SEC Enforcement: Top Trends

1. SEC Enforcement: Top Trends Presented by: Thomas Kirsch ACCA–SoCal DoubleHeader®: Preparing For The Rebound November 17, 2009

2. Background • In a speech delivered to the New York City Bar Association this summer, SEC Enforcement Director Robert Khuzami, a former federal prosecutor, announced a number of new initiatives enabling the Enforcement Division to pursue focused investigations and to restore public confidence in its ability to succeed in providing investor protection in response to the sustained and severe criticism it has endured in the wake of the Madoff scandal. 

3. Four Principles of Enforcement • The criticism acted as a catalyst to pursue a rigorous self-assessment and to embrace four sustaining principles: • Strategic - focus on cases manifesting the greatest and most immediate harm and which send a strong message of deterrence; • Swift- harmful, unlawful conduct must be pursued with urgency and energy, in order to enhance investor protection, achieve behavioral change, and maximize deterrent effect; • Smart- due to finite resources, intelligent, informed decisions need to be made regarding how to pursue, shape and charge investigations; • Successful- build the strongest case possible, in order to compel a defendant to achieve quick resolution or face compelling evidence at trial.

4. New Initiatives • In order to pursue these principles most effectively, Director Khuzami announced five new initiatives: • Specialization; • Streamlining management and internal processes; • Creation of an Office of Market Intelligence; • Fostering cooperation by individuals; and • Committing to the strategic use of new resources.

5. Specialization: New Units • New Units dedicated to highly specialized and complex areas of securities law: • Asset Management: effective enforcement requires a comprehensive approach to public and private investment funds, and the new unit will oversee investment advisors and companies, hedge funds and private equity funds, and will focus upon disclosure, valuation, portfolio performance, due diligence and diversification, transactions with affiliates, misappropriation and conflicts of interest.

6. Specialization: New Units (cont'd) • New Units dedicated to highly specialized and complex areas of securities law: • Market Abuse: institutional traders and market professionals account for an ever-increasing percentage of  trading volumes, and the Market Abuse unit will work to investigate and prevent large-scale market abuses and complex manipulation schemes by individuals.

7. Specialization: New Units (cont'd) • New Units dedicated to highly specialized and complex areas of securities law: • Structured and New Products Unit: some products are so complex that their markets have become opaque. This unit will focus upon complex derivatives and financial products, such as credit default swaps, collateralized debt and securitized products.

8. Specialization: New Units (cont'd) • New Units dedicated to highly specialized and complex areas of securities law: • FCPA Unit: the law prohibits U.S. companies from bribing foreign officials to obtain contracts and business, and this unit will pursue a proactive role in taking a global enforcement approach.

9. Specialization: New Units (cont'd) • New Units dedicated to highly specialized and complex areas of securities law: • Municipal Securities and Public Pensions: because this market is huge and is growing, scrutiny will be given to offering and disclosure issues, tax and arbitrage activity, unfunded or underfunded liabilities, and pay-to-play schemes, in which financial advisors have paid kickbacks in return for the right to advise the funds.

10. Streamlining Management and Internal Processes • The number of managers will be reduced by redeploying branch chiefs to the investigatory front line in order to foster quicker decision-making, autonomy and accountability, and reduce documentary duplication. • In addition, subject to certain exceptions, the Director will now have formal order authority and subpoena power, and will not require prior Commission approval, and Director approval will be required for all tolling agreements.

11. Office of Market Intelligence • The Office will be responsible for the collection, analysis, risk-weighing, triage, referral and monitoring of the hundreds of thousands of tips, complaints, and referrals that the SEC receives each year, in order to make connections between and among tips from different sources to better evaluate those that have merit and the potential to uncover and eliminate wrongdoing.

12. Fostering Cooperation by Individuals • The SEC's limited resources must be leveraged by motivating individuals to assist with investigations.  • To encourage such cooperation, the SEC is preparing a public policy statement outlining standards to evaluate cooperation by individuals in enforcement actions, is seeking an expedited immunity process, is evaluating the potential for providing early declination assurances to witnesses, and will be prepared to recommend to the Commission that the SEC enter into Deferred Prosecution Agreements.

13. Commitment to Strategic Use of New Resources • The Enforcement Division has bolstered the ranks of its Trial Unit, and in so doing is intent upon conveying to defendants in SEC actions that it is committed to fully pursuing its cases, and that it is prepared to go to trial and win.

14. Current Priorities and Cases • The credit crisis remains the highest priority in the Division of Enforcement. • The recently formed Subprime Group will continue to pursue significant credit-related cases, of which the best-known is Countrywide, wherein the SEC charged former CEO Mozilo and two other former executives with fraud for allegedly misleading investors about the significant risks it was undertaking.

15. Current Priorities and Cases • Recent cases have also included: • charging the managers of a $62-billion money market fund whose net asset value fell below $1.00, or "broke the buck," implicating disclosure obligations; • ponzi schemes in which new investors pay returns to old investors, as in the Stanford case; • cross-market misconduct cases in which two or more of the equity, fixed-income and derivatives markets engage in wrongdoing; • hedge fund breach of fiduciary duty/due diligence cases; and  • insider trading in credit default swaps.

16. Conclusion • In light of the SEC Enforcement Division's proclaimed strong commitment to protect investors and the markets and to reclaim public confidence in its potency through aggressive and revitalized enforcement, public companies and regulated entities should be prepared to invest in, or continue to maintain, a comprehensive and versatile compliance program to prevent, identify and assess potential issues, and to respond to inquiries or correct problems if required, as the current robust regulatory trend will likely continue unabated.