[author: David Smyth]

Several more things from the Securities Enforcement Forum 2012 occurred to me after my last post, and I thought I would note them here.

Rajat Gupta

First, in a discussion of recent insider trading cases, Judge Sporkin supposed that Rajat Gupta might have avoided criminal prosecution if he had settled the SEC’s initial administrative case against him instead of suing to have it removed to federal court. Remember that before Gupta’s criminal insider trading case, the SEC brought an administrative action against him on essentially the same facts. Gupta sued in federal court to prevent that administrative case and prevailed on the SEC’s motion to dismiss Gupta’s action. The resulting settlement of that interlocutory issue brought the SEC’s case to federal court before Judge Rakoff in August 2011. Gupta’s criminal indictment followed in October. Judge Sporkin’s point was that if Gupta had settled the SEC’s administrative case, criminal prosecutors might not have felt compelled to seek a criminal conviction. Essentially, getting the SEC’s case kicked from administrative court to federal court might have been a high-profile, over-lawyered battle in an ultimately losing war.

The SEC’s Scott Friestad disagreed with that assessment on the panel and said he thought a criminal case against Gupta was inevitable by the time the SEC’s initial case was filed. Still, before his trial, there was a lot of handwringing about Gupta’s case and the prosecutors’ ability to get a conviction. I don’t think it is crazy to assume that prosecutors might have passed on a circumstantial case if the SEC’s matter had already been resolved.

Cooperators and Whistleblowers

On the same panel Tom Sporkin, the former chief of the SEC’s Office of Market Intelligence and now at Buckley Sandler in D.C., pointed out that there is not always a big difference between a cooperator and a whistleblower. That is to say, both categories of people often have similar information to share with the government, and it is basically a matter of timing as to which box one gets put in. Given that even somewhat culpable whistleblowers can possibly earn financial rewards for bringing information to the government, it may make sense to decide on that path early on. It could mean the difference between earning that money as a “whistleblower” and being charged with lesser federal securities law violations as a “cooperator”. Friestad added that he’d like to see people cooperate – one way or the other – earlier on, not after they’ve been threatened with a suit by the SEC.

Don Langevoort

At lunch last Thursday, Georgetown law professor Don Langevoort delivered a fascinating keynote speech on the psychology of securities fraud.  It was quite interesting, and included these three pieces, among many others:

• Self-deceivers are much more effective at deceiving others, because they don’t exhibit the same physiological signs of deceit as others do;
• once you’ve disclosed a conflict of interest you are more likely to act deceptively; and
• a public company whose headquarters are more than 100 km away from an SEC office are 3½ times more likely to issue a financial restatement than companies within 100 km of an SEC office.

Langevoort’s recent paper in the Boston University Law Review covers many of these topics. Again, it was an excellent conference. Consider attending next year.