Without question, the first six months of 2009 have been a period of sharply increased enforcement activity at the Securities and Exchange Commission. The financial crisis, the new administration, new SEC leadership, increased funding and the focus of Congress and the media have all combined to encourage heightened government scrutiny. And even though it has only been a few months since a new Chairman took office, already there are tangible signs that the SEC has taken a more aggressive enforcement posture. In this alert, we review the changes the new SEC leadership has instituted and is considering, the observable impact of the new administration on enforcement activity and significant cases in key areas that reflect the agency’s evolving enforcement program.
I. Overview of Changes
A. The Backdrop
The events of 2008 led directly to the current enforcement agenda. The collapse of the subprime mortgage market, the ensuing credit crisis, the demise of several major investment banks and, perhaps most of all, the Madoff case led to a loss of confidence in the agency’s ability to protect investors. This loss of confidence was manifested in Congressional hearings and an intensified media spotlight. At the same time, the SEC’s Inspector General has issued a number of reports critical of the agency, and Congress intensified pressure on the SEC and Department of Justice to bring cases in the wake of the financial crisis. At a March hearing of the Senate Judiciary Committee on the law enforcement response to the financial crisis, Senator Patrick J. Leahy declared, “I want to see prosecutions…. I want to see people go to jail.”
B. The New SEC
Against this backdrop, the Obama Administration took office with a new regulatory and enforcement agenda. Mary Schapiro was sworn in on January 27, 2009 as the twenty-ninth Chairman of the SEC. She wasted no time in implementing changes to “reinvigorate” enforcement. In February, in her first speech as Chairman, Ms. Schapiro announced two changes to the enforcement process at the SEC intended to “empower” the staff of the Enforcement Division. 
First, Chairman Schapiro ended a two-year “pilot” program, implemented by the prior Chairman, which required the Enforcement staff to seek prior approval of the Commission before negotiating a civil money penalty against a public company for alleged securities fraud. Chairman Schapiro stated that the pilot program had introduced significant delays into the process of bringing a corporate penalty case, discouraged staff from arguing for a penalty and sometimes resulted in reductions in the size of penalties imposed. Chairman Schapiro further stated that the end of the program was designed “to expedite the Commission’s enforcement efforts and ensure that justice is swiftly served.”
Second, Chairman Schapiro provided for more rapid approval of formal orders of investigation authorizing the staff to issue subpoenas by permitting approval within a couple of days pursuant to the SEC’s “seriatim” or “duty officer” procedures. As Chairman Schapiro explained the change, “in investigations that require subpoena power, time is always of the essence.”
In March, Chairman Schapiro announced an initiative to revamp the SEC’s process for reviewing complaints and tips. The SEC retained the Center for Enterprise Modernization, operated by the MITRE Corporation, to assist with the creation of a more centralized process to identify leads for potential investigations and inspections.
Chairman Schapiro has also initiated efforts to bring greater industry expertise to the staff. In April, Chairman Schapiro announced a new Industry and Markets Fellows Program to give industry professionals an opportunity to work for two years in the Office of Risk Assessment and help identify and assess risks in the financial markets. In addition, Chairman Schapiro created new senior level positions within the examination program for individuals with expertise in areas such as derivatives, valuation, securities trading, risk management and forensic accounting.
C. New Director of Enforcement Division and More Changes
In February, Chairman Schapiro announced the appointment of Robert Khuzami, a former federal prosecutor and investment bank general counsel, as the new Director of the Division of Enforcement. In his May testimony to the Senate Banking Committee,  Mr. Khuzami discussed proposals to reallocate resources within the Enforcement Division to improve efficiency, including:
• increasing the number of trial unit attorneys to present a “credible threat” to defendants, improve the ability to win at trial and increase settlement outcomes;
• increasing administrative, paralegal, and para-professional support, to free up enforcement lawyers and accountants to focus on high-value investigative tasks; and
• increasing information technology support for screening tips, improving case and document management, analyzing market data and assessing risks to investors.
Mr. Khuzami also outlined organizational changes under consideration with a focus on making the Enforcement Division more “strategic, swift, smart and successful,” including:
• creating specialized groups of attorneys along product, market or transactional lines and increasing collaboration among staff across regions;
• flattening the management structure of the Division and reducing the levels of review and approvals required for investigative steps to be taken;
• revising performance metrics to deemphasize quantitative factors, such as the number of cases filed, and instead focus on qualitative factors, such as timeliness, programmatic significance and deterrent effect; and
• increasing the rewards to individuals for cooperating in investigations, including a potential request to Congress for an expanded whistleblower program (beyond the existing statutory authorization for insider trading cases) and greater use of agreements similar to deferred prosecution agreements.
The appointment of Mr. Khuzami was followed by appointments of two other former federal prosecutors to senior positions: George Canellos, as Director of the New York Regional Office, and Lorin Reisner, as Deputy Director of the Enforcement Division. Both Messrs. Canellos and Reisner served in the U.S. Attorney’s Office for the Southern District of New York earlier in their careers. Most recently, news reports indicate that Mr. Khuzami has also taken steps toward eliminating one entire tier of supervisors within the Enforcement Division in an effort to reduce the levels of review.
D. Increased Enforcement Activity
Both Chairman Schapiro and Mr. Khuzami have cited a number of statistics to demonstrate a significant up-tick in enforcement activity.  According to these statistics, between February and May of this year, the number of emergency cases seeking temporary restraining orders has nearly tripled (most likely due to the wave of Ponzi scheme cases filed this year in the wake of the Madoff case) and the number of formal orders of investigation issued has more than doubled from the same period last year.
|Feb.-May 2008||Feb.-May 2009|
Aside from the increase in TRO cases, the increase in the number of new investigations opened and formal orders issued indicates a greater level of investigative activity. But has there been an increase in the number of enforcement cases being filed? The answer is a clear yes. We compared injunctive actions filed in the first six months of 2009 and 2008. We found that the number of injunctive actions filed and number of defendants charged is up significantly year over year.
|Jan.-June 2008||Jan.-June 2009|
|Injunctive Actions Filed||114||167|
|Number of defendants||317||527|
Our analysis also reflected a noteworthy trend in the cases being filed. While the number of cases filed and defendants charged is up, the percentage of defendants whose charges were settled at the time of filing is down significantly year over year.
|Jan.-June 2008||Jan.-June 2009|
|Percentage of defendants settled at time of filing||32%||20%|
This reflects not only increased enforcement activity, but particularly a willingness by the SEC to file cases against defendants in the absence of settlements. This may again be partly a result of the recent number of Ponzi scheme cases that are typically filed on an emergency basis. But, as discussed in more detail in the next section, it also likely reflects a priority on bringing cases against individuals more quickly, without settlements and without awaiting the result of possible parallel criminal investigations.
E. Significant Cases and Trends
More telling than the statistics, in the last few months, the SEC has filed a number of high profile cases that demonstrate a more aggressive enforcement approach and that are consistent with the themes that Mr. Khuzami has articulated. Not surprisingly, the SEC has focused its attention on cases related to the financial crisis. In addition, in an effort to bring cases more quickly, the SEC has also more frequently filed these cases in the absence of settlements and in the absence of parallel criminal cases. Moreover, presumably towards its goal of sending an “outsized message of deterrence,” the SEC has charged senior level individual executives. As a consequence, the SEC likely will face vigorous defenses and full litigation. The following cases illustrate these points: 
• SEC v. Mozilo, the SEC alleges that former executives of Countrywide Financial misrepresented credit risks the company was undertaking to maintain its market share; the SEC also alleges the former chief executive officer engaged in insider trading despite having followed a 10b5-1 plan in selling company stock.
• SEC v. Reserve Mgmt. Co., the SEC alleges that managers of the Reserve Primary Fund money market fund failed to disclose material facts about the fund’s vulnerability as Lehman Brothers sought bankruptcy protection.
• SEC v. Strauss, the SEC alleges that former officers of American Home Mortgage failed to disclose the company’s deteriorating financial condition in 2007.
• SEC v. Rand, the SEC alleges that the former chief accounting officer of Beazer Homes artificially reduced the company’s income during the housing boom by improperly increasing reserves and liabilities and then reversed those entries when the housing market declined to continue meeting analysts’ expectations.
• SEC v. Rorech, the first case to allege insider trading in credit default swaps, the SEC alleges that a hedge fund manager traded in credit default swaps on bonds based on nonpublic information from a bond salesman at an investment bank that an upcoming restructuring of a bond offering would impact the price of the swaps.
Note the following similarities in these cases:
• The cases touch on aspects of the financial crisis, demonstrating the SEC’s emphasis on making this area a priority.
• With the exception of one defendant, the cases were filed without settlements. This indicates an emphasis on bringing cases against individuals, on bringing cases more quickly, and a greater willingness to litigate cases. Going forward, it will be interesting to observe whether the SEC has sufficient resources to sustain the continued filing of cases that are likely to be litigated to final judgment.
• The cases were also filed without any parallel criminal actions against the individual defendants. This indicates a trend away from holding off on filing civil cases while waiting for criminal prosecutors to determine whether to pursue criminal charges.
F. Increased Funding
Congress and the Administration have also provided additional money for securities enforcement. In May, the President signed the Fraud Enforcement and Recovery Act of 2009, which adds $265 million per year to the 2010 and 2011 budgets of the SEC, DOJ and other law enforcement agencies for the investigation and prosecution of fraud involving financial institutions. In addition, the Omnibus Appropriations Act of 2009 added $37 million to the SEC’s 2009 budget which the agency is using to enhance enforcement. The President’s 2010 budget proposal would increase the SEC’s budget by 13%, with the additional resources to be used to “increase staff and use new technology to pursue risk-based approaches” to better detect fraud. 
G. The Future of SEC Enforcement
This era of heightened enforcement will continue for the foreseeable future. In this environment, it is more important than ever that financial services firms and public companies reinforce efforts to assure that their legal and compliance infrastructure is identifying and resolving potential issues of concern to regulators and positioning the company to respond effectively to possible future regulatory inquiries.
II. Financial Reporting Cases
In the first half of 2009, the SEC has emphasized financial reporting cases related to the collapsed subprime mortgage market. Other cases reflect the SEC’s continuing prosecution of allegedly manipulative accounting entries. The SEC also resolved outstanding stock option backdating claims that arose beginning in the spring 2005.
A. Subprime and Financial Crisis Related Cases
In April, in SEC v. Strauss, the SEC charged three former executives of American Home Mortgage Corporation, including the CEO, CFO and controller.  The SEC alleges the defendants failed to disclose the extent to which the company issued loans without income verification and the impact that accelerating defaults were having on the company’s liquidity in 2007. Pursuant to a settlement, the company’s former CEO consented to $2.2 million in disgorgement, a $250,000 penalty and a five year officer and director bar. Litigation continues against the other defendants.
In June, in SEC v. Mozilo, the SEC charged three former executives of Countrywide Financial Corporation, including the CEO, the COO and the CFO.  The SEC alleges that the defendants presented the company as a lender of prime quality mortgage loans, different from competitors who engaged primarily in riskier subprime lending, and did not disclose that the company had actually developed a “supermarket” strategy that widened underwriting guidelines to match products offered by its competitors. The complaint cites to internal email messages that allegedly reflect knowledge of the increasing risks the company was undertaking. The CEO, Mozilo, was also charged with insider trading.
On July 1, in SEC v. Rand, the SEC charged the former chief accounting officer of Beazer Homes USA, Inc.  The SEC alleges that the defendant artificially decreased the company’s income during the housing boom by improperly increasing reserves and recording additional liabilities and then reversed those entries when the housing market declined in 2006 and 2007 in order to continue meeting analysts’ expectations. On the same day, Beazer reached agreements to resolve criminal and civil charges with the Department of Justice and the Department of Housing and Urban Development alleging false mortgage originations and accounting practices. Pursuant to a deferred prosecution agreement, Beazer will pay up to $50 million in fines and restitution to home buyers. 
B. Vendor Payment and Inventory Management Claims
The SEC also resolved a number of financial reporting cases outside the realm of the subprime mortgage market. The SEC announced a settlement with CSK Auto Corporation alleging that the company overstated operating income from 2002 to 2004 by failing to write off uncollectible vendor allowances receivables and recognizing vendor allowance receivables in the wrong time period.  The settlement with CSK followed similar charges in March against several four former CSK employees. The litigation against the individuals is continuing. 
The SEC also settled claims against several former employees of Cardinal Health, Inc., alleging that they inflated the company’s earnings by misclassifying bulk sales as operating revenue, selectively accelerating recognition of cash discount income, and improperly adjusting reserves. Pursuant to settlements, the defendants paid civil penalties ranging from $50,000 to $100,000, and consented to officer and director bars and suspensions from appearing or practicing before the SEC as an accountant for three to five years. 
C. Backdating Cases
The SEC continued to settle several outstanding stock option backdating investigations that began in 2005. The SEC reached a settlement with Monster Worldwide, Inc., with a $2.5 million penalty,  Take-Two Interactive Software, Inc., with a $3 million penalty,  and Quest Software, Inc., with no penalty.  Former executives of Take-Two and Quest also reached settlements. In addition, in May 2009, following a trial, Monster’s former chief operating officer, James Treacy, was found guilty of criminal charges for his role in options backdating at Monster.
III. Cases Against Broker-Dealers
The SEC’s enforcement actions against broker-dealers have addressed the financial crisis, but have also encompassed sales practices, information barriers, international business and market operations.
A. Financial Crisis
In May, the SEC charged ten brokers in Florida in connection with the sale of collateralized mortgage obligations (CMOs) to retirees and other conservative investors.  The SEC alleged that the brokers misrepresented the CMOs as guaranteed by the U.S. government and suitable for investors with conservative objectives. The SEC also alleged that the defendants misrepresented the extent to which margin would be used and the risks it would create.
B. Cross-Border Business
This year the SEC played a role in challenging a foreign financial institution allegedly used by U.S. citizens to avoid taxes. The defendant was a Swiss financial institution that was not registered as either a broker-dealer or investment adviser in the U.S. In a settled enforcement action, the SEC alleged that the defendant opened accounts in Switzerland for U.S. citizens, but used U.S. jurisdictional means to provide brokerage and advisory services to those customers in the U.S.  Thus, the SEC alleged that the defendant acted as a broker-dealer and investment adviser without registering as such. Pursuant to the settlement, the defendant agreed to pay $200 million in disgorgement. The defendant also entered into a deferred prosecution agreement with the Department of Justice pursuant to which it will pay an additional $180 million, as well as $400 million in tax-related payments.
C. Information Barriers
In 2005 and 2006, the SEC filed enforcement actions against brokers at several firms and day traders outside those firms, alleging that the brokers permitted the day traders to hear confidential information regarding the firms’ institutional customers’ unexecuted orders as they were transmitted over the firms’ squawk box. The day traders allegedly traded ahead of the institutional customer orders and profited from price movements caused by execution of the institutional customer orders. The brokers allegedly received kickbacks from the day traders in exchange for providing access to the information.
This year, the SEC instituted a settled action against one of the broker-dealer firms alleging that the firm had not established, maintained and enforced written policies and procedures reasonably designed to prevent the misuse of material, non-public information relating to customer orders.  According to the SEC’s administrative order, the firm lacked policies and procedures to limit and track employee access to the squawk box and to supervise its use. Pursuant to the settlement, the firm agreed to pay a $7 million penalty and to implement certain policies and procedures to prevent misuse of the squawk boxes.
In 2004, the SEC brought settled administrative proceedings against the seven specialist firms on the New York Stock Exchange alleging trading ahead and inter-positioning. In March of this year, the SEC brought similar enforcement actions against fourteen specialist firms that operated on several regional and options exchanges.  As in the earlier actions, the SEC alleged that the specialist firms did not fulfill their obligation to match executable public customer orders and instead traded ahead of such orders or inter-positioned proprietary trades between them. Pursuant to the settlement, the fourteen firms agreed to pay collectively nearly $70 million in disgorgement and penalties.
IV. Cases Against Investment Advisers
Cases against investment advisers also focused on the financial crisis. In general, the cases involving advisers reflect a continued emphasis on fulfilling fiduciary duties of accurate and timely disclosure to clients of material information and potential conflicts of interest.
A. Cases Related to the Financial Crisis
The SEC filed an action against managers of the Reserve Primary Fund money market fund, which “broke the buck” when its net asset value fell below $1.00 per share the day after Lehman’s bankruptcy filing.  The SEC alleges that, following the bankruptcy filing, the defendants made inaccurate disclosures concerning the fund’s exposure to Lehman and the management company’s willingness and ability to provide capital support.
In another enforcement action, the SEC challenged an investment adviser’s valuations of a mutual fund’s holdings of mortgage-backed securities.  In this settled action, the SEC’s administrative order alleged that the respondents overstated the value of mortgage-backed securities in the fund’s portfolio in 2007 and 2008 by failing to take into account certain adverse information, such as the decline in a benchmark asset-backed derivative index and the cessation of payments on a CDO tranche held by the fund, and recommended overriding the declining valuations provided by third-party pricing vendors. In June 2008, the fund’s valuation committee re-priced several of the securities in the fund, which caused a decline in its NAV. According to the SEC’s order, the respondents prepared talking points for wholesalers to provide to certain sales channels and to respond to investor inquiries. The SEC’s order alleged that the respondents’ selective disclosure of information about the repricing to certain fund shareholders, and failure to disclose such information more broadly, constituted a separate violation of the Advisers Act, which allowed certain investors to redeem their shares ahead of others at a higher net asset value. Shortly after the re-pricing, investor redemptions led the fund to close and go into liquidation. Pursuant to the settlement, the respondents agreed to pay a total of $40 million in compensation to fund shareholders, disgorgement and penalties, and to retain an independent compliance consultant to review certain policies and procedures.
B. Due Diligence of Other Advisers
In a settled enforcement action, the SEC challenged the sufficiency of due diligence performed by an investment adviser before placing client funds with another adviser.  The SEC alleged that the respondents, a hedge fund consultant and its principal, breached fiduciary duties owed to clients by not performing the due diligence evaluation it represented it would do before and after recommending investment in the Bayou Fund. The SEC’s administrative order alleged that the respondents failed to conduct a portfolio trading analysis and failed to verify Bayou’s relationship with its outside auditor. In settling the matter, the respondents agreed to pay approximately $800,000 in disgorgement and penalties.
C. Public Pension Fund Asset Management
In the last six months, the SEC, in conjunction with the New York State Attorney General, has taken action against individuals who have allegedly participated in arrangements to require investment advisers to pay consideration in return for the opportunity to manage money from a New York State pension fund.  In its original complaint, filed in March 2009, the SEC alleged that David Loglisci, former Deputy Comptroller and Chief Investment Officer of the New York State Common Retirement Fund, working with Hank Morris, a political adviser to the former New York State Comptroller, required investment managers seeking to manage Common Fund money, to pay a “finder’s fee” to Morris and others. The complaint alleges that those who received the payments did not perform legitimate services for the fees and that the fees were merely kickbacks of a portion of the investment advisory fees received by the advisers. Since filing the original complaint, the SEC has added several other individual defendants who also received payments, as well as one investment adviser who made such payments.  The SEC’s release announcing charges against the investment adviser noted that, at the time of making the suspect payments, the adviser was serving as an outside consultant to the Common Fund, thus making the adviser a fiduciary of the Common Fund.  The New York State Attorney General has pursued parallel criminal charges against some of the same defendants.
E. Ponzi Schemes
In a typical year, we would not discuss Ponzi schemes. However, this has not been a typical year thus far. In the wake of the Madoff case, the SEC has filed a series of Ponzi scheme cases. This is probably due to both increased investor redemption demand exposing more schemes and the SEC’s heightened focus on these cases. Many of these cases have been against individuals and firms that were, or purported to be, investment advisers.
One particularly noteworthy development came in the Stanford case. For the first time, to our knowledge, the SEC has charged a foreign regulator with violation of the U.S. securities laws. In June, the SEC amended its complaint in the Stanford case to add as a defendant the administrator and chief executive officer of Antigua’s Financial Services Regulatory Commission for allegedly accepting bribes to ignore the Ponzi scheme, supplying Stanford with confidential information about the SEC’s investigation and collaborating with Stanford to withhold information requested by the SEC. 
V. Insider Trading
This year the SEC for the first time alleged insider trading in credit default swaps. In another case the SEC charged insider trading despite the defendant’s use of a 10b5-1 plan.
A. Insider Trading in Credit Default Swaps
In May 2009, the SEC filed the first case alleging insider trading in credit default swaps, in this case swaps on the bonds of Dutch company, VNU N.V.  The defendants are a bond salesman at an investment bank and a portfolio manager at a hedge fund. The SEC alleges that the bond salesman learned from fellow employees confidential information concerning changes in a proposed VNU bond offering that the investment bank was underwriting, changes that would increase the price of credit default swaps on VNU bonds. The SEC alleges that the bond salesman tipped the hedge fund manager about the confidential information and that the hedge fund manager purchased credit default swaps on VNU bonds for his hedge fund and later covered the position for a profit when news of the bond restructuring became public. As for the SEC’s jurisdiction over trading in the credit default swaps, the complaint alleges, “The CDSs at issue in this matter qualify as security-based swap agreements under the Gramm-Leach-Bliley Act of 2002 and are therefore subject to the antifraud provisions set forth in Section 10(b) of the Exchange Act and the rules promulgated thereunder.” This case will likely test the SEC’s assertion of jurisdiction over trading in credit default swaps in general and in the circumstances of this case in particular.
Of more immediate concern, however, are the implications of this case for ongoing compliance at broker-dealers and investment advisers who trade in credit default swaps. Whether or not the SEC prevails in this case, the filing of the case means that broker-dealers and investment advisers need to make sure their information barriers designed to prevent the misuse of material nonpublic information encompass potential trading in credit default swaps. Depending on the nature of the organization, this may mean the implementation of additional surveillance systems or physical separation of personnel not previously considered to be at risk for insider trading.
B. Insider Trading and 10b5-1 Plans
In SEC v. Mozilo, in addition to the disclosure allegations discussed above, the SEC also alleged insider trading.  The complaint alleges that, at the time Mozilo established four Rule 10b5-1 plans to sell Countrywide stock, he was aware of nonpublic information concerning Countrywide’s increasing credit risk and the risk that the poor expected performance of its loans would prevent the company from continuing its business model of selling its loans into the secondary market. This case emphasizes the care that must be taken when establishing a 10b5-1 plan to ensure that it will provide an effective defense to potential allegations of insider trading.
VI. The SEC In The Courts — Litigation Developments
As one would expect, in the first half of 2009, the SEC met with some successes and some setbacks in the courts. We focus here on court decisions that have implications for future litigation against the SEC.
A. Statute of Limitations
For years, the SEC has struggled with litigating old conduct and, consequently, often has to surmount a defense based on the statute of limitations, typically relying on arguments that the statute should be tolled due to the defendant’s concealment of the fraud. These arguments have met with varied success in the courts. This year, the SEC prevailed in a case in the Seventh Circuit.  In SEC v. Koenig, the SEC filed its complaint more than five years after the alleged accounting fraud had ended, but less than five years after the company issued a press release announcing that its prior financial statements were unreliable. The court held that in applying the statute of limitations in 18 U.S.C. §2462 to an SEC fraud claim, the statute does not begin to run until the SEC discovers, or reasonably could have discovered, the fraud. The court determined that the company’s press release was the earliest event that put the SEC on notice of the need for inquiry, and thus, the SEC’s complaint was timely. The Koenig decision sets a lower threshold for the SEC to establish tolling than the standard previously articulated by a district court in the Southern District of New York.  Thus, while the Koenig decision is helpful to the SEC, the divergence in these cases means that the SEC will continue to face uncertainty over the viability of claims in future litigation involving old conduct.
B. The Scope of Secondary Liability
The SEC received a setback from the First Circuit on the scope of aiding and abetting liability.  In SEC v. Papa, the First Circuit affirmed the dismissal of aiding and abetting claims against three defendants who signed audit confirmations that failed to disclose a prior fraud allegedly committed by three other co-defendants.
The SEC complaint named six former executives of a trust company that provided administration services to pension funds and mutual funds. According to the allegations of the complaint, the trust company inadvertently delayed investing a pension fund’s assets, which caused losses to the fund. The defendants then tried to remedy the loss by executing certain back-dated cross-trades between the pension fund client and mutual fund clients that partially shifted the losses from the pension fund to the mutual funds, without disclosure to the affected clients. The complaint alleged that all six defendants participated in meetings in which the plan was discussed and agreed to; three of the defendants effected the trades and associated accounting entries; and three signed audit confirmations one and two years later that did not disclose these events.
The district court dismissed all claims against the three defendants who had signed the audit confirmations, holding that the SEC had not stated a claim of either primary or secondary liability. On appeal the SEC pressed only the theory of secondary liability, that the false audit confirmations substantially assisted the fraud by continuing the trust company’s breach of fiduciary duty of disclosure to the clients. The First Circuit affirmed the dismissal, holding that the execution of audit confirmations did not render substantial assistance to the fraud because the fraud had ended long before the letters were signed. In the words of the court, “one cannot aid and abet a fraudulent scheme that is already complete.” As the court explained, to hold otherwise “would extend the supposed wrong indefinitely and until its disclosure,” and “would create new liability under section 10(b), long after the original transactions” had occurred. 
The Papa decision puts into question the viability of aiding and abetting fraud claims against a defendant whose only misconduct consists of signing an inaccurate audit confirmation. On the other hand, in dicta, the court noted the possibility that the SEC might have sustained an aiding and abetting claim against the same three defendants based solely on their alleged acquiescence to the original plan, a theory the SEC had not pursued on appeal. Thus, the SEC may take from this decision encouragement toward asserting such claims in the future.
C. The Scope of Primary Liability
In December 2008, a divided panel of the First Circuit held that the SEC had adequately alleged a primary violation of Section 10(b) and Rule 10b-5(b) for misstatements concerning market timing “impliedly” made in mutual fund prospectuses by defendants, employees of the underwriter and distributor of mutual fund shares.  In SEC v. Tambone, the First Circuit reasoned that underwriters hold a “unique position” that carries with it a “duty to review and confirm the accuracy of the material in the documentation” an underwriter distributes. Thus, even though the defendants did not author the statements at issue, the court held that defendants’ “use” of the prospectuses to sell securities amounted to “implied statements of their own regarding the accuracy and completeness of those prospectuses.” A sharply-worded dissent criticized the court’s holding for enlarging the scope of primary liability and blurring the line between primary and secondary liability that the Supreme Court recently drew in Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc.  Subsequently, the court solicited briefs from the parties and amici in connection with the defendants’ motion for a rehearing en banc, but then denied the defendants’ motion for rehearing. The defendants’ petition for certiorari is pending in the Supreme Court.
D. Transnational Enforcement Actions
In emergency actions, the SEC frequently obtains preliminary asset freeze orders, but such orders may not have extraterritorial effect. Recently, the SEC received affirmation of its ability to freeze assets abroad through a foreign court.  At the outset of SEC v. Lydia Capital LLC, in 2007, the SEC obtained from a U.S. district court an asset freeze order against a defendant who was a citizen of the U.K. In 2008, with the assistance of the U.K. FSA, the SEC retained U.K. counsel and filed a limited notice application with the High Court of Justice, Queen’s Bench Division, seeking an order freezing the defendants assets in the U.K.  The High Court granted the SEC’s emergency request the same day, and then, following an evidentiary hearing, extended the freeze order pending adjudication of the SEC’s enforcement action in the U.S. The defendant appealed the High Court’s order, and, in January 2009, a three-judge panel of the Supreme Court of Judicature Court of Appeal dismissed the defendant’s appeal, upholding the asset freeze order in the U.K.
E. Discovery in Enforcement Litigation Against the SEC
The SEC drew a sharp rebuke from Judge Shira Scheindlin in the Southern District of New York, for its posture in responding to discovery requests in SEC v. Collins & Aikman Corp.  The court ruled that the SEC’s production of a 10.6 million page, unorganized database of documents produced in its investigation was improper because it was not maintained that way “in the usual course of business.” Instead, the court required the SEC to identify and produce particular documents responsive to the defendant’s specific document demands or produce the documents in the manner in which the SEC staff had organized them, rejecting the SEC’s assertion of work product protection as to the staff’s organization.
The defendant also requested discovery on the SEC’s consideration in other contexts of accounting pronouncements at issue in the litigation. The SEC asserted the “deliberative process” privilege. The court declined to accept at face value the SEC’s broad claim of the privilege. The court held that the deliberative process privilege must be construed narrowly, that the SEC’s privilege log was conclusory, and that its search for documents was inadequate. Accordingly, the court ordered that the SEC produce the withheld documents for in camera review and negotiate in good faith regarding a search protocol for internal SEC emails that had not yet been searched.
This decision may reduce the cost of litigating against the SEC and permit access to information which could support a defense that good faith regulatory and accounting judgments were made in an uncertain environment.
 Mary L. Schapiro, Chairman, SEC, Address to Practising Law Institute’s “SEC Speaks in 2009″ Program (Feb. 6, 2009), here.
 Robert Khuzami, Director, Div. of Enforcement, SEC, Testimony Concerning Strengthening the SEC’s Vital Enforcement Responsibilities (May 7, 2009), here.
 Mary L. Schapiro, Chairman, SEC, Testimony Before the Subcommittee on Financial Services and General Government (June 2, 2009), here.
 The descriptions of SEC actions in this article are based on allegations made by the SEC in its charging documents and do not assume the truth of the facts alleged in them. Gibson, Dunn & Crutcher LLP represents various parties in related matters. Thus, these descriptions do not reflect the positions of the firm, its lawyers or its clients.
 Press Release No. 2009-37, SEC, Statement from Chairman Schapiro on Proposed Budget for SEC (Feb. 26, 2009), here.
 SEC v. Strauss, et al., No. 09-CV-4150 (RB) (S.D.N.Y. filed April 28, 2009); see also SEC Litig. Release No. 21014 (April 28, 2009), here.
 SEC v. Mozilo, et al., No. CV 09-03994 (VBF) (C.D. Cal. filed June 4, 2009); see also SEC Litig. Release No. 21068 (June 4, 2009), here.
 SEC v. Rand, No. 1:09-CV-1780 (N.D. Ga. filed July 1, 2009); see also SEC Litig. Release No. 21114 (July 1, 2009), here.
 Press Release, Dep’t of Justice, Beazer Homes U.S.A., Inc. Reaches $50,000,000 Settlement of Mortgage and Accounting Fraud with United States (July 1, 2009), here.
 In the Matter of CSK Auto Corp., File No. 3-13485 (SEC May 26, 2009), here.
 SEC v. Fraser, et al., No. 2:09-cv-00442-LOA (D. Ariz. filed March 5, 2009); see also SEC Litig. Release No. 20933 (March 6, 2009), here.
 SEC v. Miller, et al., No. 09-CV-4945 (S.D.N.Y. filed May 27, 2009); see also SEC Litig. Release No. 21058 (May 27, 2009), here.
 SEC Release No. 2009-113, SEC Charges Monster Worldwide Inc. for Backdating Scheme (May 18, 2009), here.
 SEC Release No. 2009-72, SEC Charges Take-Two for Stock Options Backdating Scheme (Apr. 1, 2009), here.
 SEC Release No. 2009-57, SEC Charges Quest Software and Three Executives for Stock Option Backdating (Mar. 12, 2009), here.
 SEC v. Betta, et al., No. 09-80803 (S.D. Fla. filed May 28, 2009); see also SEC Litig. Release No. 21061 (May 28, 2009), here.
 SEC v. UBS AG, No. 1:09-cv-00316 (D.D.C. filed Feb. 18, 2009); see also SEC Litig. Release No. 20905 (Feb. 18, 2009), here.
 In the Matter of Merrill Lynch, Pierce, Fenner & Smith Inc., File No. 3-13407 (SEC Mar. 11, 2009), here.
 See SEC Release No. 2009-42, with links to five complaints and seven administrative orders, here.
 SEC v. Reserve Mgmt. Co., Inc. et al., No. 09-CV-4346 (S.D.N.Y. filed May 5, 2009); see also SEC Litig. Release No. 21025 (May 5, 2009), here.
 In the Matter of Evergreen Inv. Mgmt. Co., LLC, File No. 3-13507 (SEC June 8, 2009), here.
 In the Matter of Hennessee Group LLC, File No. 3-13454 (SEC Apr. 22, 2009), here.
 SEC v. Morris, et al., No. 09-CV-2518 (S.D.N.Y. filed Mar. 19, 2009); see also SEC Litig. Release No. 20963 (Mar. 19, 2009), here.
 SEC v. Morris, No. 09-CV-2518 (S.D.N.Y. amended complt. filed May 12, 2009); see also SEC Litig. Release No. 21036 (May 12, 2009), here.
 SEC v. Morris, No. 09-CV-2518 (S.D.N.Y. amended complt. filed Apr. 30, 2009); see also SEC Litig. Release No. 21018 (Apr. 30, 2009), here.
 SEC v. Stanford Int’l Bank, Ltd., et al., No. 3:09-cv-0298 (N.D. Tex. amended complt. filed June 19, 2009); see also SEC Litig. Release No. 21092 (June 19, 2009), here.
 SEC v. Rorech, et al., No. 09-CV-4329 (JGK) (S.D.N.Y. May 5, 2009); see also SEC Litig. Release No. 21023 (May 5, 2009), here.
 SEC v. Mozilo, No. CV 09-03994 (VBF) (C.D. Cal. filed June 4, 2009); see also SEC Litig. Rel. No. 21068 (June 4, 2009), here.
 SEC v. Koenig, 557 F.3d 736 (7th Cir. 2009).
 SEC v. Jones, 476 F. Supp. 2d 374 (S.D.N.Y. 2007).
 SEC v. Papa, 555 F.3d 31 (1st Cir. 2009).
 Id. at 37 (emphasis in original).
 SEC v. Tambone, 550 F.3d 106 (1st Cir. 2008), reh’g. denied (1st Cir. 2009).
 Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008).
 SEC v. Lydia Capital, LLC, No. 07-10712-RGS, 2008 WL 5273313 (D. Mass. Dec. 19, 2008).
 SEC v. Manterfield, Claim No. HQ08X00798 (High Court of Justice, Queen’s Bench Division, Royal Courts of Justice).
 SEC v. Collins & Aikman Corp., 256 F.R.D. 403, 2009 WL 94311 (S.D.N.Y. Jan. 13, 2009).