm practice be affected by this week’s compromise by Congressional leaders regarding taxes and deductions if it becomes law (which is currently anticipated)?

Accountant Steven Bankler has outlined which “Extenders,” both for business and individuals, are being made permanent, and also which “Extenders” are being extended through 2016 and which are extended through 2019.

In an analysis published on his website, he has outlined how those extenders apply to businesses and to individuals.

Read the report.

Certified Forensic Accountant Steven Bankler takes a look back at his tenure as an expert witness for a congressional committee investigating President Bill Clinton’s investment in Whitewater Development Corporation.

In a report published on his website, he explains that he was U.S. Senate’s investigative accountant for the Special Committee to Investigate Whitewater Development Corporation and Related Matters, administered by the Committee on Banking, Housing, and Urban Affairs.

“One could say that the Whitewater investigation presented a “trial by fire” test of my Daubert prowess, since the standard was still in its infancy,” he wrote. “These days, 20 years after the standard was first introduced, there is no excuse not to be prepared.”

Read the report.

The Securities and Exchange Commission has reached a settlement with JPMorgan Chase agreeing to pay penalties totaling $367 million, after the SEC accused two of the bank’s wealth management subsidiaries of failing to disclose conflicts of interest to clients, reports consumerist.com.

“The SEC found that JPMorgan Securities and JPMorgan Chase Bank preferred to invest clients in the firm’s own proprietary investment products, but didn’t exactly go out of their way to disclose this preference,” the site reports. “The regulators say that, without this information, JPMorgan’s were deprived of information they needed to make fully informed investment decisions.”

Read the article.

InformationWeek has posted a free on-demand webinar reviewing key industry cyber security trends affecting financial institutions and methods of preventing and responding to a breach.

“If you’re like most financial institutions, you have controls that identify breaches, but need proper procedures that’ll enable you to recover from such an event,” InformationWeek says on its Bank Systems & Technology site. “In addition, you now face regulatory guidance for developing cyber resilience within your security program. Your ability to respond quickly to cyber security incidents is critical to limiting the impact of a breach on your operations.”

The webinar discusses the current threats across the financial marketplace and explore strategies for implementing a successful incident response program as outlined in the Federal Financial Institutions Examination Council’s cyber resilience guidance.

Watch the on-demand webinar.

The Wall Street Journal lists five points to keep in mind when considering the Federal Reserve’s action on interest rates at today’s Fed meeting.

“The Federal Reserve, after holding its benchmark federal-funds rate near zero for seven years, is likely to raise it this week by a quarter percentage point.” according to the report. “The widely expected move ‘will be a testament…to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession,’ Chairwoman Janet Yellen said earlier this month. Looking past liftoff, the U.S. central bank will seek to shape expectations for how quickly interest rates will rise in the coming months and years.”

Read the article.

In an industry known for its inventiveness, energy companies may turn to a new source of capital outside traditional debt or equity markets or even large asset sales, reports Sidd Dadhich in an article posted on the website of The Texas Journal of Oil, Gas, and Energy Law.

“The crowdfunding phenomenon has given entrepreneurs passed over by institutional investors access to much needed capital. The 2012 Jobs Act made equity crowdfunding, which gives investors a piece of the company they fund, easier for accredited investors,” according to the article.

The SEC did not open up equity crowdfunding to individuals (or couples) with net worths below $1 million, but newly released rules will enable non-accredited investors to join in equity crowdfunding under certain constraints, beginning in January 2016.

“If companies and crowdfunding portals can adequately manage the litigation risk, the possibility of opening investment opportunities to the ‘little guy’ will be a welcome prospect for all parties involved,” Dadhich writes.

Read the article.

D.C. Toedt III, an attorney and adjunct professor at the University of Houston Law Cen­ter, has published an article that he calls “a useful teaching case for people drafting (i) merger-and-acquisition agreements, and (ii) related employment agreements, especially those being offered to employees of an acquired company.”

The article is on the On Contracts website.

The case is Cardoni v. Prosperity Bank, No. 14-20682 (5th Cir. Oct. 29, 2015), involving the acquisition of an Oklahoma bank by a Texas bank.

Read the article.

A Dallas County jury has returned an actual damages verdict totaling more than $5.45 million in favor of local investment firms Gerritsen Beach Investments Ltd. and SSST Riviera Investments Ltd. after finding that Dallas-based Southwest Securities Inc. conspired to defraud investors and lenders out of millions of dollars between 2005 and 2010.

On Nov. 11, jurors in Judge Bonnie Lee Goldstein’s 44th Judicial District Court found that real estate developer Stephen Jemal conspired with Southwest to defraud the two Texas partnerships by misrepresenting the value of his Southwest holdings. The verdict also allows the plaintiffs to seek millions in attorneys’ fees, prejudgment interest, and costs, according to a release from the plaintiffs’ law firm.

“Mr. Jemal’s scheme relied on fake brokerage account statements that purported to show he owned tens of millions of dollars in blue chip stocks at Southwest,” says attorney Joel Reese of Dallas-based Reese Gordon Marketos LLP, who, along with partner Adam Sanderson, represented Gerritsen Beach and Riviera. “Lenders and investors, like our clients, relied on those fake statements, which were all tied to real accounts at Southwest.”

Trial evidence showed that Southwest provided easily altered brokerage statements that Jemal then used to deceive lenders and investors. Witnesses testified that Southwest assisted in the deception by lying about the value of the accounts, the firm reports.

“After five years of hard-fought litigation, our clients are pleased to finally receive justice,” says Reese. “Considering all the witness testimony and the incriminating documents, Southwest should have expected this result.”

Southwest recently was acquired by Dallas’ Hilltop Holdings Inc. and renamed as Hilltop Securities. The case is Gerritsen Beach Investments Ltd., et al. v. Southwest Securities Inc., et al., No. 10-10673.

As China’s big banks expand in the U.S., they are testing how far U.S. judges can go in demanding account records located in China, The Wall Street Journal reports.

“In a closely watched case, Kering SA’s Gucci and its other luxury brands allege that some of their most troublesome counterfeiters have accounts with Bank of China Ltd. and have issued subpoenas for information about their transactions,” report Nicole Hong and Lingling Wei.

The Bank of China has responded that turning over account records would violate Chinese law.

Read the article.