On January 11, 2016, the SEC announced its Office of Compliance Inspections and Examinations (OCIE) priorities for the year . The announcement included several new areas of focus, including liquidity controls, public pension advisers, exchange-traded funds (ETFs), product promotion, and variable annuities. Hedge fund and mutual fund managers, private equity firms, and broker-dealers – in particular those that deal with retirement investments – would be wise to take note of these new areas of interest. As in past years, enforcement actions in these areas are likely to follow.
Last week the SEC announced an award of between $1.4 to $1.6 million to a whistleblower who provided information that assisted the SEC in an enforcement action. The enforcement action against the whistleblower’s company resulting in monetary sanctions exceeding $1 million. This marks the second award to a whistleblower with an internal audit or compliance function at a company. The first was back in August 2014, when the SEC awarded a whistleblower in internal auditing/compliance with over $300,000. Here, as with the prior award, the officer had a reasonable basis for believing that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial financial harm to the company or investors. In both cases, responsible management was made aware of the potential harm that could occur, yet failed to take steps to prevent it.
Securities and Exchange Commission leadership and staff members addressed the public on February 20-21 at the annual “SEC Speaks” conference in Washington, D.C. Common themes among the numerous presentations included the Commission’s increasing use of data analytics, the Commission’s focus on gatekeepers such as accountants and attorneys, and the Commission’s still incomplete rulemakings mandated by both the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups Act.
The leaders of the Securities and Exchange Commission addressed the public on February 21-22 at the annual SEC Speaks conference in Washington, D.C. The presentations covered an array of topics, but common themes included the Commission’s ongoing effort to carry out the rulemaking agenda set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, its role as an enforcement body post-financial crisis, its increasing utilization of technology, and its renewed focus on the conduct of gatekeepers. In a surprise appearance, Dallas Mavericks owner and former insider trading defendant Mark Cuban attended the first day of the conference. During his time at the conference, Mr. Cuban shared his thoughts on a number of the presentations via his Twitter account.
From a litigation and enforcement perspective, key takeaways from the conference include the following: READ MORE
The SEC this year has demonstrated its willingness to incentivize whistleblowers and companies to share information about misconduct and assist with the SEC’s investigations. To that end, the SEC issued its first Deferred Prosecution Agreement (DPA) with an individual on November 12, 2013. A DPA is an agreement whereby the SEC refrains from prosecuting cooperators for their own violations if they comply with certain undertakings.
This first DPA is with Scott Herckis, a former Fund Administrator for Connecticut-based hedge fund Happelwhite Fund LP. In September 2012 Herckis resigned and contacted government officials regarding the misappropriation by the fund’s founder and manager, Berton Hochfeld, of $1.5 million in hedge fund proceeds. Herckis further reported that Hochfeld had overstated the fund’s performance to investors. Herckis’s cooperation with the SEC, including producing voluminous documents and helping the SEC staff understand how Hochfeld was able to perpetrate the fraud, led the SEC to file an emergency action and freeze $6 million of Hochfeld’s and the fund’s assets. Those frozen assets will be distributed to the fund’s investors. READ MORE
After first announcing a change on June 18 of this year to demand more admissions in SEC actions, an SEC leader recently made further comments echoing that same sentiment, as well as referencing the SEC’s intended use of stiffer monetary penalties. On October 1, at a Practising Law Institute conference, SEC Enforcement Division Co-Director Andrew Ceresney discussed the new SEC regime’s motto of strict enforcement and provided concrete, practical advice for defense lawyers on how to effectively interact with the SEC’s enforcement personnel.
Given the SEC’s ongoing commitment to deter current and future violations, Mr. Ceresney stated that the SEC will continue to increase penalties in an aggressive bid to deter misconduct. He stated that “[t]here is room for bolder actions” and monetary penalties are a deterrent that everyone understands. Mr. Ceresney also advised defense lawyers on how to handle meetings with SEC enforcement personnel. He stated that defense lawyers should focus on a case’s broad policy or legal arguments, including the circumstances surrounding the case, the client’s settlement position, and any flaws in the legal theory and policy implications of the case. Most importantly, stated Mr. Ceresney, defense lawyers must answer the SEC’s questions, must be trustworthy, and must not attempt to intimidate the SEC. READ MORE
Last week the SEC announced the creation of three new Division of Enforcement initiatives designed to combat fraud in financial reporting and microcap securities and to enhance risk identification and analysis: (1) The Financial Reporting and Audit Task Force; (2) The Microcap Fraud Task Force; and (3) The Center for Risk and Quantitative Analytics.
The Financial Reporting and Audit Task Force will focus on expanding and strengthening the Division’s work in identifying securities violations, particularly in the areas of preparation of financial statements, issuer reporting and disclosure, and audit failures. Using technology-based tools like the Accounting Quality Model, designed to identify red flags in areas particularly susceptible to fraudulent financial reporting, along with ongoing review of financial statement restatements and revisions, and analyzing industry performance trends, the Task Force will aim to detect fraud early and to increase prosecution of alleged securities violations involving false or misleading financial statements and disclosures.
The Microcap Fraud Task Force is a much more specialized unit, focusing exclusively on investigating fraud in the issuance, marketing and trading of microcap securities (typically low-priced securities issued by very small companies with limited assets). The principal goal of this Task Force is to develop and implement long-term strategies for detecting and combating fraud in the microcap market, in particular by targeting who the SEC deems as “gatekeepers” or “significant participants,” namely, attorneys, auditors, broker-dealers, transfer agents, stock promoters and purveyors of shell companies. READ MORE
The SEC announced last week that Commission chairman Mary L. Schapiro will end her tenure later this month. Previously an SEC commissioner from 1988 to 1994, Ms. Schapiro was appointed chairman by President Obama in January of 2009, in the wake of the financial crisis. She is the first woman to have held the chairman position full-time, and is also among the longest-serving commissioners in SEC history.
Ms. Schapiro’s four-year legacy is one of enforcement, and in each of the past two years the agency has brought more enforcement actions than ever before, including 735 enforcement actions in fiscal year 2011 and 734 actions in fiscal year 2012. One resulting victory was the SEC’s $550 million penalty against Goldman Sachs, the largest in SEC history, to settle claims related to Goldman’s involvement in the subprime mortgage meltdown. (Critics of Ms. Shapiro have downplayed the verdict, noting that no senior executives were singled out in the suit and that the penalty, while large, constituted only two weeks of Goldman’s earnings.) All told, Ms. Schapiro presided over the return of $6 billion to investors during her tenure.
Driven by tougher requirements of the Dodd-Frank Act, Ms. Schapiro also presided over one of the SEC’s busiest rulemaking periods in decades. In particular, she worked to pass a new rule creating a computerized monitoring system called the consolidated audit trail, or CAT, that will give the Commission unprecedented abilities to track trading activity. She also worked to streamline what many saw as an unnecessary bureaucracy, most notably eliminating a policy of her predecessor that required enforcement attorneys seek approval of the five member commission before opening any new inquiry.
Upon announcement of Ms. Schapiro’s resignation, President Obama immediately promoted current Commissioner Elisse B. Walter as her replacement. It remains to be seen whether Ms. Walter’s appointment will be on a permanent basis.