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SEC collects Wall Street’s private messages as WhatsApp probe escalates

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SEC collects Wall Street's private messages as WhatsApp probe escalates

The U.S. securities regulator has collected thousands of staff messages from more than a dozen major investment companies, escalating its probe into Wall Street’s use of private messaging apps, said four people with direct knowledge of the matter.

Previously, the Securities and Exchange Commission (SEC) had asked the companies to internally review the messages in its investigation of Wall Street’s use of WhatsApp, Signal and other unapproved messaging apps to discuss work.

The two-year crackdown into potential breaches of record-keeping rules initially targeted broker dealers, netting regulators over $2 billion in fines.

While Reuters and other media have reported that the SEC’s “off-channel” communication probe has expanded to investment advisers, its move to review thousands of their staff messages has not previously been reported. It marks an escalation of the investigation and raises the stakes for the companies and the executives concerned by exposing their conduct to SEC scrutiny.

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“It increases risk,” one source said. “The more information you give the SEC, the more you fuel the beast.”

In the latest phase of the probe of more than a dozen investment advisers, the SEC has in recent months asked for messages on personal devices or applications during the first half of 2021 that discuss business, the sources said. It has targeted a selection of employees, in some cases as many as a dozen, including senior executives.

The firms include Carlyle Group (CG.O), Apollo Global Management (APO.N), KKR & Co (KKR.N), TPG (TPG.O), and Blackstone (BX.N), according to three people with direct knowledge of the matter, as well as some hedge funds, including Citadel, said a different person with direct knowledge.

The executives gave their personal phones and other devices to their employers or lawyers to be copied, and messages discussing business have been handed to the SEC, three people said.

That is in contrast to the broker-dealer probes. In those cases, the SEC asked companies to review staff messages and report to the agency how many discussed work. SEC staff reviewed only a sample of messages themselves, according to three sources with knowledge of the previous investigations.

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The sources spoke on the condition of anonymity because SEC investigations are confidential.

At least 16 firms including Carlyle, Apollo, KKR, TPG, and Blackstone, have disclosed that the SEC is probing their communications. The firms did not provide further details and did not comment for this story. A spokesperson for Citadel declined to comment.

Government investigations are not evidence of wrongdoing and do not necessarily lead to charges.

An SEC spokesperson declined to comment. Chair Gary Gensler has defended the communications scrutiny, saying record-keeping rules are critical in helping the SEC guard against wrongdoing.

“Now that they have all that data – it is very possible that the SEC will find compliance failures in there somewhere that have nothing to do with the off-channel communications record-keeping issues,” said Jaclyn Grodin, a lawyer at Goulston & Storrs who is not involved in the investigation.

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Private fund fees and expenses, conflicts of interest and preferential treatment of investors are issues the SEC is increasingly focusing on, she noted.

‘SHOOTING FISH’
The problem of keeping tabs on staff communications has dogged Wall Street compliance departments for years. Because companies do not surveil personal messaging channels, using them to discuss business puts SEC-regulated employers in breach of requirements to record all business communications.

The SEC began to home in on Wall Street’s record-keeping problem when JPMorgan Chase (JPM.N) failed to provide documents from at least 2018 pertaining to an unrelated probe, according to a 2021 settlement in which the bank agreed to pay the SEC $125 million to resolve charges over record-keeping lapses.

Suspecting that off-channel chat about deals, trades and other business was rife on Wall Street, the SEC in 2021 opened an inquiry into other broker-dealers’ communications, said two sources. The misconduct proved so pervasive that the agency has been “shooting fish in a barrel,” one said.

The probe is shaping up to be Gensler’s signature Wall Street enforcement initiative, netting multiple big names including Wells Fargo (WFC.N), Bank of America (BAC.N), Goldman Sachs (GS.N) and Morgan Stanley .

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It has generated millions in fees for attorneys, with firms hiring dozens of lawyers to represent both the company and executives worried about their exposure, according to several sources.

‘INVASIVE’
The SEC began approaching investment advisers in October 2022, Reuters previously reported. As with broker-dealers, the SEC initially sought details on investment advisers’ record-keeping policies. It then identified a group of executives and asked the firms to search their devices and report back on what they found.

But the firms resisted, arguing their record-keeping requirements are narrower than broker-dealers’.

In a January letter led by the Managed Funds Association, the industry said the SEC’s request was “invasive” and raised privacy issues. Bloomberg previously reported the letter.

The SEC later demanded that the investment advisers hand over the messages, the sources said.

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The agency is ignoring important differences in investment advisers’ recordkeeping requirements, said Jennifer Han, the MFA’s executive vice president and chief counsel.

“Unilaterally expanding the rules by enforcement actions sidesteps due process and creates a dangerous precedent,” she said in a statement.
 

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A former OpenAI leader says safety has ‘taken a backseat to shiny products’ at the AI company

A former OpenAI leader says safety has ‘taken a backseat to shiny products’ at the AI company

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A former OpenAI leader says safety has 'taken a backseat to shiny products' at the AI company

A former OpenAI leader who resigned from the company earlier this week said Friday that safety has “taken a backseat to shiny products” at the influential artificial intelligence company.

Jan Leike, who ran OpenAI’s “Superalignment” team alongside a company co-founder who also resigned this week, wrote in a series of posts on the social media platform X that he joined the San Francisco-based company because he thought it would be the best place to do AI research.

“However, I have been disagreeing with OpenAI leadership about the company’s core priorities for quite some time, until we finally reached a breaking point,” wrote Leike, whose last day was Thursday.

An AI researcher by training, Leike said he believes there should be more focus on preparing for the next generation of AI models, including on things like safety and analyzing the societal impacts of such technologies.

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He said building “smarter-than-human machines is an inherently dangerous endeavor” and that the company “is shouldering an enormous responsibility on behalf of all of humanity.”

“OpenAI must become a safety-first AGI company,” wrote Leike, using the abbreviated version of artificial general intelligence, a futuristic vision of machines that are as broadly smart as humans or at least can do many things as well as people can.

Open AI CEO Sam Altman wrote in a reply to Leike’s posts that he was “super appreciative” of Leike’s contributions to the company was “very sad to see him leave.”

Leike is “right we have a lot more to do; we are committed to doing it,” Altman said, pledging to write a longer post on the subject in the coming days.

The company also confirmed Friday that it had disbanded Leike’s Superalignment team, which was launched last year to focus on AI risks, and is integrating the team’s members across its research efforts.

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Leike’s resignation came after OpenAI co-founder and chief scientist Ilya Sutskever said Tuesday that he was leaving the company after nearly a decade.

Sutskever was one of four board members last fall who voted to push out Altman — only to quickly reinstate him. It was Sutskever who told Altman last November that he was being fired, but he later said he regretted doing so.

Sutskever said he is working on a new project that’s meaningful to him without offering additional details.

He will be replaced by Jakub Pachocki as chief scientist. Altman called Pachocki “also easily one of the greatest minds of our generation” and said he is “very confident he will lead us to make rapid and safe progress towards our mission of ensuring that AGI benefits everyone.”

On Monday, OpenAI showed off the latest update to its artificial intelligence m

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US, TikTok seek fast-track schedule, ruling by Dec. 6 on potential ban

US, TikTok seek fast-track schedule, ruling by Dec. 6 on potential ban

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US, TikTok seek fast-track schedule, ruling by Dec. 6 on potential ban

The U.S. Justice Department and TikTok on Friday asked a U.S. appeals court to set a fast-track schedule to consider the legal challenges to a new law requiring China-based ByteDance to divest TikTok’s U.S. assets by Jan. 19 or face a ban.

TikTok, ByteDance and a group of TikTok content creators joined with the Justice Department in asking the U.S. Court of Appeals for the District of Columbia to rule by Dec. 6 to be able to seek review from the Supreme Court if needed before the U.S. deadline. 

On Tuesday, a group of TikTok creators filed suit to block the law that could ban the app used by 170 million Americans, saying it has had “a profound effect on American life.”

Last week, TikTok and parent company ByteDance filed a similar lawsuit, arguing that the law violates the U.S. Constitution on a number of grounds including running afoul of First Amendment free speech protections.

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“In light of the large number of users of the TikTok platform, the public at large has a significant interest in the prompt disposition of this matter,” the U.S. Justice Department and TikTok petitioners said.

TikTok said with a fast-track schedule it believes the legal challenge can be resolved without it needing to request
emergency preliminary injunctive relief.

The law, signed by President Joe Biden on April 24, gives ByteDance until Jan. 19 to sell TikTok or face a ban. The White House says it wants to see Chinese-based ownership ended on national security grounds, but not a ban on TikTok.

The parties asked the court to set the case for oral arguments as soon as practical during the September case calendar. The Justice Department said it may file classified material to support the national security justifications in secret with the court.

Earlier this week the Justice Department said the TikTok law “addresses critical national security concerns in a manner that is consistent with the First Amendment and other constitutional limitations.”

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The law prohibits app stores like Apple and Alphabet’s Google from offering TikTok and bars internet hosting services from supporting TikTok unless ByteDance divests TikTok.

Driven by worries among U.S. lawmakers that China could access data on Americans or spy on them with the app, the measure was passed overwhelmingly in Congress just weeks after being introduced.

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Spotify sued over alleged unpaid royalties

Spotify sued over alleged unpaid royalties

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Spotify sued over alleged unpaid royalties

Music streaming giant Spotify has been sued in a US federal court for allegedly underpaying songwriters, composers and publishers by tens of millions of dollars.

The lawsuit against Spotify USA was filed in New York on Thursday by the Mechanical Licensing Collective (MLC), a non-profit that collects and distributes royalties owed from music streaming services.

The suit alleges that Spotify on March 1, without advance notice, reclassified its paid subscription services, resulting in a nearly 50 percent reduction in royalty payments to MLC.

“The financial consequences of Spotify’s failure to meet its statutory obligations are enormous for Songwriters and Music Publishers,” MLC said.

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“If unchecked, the impact on Songwriters and Music Publishers of Spotify’s unlawful underreporting could run into the hundreds of millions of dollars.”

According to MLC, Spotify reclassified its Premium Individual, Duo and Family subscription streaming plans as Bundled Subscription Offerings because they now include audiobooks.

Royalties paid on bundled services are significantly less. MLC said Premium subscribers already had access to audiobooks and “nothing has been bundled with it.”

“Premium is exactly the same service that Spotify offered to its subscribers before the launch of Audiobooks Access,” it said. In a statement, Spotify said the lawsuit “concerns terms that publishers and streaming services agreed to and celebrated years ago.”

Spotify said it paid a “record amount” in royalties last year and “is on track to pay out an even larger amount in 2024.” “We look forward to a swift resolution of this matter,” the Swedish company said.

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In February, Spotify said it paid $9 billion to musicians and publishers last year, about half of which went to independent artists. 

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