Part II: SEC Enforcement Trends and Priorities 2008 — Policies

SEC enforcement has traditionally combined the functions of the cop on the beat and regulation through litigation. The policies and procedures which govern the SEC’s enforcement efforts can have a critical impact on those involved in its cases. While some policies served the program well, others have led to calls for reform, most of which have gone unheeded.

Cooperation is a key policy. On one side is cooperation with other regulators, and on the other is the cooperation of issuers and others with the SEC. While the SEC has traditionally cooperated with other regulators, those efforts seems to be increasing, particularly with DOJ. Many of the SEC’s high profile insider trading and FCPA cases last year were brought with either the assistance of foreign regulators or criminal prosecutors. The TXU Options case (SEC v. One or More Unknown Purchasers of Call Options of the Common Stock of TXU Corp., Civil Action No. 1:070cv-01208 (N.D. Ill. Marc 2, 2007)) is just one of a series of cases in which the SEC acknowledge the assistance of foreign regulators. In that case the Commission thanked the U.K. Financial Services Authority and the Swiss Federal Banking Commission for their assistance.

In the Chevron FCPA case (SEC v. Chevron Corp., Civil Action No. 07-10299 (S.D.N.Y. Nov. 14, 2007)) the SEC coordinated with the Office of the U.S. Attorney, the Manhattan District Attorney and the Office of Foreign Asset Control. This is just one of a rising tide of cases in which the SEC is working with criminal prosecutors.

The other facet of cooperation is issuers and others assisting with the SEC’s regulatory and investigative efforts in the hope of receiving credit in the prosecutorial charging process. The SEC’s policies on cooperation are set forth in its 2001 Seaboard Release which details considerations for charging a business organization. Like those of DOJ, the policies offer business organizations the prospect of credit in return for cooperation. Like those of DOJ, they reference the prospect of privilege waivers as part of what may constitute cooperation. Like those of the DOJ, those policies have been under fire for fostering a “culture of waiver” in which the waiver of important rights like the attorney client privilege is the currency which purchases cooperation credits in the charging decision.

While DOJ has revised its policies and Congress is considering legislation, the SEC has steadfastly maintained that waivers are not a perquisite to cooperation. Linda Thomson, Director the SEC’s Enforcement Division, made this clear in a speech in April 2007. In her speech Ms. Thomson cited two examples of cases in which the issuer received cooperation credit that impacted the resolution of its case. In one, the company waived privilege. In the other it did not. In the former the company was not prosecuted. In the latter the company was prosecuted.

The debate over the waiver of privilege however, is only one part of the debate about cooperation credit. A more fundamental difficulty is what credit the company receives and its value in contrast to the difficulties waivers and cooperation may cause for the company. A close study of SEC cases in which the agency acknowledges cooperation reveals little. Consider for example the following examples:

SEC v. Wagner, Civil Action No. 07-22123 (D.D.C. Dec. 7, 2007) involved a corporate director who traded in advance of a corporate event and then self reported to the SEC. The case was resolved with a standard consent decree and the payment of disgorgement but no penalty.

The Retirement System of Alabama, Release No. 574461 (March 6, 2008) involved a pension system which obtained inside information and used it to trade. The system did not have any procedures according to the Commission to prevent insider trading. The investigation was resolved with a Section 21(a) report and no enforcement action.

SEC v. The BISYS Group, Inc., 07-Civ-4010 (S.D.N.Y. Filed May 23, 2007) concerned a company that engaged in a pervasive corporate accounting fraud involving its senior management. The SEC acknowledged “extensive cooperation.” The case settled with a books and records injunction.

SEC v. Nortel Networks, Corp., Case No. 07-CV-051 (S.D.N.Y. Oct. 15, 2007) saw a company engaged in financial fraud by improperly accelerating revenue recognition and improperly established and maintained reserves. The SEC acknowledged Nortel’s “substantial remedial efforts and cooperation.” The case settled with a consent to a statutory injunction prohibiting future violations of the antifraud and reporting provisions and the payment of a $35 million civil penalty.

Precisely why Wagner ends with an injunction, while Retirement System of Alabama concludes with a Section 21(a) report is difficult to determine. Perhaps even more difficult to parse is the difference between the corporate fraud cases where one company is not fined and anther pays a very substantial penalty. The lack of transparency in this area, coupled with the “culture of waiver” questions, makes it most difficult for any person to assess how to proceed with the SEC. That difficulty is compounded by the rise of parallel proceedings and the SEC’s policies in that area.

Next: Parallel proceedings and calls for increased transparency in Enforcement procedures