Since becoming Chair of the Securities and Exchange Commission (“SEC” or “Commission”) in April 2013, Mary Jo White has articulated a number of new enforcement priorities for the SEC. White has suggested, for instance, that the Commission adopt a “broken windows” policy towards securities enforcement1 and that the Commission pursue admissions of wrongdoing as part of its settlement agreements.2 To the Commission’s growing list of enforcement goals, White recently added another: an increased focus on the Commission’s trial record. In a November 14, 2013 speech, White observed that the Commission’s new policy concerning admissions of wrongdoing “could well lead to more trials by parties refusing to admit their wrongdoing”—a consequence that “[the Commission] welcomes.”3 White then identified two perceived benefits that she expects will result from an increase in litigation: (1) “[M]ore thoughtful and nuanced interpretations of the law,” which White believes come from developing a full trial record; and (2) “[P]erhaps even more importantly. . . public accountability for both defendants and the government through the public airing of charges and evidence.”4
Three recent SEC enforcement losses demonstrate that White’s observations on the importance of trials—particularly that trials hold the government accountable—are well taken.5
SEC v. Kovzan
On December 2, 2013, a Kansas jury exonerated Stephen Kovzan, chief financial officer of NIC, Inc., in connection with allegations that he had concealed $1.18 million paid to NIC’s former chief executive officer, Jeffrey Fraser. The SEC filed a complaint against NIC and Fraser in January 2011, alleging that NIC and Fraser concealed payments to Fraser for living expenses and the costs of vacations and private planes.6 At the same time, the SEC filed a complaint against Kovzan, accusing him of knowingly or recklessly concealing the payments to Fraser because of his role in the preparation of the company’s public filings.7 NIC and Fraser settled the claims against them contemporaneously with the Commission’s filing of the complaint.8 Kovzan, however, chose to take his case to trial and was acquitted of all 12 charges against him.9 Indeed, the federal court jury found in favor of Kovzan on every question on the jury verdict form.10
SEC v. Cuban
In the Commission’s highly publicized case against Dallas entrepreneur Mark Cuban, a Texas jury acquitted Cuban of insider trading related to his sale of a Canadian Internet company. The SEC originally filed its complaint in January 2008, alleging that Cuban traded on material, non-public information about an impending stock offering to avoid a loss of $750,000.11 More than five years later, on October 16, 2013, a jury acquitted him on all charges.12
SEC v. Life Partners Holdings, Inc.
In a December 3, 2013, ruling in the Western District of Texas, a federal judge denied the SEC’s motion for summary judgment on the Commission’s fraud claims against Life Partners Holdings, Inc. The SEC alleges that Life Partners violated the federal securities laws by materially misstating its revenue related to the company’s sale of life settlements. In its summary judgment motion, the SEC argued that the revenue recognition policy on which Life Partners' public revenue disclosures were based did not comply with generally accepted accounting principals (GAAP) and caused the company to recognize revenue from life settlements prematurely in its public filings. However, in a December 3, 2013 order, U.S. District Judge James Nowlin disagreed, stating that the issue of GAAP compliance was in dispute and that “there remains a genuine issue of material fact as to whether or not Defendants materially misstated their quarterly filings.”13 As a result, the court held the claims should be evaluated by a jury.14
The Life Partners case had previously proven problematic for the SEC. In August 2012, the SEC was sanctioned for taking a deposition in violation of Federal Rule of Civil Procedure (FRCP) 56. The SEC argued that its deposition, which was taken without leave from the court, prior to the parties’ Rule 26(f) conference, and without notice to the defendants, was taken pursuant to its investigative authority and therefore not subject to FRCP 56. The court, however, held that “large portions” of the deposition related to the civil action rather than the Commission’s investigation and that the SEC “cannot administer an extra-judicial deposition regarding an investigation, elicit testimony during that deposition regarding allegations made in the Complaint for use against Defendants, and then claim immunity from the FRCP by labeling the deposition as ‘investigative.’”15 Accordingly, the court ordered the SEC to pay $5,000 in attorneys' fees to the plaintiffs, and ruled that the testimony transcript could not be used against any defendants in the Life Partners litigation.16
In her November 14, 2013 speech, White touted the Commission’s 80% success rate at trial over the past three years.17 The SEC’s record over the past three months, however, suggests that the Commission’s new focus on obtaining admissions of wrongdoing—and the resulting willingness of some defendants to go to trial—may lower the Commission’s success rate. It is possible, of course, that the SEC’s recent trial record is a necessary consequence of the Commission’s more aggressive focus on litigation; White admitted as much when she conceded that “if the government won every case, it could mean that our system is flawed or that the government is shying away from the hard cases.”18 Thus, if the SEC really is beginning to take the “hard cases” to trial, the Commission’s recent record suggests that some defendants in SEC enforcement actions may ultimately benefit from refusing to admit wrongdoing and forcing the Commission to play its hand.
1 See Mary Jo White, Chair, U.S. Sec. & Exch. Comm’n, Remarks at the Securities Enforcement Forum (Oct. 9, 2013) (transcript available at http://www.sec.gov/News/Speech/Detail/Speech/1370539872100). White’s “broken windows” securities enforcement policy has its origins in the New York Police Department’s 1980s and 1990s policy of “pursu[ing] infractions of law at every level.” Id. According to White, “[t]he same theory can be applied to our securities markets—minor violations that are overlooked or ignored can feed bigger ones, and, perhaps, more importantly, can foster a culture where laws are increasingly treated as toothless guidelines.” Id.
3 See Mary Jo White, Chair, U.S. Sec. & Exch. Comm’n, The Importance of Trials to the Law and Public Accountability, 5th Annual Judge Thomas A. Flannery Lecture (Nov. 14, 2013) (transcript available at http://www.sec.gov/News/Speech/Detail/Speech/1370540374908) [hereinafter “White, The Importance of Trials”].
5 The three losses described in this Legal Alert coincide with White’s recent statements concerning the SEC’s enforcement priorities. The Commission, however, has lost at least two other cases at trial in the last year. In the first case, SEC v. St. Anselm Exploration Co., No. 11-CV-00668 (D. Col.), which ended only days before White was sworn in as Chair of the SEC, the court conducted a bench trial and found for the defendants on all claims. See SEC v. St. Anselm Exploration Co., Opinion and Order, No. 11-CV-00668 (D. Col. Mar. 29, 2013). In the second case, SEC v. Brown, No. 09-CV-01423-GK (D.D.C.), which ended less than one month after White was sworn in, the SEC lost—again, after a bench trial—on five claims, prevailing only on its claim that the defendant practiced accounting before the SEC in violation of a previously-issued accounting bar. See SEC v. Brown, Memorandum Opinion, No. 09-CV-01423-GK (D.D.C. May 2, 2013).
6 SEC v. NIC, Inc., Complaint, No. 11-cv-02016 (D. Kans. Jan. 12, 2011).
7 SEC v. Kovzan, Complaint, No. 11-cv-02017 (D. Kan. Jan. 12, 2011).
8 SEC v. NIC, Inc., Final Judgment, No. 11-cv-02016 (D. Kan. Jan. 18, 2011).
9 SEC v. Kovzan, Judgment, No. 11-cv-02017 (D. Kan. Dec. 3, 2013).
10 SEC v. Kovzan, Verdict Form, No. 11-cv-02017 (D. Kan. Dec. 2, 2013).
11 SEC v. Cuban, Complaint, No. 08-CV-2050-D (SF) (N.D. Tex. Nov. 17, 2008).
12 See Jury Finds Mark Cuban Case Not Liable for Insider Trading, Lit. Release No. 22855 (Oct. 23, 2013), available at http://www.sec.gov/litigation/litreleases/2013/lr22855.htm.
13 SEC v. Life Partners Holdings, Inc., Order, No. 1:12-cv-00033, at 3 (W.D. Tex. Dec. 3, 2013).
15 SEC v. Life Partners Holdings, Inc., Order, No. 1:12-cv-00033, at 4 (W.D. Tex. Aug. 17, 2012).
16 Id. at 6. The court further ruled, however, that the Commission could still use the deposition testimony “in other cases against [the Life Partner defendants] or any other parties.” Id. at n.1. The court also ruled that the SEC could still depose the individual whose testimony the Commission improperly took, provided that the deposition complied with the FRCP. Id. at n.2.
17 See White, The Importance of Trials, supra note 3.