by T. GormanPosted on Posted in SECActions

Egan – Jones Ratings Company and Sean Egen, its founder and president, settled Commission administrative proceedings, ending months of contentious litigation. In the Matter of Egan-Jones Ratings Company, Adm. Proc. File No. 3-14856 (Jan. 22, 2013). The proceeding centered around claims that the firm and its founder provided false information in an application to register as a nationally Recognized Statistical Rating Organization or NRSRO. Shortly after the proceeding was brought Egan – Jones and Mr. Egan filed suit against the SEC to block the administrative proceeding claiming that they could not receive a fair hearing in that forum. Egan-Jones Rating Company v. U.S. Securities and Exchange Commission, Case No. 1:12-cv-00920 (D.D.C. Filed June 6, 20120).

The administrative proceeding: Respondents, according to the Order, claimed in a July 2008 application to register as an NRSRO regarding asset-backed securities and government securities that the firm had 150 outstanding ABS issuer ratings and 50 outstanding government issuer ratings. In fact at the time of the application the firm had not made available on the Internet or through another readily accessible means any ABS or government issuer ratings. Misrepresenting its experience in an effort to register with respect to these two classes violated Exchange Act Section 15E(B)(2), the Order claimed.

The Order alleged, in addition, a series of other violations including:

· That the firm falsely stating it was unaware of whether subscribers held positions in certain securities;

· The failure of the firm to enforce its policies to address conflicts of interest arising from employee ownership of securities;

· The failure of the firm to make or retain a record of the procedures and methodologies used to determine credit ratings; and

· The failure of the firm to maintain e-mails regarding its determination of credit ratings for about 18 months after registering as an NRSRO.

Mr. Egan caused the violations, according to the Order.

The suit against the SEC: The firm and Mr. Egan fought back, claiming that the proceeding was the result of a flawed process and that a fair trial could not be had in the administrative forum. The Order instituting the administrative proceeding was, according to the complaint, the product of a defective, bias and tainted process. After reciting a linty of facts and wrongful conduct the complaint demanded an order removing the proceeding to Federal Court and other relief.

The settlement: The firm and its founder have resolved the administrative proceeding. After agreeing the firm would adopt a series of procedures to remedy the deficiencies cited in the Order the settlement provides that:

· Each Respondent consent to the entry of a cease and desist order based on Exchange Act Sections 15E(a)(1), 15E(b), 15E(h)(1) and 17(a);

· The firm’s NRSRO registration for the classes of issuers of ABS and government securities would be revoked;

· Mr. Egan would be barred from association with any NRSRO registered in either of the two classes involved in the case for 18 months with any reapplication being subject to certain standards; and

· In the event either Respondent issues or maintains any credit ratings for either of the classes of securities involved here they will disclose that such ratings are not issued or maintained by a registered NRSRO. In addition, the firm will list its non-NRSRO credit ratings separately on its website and identify them as such and state that it is not an NRSRO registered with respect to the two classes of securities involved in the case. The firm also agreed to send a written notification to its subscribers stating that it is not a registered NRSRO with respect to ABS and government securities.

Finally, Respondents agreed to pay a civil penalty of $30,000. The civil suit against the Commission, while still pending, presumably will be dismissed.

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by T. GormanPosted on Posted in SECActions

Professor John Coffee’s recent proposal that the SEC retain outside counsel on a contingent fee basis to litigate select cases reflects a fundamental misunderstanding of Commission enforcement actions. In posts on his Columbia Law School Blog (The CLS Blue Sky Blog) dated January 2 and 16, 2013 Professor Coffee details what he believes to be a series of difficulties with the SEC enforcement program. His primary claims about the cases being brought and the recoveries obtained are well refuted in an National Law Journal article (Jan. 14, 2013) by Robert Khuzami and George Canellos, respectively the Director and Deputy Director, SEC Division of Enforcement.

Professor Coffee’s contingent fee proposal would refocus Commission enforcement actions from protecting investors to a quest for bigger dollars to fuel contingent fees, thereby distorting their purpose. First and foremost, SEC enforcement actions are about halting violations or possible violations of the federal securities laws to protect investors and the markets. Once halted the focus is on preventing a reoccurrence of the violations in the future. Stated differently, the point is to stop the wrong and make sure it does not happen again.

In view of this purpose, from the time the statutes were passed the remedy of choice for the SEC was not the money penalty but the injunction supplemented by equitable remedies. The injunction was intended to halt wrongful conduct and prohibit it in the future. Disgorgement was designed to take the profit out of wrong doing. Ancillary relief in the form of policies and procedures was focused on making sure the wrong is not repeated thereby protecting the public in the future.

The success of these remedies cannot be doubted. When the Commission’s enforcement program was considered one of the best and most efficient in government, its remedies were the injunction and ancillary relief, not money fines. In the late 1970s when the Commission implemented the Volunteer Program, for example, hundreds of companies stepped forward, admitted their complicity in what were then called “questionable payments” and faced SEC Enforcement actions. The remedies for this very successful program were not money fines but the injunction and carefully crafted procedures to prevent a reoccurrence of the wrongful conduct.

With the passage of the Remedies Act in 1990 Congress gave the SEC the authority to seek civil money penalties in appropriate cases. The grant of authority was in addition to other remedies – a supplement – not a replacement for all others. In recent years unfortunately increasing emphasis has been placed on money penalties and less on the adoption of policies and procedures. Big dollar fines make good headlines, great statistics and quick responses to Congressional inquiries.

If money penalties are used judiciously as part of an overall package of remedies they can be what Congress intended – and effect additional weapon in the SEC’s arsenal. Professor Coffee’s proposal would, however, make them the primary focus of presumably some of the Commission’s most important enforcement actions. This simply misses the mark. It would refocus enforcement actions from halting violations, preventing a reoccurrence and protecting investors and the markets to a quest for more and more dollars to fund the contingent fee. That is not what SEC enforcement is about.

The success of SEC enforcement in the future depends on the prudent use of all its weapons. The Enforcement program has undergone a dramatic transition in recent years, overcoming significant obstacles in most difficult times. If it is to continue on the path to success the focus must be on meaningful remedies to protect investors and the markets in the future, not funding contingent legal fees.

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