Series: SEC Enforcement Program 2007, Projecting Trends and Key Issues (Part I)

Today we begin a series of posts reviewing 2007 SEC Enforcement trends. will periodically post this series over the next several weeks.  It will analyze the following key points: 1) An overview of the enforcement program; 2) New enforcement policy initiatives; 3) Key developments regarding investigations; 4) Significant cases in 2006; and 7) Trends and key issues for 2007.  

Enforcement Program Overview

During 2006 the number of SEC enforcement cases fell by about 9%.  Some sources have attributed this to budget restrictions.  Enforcement Chief Linda Thomsen, however, noted at a recent ABA program that the reduced number of cases was not significant.  Rather, Ms. Thomsen said that she had reviewed statistics over a number of years and that some years they go up and some years they go down.  

As in earlier years, the Enforcement Program had its critics.  In March 2006, the U.S. Chamber of Commerce published a report that reviewed the Program.  The report criticized the Enforcement Program for recent litigation set backs, attempts to shift standards of liability, misuse of penalties, and characterized it as having an increasingly harsh tone. 

The SEC of course does not agree with the findings of the report.  For example, at recent programs, such as SEC Speaks, the staff has noted that in fiscal 2006 they had a perfect 10-0 win record in district court.  No doubt, there were some significant court victories.  Those included:

SEC v. Yuen (C.D. Ca. May 8, 2006) ( in which the former Chairman and CEO of Gemstar-TV Guide was found liable and enjoined, ordered to pay over $22.3 million in disgorgement, penalties and interest and barred from being an officer or director;

SEC v. Treadway (S.D.N.Y. Oct. 26, 2006) ( in which a jury found Mr. Treadway liable for securities fraud stemming from an undisclosed market timing scheme. Subsequently, Mr. Treadway consented to a statutory injunction and an order directing the payment of $572,000 as disgorgement, interest and penalties; and

SEC v. Snyder (S.D. Tex. Feb. 1, 2006) ( in which the former CFO of Waste Management was found liable for insider trading and financial fraud and ordered to pay over $2 million in disgorgement, prejudgment interest and penalties. 

There were, however, losses prior to verdict or in administrative actions.  Those included:

SEC v. Todd (S.D.Ca. May 30, 2006) in which summary judgment was granted in favor of former Gateway executive Weitzen in a fraudulent earnings case;

SEC v. Talbot (C.D. Col. Feb. 14, 2006) in which insider trading claims were dismissed finding no duty of confidentiality against a Fidelity National director who traded in the shares of Lending Tree after he learned through Fidelity, which owned a stake in Lending Tree, of take over talks concerning Lending Tree; and

In the Matter of Flynn (Adm. Proc., Aug 2, 2006) where an ALJ dismissed aiding and abetting claims against former CIBC director Paul Flynn that claimed he aided a late-trading and market timing scheme.  This action followed the dismissal of criminal charges by former NY AG Eliot Spitzer against Mr. Flynn for the same conduct.

While we have not totaled all of the SEC’s wins and losses, the SEC can, in fact, cite to ten district court wins in fiscal 2006.  At the same time, the SEC does not have a perfect track record when the totality of its results are considered.  As the examples cited above suggest, the SEC did lose significant cases in district court on pre-trial motions.  Other losses came in administrative proceedings.  It is clear that the SEC is willing to litigate, even when the factual and legal theories are difficult, as in Talbot and Flynn.  Likewise, despite the 9% reduction in cases, the overall Enforcement Program seems alive, well, and aggressive.