In its enforcement actions, the SEC almost always seeks injunctions that prohibit the defendants from violating specific securities laws. Their value lies in the threat of contempt for violation of the order (a largely illusory threat) and collateral consequences for various aspects of the defendant’s business (can be quite serious). For defendants who are not broker-dealers and do not otherwise hope to participate in the capital markets, these obey-the-law injunctions can seem somewhat insignificant.
Officer-and-director bars, on the other hand, can be quite significant, for a broad range of defendants. Authorized by Section 21(d)(2) of the Exchange Act and Section 20(e) of the Securities Act, the bars simply prohibit defendants from serving as an officer or director of a publicly traded company “for such period of time as [the court] shall determine.” Many defendants who would accept other aspects of proposed settlements from the SEC, including disgorgement of ill-gotten gains and civil penalties, fight hard over a bar from serving as a corporate officer or director. And so it was with Brett Bankosky in a case recently handed down by Judge Baer in the Southern District of New York: SEC v. Bankosky, 12-cv-1012 (S.D.N.Y. 2012).
In that case, Bankosky had been a director in the business development group at Takeda Pharmaceuticals International, Inc. In his role, Bankosky came into a good deal of material, nonpublic information about Takeda’s prospective business partners, and he traded on that information. He typically bought out-of-the-money call options in the securities of companies that were about to be acquired by Takeda. The SEC sued him for his alleged insider trading, and the two sides eventually came to a partial settlement. First, Bankosky agreed to the typical obey-the-law injunction. Second, he agreed to disgorge $63,000, pay prejudgment interest of about $10,000 on that amount, and a civil penalty of $63,000. (This arrangement is commonly known as a “one-and-one” settlement, where the disgorgement figure is the “one” and the equal penalty figure is the other “one”.) But the SEC and Bankosky could not agree on the terms of an officer-and-director bar. They did agree that the SEC would move for one and let the court decide the issue.
The SEC sought a permanent bar. Judge Baer focused on six factors used in the Second Circuit: (1) the egregiousness of the underlying securities law violation; (2) the defendant’s “repeat offender” status; (3) the defendant’s role or position when he engaged in the fraud; (4) the defendant’s degree of scienter; (5) the defendant’s economic stake in the violation; and (6) the likelihood that the misconduct will recur.
Unfortunately for Bankosky, he appears to have taken the SEC’s motion as an opportunity to try to relitigate his liability for the underlying insider trading. The problem with that strategy was that for purposes of the motion, both sides agreed to accept the allegations in the SEC’s complaint as true. And the problem with that was that when the SEC files a complaint to be litigated, it writes an aggressive, wartime complaint. If it files to settle, the terms can often be negotiated to be less sharp. Which is a slightly long way of saying that if Bankosky had settled earlier, he could likely have negotiated allegations (facts, really) that were less onerous than the ones he got.
Having accepted those allegations, though, Bankosky was left with almost nowhere to turn. Judge Baer instead focused on his responses to the SEC’s investigation and his failure to provide the court any assurance of his acceptance of his responsibility. In his administrative testimony, Bankosky had flatly denied working on deals involving issuers he traded in. Sticking to that story in the face of the accepted allegations of the complaint was not credible to the court. Judge Baer imposed a ten-year bar, obviously shorter than the permanent bar sought by the SEC, but perhaps a lot longer than what Bankosky otherwise could have negotiated.