Last week on the heels of the issuance of the Paulson Committee Report, senior SEC enforcement staff met with ABA Business Section members for their annual tête-à-tête.

After an hour and a half of dialogue little new information about the enforcement program was revealed. The staff did state that the enforcement program is alive and well, hardly a surprising claim. In this regard, Enforcement Chief Linda Thomson pointing out that the SEC brought less enforcement cases last year than in prior years is of no moment. Ms. Thomson said that she went back and reviewed several years worth of statistics on the number of cases brought each year. Her examination demonstrated that the number of cases tends to fluctuate over the years, which led her to reassure all that the program was as robust as ever. At one point the staff noted that it had prevailed in its last fifteen straight cases in federal district court. This contention seems to refute the recommendation of the U.S. Chamber of Commerce in its report earlier this year stating that “the Commission should closely evaluate the number of recent losses in litigated enforcement actions, the various reasons for those losses, and the criticisms of both factual assertions and legal theories that are contained in the decisions.”During the discussion, the staff reviewed its progress to date on the options backdating cases. While the staff declined to specifically identify the number of companies under investigation, it did note that there are over 100, as has been widely Reported in the press. As in the past the staff noted that we can expect more cases – not much of a surprise. In response to a specific question about spring loaded option cases, the staff noted that “its client” – i.e. the SEC – had not made a decision on this controversial issue. As many will recall, this practice was the subject of an October 6, 2006 New York Times article urging that these cases be brought, although the article did note that the legal basis for bringing such cases is questionable.

Finally, the staff declined to comment on the recommendations and proposals of the Paulson Committee, noting that they had not had time to analyze the Report. Reportedly, it will be some time before the final Report is prepared.

The Report contained few surprises – much like the discussion with the SEC Enforcement staff. Regardless of the merits or demerits of the various proposals – and there are press articles taking virtually any position you would like to adopt – one has to wonder what many of the proposals have to do with the overall competitiveness of the U.S. Capital markets. Take for example, the issues flagged in this blog last week regarding litigation reforms. Uncertainties about the precise interpretation of elements of Rule 10b-5 liability because of a split in the circuits may be an interesting question but hardly new and does not seem to be one that has global significance. Likewise, whether payments under Fair Funds are credited against securities class action settlements is not a new or surprising idea and also seems to lack global appeal. On the other hand, reducing criminal liability for organizations might be of more interest to an organization considering where to market its securities. Overall however, many of the issues regarding litigation discussed in the Report seem to have the same qualities as the discussion with the SEC Enforcement staff – not much new here. In addition, many seem to have little to do with the key topic of the Report – the competitiveness of U.S. Capital markets. Perhaps in the final Report the Committee will spend more time discussing how its concerns relate specifically to that issue.

The Committee on Capital Markets Regulation, otherwise known as the Paulson Committee (after Treasury Secretary Henry M. Paulson, Jr. who spoke approvingly of the group), issued its much talked about and anticipated Interim Report today.  While the 135 page tome did not address some of the more controversial issues discussed in recent press releases and commented on earlier, it does cover a number of issues regarding competitiveness in the U.S. capital markets, many of which will be addressed in more detail in future entries.  

Two key issues addressed relate to SEC enforcement actions and the criminal prosecution of corporations.  As to the former, the Report makes three specific recommendations:  1) that the SEC resolve conflicts among the circuits on certain issues regarding private damage liability under Rule 10b-5; 2) that the amount recoverable in class actions be reduced to the extent that investors have been compensated from funds paid under the SOX Fair Funds provision from an SEC enforcement actions; and 3) that a rule should be established to limit “pay-to-play” arrangements involving charitable donations made by class action law firms to solicit institutional investors to be lead plaintiffs.  As to the latter, the Committee recommended that the standards in the Thompson Memo for indicating a corporation be modified so that a corporation can only be charged in “exceptional cases . . . ”  (In all the discussion about the waiver of privilege it is often overlooked that the original idea behind the Holder and Thompson Memos, which at least in part emanated from the private bar, was to delimit the scope of corporate criminal liability which in theory has been extremely broad since the 1909 decision of the Supreme Court in New York Central v. U.S., 212 U.S. 481, which first held that corporations could be held accountable for criminal acts of their agents).  

The full text of the report can be found on the Committee’s web site at