Enforcement

Three’s Company, Too: The SEC’s New Enforcement Initiatives Will Be Waiting For You

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

SEC Commissioner Schapiro to Step Down After Four Tough Years

Wall Street

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.