by T. GormanPosted on Posted in SECActions

SEC Commissioner Paul Atkins recently published an article tracing the history of the enforcement division, calling for a new Wells Committee and making recommendations for items to be considered by the Committee. Paul S. Atkins and Bradley J. Bondi, Evaluating the Mission: A Critical Review of the History and Evolution of the SEC Enforcement Program, 13 Fordham Journal of Corporate & Financial Law 367 (2008).

This is not the first time Commissioner Atkins has raised the issue of a new Wells Committee or raised some of the points contained in the article. Some of the suggestions have been raised by the Commissioner in speeches discussed here and here. Nevertheless, the article does contain a number of thoughtful suggestions regarding the enforcement program.

According to Commissioner Atkins, a new Wells or advisory committee should be formed with the “mission … to conduct an independent review of the Commission’s enforcement program from multiple, diverse perspectives, and to recommend to the Commission, if warranted, any needed changes.” In the article, Commissioner Atkins then suggests several topics for consideration by the new committee including:

1) The implementation of mechanisms to provide more efficacy, predictability and transparency to the enforcement program. In this regard, the overall management and approach of the enforcement program would be examined in view of its mission and goals.

2) The implementation of an “open jacket” policy, such as that used by criminal prosecutors. Under this policy, which Commissioner Atkins as recommended before, the enforcement staff would disclose to defense counsel the evidence supporting its claims.

3) A review of the closing process. As noted the article, a prior GAO report harshly criticized the Enforcement Division for failing to promptly close investigations.

4) An examination of enforcement practices from a due process stand point and consideration of ways to improve the current Wells process.

5) A review and analysis of the costs and burdens imposed by the investigative process. This would include consideration of the necessary scope of requests for documents and consideration of ways to ease the burdens and costs of electronic data production.

6) An examination of the use, effects, amount and appropriateness of issuer penalties.

7) Consideration of the minority recommendation from the Senate Finance Committee regarding the Pequot Capital Management inquiry suggesting that Enforcement adopt a manual of procedures which would be similar to the U.S. Attorney Manual.

These are thoughtful and serious recommendations which deserve careful consideration. Hopefully, the Commission will act on the suggestion of Commissioner Atkins and convene an appropriate committee to consider these and other issues.

by T. GormanPosted on Posted in SECActions

The SEC filed another settled insider trading case on Friday. SEC v. Di Vita, Civil Action No. 1:08-cv-01060 (D.D.C. June 20, 2008).

The basic facts to the case appear to be similar to many others filed by the Commission. Defendant Adrian P. Di Vita was employed by Williams-Sonoma, Inc. (“WSM”) as a manager for Financial Planning and Analysis. On August 22, 2006, Mr. Di Vita attended a monthly operating review meeting held for senior management at WSM. The meeting was held to discuss the prior month’s results and the outlook for each division. At the meeting “a member of WSM senior management again discussed Pottery Barn’s [a unit of WSM] difficulties and, among other things, said the expectation was that those difficulties would not reverse in the near future,” according to the complaint. The factual section of the complaint does not provide any other details about the meeting. The summary at the beginning of the complaint however, claims that Mr. Di Vita received information which “enabled him to know, that when WSM issued a scheduled earnings press release … the company would lower its earnings guidance … .” (emphasis added).

Following the meeting, Mr. Di Vita sold 707 of his WSM Stock Fund units (from his pension fund) and purchased 1,000 WSM put options. After WSM issued an earnings release in which it lowered guidance, Mr. Di Vita sold his put options. Overall, Mr. Di Vita avoided trading losses and made gains totally $67,690, according to the complaint.

To settle the action Mr. Di Vita consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. In addition, he consented to the entry of an order requiring him to pay disgorgement and prejudgment interest of $76,932.80 and a civil penalty of $67,690.

While the case seems to be straight forward, it does raise two questions. First, it is unclear why the SEC’s complaint is so vague about the key meeting attended by Mr. Di Vita. The fact section contains virtually no detail about the meeting. There is no claim, however, in the fact section that the managers were told that earnings guidance would be lowered. While apparently the managers were told something about continuing difficulties at the Pottery Barn unit, there is no indication of whether this represented a new trend or simply a continuation of what had previously been disclosed. Likewise, there is no representation that managers were told about earnings projections for the period or that guidance would be lowered.

The allegations in the “Summary” at the beginning of the complaint make a small addition to the allegations about the meeting. That portion of the complaint suggest that, in fact, managers were not told that guidance would be lowered, but were supplied with enough information from which they could figure it out or which “enabled” defendant to know.

While Mr. Di Vita’s trading clearly suggests that he “figured out” something – and the results show he was correct – this is clearly not an adequate basis on which to being an insider trading case. Guesses, right or wrong, are not inside information. If, in fact, WSM managers were told that guidance was being lowered or if they were provided with other details about the financial performance of the company, the SEC should be able to do better than make the vague allegations set forth here.

Second, there is no explanation for the financial penalty imposed here. The penalty equals only the disgorgement. It does not equal the total of disgorgement and prejudgment interest, as in many cases. Nor does it represent a multiple of the disgorgement and prejudgment interest total as in many cases. Overall, this complaint, like one filed earlier last week (discussed here) raises more questions than it answers.