By Peter B. Moores
Choste, Hall & Stewart LLP
On Wednesday May 16, 2012, the BBA’s Criminal Law Section and Securities Law Committee presented a Securities Enforcement CLE. The CLE was comprised of two panels, entitled “Recent Developments in Enforcement” and “How SEC Administrative Trials May Alter the Landscape.” The well-attended program provided insight into current developments at the SEC and the United States Attorney’s Office and substantive information and practice points for practitioners.
The first panel about updates on enforcement included David Bergers, Director of the Boston Regional Office of the SEC; Carmen Ortiz, U.S. Attorney for the District of Massachusetts; Paul Levinson, Chief of the Economic Crimes Unit, U.S. Attorney’s Office for the District of Massachusetts; Daniel O’Connor, a partner at Ropes & Gray; and Jack Falvey, a partner at Goodwin Proctor. Diana Lloyd, a partner at Choate, Hall & Stewart, moderated the discussion.
Much of the first panel’s discussion revolved around the SEC’s and U.S. Attorney’s Office increased efforts and greater collaboration to combat fraud and market abuses. Currently, the Boston office of the SEC is conducting approximately 100 on-going investigations, 33% of which are conducted within the office’s 5 specialty units (Asset Management, Market Abuse, FCPA, Structured Products, and Municipal Securities/Pension Funds).
So far in FY 2012, 30 cases have been in active litigation, which represents a busier than normal year. In FY 2012, 5 cases from the Boston office have gone to trial. These trials constitute 20% of the SEC’s trials nation-wide for FY 2012. With only 5% of the SEC’s national staff, the Boston office has disproportionally more trials. To handle the increased activity, the Boston office is currently seeking to hire 15 additional employees, including enforcement attorneys, paralegals, and experts.
The office is also collaborating much more with the U.S. Attorney’s office and the FBI. Leadership and the staffs have regular and routine contact with counterparts, and the SEC notifies the U.S. Attorneys office earlier to ensure that they are also at the table. The U.S. Attorney’s office has assigned more AUSAs to the economic crimes unit and is hiring more AUSAs to replace recent departures to keep the unit well staffed.
The practitioners on the panel advised that it is more realistic now than before that the U.S. Attorney’s office will become involved in an SEC investigation. Investigation targets must be even more careful when deciding whether to respond to the SEC or plead the 5th.
The Economic Crimes Unit is not focused on any one particular type of case. It is also diversifying its investigation tactics by applying tools long used elsewhere to become more proactive in its investigations. In November 2011, an economic crimes investigation used undercover operations for the first time. The office is continuing to explore the use of wiretaps and videotape recordings and the development of sources within the area. The new tactics are intended to gather evidence as to intent and knowledge. The difficult balance is to collect the evidence without allowing the market and innocent investors to suffer from any on-going fraud.
Some of the increased activity at the SEC and U.S. Attorney’s office results from changes to the law and regulations governing the SEC’s whistleblower program. In the 7 weeks following the changes in mid-2011, the SEC received 334 whistleblower complaints or tips. Currently, the SEC averages 7 tips a day to its whistleblower office in Washington, D.C. The tips are typically of better quality than before because the tips now must be sworn to under the penalties of perjury. Over 90% of whistleblowers have indicated that they reported their complaint internally before going to the SEC.
The tips are triaged at the D.C. office and some are eventually handled by regional offices. The Boston office has recently brought significant cases first raised by whistleblowers. No whistleblower has received a bounty yet for his tip, although there are many actions derived from whistleblower tips pending.
The first panel also discussed: (1) the SEC’s revamped guidance on cooperation agreements and how they have been implemented; (2) the powerful executive compensation clawback tool in Section 304, which the Boston office of the SEC has not utilized to date to recover money from a CEO or CFO in a stand alone action where the executive was not part of the fraudulent activity; (3) the extension of insider trading prohibitions per Dodd-Frank to additional entities, including hedge funds and private equity companies, which will likely generate more activity; (4) the rising number of FCPA cases and the balance between the desire to enforce the FCPA in local offices with the tremendous amount of resources those cases consume; and (5) the difficulty the SEC has in trusting the results of a company’s internal investigations because its own questioning of company witnesses often generates different testimony than that elicited by the internal investigations.
The second panel about administrative trials included Ian Roffman, a partner at Nutter McClennen & Fish; Luke Cadigan, a partner at K&L Gates; John Sylvia, a partner at Mintz Levin; and Mark Pearlstein, a partner at McDermott, Will & Emery. Michele Adelman, a partner at Foley Hoag, moderated the discussion.
Dodd-Frank expanded the SEC’s ability to use administrative trials. The SEC is now authorized to use administrative trials against all violators. Prior to Dodd-Frank, the SEC could only bring regulated broker dealers to trial before an administrative law judge. The panel’s discussion highlighted the procedural and substantive differences between administrative trials and regular civil court enforcement actions. Of note, administrative proceedings permit extremely limited discovery and allow virtually no motions practice. Defendants are, however, entitled to a copy of the SEC’s investigation file.
Administrative trials have no juries and are not burdened with the Federal Rules of Evidence. All evidence that is relevant, i.e. which “can conceivably throw any light upon the controversy,” is admissible. An entire action -- filing through trial -- must be completed within 300 days.
The panel discussed why the SEC might choose an administrative trial over a federal court trial and what the relative benefits were for a defendant. Some indicated that the loose evidentiary standards enabled them to better put on their case. Others thought the administrative trials’ quick procedure -- the “long fire drill” -- and limited discovery could prevent the SEC from fixing bad investigation files in time for trial. Ultimately though, the panelists indicated a preference for district court proceedings instead of administrative trials.
At the end, all questions were answered and a lively reception at the BBA followed.