financial fraud law report - paul hastings · “broken windows” theory of enforcement to the...

Editor’s NotE: Mary Jo WhitE’s sECSteven A. Meyerowitz

sEC ENforCEMENt: top 10 dEvElopMENts UNdEr Mary Jo WhitEThomas A. Zaccaro, Eleanor K. Mercado, and Neil J. Schumacher

Halliburton Co. v. EriCa P. JoHn Fund, inC.: assEssiNg possiblE ModifiCatioNs to basiC aNd thE fraUd-oN-thE-MarkEt thEoryJason M. Halper, Ryan J. Andreoli, and William J. Foley

six stEps to prEvENt disClosUrE of iNtErNal iNvEstigatioN rEportsWilliam A. Roberts, III, Mark B. Sweet, and Richard B. O’Keeffe, Jr.

rECENt dEvElopMENts iN thE rEgUlatioN of bitCoiN UNdEr statE aNd fEdEral sECUritiEs laWsScott H. Kimpel

rEiNiNg iN ovErbroad CriMiNal sUbpoENas — is soME rEliEf iN sight?Ben Barnett, Rebecca S. Kahan, and Nathaniel Hopkins

rECENt fCa dECisioN has iMportaNt iMpliCatioNs for CoNtraCtor disClosUrEs to thE govErNMENtRichard J. Vacura, Pablo A. Nichols, and Sara Bartel

MarUbENi gEts hit agaiN for fCpa violatioNs: doJ says thE CoMpaNy did Not volUNtarily disClosE thE CoNdUCt aNd rEfUsEd to CoopEratEPaul T. Friedman, Stacey M. Sprenkel, and Tiffany A. Rowe

U.k. fiNaNCial CoNdUCt aUthority iMposEs fiNE oN bEsso liMitEdKarolos Seeger, Bruce E. Yannett, Matthew H. Getz, Robin Lööf, and Robert Maddox

brazil’s aNti-CorrUptioN “ClEaN CoMpaNy laW” NoW iN EffECtAndré Marques Gilberto

U.s. sUprEME CoUrt ExtENds sarbaNEs-oxlEy WhistlEbloWEr protECtioNs to EMployEEs of MUtUal fUNd iNvEstMENt advisErs aNd othEr privatEly-hEld CoNtraCtors to pUbliC CoMpaNiEsStephen T. Cohen and Alexander R. Bilus

dodd-fraNk Wall strEEt rEforM aNd CoNsUMEr protECtioN aCt UpdatEDavid A. Elliott, Kristen Peters Watson, E. Jordan Teague, and Seth Muse

aN a.s. pratt & soNs pUbliCatioN May 2014

FinancialFraudLaw

Report

The Financial Fraud law reporT is published 10 times per year by Matthew Bender & company, inc. copyright 2014 reed elsevier properties Sa., used under license by Matthew Bender & company, inc. all rights reserved. no part of this journal may be reproduced in any form — by microfilm, xerography, or otherwise — or incorporated into any information retrieval system without the written permission of the copyright owner. For permis-sion to photocopy or use material electronically from the Financial Fraud Law Report, please access www.copyright.com or contact the copyright clearance center, inc. (ccc), 222 rosewood drive, danvers, Ma 01923, 978-750-8400. ccc is a not-for-profit organization that provides licenses and registration for a variety of users. For subscrip-tion information and customer service, call 1-800-833-9844. direct any editorial inquires and send any material for publication to Steven a. Meyerowitz, editor-in-chief, Meyerowitz communications inc., po Box 7080, Miller place, nY 11764, [email protected], 631.331.3908 (phone) / 631.331.3664 (fax). Material for publication is welcomed — articles, decisions, or other items of interest. This publication is designed to be accurate and authorita-tive, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. if legal or other expert advice is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher.poSTMaSTer: Send address changes to the Financial Fraud Law Report, lexisnexis Matthew Bender, 121 chan-lon road, north Building, new providence, nJ 07974. direct inquiries for editorial department to [email protected]. ISBN: 978-0-76987-816-4

Editor-in-chiEfSteven A. Meyerowitz

President, Meyerowitz Communications Inc.

Board of Editors

Frank W. Abagnaleauthor, lecturer, and consultantabagnale and associates

Stephen L. Ascher partner Jenner & Block llp

Thomas C. Boglepartnerdechert llp

David J. Cookpartnercook collection attorneys

David A. ElliottpartnerBurr & Forman llp

William J. Kelleher III corporate counselpeople’s united Bank

James M. KeneallypartnerKelley drye & warren llp

H. David Kotzdirector Berkeley research Group, llc

Richard H. KravitzFounding directorcenter for Socially responsible accounting

Frank C. Razzanopartnerpepper Hamilton llp

Sareena Malik SawhneydirectorMarks paneth & Shron llp

Mara V.J. Sennpartnerarnold & porter llp John R. SnyderpartnerBingham Mccutchen llp Jennifer TaylorpartnerMcdermott will & emery llp

Bruce E. Yannettpartnerdebevoise & plimpton llp

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Published by Matthew Bender & Company, Inc. in the May 2014 issue of Financial Fraud Law Report. Copyright © 2014 Reed Elsevier Properties SA.

SEC Enforcement: Top 10 Developments Under Mary Jo White

THOMAS A. ZACCARO, ELEANOR K. MERCADO, AND NEIL J. SCHuMACHER

The authors highlight the Top 10 developments that have occurred since Mary Jo White took the helm of the Securities and Exchange Commission.

Just over a year ago, the Senate confirmed president Barack obama’s nom-ination of Mary Jo white as chair of the Sec. white, who was lured away from a new York city law firm that has represented wall Street

banks and their executives, previously spent a decade as a united States attorney in new York city overseeing the prosecution of various criminals, including mafia dons, corrupt politicians, and international terrorists (in-cluding the 1993 world Trade center bombers). She has a reputation for being driven, competitive, and tough as nails. while white’s former legal practice representing wall Street elites drew questions during her nomination, white’s aggressive enforcement agenda has proven she is no wall Street apologist. during her first year at the helm, the agency saw significant increases in both the number of new investigations

Thomas A. Zaccaro is a partner in Paul Hastings’ Los Angeles office and is the vice chair of the firm’s Investigations and White Collar Defense Group. Before joining Paul Hastings, Mr. Zaccaro was the Chief Trial Counsel of the Securities and Exchange Commission’s Pacific Regional Office. He previously served as an assistant u.S. Attorney for the Southern District of New York and as a Trial Attor-ney at the Department of Justice, Organized Crime and Racketeering Section. Eleanor K. Mercado and Neil J. Schumacher are associates in the firm’s Investiga-tions and White Collar Defense Group. Peter T. Brejcha and Sarah Kelly-Kilgore, also associates in the firm’s Investigations and White Collar Defense Group, con-tributed to this article.

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and formal orders of investigation.1 and while the Sec initiated fewer new cases in 2013 than in either of the two prior fiscal years, it collected a record $3.4 billion in disgorgement and civil penalties, the highest amount in the agency’s history.2 But white’s Sec is not just focused on big targets. She has analogized the Sec to a “cop on the beat” and declared a mission to adapt the “broken windows” theory of enforcement to the securities markets — under which no violation is too small to pursue.3 Given white’s ambitious enforce-ment agenda, the downtick in new cases was likely a temporary aberration attributable to the leadership change and shifting priorities. under white’s leadership, the agency has remained focused on insider trading, significant Fcpa settlements, and charges arising out of the financial crisis, while breaking new ground in a series of actions against “gatekeepers,” including auditors and individuals. The Sec also reaped its first rewards from the formation of a specialized unit to pursue alleged wrongdoing in the municipal securities market. white also announced the formation of the Financial reporting and audit Task Force, the most recent of the Sec’s mul-tidisciplinary teams dedicated to developing new strategies for the detection and enforcement of fraud in financial statements. again, white’s Sec may be mimicking the investigative strategies of her former colleagues at the u.S. attorney’s office, who have long trained prosecutors as specialists and em-ployed traditional evidence-gathering methods alongside more sophisticated techniques. even in settlement, the division of enforcement continued to borrow from the prosecutor’s playbook. in a landmark announcement prompted in part by the financial crisis, white announced that the Sec would, for the first time in its history, seek admissions of wrongdoing as a condition of settlement. white has explained that admissions are important because they achieve a greater measure of public accountability, which bolsters public confidence in law enforcement and the stability of the markets. She has also stated that she expects to seek admissions in more cases in 2014, as the new protocol is implemented. with less fanfare, the Sec has also expanded its use of non-prosecution and deferred prosecution agreements to defendants who provided exemplary cooperation. Taken together, the historic policy shift and greater inducements for cooperation make the stakes and tactics of an Sec inquiry increasingly similar to those of a doJ prosecution.

SEC ENFORCEMENT: TOP 10 DEVELOPMENTS uNDER MARY JO WHITE

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earlier this year, on the first anniversary of her nomination to lead the Sec, white acknowledged that the Sec’s investigation of the financial crisis is winding down, but she promised that 2014 would be a “very busy year in en-forcement.”4 while it is too soon to anticipate which of the recent enforcement trends will fill the void during her second year at the helm, it will be critical for the Sec to illustrate transparency and proportionality in applying its admis-sions policy, cooperation initiative, and penalty determinations consistent with its civil, remedial mandate and in a market no longer overshadowed by the events of September 2008. The top 10 developments under chair white follow.

1. rEspoNdiNg to CritiCisM, sEC ovErhaUls No-adMit, No-dENy poliCy

on June 18, 2013, in the wake of widespread criticism that the Sec had been soft on those responsible for the financial crisis, white announced a new settlement policy: The Sec will now require admissions of wrongdoing as a condition of settling certain egregious cases. The new policy represents a radical departure from the Sec’s longstanding practice of settling cases and allowing defendants to neither admit nor deny wrongdoing. while the Sec’s decades-long no-admit, no-deny settlement policy was credited with encouraging defendants to settle and expediting recovery for victims, the policy came under scrutiny in 2011 when Judge Jed S. rakoff re-fused to approve the Sec’s proposed $285 million settlement with citigroup. Though the Citigroup ruling was later vacated by the Second circuit, Judge rakoff has continued to focus public attention on the issues of accountabil-ity and has criticized the policy as “hallowed by history but not by reason.”5 Judge John l. Kane of the district of colorado recently echoed these senti-ments in his refusal to approve a settlement with a defendant “who remains defiantly mute as to the veracity of the allegations against him.”6

in a recent interview with the L.A. Times, white affirmed the Sec’s deter-mination to secure admissions in appropriate cases: “what we are focused on is the enhanced public accountability and the admission of the conduct, the wrongdoing…. an apology is easy. we want you to admit what you did.”7 Speaking at The Sec Speaks conference on February 22, 2014, director of en-


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forcement andrew ceresney echoed white’s comments, stating that the Sec will aggressively pursue admissions in cases involving egregious conduct. in the past year, the Sec has put this policy into practice, settling several actions with admissions of wrongdoing. earlier this year, credit Suisse agreed to pay $196 million and admit to violating federal securities laws by provid-ing advisory services to u.S. clients without satisfying the requirement that it register with u.S. regulators.8 This settlement followed two high-profile an-nouncements in august and September of 2013, the first with philip Falcone and his advisory firm Harbinger capital partners, and the second with J.p. Morgan chase in the widely publicized “london whale” case in which the bank lost $6.2 billion trading credit-default swaps.9 Falcone and Harbinger were required to admit that they had engaged in reckless misconduct that caused harm to investors and interfered with the securities markets, while J.p. Morgan chase admitted, among other things, that it lacked adequate internal controls and that its senior management had made misleading disclosures.10

These cases, along with white’s and ceresney’s comments, suggest that the Sec will increasingly require admissions in cases involving harm to a large number of investors or otherwise “egregious” conduct, and in situations where requiring an admission could “send an important message to the mar-ket,” suggesting that admissions should be the exception rather than the rule. it remains to be seen whether the language of a required admission will be a matter for negotiation. But for most defendants, the new policy may result in a greater likelihood of trial as they are required to choose between the risks of trial and the likelihood that a settlement with any form of admission may expose them to further civil — and potentially criminal — liability.

2. WhistlEbloWEr prograM gaiNs MoMENtUM

From the inception of the Sec’s whistleblower program on august 12, 2011, through the end of 2012, the Sec made just one whistleblower award in the amount of $50,000.11 while that award represented 30 percent of the sanctions collected by Sec (the maximum permitted by law), the long-delayed announcement of the first award and its modest amount cast some doubt on whether the program would be a success. Such doubt appears to be fading.


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in 2013, the program’s second full year of operation, the Sec reported an increase in both the quality and the quantity of tips received and announced new awards of $125,000 and $150,000, as well as the extraordinary award of more than $14 million to a single individual for providing “documents and other significant information that allowed the Sec’s investigation to move at an accelerated pace and prevent [a multimillion-dollar] fraud.”12 Several se-nior Sec officials have commented on the likelihood that significant awards will continue as the program matures.13 as companies adapt to the new whistleblower program, they should en-sure that their policies do not run afoul of dodd-Frank’s requirements and keep abreast of evolving judicial interpretations. late last year, the Sec an-nounced that it would seek to identify efforts by companies to impede com-plaints through the practice of requiring an employee to sign a confidentiality agreement, thereby preventing the employee from qualifying as a whistle-blower.14 while the Sec has exercised its rulemaking authority broadly in favor of whistleblowers, courts are actively wrestling with the extent of the protections permissible under dodd-Frank. Some courts have relied on the Sec’s rules to conclude that an employee’s internal report is sufficient to trig-ger eligibility and protection from retaliation.15 However, the Fifth circuit recently limited the Sec’s whistleblower protections based on the text of the statute, holding that only those who report directly to the Sec qualify for protection.16 not surprisingly, in a separate case presenting the same is-sue, the Sec filed an amicus brief urging the Second circuit to defer to the commission’s rulemaking authority.17 if other circuits follow the Fifth cir-cuit’s reasoning, whistleblowers may have an even greater incentive to avoid or supplement internal reporting procedures by contacting the Sec directly. More recently, however, the Supreme court interpreted the Sarbanes-oxley act broadly to extend anti-retaliation protections to employees of third parties (such as accounting firms) that provide services for an issuer.18 The ruling reinforces the Sec’s expectations of gatekeepers, as it appears likely to encourage accountants, attorneys, and other professionals with ac-cess to financial and other confidential information to report their con-cerns. regardless of judicial trends, however, the continued uptick in the quality and quantity of information will contribute to broader institutional support for the whistleblower program, more frequent whistleblowing and


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self-reporting, and increased Sec awareness of and involvement in corpo-rate internal investigations.

3. “opEratioN brokEN gatE” sigNals rEdoUblEd Efforts to pUrsUE aUditors aNd aUdit Work papErs

in her first year, white announced and repeatedly highlighted “operation Broken Gate” as a key enforcement initiative in its ongoing pursuit of auditors, attorneys, and other “gatekeepers” who fail to detect fraud or other malfea-sance as part of their professional duties.19 The Sec escalated this operation in the audit space, announcing actions against three certified public accountants charged with various errors and omissions in the course of their audits allegedly in violation of pcaoB standards.20 a few months ago, the Sec announced charges against KpMG for alleged violations of auditor-independence rules, in-cluding regulation S-X prohibiting ancillary relationships with audit clients.21 These actions followed former director Khuzami’s pursuit of KpMG auditors for an allegedly deficient audit of a bank’s loan reserves in early 2013.22

audit firms also took note of a landmark decision that could impact major overseas audit practices. in a widely-anticipated ruling earlier this year involving chinese affiliates of five major accounting firms, an Sec admin-istrative law judge held that the firms were obligated to produce their audit work papers upon request even though the china Securities regulatory com-mission (“cSrc”) and other regulators refused to consent.23 The decision illustrates the potential conflicts between u.S. law and Sec implementing regulations — which have been applied extraterritorially — and their foreign counterparts. despite the firms’ arguments that the commission historically attempted to harmonize conflicts of law, and the potentially adverse impact on audit quality, the alJ censured the firms and imposed a six-month prac-tice bar on the chinese affiliates of four of the five firms, reasoning that their refusals to produce documents under Section 106 of Sarbanes-oxley were willful because they voluntarily continued auditing foreign issuers after the dodd-Frank act became effective. as the decision would likely require major u.S. firms to choose between foreign and domestic regulatory consequences (or withdraw from the foreign markets entirely), the defendants have ap-pealed the matter to the full commission.


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4. JUdiCioUs UsE of CoopEratioN agrEEMENts

More than three years have passed since former director Khuzami an-nounced the “cooperation initiative,” a program which adapted tools familiar to the criminal process — non-prosecution agreements (“npa”) and deferred prosecution agreements (“dpa”) — for use in the Sec’s civil program.24 To date, the Sec has disclosed the existence of only seven such agreements,25 including the first agreement with an individual (a november 2013 dpa with former hedge fund administrator Scott Herckis)26 and the first agreement in an Fcpa matter (an npa with ralph lauren earlier in the year). in Herckis’ case, the Sec recognized the “voluntary and significant co-operation” in the form of providing real-time reports that enabled the agency to file an emergency enforcement action and recover millions for investors.27 even so, Herckis received a five-year broker-dealer bar, was required to admit wrongdoing, and ordered to pay disgorgement of approximately $50,000.28 in the Ralph Lauren matter, the Sec’s relatively light penalty and will-ingness to offer an npa to ralph lauren may be as much a reflection of the unusually isolated wrongdoing as it was a recognition of the company’s thorough cooperation — which included such extraordinary measures as providing english translations of documents and access to foreign witnesses for Sec staff.29

despite the initial enthusiasm surrounding the cooperation initiative, the Sec does not appear to be using either the npa or the dpa as often as origi-nally anticipated. Moreover, the Sec’s framework for evaluating cooperation does not yield a predictable answer to the question of eligibility. indeed, based on the limited evidence to date, the cooperation initiative appears to require more than just exemplary cooperation. Setting aside the Sec’s agree-ments with Fannie Mae and Freddie Mac — which both received npas in part because of the potential harm to u.S. taxpayers — the remaining cases suggest that an npa may be off the table unless the purported wrongdo-ing shows no sign of a systemic weakness. For more serious or widespread violations, the Sec may be willing to consider a dpa, but in these cases, a company’s immediate and comprehensive reporting and remediation appear to be critical factors for eligibility. with so little precedent, it remains to be seen whether the program will fulfill its original purpose of encouraging


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more frequent cooperation by offering demonstrable benefits to cooperating defendants.

5. UptiCk iN adMiNistrativE proCEEdiNgs sigNals a NEW trENd

in 2013, the Sec made greater use of its administrative forum, filing cases typically reserved for federal court as administrative proceedings. Senior officials have explained that the Staff is shedding dated notions about which cases should be filed in federal court, and we can expect to see greater use of the administrative forum in the future. administrative proceedings have been touted by the commission as highly specialized tribunals that allow for the efficient adjudication of com-plex securities matters. cases brought as administrative proceedings are typi-cally resolved much more quickly than federal court actions and are decided by administrative law judges who, according to the commission, have the advantage of developing expertise concerning this complicated and nuanced area of the law. nevertheless, the growing trend toward the use of administrative proceed-ings has raised serious concerns among members of the defense bar. chief among these is that administrative proceedings do not provide for the right to trial by jury. instead, cases are tried before judges who are employed by the commission and housed in its offices. The close ties between the judges who preside over these cases and the agency that brings them has caused many to question whether administrative proceedings can be truly objective. defense counsel have also raised concerns about the speed of administra-tive proceedings and the limited discovery available to defendants. admin-istrative proceedings are not subject to the Federal rules of evidence, or the Federal rules of civil procedure, and thus defendants lack the protections of a formal discovery process. while the commission may carry out an inves-tigation gathering testimony and documents over a matter of years prior to instituting proceedings, defendants have just two months to gather evidence and plan their defense, and they have no right to depose witnesses.30

in a well-publicized action in 2011, Judge rakoff ruled that rajat Gupta, the former Goldman Sachs director accused of tipping hedge fund billionaire


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raj rajaratnam, could maintain a federal court action challenging the Sec’s choice of an administrative forum.31 Gupta argued that the administrative action violated his constitutional rights to due process and trial by jury, and that the Sec was singling him out because other actions arising from the Gal-leon probe were filed in federal court.32 Gupta also argued that dodd-Frank’s civil penalty provision could not apply retroactively and sought an injunction barring the Sec from bringing an administrative proceeding against him.33 after Judge rakoff allowed the case to proceed, the Sec and Gupta agreed to a stipulation under which Gupta dropped his lawsuit against the Sec and the Sec dismissed its administrative action against Gupta and agreed that any future action would be filed in federal court.34

defendants will surely continue to raise challenges, but, without judi-cial precedent supporting their positions, the routine use of administrative proceedings likely is here to stay. Senior officials have expressed their view that administrative proceedings comport with due process and provide a level playing field since all parties are subject to the same rules.

6. CoNtiNUEd foCUs oN fCpa aCtioNs

after an unusually quiet year in which the Sec initiated only five new Fcpa actions during fiscal year 2013 (a fraction of the 15 cases filed last year and 20 filed in 2011),35 it quickly reverted to the historical norm by bringing five new cases in the opening months of 2014 and obtaining high-profile set-tlements with aluminum giant alcoa inc. and cosmetics manufacturer avon products, inc. But even amid last year’s modestly lower enforcement tally, the Sec announced two of the largest settlements ever. in May, oil giant Total S.a. agreed to resolve parallel doJ/Sec enforcement proceedings by paying $398 million, including $153 million in disgorgement of illicit profits, for allegedly bribing an iranian official to help the company secure a contract to develop the country’s oil and gas fields beginning in 1995.36 Total S.a. was required to coordinate with u.S. and French authorities and retain an inde-pendent compliance monitor for three years. Subsequently, oilfield products and services provider weatherford inter-national agreed to resolve a multi-agency investigation into alleged bribery and export-controls violations. weatherford’s alleged violations included ap-


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proving inadequate due diligence on various third-parties, failing to investi-gate bribery allegations, and weaknesses in internal controls relating to the misappropriation and false reporting of cash advances and rebates.37 weath-erford’s subsidiaries also created false accounting and inventory records to conceal illegal sales to sanctioned countries. weatherford was required to disgorge $65.6 million. There was, however, good news for u.S. issuers considering disclosures. as part of its settlement, weatherford was required to retain an independent compliance monitor for only 18 months, which appears to have reflected that the company’s voluntary disclosures, cooperation, and remedial efforts were well received.38 in her remarks at The Sec Speaks conference, Fcpa chief Kara Brockmeyer evidently confirmed this trend. Going forward, compa-nies with effective compliance programs may have even stronger precedent to avoid the appointment of an independent monitor. equally welcome were the Sec’s announcements of the first-ever non-prosecution agreement in an Fcpa matter with ralph lauren corp.39 and declinations for casino operator wynn resorts, ltd.40 and medical-device manufacturer Zimmer Holdings.41 of course, an npa or declination will not be an option for all companies un-der investigation — ralph lauren disclosed an aggregate of only $568,000 in payments confined to one country over four years — but the Sec’s will-ingness to offer such an agreement may tip the balance in favor of disclosure in some cases.

7. thE CoNtiNUiNg iMpaCt of SEC v. GabElli

The Supreme court’s February 27, 2013 decision in SEC v. Gabelli sig-nificantly limited the Sec’s ability to recover civil penalties by holding that the five-year statute of limitations for actions governed by 28 u.S.c. § 2462 begins to run when the alleged fraud occurs, not when it is discovered.42 while the ruling will have no impact on direct actions by victims, it promises to reduce potential civil penalties and may offer some repose for peripheral actors involved in years-long Sec investigations. indeed, shortly after the decision in Gabelli, the Second circuit overturned a $38 million fine against pentagon capital Management for alleged late-trading violations from 1999 to 2003. The Second circuit ruled that the fine must be recalculated so that


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it was not based on profits earned through late trading that occurred more than five years before the 2008 lawsuit was filed. Going forward, Gabelli may force an end to the Sec’s investigation of the financial crisis, which is now largely beyond the five-year limitations period. Gabelli, however, does not squarely address whether 28 u.S.c. § 2462 applies to other remedial tools such as disgorgement and equitable relief. according to the Sec’s director of public affairs, Gabelli “only pertains to penalties and does not restrict [the Sec’s] ability to strip violators of their unlawful financial gains or bar them from the securities industry when necessary to protect investors.”43 But several lower courts have held that barring someone from working in the securities industry or serving as a director or officer of a company does constitute a monetary penalty.44 The reach of Gabelli is sure to be the subject of future litigation by the Sec and other federal government agencies seeking to enforce federal fraud statutes.

8. fiNaNCial Crisis ENforCEMENt WiNdiNg doWN

even as the Sec obtained significant monetary penalties from the coun-try’s largest financial institutions in the past few years, some questioned whether the Sec had held banks and executives fully accountable for mis-conduct relating to the financial crisis. of course, white’s hands may have been tied as she took the reins mere months before the five-year statute of limitations over much of the conduct would expire. even so, at this year’s The Sec Speaks conference, white noted that the commission has charged 169 individuals or entities for conduct related to the financial crisis — “70 of whom were ceos, cFos, or other senior executives.” There is no doubt that white made good on her congressional testimony vowing to sustain, and in some cases, escalate enforcement attention on large cases against wall Street banks and executives.45 white’s round of high-profile enforcement actions began on august 6, 2013, when the Sec brought new charges against wall Street heavyweights uBS and Bank of america for offering fraud and related violations. The charges against uBS stemmed from its failure to disclose approximately $23 million in upfront payments received in structuring a collateralized debt ob-ligation (“cdo”).46 The charges against Bank of america were based on its


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alleged failure to disclose increased risks and relaxed underwriting standards associated with certain loans originated in its wholesale channel as part of an $855 million offering in 2008.47 Bank of america has yet to resolve these charges. Months later, the Sec announced a second set of charges against Mer-rill lynch (acquired by Bank of america in 2008) for improper disclosures concealing a hedge fund’s role in the selection of collateral for two cdos, and failure to record trades to benefit itself as part of a third cdo.48 Bank of america’s $131.8 million settlement was the fourth nine-figure settlement of similar allegations that a hedge fund with interests potentially adverse to other investors improperly influenced the structuring of a cdo. This settle-ment also came on the heels of the Sec’s successful jury verdict in its trial of Fabrice Tourre, the Goldman Sachs trader accused of concealing a hedge fund’s role in selecting a portfolio of residential mortgage-backed securities in 2007. Goldman settled with the Sec for $550 million in connection with this cdo transaction, but Tourre has since challenged the Sec’s $1 million fine. whatever the outcome the Sec’s willingness to bring Tourre to trial, the possibility of tolling agreements, and the sizable recent settlements sug-gest that although the end may be near, the enforcement division has not yet completed its pursuit of wrongdoing linked to the financial crisis.

9. sEC adapts rEgUlatioN fd to NEW tEChNology

on april 2, 2013, the Sec issued its report of investigation of netflix, inc. (“netflix”) and its chief executive officer, reed Hastings (“Hastings”), confirming that regulation Fair disclosure (“regulation Fd,” 17 c.F.r. § 243.100 et seq.) applies to disclosures made through social media outlets, such as Facebook and Twitter, and other emerging forms of communications. The report concerned whether netflix and Hastings violated regulation Fd49 and Section 13(a) of the exchange act when Hastings used his personal Facebook page to announce that, in June 2012, netflix’s monthly online viewing exceed-ed one billion hours for the first time. netflix made no accompanying press release or other public disclosure, and had never informed its investors that it might use Hastings’ Facebook page to announce corporate information. The Sec decided not to pursue an enforcement action, but emphasized


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in its report that communications made through social media channels require regulation Fd analysis to ensure all investors receive equal access to material information. The Sec also made clear that its august 2008 Guidance on the use of company web Sites50 also applies to disclosures through social media. The message is clear: while the commission will not discourage the use of emerging communications to disseminate information to the investing public, it will require issuers to apply the same scrutiny to disclosures made through non-traditional means as to those made through traditional means.

10. hEightENEd sCrUtiNy of MUNiCipal dEbt

Following the formation of the Municipal Securities and public pensions unit in 2010, the Sec has delivered on its promise to devote greater resourc-es and expertise to this sector. consistent with its 2012 report, which called attention to the lack of transparency in municipal financial disclosures,51 the Sec brought several unprecedented enforcement actions against municipali-ties and individuals in 2013. in what appears to be the first action based on the recently promulgated rule 15c-12 obligating municipal issuers to provide annual financial infor-mation and event notices to investors, the Sec charged an indiana school district and its underwriter for falsely representing that the district had com-plied with rule 15c-12 requirements in connection with an earlier bond of-fering.52 The Sec also pursued the underwriter — and its head of public finance individually — for failing to detect the city’s violation. in the first-ever action against a municipal issuer for statements made outside of a securities disclosure, the Sec settled an action against the city of Harrisburg, pennsylvania, for false and misleading statements made on the city’s website.53 demonstrating that it will seek financial penalties if they can be paid from sources other than taxpayer revenues, the Sec announced the first-ever financial penalty against a group of washington municipalities charged with fraud for allegedly false statements about the financial viability of an event center and an ice hockey arena and material omissions relating to the district’s cumulative debt burden.54 while the $20,000 penalty is more significant as precedent than in amount, the simultaneous charges against the project de-


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veloper, lead underwriter, and a senior staff member of the municipality are a further example of the Sec’s aim to hold individual gatekeepers accountable for misconduct in this emerging enforcement landscape.

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in her first year on the job, white has already made her mark on the division of enforcement. She has continued to arm the division with tradi-tional prosecutorial tools and has sent the message that the Sec stands ready to aggressively prosecute all violations of the federal securities laws. under her leadership, it seems likely that the number of enforcement actions and the amount of penalties and disgorgement recovered will increase across the board. But her aggressive agenda will not come without consequences — defendants faced with the possibility of having to admit wrongdoing and harsh sanctions are more likely to forgo settlement and elect to proceed to tri-al, further stretching the Sec’s already limited resources. in the year ahead, white’s biggest challenge may be figuring out how to manage an increased trial docket without diluting other aspects of her pro-enforcement agenda.

NotEs1 See press release, Sec. & exch. comm’n, Sec announces enforcement results for FY 2013 (dec. 17, 2013), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/1370540503617.2 See id.; Year-by-Year enforcement Statistics, Sec. & exch. comm’n (dec. 17, 2013), available at http://www.sec.gov/news/newsroom/images/enfstats.pdf.3 remarks of chair Mary Jo white at the Securities enforcement Forum (oct. 9, 2013), available at http://www.sec.gov/news/Speech/detail/Speech/1370539872100.4 “The Sec in 2014,” remarks of chairwoman Mary Jo white, 41st annual Securities regulation institute (Jan. 27, 2014), available at http://www.sec.gov/news/Speech/detail/Speech/1370540677500.5 See opinion and order (dkt. no. 33), SEC v. Citigroup Global Mkts. Inc., no. 11 civ. 7387 (JSr) (S.d.n.Y. nov. 28, 2011).6 See order denying entry of Final Judgments (dkt. no. 53), SEC v. Bridge Premium Finance, LLC, no. 1:12-cv-02131-JlK-BnB (d. colo. Jan 17, 2013).


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7 See andrew Tangel and Jim puzzanghera, SEC’s Mary Jo White Wants Companies to Fess Up, L.A. Times, Jan. 2, 2014, available at http://articles.latimes.com/2014/jan/01/business/la-fi-sec-white-20140102.8 See press release, Sec. & exch. comm’n, credit Suisse agrees to pay $196 Million and admits wrongdoing in providing unregistered Services to u.S. clients (Feb. 21, 2014), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/1370540816517.9 See press release, Sec. & exch. comm’n, philip Falcone and Harbinger capital agree to Settlement (aug. 19, 2013), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/ 1370539780222; press release, JpMorgan chase agrees to pay $200 Million and admits wrongdoing to Settle Sec charges (Sep. 19, 2013), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/1370539819965.10 See id.11 See press release, Sec. & exch. comm’n, Sec issues First whistleblower program award (aug. 21, 2012), available at http://www.sec.gov/ news/pressrelease/detail/pressrelease/1365171483972.12 See press release, Sec. & exch. comm’n, Sec awards More Than $14 Million to whistleblower (oct. 1, 2013), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/1370539854258.13 rachel louise ensign, SEC Hands Out Second-Ever Dodd-Frank Whistleblower Award, wall St. J. (June 14, 2013) (quoting office of the whistleblower director Sean McKessy); Michele wein layne, Blowing the whistle under dodd-Frank — an update, remarks at the american Bar association annual Meeting (aug. 10, 2013).14 See 2013 annual report to congress on the dodd-Frank whistleblower program, Sec. exch. comm’n (nov. 15, 2013), at 2, available at http://www.sec.gov/about/offices/owb/annual-report-2013.pdf ; see also Sec rule 21F-17(a).15 See, e.g., Genberg v. Porter, 935 F. Supp. 2d 1094 (d. colo. 2013); Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986 (M.d. Tenn. 2012).16 See Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th cir. 2013).17 See Brief of Amicus Curiae in Support of appellant, Meng-Lin v. Siemens AG, no. 13-4385 (2d cir. Feb. 20, 2014).18 See Lawson v. FMR LLC, 572 u.S. __, 134 S. ct. 1158 (2014).19 See, e.g., remarks of chairwoman Mary Jo white at the Securities enforcement Forum, supra n.3.20 See press release, Sec. & exch. comm’n, Sec charges Three auditors


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in continuing crackdown on Violations or Failures by Gatekeepers (Sept. 30, 2013), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/1370539850572.21 See press release, Sec. & exch. comm’n, Sec charges KpMG with Violating auditor independence rules (Jan. 24, 2014), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/1370540667080.22 See press release, Sec. & exch. comm’n, Sec charges Two KpMG auditors for Failed audit of nebraska Bank Hiding loan losses during Financial crisis (Jan. 9, 2013), available at https://www.sec.gov/news/pressrelease/detail/pressrelease/1365171513624.23 See initial decision, In re BDO China Dahua CPA Co., Ltd. et al., nos. 3-14872, 3-15116 (Jan. 22, 2014), available at http://www.sec.gov/alj/aljdec/2014/id553ce.pdf.24 See press release, Sec. & exch. comm’n, Sec announces initiative to encourage individuals and companies to cooperate and assist in investigations (Jan. 13, 2010), available at http://www.sec.gov/news/press/2010/2010-6.htm.25 See enforcement cooperation program, Sec. & exch. comm’n, http://www.sec.gov/spotlight/enfcoopinitiative.shtml (last visited May 7, 2014).26 See press release, Sec. & exch. comm’n, Sec announces First deferred prosecution agreement with individual (nov. 12, 2013), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/1370540345373.27 deferred prosecution agreement Between u.S. Securities and exchange commission and Scott Jonathan Herckis (nov. 8, 2013), available at http://www.sec.gov/news/press/2013/2013-241-dpa.pdf.28 Id.29 See press release, Sec. & exch. comm’n, Sec announces non-prosecution agreement with ralph lauren corporation involving Fcpa Misconduct (apr. 22, 2013), available at https://www.sec.gov/news/pressrelease/detail/pressrelease/1365171514780.30 See 17 c.F.r. § 360.31 See Gupta v. SEC, 796 F. Supp. 2d 503 (S.d.n.Y. 2011).32 Id. at 507-08.33 Id. at 508.34 See B. van Boris and J. Gallu, rajat Gupta, Sec agree to drop Galleon-related Suit, administrative action, Bloomberg (aug. 5, 2011), available at http://www.bloomberg.com/news/2011-08-04/rajat-gupta-sec-agree-to-drop-galleon-related-suit-administrative-action.html.


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35 See Year-by-Year enforcement Statistics, Sec. & exch. comm’n, supra n.2.36 See press release, Sec. & exch. comm’n, Sec charges Total S.a. for illegal payments to iranian official (May 29, 2013), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/1365171575006.37 See press release, Sec. & exch. comm’n, Sec charges weatherford international with Fcpa Violations (nov. 26, 2013), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/1370540415694.38 Id.39 See press release, Sec. & exch. comm’n, supra n.29, available at https://www.sec.gov/news/pressrelease/detail/pressrelease/1365171514780.40 Form 8-K, wynn resorts ltd. (July 8, 2013).41 Form 10-K, Zimmer Holdings, inc. (Feb. 27, 2013).42 See Gabelli v. SEC, 568 u.S. 133 (2013).43 High court limits Sec authority to Seek penalties, ChiCAgo Tribune (Feb. 27, 2013).44 See SEC v. Bartek, 484 Fed. appx. 949 (5th cir. Tex. 2012). 45 Testimony on oversight of the Sec, Mary Jo white (May 16, 2013), available at http://www.sec.gov/news/Testimony/detail/Testimony/1365171516050.46 See press release, Sec. & exch. comm’n, uBS to pay $50 Million to Settle Sec charges of Misleading cdo investors (aug. 6, 2013), available at https://www.sec.gov/news/pressrelease/detail/pressrelease/1370539751175.47 See press release, Sec. & exch. comm’n, Sec charges Bank of america with Fraud in rMBS offering (aug. 6, 2013), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/1370539751924.48 See press release, Sec charges Merrill lynch with Misleading investors in cdos (dec. 12, 2013), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/1370540492377.49 regulation Fd prohibits public companies, or persons acting on their behalf, from selectively disclosing material, nonpublic information to certain individuals or entities. in general, regulation Fd provides that when an issuer, or person acting on its behalf, discloses material, nonpublic information to certain enumerated individuals (generally, securities market professionals and shareholders who may trade on the basis of such information), that information must also be disclosed to the public. 50 commission Guidance on the use of company web Sites, release no. 34-58288 (aug. 7, 2008).51 See report on the Municipal Securities Market, Sec. & exch. comm’n (July 31,


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2012), available at https://www.sec.gov/news/studies/2012/munireport073112.pdf.52 See press release, Sec. & exch. comm’n, Sec charges School district and Muni Bond underwriter in indiana with defrauding investors (July 29, 2013), available at https://www.sec.gov/news/pressrelease/detail/pressrelease/1370539734122.53 See press release, Sec. & exch. comm’n, Sec charges city of Harrisburg for Fraudulent public Statements (May 6, 2013), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/1365171514194.54 See press release, Sec. & exch. comm’n, Sec charges Municipal issuer in washington’s wenatchee Valley region for Misleading investors (nov. 5, 2013), available at http://www.sec.gov/news/pressrelease/detail/pressrelease/1370540262235.

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