Day Three of PLI’s Securities Regulation Institute begins with an Enforcement Roundtable including speakers Preet Bharara, Robert Khuzami, Fried Frank’s Carmen Lawrence, Mary Jo White and Bruce Yannett of Debevoise & Plimpton and moderator Richard Walker of Deutsche Bank . Highlights from the panel are:
Updates from DOJ and SEC:
Bharara says his office has convicted 69 of 72 insider trading defendants and they are not done yet. They are also focusing on other white collar crime as well. Cybersecurity is an important area of focus both in the area of national security but also in the corporate realm. He says businesses need to pay attention to how they think about the cyber threat and what kind of programs they have in place in preparation. Public corruption also remains an important priority.
Khuzami says, while “everything” is his priority, his office has been active in the insider trading area. He says it is a problem that is always present. He doesn’t think there is anything particularly new, it is just “seductive” to those who tend to push things over the line. The only new nuance is organized insider trading in the hedge fund world. His office is also focused on market abuse, compliance failures, trading violations and investment advisers. Municipal securities and FCPA remain priorities as well.
Carmen Lawrence says the defense bar is paying close attention to insider trading “light” cases where employees who did not directly trade are caught up in the web (i.e. Mosaic). Bharara says their ultimate objective is to provide a deterrent. There are people in the white collar world who, if they appreciate the cost of the crime, will not engage in it. That is why trends of prosecution tend to be cyclical. Khuzami says he would much rather be in the deterrence business than the prosecution business but that is difficult to achieve as there will always be those who break the law. He says his office makes an effort to provide vigorous enforcement combined with an effort to show that enforcement is watching at all times (i.e. sweep of Form ADVs). Bharara says it is impossible to know specifically what the deterrent effect they are having is but they did learn from wiretaps after Galleon that targets were paying attention. While there are always people who think they can get away with it, he thinks things have gotten better. He steadfastly defends the use of wire taps as not only legal but appropriate.
Financial Crisis Cases:
Bharara says they have been holding financial institutions responsible for fraudulent mortgage practices for some time now. Various government panels are working together well to investigate and bring cases. He says they have a significant pipeline of cases and has no estimate for when the cases will end as it is not clear that financial institutions have learned their lessons. Mary Jo White says on the ground the general feeling is that various regulators could work together more rationally so they are not repeatedly hitting the same defendants. Khuzami says he has never seen better sharing and coordinating among authorities. It is not perfect but is much better than the “old model.”
Both Khuzami and Bharara address process and companies who claim to be ambushed by suits. They both say there is a great deal of process and fairness and their door is open to defendants and counsel to discuss matters before they escalate. Bharara says there have been instances where the arguments of defense counsel have caused them to change course or drop a case. There are specific instances (TRO, flight risk) where this process is not possible. At the end of the day, Bharara says no defendant is going to be happy if they are ultimately sued regardless of process. Bharara also makes it clear that his office does not enter into a deferred prosecution agreement or settlement if they are not certain they have passed a legal threshold that there was a violation of the law. They are not in the business of “extorting” companies.
This is a major issue. FBI Director Mueller has said that there are two types of companies, those who have been hacked and those who will be hacked. Bharara says any company, large or small, who is not prepared is at risk and he does not think most companies are prepared. Yannett says the assumption is everyone is vulnerable including government agencies. Companies need to think about what the plan is. A very senior person (General Counsel or the like) needs to be in charge in case of attack because many legal issues will be in play. He says law enforcement can be of significant help and should be called in immediately and public disclosure of some sort is necessary. Khuzami says if the hacking rises to a material level it must be disclosed. He does not want the disclosure to come so early as to cause greater risk but there does come a point in the continuum where disclosure is necessary.
Arguing Your Case to the Government:
Bharara says to be absolutely prepared on facts and legal arguments before they come in. He said he is often surprised by how unprepared lawyers and their clients are. Come prepared to argue the degree of economic harm between various outcomes (DPA, NPA). Other unpersuasive arguments are that the prosecutor will be embarrassed if they bring a case or that the client is not accepting of the problem and counsel needs more time to “handle” them. White says it is on defense counsel to explain early on to the board about the various outcomes and prepare them for anything.
Khuzami says he listens carefully to his staff and antagonistic relationships with the staff will get counsel nowhere. You should know your case inside and out from the very start and should be forming a strategy early on. Weak defenses and specious arguments undermine your credibility and undercut any compelling arguments that you have.
White advises counsel to put themselves in the regulators’ seat. Be candid and address what the government feels are their strongest points. Yannett says one of the challenges for defense lawyers is dealing with executives who have little experience dealing with the government. They often are angry and want to make arguments that counsel know will not be successful. It is counsel’s responsibility to manage their expectations and allow them to interact with regulators only when appropriate . Khuzami says a well prepared, knowledgeable CEO can be very effective but Bharara says CEOs should know that they will be challenged and questioned.
Next up: Whistleblowers and Investigations