by T. GormanPosted on Posted in SECActions

The SEC Enforcement Division is about to be reorganized in an effort to revitalize the once highly respected program. The focus of the reorganization, according to a report from Bloomberg, is to streamline operations and add efficiency. The question is, will it revitalize the Enforcement Division?

The reorganization, billed as the largest in three decades, will eliminate supervisory positions and excess layers of management to create more front line investigators while adding expertise. Overall there will be five specialist teams focused on particularly difficult areas of the market, according to the report. In addition, Enforcement Director Robert Khuzami, recently brought in by Chairman Schapiro, has hired Lorin Reisner as his deputy. Mr. Reisner is a former prosecutor who has been in private practice.

More front line investigators are critical to effectively carrying out the mission of the Enforcement Division. It should permit the Division to return to basics, beginning with better case intake and a more critical evaluation of evidence done on a first hand basis by experienced investigators. This is clearly preferable to the current system which evidence is evaluated by layers of supervisory staff based largely on summaries from junior attorneys.

Investigations and an evaluation of evidence to determine if there are possible violations of the federal securities laws are the key focus of the Enforcement Division after all. They are designed to protect investors and ensure the integrity of the markets. Critical to that mission is the discovery of a possible violation at the earliest possible time. This has been highlighted recently by the Madoff debacle. Clearly, the SEC cannot stop someone like Mr. Madoff at inception. Equally clear however, is the fact that Mr. Madoff could have been stopped at a much earlier point. Moving the point of detection as close as possible to the time the improper conduct begins maximizes investor protection. It also can help prevent future violations by creating the aura of an effective cop on the beat. If the reorganization puts more investigators to work sifting the evidence, it should serve as a good beginning to revitalizing the Division.

While the precise structure of the reorganization is unclear, it is not critical. Regardless of whether the current structure is used or some other model or organization chart, the critical point is to have more front line investigators working the investigations and evaluating the evidence. This focus should also help speed the work of the Division because it necessarily implies less layers of supervision and reporting which can bog down the inquiry.

Finally, while the Division can no doubt benefit from additional expertise, before looking outside the agency, the Enforcement Director would do well to evaluate the manner in which the Enforcement staff works with other divisions of the staff. The Commission’s staff has many talented professionals with significant expertise in the operation of the securities markets. A critical step in rejuvenating Enforcement is to make sure that the Division draws on and utilizes that expertise. If that expertise is fully utilized, and Enforcement focuses on having more front line investigators sifting evidence and evaluating possible cases, the Division will have a sound foundation from which to move forward toward once again being Wall Street’s top cop and the protector of investors and the markets.

by T. GormanPosted on Posted in SECActions

Today begins a new occasional series on the pleading requirements under the Supreme Court’s opinion in Dura Pharmaceuticals v. Broudo, 544 U.S. 336 (2005). That decision held that plaintiffs in private securities damage actions must plead and prove loss causation.

A key question in applying the teachings of Dura is the applicable pleading standard. Under the PSLRA, allegations of fraud must be pled with particularity. Under Federal Civil Rule 9(b) fraud also must be pleaded with particularity. Dura loss causation is an element of a cause of action for fraud. Accordingly, some argue that it should be pled in accord with Rule 9(b). Others however, claim that neither the PSLRA pleading standards nor Rule 9(b) should apply.

Whether either contention is correct is a matter of debate. It is beyond dispute at this point however, that the Dura Court discussed a pleading standard in its opinion. In this regard the Court stated: “And we assume, at least for argument’s sake, that neither the Rules nor the securities statutes impose any special further requirement in respect to the pleading of proximate causation or economic loss. But, even so, the ‘short and plain statement’ must provide the defendant with ‘fair notice of what the plaintiff’s claim is and the grounds upon which its rests,’ quoting Conley v. Gibson, 355 U.S. 41 (1957). Dura, 544 U.S. at 346. Accordingly, the Court “assumed,” without deciding that Rule 8(a) applies.

The oral arguments at the time of Dura do little to clarify the point. The Solicitor General argued in favor of applying Rule 9(b) and its particularity requirement to the element of loss causation. Brief of the United States as Amicus Curie, supporting Petitioner, Dura Pharmaceuticals, v. Broudo, 544 U.S. 336 (2005) (No. 03-932), 2004 WL 2069564, at *14-*16. This position is apparently based on the theory that, as an element of a cause of action for fraud, the particularity requirements should apply. The Court clearly did not adopt the Solicitor’s suggestion. It also did not however, specifically reject the point.

During the oral arguments, Justice Ginsburg indicated that Rule 9(b) does not apply: “I thought you pointed to the 9(b) pleading rule because fraud must be pleaded with particularity, but causation does not, under the rules and not under the statute.” Dura Pharm., Inc. v. Broudo, No. 03-932, 2005 U.S. TRANS LEX 4, at * 19 (Jan. 12, 2005). Like the Solicitor’s contention, this position is not specifically stated in the Court’s opinion.

The applicable pleading standard has been further clouded by the recasting of the Rule 8(a) pleading requirements and the reinterpretation of Conley v. Gibson by the Supreme Court. Beginning in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and then again this year in Ashcroft v. Iqbal, 127 S.Ct. 1937 (2009), the Court essentially rewrote the meaning of Rule 8(a) and the pleading requirements for a civil complaint, increasing the requirements to include a plausibility standard without specifically acknowledging that fact. Interestingly, the High Court cited Dura as the predicate for its reinterpretation of Rule 8(a) pleading standards in Twombly. And, Iqbal briefly mentions Rule 9(b) in discussing pleading standards, in addition to reaffirming and broadening Twombly.

Last term, the Supreme Court declined to hear a case from the Ninth Circuit which specifically presented the question of what pleading standard must be met when alleging Dura loss causation. Petition for a Writ of Certiorari in Gilead Sciences, Inc. v. Trent St. Clare, Case No. 08-1921 (S.Ct. Filed Feb. 6, 2009). Specifically, the petition argued that there is a split in the circuits regarding the applicable pleading standards for loss causation. Some circuits, the petition claims, require compliance with Rule 8(a) while others hold that the particularity requirement of Rule 9(b) applies, or at least a heightened pleading standard.

A split over the pleading standards for Dura loss causation is significant. In many instances, securities fraud complaints have been dismissed for failing to adequately plead loss causation. See, e.g., Catogas v. Cyberonics, Inc., 292 Fed. Appx. 311 (5th Cir. 2008). If the element must be pled with particularity under Rule 9(b), Dura would have an even greater impact on securities damage actions, adding to the requirements already imposed by Congress and the courts to weed out suits.

This series will examine the debate over Dura pleading standards. In the coming weeks four key points will be considered: 1) A brief overview of Dura and its origins; 2) Theories of pleading loss causation under Dura; 3) Pleading loss causation, an analysis of key circuit court decisions construing the pleading standards for Dura loss causation; and 4) Analysis and conclusions.

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Webinar: On Thursday July 9, 2009 there will be a webcast titled “2009 Mid-Year Review-Securities Litigation and Enforcement” beginning at 2:00 p.m. There is no charge for listing to this program on SEC enforcement trends. It is available here. Speakers include Bruce Carton, Kevin LaCroix, Francine McKenna, Lyle Roberts and Tom Gorman