"There is an obvious tension between encouraging and crediting cooperation and in holding entities and individuals accountable for their unlawful conduct; offering too much or too frequent credit for cooperation may also attract the attention of Congressional watchdogs. But, to the extent the SEC wants to regularly and consistently receive the kind of cooperation it seeks, it needs to make clear through actions as well as words that such cooperation will in fact be rewarded – tangibly and meaningfully…"
We recently caught up with Jim Meyers, partner in Orrick Herrington & Sutcliffe's Washington, D.C., office for his perspective on what trends we might see regarding future Securities and Exchange Commission enforcement actions. A member of Orrick's Securities Litigation and Regulatory Enforcement group, here's what Mr. Meyers had to say about the new arrivals of SEC chairwoman, Mary Jo White and Enforcement Unit co-head, Andrew Ceresney, as well as the recent “Non-Prosecution Agreement” with Ralph Lauren – among other enforcement matters:
Q: How might the arrivals of Mary Jo White and Andrew Ceresney influence the direction the SEC is taking?
Meyers: While the direction of SEC enforcement will change to some extent in the White/Ceresney "administration," the change will not be radical and will take place over time. The Commission will need to clear its docket of pending investigations begun under the Mary Schapiro/Rob Khuzami administration. Thus, the enforcement actions that are announced in the first year or so of the White/Ceresney administration will result from investigations initiated by their predecessors and will reflect their predecessors’ policies and approach. More fundamentally, Ms. White and Messrs. Ceresney and Khuzami, as well as Co-Director George Canellos, are cut from a similar cloth – all were prosecutors in the Southern District of New York, and they bring that shared perspective to enforcement issues.
To the extent SEC enforcement takes a new direction, it will reflect the substantive issues requiring Enforcement’s attention. During the Schapiro/Khuzami years, the Commission and the Division of Enforcement needed to address financial crisis cases and Ponzi schemes. As those matters get resolved (and given the Commission’s inability under the Supreme Court’s recent decision in Gabelli v. SEC to initiate civil penalty enforcement actions more than five years after the allegedly unlawful conduct occurred), new substantive areas will come to the fore. In a recent presentation, Mr. Canellos voiced his expectation that cases involving interpretation of the Dodd-Frank and rules and regulations thereunder will be a focus of enforcement activity. I also expect the Commission to continue its pursuit of alleged large-scale insider trading rings and alleged insider trading by market professionals such as hedge funds and private equity firms. And, I would not be surprised if alleged accounting fraud investigations and actions, which have decreased precipitously in the last several years, increase in the coming years.
Q: Is the Ralph Lauren Non-Prosecution Agreement a one-off or the start of a trend?
Meyers: It is hard to say whether the Ralph Lauren NPA is the beginning of a trend. Perhaps reflecting Rob Khuzami’s background as a prosecutor, NPAs and DPAs were introduced to SEC enforcement in 2010, during Mr. Khuzami’s tenure as Enforcement Director. Given that Mary Jo White, Andrew Ceresney and George Canellos have a similar background, I expect the SEC to continue to offer NPAs, DPAs and other forms of credit for cooperation. To date, however, NPAs and DPAs have been few and far between – only a handful of such resolutions with companies, and only one publicized instance of which I am aware of a decision not to prosecute an individual due to the individual’s substantial cooperation during an investigation. Moreover, unlike decisions not to bring any enforcement action in the first instance, NPAs and DPAs offer cooperators only partial, not complete, credit for cooperation. In the Ralph Lauren NPA, for example, while the company was not subjected to an injunction or civil penalties, it nevertheless had to pay significant disgorgement and did not receive the favorable “neither admit nor deny” language that is a staple of SEC settlements.
It is understandable that the Commission does not want to resolve too many matters with NPAs or DPAs. There is an obvious tension between encouraging and crediting cooperation and in holding entities and individuals accountable for their unlawful conduct; offering too much or too frequent credit for cooperation may also attract the attention of Congressional watchdogs. But, to the extent the SEC wants to regularly and consistently receive the kind of cooperation it seeks, it needs to make clear through actions as well as words that such cooperation will in fact be rewarded – tangibly and meaningfully.
Q: The Wall Street Journal recently suggested that the SEC is “running from the courtroom.” Do you agree with that characterization?
Meyers: I have not sensed that the SEC is “running from the courtroom.” To the contrary, by virtue of the trend over the past few years to bring actions more against individuals than against corporations, the SEC is forcing itself to be in the courtroom. For a variety of reasons, financial institutions and other corporations generally enter into pre-litigation settlements with the SEC, while individuals have strong reputational and career interests in fighting SEC charges in court. And, the Enforcement staff, once it obtains Commission approval to bring a case, has strong disincentives to settle, unless events unfold during the course of the litigation that change the Commission’s risk calculus. That does not mean cases can’t settle once the Commission has brought a litigated enforcement action. Indeed, trials are relatively rare. Most litigated cases either get decided on a motion to dismiss or for summary judgment or, more commonly, they settle before trial, often in the month before the trial is scheduled to begin. Once an enforcement action is brought, the defendant must not only have good legal and factual arguments on the merits, but must be prepared – financially and emotionally – to litigate with the Commission for what is usually a multi-year period. But, if the defendant is willing and able to do so, and if (s)he has a good case, a favorable settlement can be achieved.
Q. Tell us what to think about the SEC’s use of "admit nor deny" settlements. A growing trend?
Meyers: The Commission’s policy to settle matters on a “neither admit nor deny” basis is not a growing trend; it has been a near-universal feature of SEC settlements for as long as I can remember. I expect that to remain so in the future, unless the Second Circuit affirms Judge Rakoff’s rejection of the settlement in the SEC v. Citigroup Global Markets case, in which a decision could come at any time. The Second Circuit’s decision will also dictate whether judicial opposition to, or at least questioning of, such settlements will grow or subside. Recall that the decision in Citigroup is the only one to actually reject a proposed settlement. In other matters to date, courts have sometimes raised questions about the “no admit, no deny” clause and asked for further briefing about the merits, but have ultimately approved the settlements with that clause intact. Also recall that judicial questioning of SEC settlements is still relatively rare, typically occurring in high profile matters involving large dollar-value settlements or cases involving particularly egregious alleged conduct. Barring any strong holding one way or the other by the Second Circuit in the Citigroup case, I expect that district judges will continue to periodically raise questions about “no admit, no deny” settlements in high dollar-value cases and cases involving allegedly raw conduct, but that in the vast majority of cases, they will continue their current practice of expeditiously approving SEC settlements.
Q. What other SEC enforcement issues should we be thinking about?
"…the pressure will be on the senior leadership of the Commission and the Enforcement Division to replenish that pipeline in order to maintain the record number of actions brought in the last two years and perhaps also to help justify the budget increases the Obama Administration has sought for the SEC."
Meyers: Both Bloomberg and Cornerstone have reported that the pipeline of open investigations at the Enforcement Division is static or shrinking. If true, the pressure will be on the senior leadership of the Commission and the Enforcement Division to replenish that pipeline in order to maintain the record number of actions brought in the last two years and perhaps also to help justify the budget increases the Obama Administration has sought for the SEC. Recent reports and SEC statements also suggest that an increasing source of investigations is the SEC’s whistleblower program adopted in the wake of Dodd-Frank. But, to date, despite the rhetoric, the SEC has made only one award (of $50,000) to a whistleblower. Unless the SEC begins to make more whistleblower awards, and perhaps higher dollar-value awards, it runs the risk of losing or diminishing this important source of investigation referrals.
Companies and individuals should focus on how the SEC reacts to the Supreme Court’s recent decision in Gabelli v. SEC, which held that in most (if not all or nearly all) cases, the SEC must bring an enforcement action for civil penalties within five years after the allegedly unlawful conduct occurred, and cannot wait until five years after it claims to have first discovered the allegedly unlawful conduct. How will the Commission and the Enforcement Division respond to this important decision? Will they streamline the investigative process to avoid triggering the statute of limitations? Will the staff now routinely request tolling agreements from companies and individuals under investigation? Will the staff become more resistant to granting extensions of time for document productions, investigative testimony and Wells submissions? Will the Commission argue in court that Gabelli contains loopholes that warrant deviating from its apparently clear holding? Some or all of the above? I think there is a good chance companies and individuals under investigation will see more staff requests for tolling agreements and staff decisions to grant fewer and shorter extensions of time during the course of an investigation. It will also be interesting to see how the lower courts apply Gabelli. Will they adhere to the Court’s seemingly clear, strongly worded holding? Or will they apply possible exceptions based on notions of “fraudulent concealment” separate from the alleged unlawful conduct or a “continuing violation”? Time will tell.
Read additional commentary and analysis by Mr. Meyers on JD Supra>>