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
Though investors might have assumed that the entire Securities and Exchange Commission was their advocate to begin with, on February 12th the agency announced that it had hired Rick Fleming to be its very first Investor Advocate in the recently created Office of the Investor Advocate (“OIA”).
Last week, Scottrade Inc. became the latest entity to admit wrongdoing in connection with settling SEC charges. In a January 29, 2014 administrative order, the brokerage firm not only agreed to a $2.5 million penalty, but also admitted that it violated federal securities laws when it failed to provide the SEC with complete and accurate “ blue sheet” trading data. This settlement marks the fourth such admission since the Commission’s June 2013 modification to its “no admit/no deny” settlement policy.
Most civil law enforcement agencies – including the SEC – generally do not require entities or individuals to admit or deny wrongdoing in order to reach a settlement. The SEC regularly utilizes this “no admit/no deny” policy, finding it an effective tool to facilitate settlements. In June 2013, however, the Commission announced a revision to this longstanding policy, indicating that it would require public admissions of wrongdoing in selected cases, including those involving “egregious” fraud or intentional misconduct, as well as those involving significant investor impact or that are otherwise highly visible. Since then, the Commission has obtained admissions in three previous settlements. Read More
Momentum for the SEC’s Dodd Frank whistleblower program is growing, and 2014 can be expected to bring continued expansion of the program and the number and types of whistleblower actions initiated by the SEC. The SEC’s annual report to Congress reported that 3,238 whistleblower tips were received in 2013, up almost 10% from 2012, and awards to whistleblowers who provide information to the SEC are increasing as more substantive tips are received.
An investigation by the SEC into a whistleblower tip can take several years to culminate in an enforcement action, so the last year likely saw just the beginning of a wave of enforcement actions. Despite the fact that over 6,000 tips have been received through 2013, the SEC has issued only six separate awards to tipsters. Those awards have ranged from $125,000 to a record $14 million, representing 10 to 30 percent of the overall funds recovered by the SEC in these whistleblower cases. Read More
On January 7, 2014 the SEC lost an insider trading bench trial before Judge William Duffey of the U.S. District Court for the Northern District of Georgia. In a thorough opinion, Judge Duffey found the SEC’s case to be entirely circumstantial, founded on no more than a pattern of trades that were made in close proximity to communications between the purported tipper and tippee. This case shows how difficult insider trading claims are to prove, especially without wire taps, and may give the Commission pause in bringing cases to trial that rest on such circumstantial evidence.
On trial was Larry Schvacho, a retiree who spent much of his free time investing. The SEC alleged Schvacho had misappropriated material, nonpublic information from Larry Enterline, a long time friend, who was then CEO and director of Comsys IT. Although Schvacho had traded in Comsys stock for many years, the SEC’s case focused on trades Schvacho made during the run-up to an acquisition of Comsys by Manpower in early 2010. As the SEC established at trial, Schvacho and Enterline had repeatedly communicated and socialized together during the period, and there were numerous phone calls, text messages, car rides, sailing trips, and dinners where Enterline could have given Schvacho information about the acquisition. When news of the acquisition was eventually made public to the market, Schvacho made over $500,000 on his trades. 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
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
The SEC released its Fiscal Year 2013 Annual Report (the “Report”) to Congress on the Dodd-Frank Whistleblower Program on November 15, 2013. The Report analyzes the tips received over the last twelve months by the SEC’s Office of the Whistleblower (“OWB”) and provides additional information about the whistleblower award evaluation process.
Breakdown of Tips Received in FY 2013
The OWB reported a modest increase in the number of whistleblower tips and complaints that it received in 2013 – 3,238 tips in 2013 compared to 3,001 in 2012. Overall, the 2013 whistleblower tips were similar in number, type, and geographic source to the whistleblower tips reported in 2012. As in 2012, the most common types of allegations in 2013 were: Corporate Disclosure and Financials (17.2%), Offering Fraud (17.1%), and Manipulation (16.2%). Most whistleblowers, however, selected “Other” when asked to describe their allegations. In 2012, the most common complaint categories reported were also Corporate Disclosure and Financials (18.2%), Offering Fraud (15.5%), and Manipulation (15.2%). See Appendix B to the Report, listing tips by allegation type and comparing tips received in 2013 to those received in 2012. Read More
Following a defense verdict in the insider trading case brought against him by the SEC, Dallas Mavericks owner Mark Cuban has not been sitting on the bench—but rather using his blog to stay on the offensive. Since the October 16, 2013 verdict, Cuban continues to post about the case on his blog—including, just a few days ago, blogging about when his own blog became the focus of the trial. According to his October 26 post, an SEC attorney asked him during trial if everything he posted on his blog was true information, to which he replied that it was meant more “to communicate a point” and stimulate discussion. Following up, the SEC attorney asked: “If you post on your blog that you think the Lakers are going to stink in 2013 . . . you’re not telling this jury that that’s an opinion you don’t honestly hold, right?” Cuban posted that the courtroom “cracked up” when he replied “This year?”, before going on to answer: “Well, no. In 2004, I wouldn’t say it. They had Shaq, they had Kobe, they actually went to the finals . . . To answer your question, if I said in 2004 that they stink, I didn’t believe it.” In an earlier blog entry, Cuban also poked fun at the former Head of Enforcement—posting about internal emails, disclosed earlier in the case, in which SEC attorneys commented on photos of Cuban. Read More
In a recent speech to the Securities Enforcement Forum, SEC Chair Mary Jo White fleshed out the Commission’s plan to pursue all violations of federal securities laws, “not just the biggest frauds.” She also addressed the looming question of whether this approach makes the best use of the agency’s limited resources.
Chair White compared the SEC’s strategy of pursuing all forms of wrongdoing, no matter how big or small, to the “broken window” theory of policing, which was largely credited for reducing crime in New York City under Mayor Rudy Giuliani. According to the “broken window” theory, a broken window which remains unfixed is a “signal that no one cares, and so breaking more windows costs nothing.” On the other hand, a broken window which is fixed indicates that “disorder will not be tolerated.” Chair White postulated that the same theory applies to the US securities markets: minor violations that go ignored may lead to larger violations, and may foster a culture where securities laws are treated as “toothless guidelines.” Characterizing the SEC as the investors’ “cop,” she declared that the SEC needs to be a “strong cop on the beat,” understanding that even the smallest securities violations have victims. Read More
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