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

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), 

Other cases focused on attorneys.  For example: 

In Re: J.B. Oxford Holdings, Inc., (Sept. 25, 2006),  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),  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),  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.