As noted previously in this blog, the SEC and other regulatory agencies continue to display an increased interest in the issue of internal and supervisory controls. The Financial Industry Regulatory Authority (“FINRA”) has continued this trend, recently bringing charges against a number of member firms related to allegedly inadequate supervisory controls.
Robert G Cohen
Robert G. Cohen, senior counsel in Orrick’s New York office, is a member of the Securities Litigation, Investigations and Enforcement Group. Bob’s practice focuses primarily on the representation of accounting firms.
Bob joined Orrick in 2010. Previously, he served as Senior Deputy General Counsel and Head of Litigation for Ernst & Young LLP, a position he held from 1994-2010. Bob managed and supervised the E&Y group in defending the firm in lawsuits alleging professional malpractice, breach of contract and securities class action claims and in responding to inquiries and investigations by state and federal regulatory entities. Bob was responsible for the strategy and decision making relating to all major cases filed against E&Y throughout the United States. His experience includes the supervision of numerous trials and arbitrations.
Prior to joining E&Y in 1987, Bob was with the Commodity Futures Trading Commission's Division of Enforcement in New York for six years, serving as the Regional Counsel for the Eastern Region of the United States during his last two years. Bob also served as an assistant district attorney in the Kings County District Attorney’s Office in 1976-1978 and 1980-1981.
Bob currently serves as a mediator with the Commercial Division of the New York State Supreme Court and as an arbitrator with New York’s Joint Committee on Fee Disputes and Conciliation.
Today, the Securities and Exchange Commission (“SEC” or “Commission”) announced the terms of a settlement with four of the Respondents in In the Matter of BDO China Dhaua CPA Co., Ltd. The four Respondents are the China affiliates of the “Big Four” international accounting firms —Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), and PricewaterhouseCoopers Zhong Tian CPAs Limited. The settlement resolves an administrative proceeding brought by the Commission against Respondents pursuant to Rule 102(e) of the SEC’s Rules of Practice over requests made by the SEC for the production of audit work papers located in China.
On July 16, 2014, a three-judge Second Circuit panel affirmed the dismissal of a securities class action against Deutsche Bank AG and several underwriters. The case was brought on behalf of investors who purchased approximately $5.5 billion in preferred Deutsche Bank shares in 2007, and who alleged that defendants misled them about the bank’s exposure to mortgage-backed securities and other risks in a registration statement filed in October of 2006. Plaintiffs alleged that the registration statement omitted details about Deutsche Bank’s business, including that the company failed to properly record provisions for RMBS, commercial real estate loans and exposure to monoline insurers.
On March 5, the Supreme Court heard oral arguments in Halliburton v. The Erica P. John Fund. As discussed in previous blog posts, the United States Supreme Court agreed to consider Petitioner Halliburton’s argument to modify or overturn the fraud-on-the market presumption that the Court first articulated more than a quarter century ago in Basic v. Levinson, 485 U.S. 224, 243-50 (1988). As our readers know, the fraud-on-the market theory allows investors to bring securities class action suits under Section 10(b) of the 1934 Securities Exchange Act by using a rebuttable presumption that public information about a company is reflected in its stock price because of the efficient markets hypothesis. Basic significantly relaxes the burden on securities class action plaintiffs because they do not need to show actual reliance on a purported misstatement when deciding to buy or sell stock. Overturning or modifying Basic would significantly dampen shareholder litigation by making it more difficult to obtain class certification or to survive a motion to dismiss. Read More
Comments made by Kara N. Brockmeyer, the Securities Exchange Commission’s chief of the Foreign Corruption Practices Act (FCPA) unit, and Charles E. Duross, deputy chief of the Department of Justice’s FCPA unit, at the recent International Conference on the FCPA suggest that both agencies are increasing their scrutiny of possible FCPA violations for the next year. Both units have increased their resources for tackling investigations of possible FCPA violations. Additionally, both agencies have increased awareness among other U.S. and international government agencies so that those agencies could also be on the lookout for possible FCPA violations. Having strengthened their relationships with overseas regulators, both agencies are optimistic that they are in the position to bring significant FCPA cases in the following year.
According to Andrew Ceresney, co-director of the SEC’s enforcement division, the SEC also expects that FCPA violations will be “increasingly fertile ground” for the Dodd-Frank whistle-blower program. The SEC received 149 FCPA violation tips from whistle-blowers in just the last year and the SEC expects more enforcement cases to arise from whistle-blowers. Read More
Judge Carter issued his final order on July 16, 2013, following our blog post. The final order is substantively the same as the tentative order, and denies S&P’s motion to dismiss the case for the same reasons previously set forth. Judge Carter added a note rejecting Defendants’ argument at the hearing on July 8, 2013 that no reasonable investor or issuer bank could have relied on S&P’s claims of independence and objectivity, because this would beg the question of whether S&P truly believed that S&P’s rating service added zero material value as a predictor of creditworthiness. Judge Carter’s finding that an issuer bank could be a victim that was misled by S&P’s fraudulent ratings of its own mortgage-backed security products is an interesting development, and one that may open new doors to mortgage-backed securities litigation under FIRREA.
We first blogged about the obscure Financial Institutions Reform Recovery Enforcement Act (“FIRREA”) on May 14. As we explained, this statute provides a generous ten-year statute of limitations and a low burden of proof. Just as we predicted, the FIRREA story is beginning to heat up.
The most recent FIRREA litigation involves claims brought under this statute against ratings agency giant Standard & Poor’s. The DOJ sued S&P for $5 billion, accusing it of knowingly issuing ratings that didn’t accurately reflect mortgage-backed securities’ credit risk. S&P’s practices of issuing credit ratings to banks that paid for those services led to an inherent conflict of interest. To reassure banks and investors that its ratings were accurate, S&P issued a “Code of Conduct,” containing promises that it had established policies and procedures to address these conflicts of interest. The DOJ alleged that the “Code of Conduct” statements were false and material to investors.
On July 8, Judge David O. Carter of the Central District of California tentatively denied S&P’s motion to dismiss the case. In his tentative order, Judge Carter explained why S&P’s three arguments for dismissal were unpersuasive. First, he found that the allegedly fraudulent statements regarding the credibility of S&P’s ratings were not “mere puffery” because they were filled with “shalls” and “must nots” that went beyond mere aspirational language. Read More
Cybersecurity may be the SEC’s newest area for enforcement actions. While the SEC first released Disclosure Guidance concerning cybersecurity in 2011, the recent media attention surrounding significant cybersecurity breaches at a number of U.S. companies may cause the SEC to renew interest in the issue, and may result in enforcement actions, as well as shareholder class actions and derivative lawsuits. Companies that fail to disclose cybersecurity events in their public filings may find themselves on the wrong end of an SEC investigation and enforcement action.
Companies may also see an increase in class actions where there is a significant stock drop following disclosure of a cybersecurity breach—however, to date, there is little evidence to suggest the market reacts in a negative way following disclosure of a cybersecurity breach, leaving questions about whether plaintiffs could prove materiality and causation in a securities fraud case. Finally, increased focus on cybersecurity disclosures may result in an increase in shareholder derivative actions against officers and directors, with shareholders alleging that the company breached their fiduciary duties by failing to ensure adequate security measures. Read More
On Wednesday, the Supreme Court issued its decision in Amgen, Inc. v. Connecticut Retirement Plans. In a 6-3 decision authored by Justice Ginsburg, the Supreme Court handed a win to plaintiffs in securities fraud class actions, holding that plaintiffs do not have to prove materiality at the class certification stage. The decision marks a departure from some of the Court’s more recent class action rulings, which seemed to narrow class action litigation. Justices Scalia, Thomas and Kennedy dissented.
In their complaint, plaintiff shareholders alleged that Amgen and its executives misled investors about the safety and efficacy of two anemia drugs, thereby violating Section 10(b) and Rule 10b-5. During class certification, Amgen argued that Rule 23(b)(3) required that plaintiffs needed to prove materiality in order to ensure that the questions of law or fact common to the class will “predominate over any questions affecting only individual members.” Both the district court and the Ninth Circuit Court of Appeals rejected Amgen’s argument. The Supreme Court followed suit, affirming the Court of Appeal’s judgment and holding that proof of materiality is not a prerequisite to class certification in securities fraud cases. Read More
In Gabelli v. SEC, a unanimous Supreme Court held that the statute of limitations for “penalty” claims in governmental enforcement actions begins to run from the date of the underlying violation of the law, not when the government discovers or reasonably should have discovered the misconduct. Gabelli has important implications for the Securities and Exchange Commission (“SEC”) and all governmental agencies because it limits the sanctions available to the agency for conduct that occurred more than five years before it commences a civil enforcement action. Opinion.
Gabelli involved the application of 28 U.S.C. § 2462, which provides that “an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture … shall not be entertained unless commenced within five years from the date when the claim first accrued[.]” In 2008, the SEC sought civil penalties from Mark Gabelli, a mutual fund portfolio manager, for alleged violations of the Investment Advisers Act in connection with alleged market timing issues. Gabelli successfully moved to dismiss the penalty claims as time-barred under Section 2462 because the complaint was filed almost six years after the alleged misconduct. On appeal, the Second Circuit reversed, reasoning that in cases of fraud the statute of limitations does not begin to run until the SEC discovered (or reasonably could have discovered) the wrongful acts. The Supreme Court disagreed, holding that “a claim based on fraud accrues—and the five-year clock begins to tick—when a defendant’s allegedly fraudulent conduct occurs.” Read More