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Insight & Commentary on SEC Enforcement Actions and Related Issues

Rengan Rajaratnam Settlement Exposes Slightly Weak Point in SEC’s Newish Admissions Policy

Posted in Insider Trading, Parallel Proceedings, SEC Litigation

You remember Rengan Rajaratnam, right?  He broke the S.D.N.Y.’s long streak of insider trading victories when a jury acquitted him in July.  I wondered what the effect on his case with the SEC would be.  Would he settle?  Would he take that one to trial and win, too?

Well, he and the SEC came to a settlement last Thursday, and here they are: Rajaratnam will pay disgorgement of $372,000, prejudgment interest of $96,000, and a civil penalty of $372,000.  He also agreed to be barred from the securities industry with the right to apply for reentry after five years.  So, pretty standard terms.  And at first I read them as a substantial SEC victory.  That is, regardless of the acquittal in Rajaratnam’s criminal case, the SEC appeared to have dictated the terms and exacted what it normally does when settling an insider trading case before trial, as most are done.

Anyway, I thought that until I read this quote from Rajaratnam’s lawyer, Daniel Gitner: “The S.E.C. elected to offer, and Rengan elected to accept, a no admit/no deny settlement. Rengan is moving on to the next phase of his life. If the S.E.C. has further comment, so will we.”  Gitner was right to make this point publicly, and it means a bit more than it would have two years ago.  Since the Commission changed its policy for settled cases last year to compel admissions of liability in some of them, a case without one is a small victory, however modest, for a settling defendant.  Rajaratnam may be paying a lot of money, and he’s agreeing to step out of the securities industry for at least five years.  But even with all the resources of two government agencies being thrown at him, they’re not making him admit he did anything wrong.  It’s not a huge win.  Rajaratnam probably isn’t crowing about it at home.  But it’s slightly more than he would have had if the SEC had kept its policy to have all settlements be uniform on that point.

SEC Issues Risk Alert, Hits E*Trade on Penny Stock Sales

Posted in Broker-Dealers, Compliance

“What has been will be again / what has been done will be done again; there is nothing new under the sun.”  Ecclesiastes 1:9.

On October 9th the SEC brought a settled administrative action against E*Trade Securities and G1 Execution Services (formerly E*Trade Capital Markets) for their part in the unregistered sales of billions of shares of penny stocks between 2007 and 2011.  Suffice it to say that they weren’t the only ones.  On the same day the Commission also (1) released FAQs on a broker-dealer’s duties on when trying to rely on the reasonable inquiry exemption when executing customer orders; and (2) issued a Risk Alert on broker-dealer controls regarding customer sales of penny stocks.  The gist is, broker-dealers cannot turn a blind eye when executing its customers’ sales of securities of dubious or uncertain origin.  These documents are all part of the SEC’s larger effort to focus on financial system gatekeepers and thereby save staff resources that would otherwise be spent chasing individual bad actors.  What’s most interesting to me about the case and accompanying educational materials is how old the underlying principles are.  The SEC has been preaching about broker-dealer oversight of little-known securities for literally half a century.  And yet here we are.

The Law

Here’s the law in this area (roughly):  Section 5 of the Securities Act prohibits the offer and sale of securities unless a registration statement is in effect or the offer and sale are subject to an exemption.  Section 2(a)(11) defines a securities underwriter partially as “any person who has purchased from an issuer, with a view to, or offers or sells for an issuer in connection with, the distribution of any security.”  There’s nothing especially wrong with being an underwriter, but if you are, that status will affect your (and, as we’ll see, your broker’s) ability to dump securities on the open market willy-nilly.

Also, many securities are properly sold under exemptions every day, but some people still like to make sales that are neither registered nor exempt.  Broker-dealers don’t relish the idea of being liable for these sales, so Securities Act Section 4(a)(4) includes an exemption just for them.  To rely on that exemption, though, a broker must, among other things, engage in a “reasonable inquiry” into the facts surrounding the proposed unregistered sale, and after such inquiry it must not be “aware of circumstances indicating that the person for whose account the securities are sold is an underwriter with respect to the securities or that the transaction is part of a distribution of the securities of the issuer.”  See Section 4(a)(4); Rule 144(g)(4).  The idea is, the broker needs to be sure it’s not just acting as a link in the chain of distribution from the issuer to the market; if it is, and the sales are not registered, it could be liable under Section 5.

But what counts as a “reasonable inquiry”?  The SEC explained the general principles over 50 years ago in an interpretive release: Distribution by Broker-Dealers of Unregistered Securities, Securities Act Release No. 4445 (Feb. 2, 1962):

A dealer who is offered a modest amount of a widely traded security by a responsible customer, whose lack of relationship to the issuer is well known to him, may ordinarily proceed with considerable confidence. On the other hand, when a dealer is offered a substantial block of a little-known security, either by persons who appear reluctant to disclose exactly where the securities came from, or where the surrounding circumstances raise a question as to whether or not the ostensible sellers may be merely intermediaries for controlling persons or statutory underwriters, then searching inquiry is called for.

The E*Trade Case

So what did the E*Trade subsidiaries do?  Basically, they had three institutional customers, known for purposes of the SEC’s administrative order as A, B, and C.  From the time that those customers began trading penny stocks, the order says E*Trade was presented with the following recurring red flags: (1) the three customers acquired substantial amounts of newly issued penny stocks; (2) directly from little known, non-reporting issuers; (3) through private, unregistered transactions; (4) then immediately resold those shares; and (5) wired out the sales proceeds.  Hmmm, does that sound familiar?  The SEC thought these facts should have raised a question as to whether these customers were engaged in an unlawful distribution by, for example, acting as statutory underwriters.

So, in the face of these red flags, what did the E*Trade subsidiaries allegedly do (or not do)?  For three years, they did not ascertain whether an exemption from registration was available.  They didn’t ask A and B to identify the specific exemptions they were relying on.  Later, the subsidiaries conducted an Enhanced Due Diligence review and allegedly relied on conclusory representations by A and C that the claimed exemptions were available.  According to the order, they also relied on attorney opinion letters that claimed to identify an applicable exemption and why it was properly available.  These letters, though, indicated that their conclusions were primarily based on unverified representations by the customers and issuers and did not describe all of the elements of the claimed exemptions.

The SEC held that the E*Trade subsidiaries were aware of facts showing that their customers were engaging in improper distributions of securities, and found them liable for direct violations of Section 5.  They are jointly and severally liable for disgorgement of $1.4 million and a penalty of $1 million.  Given that G1Execution is no longer part of E*Trade, they’ll have to sort out who pays what.

What to Do

What should a broker in the same position do here?  The FAQs explain what we’ve known all along.  The factors a reasonable inquiry should cover are included in Note (ii) to Rule 144(g)(4):

  • the length of time the securities have been held by the broker-dealer’s customer (including physical inspection of the securities if practicable);
  • the nature of the transaction in which the securities were acquired by the customer;
  • the amount of securities of the same class sold during the past 3 months by all persons whose sales are required to be taken into consideration in evaluating compliance with the volume limitations of Rule 144(e);
  • whether the customer intends to sell additional securities of the same class through any other means;
  • whether the customer has solicited or made any arrangement for the solicitation of buy orders in connection with the proposed sale of securities;
  • whether the customer has made any payment to any other person in connection with the proposed sale of the securities; and
  • the number of shares or other units of the class outstanding, or the relevant trading volume.

For smaller shops without an online presence – increasingly rare – staying on top of problematic trades may be relatively simple.  Outliers selling large blocks of microcap securities will stand out.  For broker-dealers allowing online trading, their compliance software should be written to automate exception reports based on these factors if it doesn’t incorporate them already.  And take them seriously when electronic triggers are pulled, without relying on a customer’s or issuer’s own representations.

Other Aspects of the Risk Alert

The Risk Alert also noted that broker-dealers should keep a careful watch out for particular kinds of accounts and account structures, including accounts of purported stock loan companies, accounts using a master/sub-structure, and held in the names of corporate entities or foreign financial institutions.  All could have the effect of disguising trading activity and facilitating unregistered sales.  Finally, if appropriate, broker-dealers should be prepared to file Suspicious Activity Reports notifying FinCEN of bad actors in their midst.  The exam sweep leading to the Risk Alert found a number of firms that were not filing SARs when necessary.

DOJ’s Marshall Miller: You’re All FCPA Lawyers Now

Posted in Compliance, FCPA

Marshall Miller, the Justice Department’s  principal Deputy Assistant Attorney General for the Criminal Division, has been heating up the compliance conference circuit in recent weeks.  On September 17th, it was the Global Investigation Review Program in New York.  On October 7th, he stopped by the Advanced Compliance and Ethics Workshop to discuss corporate compliance programs: what to do and what not to do to maximize their effectiveness.

As you might expect Miller to say, a growing company’s failure to expand compliance programs to meet its needs can lead to a lot of problems.  Conversely, programs that have widespread,  protective and training mechanisms – as well as procedures designed to uncover wrongdoing and expose culpable individuals – are the most effective.

Also, while no single compliance program could fit all companies, some characteristics will be common to all.  Fortunately, the Justice Department and SEC have told you what those are in their 2012 FCPA Resource Guide.  Have you read it?  Even if your company’s sales are entirely domestic, it might not be a bad idea.  It includes a section entitled, “Hallmarks of Effective Compliance Programs.”  As Miller notes, while the hallmarks are focused on anti-corruption compliance, “the principles identified apply universally.”  These include:

  • Commitment from corporate leaders;
  • Adaptation to corporate growth; and
  • Encouraging good behavior with concurrent enforcement and discipline of bad actors.

Miller pointed out several egregious cases from the recent years.  Weatherford International is a Swiss oil services company that settled a massive FCPA case in November 2013.  Before 2008, Weatherford did not have a dedicated compliance officer or compliance personnel, did not conduct anti-corruption training, and did not have an effective system for investigating employee reporting of ethics and compliance violations.  Though it operated in more than 100 countries, it didn’t bother translating its compliance policy into non-English languages, and did nothing to respond to affirmative allegations of corruption arising out of a 2004 ethics questionnaire.  “Put simply, Weatherford’s compliance policy was a program in name only.  It wasn’t worth the paper it was written on.”

The Orthofix International case, Miller said, is another example of a program’s adaptive failure.  Between 2003 and 2010, according to DOJ and the SEC, the Mexican subsidiary of this medical device company paid bribes to Mexican officials in return for hospital agreements to purchase millions of dollars of medical equipment.  Like Weatherford, Orthofix had failed to translate its compliance policy into Spanish or even implement its compliance policy at the subsidiary.  Orthofix also failed to train its personnel or regularly test or audit transactions for illicit payments.

One case Miller cited involved not so much a failure of compliance as much as a triumph of we-don’t-need-no-stinking-compliance.  Between 2004 and 2012, BNP Paribas secretly moved over $8.8 billion through the U.S. financial system on behalf of Sudanese, Iranian and Cuban sanctioned certain Sudanese banks.  Another identified specific transactions in cautioning that a satellite bank system was being used to evade U.S. sanctions.  The compliance officer sounded warning bells, writing: “This practice effectively means that we are circumventing the U.S. embargo on transactions in USD by Sudan.”  Other compliance staff in New York flagged some problematic transactions and raised concerns.  What did bank officials say in response?  As one executive put it: “I only see the solution of going through another bank than BNPP NY for all transactions to these destinations.”

Miller’s prescription for compliance personnel in such a situation is . . . well, he doesn’t really have one.  Document your advice and when you gave it?  Try not to find yourself on the legal or compliance side of such a company because there will not be much you can do.

Miller did end on a positive note with reference to the 2012 Morgan Stanley FCPA “declination” and concurrent prosecution of Garth Peterson.  The message, as Miller is becoming fond of saying, is to have a rigorous compliance program with substantial training and follow-up, and be ready to rat out your employees if necessary.  Easy as that.

Wrapping up Securities Enforcement Forum 2014

Posted in Non-scienter-based Violations, SEC Litigation, SEC Structure

I was lucky enough to spend Tuesday at Bruce Carton’s Securities Enforcement Forum 2014.  In three years, it has gone from zero to the preeminent securities enforcement law conference anywhere.  I blogged it hurriedly throughout the day, but here are what I think are the most salient points or comments after some reflection:

“Broken Windows”

Commissioner Michael Piwowar thinks that a “broken windows” approach to securities enforcement does not necessarily work when applied to all regulations and entities the SEC is charged with overseeing.  This point generated discussion later in the day, when Enforcement Director Andrew Ceresney defended his and Chair Mary Jo White’s approach.   He noted that for his Division, the broken windows theory is not about making every regulatory violation into an enforcement action.  OCIE is still out there issuing deficiency letters without enforcement actions.  Still, Section 16(a) of the Exchange Act is an important protective rule, and is designed to prevent larger trading violations.  Ceresney insisted that the SEC was not moving away from important areas such as financial reporting and market structure cases to do trivial work.

Corporate Penalties

Commissioner Piwowar also raised the spectre of the 2006 Statement of the SEC Concerning Financial Penalties.  The statement raises a number of factors for the Commission to consider in deciding corporate penalties.  Piwowar and others, including Commissioner Gallagher, think that large corporate penalties can sometimes hurt, not help, shareholders.  Piwowar also thinks that the 2006 statement is receiving short shrift from some staff.  Ceresney was somewhat dismissive of the statement when the Directors Panel came around.  As he said, the 2006 statement was never binding and is merely a guide.  It provides factors for the staff to consider, and the staff considers them.  But they are not bound by something that never became a rule.

FCPA Monitors

Chuck Duross at Morrison & Foerster noted that companies coming out of FCPA enforcement actions are not being forced to endure compliance monitors for the lengths of times that they used to.  Instead of three year terms, companies are sometimes able to forego monitors entirely or have them for 18 months with the possibility of extension.  The SEC’s FCPA Unit Chief Kara Brockmeyer sees this as a result of companies preparing their compliance systems on the front end, and not requiring the same level of oversight as before.  Still, she doesn’t see monitors disappearing entirely.  In response to a reporter’s question asking what the downsides of having monitors are, Simpson Thacher’s Jeffrey Knox pointed out that corporate monitors are not mere passive observers but corporate policy makers.  If the compliance function is working without them, their presence may not be good for the company or the public.

Administrative Proceedings

The day saw a lot of discussion of the SEC’s post-Dodd-Frank increased use of administrative proceedings in its enforcement matters.  Several senior staff members, including Ceresney, Brockmeyer, and Associate Director Scott Friestad assured the audience that more were coming.  Recently departed Co-Director George Canellos opined that in deciding between filing cases in federal court or as an AP, it wasn’t appropriate for the staff to consider which gave the SEC a better chance to win.  Ceresney didn’t seem to be as sure about that, and Friestad definitely didn’t buy it.  “Should I be filing where I’m most likely to lose?”  For Russ Ryan, at King & Spalding, administrative proceedings after Dodd-Frank have a core, potentially Constitutional problem.  That is, they provide an extremely accelerated process that is well suited for technical, regulatory violations, but is now being applied to enforce punitive sanctions against non-registered entities.  Now, the SEC is acting as both the prosecutor and the judge in a punitive context and in a way that Ryan thinks triggers Separation of Powers concerns.  He also thinks some of the recent challenges to SEC administrative cases are not quite ripe, and have allowed district courts easy outs by saying the respondents have not exhausted their administrative remedies.  This topic will have a way to go before it’s played out.

Practice Suggestions

Steptoe’s Phil Khinda had a few.  For Wells submissions, he said to remember you’re not writing for the Enforcement staff.  You’re writing for the GC’s office and the worriers in the other divisions and offices to create doubt and weakness in the SEC’s case.  The Wells doesn’t need to be written like an attacking opposition brief.  Instead, it should read like an amicus brief, and speak to the staff like they would talk to each other.  Ryan also said he’d seen a recent trend wherein the staff has been more open to frank discussions very early in a case about what they’re looking for and how a subpoena might be kept relatively narrow.  Friestad said that Ryan may have just been lucky, but that he encouraged staff in his group to be similarly forthcoming.  Khinda also said that he tries very hard to build credibility with the staff early in an investigation.  When he gets challenged for a lack of “independence” when he’s acting as defense counsel, “[w]hat I say to the staff is independence is a proxy for intellectual integrity.  If I seem tired it’s because I’ve been running around trying to get at what the issues are.  The staff wants to know that you are thinking about the issues and trying to learn them the way they would.”

Securities Enforcement Forum 2014 — Current Developments in Trials, Testimony, Wells, APs and Settlements

Posted in Uncategorized

Today I’m blogging from Securities Enforcement Forum 2014, Bruce Carton’s excellent one-day conference, this year being held at the Four Seasons hotel in Washington, D.C.  The posts will be fairly raw, and certainly not verbatim accounts of what is being said.

This post covers what is essentially the SEC process panel.

Phil Khinda at Steptoe & Johnson moderating.

Brad Karp at Paul Weiss:  We represented Citi in its case with the SEC.  The model had worked just fine for JPMorgan, but our case landed on Judge Rakoff’s desk.  We couldn’t provide the court with findings of fact with exposing Citi to huge private liability.  Rakoff decided to pose nine questions to the parties, which turned out to be mostly rhetorical.  He issued a ruling rejecting the settlement as unfair, unreasonable, inadequate, and not in the public interest.  Second Circuit stayed the trial in a per curiam opinion wrote a blistering opinion attacking Rakoff’s opinion.  Emphatic rejection of the district court.  Then merits briefing.  Oral argument in February 2013.  Then we waited and waited.  Finally in June 2014, the Second Circuit vacated Rakoff’s denial of the settlement and announced a new standard for reviewing federal consent judgments.  Fair and reasonable are appropriate criteria.  Adequacy doesn’t have a role in this context, and had seeped in from class actions.  It’s a procedural review only, not a substantive one.  SEC has showed some flexibility in seeking admissions.  It is a harrowing take with a relatively happy ending.

Khinda:  I want to ask about APs.  The SEC has been keeping more of the work in-house as judge, jury, and executioner.

Russ Ryan at King & Spalding:  I see three main issues.  APs have at most a 300-day clock before a decision must be issues.  Hearing within four months.  Some extensions, but few.  Back in the day with one-broker cases that was no big deal.  Now more complex cases, multiple defendants.  Very hard to get adequately prepared in time.  Enforcement has to turn over the files in seven days, but it can be millions of pages dumped on defense counsel that are not organized in any way.  Even if they could get through the material, many defendants can’t afford the document review.  Basically no Fifth Amendment right because silence can be used against you.  But the main problem is these APs are being used as penal law enforcement when it used to be for technical regulatory violations.  Separation of powers issue because the SEC is acting as both prosecutor and judge.  Most of the litigation so far has been respondents going to the court so far before exhausting their administrative remedies.  Interesting case filed a couple weeks ago filed by Joseph Stilwell raising an interesting issue.  Appointments Clause argument.  Drawing an analogy to a PCAOB case. ALJs are technically appointed by the Commission and can’t be removed except for good cause.  Commissioners are appointed by the President and can’t be removed except for good cause.  Constitutional argument is that you can’t have that much discretion vested in ALJs with that much insulation.

Khinda: What thought has the staff given to pushback on Constitutional grounds?

Scott Friestad, Associate Director at SEC:  We’re not really considering that.  My starting presumption is either federal court or an AP is appropriate.  Question is what is best for the Commission?  We have high winning percentages in federal court and in APs.  The lack of discovery affects us, too.  We have to investigate cases differently knowing that discovery might not be available after we file.  We might have to have experts lined up as well.  We might benefit from that discovery in some cases.  My decision is based in what’s better for us, not what’s better for you.

Ryan: You’re being honest about saying the query is what makes it better for us to win the case.  Canellos was up here saying it’s not appropriate to think about it that way.

Friestad:  Should I be filing where I’m most likely to lose?   I still have to convince an ALJ that our theory is a good theory.  And we’ve had a lot of success in federal courts as well. The playing field has been leveled to a certain degree by Dodd-Frank.  There are good reasons to go to federal court.  I don’t think internal review by GC or the Secretary’s office has ever affected my decision not to do an AP.

Khinda:  What about the pre-Wells calls?  Are those more prevalent?

Tom Sporkin at Buckley Sandler:  There are six month deadlines for Wells notices, but they can be extended up to a year.  You have to set the expectations with the client and try to cabin the staff’s scope, too.  You’re trying to hit certain hot button issues.  The first factual recitation is very important.  When you meet with the staff.  If your client can afford a formidable team with consultants and experts and you know the case well, you have a better chance of getting a better resolution.

Khinda:  Exploit the procedural opportunities.  We’ve been thinking about trial issues from the first day.  You’re not writing for Enforcement.  You’re writing for the GC’s office and the other worriers.  The vibe is that they’re going to litigate.  It doesn’t need to be written like an opposition brief.  It needs to read like an amicus brief, and talk to the staff like they would talk to each other.

Karp: You have to pick your battles.  Hyperbole and hysteria don’t work.  Keep the endgame in mind and think about the entities that will be charged.  Focus on the powerful individuals in the organization.  Signal that if there isn’t an appropriate resolution, you will respectfully fight if necessary.  Acknowledge where you’ve crossed the line.

Sporkin:  Have to think about what meetings to ask for above the frontline staff level.  I recently was in a meeting with Andrew Ceresney and I’ve never seen an Enforcement Director get into the weeds the way he did.

Khinda: Have to ask yourself, why did someone in the Division stop what they were doing and come looking at you?  What I say to the staff is independence is a proxy for intellectual integrity.  If I seem tired it’s because I’ve been running around trying to get at what the issues are.  The staff wants to know that you are thinking about the issues and trying to learn them the way they would.  Pick your spots and understand from the beginning why the staff is looking around.  Some people say that more and more, the staff’s approach depends on who you get.

Friestad:  You should care most about consistency in enforcement decisions at the end of the process.  Our process is about fairness within a case and across cases.  The outcomes ought to be substantially similar.  Each case has nuanced facts and circumstances and the staff has to use their own best judgments.

Karp: Profound sense in the defense community that many different regulators and law enforcement authorities have been overly politicized and that the fines, suspensions, bars, etc. are only going up and up and up.  Something of a foodfight among different agencies to show they are the cop on the beat.

Friestad:  I’m proud of our track record on that and think we’ve done a good job on bringing cases only when they’re warranted.  I think we’ve withstood that pressure to bring cases just for headlines.

Khinda: What we miss is a time when the SEC was the chief regulator and was first in line before the NY AG’s office and DOJ and others.

Friestad:  There clearly is pressure because we’ve taken our fair share of criticism for not being first.  From my perspective, we want not to be first, but right.  When Harvey Pitt was the chairman, realtime enforcement was the mantra.  Nobody since then has said let’s slow things down and have things take longer.  APs fit with that approach, and can add to the deterrence value of cases.

Ryan: Welcome trend I’ve seen anecdotally.  When you do get the first subpoena, I’m finding more and more that the staff sometimes will lay out chapter and verse, we think these three employees did these three things.  If you can help us get to the bottom of that, we’ll limit the subpoena to that.  Tremendously welcome development.  If you just ask the staff, what is it you’re looking for, you might get somewhere.

Friestad:   In many cases, it’s perfectly appropriate for the staff to lay its cards on the table early and can speed the investigation along.  More efficient from our perspective sometimes. It doesn’t foreclose us from coming back later.

Ryan: I think the courts will eventually limit these APs to some degree.

 

 

 

 

 

 

 

Securities Enforcement Forum 2014 — SEC/FINRA Investigations & Cybersecurity Priorities

Posted in Cybersecurity, FINRA

Today I’m blogging from Securities Enforcement Forum 2014, Bruce Carton’s excellent one-day conference, this year being held at the Four Seasons hotel in Washington, D.C.  The posts will be fairly raw, and certainly not verbatim accounts of what is being said.

This post covers the SEC/FINRA and cybersecurity panel.

Jacob Frenkel at Shulman Rogers moderating:

Stephanie Avakian, SEC’s Deputy Director of Enforcement: An array of cases against IAs.  Misrepresentations, undisclosed conflicts and fees. Adequacy of compliance programs.  IAs not disclosing fees.  Custody rule.  Best execution.  Allocation of expenses.  B-D side: 15(g) case against Wells Fargo.  E*Trade case on unregistered sales of penny stocks.  Gatekeeper responsibilities. Developing expertise by centralizing information on B-D cases.  Churning initiative, building on OCIE work.  AML initiative.  Focusing on IRA rollovers.  Complex products being sold to retail customers.  ATSs.  Market access rule.  High frequency trading.

Brad Bennett at FINRA: Single-broker cases are FINRA’s bread and butter.  Those are up 10% year over year.  Lots of cases involving microcap securities and liquidations. Real harm to real people. B-Ds are gateways to those schemes.  Nuts and bolts type cases.  Reg. SHO, e.g.  Compliance is not a place to save money.  We’ll have a strong sanctions year.  A non-compliant firm shouldn’t have a competitive advantage over a compliant firm.

Karl Groskaufmanis at Fried Frank: In addition to people who missed Madoff in the government, sophisticated investors missed it, too.  Investors want to know about principles and strategies.

John Stark at Stroz Friedberg:  Lots of challenges with ESI.  Back in the day as a staff attorney, we didn’t want to ask for too much.  Now the secret information is available and has turned full circle.  You can ask for all data and they can mine it.  Staff says let’s make the subpoenas as broad as possible.  Data exists in so many different places.  Lots of “deleted” data on your systems.  Witnesses often testify that they think they’ve deleted an email or whatever.  It can be found.  Now you have to find it and review it before producing it to the government.  Home devices have to be considered as well.

Bennett: Our enforcement program is only as good as its examination program.  But you should not be receiving overbroad document requests from FINRA.  We start focused and then expand if necessary.

Stark: Regulated entities have recordkeeping obligations.  But then public companies could have more and looser data without those same obligations.  Too many places where your data may reside.

Groskaufmanis: With any buy-side investor, when you come into possession of material, nonpublic information, talk to your compliance staff.  You can’t be omnipresent, but if you do that, you’re doing a lot to protect yourself.  Legal and compliance is challenging in this environment.  Also, don’t suspend your common sense.  A statute won’t, say, tell you specifically not to manipulate LIBOR, but probably don’t do that.

Bennett: As a compliance officer, your job comes with responsibility.  If you have a duty and don’t do it, you’ll be charged.

Avakian: I would echo Brad.  We view compliance people as the front line and our partners in this.  We’ll bring cases where warranted.

Frenkel: How should a compliance officer act to preserve the attorney-client privilege?

Groskaufmanis: First, segregate clearly privileged communications.   In all of these entities, management looks to you to be someone who makes judgments as they go along.  There’s a technical definition for an advice of counsel defense.  If you can meet those factors, that will count more than anything else.  Real challenge for the inside counsel is how to maximize the effectiveness of your judgments in a way that sticks four years later.  Some documentation of what you’re doing is much better than none.  Don’t let the perfect be the enemy of the good in terms of getting some record of your advice down in black and white.

Bennett:  SEC v. Howard on advice of counsel defense.  Sometimes it comes up very late and very few respondents can actually show reliance.

Avakian:  We see the range.  Some people come in with all the boxes properly checked.  In the middle, there was a lawyer in the room or on the emails.  On other end, sort of a reliance on process defense.  We’re going to ask for all of the facts surrounding the advice, so we’ll ask for a waiver and will have to dig into those.

Stark: When it comes to giant document productions, sometimes just the collection of data is a huge process.  We sometimes have to set up data collection centers abroad because data privacy laws donp’t allow the production of documents to the U.S.  Defendants should push back on SEC subpoenas for hard drives.  Those subpoenas are more like search warrants, which the staff aren’t authorized to get.  The more transparent you can be, the better.

Avakian: We expect staff to be reasonable and seek what they need.  We rely on people to exercise their judgment.

Bennett: People who have gotten overbroad requests should negotiate them with the staff.  We can go in and take hard drives from recalcitrant firms.  When you sign up to be a member firm, you sign on for that.  Those seizures haven’t been litigated as far as he knows.  We have to be aggressive because real harm can be done to real investors. The SEC has done good work against stock liquidators.  We have quarantines to avoid getting privileged material.  For some people, only criminal prosecutions workr

Stark: Interesting times for cybersecurity.  Historically it was the data of customers.  Then market manipulations.  That paradigm has shifted.  OCIE cybersecurity module released in April 2014.  Has anyone seen it?  It is very sophisticated and requires a lot from IAs.  The SEC is showing its cards in a way it doesn’t normally do.  You read about these data breaches.  If you’re hacked, you’re the victim of a crime and then treated like a criminal.  The only one who’s your friend is the FBI because they want to figure out who did it.  State regulators are calling.  Customers are calling.  Board is irate.  Boards are hiring independent investigators.  Hacking investigations are sort of like FCPA investigations in that there are multiple workstreams.  Remediation efforts are massive.  Most IAs are almost unable to comply with OCIE’s module.

Bennett: What is the standard on which one should be judged?

Stark: We have extremely sophisticated clients who are suffering breaches.

Bennett: Still, individuals are falling down on the job and signing security certifications that they shouldn’t.

Avakian: Putting aside the giant breaches, B-Ds and IAs need to have policies and procedures in place.

Bennett: If you are devoting inadequate resources to customer protection, then you might have an enforcement action.  We won’t file cases indiscriminately.

Karl:  For some of companies, these may be material developments.

Bennett: Your enforcement liability may pale compared to your private civil liability.

 

Securities Enforcement Forum 2014 — Directors Panel

Posted in Uncategorized

Today I’m blogging from Securities Enforcement Forum 2014, Bruce Carton’s excellent one-day conference, this year being held at the Four Seasons hotel in Washington, D.C.  The posts will be fairly raw, and certainly not verbatim accounts of what is being said.

This post covers the panel of current and former SEC Enforcement Directors.

Brad Bondi at Cadwalader, moderating:

Andrew Ceresney:  Happy to be here with other former directors.  Talking about this past year.  Quite a banner year.  Many different kinds of cases.  First ever cases: market access rule.  15c3-5 Wedbush Capital,  WB anti-retaliation.  Halting a muni bond offering.  Twice as many trials this year as prior year.  Did well in those trials.  Wyly case.  Used big data in new ways to detect and investigate misconduct.  Admissions.  MCDC initiative.  Attribute to the Enforcement staff.  Looking forward: insider trading is still a focus.  More than 580 cases in last five years.  Big time for insider trading.  Working closely with DOJ, but many are SEC-only cases.  Investment adviser cases.  15(c) initiative under Investment Co. Act.  Market structure realm, too.  Market access rule cases against B-Ds.  Cases against exchanges, ATSs.  Cases re: manipulative trading. Financial reporting and audit cases.  Microcap and pyramid schemes.  Gatekeepers and others in that area.  Focus on low and middle income investors there.

Bondi: Big data. What’s new?  How do you plan to use it?

Ceresney: Using bluesheet data better.   Billions of lines of that data that we can manipulate now.  Aberrational performance, too.  Team in Salt Lake City gets clearing data showing unsuitable trades.  We can see on a platform basis rather than trader by trader.  Microcap database, too.  Also some technology to make connections among wrongdoers.  Institutional knowledge to build cases.

Bondi: Emphasis on admissions recently.  Please expand on that.  Rob, is the admissions program where you thought it would be?

Khuzami: This program is a little different.  We did it for parallel criminal cases.  Those cases were a little ridiculous.  We didn’t require it on a stand-alone basis.  It does serve a role in accountability.  Question is how is the program playing out in practice.  The criteria are elastic.  Maybe not transparent in how they are being applied.  Does it give extra leverage to the SEC for other settlement points?  If more trials, that’s just a resource allocation issue.  Judicious use of admissions has probably prevented worst possible abuses.

Ceresney: It shouldn’t be used as leverage.  Staff shouldn’t be asking for admissions without clearance from the front office.  Predic, tions of more trials.  Hard to tell, but I don’t think it’s had that result.  We’ve been true to the factors we announced.

Thomsen: I agree the staff aren’t using it as leverage explicitly, but they are using it implicitly.

Ceresney: Staff shouldn’t be saying admissions could still be around the corner.

Bondi: Broken windows approach for small infractions.  How do you square that policy with Seaboard, etc.?

Thomsen: Not sure we know failing to file some form will lead to a larger violation.  But you do want to get to smaller violations before they lead to larger ones.  Are the rules we’re enforcing making sense?  It used to be that a missed filing led to a filing and a remedial program in place.  Now that could lead to enforcement action.  The reaction can be disproportionate.

Ceresney:  It’s not about taking every violation into an enforcement action.  OCIE is still out there issuing deficiency letters without enforcement actions.  But Form 4s are important to file.  We have increased resources on financial reporting and auditing and market structure.  We’re not moving away from those to do dinky stuff.  It’s not every violation.  It’s areas where we have important rules to enforce on the front end.

Bill McLucas:  I think the perception is that in this environment, here’s zero tolerance.  No room to have somebody who broke the rules without fraud and not get charged. Down in the ranks, if there’s any violation you’re in the soup.

Stanley Sporkin:  You have to enforce all the rules.  You have to comply.  I had a commissioner one time who tried to tell me not to bring all these cases.  Once we referred a 16(a) case as a criminal case.

McLucas: Whose side are you on here?  He doesn’t need any encouragement! (pointing to Ceresney)

Bondi: Is the broken windows approach trumping Section 21(a) reports?

Ceresney: No.  We don’t do rulemaking by enforcement.

Sporkin: Your whole insider trading program was by enforcement!

George Canellos:  So, case law, right?

Ceresney: I’m talking about extending prohibitions where the rules don’t provide for it.

Canellos: None of those cases are legally controversial.  The Enforcement Division has done a good job in coming up with settlement templates.  It can some cases it’s hard to properly calibrate remedies in the current environment.

Bondi: Is the penalty statement from 2006 dead?

Ceresney: It was never binding.  Nine factors, non-exclusive.  We analyze them, but it was never binding.

Bondi: But given the increase in penalties, when you’re advising clients, should you tell them to treat cooperation credit the same as ten years ago?

McLucas: Self-reporting is one issue.  You cooperate to the full extent you can.  But if you discover a problem on your own, do you walk it in?  You’re weighing the risk of an investigation against the likelihood that you can deal with it, self-remediate, and move on.  If you do that and the government finds out, you could be penalized more. Among rational people, some of them might want to fix it without reporting.

Thomsen: Especially hard question for old FCPA issues.  Will the government find it or not?  Companies do find isolated, historical issues.  Do I put myself through the wringer?

Bondi: Record $30 million whistleblower award.  What are you trying to signal?  Everyone should step forward?

Ceresney: Yes.  It seems like a huge gamble not to disclose criminal conduct.

McLucas: These are not all criminal.

Ceresney: Even on the border.  But we try to incentivize cooperation.  It’s hard to advertise that, but we do.  Includes providing information on individuals at your company.

Bondi: How do you deal with dissents by commissioners?  Aguilar issued a forceful dissent this summer, calling a case a slap on the wrist.  First since your days, Bill.

McLucas: It wasn’t that long ago!  The challenge today is different.  There was a lot of debate about enforcement actions.  You can’t stop a commissioner from speaking.  The difference today was the effort to have the Commission speak with one voice 20 years ago was different from today.  Some of the individual identities dissipated once they were sworn in.  The better message was to have the agency speak with one voice.  We had spirited debates.  The meetings in the closed Commission room could be heated, but collegial.  Difference is the Commissioners worked harder then to speak as one.  But it’s not the end of the world.  My personal view is these dissents erode the SEC’s credibility with the markets and the bar.

Bondi: Will these dissents chill enforcement staff from bringing a particular charge?

McLucas: I don’t think so, but the individual views of Commissioners hold great sway with recommendations of the staff and where they think they can navigate a case to completion.

Thomsen: The Commission has become the Commissioners.  I’m not sure that fracturing is a good thing.  It used to be that there was more dovetailing actions with past actions, as courts do.  That happens less now.

Canellos: There have always been dissenting voices.  It’s hard to navigate the shoals of the SEC process.  It can be like there’s threading a needle but there’s no hole. Pleasing one Commissioner will displease another.  In some cases, you want to bring cases to send a message to someone who’s fallen down in their duties but hasn’t committed fraud.  Aguilar’s dissent in Blodgett/Kaiser was very acrimonious.

Ceresney: We’ll make decisions based on the evidence.

Khuzami: Jesse Eisinger said admissions were only the first vertebra needed in the SEC’s spine.  Politicization of the agency since the financial crisis.

Sporkin: The SEC can no longer regulate from behind.  The genie’s out of the bottle.  The SEC needs good intelligence and to get out in front of things when they can.  Make little cases now so you don’t have to make big cases later.

Bondi: Any advice to the bar to get better cooperation credit?

Ceresney: You need credibility.  Having robust dialogue with defense counsel is critical.  We’ve been doing reverse proffers, laying out what our case would look like.  It breeds transparency.  We know what our litigation risk is, but that probably won’t persuade us not to bring a case.  If we’re not using a few, we’re not being aggressive enough.  Helps  to hear that this is not the kind of case where you want to expend your resources.

Bondi: Cites Russ Ryan’s WSJ piece on APs. Where do you make the call on APs vs. federal court?

Ceresney: We look at a number of things.  ALJs are sophisticated fact finders.  Sometimes we need more discovery in court.  I disagree with Russ.  We’ve lost APs and will probably lose some more.  There are extensive procedural protections.  We turn over the entire file seven days after filing.  No depositions in criminal proceedings either.

Khuzami: Also guilt beyond a reasonable doubt.

Ceresney: Supreme Court has upheld APs as appropriate under the Due Process Clause.

Bondi: Will there ever be any published guidance on the SEC’s decisions here?

Ceresney: Probably not.  Facts and circumstances.

Thomsen: You’ll see some challenges.  Gupta case was unique.  Rakoff said the SEC was evidently forum shopping.  Joseph Stilwell sued the SEC this month.  Those challenges may not prevail, but if the forum choice seems to be unfair to the defendant, I could see a court treating those circumstances as profoundly unfair.

Canellos: 80% of the administrative docket is extremely technical and appropriate for an AP.  Reg. SHO cases.  Rule 105, etc.  Significant differences between the two forums.  Higher penalties in insider trading matters in federal court, e.g.  You shouldn’t be picking the forum where you’re most likely to win, but the one that is most appropriate for the case.

Bondi:  Closing cases.  What have you done to streamline case closings post-Madoff?

Ceresney:  We’ve placed a premium on doing cases quickly. Quarterly reviews with every senior officer.  For old cases, let’s bring or close.  Sometimes a parallel DOJ case could keep it open.   Trying to move them along.

Sporkin: Chairman Casey gave Sporkin the authority to close cases.

Securities Enforcement Forum 2014 — Financial Reporting and Accounting Fraud

Posted in Financial Fraud

Today I’m blogging from Securities Enforcement Forum 2014, Bruce Carton’s excellent one-day conference, this year being held at the Four Seasons hotel in Washington, D.C.  The posts will be fairly raw, and certainly not verbatim accounts of what is being said.

This post covers the accounting fraud panel.

Marty Wilczynski at FTI Consulting moderating.

Steve Cohen at the SEC:  Under new Chief Accountant Mike Maloney, we’re redistributing staff accountants to enforcement groups to build knowledge and familiarity.

Wilczynski: How are accountants working with the staff under the Financial Fraud Task Force?

Cohen: The task force is a hybrid group.  It generates leads and then farms them out to investigative groups.  The Task Force is about a year old and trying to integrate more staff.  We can consolidate best practices in how we look for cases and investigate them.

Bill Baker at Latham & Watkins:  Are regional offices part of this?

Cohen:  Yes.

Baker: Can you be talked out of proceeding?

Cohen: Yes, but in the early stages of an investigation probably not.

Jonathan Tuttle at Debevoise: What is the handoff point from Task Force to an investigative group?

Cohen:  It depends on how complex the matter is.  The harder it is, the longer the Task Force will keep it and develop it.

Wilczynski: Bill, do you see differences in your interactions with the staff?

Baker: To me the biggest change is inquiries from CorpFin or comment letters can now turn into Enforcement investigations easily.  You have to educate lawyers dealing with CorpFin staff that rewordings can lead to Enforcement involvement.   David Woodcock and Margaret McGuire, the Task Force chairs, are not bashful about showing up early.

Tuttle: You can end up in an enforcement investigation much sooner than corporate lawyers realize.

Baker: The issuers can think enforcement defense lawyers are the problem by holding off indiscriminate document productions to CorpFin.

Deborah Conner at U.S. Attorney’s Office in D.C.: My office hasn’t seen much generated from the Task Force.  Expect to see more as it grows.  We do training together but there’s not regular reporting on this issue between SEC and DOJ.  We do have forensic accountants on our staff.

Cohen: We’ve seen a lot of interest from DOJ in our accounting cases.

Wilczynski: Any particular areas or trends that you’re seeing?

Baker: Internal controls, internal controls, internal controls.   Outgrowth of FCPA issues, but much broader today.

Tuttle: More focus on technical accounting issues.

Mike Trager at Arnold & Porter:  We’re seeing the staff be more methodical and so looking into areas that might not be obvious.

Wilczynski: Internal controls.  Extension of broken windows philosophy?

Cohen: No.  We’re seeing an increase in revisions vs. restatements.  Often we see large frauds in places without a lot of visibility to senior management.  You can expect the focus on internal controls to continue, even in stand-alone, non-fraud cases.  Hard in my mind to segregate fraud/scienter from internal controls.  But we’re investigating internal controls from the outset more and more.

Marty: Technology.  New investments in this area by the government?  Effective?

Connor: We have to keep up with big law firms producing all of this data.  We have data management systems to review and analyze information.  I tell our staff to be careful about subpoenas because we have to understand what we collect.  We also use technology from the FBI and IRS.

Trager: Of course you could always narrow your requests for information.

Wilczynski: Accounting Quality Model.   What’s the status?

Cohen: We’re seeing a renaissance in technology, both reacting to data and in seeking out accounting fraud.  Commission created the Center for Risk and Quantitative Analytics last year.  CRQA has been able to centralize these tools.  Also access to a wide range of data and we assemble tools in house to process it.  AQM is really just one small piece of what we’re doing.  It’s been refined over the last year and will get better, especially for earnings management.

Trager:  What about false positives?

Cohen: The AQM, e.g., looks at accruals compared to industry peers.  It’s just a red flag, not the entire case.  We take those leads and then do due diligence from other sources.  We don’t want to waste staff resources either.  Earlier meetings with companies can actually be useful to them.

Baker: Yeah, but we’re always in reactive mode.  The requests we get are very open-ended.

Tuttle: The staff won’t share their specific concerns.  From the defense side, there often are rational explanations for seemingly aberrant accounting.

Cohen: We’re not guided only by technology.  The AQM and other tools are only leads.   These tools (and reasonable corporate explanations) have sometimes led us not to pursue investigations.

Linda Thomsen (Davis Polk) question: How frequently can defense counsel talk the staff out of a case?

Trager: Rarely.  An early presentation can backfire and give the staff more information to pursue.

Cohen: I can’t think of an investigation where we held it against the company for not knowing all the facts very early in an investigation.

Cohen: Gatekeepers and auditors are very important for our investigations.  We’re willing to bring cases against auditors for their failures even if not necessarily fraud by the underlying companies.

Tuttle: Before maybe there were too many restatements.  It’s a pendulum going back and forth on that.

Baker: Last week I spent three hours in testimony where the staff accountant went through SAB 99 line by line.  Unusual to see that level of detail.

Cohen: An admission is not a negotiable part of a settlement.  We’ve raised them early so people aren’t caught off guard.

Connor: If a person chooses to admit or not, we have our own DOJ investigation.

Baker: As a result of a PCAOB exam, an auditing firm can change its position in a way that causes a company to make a restatement.  Then an investigation opens.  It changes how the auditors react to you in real time.

Mark Adler at PCAOB: I’d like to think we’re contributing to the mission.  We do cooperate with the SEC.

Trager:  What about admissions in non-fraud cases?

Cohen: Scienter isn’t necessarily required for admissions.  There are about a dozen of them.  Soon we’ll stop counting but it will continue tolp  be exception rather than the rule.

Trager:  Also may help avoid a fraud charge if you admit to negligence.

Tuttle: When you add admissions, you may remove the last benefit of settlement and force a case to trial.  Individuals have a lot of incentive to litigate.

Cohen: And you can assume that’s fine with us.

Baker: Sharp increase in trials, but those have mostly not involved accounting cases.

Securities Enforcement Forum 2014 — FCPA, SEC/DOJ Joint Actions, and Other Recent Criminalization Trends

Posted in FCPA

Today I’m blogging from Securities Enforcement Forum 2014, Bruce Carton’s excellent one-day conference, this year being held at the Four Seasons hotel in Washington, D.C.  The posts will be fairly raw, and certainly not verbatim accounts of what is being said.

This post covers the FCPA panel.

Chuck Duross at MoFo is the moderator.

Kara Brockmeyer, the SEC’s FCPA chief: Our cases are all over the world and in every industry.  Also, size doesn’t matter.  We’re suing large companies and small companies that are moving into the international space for the first time.  Also, some of our investigations are spinning out of earlier investigations.  Your competitors are probably ratting you out, and problems run across industries.

Jeff Knox,  formerly at DOJ’s Fraud Section and now at Simpson Thacher:   lots of tech companies are having FCPA issues.  Factors: they operate in high-risk markets.  Large government contracts in competitive markets.  IT people in these industries have a lot of discretion in selecting winners.  They rely heavily on third party distributors who are former government officials.  The deals tend to be complex and lend themselves to excess margin to hide corrupt payments.  You can’t police hundreds of sales people effectively, but you have to apply heightened due diligence to the highest risk transactions.  What role is this entity playing with respect to that entity?

Jon Barr at Baker Hostetler:  In the Marubeni case, the DOJ brought the stick out and said if you u’cooperate, here’s what’s going to happen.  Forfeiture in the Alcoa settlement was noteworthy.  Where does the forfeiture go?  Also, monitors.

Duross:  What’s the trend on monitors?  He suspects the government is opportunistic and looks for chances.  It really depends on the case.  The “trend” goes up and down over time.

Brockmeyer:  It matters if a company is getting a handle on their compliance.  If they can demonstrate that, a monitor might not be necessary.  But we’ll see more going forward.

Alex Bourrelly at Baker Botts:  There can be rational reasons not to cooperate, especially if you’re a non-U.S. issuer.

Duross:  Debarment can be a real issue.  A guilty plea by the parent corporation can be a big negotiating point.

Knox:  Some companies make a calculated risk that the government won’t be able to put a case together.  Parent-level guilty pleas are possible.  DOJ is more skeptical of collateral consequence claims now, and getting more experience in dealing with them.  Not buying the sky-is-falling arguments.

Duross:  Government is letting the spectre of Andersen fade away.  The company may well survive without mass layoffs.

Brockmeyer:  Administrative actions are the new normal because Dodd-Frank allows civil penalties.  We’re exploring using those more frequently.

Bourrelly: If you have a settled case in an AP, it allows you to avoid a meddlesome federal judge.  Can lessen uncertainty.  The sta ff has the authority, but as a practical matter, it can be very bad for a defendant to get a case together on that compressed time schedule.  New administrative law judges, but not sure there will be tons of litigated FCPA cases in administrative court.

Barr: With a litigated case against an individual, discovery is limited and it can be very hard.  No jury.   Very little time.  Not like you have all the documents.  Drinking from a fire hose.  I’d hope the SEC would not use the administrative process for those cases.

Brockmeyer:  You do get the whole record in seven days.

Barr: Terabytes of information!

Brockmeyer: Hopefully not terabytes.

Barr:  It’s very difficult.

Duross: Hybrid monitor of 18 months with an option to go longer can be a reasonable option.  DOJ and SEC are becoming more sophisticated in recommending them.

WSJ question:  What’s the disadvantage from not having a monitor in place?

Brockmeyer:  If they’ve remediated the problem, a monitor might not be useful.

Knox: Monitors are not just passive observers.  They are in the middle and creating policy.  If the compliance function is working, a monitor might not be good for the company or the public.

Duross: A monitor is not supposed to be punitive, au nd it carries costs.  It has to be necessary.

Brockmeyer:  Many companies are doing a much better job now.  Question used to be, how are you going to test that?  The company wants to find the problem long before the government does.  Companies are being much more proactive these days.  Corporate sophistication is helpful here.

Barr: Goal is to make the government comfortable with getting continued self-reports.

Brockmeyer:  Same conduct that can minimize monitors is also the best way to a declination.

Question from Jacob Frenkel at Shulman Rogers: What about tips from foreign whistleblowers, non-issuers?

Brockmeyer:  We have strict confidentiality provisions with respect to whistleblowers.

Question about overlapping jurisdiction.

Brockmeyer: If a company has problems with internal controls, those problems often aren’t going to be confined to a single area.

Knox: Reality is sometimes prosecutors are focused on one particular kind of conduct.  Also, sometimes people aren’t incentivized to report different kinds of conduct.

Bourelly: You want to resolve everything with the government at once if you can.

Duross: International cooperation. Looking at the last year, the government put thought into who gets thanked at the bottom of press releases.

Knox:  Level of international cooperation is much higher these days.  Three tools: traditional ones, corporate cooperators, cooperation from international governments. Lots of times the only window into bribe recipients is going to come from foreign governments.

Brockmeyer: IOSCO lets us get critical bank and brokerage records.

Barr:  Lots of cooperation going on.  If you’re going to walk something in you have to be careful about proffer letters to limit what DOJ can share with foreign regulators.  Also NPAs.  If you’re not careful, you’ll be compelled to cooperate with a foreign government, and you won’t necessarily have any protections as to that government.  DOJ has been sensitive to that.

Bourrelly: To what degree do foreign governments feel cut out of deals like that?

Barr: We’ve had luck negotiating additional terms.  Most you can really get is an agreement to share if the government agrees to X protections.

Duross: DOJ has understood that there can’t be a proffer where the defendant is then immediately turned over to the Serious Fraud Office.

Barr: You have to ask for it.

Securities Enforcement Forum 2014 — Morning Keynote Speech by Commissioner Piwowar

Posted in Uncategorized

Today I’m blogging from Securities Enforcement Forum 2014, Bruce Carton’s excellent one-day conference, this year being held at the Four Seasons hotel in Washington, D.C.  The posts will be fairly raw, and certainly not verbatim accounts of what is being said.

This post covers Commissioner Michael Piwowar’s morning keynote speech.  He started by noting that he’s one of only three economics Ph.Ds to serve as a commissioner at the SEC.  He also pointed out the Takings Clause of the Constitution, which should give you an idea of his perspective on securities regulation. Also, did you know that the Code of Federal Regulations has grown from two volumes to three?  If every rule is a priority, then no rule is a priority.  Commissioner Piwowar thinks that a “broken windows” approach to securities enforcement does not necessarily work when applied to all regulations and entities the SEC is charged with overseeing.

He gets the requirements of the Administrative Procedures Act can be cumbersome and frustrating, but says due process requires their application.  Also, raw numbers for SEC enforcement actions are not good measures for Enforcement Division effectiveness.  You wouldn’t measure a police officer’s effectiveness by counting up the number of speeding tickets he issued.  He notes that because of general diversification practices, a dishonest broker or adviser could be more damaging to a particular investor than a dishonest CFO.

The Commission has not held a summit devoted to elderly investors in a long time, and should focus on that area.  Individuals commit violations and should be charged as such.  Sometimes entities may settle cases just to resolve them.

Commissioner Piwowar also got into the SEC’s treatment of corporate penalties and the notion, also held by Commissioner Gallagher, that investors should not be punished for acts committed by corporate officers and directors.  In particular, many SEC staff are recommending corporate penalties without reference to the factors laid out in the Commission’s 2006 statement on those penalties.  Piwowar thinks those omissions are a failure that could expose the SEC as acting in a misleading way.

Finally, the SEC’s new ombudsman mandated by Dodd-Frank.  Piwowar suspects many issues for the ombudsman will relate to whistleblower tips, but thinks her jurisdiction will grow.  It is not unusual for government agencies and private companies have such a person.  An ombudsman with authority to examine the SEC’s workings below the IG level could be a useful addition.