We are kicking off day three of the Securities Regulation Institute with a panel entitled The Government Enforcement Agenda and Practical Handling of Enforcement Issues. The panel features an all-start lineup with Mary Jo White of Debevoise, Preet Bharara from the U.S. Attorney’s Office for the Southern District of New York, Bill Johnson of Fried Frank, SEC Enforcement Chief Robert Khuzami, Mark Pomerantz of Paul Weiss, Former Enforcement Chief Linda Chatman Thomsen, now with Davis Polk (and a Practice Center Contributor!) and Sean Hecker of Debevoise. Here are some of the highlights from this exciting panel:
Rob Khuzami says there has been a concentration on cases from the credit crisis and they have been highly successful. They have taken a hard look at companies in the mortgage business and whether they made proper disclosures when times went bad (Beazer Homes, Countrywide, AHM are good examples). Significant settlements have come from these cases. Fund cases are also important with the revelations that some funds did not disclose their exposure to subprime securities. Retail cases where complex products were sold to investors with conservative goals have also been pursued and Khuzami puts the Goldman Sachs case into this category. Individuals have also felt the heat. He says they have charged four CEOs, three CFOs and eleven senior officers. Of these, eight have settled for millions in disgorgement and penalties. Khuzami says traditional enforcement cases such as insider trading, misleading/fraudulent financial statements and FCPA are also a priority. He says there is a lot of hiring of industry experts going on across the division and the new RiskFin Division is training SEC staff so they are up to speed on the issues presented by complex cases.
Department of Justice:
Preet Bharara says the Financial Fraud Enforcement Task Force set up a year ago by President Obama has improved coordination of federal enforcement agencies and he says to expect further cooperation due to Dodd-Frank mandates. He also said they are looking for opportunities to prosecute people for perjury when they are suspected of lying in SEC investigations. Insider trading investigations are a major priority for his office. He says it is “far too common and far too casual” these days. There is a continued focus on ponzi schemes and he says they are focused on getting as much recovery as possible for the victims. This requires making a tough call on when to act if the scheme is ongoing. Bharara also says there is a trend towards increasingly aggressive techniques because of the complexity of securities products and the need to act quickly. He says they will continue to use wire taps in insider trading investigations. Bharara also mentions the breaking news that Britain will now tape the global calls of traders (including business cell phones) and says the British are leading the way in this regard. He ends with a warning that we have seen an uptick in judges handing out incarceration for white collar crime and long sentences are becoming more common.
Linda Thomsen says far and away the most important provision of Dodd-Frank in this area is whistleblowing. Bounties of between 10-30% for settlements of $1 million or more are mandatory now. This means the minimum bounty would be $100,000 which Thomsen points out is nearly twice the median income of U.S. households. Whistleblowers are also protected from retaliation in addition to being rewarded. Two issues to think about are whether the money will actually lead to more high quality tips (it will certainly lead to more in general) and whether the rule will put a wedge between the personal interests of employees and the business interests of a company. SEC and CFTC must implement final rules by April and both agencies have already issued proposed rules. Khuzami says there is no reason to think these whistleblower tips will be treated any differently than how they are treated already. He thinks it likely that the SEC would go to a company and ask them to look into the matter on certain tips. The SEC’s proposed rule tries to support internal compliance by allowing people 90 days from when they report to their employer but Thomsen thinks allowing and not requiring may not make much of a difference. Legal and compliance professionals are likely not eligible since information they learn during an investigation is not original. Whistleblowers are subject to perjury prosecutions for lying.
Sean Hecker discusses last week’s settlements in the Panalpina, Inc. cases. The cases were coordinated with the DOJ Fraud Section and settlements total $236.5 million and Panalpina was the first non-issuer charged in an FCPA case. Hecker says the various penalties and disgorgements show the benefits of self-reporting as those defendants who did so paid a lower price in the end and he notes that none of the settlements included a corporate monitor. Pharma, arms suppliers and tobacco industries have also been targeted in the past year. There is also an increasing use of non-FCPA statutes such as mail fraud.
Next up – Private Securities Litigation