SEC Enforcement, Oversight, and Authority: A JD Supra Legal Reader

For your convenience, a roundup of updates on the topic of SEC enforcement, organized into three broad categories: enforcement actions, oversight and authority, and procedures.

Enforcement Actions

“District of Columbia Circuit Vacates SEC Default Order for Failure to Apply Rule Consistently” in Inside the Courts: An Update From Skadden Securities Litigators (Skadden, Arps, Slate, Meagher & Flom LLP):

“The U.S. Court of Appeals for the District of Columbia Circuit vacated an SEC default order and remanded because the SEC failed in this instance to apply a rule allowing it to set aside default orders for good cause consistently with prior SEC precedent… The court determined that the SEC’s refusal to consider the petitioner’s proposed defenses (a third requirement of Rule 155(b)) was not consistent with the SEC’s previous application of the rule, and so was arbitrary.” Read on>>

New SEC Enforcement Action Highlights the Unique Role Advisors Play in China-based Reverse Takeover Companies and Due Diligence Problems They Can Create for PE Investors (Ropes & Gray LLP):

“A new enforcement action by the U.S. Securities and Exchange Commission (SEC) against a financial advisor who specializes in assisting China-based businesses that become U.S. public companies through reverse takeovers (RTO’s) highlights how such advisors present a distinct – yet often poorly understood – risk for private equity investors.” Read on>>

SEC Enters Into Deferred Prosecution Agreement with Investment Fund (Katten Muchin Rosenman LLP):

“This week the Securities and Exchange Commission entered into Deferred Prosecution Agreement (DPA) with the Amish Helping Fund (the Fund), an Ohio non-profit corporation. This is only the second DPA that the SEC has reached since it announced its Cooperation Initiative over two years ago.” Read on>>

Let’s Make a Deal: SEC Settlements with Individuals Spike in 2012 (Orrick):

“In the first half of 2012, the SEC settled 286 cases with individuals, for a projected annualized 572 settlements. This reflects the highest number of SEC settlements with individual defendants since 2005, most of them related to alleged insider trading, Ponzi-schemes, and public company restatements. The NERA report projects 120 insider trading related settlements in fiscal year 2012, nearly double the 63 settlements in 2011.” Read on>>

Even Domestic Bribery Falls within the SEC’s Jurisdiction (Brooks Pierce):

“Much ink has been spilled in recent years discussing the SEC’s and Justice Department’s focus on the Foreign Corrupt Practices Act, a law that prohibits paying bribes to foreign government officials. While the federal criminal code has provisions prohibiting bribery of domestic public officials … domestic bribery has rarely been a focus for the SEC. But if you’re a publicly traded company, you can’t forget the accounting provisions of the federal securities laws, because they will catch you.” Read on>>

Eleventh Circuit Reverses In Part Securities Fraud Judgment Against Clearing Broker in an Action Brought by the SEC (Sheppard Mullin Richter & Hampton LLP):

“… the United States Court of Appeals for the Eleventh Circuit held that the recording of a sham transaction in the corporate books did not constitute ‘securities fraud’ in violation of Section 10(b) of the Securities Exchange Act of 1934, and Securities & Exchange Commission (“SEC”) Rule 10b-5, because ‘a misrepresentation that would only influence an individual’s choice of broker-dealers cannot form the basis for § 10(b) securities fraud liability.’ In so holding, the Eleventh Circuit declined ‘the SEC’s invitation to expand [the] definition of materiality’ to capture the misrepresentation.” Read on>>

A Man Overboard Will Not Sink the Ship: How Robust FCPA Compliance Can Keep a Company Out of Hot Water Even When An Executive is Neck Deep (Sheppard Mullin Richter & Hampton LLP):

“The story of one man prosecuted by the SEC and the DOJ for an FCPA violation may run a little below the radar these days, when allegations of bribery by manufacturing, retail, and entertainment companies plaster the headlines. The guilty plea entered by an ex-Morgan Stanley executive, Garth Peterson, however, holds a very important lesson for companies that do not wish to see their own names on the broadsheets above a story about corruption enforcement actions. The lesson is simple: robust corporate compliance can protect a company even when a high-level employee commits brazen acts of bribery.” Read on>>

Financial Statements and Settlement Negotiations of Cooperating Witnesses in SEC Action Not Discoverable by Defendants (Katten Muchin Rosenman LLP):

“The U.S. District Court for the Southern District of New York last week denied defendants Rajat Gupta and Raj Rajaratnam’s motion to compel documents concerning settlement negotiations between the Securities and Exchange Commission and various cooperating witnesses.” Read on>>

Oversight and Authority

Investment Advisors Would Pay For Some SEC Oversight (Orrick):

“Congress continues to struggle with the issue of proper oversight for investment advisors. Despite catastrophes like the Bernie Madoff scheme, SEC budget constrictions have resulted in only a handful of investment advisors being reviewed by the Commission each year (as compared to over half of all broker-dealers)… [O]n Wednesday of last week a competing investment advisor oversight bill was introduced in the House. The Investment Advisor Examination Improvement Act of 2012 gives oversight of investment advisors to the SEC, and pays for the SEC’s review with user fees charged to advisors.” Read on>>

Senators Unveil Bill to Increase SEC Civil Penalties; House Members Propose Competing Bills to Enhance the SEC’s Investment Adviser Oversight (BuckleySandler LLP):

“On July 23, Senators Reed (D-RI) and Grassley (R-IA) unveiled legislation to increase statutory limits on SEC civil monetary penalties to $1 million per violation for individuals, and $10 million per violation for entities. The bill, S. 3416, would also allow for the size of penalties to be linked to the scope of harm and associated investor losses, and provide substantially higher penalties for repeat offenders.” Read on>>

Bipartisan Bill Introduced in U.S. Senate to Authorize SEC to Impose Larger Penalties (Katten Muchin Rosenman LLP):

“Pursuant to existing law, the SEC may only penalize individuals a maximum of $150,000 per violation and entities $725,000 per violation. The SEC has the authority to seek penalties above these caps only if the matter is adjudicated in federal court, but not when the SEC handles a case through its administrative process.” Read on>>

Government Enforcement Update: Whistleblower Incentives; Changes to the SEC’s ‘Neither Admit Nor Deny’ Policy; Difficulties of Multijurisdictional Settlements (Skadden, Arps, Slate, Meagher & Flom LLP):

“Resolutions with the SEC for alleged FCPA violations have been complicated by a new policy promulgated by the SEC’s Division of Enforcement. Under this policy, the SEC no longer will accept resolutions in which a defendant “neither admits nor denies” the allegations against it where that defendant has entered into an agreement with the DOJ under which it did make factual admissions.” Read on>>

Lessons Learned for the SEC from the False Claims Act and Whistleblowers (Michael Volkov):

“As the SEC whistleblower program matures, it is likely to operate in much the same fashion as the False Claims Act except that the SEC will need to develop specific practices and procedures for handling whistleblower complaints. For right now, the SEC has a very broad field of discretion as to how it operates the whistleblower program.” Read on>>

E.D.N.Y. Judge Highlights SEC’s Limited Enforcement Powers (Brooks Pierce)

“If a defendant breaks the law in a way that earns her, say, $1 million, but causes losses that stretch into the billions for other investors, the SEC’s authority is limited to taking the $1 million back from the defendant. It can do very little about the billions. It is true that civil penalties are meted out per violation, and at times a draconian reading of the facts can conjure many, many violations on which penalties can be applied. But such readings are quite rare…” Read on>>

When Should the SEC or the DOJ Investigate an Allegation of Bribery? (Michael Volkov):

“… how much ‘evidence’ does it take for the SEC or the Justice Department to open an investigation? From my experience in representing companies and individuals under investigation, it does not take too much. Prosecutorial discretion is a very valuable concept and it needs to be protected.” Read on>>

SEC v. Citigroup: Update on SEC’s Practice of Settling Cases Without Defendants Admitting or Denying Allegations” in White Collar Watch – June 2012 (Saul Ewing LLP):

“… the [SEC] is confident that its practices regarding ‘neither admit nor deny’ settlements are consistent with and supported by those of other federal agencies and previous court decisions and that its settlement practice is a matter of good public policy. If Citigroup is the barometer, then defendants in similar circumstances clearly agree with the SEC.” Read on>>

Developments Regarding Extraterritorial Effect of U.S. Securities Fraud Statutes (King & Spalding):

“In June 2010, the Supreme Court overturned years of federal jurisprudence by holding that the U.S. securities fraud laws do not apply extraterritorially in the case Morrison v. National Australia Bank Ltd… Earlier this year, the SEC released its study on international securities fraud cases since Morrison and explained its stance that the Supreme Court’s holding should be reversed for private rights of action. That same day, an SEC Commissioner issued a statement dissenting from the SEC’s study, finding that it fell short of providing an informed recommendation to Congress because the study did not provide a strong enough case to fully repeal Morrison.” Read on>>


California Lawyer 2012 Roundtable Series: Securities (Keker & Van Nest):

“… everyone knows that you are at a major disadvantage during an SEC deposition. You don’t have all the normal protections of the Federal Rules of Civil Procedure. Rules of evidence don’t apply, and often times there are two to three questioners asking questions interchangeably. They may ask your client to speculate and answer hypothetical questions, which frankly is improper. Oftentimes the staff encounters defense lawyers who are used to dealing with the Federal Rules of Civil Procedure and inserting objections where they think the questions are improper. They are not happy about that.” Read on>>

Tips for Minimizing Missteps When Interfacing with SEC Staff (BuckleySandler LLP):

“Counsel’s conduct and interactions with SEC staff prior to, during and following any type of informal or formal investigation can have a huge impact on the staff’s treatment and management of the proceeding.” Read on>>

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