SEC Gets Tough (or Tougher?)

Early each year, the SEC hosts its most important conference: The SEC Speaks.   At the conference, the chairman, the commissioners, and the heads of the various divisions summarize the SEC’s activities of the previous year and outline the priorities and major initiatives of the SEC for the coming year.   Judging from the comments of the commissioners and staff at this year’s event, it is clear that the SEC’s reforms of the past year will be supplemented by more aggressive enforcement, despite the lack of budget.

SEC Chairman Mary Shapiro began the conference by focusing on the importance of investor protection and the SEC’s role as “the investor’s advocate.”   She noted that court-ordered disgorgements were up 20% in 2010 and the amount of penalties tripled.   The SEC pipeline of significant cases remains full, encouraging the Commission’s efforts to increase efficiency and coherence in investigations.   Towards that end, the agency has created a centralized database housing tips and complaints that allows examiners and investigators to review tips received nationwide.   The database will soon provide improved search and analysis capabilities and, budget permitting, will implement analytics that uncover market trends.

Insider Trading:  A Major Focus

It seems a new story on insider trading breaks every day and there are some fairly major cases pending.  Insider trading and market manipulation remains one of the “highest priorities” of the Enforcement Division, and coordination with criminal regulators increasingly results in parallel proceedings.   The SEC noted an evolution in insider trading over the past four to five years from a close-knit circle of people exchanging confidential material information to institutionalized networks of traders.   In an action filed recently against six individual “expert consultants” and employees for the expert network firm Primary Global Research, LLC, the SEC alleged that the defendants shared material, nonpublic information with traders, allowing hedge funds to obtain more than $6 million in illegal gains.   The Market Abuse Unit is pursuing organized insider trading violations through more aggressive investigation tactics, often bringing in criminal authorities earlier in order to obtain evidence that makes the case more likely to succeed.

Foreign Corruption Also a Target

Cheryl Scarboro, chief of the Foreign Corrupt Practices Act Unit, recounted a busy 2010 with more FCPA actions in a single year than ever before, and exceeding the number brought in 2008 and 2009 combined.   The Division of Enforcement brought actions against 23 separate entities and seven individuals, resulting in disgorgement and penalties exceeding $600 million. Scarboro noted that, significantly, a number of the Commission’s cases involved foreign issuers, including Daimler AG and Alcatel-Lucent, S.A.   As was true last year, Scarboro noted that the Enforcement staff was being more “proactive” in seeking out FCPA cases, rather than waiting for issuers to self-report.   For example, the staff is continuing to focus on what it believes are “high risk” industries for investigation.   Scarboro noted that, in one recent instance, the SEC charged seven oil services and freight forwarding companies, including Panalpina, Inc., Transocean, and GlobalSantaFe, with bribing foreign officials to receive preferential treatment and improper benefits during the customs process.   This “oil services sweep” resulted in sanctions of more than $230 million.

The FCPA Unit is also focusing on individuals in order to send a much stronger deterrent message.   In SEC v. Innospec,  Inc., the SEC brought actions against the CEO, CFO, and individual agent who facilitated the bribe payments.   Unlike in a traditional FCPA case, the corporate agent that facilitated bribe payments was subject to SEC disgorgement and penalties.   Pursuing third parties who play an important role in carrying out the scheme is a significant change in approach for the agency and is expected to continue, as Scarboro tries to foster more creative and aggressive enforcement actions.

Cross-border collaboration of regulators is imperative to continued FCPA enforcement.   Scarboro stated that she and the staff are interested in seeing the results of revisions to the United Kingdom’s Bribery Act of 2010 and expects an increased number of actions by the UK Serious Fraud Office.   Domestically, the number of tips related to FCPA violations has increased greatly due to the whistleblower provisions.

Final Observation

The SEC conference made clear that the Division of Enforcement, and the Commission itself, is continuing to flex its regulatory muscle in aggressively pursuing enforcement matters.   The focus for the coming year is likely to be FCPA, financial reporting, insider trading, among other areas.   The agency will also be implementing its new Whistleblower Program, which is likely to result in many significant investigations.   Those investigations will often lead to new enforcement filings, which will incorporate many of the new remedies that Dodd-Frank has given to the SEC.   The SEC and the Division of Enforcement are currently being slowed by the lack of a budget, which will force them to pick and choose the battles they wish to fight.   However, based on the commentary at SEC Speaks, the Division anticipates that it will choose those battles wisely, and will continue to focus aggressively on protecting investors and pursuing those they believe have violated the federal securities laws.

Published: February 14, 2011 By: irthereforeiam