by T. GormanPosted on Posted in SECActions

In the wake of a series of law suits challenging the discretion of the SEC to bring actions as administrative proceedings and questioning of Chair White last week at a Senate Subcommittee budget hearing on the topic, the staff posted on the agency website: “Division of Enforcement Approach to Forum Selection in Contested Actions.” This is the first guidance published by the agency beyond comments made in speeches or at programs.

The Approach

The overall approach is guided by the mission of the agency which is “to protect investors and the integrity of the markets through strong, effective, and fair enforcement of the federal securities laws.” A series of factors which tend to delimit forum selection choices in certain instances are identified. Nevertheless, the forum selection decision is discretionary — there is “no rigid formula dictating the choice of forum.” To the contrary, the Division considers “a number of factors . . .” which may differ from case to case although “in some circumstances a single factor may be sufficiently important to lead to a decision . . .” The list provided is not exhaustive and may not contain factors considered in some instances. Those identified are:

Factor 1: “The availability of the desired claims, legal theories, and forms of relief in each forum.” The selection of a particular forum might be dictated by the nature of the charges or the relief sought. For example, a failure to supervise charge can only be brought in an administrative forum while a control person liability theory must be pursued in district court, according to the staff. Likewise, the need to seek a TRO or to name a relief defendant would dictate that the forum be district court.

Factor 2: “Whether any charged party is a registered entity or an individual associated with a registered entity.” These persons have “long been subject to the Commission’s regulatory oversight. . .” and an administrative forum provides the agency with additional remedies not available in district court such as “associational bars and suspensions. . .” While it is possible to bring a district court action against these persons and obtain the additional remedies in a tag-a-long administrative proceeding, it may be more efficient to bring one action.

Factor 3: “The cost-, resource-, and time-effectiveness of litigation in each forum.” The focus here is the efficient use of the SEC’s limited resources. Thus where a quick or “more timely public airing” is necessary an administrative forum may be the choice. Yet if complete relief may only be obtained by naming a relief defendant, the efficient choice may be district court. Procedure can also be a significant factor. If, for example, a broad range of claims should be addressed through summary judgment, or if there is a particular need for depositions, then the appropriate venue may again be district court.

Factor 4: “Fair, consistent, and effective resolution of securities law issues and matters.” Where the action is “likely to raise unsettled and complex legal issues under the federal securities laws, or interpretation of the Commission’s rules . . .” the expertise of the Commission and the Administrative Law Judges, subject to appellate review, “facilitate development of the law” dictating the choice of an administrative forum. In contrast, if there are questions of state law, other specialized areas of federal law or if “similar charges are being or have been brought against similarly situated parties . . .” then it may be “preferable” to bring the action in the same forum.

Analysis

While the posting of this memorandum may be a response to the rash of law suits filed against the Commission over forum selection, and questioning in the Senate last week, it is unlikely to ameliorate the concerns presented. Three points are critical:

First, the memorandum does little to actually define the forum selection process. Much of what it discussed has little significance to the day-to-day forum decisions for most cases. To be sure there are instances when the nature of the claim or the remedy dictates the choice. This is not most cases however. This is particularly true following Dodd-Frank which added provisions to the statutes which, in part, may be driving the move to the administrative forum. Viewed in this context, the discussion of these factors offers little insight into, or guidance about, the SEC’s forum selection process.

Second, citing the Commission’s resources as a driving factor adds little to illuminate the opaque process. If speed and cost were the determinative factors an administrative proceeding would always be the choice since the agency has imposed time limits on most of these actions. All this really tells the public is that after spending whatever time the SEC deems necessary to conduct an investigation, a rush to judgment is the way to go despite a host of factors such as the complexity of the action, difficult credibility issues which should be resolved by a jury and other factors which might dictate bringing the case in district court.

Third, stating that difficult or unsettled legal issues may dictate the selection of an administrative forum in view of the Commission’s expertise and the availability of appellate review raises the prospect of selecting an administrative forum in an effort to avoid having those issues resolved by the courts which has traditionally been the case. This approach may not only permit the agency to avoid trial losses, such as those suffered in recent months, but to side-step developing case law it does not like. For example, by moving insider trading cases into an administrative forum, the SEC may avoid the requirements of Newman regarding the personal benefit test for illegal tipping. Since virtually all insider trading law has been fashioned by the courts, such a move could stilt the development of the law. The prospect of appellate review does not change this point since the SEC will no doubt claim on appeal that the court should defer to its views. Not only will this undermine the development of the law, it creates the perception of unfairness – supposedly one of the key goals of enforcement policy.

While it clearly would be beneficial if the SEC addressed the questions regarding forum selection to reassure the public regarding the fairness of its processes, this memorandum misses the mark. It offers virtually no insight into what can only be viewed as a “black box” process used by the agency to make these critical decisions. Anxiety regarding that process can only be intensified by the prospect that in addition to those actions typically brought in that forum whole new classes of actions may now be brought there to take control of the development of the law. Avoiding the courts in that fashion can only add to the perception of unfairness, undercutting the mission of the agency.

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by T. GormanPosted on Posted in SECActions

The debate over waivers WKSI waivers and other similar provisions continued this week. The Commission granted a WKSI waiver to Deutsche Bank despite a guilty plea to criminal felony charges but only over the dissent of Commissioner Stein.

The agency filed two civil injunctive actions this week. One ties back to the market crisis and named four former bank officials who are claimed to have falsified certain provisions related to real estate loans, concealing the true financial condition of the institution. The other involved a fraudulent investment scheme tied to so-called “man camps” to be built in the Bakken.

Finally, the controversy over the use of administrative proceedings rather than civil injunctive actions continued this week. During budget hearings before Congress Chair White is reported to have suggested that the SEC may consider guidelines regarding forum selection.

SEC

Pilot project: The SEC approved a pilot project to assess tick size impact for smaller issuers (here).

Testimony: Chair Mary Jo White testified before the Senate Subcommittee on Financial Services and General Government Committee on Appropriations regarding the fiscal year 2016 budget (here).

Waivers: The SEC granted a so-called WKSI waiver – a waiver of the disqualification from being considered a well-known seasoned issuer – to Deutsche Bank AG, despite the fact that its subsidiary pleaded guilty to criminal felony charges tied to the years long manipulation of LIBOR. Commissioner Kara M. Stein dissented (here).

CFTC

Remarks: Chairman Timothy G. Massad addressed the European Union Parliament, Committee on Economics, Brussels, Belgium (May 6, 2015). His remarks, illustrated by a series of charts, focused on CCPs (here).

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 2 civil injunctive cases and 0 administrative actions, excluding 12j and tag-along proceedings.

False statements: SEC v. Merchant, Civil Action No. 23253 (N.D. Ga.) is a previously filed action against Charles H. Merchant, Sr. and his firm, Southern USA Resources, Inc. The complaint alleged that the firm, which purportedly exploited gold mining rights in Alabama, and Mr. Merchant, its CEO, CFO, president, secretary, treasurer and director, filed false reports with the Commission regarding the value of the firm’s land. In addition, Mr. Merchant filed false certifications regarding the internal controls and his understanding of them. The company was also delinquent in its filing obligations. Previously, the Court entered a permanent injunction as to Mr. Merchant based on Exchange Act Section 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)5 and 20(a). An officer and director bar was also entered against Mr. Merchant. An injunction based on the same Sections (omitting Exchange Act Sections 13(b)5 and 20(a)) was also entered against the firm. This week the Court made findings as to monetary penalties, ordering Mr. Merchant to pay a third tier penalty of $300,000 and the firm $750,000. While the Court concluded that disgorgement was appropriate, no order was entered in view of the lack of evidence. See Lit. Rel. No. 23252 (May 7, 2015).

Market crisis: SEC v. Gibson (D. Del. Filed May 6, 2015) names as defendants: David Gibson, the former CFO of the bank; Robert Harra, Jr., its former president and COO; Kevyn Rakowski, the comptroller; and William North, the chief credit officer. Messrs. Rakowski and North were charged by the U.S. Attorney’s Office for the District of Delaware in a parallel criminal case. Years of record growth resulted in a loan balance of over $9 billion in 2009 for the Bank. As the credit crisis continued, and the housing market deteriorated, many of the construction projects underlying the Bank’s loans stalled. Others matured and the principal became due. As these events unfolded the Bank failed to classify these loans as non-accruing. To the contrary, the Bank continued to accrue or record income as if payment was expected. The bank also did not disclose, for the most part, this fact. In the third quarter of 2009 the Bank disclosed only $38.7 million of these loans, omitting about $351 million. In the fourth quarter of that year actions by the four defendants resulted in the omission of about $330.2 million of these loans. Disclosures for that quarter reflected only $30.6 million in matured loans 90 days or more past due. Mr. Gibson’s actions are also alleged to have resulted in the failure by the Bank to disclose significant events which occurred after the close of the quarter but prior to the completion of the financial statements for the third quarter and year end, contrary to GAAP. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and13(b)(5). The action is pending. See Lit. Rel. No. 23254 (May 7, 2015).

Investment fund fraud: SEC v. North Dakota Developments, LLC, Civil Action No. 4:15-cv-00053 (D.N.D.) is an action against the firm and its principals, Robert Gavin and Daniel Hogan. The defendants are alleged to have raised over $62 million from hundreds of investors to develop “man camps” in the Bakken oil fields. Investors were promised returns as high as 42% or guaranteed returns of up to 24%. The first camp failed while the second was developed but Ponzi type payments were made to investors. Much of the money was misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The Court granted a temporary freeze order. A hearing on a preliminary injunction is scheduled for May 18, 2015. See Lit. Rel. No. 23252 (May 6, 2015).

Investment fund fraud: SEC v. Pameijer, Civil Action No. 1:12-cv-01364 (S.D. Ind.) is a previously filed action against Rudolf Pameijer and his daughter, Lindsay Sayer. The complaint alleged that the two defendants assisted co-defendant Ryan Koester, who falsely claimed to be an expert currency trader, to secure investor funds. Mr. Koester previously settled. Mr. Pameijer and Ms. Sayer solicited clients to invest in promissory notes that claimed to have a guaranteed return with no risk. In fact the father-daughter combination misappropriated most of the investor funds raised while the remaining were given to Mr. Koester who lost them through trading. The Court entered an order based on the settlement of the two defendants, enjoining them from future violations of Exchange Act Section 10(b) and Securities Act Section 17(a). In addition, Mr. Pameijer agreed to pay disgorgement of $1,226,703 along with prejudgment interest but no civil penalty in view of his sentence in the parallel criminal case. Ms. Sayer agreed to pay disgorgement of $90,822 along with prejudgment interest. A penalty was waived based on financial condition. See Lit. Rel. No. 23251 (May 1, 2015).

PCAOB

Audit committee: The Board issued the first of what is planned as a series called Audit Committee Dialogue. The series is based on insights from inspections of public company auditors that may prove beneficial to audit committee members. It includes a discussion of key recurring areas of concern and risks the Board in monitoring (here).

Australia

Misappropriation: The Australian Securities and Investment Commission announced that Anthony Nicholis, a director of Zantholis International Pty Ltd pleaded guilty to three charges of dishonesty tied to misusing firm funds. Specifically, the companies raised about $2.68 million from about 20 investors. The funds were to be used for property developments. Between 2004 and 2006 Mr. Nicholis authorized the withdrawal of over $750,000 from the funds raised for his personal benefit. The date for sentencing has not been set.

Hong Kong

Bar order: The Securities and Futures Commission, following an investigation, barred Benjamin Zhiwei, formerly a representative at JPMorgan Chase Bank, from the securities business. The action was based on the fact that he concealed from his firm a personal securities trading account and his interest in the account of a friend. During that period the accounts held positions which were on the restricted list of the firm.

Investment fund fraud: The SFC resolved proceedings regarding the Descartes Athena Fund SPC or the Athena Fund, a hedge fund based in the Cayman Islands. In April 2009 the SFC instituted proceedings against the fund and others based on allegations that the management defrauded investors. A freeze order was obtained, a receiver appointed and the assets traced. Now the SFC has recovered about $191,360, 215 for investors.

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