Several Wall Street banks were financially penalized earlier this month for the use of private messaging and encrypted chats by their employees. The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission settled with units of Bank of America, Goldman Sachs, Nomura and eight other financial services giants with a combined $1.8 billion in penalties for recordkeeping and oversight failures tied to "off-channel" employee communications. The purpose of using the private and/or encrypted platforms was to keep their business conversations off the record.
Mobile apps such as Signal and WhatsApp have made it easier for brokers and traders to have conversations not monitored by their employers. The rampant increase in use of these apps has resulted in a broader regulatory crackdown. Most of the institutions named in the settlements so far were registered as broker-dealers, who are legally required to monitor and keep record of the business-related communications of their employees.
So far, the SEC and CFTC have not singled out specific bank employees for fines or other penalties, however, the agencies strongly suggested that the use of unapproved messaging platforms wasn't confined to junior associates or a few “bad apples.” According to the regulators' consent orders, off-channel communications occurred at all seniority levels and included dozens of managing directors, trading desk heads and other bosses at each firm.
The SEC noted that, despite the settlements, that their investigation into the texting habits of bank employees remains ongoing. Richard Morvillo, co-chair of Stroock & Stroock & Lavan LLP's white collar and internal investigations practice, said "[g]oing back to insider trading and other past enforcement [sweeps], they've started with investment banks and moved on to hedge funds, so it wouldn't be surprising to see them expand in that direction now."
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About Cristina M. Paneque
Cristina Paneque's practice is focused on securities litigation. She is an associate in the firm's New York office.
Cristina M. Paneque
Associate at Faruqi & Faruqi, LLP
New York office
Tel: (212) 983-9330
Fax: (212) 983-9331