Because Of Course: Trump's SPAC Deal May Have Broken The Law

from the on-brand dept

If you thought that Trump's new Truth Social website's potential legal problems with its apparent failure to abide by the license on the open source code it seems to be using would be the worst legal problems facing the site, well, you underestimated The Donald. There's been plenty of talk about the SPAC deal that valued the company at billions of dollars through one of those reverse merger IPOs. But, now the NY Times is reporting that the way the deal was done may have violated securities laws. So on brand.

To get his deal done, Mr. Trump ventured into an unregulated and sometimes shadowy corner of Wall Street, working with an unlikely cast of characters: the former “Apprentice” contestants, a small Chinese investment firm and a little-known Miami banker named Patrick Orlando.

Mr. Orlando had been discussing a deal with Mr. Trump since at least March, according to people familiar with the talks and a confidential investor presentation reviewed by The New York Times. That was well before his SPAC, Digital World Acquisition, made its debut on the Nasdaq stock exchange last month. In doing so, Mr. Orlando’s SPAC may have skirted securities laws and stock exchange rules, lawyers said.

SPACs sell their shares to investors through an initial public offering and then find a private company with which to merge. Because SPACs are empty vessels, stock exchanges allow them to list their shares without disclosing much financial information. But that creates opportunities for SPACs to serve as backdoor vehicles for companies to go public without receiving the kind of investor scrutiny they would in a traditional listing. To prevent that, SPACs aren’t supposed to have a merger planned at the time of their I.P.O.

Ooops.

And it gets worse:

Another issue is that Digital World’s securities filings repeatedly stated that the company and its executives had not engaged in any “substantive discussions, directly or indirectly,” with a target company — even though Mr. Orlando had been in discussions with Mr. Trump.

Given the politically fraught nature of a deal with Mr. Trump, securities lawyers said that Digital World’s lack of disclosure about those conversations could be considered an omission of “material information.”

You don't say.

Of course, given all this, how much do you want to bet that it would be Orlando on the hook for this, rather than Trump? Either way, the NY Times has more details suggesting that, despite Digital World insisting that it didn't have any acquisition deals in place, everyone in Trump world was blabbering on about the SPAC deal they had set to go.

In early July, Phillip Juhan, a former financial analyst who had also been an executive at a bankrupt fitness company, was introducing himself to people as Trump Media’s chief financial officer. He said the company was in an “exclusive agreement” with a SPAC, according to one of the people.

So now the question is, which is going to be more of a problem for Trump's new operation? The Software Freedom Conservancy (SFC) or the SEC?

Filed Under: donald trump, patrick orlando, sec, spac
Companies: digital world acquisition, tmtg, truth social

SEC Sues AT&T For Leaking Info To Analysts To Cover Up Drooping Smartphone Sales

from the free-ride-appears-to-be-over dept

AT&T had a damn good ride during the Trump administration. Not only did it convince Trump regulators to effectively lobotomize the nation's top telecom regulator (right before a pandemic, no less), the company got billions in tax breaks for doing effectively nothing. And while the government did sue AT&T over the Time Warner merger, that had more to do with making Rupert Murdoch happy than making life hard on AT&T (AT&T won the lawsuit anyway). All told, AT&T nabbed billions upon billions in regulatory favors, merger approvals, and tax breaks. In exchange the US public saw...58,000 layoffs.

As another indication that AT&T's good times may be slowing down, the SEC filed suit against AT&T this week, accusing the telecom giant of leaking cell phone sales information to analysts and reporters to change their revenue forecasts for the company. This, in turn, let AT&T "beat" analysts' revenue forecasts in the first quarter of 2016, according to the SEC complaint (pdf). Technically, the SEC says AT&T violated the Securities Exchange Act and the SEC's Regulation "fair disclosure" rules, which "prohibit selective disclosures by issuers of material nonpublic information to securities analysts."

Granted, this will now see a year+ of litigation ending it a tiny, pathetic fine (that could then be negotiated away to nothing), but it's still interesting to see regulators trying. From the SEC announcement:

"The SEC remains committed to assuring an even playing field by taking appropriate action, including litigation when necessary, against public companies and their executives who selectively disclose material nonpublic information," added Melissa R. Hodgman, Acting Director of the Division of Enforcement."

Note that this four year investigation saw no charges during the Trump administration. Something AT&T tries to claim suggests that the company is innocent in a press release:

"AT&T claimed in a response Friday that "there was no disclosure of material nonpublic information and no violation" and said it will fight the lawsuit. AT&T also said that the SEC "spen[t] four years investigating this matter," but no charges were brought during the Trump administration. The lawsuit was filed about six weeks after President Biden appointed Democrat Allison Lee as acting chair for the SEC; although the SEC is an independent agency, its commissioners and chair are appointed by the president."

Granted I've spent several decades watching AT&T get "creative" in terms of earnings reports, particularly when it came to trying to hide the company's traditional broadband subscriber losses due to a lack of upgrades. This is also the same company that professed its innocence when it was sued by the US government for ripping off the hearing impaired, making bills more complicated so it would be easier for "crammers" to rip off its customers, turning a blind eye as drug dealers ran scams on its directory assistance customers, and for ripping off a program for low income Americans, so context matters.

Filed Under: fair disclosure, revenue forecasts, sec
Companies: at&t

A Legal Fight Against The SEC May Represent Our Last Hope For An Open, Distributed Internet

from the pay-attention dept

Let's get this out of the way up top: yes, many cryptocurrencies and "Initial Coin Offerings" (ICO's) were complete scams, designed to dupe people out of billions of dollars. It's entirely reasonable to call those out, and to argue that there should be some significant regulatory oversight of such scams. However, it is also possible to believe that an overreaction to such scams could kill off a nascent attempt to rebuild a truly open and distributed internet. For years now, I've been talking about why we could better fulfill the dream of an open, distributed internet if we were to move to a world of protocols, not platforms, and in a more recent post, I've discussed some policy proposals to help the world move in that direction -- with the final one concerning the SEC, and getting it to stop looking at cryptocurrencies solely as a financial instrument nearly identical to a security. This is not to avoid all scrutiny of cryptocurrencies. But having a working cryptocurrency system in which the success of a protocol can be driven by its actual usage and development, rather than ads or "surveillance capitalism", would benefit massively from more freedom to experiment.

While it does not appear that, by itself, it will be that successful, a few years back the social network/messaging app Kik started an experiment in this space, raising $100 million with an ICO and designing it so that its "Kin" tokens could be used to reward developers who build services. The company has put some effort into encouraging developers to build within its ecosystem, and for others to use the Kin tokens as currency.

However, mostly behind the scenes, Kik and the SEC have been having a bit of a fight over whether or not the ICO was an unregistered securities sale. Back in January, the company revealed that it had been negotiating with the SEC over the whole thing.

The SEC isn’t accusing Kik of fraud, Mr. Livingston said. Rather, its enforcement division believes Kik failed to register the sale with the SEC and thus didn’t give investors the proper information. The agency’s enforcement action must be authorized by the SEC’s commissioners, and it’s unknown whether they have voted to authorize the litigation.

[....]

The SEC says most digital tokens are covered by a 73-year-old Supreme Court decision that defined which investments are considered securities. Many tokens meet the court’s test because they can be traded for profit, and their value is tied to the performance of the startup that sold them, regulators say.

In a 39-page rebuttal on Dec. 10 to the SEC, Kik argued the sale terms, in fact, don’t constitute an investment contract, and investors weren’t led to expect to profit on their purchase of kin.

“Bringing the proposed enforcement action against Kik and the foundation would amount to doubling down on a deeply flawed regulatory and enforcement approach,” the company’s lawyers wrote, according to copy of the rebuttal reviewed by the Journal.

Since that time, the two sides have continued to negotiate, with Kik basically now admitting it wants a judge to weigh in because it can't get the SEC to see things its way. It has announced that it has set aside $5 million to go to court with the SEC over this matter (and is asking for further donations).

Despite the fact that last month over 300,000 people earned and spent Kin as a currency, the SEC is still saying that it might be a security. After months of trying to find a reasonable solution, Kin has been unable to reach a settlement that wouldn’t severely impact the Kin project and everyone in the space. So Kin is going to take on the SEC in court to make sure there is a foundation for innovation going forward.

As the company notes, the current ambiguity is acting as a real "innovation tax" in the space. Many companies are refusing to experiment with these kinds of offerings, or even to work with existing tokens, out of fear of how an SEC might completely upend the space with a decision one way or the other. Indeed, in a recent talk by SEC Commissioner Hester Peirce (who is supportive of more experimentation with crypto), she very clearly worries about how ambiguities in the way the SEC has acted over the last couple of years will stifle innovation. The speech notes that the SEC has mostly avoided heavy handed regulation in the space, but that it has not done much to help actually clarify the rules.

The SEC staff recently issued a framework to assist issuers with conducting a Howey analysis of potential token offerings. The document is a thorough 14 pages. It points to features of an offering and actions by an issuer that could signal that the offering is likely a securities offering. If this framework helps issuers understand what the different Howey factors might look like in an ICO context, it may be valuable. I am concerned, however, that it could raise more questions and concerns than it answers.

While Howey has four factors to consider, the framework lists 38 separate considerations, many of which include several sub-points. A seasoned securities lawyer might be able to infer which of these considerations will likely be controlling and might therefore be able to provide the appropriate weight to each. Whether the framework gives anything new to the seasoned securities lawyer used to operating in the facts and circumstances world of Howey is an open question. I worry that non-lawyers and lawyers not steeped in securities law and its attendant lore will not know what to make of the guidance. Pages worth of factors, many of which seemingly apply to all decentralized networks, might contribute to the feeling that navigating the securities laws in this area is perilous business. Rather than sorting through the factors or hiring an expensive lawyer to do so, a wary company may reasonably decide to forgo certain opportunities or to pursue them in a more crypto-friendly jurisdiction overseas.

On the same day the Corporation Finance staff issued the Framework, the staff also issued the first token no-action letter in response to an inquiry from TurnKey Jet, a charter jet company. The company intended to effectively tokenize gift cards. Customer members could purchase tokens that would be redeemable, dollar for dollar, for charter jet services. The tokens could be sold only to other members. This transaction is so clearly not an offer of securities that I worry the staff’s issuance of a digital token no-action letter—the first and so far only such letter—may in fact have the effect of broadening the perceived reach of our securities laws. If these tokens were securities, it would be hard to distinguish them from any medium of stored value. Is a Starbucks card a security? If we are going that far, I can only imagine what name the barista will write on my coffee cup.

And yet, the staff’s letter did not stop at merely stating that the token offering would not qualify as a securities offering, but highlighted specific but non-dispositive factors. In other words, the letter effectively imposed conditions on a non-security. For example, the staff’s response prohibits the company from repurchasing the tokens unless it does so at a discount. Further, as I mentioned earlier, the incoming letter precluded a secondary market that includes non-members. Does that mean that a company that chooses to offer to repurchase gift cards at a premium or that allows gift card purchasers to sell or give them to third parties needs to call its securities lawyer to start the registration process?

As Peirce notes, there are still so many hugely open questions, and the potential liability for getting any of these wrong is clearly holding back many possible innovations that could be quite important to a more distributed, more open, internet. After listing out a bunch of unanswered questions, she notes:

On these points, the SEC has been nearly silent. This silence may ultimately be deadly. An issuer can conduct a private securities offering with no SEC involvement. The rules that distinguish a private from a public offering focus on the offerees and investors. The form that the security is in—whether shares of common stock or interests in orange groves—has no bearing on how the rules operate. The rules that govern broker-dealers, investment advisers, auditors, and trading platforms are different. They govern the ownership, storage, and exchange of securities—exactly the aspects of digital assets that the crypto industry seeks to transform. A broker or adviser cannot custody an asset if it does not know how to show it has possession and control of the asset. An auditor must be able to review and verify the actual transactions.

Additionally, while issuers that rely on the private offering exemption do not need SEC permission to issue securities, a platform cannot trade securities unless it is registered with the SEC as an exchange or an alternative trading system. A broker-dealer generally must register with the SEC and FINRA.

The SEC has yet to provide guidance to the public or FINRA on any of the core questions. The result is that many would-be brokers and trading platforms are stuck in a frustrating waiting mode; they are unable to get clear answers to questions about how they may proceed in this market.

This is why Kik/Kin going to court to force the SEC to make some decisions is so important here. Venture capitalist Fred Wilson put up a blog post explaining why:

Sadly, the SEC looks at crypto tokens and sees securities that they want to regulate as such. They cannot seem to understand that not all of these assets are securities, they cannot seem to understand that most are commodities, currencies, or utilities like frequent flyer miles. They cannot understand that crypto tokens are unlike any assets that have come before them and that crypto tokens need new regulatory structures. They cannot understand that their unwillingness to come up with new rules paired with their “regulate by enforcement” strategy is hurting the crypto sector, pushing it offshore, and is causing most of the new projects to raise capital outside of the US and/or put together legal structures that look like Frankenstein monsters.

None of this is an attempt to argue that there shouldn't be any oversight over cryptocurrencies. Clearly, and obviously, there have been many that are little more than ponzi schemes and get rich quick cons. The entire space will benefit from some clear rules that enable greater experimentation with things like helping to fund protocols via such tokenization -- but the SEC's overall approach to date has been one where it seems on the one hand to be afraid to do anything at all other than make scary noises and threats, and on the other to be hinting that any new cryptocurrency offering should have to go through an FDA-like approval process before it might hit the market. This is an untenable position.

I have my doubts as to whether the Kik/Kin approach to cryptocurrency will itself work. But its legal fight is an important one, if you'd like to see a better decentralized internet. Dealing with scams is one thing, but if every new platform startup needs to go through the regulatory rigmarole as if it were a company preparing to go public, that would be a massive chill on innovation and experimentation. There needs to be a better, more permissionless manner of exploring these ideas, so what happens with Kik's legal challenge here will ultimately be extremely important for the future of a world of protocols over platforms.

Filed Under: cryptocurrency, distributed internet, kin, protocols, regulations, sec
Companies: kik, kin

Congress Tries Once Again To Require Warrants To Search Emails

from the will-it-actually-happen? dept

The efforts to reform ECPA -- the Electronic Communications and Privacy Act -- have been going on for basically two decades at this point. The law, which was passed in 1986, has a whole bunch of problems, with the biggest one (as we've discussed dozens of times) being that it considers any email that's been on a server for more than 180 days "abandoned," and thus freely searchable by law enforcement without a warrant. That's because there was no concept of cloud computing back in 1986. People who got email "retrieved" those emails off of a server and downloaded them to local storage. Many in Congress have been trying to fix this for so, so, so many years. And it always gets blocked. The IRS and the SEC have both been fairly proactive in trying to block ECPA reform bills that will require a warrant (funny: I thought it was the 4th Amendment that made such a warrant necessary, but, silly me, no one cares about the 4th Amendment any more).

Last year, a plan to fix ECPA, called the Email Privacy Act, with an astounding 315 co-sponsors, passed the House unanimously. As we noted at the time, this is fairly incredible. In these contentious times -- especially on issues related to surveillance and law enforcement -- to have a unanimous vote on a law that says "get a warrant" if you want access to emails, is quite incredible. But, of course, even with that much support on that side of Congress, the Senate has a way of killing ECPA reform each and every year. Last year, a few Senators -- including Jeff Sessions, who is likely to be our next Attorney General -- tried to bury it with ridiculous amendments that would expand surveillance.

On Monday, the reintroduced Email Privacy Act easily passed the House via a voice vote, showing that our Congressional Members still recognize how important this is. Of course, now it gets to go back to the Senate, and we saw how well that worked last year. And then we have to believe that President Trump will sign the bill. Stranger things have happened, of course, but it still seems like a longshot that real ECPA reform will become law this year. It's great that Rep. Kevin Yoder, along with Reps. Jared Polis, Bob Goodlatte, John Conyers, Ted Poe, Suzan DelBene, Will Hurd, Jerry Nadler, Doug Collins and Judy Chu keep pushing this bill. I disagree with many of the folks on that list on a number of other issues we cover, but the fact that they're willing to support basic 4th Amendment concepts for email is worthy of recognition. Now, hopefully, the Senate won't try to muck it up again.

Filed Under: 4th amendment, ecpa, ecpa reform, email, email privacy act, irs, kevin yoder, sec, warrants

SEC And Chuck Grassley Still Trying To Stop Email Privacy Act That Got UNANIMOUS Support In The House

from the because-fuck-the-4th-amendment,-that's-why dept

Hey, remember last week, when lots of folks were super excited about the US House of Representatives unanimously voting in favor of the Email Privacy Act? They voted 419 to 0. That kinda thing doesn't happen all that often. I mean, sure it happens when condemning ISIS, but they couldn't even make it when trying to put sanctions on North Korea. Basically, something needs to be really, really screwed up to get a unanimous vote in the House. And the Email Privacy Act, which goes a long way (though not far enough) towards fixing ECPA (the Electronic Communications Privacy Act of 1986) that makes it way too easy for the government to snoop on your electronic communications, actually got that unanimous vote.

So it should be moving forward and well on its path to becoming law, right? Right?!? Well... about that. You see, as we'd mentioned in the past, the SEC has been the main voice of opposition to the Email Privacy Act, since it (along with the IRS), kinda like the fact that they can snoop through emails without a warrant. Never mind that it's probably unconstitutional, it makes their jobs so much easier. And, really, isn't that the important thing?

Apparently, Senator Chuck Grassley thinks so. And, hey, bad luck for, well, everyone, because Grassley just happens to be the guy in charge of moving the bill forward on the Senate side. And he's not having any of it right now, claiming that there are "concerns" about the bill:

“Members of this committee on both sides of the aisle have expressed concerns about the details of this reform, and whether it’s balanced to reflect issues raised by law enforcement,” said Sen. Charles Grassley, the chairman of the Senate Judiciary Committee, on Thursday.

Concerns? It didn't seem like anyone in the House was concerned about it because (I should remind you) it passed unanimously. And that's because it's really only making fairly common sense changes to the law to require a warrant (as required by the 4th Amendment) to snoop on emails.

And just what "law enforcement" issues have been raised? Sounds like it's our friends at the SEC yet again:

The Securities and Exchange Commission is still fighting a House-passed bill to require law enforcement to get a warrant before obtaining messages from email providers. “[The Email Privacy Act] would create a dangerous digital shelter for fraudsters,” SEC Enforcement Director Andrew Ceresney said in a statement to POLITICO. “The privacy interests the bill addresses can be fully achieved without blocking civil law enforcement agencies like the SEC from obtaining the evidence it needs to protect investors.”

No. Actually, it doesn't create a "digital shelter for fraudsters." That's SEC Enforcement Director Andrew Ceresney lying through his teeth. It just means that the 4th Amendment needs to be obeyed when obtaining emails that are hosted on cloud providers. Just like a warrant is needed to obtain someone's personal papers. It's not creating a digital shelter. It's harmonizing the rules for digital content so they match the rules for physical documents and communications. And, in doing so, protecting the privacy and the very concept of the 4th Amendment.

Either way, all that momentum in the House may be for nothing if the SEC and Grassley get their way.

Filed Under: chuck grassley, congress, ecpa, ecpa reform, email, email privacy act, house, irs, privacy, sec, senate

Congress Might Actually Be Moving Forward On Fixing Outdated Email Privacy Law!

from the didn't-see-that-coming dept

We've been talking about and asking for ECPA reform for many, many years, and it might finally be moving forward. ECPA is the Electronic Communications Privacy Act, which details how the government can get access to your electronic communications. The law was written in the early 1980s, and as you've probably noticed, we live in a very different world these days as it pertains to electronic communications. One key example: the law says that messages left on a server for more than 180 days are considered abandoned and can be searched without a warrant. That may have made some sense (though, not really) in a client-server era, where everyone downloaded their messages leading to them being deleted from a server, but it makes no sense at all in an era of cloud computing.

The main foes against updating ECPA have been government agencies that have investigatory powers, but not the ability to get a warrant -- mainly the SEC and the IRS, with the SEC being the real stumbling block. The SEC really liked the fact that it could snoop through emails without a warrant. So, even with massive support in Congress, ECPA reform never went anywhere.

So it was a bit surprising to folks this week to see Rep. Bob Goodlatte announce that the Judiciary Committee will now markup the ECPA reform bill, meaning that the bill is moving forward again. It's not entirely clear why it's happening now, but at the very least, it sounds like the SEC's constant protests may no longer be an obstacle. Hopefully it does move forward, and whatever results from the process leads to much stronger privacy protections on electronic communications, such as actually requiring a warrant, like the 4th Amendment says should happen.

Filed Under: bob goodlatte, ecpa, ecpa reform, electronic communications, email, irs, judiciary committee, markup, sec, surveillance

SEC, DOJ And Law Enforcement Want To Rewrite Email Privacy Law Update... In Their Favor

from the updated-for-government-needs-and-wants dept

The SEC (Securities and Exchange Commission) has been fighting much-needed updates to the ECPA (Electronic Communications Privacy Act) for a few years now, claiming that treating old email like new email would somehow strip it of its power to investigate and punish wrongdoing. For no discernible reason, legislators decided to treat electronic mail like physical mail, designating unopened emails over six months old "abandoned" and accessible by almost anyone using nothing more than a subpoena.

Moving the law towards logic would insert a warrant requirement for old emails, bringing them under the same protection as emails less than 180 days old. But it's not just the SEC that's resistant to changing the law. It's also local law enforcement and the DOJ itself, both of which have greater powers than the SEC when it comes to accessing electronic communications.

The most recent hearing featured testimony from the SEC, DOJ and, for no discernible reason, the Tennessee Bureau of Investigation. The consensus is that the law should be updated, but not that part of it (SEC) and only if it makes it easier for law enforcement to obtain more stuff without warrants (DOJ, TBI).

The SEC's argument against the introduction of a warrant requirement is that it would prevent the agency from obtaining other user data from ISPs using only a subpoena, glossing over the fact that it likes having warrantless access to tons of email.

When we conduct an investigation, we generally will seek emails and other electronic communications from the key actors via an administrative subpoena – a statutorily authorized mechanism for gathering documents and other evidence in our investigations. In certain instances, the person whose emails are sought will respond to our request. But in other instances, the subpoena recipient may have erased emails, tendered only some emails, asserted damaged hardware, or refused to respond – unsurprisingly, individuals who violate the law are often reluctant to produce to the government evidence of their own misconduct. In still other instances, email account holders cannot be subpoenaed because they are beyond our jurisdiction.

It is at this point in an investigation that we may in some instances, when other mechanisms for obtaining the evidence are unlikely to be successful, need to seek information from the internet service provider (ISP). H.R. 699 would require government entities to procure a criminal warrant when they seek the content of emails and other electronic communications from ISPs. Because the SEC and other civil law enforcement agencies cannot obtain criminal warrants, we would effectively not be able to gather evidence, including communications such as emails, directly from an ISP, regardless of the circumstances.

As is (sort of) admitted in the SEC's testimony, the current law provides more protection for physical documents than electronic ones. However, SEC Director Andrew Ceresney spins this as an argument against modifying the ECPA.

Some have asserted that providing civil law enforcement with an ability to obtain electronic communications from ISPs in limited circumstances would mean electronic documents enjoy less protection than paper documents. That is not accurate. Indeed, as currently drafted, H.R. 699 would create an unprecedented digital shelter – unavailable for paper materials – that would enable wrongdoers to conceal an entire category of evidence from the SEC and civil law enforcement.

The DOJ and Tennessee Bureau of Investigation also express alarm at the proposed rollback of subpoena powers, but they use the kidnapping of children, rather than financial misconduct, as their starting points.

While the DOJ admits the 180-day cutoff period makes very little sense, it suggests no fixes along those lines. Instead, it suggests warrant exceptions for Pen Register statutes (information about communications) be aligned with those in the Wiretap Act (the communications themselves) so DOJ agencies can acquire the data along with the communications when operating a wiretap. It makes a certain amount of sense, but it's actually just the DOJ asking for the less-stringent set of exceptions (tied to the Wiretap Act, believe it or not) to be applied across the board.

It also asks for legislators to better define what can be accessed with certain orders to eliminate "inconsistency" in judge behavior.

The Fifth Circuit has interpreted this provision to require a court to issue a 2703(d) order when the government makes the “specific and articulable facts” showing specified by § 2703(d). See In re Application of the United States, 724 F.3d 600 (5th Cir. 2013). However, the Third Circuit has held that because the statute says that a § 2703(d) order “may” be issued if the government makes the necessary showing, judges may choose not to sign an application even if it provides the statutory showing. See In re Application of the United States, 620 F.3d 304 (3d Cir. 2010). The Third Circuit’s approach makes the issuance of § 2703(d) orders unpredictable and potentially inconsistent; some judges may impose additional requirements, while others may not.

(Hey, judicial inconsistency isn't much fun for defendants, either.)

Once again, the DOJ is looking for a less-stringent standard to be applied, rather than truly looking to bring this law into the 21st century. Its plea for "technologically-neutral" handling of communications data is similarly focused on applying a lower standard to the acquisition of communications, no matter their source.

The Tennessee Bureau of Investigation, on the other hand, argues that an updated ECPA would put too much power in the hands of ISPs and other entities responsive to law enforcement warrants and subpoenas.

H.R. 699 goes far beyond the commonly stated goal of modernizing ECPA by requiring a search warrant for all stored content. In fact, it creates protections for a wider range of stored electronic evidence that could pose a greater hindrance to law enforcement than protections afforded evidence stored on a computer inside a house or office. Searches in response to ECPA process are performed by service providers, not by law enforcement officers, and H.R. 699 extends the notice provisions previously necessary only with lesser levels of process like subpoenas along with the probable cause standard. The end result is that law enforcement has to get a search warrant to access more evidence, and must bear the added burden of notice requirements that were previously limited to lesser process, without the benefit of controlling the execution of the warrant.

Apparently, any increase in difficulty -- no matter its relation to the Fourth Amendment -- is unacceptable.

Because H.R. 699 in its current form imposes burdens that will make our job harder without offering any relief in other areas, we urge the committee not to pass H.R. 699 without amending the bill to reflect greater sensitivity to the concerns of the state and local law enforcement community. When we have to get a warrant, it should mean something; right now, H.R. 699 turns the compulsory process of a search warrant into a subpoena with a higher proof requirement.

The Bureau's Richard Littlehale further lays out his argument for lowered requirements by claiming entities being served with legal paperwork have been less than helpful in the past.

In many instances, we are unable to utilize evidence that would be of enormous value in protecting the public because the technologies used to carry and store that information are not accessible to us, no matter what legal process we obtain. That may be because of technological problems, but just as frequently it is because of non-technical barriers to access. The companies that retain these records are often unable or unwilling to respond to law enforcement’s lawful demands in a timely manner, and there are few consequences for an incomplete or inaccurate response. The primary emergency disclosure provision in the section of ECPA that we use to obtain stored content is voluntary for the providers, not mandatory, and even where emergency access is granted to law enforcement, in some instances, there is insufficient service provider compliance staff to process legitimate emergency requests quickly.

Littlehale's argument appears to be a paraphrasing of Pat Paulsen's satirical campaign slogan: if we (law enforcement) have to up our standards, up theirs! He apparently feels ISPs, etc. don't face enough legal penalties for not immediately handing over everything law enforcement demands, whether they have the capability to do so or not. Littlehale wants warrant service under a modified ECPA to more closely resemble warrant service at a residence: where cops announce their presence after they've entered and destroyed everything they touch in search of evidence. He can't handle the fact that private entities maintain control of digital communications sought and that his agency (and others) must approach them (rather than drive up on their lawns and shoot grenades through their windows) with the proper paperwork and wait until responsive information is gathered and turned over.

Much like the DOJ and the SEC, Littlehale doesn't want an updated law. He wants a law rewritten to treat digital communications like physical communications, bringing the barrier to access and the expectation of privacy down to the lowest level possible. That's what is really being discussed here. Not a rewrite of an outdated law to reflect the reality of modern communications, but ways to make an already law enforcement-friendly law even friendlier.

Filed Under: 4th amendment, doj, ecpa, reform, sec, warrants

Congress Still Fighting SEC's Investigation Of Alleged Insider Trading By Its Members

from the 'pretty-sure-we're-above-the-law,-judge' dept

Congress is once again declaring its willingness to hold everyone in the nation accountable for their actions, present party excepted.

Back in 2011, it was revealed that members of Congress were participating in insider trading. Spending a great deal of time conversing with lobbyists tends to result in the discussion of information that has yet to be made public. Legislators, being the opportunists they are, chose to buy and sell stock based on this insider info. Lobbyists -- also opportunists -- sometimes did the same thing. And it was all perfectly legal... at least for Congress.

This revelation did nothing to increase the public's goodwill towards its so-called "representatives." With its approval percentage (15%) sliding below that of Bernie Madoff's personal loan applications, Congress swiftly acted to close this loophole in the law.

Two years later, with everyone safely re-elected, Congress quietly excised the disclosure requirement in the new law, making it virtually impossible to verify whether or not it was actually playing by the rules it had made for itself. Predictably, it called the disclosure of such information a "national security risk."

Meanwhile, the SEC opened an investigation into Congressional insider trading related to health insurance companies. Congress refused to answer subpoenas or provide documents to the Commission. When ordered to by a federal judge, the House Ways and Means Committee gently explained that it could do whatever the fuck it wanted to.

The U.S. House Ways and Means Committee and a top staff member say the panel and its employees are "absolutely immune" from having to comply with subpoenas from a federal regulator in an insider-trading probe.

Two years later, Congress is still arguing that rules and laws are for people who can't write their own rules and laws. Judge Paul Gardephe didn't buy Congress' arguments that its conversations with lobbyists were so "privileged" they couldn't be examined by another federal agency. He also pointed out that the "immunity" it relied on was carved out by the very law they had passed to address insider trading a steep drop in approval ratings.

On November 13, U.S. District Judge Paul Gardephe agreed with most of the SEC’s claims and ordered Congress to comply with the subpoena within 10 days. “Members of Congress and congressional employees are not exempt from the insider trading prohibitions arising under the securities laws,” he wrote. Gardephe reminded the attorneys that “Congress barred such claims of immunity when it adopted” the STOCK Act.

Congress' top lawyer fought back, claiming certain, very specific words were missing from the STOCK Act and that legislators' immunity was still intact.

Kerry W. Kircher, the House general counsel, requested more time. Then, shortly before Thanksgiving, on November 25, he filed a motion to appeal the subpoena to the 2nd Circuit. Kircher argued that the STOCK Act did not explicitly authorize the SEC to issue subpoenas to Congress, even to investigate insider trading.

This may not result in the investigation being scuttled or the lawsuit being tossed, but it does buy Congress more time to figure out its next accountability-dodging move. Meanwhile, Congress members are doing what they can to ensure the battle the SEC is waging to at least hold them as accountable as their own STOCK Act promised they would, will be long, expensive and hopefully, ultimately fruitless. These efforts are also shady as hell.

Away from the spotlight, however, congressional leaders continue to fight enforcement and to shore up the target of the SEC inquiry. Rep. Pat Tiberi, R-Ohio, and Rep. Diane Black, R-Tenn., two lawmakers who served on the same committee as Sutter, have used PAC money to donate to the legal defense fund set up to defend him.

Campaign funding -- itself a toxic wasteland where morality and ideals go to die -- is being rerouted to keep Bruce Sutter, a former Ways and Means Committee member who allegedly passed on non-public Medicare reimbursement information to a lobbyist for law firm Greenberg Taurig. Not only will Congress members let nothing stand in the way of personally profiting from their time in office, they'll also apparently ensure those who previously got away with it will continue to elude being held accountable.

Filed Under: bruce sutter, congress, insider trading, investigation, sec, stock act, subpoena

LA School District's iPad Farce Reaches Nadir As Officials Demand Refunds From Apple, Answer Questions From The SEC

from the all-aboard-the-USS-Not-Our-Fault! dept

The Los Angeles school district's headfirst leap into technological waters has turned into the ultimate cautionary tale. Rather than ensure everything was up to spec, the district chose to distribute 90,000 iPads bundled with Pearson software and hand them over to its students… who cracked the minimal built-in protections within a week and turned the devices into something they wanted to use, rather than something they had to use.

Why the full-on dive? Well, it appears at least part of it may have been motivated by low-level corruption -- the sort of thing you'd expect to be present in a $500 million project, one that ballooned to $1.3 billion, even as most students went without new iPads or laptops. (Only 91,000 of the 650,000 iPads had been purchased by the point the program was shut down.)

Now, the district is facing an inquiry by the SEC -- to go with its ongoing investigation by the FBI for some pre-contractual irregularities (i.e., wining and dining with eventual contract winners Apple and Pearson) by the then-superintendent overseeing the program.

The federal Securities and Exchange Commission recently opened an informal inquiry into whether Los Angeles school officials complied with legal guidelines in the use of bond funds for the now-abandoned $1.3-billion iPads-for-all project.

In particular, the agency was concerned with whether the L.A. Unified School District properly disclosed to investors and others how the bonds would be used, according to documents provided to The Times.

Now that the program is effectively dead and under intense scrutiny, the ineptness of the district's rollout is under discussion. The district is claiming this debacle really isn't its fault.

The Los Angeles Unified School District is seeking to recoup millions of dollars from technology giant Apple over a problem-plagued curriculum that was provided with iPads intended to be given to every student, teacher and administrator.

Apple may be in the headline and leading paragraph, but district officials seem more irritated with software provider Pearson. Under the terms of the agreement, Pearson was allowed to half-ass its way through the first year, providing only "partial curriculum." It was expected to be at least as prepared as the students by the beginning of the following school year. It wasn't, despite receiving $200 per iPad in licensing fees.

“Only two schools of 69 in the Instructional Technology Initiative ... use Pearson regularly,” according to an internal March report from project director Bernadette Lucas. “Any given class typically experiences one problem or more daily. Teachers report that the students enjoy the interactive content — when it’s available. When it’s not, teachers and students try to roll with the interruptions to teaching and learning as best they can.”

The remaining schools, she said, with more than 35,000 students, “have given up on attempting regular use of the app.”

Pearson, despite having received millions of dollars (and possibly some preferential treatment during the bidding process), is flunking. It hasn't created bilingual versions of its software -- something of a necessity in Los Angeles. The analytic software it promised to the district (as part of the justification for the software premiums) has yet to arrive. It hasn't even provided online versions of periodic achievement tests.

How much Apple and other device makers are really at fault is up for debate. As the device makers, they only needed to provide a device and operating system. The rest seems to be on Pearson, which at this point, should really be doing better at providing functional educational software. The LA school district may have erred in its decision to roll this out before ensuring everything worked properly, but the future's not just going to sit around waiting for giants like Pearson to get their end of the equation in order. The field is ripe for disruption. Or, it would be... if entrenched interests (government entities) weren't so set on bedding down with equally entrenched interests (textbook publishers).

But what comes across here is something more than just ensuring government contractors live up to the terms of their agreements. Above the better-late-than-never attempt at fiscal responsibility (always save your receipts!), you can hear the faint whinging noise of the district arguing that it shouldn't be responsible for its own botched rollout, financial impropriety or inability to respond to problems with more agility. As much as I'd like to bash Pearson (and I really, really would), there's definitely a hint of buck-passing in the air.

The district could have handled this better, but there was just too much money at stake. Hundreds of millions of dollars in expeditures can't guarantee working tech, but it goes a long way towards ensuring a certain level of mismanagement. Large contracts tend to bring out the worst in people. Not only will there almost always be some level of impropriety, but there will also be a compulsion to do everything fast and hard so the public can see where its money's being spent. Doing something, even if it's clumsy and questionable, is almost always preferable to doing it the right way. The LA school district wanted to win the race to the future, but only managed to knock over every hurdle before collapsing several hundred iPads short of the finish line. And now it wants the same companies it allegedly allowed to seduce it into handing over more that $500 million to give some of it back.

Filed Under: corruption, ipads, la school district, los angeles, sec
Companies: apple

SEC Boss Can't Keep Her Story Straight On Whether Or Not SEC Snoops Through Your Emails Without A Warrant

from the let's-get-this-straight-now... dept

For many years now, we've been writing about the need for ECPA reform. ECPA is the Electronic Communications Privacy Act, written in the mid-1980s, which has some frankly bizarre definitions and rules concerning the privacy of electronic information. There are a lot of weird ones but the one we talk about most is that ECPA defines electronic communications that have been on a server for 180 days or more as "abandoned," allowing them to be examined without a warrant and without probable cause as required under the 4th Amendment. That may have made sense in the 1980s when electronic communications tended to be downloaded to local machines (and deleted), but make little sense in an era of cloud computing when the majority of people store their email forever on servers. For the past few years, Congress has proposed reforming ECPA to require an actual warrant for such emails, and there's tremendous Congressional support for this.

And yet... it never seems to pass. The story that we keep hearing is that two government agencies in particular really like ECPA's outdated system: the IRS and the SEC. Since both only have administrative subpoena power, and not the ability to issue warrants like law enforcement, the lower standards of ECPA make it much easier for them to snoop through your emails without having to show probable cause. Last year, in a Congressional hearing, the SEC's boss, Mary Jo White, was questioned about this by Congressman Kevin Yoder, who has been leading the charge on ECPA reform. As we reported at the time, in the conversation, White clearly said that the SEC needed this ability or it would lose "critical" information in its investigations. You can see the conversation from 2014 below, where White (starting around 2:30) explains how vital this process is to the SEC: Here's the key line:

"What concerns me, as the head of a... law enforcement agency, is that we not put out of reach of lawful process... what is often, sometimes the only, but critical evidence of a serious securities fraud.... And we use that authority quite judiciously, but it's extremely important to law enforcement."

What struck us as interesting last year was White admitting that the SEC appeared to regularly use this process, since she noted that it was "extremely important" and provided "critical evidence."

Fast forward to this week, and the same two players were involved in yet another Congressional hearing. You can see that conversation here as well, with the critical point being made after about four and a half minutes, where White says some of the same stuff, about the privacy protections, and how even if the SEC used this process it still notifies the subscribers to give them a due process right to protest the subpoena... but also, oddly, seems to claim that the SEC never actually makes use of this process: Here's the key line this time (the full response is a jumble of half sentences and unfinished thoughts, so it's a bit of a mess):

"While these discussions have been going on, to try to sufficiently balance the privacy and the law enforcement interests, we've not to date to my knowledge proceeded to subpoena the ISPs. But that, I think, is critical authority to be able to maintain -- done in the right way and with sufficient solicitousness and it's very important to the privacy interests which I do think can be balanced.

As I said, if you watch her entire response, it's a complete mess of half-finished thoughts, which seems rather typical of someone trying to sound like they're answering a question but not actually doing so. Later in the same answer, she insists that taking away this authority might take away an important tool.

So, we know that the SEC really wants to keep this tool. But last year it said it was "extremely important" and provided "critical evidence." This year, she's saying that the SEC isn't even using the tool. So, uh, which is it? Is this tool absolutely necessary for critical evidence, or is it not even being used by the SEC?

And, through all of this, the SEC still has not answered the most basic question: why can't it treat email the same way it has to treat paper documents under the 4th Amendment? That is, if it wants the document it can subpoena the end user for those documents. It does not get to route around the end user and subpoena a third party for those documents. So why can't it treat email in the same way?

Filed Under: ecpa, ecpa reform, emails, irs, kevin yoder, mary jo white, sec, subpoenas, warrants