Securities Enforcement Forum 2014 — Directors Panel

Brooks Pierce

Yesterday I blogged from the Securities Enforcement Forum 2014, Bruce Carton’s excellent one-day conference,  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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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