Our mid-year report one year ago presented an exciting opportunity to discuss a time of great change at the SEC. A new Chair and a new Director of Enforcement had recently assumed the reins and begun making bold policy pronouncements. One year later, things have stabilized somewhat. The hot-button issues identified early in the new SEC administration—admissions for settling parties, a growing number of trials (and, for the agency, trial losses), and a renewed focus on public company accounting—remain the leading issues a year later, albeit with some interesting developments.
Posts Tagged ‘Securities fraud’
The announcement of the Credit Suisse guilty plea on May 19, 2014 marks the first time in more than a decade that a large financial institution has been convicted of a financial crime in the United States. For this reason alone, some will herald it a watershed moment in the history of corporate criminal liability. But the government’s well-publicized efforts to mitigate the collateral consequences resulting from the plea will likely limit the plea’s practical significance for companies that find themselves in the unenviable position of negotiating a resolution of criminal allegations with the government. This post will explore the potential implications of the Credit Suisse guilty plea for corporate criminal liability.
Although US Securities and Exchange Commission (SEC) enforcement actions related to financial fraud and issuer disclosures have been on a decline since 2007, recent statements and actions suggest that the SEC is likely to re-focus its efforts on detecting, pursuing, and preventing accounting fraud.  Since her confirmation as Chair of the SEC, Mary Jo White has made it clear that her administration will focus on identifying and investigating accounting abuses at publicly-traded companies.  Among the recent initiatives announced by the SEC are the increased focus on the whistle blower program and the establishment of the Financial Reporting and Audit Task Force, the Microcap Fraud Task Force, and the Center for Risk and Quantitative Analytics. 
The number of accounting case settlements in 2013 increased for the second year in a row, but remained low compared with the previous 10 years, according to Cornerstone Research’s latest report, Accounting Class Action Filings and Settlements—2013 Review and Analysis. While the number of securities class action filings that included accounting allegations (47) remained relatively constant in 2013 compared with 2012, the market capitalization losses associated with these filings more than doubled.
The SEC’s success is conventionally measured by the number of enforcement actions it brings, the multimillion-dollar fines it secures, and the high-impact trials it wins. But the SEC does more than punish wrongdoing. Over the last twelve years, the SEC has quietly become an important source of compensation for defrauded investors. Since 2002, the SEC has distributed $14.33 billion  to defrauded investors via 236 distribution funds, usually called “fair funds” after the statute that authorizes them. 
Despite serious concerns about the quality of auditing and financial reporting of U.S.-listed Chinese firms, the SEC and the PCAOB have been unable to provide sufficient or timely information to U.S. investors due to resource constraints, the confidentiality rules underlying the PCAOB disciplinary proceedings, and no access to relevant work papers of Chinese auditors. In the paper, The Informational Role of Internet-Based Short Sellers, which was recently made publicly available on SSRN, I focus on a new breed of information intermediary, i.e. Internet-based short sellers that have emerged in response to such regulatory loopholes and severe information asymmetry. Based on hand-collected Internet reports released during the 2009-2012 period by short sellers that target U.S.-listed Chinese firms, I find that these short sellers provide substantial information both directly and indirectly to investors.
I have participated in this event for many years and have always considered this conference to be all about the compliance and legal issues that are most important to the integrity of our securities markets. Now, as Chair of the SEC, I would like to thank you for the work you do day in and day out to protect investors and keep our markets robust and safe.
In about a week, I will have completed my first year at the SEC. It has been quite a year. We have made very good progress in accomplishing the initial goals I set to achieve significant traction on our rulemaking agenda arising from the Dodd Frank and JOBS Acts, intensify our review of the structure of our equity markets, and enhance our already strong enforcement program.
A recent and groundbreaking decision of the European Court of Human Rights (ECHR) in Strasburg might shatter the entire structure of the Italian and European regulation of market abuse (insider trading and market manipulations). The case is “Grand Stevens and others v. Italy”, and was decided on March 4, 2014.
The facts can be briefly summarized as follows. In 2005, the corporations that controlled the car manufacturer Fiat, renegotiated a financial contract (equity swap) with Merrill Lynch. One of the goals of the agreement was to maintain control over Fiat without being required to launch a mandatory tender offer. Consob, the Italian securities and exchange commission, initiated an administrative action against the corporation and some of its managers and consultants, accusing them of not having properly disclosed the renegotiation of the contract to the market. The procedure resulted in heavy financial fines (for some individuals, up to 5 million euro), and additional measures prohibiting some of the people involved from serving as corporate directors and practicing law. At the same time, a criminal investigation was launched for the same facts. It is not necessary here to discuss the merits of the controversy, it is sufficient to mention that the sanctioned parties challenged the sanctions in Italian courts, but did not prevail.
Greg [Tanzer, ASIC Commissioner] suggested that I talk about my perspectives on international cooperation in the enforcement context, as well as what we at the SEC are doing to try to make our own enforcement program even more robust and responsive to the issues presented by interconnected and fast moving markets. I am happy to do that. But, before I do, I would like to share a couple of thoughts on the topic of your first session—“Enforcement—does the punishment fit the crime?”
Much of my professional background has been in enforcement and strong enforcement was one of my primary focuses when I became Chair of the SEC almost a year ago and it remains so. Vigorous enforcement of the securities laws in the United States, in Australia and around the world is obviously a critical component of our investor protection mission.
In Lawson v. FMR LLC, No. 12-3 (Mar. 4, 2014), the U.S. Supreme Court clarified the scope of whistleblower protection provided by the Sarbanes-Oxley Act of 2002 (“SOX”), holding that employees of private contractors and subcontractors of public companies are protected by the whistleblower provision set forth in 18 U.S.C. § 1514A of the Act. The Court, acknowledging that the language of the Act is ambiguous, interpreted it to allow persons employed by non-public contractors to public companies—such as lawyers or accounting firms—to bring whistleblower claims under the Act. In a strong dissent, Justice Sotomayor objected to the “stunning reach” of this interpretation. The majority opinion, responding to that criticism, cited “various limiting principles” proposed by the plaintiffs and Solicitor General, which employers will need to rely on in the future. Among other things, the “limiting principles” include that the types of contractors whose employees could make use of SOX are those “whose performance will take place over a significant period of time,” and that an employee of a contractor would only be able to invoke SOX as to complaints arising out of the contractor’s “fulfilling its role as contractor for the public company, not the contractor in some other capacity.” Ultimately, however, the Court declined to address the precise bounds of § 1514A, finding that the whistleblower claims at issue fell squarely within the “mainstream application” of the statute, as both plaintiffs claimed retaliation after reporting allegedly fraudulent activity that plainly implicated mutual funds’ shareholders.