Atom Investors Shows a Creative Path to Cooperation Credit
At this point, if you’re an investment adviser or broker-dealer and you’re not under investigation for your personnel’s off-channel communications it seems like you either just settled with the SEC or you haven’t gotten a subpoena yet. These cases aren’t that interesting anymore, but do you know what is interesting? Paying zero dollars to the SEC for your staff’s texting is pretty interesting.
How do you do that? Atom Investors knows. In 2021, the Austin, Texas-based adviser got a third-party subpoena and soon learned that it couldn’t swear that it had all of the potentially responsive communications because some of them were made on their staff’s own devices.
Here’s what Atom did to escape a penalty, with our take following each bullet:
They self-reported the record-keeping failure to the SEC staff.
Uh, sure, okay. This is one instance where I think the self-reporting is actually a little underwhelming. This isn’t a situation where Atom realized it had a problem, did a more comprehensive assessment, and then went to the SEC purely on its own. What other option did it have after they’d gotten a third-party subpoena and then were not able to fully respond to the subpoena? It seems like any other response would have been misleading to the staff.
After discovering the gap, they voluntarily conducted an internal review to identify the scope of the use of these communications and to collect and retain communications.
Mm-hmm, a concrete showing of good faith going forward. Fine.
They cooperated in the staff’s investigation of the third-party entity. “For example, Atom undertook efforts to retrieve, analyze, and organize trading data to match orders directed by the other entity to execution data.”
I think we’ve found our winner! Atom looked at this situation, realized its self-reporting wasn’t going to be stellar on its own, and then apparently volunteered to do part of the staff’s investigation into this other entity. It’s hard to know how extensive the retrieval, analysis, and organization of the trading data was, but it was potentially quite extensive. That can be a lot of work. The order says, “Atom’s cooperation helped conserve resources, enabling Commission staff to focus on other areas of the investigation.” I mean, I should say so. Given the size of some of the penalties imposed in these off-channel cases, this seems like a good trade: do some of the staff’s work for them, and hope for the best on the back end in penalty reduction or avoidance.
We can call this self-reporting all day, and the press release does, but this matter almost seems more like a whistleblower’s independent analysis under Rule 21F-4(b)(3). (Under the SEC’s whistleblower rules, “original information” that qualifies for an award includes information derived from your independent analysis. “ ‘Analysis’ means your examination and evaluation of information that may be publicly available, but which reveals information that is not generally known or available to the public.”) I don’t mean to confuse concepts, and Atom is obviously not a whistleblower here, but it is providing the same sort of trading analysis that might have led to a whistleblower award in another context. Atom’s outside counsel deserves a lot of credit for proposing and then executing this strategy when it might have seemed silly to assist the very SEC that was hammering them for their off-channel communications in the first place.
In re Atom Investors LP, Admin. Proc. File No. 3-22155 (Sept. 23, 2024)