by T. GormanPosted on Posted in SECActions

SEC Enforcement Trends – Conclusion 

An analysis of recent SEC statements and selected enforcement cases suggests several key trends that issuers, directors, officers and those who provide services to public companies should carefully monitor and consider.  The aggressive enforcement positions being taken by the agency suggest prudent prevention steps for companies, directors, officers and professionals. 

Enforcement policies.  Three key events to monitor in coming months that may significantly impact enforcement actions: 

            The decision by the Ninth Circuit concerning SEC Form 1662 in U.S. v. Stringer.  If the court upholds this case and rejects the SEC’s argument that Form 1662 is an adequate warning regarding whether a parallel criminal inquiry is being conducted, it could significantly change the way in which the Enforcement Division conducts investigations.  Specifically, for the first time SEC enforcement attorneys may be required to disclose the fact that there is a parallel criminal investigation rather than relying on stock warnings or slogans such as “assume the worst.”  

            Further proceedings in SEC v. Reyes, et. al., and U.S. v. Reyes, et al.  The court noted in ruling against a defense motion to compel that it would take appropriate action and level the playing field, if necessary, as trial approached.  The defendants in the SEC enforcement action, which the court refused to stay despite government requests, had argued that SEC attorneys had access to evidence from the DOJ witness proffer sessions that defendants could not obtain.  A subsequent ruling here could impact the manner in which the DOJ and the SEC share evidence in parallel cases.  

            The SEC may amend its cooperation policy.  Congress and the ABA continue to pressure the SEC to revise the Seaboard Release to eliminate the so-called “culture of waiver.”  A revision of these cooperation standards eliminating the need to waive attorney-client privilege and work product protection would significantly impact how issuers approach settlement discussions with the SEC.  A related issue is proposed Federal Rule of Evidence 502, which contains a selective waiver provision long favored by the SEC but almost routinely rejected by the courts and Congress.  Adoption of this rule would virtually compel issuers to waive privilege as to the SEC to gain cooperation credit.  The difficulty with this approach is that the SEC cannot assure that the information will be protected.  

Backdated Options cases.  The SEC brought a few cases quickly earlier this year.  The fate of the remaining 140 or more companies also being investigated may be determined later this year as well.  Key developments will include: 

            Standards:  A key question given the number of investigations is the standards used to select cases.  Some indication of this may arise from the trial of U.S. v. Reyes, et al., in June. 

            Scope of liability:  As the investigations proceed the DOJ and the SEC will carefully review the conduct of directors, officers, in-house and outside counsel, accountants and others.  A key question will be the scope of the gatekeepers and third-parties the SEC targets. 

Hedge Funds:  Chairman Cox’ comments to Congress assuming that these funds will not go unregulated in the wake of Goldstein, the cases brought last year, and recent rule writing efforts, assure that there will be regulation by enforcement action in this area in the future.  The current Wall Street sweep, for example, focuses in part on hedge funds.  

Financial fraud:  No doubt the SEC will continue to focus on this traditional enforcement area.  A key question here will again be the scope of liability and the focus on those outside an issuer who render services and participate in transactions.  

FCPA:  In view of increased globalization there should be more emphasis in this key enforcement area in the future.  The Enforcement Division has already initiated significant cases in this area in 2007. 

Insider trading:  This key enforcement priority seemed to witness a huge revival with the filing of SEC v. Guttenberg, et al., earlier this year.  That case has been called the most significant insider trading case since the 1980’s and the days of Ivan Boesky, Dennis Levine and others caught up in the scandals of the times.  Couple this case with the very aggressive sweep currently being conducted on Wall Street and there should be little doubt that insider trading will continue to be a priority.  If those actions are not sufficient indication of the Division’s intent, every officer and director should review the remarks of Enforcement Chief Linda Thomsen suggesting that the so-called safe harbor of Rule 10b-5-1 plans many no longer be safe – those using the plans could find themselves in an insider trading inquiry. 

Gate Keepers:  The Enforcement Division will continue to focus on this key area, carefully reviewing those it views as the “advance guard” to many corporate activities.  Included here are directors, attorneys and auditors.  Clearly, the actions of the gate keeps will continue to be scrutinized carefully in connection with financial fraud cases, option backdating, FCPA compliance and insider trading. 

Finally, an analysis of these trends suggests that there will be an aggressive SEC Enforcement program moving forward.  The division clearly intends to push the envelope on the facts and the law, as it has in the past.  Some of those actions will be keyed to those called the gate keepers because of their vital role.  No doubt the SEC will, as in the past, bring cases that cannot be sustained.  In other instances, it will bring cases on which it will prevail.  This counsels the prudent company, director, officer, attorney, account or other service provider to carefully review these areas, analyze existing compliance programs and take reasonable steps to avoid becoming entangled in situations which could lead to inquiries, investigations and enforcement actions.

by T. GormanPosted on Posted in SECActions

SEC Enforcement Trends – Gate Keepers 

The SEC has long focused on the conduct of “gate keepers,” such as directors, attorneys and auditors, in an effort to enlist them as a kind of “advance guard” to be there on the spot and stop fraudulent transactions from occurring.  These efforts provoked sympathy from the Ninth Circuit Court of Appeals in one case, but not agreement that the SEC could create such an advance guard. SEC v. Arthur Young & Co., 590 F. 2d 785, 788 (9th Cir. 1979) (“We can understand why the SEC wishes to so conscript accountants. . . . The difficulty with this is that Congress has not enacted the conscription bill that the SEC seeks to have us fashion and fix as an interpretive gloss on existing securities laws.”). 

Nevertheless, efforts continue in view of the key role such gate keepers frequently play in corporate transactions.  It was in this context that then Judge and former SEC Enforcement Chief Stanley Sporkin wrote “Where also were the outside accountants and attorneys when these transactions were effectuated?,” Lincoln Sav. & Loan Ass’n v. Wall, 743 F. Supp. 901, 920 (D.D.C. 1990).   

Last year the SEC continued to pursue cases against gate keepers – and no doubt there will be many more in the coming months.  For example, last year the Commission brought an action against a former director of a biotech company who was alleged to have engaged in insider trading in advance of an announcement of FDA approval of a device for his company.  The director settled the enforcement action with consent to a statutory injunction and the entry of an order directing the payment of disgorgement and prejudgment interest of over $14,000 and a penalty of about $13,600.  SEC v. Mark Kishel, (N.D. Ga. Jan. 23, 2006), www.sec.gov/litigation/litreleases/lr19538.htm.  

Other cases focused on attorneys.  For example: 

In Re: J.B. Oxford Holdings, Inc., (Sept. 25, 2006), sec.gov/litigation/admin/2006ic-27497.pdf.  Where the complaint charged the former general counsel of a broker dealer holding company in a late trading scheme. 

SEC v. Biopure Corporation, et al., (D. MA. Sept. 13, 2006), www.sec.gov/litigation/litreleases/2006/lr119825.htm.  Which charged a former general counsel with aiding and abetting filing violations where those filings failed to disclose negative FDA news. 

SEC v. Alexander, et al., (E.D.N.Y. Aug. 9. 2006), www.sec.gov/litigation/litreleases/2006/lr19796.htm.  Which charged the former general counsel of Comverse in a scheme to backdate options.  

These examples from last year are perhaps only the beginning of an increased emphasis in this area.  As the options scandal continues to unfold, for example, the SEC and other regulators will clearly focus on the role of directors, attorneys, auditors and outside consultants.  In addition, the recent comments of Enforcement Chief Linda Thomsen noting that the staff is reviewing Rule 10b5-1 plans (see blog post 3/19/07) to determine if insider trading cases should be brought promises to bring increased scrutiny to the transactions of corporate directors.  All of this suggests that in the future the SEC Enforcement division will continue to view gate keepers as the advance guard and carefully scrutinize their activities, resulting in more gatekeeper-focused enforcement investigations and actions.