Kenneth Herzinger

Partner

San Francisco


Read full biography at www.orrick.com

Ken Herzinger is the Chair of the White Collar, Investigations, Securities Litigation & Compliance Group and a partner in the San Francisco office. Ken was an attorney in the Enforcement Division of the U.S. Securities and Exchange Commission prior to joining private practice. His practice focuses on SEC investigations and enforcement actions, internal investigations, securities class actions, and ERISA class actions.


Ken has 20 years of experience as a securities litigator and has handled every type of SEC investigation and securities case, including new and developing areas like cybersecurity, blockchain, cryptocurrency, and SEC BSA/AML enforcement, and more traditional matters such as accounting and financial statement fraud, internal control over financial reporting (ICFR), disclosure controls and procedures, the Foreign Corrupt Practices Act (FCPA), insider trading, and Dodd-Frank and SOX whistleblower retaliation claims.

SEC and Regulatory: As a former SEC Enforcement attorney, Ken has successfully represented corporations, officers and directors, financial institutions, broker-dealers, auditors, and government municipalities in dozens of high profile investigations and enforcement proceedings by the SEC, U.S. Attorney's Office, PCAOB, and self-regulatory organizations such as FINRA.

Internal Investigations: Ken has conducted numerous global and domestic internal investigations for public and private companies and audit committees regarding a myriad of issues including accounting fraud, ICFR, disclosure controls and procedures, the FCPA, insider trading, and whistleblower retaliation claims.

Securities Class Actions:  Ken has also represented officers and directors and public companies in many high stakes securities class actions. He has tried cases in federal and state court and in arbitration proceedings, and was a member of the trial team which obtained a defense verdict in one of only several securities class action jury trials in the country to be tried to verdict.

ERISA Class Actions:  Ken has successfully defended companies and ERISA plan fiduciaries in ERISA class actions and has a strong track record of defeating the cases at the motion to dismiss stage.  Representative cases include: In re Chesapeake Energy Corp. 2012 ERISA Class Litigation, 2013 WL 5596908 (W.D. Okla. 2013)(Won a motion to dismiss an ERISA class action on behalf of Chesapeake Energy Corporation and its 401(k) Plan fiduciaries); Tomassini v. Oracle Corporation ERISA Class Action, Case No. 3:16-cv-03583-EMC (N.D. Cal. 2016)(Obtained a voluntary dismissal of an ERISA class action on behalf of Oracle Corporation and its 401(k) Plan fiduciaries.); Scholl v. Chesapeake Energy Corporation, et al. ERISA Litigation, Case No. civ-17-279-R (W.D. Okla. 2017)(Obtained a voluntary dismissal of an ERISA class action on behalf of Chesapeake Energy Corporation and its 401(k) Plan fiduciaries in an ERISA class action.); Gernandt v. SandRidge Energy Corporation, Case No. civ-15-834-D (W.D. Okla. 2015)(Currently representing SandRidge Energy Corporation and its 401(k) Plan fiduciaries in an ERISA class action).

Ken frequently lectures on and provides training for publicly traded companies and directors and officers on regulatory matters, corporate governance, and compliance.

His clients include: Broadcom Corporation, Charles Schwab, Chesapeake Energy Corporation, McAfee, Oracle Corporation, SandRidge Energy, Walmart, and Western Union.

Posts by: Ken Herzinger

The SEC’s Authority to Enforce the Bank Secrecy Act is Challenged

In the past few years, the SEC has become increasingly active in bringing enforcement actions based on broker-dealers’ alleged failures to comply with requirements of the Bank Secrecy Act (BSA), in particular that requirement that they file “Suspicious Activity Reports,” or “SARs.” The SEC’s authority to bring such actions, however, has never been established by statute or appellate authority, and is being challenged in a petition for a writ of mandamus currently pending in the Second Circuit.  Though the procedural posture of that case makes it an unlikely vehicle for resolving the question, the issue it raises is likely to recur so long as the SEC continues to bring such enforcement actions despite its lack of any clear authority to do so.  Practitioners should be aware of this open issue so that it can be properly raised and preserved in BSA enforcement actions brought by the SEC.

The SEC’s Lack of Civil Penalty Authority under the BSA

The Bank Secrecy Act, enacted in 1970 to combat money-laundering, gives general examination and enforcement authority to the Secretary of the Treasury.  The Treasury Secretary is also authorized to “delegate duties and powers … to an appropriate supervising agency.”  31 U.S.C. § 5318.  By regulation, Treasury has delegated “[a]uthority to examine institutions to determine compliance with the requirements of” the BSA to various other agencies. 31 C.F.R. § 1010.810(b).  With respect to securities broker-dealers, such “authority to examine” has been delegated to the SEC. 31 C.F.R. § 1010.810(b)(6).  However, Treasury has kept “[a]uthority for the imposition of civil penalties” with the Financial Crimes Enforcement Network, or FinCEN, which is a bureau of Treasury.  31 C.F.R. § 1010.810(d).

Despite its lack of delegated authority, for more than a decade the SEC has initiated civil enforcement actions based on alleged failure of securities broker-dealers to comply with BSA requirements. In recent years, these enforcement actions have become more frequent, and have also changed in nature. Earlier enforcement actions typically focused on the requirement that broker-dealers establish and comply with a written Customer Identification Program. And in those cases where the SEC based its enforcement action on the requirement that broker-dealers file SARs, it was generally in circumstances where the broker-dealer in question failed to file any SARs at all for a protracted period. More recent enforcement actions, however, have challenged the adequacy of SARs that broker-dealers actually did file.

In these proceedings, the SEC has based its asserted enforcement authority under the BSA on Exchange Act Section 17(a), which allows the SEC to require that broker-dealers “make and keep for prescribed periods such records” that the Commission requires. Under that provision, the SEC promulgated Exchange Act Rule 17a-8—17 C.F.R. § 240.17a-8—which cross-references the regulations promulgated by the Treasury Department under the BSA and requires that securities broker-dealers comply with them.  In effect, then, the SEC has invoked its books-and-records authority as a means to assert for itself authority to enforce the requirements of the BSA.

The Pending SEC v. Alpine Securities Corp. Litigation

Although the SEC has been bringing enforcement actions based on securities broker-dealers’ alleged failures to comply with BSA requirements for more than a decade, its authority to do so was not challenged until recently.  The SEC brought a BSA enforcement action against Alpine Securities Corp. in the summer of 2017 in the Southern District of New York. That suit is representative of the SEC’s more recent BSA enforcement actions. According to the SEC’s allegations, Alpine did have a BSA compliance program, and did file thousands of SARs. The SEC, however, alleges that the SARs that Alpine filed were inadequate in various ways. And as in other BSA enforcement actions brought by the SEC, the agency alleged that these inadequate SARs violated Section 17(a) of the Exchange Act and Rule 17a-8.

In early 2018, Alpine moved for summary judgment, arguing that the SEC lacks authority to bring enforcement actions seeking civil penalties for alleged violations of the Bank Secrecy Act.  Alpine argued that the BSA expressly delegates authority to bring civil enforcement actions to the Treasury Secretary, and that the Treasury Secretary—while delegating authority to examine various institutions for BSA compliance to various other agencies—retained enforcement authority for itself.  Alpine contended that the SEC’s interpretation of the “books and record” provision as giving it the power to bring its own BSA enforcement actions was contrary to Congressional command, and that the SEC was improperly attempting to “bootstrap” itself into an area where it lacked jurisdiction.

The district court judge—Judge Denise Cote—denied Alpine’s motion. First, the court concluded that Alpine was wrong to characterize the SEC’s suit as seeking to enforce the BSA, because the SEC in fact brought the suit under Section 17(a) and Rule 17a-8. Second, the court rejected Alpine’s challenge to the SEC’s interpretation of Section 17(a) of the Exchange Act.  Applying the two-step framework from Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984), the court concluded that Rule 17a-8, which requires compliance with certain BSA regulations, is a reasonable interpretation of Exchange Act Section 17(a).  The court further observed that “neither the Exchange Act nor the BSA expressly precludes joint regulatory authority by FinCEN and the SEC over the reporting of potentially suspicious transactions.”

Alpine moved for reconsideration of the court’s order or, in the alternative, for certification of an interlocutory appeal. The court denied both motions.  On June 22, 2018, Alpine filed a petition for a writ of mandamus in the Second Circuit, again arguing that the BSA expressly delegates enforcement authority to Treasury, and such authority cannot be usurped by the SEC. On July 9, the SEC filed an opposition to the mandamus petition.

Implications for White-Collar and Securities Practitioners

In light of the high bar for obtaining a writ of mandamus, the chances that the Second Circuit will grant the relief Alpine requests are likely low.  The reasoning and conclusion of the district court’s decision, however, are vulnerable to attack.  The district court focused its analysis almost exclusively on Exchange Act Section 17(a) and Rule 17a-8, and rejected Alpine’s challenge based on its determination that the SEC clearly has authority to impose record-keeping and production requirements on broker-dealers.  In FDA v. Brown & Williamson, however, the Supreme Court emphasized that, “[i]n determining whether Congress has specifically addressed the question at issue, a reviewing court should not confine itself to examining a particular statutory provision in isolation.”  529 U.S. 120, 132 (2000).  Rather, courts must “interpret the statute as a symmetrical and coherent regulatory scheme,” and must also take into account how one statute “may be affected by other Acts.”  Id. at 133 (internal citations omitted).  Similarly, the Second Circuit has held that where an Act of Congress “specifically and unambiguously targets” a particular issue and “unambiguously” gives enforcement authority to a particular agency, another agency’s “assertion of concurrent jurisdiction rings a discordant tone with the regulatory structure created by Congress.”  Nutritional Health All. v. FDA, 318 F.3d 92, 104 (2d Cir. 2003).

As long as the SEC continues to bring BSA enforcement actions, it appears inevitable that at some point a court of appeals will be called upon to determine whether the SEC does, in fact, have such enforcement authority. White-collar and securities practitioners defending broker-dealers in SEC enforcement actions based on the alleged failure to file SARs or comply with other requirements of the BSA should raise the issue during the investigation process and again during court proceedings to ensure that it is preserved, and ask the court to certify the question for interlocutory appeal under 28 U.S.C. 1292(b) if the court determines that the SEC does have such authority.  Although the district judge in the Alpine Securities case refused to certify an interlocutory appeal, in light of the dearth of appellate case law on the issue and the fundamental nature of the challenge, other district judges may be willing to certify.

Looking Out for Main Street: SEC Focuses on Retail, Cybersecurity and Cryptocurrency

The Commissioners and senior officials of the Securities and Exchange Commission (“SEC” or “Commission”) addressed the public on February 23-24 at the annual “SEC Speaks” conference in Washington, D.C. Throughout the conference, many speakers referred to the new energy that SEC Chairman Jay Clayton had brought to the Commission since his confirmation in May 2017. The speakers also seemed relieved that the SEC was finally operating with a full set of commissioners since the recent additions of Robert J. Jackson, Jr. and Hester M. Peirce. Clayton’s address introduced the main refrain of the conference: that the SEC under his leadership is focused on the long-term interests of Main Street investors. Other oft-repeated themes included the challenges presented by cybersecurity and the fast-paced developments in cryptocurrency and blockchain. To address these shifts in focus, the Enforcement division plans to add more resources to the retail, cybersecurity and cryptocurrency spaces.

Following are the key litigation and enforcement takeaways.

Main Street Investors

Commissioner Kara Stein picked up on Clayton’s Main Street investors focus when she asked whether increasingly complex and esoteric investments, such as product strategies and structures that utilize derivatives, were appropriate for retail investors. She explained that it was not a question whether the financial industry could develop and sell these products, but whether it should. She said it was not clear that financial professionals fully understood the products they were selling, and that even if brokers and advisers made disclosures regarding the potential outcomes and risks to investors, complete disclosures might not even be possible due to the products’ complexity. Both SEC and FINRA Enforcement have brought actions related to the sales practices of inverse and leveraged ETFs, as well as the purchase and sale of complex products. Stein opined that gatekeepers needed to remember the real people behind every account number when they were advising clients on how to handle these types of products.

Steven Peikin, Co-Director of the Division of Enforcement, described the SEC’s Share Class Selection Disclosure Initiative as one way in which Enforcement was trying to help Main Street investors. The Initiative was created to address the problem of investment advisers putting their clients into higher fee share classes when no fee or lower fee classes were available. The SEC is incentivizing advisers to self-report this issue by promising not to impose any penalties, and only requiring them to disgorge their profits to investors. Peikin encouraged investment advisers to take advantage of this opportunity, indicating that if the Commission learned that an adviser had engaged in this conduct and did not self-report, it would be subject to significant penalties. The Chief of the SEC’s Broker-Dealer Task Force shared that AML programs and SAR-filing obligations are also a priority for the Enforcement division and OCIE exams. READ MORE

SEC’s OCIE Announces 2018 Areas of Focus

On February 7, 2018 the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced its 2018 National Exam Priorities. The priorities, formulated with input from the Chairman, Commissioners, SEC Staff and fellow regulators, are mostly unchanged from years past (New Year, Similar Priorities: SEC Announces 2017 OCIE Areas of Focus, Orrick.com). However, the publication itself is presented in a more formal wrapper that begins with a lengthy message from OCIE’s leadership team describing the Office’s role and guiding principles, including that they are risk-based, data-driven and transparent, and that they embrace innovation and new technology.

2018 Priorities

OCIE’s principal 2018 priority, not surprisingly, appears to be the protection of retail investors, including seniors and those saving for retirement. OCIE specifically stated that it will focus on the disclosure of investment fees and other compensation received by financial professionals; electronic investment advisors – sometimes known as “robo-advisors”; wrap fee programs in which investors are charged a single fee for bundled services; and never-before-examined investment advisors. As to the latter, OCIE indicated that in the most recent fiscal year, it examined approximately 15 percent of all investment advisors, up from 8 percent five years before. It remains to be seen whether that increasing trend will continue.

Noting that the cryptocurrency and initial coin offering (ICO) markets “present a number of risks for retail investors,” OCIE included them as a priority for the first time. Examiners will focus on whether financial professionals maintain adequate controls and safeguards over the assets, as well the disclosure of investment risks.

Other 2018 priorities are compliance and risks in critical market infrastructure; cybersecurity protections, which OCIE states are critical to the operation of our markets; and anti-money laundering programs. In addition, OCIE has prioritized its examinations of FINRA and MSRB to ensure that those entities continue to operate effectively as self-regulatory organizations subject to the SEC’s oversight. READ MORE

Supreme Court Likely to Decide Whether to Hear SEC ALJ Issue This Term

As the U.S. Supreme Court commenced a new term last week, one issue of substantial interest to many readers of this blog is whether the Court will address the constitutionality of the Securities & Exchange Commission’s use of administrative law judges (“ALJs”) to adjudicate enforcement proceedings. The issue, which we have covered extensively in past posts, essentially comes down to whether SEC ALJs are Officers subject to the Constitution’s Appointments Clause, or whether they are merely employees, who do not require appointment by the President or a Presidential appointee. The SEC currently selects ALJs through an internal administrative process, pursuant to 5 USC 3105.

Advocates on both sides of a clear circuit split have already filed petitions for writ of certiorari. Most recently, on September 29, 2017, the U.S. Department of Justice Solicitor General’s office filed a certiorari petition on behalf of the SEC asking the Court to review the Tenth Circuit’s December 2016 holding in Bandimere v. SEC. That holding, which was denied en banc review by the Tenth Circuit in May, found that SEC ALJs were “inferior Officers” and thus are subject to the Appointments Clause. After the Tenth’s Circuit ruling in Bandimere, the SEC stayed all administrative ALJ proceedings that could be appealed to the Tenth Circuit pending resolution of the issue by the Supreme Court or further order of the Commission.

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Second Circuit Ruling Creates Challenge for Securities Class Action Plaintiffs

The Second Circuit recently considered the extraterritorial application of the U.S. securities laws in the private securities class action context, bringing some clarity to an area of the law that is increasingly important given the globalization of financial markets.

In re Petrobras Securities, 862 F.3d 250 (2nd Cir. 2017), was an appeal of a class certification order in a securities class action related to an alleged multi-year money-laundering and kickback scheme involving Petróleo Brasileiro S.A. (“Petrobras”), the Brazilian state-owned oil and gas company. The district court had certified two classes of investors who purchased Petrobras American Depository Shares (ADS) and debt securities, and who brought misrepresentation claims under the Securities Act of 1933 and the Securities Exchange Act of 1934 against Petrobras, its subsidiaries, and its underwriters. Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), held that the anti-fraud provisions of the securities laws have no extraterritorial effect, and as a consequence apply only to transactions in securities that occur on a U.S.-based exchange or that are otherwise “domestic.” Petrobras ADS shares satisfied the first requirement, but the company’s debt securities are traded over-the-counter, not on a U.S. exchange. Prior decisions had limited “domestic” transactions to ones where (1) the purchaser “incurred irrevocable liability within the United States to take and pay for a security . . . or to deliver a security” or (2) “legal title to the security . . . transferred in the United States” (see, e.g., Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 68 (2d Cir. 2012)), but how this test implicated the standards for class certification was not clear. READ MORE

Chairman Clayton Sets New SEC Agenda

On Wednesday July 12, 2017, in his first public speech as Chairman of the SEC, SEC Chairman Jay Clayton laid out a set of eight priorities that will guide his SEC Chairmanship.[1] He said his priorities are consistent with and complimentary to the seven “core principles” set forth in President Donald Trump’s February 3, 2017 executive order regarding the regulation of the U.S. financial system.

The overarching themes in Chairman Clayton’s speech are that he is focused primarily on capital formation, modernizing the trading and markets system, and he favors a disclosure and market-based approach to federal securities regulation . Given the kind words for former Chair Mary Jo White and multiple references of areas of agreement, it is difficult to determine how much of a shift one can expect from the Commission under Chairman Clayton. Nevertheless, the following are a few key takeaways from the speech.

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Government Leaks Lead to Landmark Insider Trading Case

On May 24, 2017, the SEC for the first time brought charges based on allegations of insider trading on confidential government information. The alleged insider trading scheme involved tips related to three announcements by the Center for Medicare & Medicaid Services (“CMS”) regarding non-public rate changing decisions affecting the stock of issuers in the healthcare industry.

The complaint alleges that from May 2012 to November 2013, Christopher Worrall, a health insurance specialist in the Center for Medicare (“CM”), the CMS component that administers Medicare’s national payment systems and determines Medicare reimbursement rates, tipped his long-time friend David Blaszczak about internal deliberations and planned actions of CMS.  Blaszczak is a consultant specializing in healthcare policy issues and a former CMS employee. READ MORE

Congress May Significantly Increase SEC Civil Penalties Up To $10 Million Per Violation

On March 30, 2017, a bipartisan group of Senators introduced a bill called “Stronger Enforcement of Civil Penalties Act of 2017” (the “SEC Penalties Act”) to “crack down on Wall Street fraud” that would significantly increase civil monetary penalties in SEC enforcement actions up to $1 million per violation for individuals and $10 million per violation for entities, or three times the money gained in the violation or lost by the victims.  Currently, the maximum civil monetary penalties in SEC enforcement actions are $181,071 per violation for individuals and $905,353 per violation for entities.[1]

The SEC Penalties Act raises the maximum penalties under all three penalty tiers, would tie penalties to the scope of harm and associated investor losses, triple the maximum penalty caps under each tier for recidivists who have been held criminally or civilly liable for securities fraud within the preceding five years, and provide the SEC with authority to seek disgorgement of ill-gotten gains in SEC administrative actions (currently disgorgement is only available in federal district court actions). The legislation would not alter the current three-tier penalty structure or the standards for establishing a penalty under each tier, and does not define how administrative law judges and federal district courts should interpret the “each act or omission” language in the penalty statutes.[2]

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Keep Looking Forward: Federal Court Holds Company’s Bad Legal Predictions Protected by PSLRA’s Safe Harbor

Gavel and Hundred-Dollar Bill

In a comprehensive tour of the Private Securities Litigation Reform Act’s (“PSLRA”) safe-harbor provisions, on November 22, 2016, a federal court in Massachusetts dismissed a shareholder class-action lawsuit against Neovasc, Inc.  In holding that Neovasc’s ultimately faulty predictions concerning the outcome of a trade secrets lawsuit fell within the PSLRA’s safe harbor, the court rejected the plaintiff’s attempts to import a scienter requirement into the safe-harbor inquiry, among other things, and dismissed the complaint without leave to amend.

This putative class-action came on the heels of a $70 million jury verdict against Neovasc in May 2016. In that case, a jury found that Neovasc misappropriated certain trade secrets from CardiAQ Valve Technologies after CardiAQ had severed its manufacturing relationship with Neovasc, and Neovasc had patented a competing product.  Neovasc’s stock price fell approximately 75 percent when the jury verdict was announced.  Shortly after the verdict and stock decline, shareholders filed the class action, alleging securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  The plaintiff alleged, among other things, that prior to the verdict, Neovasc CEO Alexei Marko mischaracterized the lawsuit as “baseless,” and that Neovasc had misstated that the suit was “without merit” in the company’s SEC filings.

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The SEC Wins First Jury Trial in a Muni Case: SEC v. City of Miami and Michael Boudreaux

In what the SEC called “the first federal jury trial by the SEC against a municipality or one of its officers for violations of the federal securities laws,” a jury in the U.S. District Court for the Southern District of Florida found the City of Miami and its former budget director, Michael Boudreaux, guilty of securities fraud for misrepresentations related to three municipal bond offerings in 2009. Both Defendants are expected to appeal the jury decision.

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