by T. GormanPosted on Posted in SECActions

Last year, there were repeated calls for the SEC to reform its enforcement policies which, for the most part, went unheeded. The U.S. Senate Committee which held hearings on the botched Pequot hedge fund investigation made three key recommendations:

1) that standardized, comprehensive investigative procedures be prepared in a fashion similar to the U.S. Attorney’s Manual;

2) that procedures for assessing the complexity and needs of a case in terms of staff and resources be developed; and

3) that steps be taken to prevent improper influences.

Minority Staff of S. Comm. On Finance, 110th Cong. 1st Sess., “The Firing of an SEC Attorney and the Investigation of Pequot Capital Management” at 46 (S. Prt. 110-28 Aug. 2007).

Similarly, SEC Commissioner Paul Atkins also called for the creation of uniform enforcement standards, including an Enforcement Manual. Commissioner Paul S. Atkins, SEC, “Remarks to the ‘SEC Speaks in 2008’ Program of the Practising Law Institute’” (Feb. 8, 2008).

These suggestions have not been adopted.

In contrast, the suggestions of the GAO in a November 2007 study are, according to Chairman Cox, being implemented. That report called for the Enforcement Division to revise certain procedures to promote efficiency. Those recommendations focused largely on the relation of the Division to SROs and the use of reports from those organizations.

Unfortunately, most other calls for reform have been ignored. Thus, suggestions that the Seaboard Release and the Commission’s policies on cooperation be revised have failed. Despite requests for reform from Congress, Commissioner Atkins, the ABA and others, the staff, as noted in an earlier segment of this series, has reaffirmed the policies which many claim have created a culture of waiver.

Similarly, the Commission and the Division of Enforcement have ignored suggestions by Commissioner Atkins that a New Wells Commission be convened to reform settlement procedures and that an open file policy be adopted. Commissioner Paul S. Atkins, SEC, Remarks at the Eighth Annual A.A. Sommer, Jr. Corporate, Securities and Financial Law Lecture, Oct. 9, 2007; Commissioner Paul S. Atkins, SEC, “Remarks to the ‘SEC Speaks in 2008’ Program of the Practising Law Institute,” supra.

Finally, the disastrous results of cases such as SEC v. Jones and SEC v. PacketPort.com, Inc., discussed in earlier parts of this series, seem to have also been lost on the Commission. The rulings in those cases suggest that the Enforcement Division needs to reorganize and energize its procedures to bring cases in a more timely fashion. Such results would be consistent with the Commission’s key remedy, a statutory injunction which is forward-looking and not a punishment for past and ancient transgressions. Such a revision would also be consistent with the Enforcement Division’s “cop on the beat” role, rather that the archeologist it sometimes appears to be. Unfortunately, the lessons of these cases seem to have been lost on the would-be-cop.

Next: Significant cases – insider trading

by T. GormanPosted on Posted in SECActions

Three key enforcement policies concern corporate penalties, parallel proceedings and private actions. Each of these policies raises significant questions.

The SEC has what can be viewed as a two-fold policy toward corporate penalties. One part is reflected in the policy statement issued in 2006. Then, the SEC enunciated a number of factors to be considered in assessing whether and to what extent a corporate penalty should be imposed. The two key factors in the equation are the presence or absence of a benefit to the corporation and the degree to which a penalty will recompense or harm the shareholders.

The 2006 policy must be considered in conjunction with the policy announced by Chairman Cox in an April 13, 2007 speech which dictates the procedure for determining such penalties. Under the Chairman’s new approach, the staff must meet with the Commission in any case where there is an issue regarding corporate penalties and receive instructions on the amount or range for the amount of any penalty. After receiving instructions, the staff can proceed to meet with defense counsel and negotiate a settlement. This procedure contrasts sharply with the traditional approach under which the staff and defense counsel negotiated a tentative settlement which was then submitted to the Commission for consideration.

The impact of these policies is difficult at best to determine. The two cases cited in yesterday’s post are good illustrations. In the BISYS Systems case, the SEC did not impose any penalty. In Nortel, the Commission imposed a $35 million tax. Both cases involved financial fraud. In both cases, the Commission acknowledged the cooperation of the company. Yet, in one case there is no penalty, while in the other there is a substantial penalty. While there may be other factors which explain the disparate results, they are not readily apparent from the information disclosed by the Commission.

Nor is it clear that Chairman Cox’s new settlement procedure for cases involving corporate penalties empowers the staff and facilitates the settlement process as he announced it would in his speech. To the contrary, it is unclear at best as to whether counsel for the issuer has any meaningful opportunity to discuss and negotiate with the staff regarding a penalty. It is equally unclear whether the policy facilitates the process. Indeed, given the apparent slow pace of many enforcement cases, it appears that it may be further slowing the process.

The Commission’s policy regarding parallel proceedings was affirmed by the Ninth Circuit in the Stringer case, discussed here, on April 4, 2007. In that decision, the Circuit Court upheld the SEC’s reliance on standard form 1662 (standard warnings which note, in part, that the SEC may make its files available to criminal prosecutors) as an appropriate response to any inquiry by defense counsel regarding the existence of a parallel criminal proceeding. The only apparent limitation on the Court’s holding is that the SEC cannot make an affirmative misrepresentation. The court did not seem to be troubled by the fact that the investigations of the SEC and DOJ in Stringer were not parallel. but had merged.

This policy, like the SEC’s cooperation policy, may not facilitate cooperation with its investigations. In view of Stringer, defense counsel representing individuals many have little choice when faced with any situation where there are potential criminal charges to advise a witness to invoke his or her constitutional right not to testify rather than cooperate. This may also be the case in internal investigations where it is clear that the business organization intends to waive privilege and turn over all interview notes to the SEC. This is particularly true in view of the trend toward deputization, under which witnesses in internal investigations have been charged with making false statements where they reasonably could know that their statements would be given to the government.

Finally, there is a substantial question concerning the SEC’s current position on private securities damage actions. Traditionally, the Commission has taken the position that private damage actions are a necessary supplement to its enforcement actions. Yet, last year it seems to have taken conflicting positions on two key private actions before the Supreme Court. In Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007), the SEC argued in an amicus brief for an interpretation of the “strong inference” of scienter pleading standard in private actions that was more stringent than the one adopted by the Court. Many commentators argued that the SEC’s proposed standard was pro-business rather than pro-plaintiff.

In contrast, in Stoneridge Investment Partners, LLC. V. Scientific-Atlanta, Inc., 128 S.Ct. 761 (Jan. 15, 2008), the SEC adopted a position on the question of scheme liability which supported plaintiffs and which was ultimately rejected by the Court. While the Solicitor General did not permit the SEC to file an amicus brief, it is clear that the Commission sought to take an aggressive, pro-plaintiff position. The SEC’s position in this case stands in stark contrast to the one taken in Tellabs, creating an open question as to the agency’s position on private damage actions.

Next: Calls for the reform of SEC policies