The SEC settled claims against a registered investment adviser (the “Adviser”), its affiliated broker-dealer (the “Broker-Dealer”), and the founder, owner, and president of each (the “CEO”) that related to (1) investments in Class A shares of underlying funds made by funds managed by the Adviser (the “Funds”) and (2) commissions paid by the Funds to the Broker-Dealer for trades in exchange-traded funds (“ETFs”). Without admitting or denying its findings, the Respondents agreed to the settlement order (the “Order”), available here, which this post summarizes.
Posts Tagged ‘Securities enforcement’
In wake of ethics opinion, lawyers in New York—if not elsewhere—must think hard before considering whether to participate in the Dodd-Frank Whistleblower Award Program.
A recent SEC whistleblower award of $14 million may offer a persuasive incentive for lawyers to blow the whistle on a client’s perceived wrongdoing. However, a subsequent ethics opinion from the Committee on Professional Ethics of the New York County Lawyers’ Association will give lawyers pause. As the SEC whistleblower award program gains momentum, New York lawyers may be well-advised to wait for the courts to determine whether the SEC’s rules can pre-empt state rules of professional conduct.
On September 16, 2013, the Securities and Exchange Commission (“SEC”) charged over 20 firms with violations of Rule 105 of Regulation M of the Securities Exchange Act of 1934 (“Rule 105” or “the Rule”), which prohibits the purchase of securities in a secondary offering when the buyer has a short position, as that term is defined in SEC rules, of the same securities established during a specified restricted period.  The same day, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued guidance to firms on issues they had observed regarding compliance with Rule 105 and made suggestions to firms as to how to address the relevant risk. These recent cases, and contemporaneous SEC statements on the subject, suggest that the SEC will continue to focus attention on Rule 105 violations in examinations and enforcement inquires. Companies should therefore take steps to ensure that their policies contain appropriate provisions related to Rule 105 and consider training of relevant staff to avoid such issues.
In the six months since Mary Jo White was sworn in as the Securities and Exchange Commission’s 31st Chairman, the SEC has announced important new policies and initiatives as the agency has begun to utilize new enforcement authority under the Dodd-Frank Act and to redeploy resources. In recent weeks, White and Andrew Ceresney, Co-Director of the Division of Enforcement, have made important public announcements regarding enforcement priorities. Taken together, these policies, initiatives, and announcements signal a shift toward more aggressive enforcement. This advisory discusses these developments.
Approach to Enforcement
From the time of her nomination, White stressed that the SEC would take an aggressive approach to enforcement under her leadership. At her March 12, 2013 confirmation hearing, White pledged that one of her highest priorities as Chairman would be “to further strengthen the enforcement function of the SEC” in a way that is “bold and unrelenting.” White also stated that the SEC would pursue “all wrongdoers – individual and institutional, of whatever position or size” in order to deter wrongdoing and protect the integrity of financial markets. 
Fighting insider trading is clearly at the top of law enforcement’s agenda. In May 2011, Raj Rajaratnam, the former head of the Galleon Group hedge fund, received an eleven-year prison sentence for insider trading, the longest ever imposed. More recently, in July 2013, SAC Capital Advisors, a $15 billion hedge fund, was slapped with a criminal complaint that threatens the fund’s existence, even after having agreed to pay a $616 million civil penalty, the largest-ever settlement of an insider trading action. Yet, despite the high enforcement priority and the high stakes involved, a satisfying theory of insider trading law has yet to emerge. And this is not for want of trying. As Larry Mitchell remarked as early as 1988, “Many forests have been destroyed in the quest to understand and explain the law of insider trading.”
In my forthcoming article, Insider Trading as Private Corruption, to be published next year in the UCLA Law Review, I make the case that insider trading is best understood as a form of private corruption. I begin by arguing that we need a theory of insider trading law that not only makes sense of the law that has developed but also guides the law forward. In my view, such a theory must do two things.
As the fiscal year comes to a close—even while the Securities and Exchange Commission, amidst the government shutdown, continues to fund its operations through a carryover balance from FY 2013—it is a good time to review recent signs of SEC skepticism regarding financial statement reporting practices and the SEC’s current focus on public company officers, directors, and auditors as targets of potential enforcement actions. Since Mary Jo White was confirmed as the new Chairman in April, and George Canellos and Andrew Ceresney were named Co-Directors of the Division of Enforcement later that month, a number of enforcement actions and SEC statements suggest a heightened vigilance, particularly with respect to potential corporate accounting failures.
It is an honor to be here today [September 26, 2013]. The Council is an extremely important voice on behalf of investors and an excellent source of input for the SEC on new rules or guidance that is needed, existing rules that need to be changed and market practices that may be harming investors.
As the Chair of an agency that is focused on the needs of investors, I very much want to hear what you have to say—on everything from corporate governance to shareholders’ rights to 10b5-1 plans.
So I urge you to use your voice. We are listening. Continue to be our eyes and ears.
This morning, I will first talk briefly about some of the agency’s near-term priorities. And then I will go into more depth about how we are deploying our full enforcement arsenal for the benefit of investors. I was told that enforcement was one of the topics you would be interested in hearing about and, well, I never pass up an opportunity to talk about enforcement. But I want to start with some of the agency’s other overall priorities.
On September 6, 2013, the Securities and Exchange Commission (SEC) announced that it had brought—and settled—a cease-and-desist case under Regulation Fair Disclosure (Reg. FD), which requires that public companies broadly disclose material nonpublic information to the public that their covered officers and employees intentionally or inadvertently disclose to market professionals and stockholders. The SEC charged Lawrence D. Polizzotto, a former Vice President of Investor Relations at First Solar, Inc., with selectively disclosing that the company was unlikely to receive financing under a conditional loan from the Department of Energy. Mr. Polizzotto agreed to pay a $50,000 fine to settle the charges, although he did not admit or deny the findings.
According to the SEC order,  Mr. Polizzotto attended a September 13, 2011 investor conference with the company’s then-CEO, who “publicly expressed confidence” that First Solar would receive three loan guarantees of $4.5 billion from the Department of Energy. Several executives, including Mr. Polizzotto, learned a couple of days later that First Solar would not get at least one of the loan guarantees. The company began discussing how and when to publicly disclose this information. However, before the company issued a public announcement, a number of analysts and stockholders began contacting the company after the House Committee on Energy and Commerce sent a letter to the Department of Energy inquiring about its loan guarantee program and the status of the guarantees that had not yet closed, including all three of First Solar’s conditional guarantees. Even though the company had not yet issued its public announcement, Mr. Polizzotto and his subordinate had phone conversations with more than 30 analysts and investors. They used talking points on the calls that “effectively signaled” First Solar would not receive one of the loan guarantees. The SEC charged that these calls violated Reg. FD, which requires simultaneous public disclosure of material nonpublic information that is intentionally disclosed by covered corporate officers and company spokespersons to market professionals and stockholders.  In addition to the $50,000 penalty from the settlement of these charges, Mr. Polizzotto agreed to cease and desist from violating Reg. FD and Section 13(a) of the Securities and Exchange Act of 1934.
On August 30, 2013, the United States Court of Appeals for the Second Circuit unanimously held that Section 10(b) of the Securities Exchange Act of 1934 (“Section 10(b)”) does not apply to extraterritorial conduct, “regardless of whether liability is sought criminally or civilly.” Interpreting the scope of the Supreme Court’s landmark ruling in Morrison v. National Australian Bank Ltd.,  the Second Circuit’s significant decision in United States v. Vilar, et al. means that a criminal defendant may be convicted of fraud under Section 10(b) only if the defendant engaged in fraud “in connection with” a security listed on a United States exchange or a security “purchased or sold” in the United States. In reaching its conclusion, the court rejected the government’s attempts to distinguish criminal liability under Section 10(b) from the civil liability at issue in Morrison, holding that “[a] statute either applies extraterritorially or it does not, and once it is determined that a statute does not apply extraterritorially, the only question we must answer in the individual case is whether the relevant conduct occurred in the territory of a foreign sovereign.”
The recent trial of Fabrice Tourre has raised again the issue of whether the SEC should prosecute individuals who engage in misconduct or the firms that employ them. In the case of Tourre, some complained that the SEC targeted a relatively low level employee of Goldman Sachs rather than Goldman Sachs itself. Some even described him as a scapegoat. Not long ago, in the Bank of America case, Judge Rakoff leveled the opposite criticism at the SEC. Why was the agency seeking to impose a monetary penalty on BofA rather than prosecuting and penalizing individuals within BofA who had engaged in misconduct?
Each time this issue has come up, it seems that commentators assume that the practice in question is the predominant practice of the SEC—for example, the SEC predominantly goes after the corporation rather than individuals, or the SEC predominantly goes after low level employees rather than the corporation. We have recently completed, and intend to maintain, a database of SEC enforcement practices, and in this post, we shed some factual light on what the SEC actually does with respect to prosecuting and penalizing individual and corporate defendants. Specifically, we answer three questions: First, who does the SEC name as defendants—high level executives, lower level employees, the corporation itself? Second, to what extent does the SEC impose penalties on individual defendants? Third, how often does the SEC impose a monetary penalty on corporate defendants? We address these questions within the universe of SEC enforcement actions involving nationally listed firms for violation of disclosure-related rules—fraud, books and records and internal control rules. Our dataset covers cases filed from 2000 to the present.