[author: David Smyth]
Yesterday I attended the Securities Enforcement Forum 2012 at the Mayflower Hotel in D.C. Bruce Carton organized an excellent day of panels devoted to a number of securities enforcement topics. Here is the full agenda from the day. Several things jumped out at me as noteworthy.
More Use of Section 21(a) Reports
The Hon. Stanley Sporkin, a former federal district judge and a former director of the SEC’s Enforcement Division, had an interesting comment about the SEC’s recent spate of insider trading cases. Some of them seem borderline to him, and he wondered aloud if the SEC should be charging individuals with securities fraud in cases where materiality and a duty not to trade are not clear. In doing so, he drew an interesting parallel to criminal prosecutors, who often have the choice to charge either a felony or a misdemeanor depending on the evidence and the severity of the allegations. The SEC doesn’t always have such flexibility in terms of what it can charge, but it does have an underused tool available to it.
The SEC could claw back profits and use its authority under Section 21(a) of the Exchange Act to publicize what it sees as bad conduct without leaving people with the “fraud” stigma. That provision authorizes Commission investigations and also allows the SEC “to publish information concerning any [securities] violations.” It happens rarely, typically less than once a year, but occasionally the SEC will use that authority to publish a report that explains the arguably bad conduct without bringing an enforcement action. A number of them are listed here. The procedure allows the SEC to draw a line for others to study and stay on the right side of. The SEC v. Steffes case in the Northern District of Illinois might have been an excellent case for that process.
FCPA Declination Opinions
The FCPA panel in the morning discussed the recent Morgan Stanley / Garth Peterson matter at some length. As discussed in this space in May, in that case the SEC and Justice Department issued their first declination opinions explaining why a company was not being charged with FCPA violations. Jeffrey Knox, the deputy chief of the Department’s Fraud Section, noted three keys that led them to a decision not to charge Morgan Stanley for violations arising out of Peterson’s misconduct: (1) the company’s comprehensive compliance program; (2) Peterson was a rogue employee disregarding that program; and (3) the company’s voluntary disclosure and remediation after the violations were discovered. In discussing whether companies should or should not self-report violations to either agency, the SEC’s FCPA Unit Chief, Kara Brockmeyer, noted that a number of companies have made quick self-reports that have resulted in no enforcement action at all. This strikes me as quite interesting. Many have urged the SEC and DOJ to publish declination opinions regularly, as such opinions would give substantial clarity to companies weighing whether to disclose minor violations. Unfortunately the panel did not get into whether either agency would consider such an approach.
Self-Reporting Violations
A morning panel spent significant time discussing the value and risks of voluntarily disclosing securities violations to the SEC and Justice Department. The government representatives – Steve Cohen from the SEC and Deborah Connor from the U.S. Attorney’s Office in D.C. – encouraged self-reports as a way to lessen penalties on a company (perhaps obviously). But Cohen noted that not everything was worth self-reporting. And he said that without a voluntary disclosure, the SEC could still be persuaded that a company has taken a potential violation seriously since its discovery. Bill McLucas, another former director of the SEC’s Enforcement Division and currently the leader of the securities group at WilmerHale, said that if voluntary disclosures are not appropriately rewarded that real damage is done to the system. He also said that at the end of the day, he worries that lower level Justice Department staff cannot always stand behind the assurances they’ve made about the benefits of self-reporting.
It was a really good conference, and well attended for its first year. I suspect it will catch on and become a regular staple of the conference circuit in years to come.
