by T. GormanPosted on Posted in SECActions

Credibility. It is all about credibility. Building an effective enforcement program is all about credibility. For the SEC’s enforcement program credibility begins with winning in the courtroom. If the program is going to flourish it must be able to win at trial. Courtroom wins permits the agency to tell would be defendants in pre-filing settlement negotiations that the best offer is on the table, it is fair, and if not accepted the case will be successfully litigated. Courtroom wins in major cases make the would be defendant think twice before spurning that offer in the hope of escaping through trial.

Being willing to take the case to trial is important but not enough. When faced with going to trial those who do not have the resources to litigate with a government agency may make a business decision to settle; others may simply plod through the trial and lose. Those with the resources, however, will not be compelled to settle when faced with the prospect of trial if the agency’s claim is not backed by courtroom wins that create credibility.

SEC v. Cuban, Civil Action No. 3-08-CV-2050 (N.D. Tx.) is the high stakes insider trading case against the owner of the Dallas Mavericks. The jury returned a verdict yesterday against the SEC and in favor of Mr. Cuban. This is another loss in another major courtroom battle for the Commission.

To be sure, the case was challenging from the beginning. The SEC’s complaint claimed that Mr. Cuban engaged in fraudulent, insider trading when he sold a large stake in Mamma.com and avoided what later would have been a loss of about $700,000. The sale followed phone calls with Mamma officials in which Mr. Cuban, as the firm’s largest shareholder, was told about a coming PIPE offering. Those officials claimed that Mr. Cuban was told the information was confidential. There were remarks by Mr. Cuban, according to the complaint, which suggested he understood he could not trade. Yet the district court dismissed the complaint while offering the SEC an opportunity to file an amended action.

The Commission stood firm on its complaint, declined to amend and appealed. The Fifth Circuit Court of appeals rewarded that perseverance, reversing the dismissal. The Court’s opinion was little more than a re-read and re-interpretation of the allegations penned by SEC in its complaint. What the district court saw as insufficient the Court of Appeals found to be adequate to move forward.

The jury concurred with the district court – the allegations were not enough. This is a significant loss in a high profile case for the Commission. It is difficult to view it as not undercutting recent efforts to embolden the SEC enforcement program.

To be sure the SEC recently won a significant victory in the its action against former Goldman Sachs employee Fabrice Touree. That victory, however, was preceded by losses in two major market crisis cases — one against Bruce Bent and others from Primary Reserve Fund and the other against Brian Stoker, former Citigroup employee. One win in four major cases is not a formula for bolstering an enforcement program. That record will not compel potential defendants to settle on the SEC’s terms rather than risk trial. That record does not create credibility. And, in the end, it is all about credibility.

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by T. GormanPosted on Posted in SECActions

New SEC Chair Mary Jo White has addressed a series of topics in recent weeks, essentially outlining her vision for the Commission. Those remarks have delineated an enforcement doctrine, detailed her views on the role of an independent agency and outlined an approach to the markets. Now, in remarks to the National Association of Corporate Directors titled “The Path Forward on Disclosure (October 15, 2013), Ms. White addressed disclosure policy (here).

“Without proper disclosure, investors would be unable to make informed decisions” Ms. White noted. “They would not know about the financial condition of the company they are investing in. Nor would they know about the company operations, who its board members are or what business, operational or financial risks the company faces . . .” Paraphrasing the Supreme Court’s seminal decision in TSC Industries v. Northway, she defined its “core purpose” as providing investors with the information necessary for making an investment or voting decision.

Nevertheless, there can be “too much” disclosure the SEC Chair declared. There can be “’information overload’ – a phenomenon in which ever- increasing amounts of disclosure make it difficult for an investor to wade through the volume of information she receives to fret out the information that is most relevant.” This can result from rules or from professionals adding items such as long lists of risk factors to a filing.

Returning to a point she made in earlier remarks about Dodd-Frank’s mineral disclosure requirements, Ms. White cited public hearings on disclosure held by the Commission not long before the Northway decision. In those hearings there were suggestions for disclosure regarding over 100 topics that included a “bewildering array of “special causes.” The Commission, however, focused on the core purpose of disclosure policy.

Periodically over the years the Commission has updated disclosure policy. The JOBS Act provides a key opportunity for the Commission in this regard. It requires a review of disclosure requirements to consider how best to update, modernize and simplify the them. Currently the Division of Corporation Finance is finalizing a report which should be available soon.

Moving forward there are a number of areas to consider and evaluate disclosure policy. These include:

Updating: There may be a number of areas that need to be updated. For example, in view of the information available on the internet it may not be necessary to include certain information in filings. Likewise, the time period in which a filing is made might need to be considered.

Repetition: In some instances the same information may appear in different places in a filing and it may be possible to streamline this.

Industries: It may also be appropriate to revisit industry guides for specific disclosure keyed to certain industries.

Predicate: It is also appropriate to consider the predicate for disclosure – that is, should it be rule based or principle based.

In the end, the critical question is to determine if investors are receiving the information they need. While there is no one system that will satisfy everyone “our study regarding Regulation S-K will only be the first step, it will set the stage for the dialogue and path forward toward a meaningful review of our disclosure requirement” Ms. White concluded.

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