Yesterday, I blogged from the Securities Enforcement Forum 2014, Bruce Carton’s excellent one-day conference, this year held at the Four Seasons hotel in Washington, D.C. The posts will be fairly raw, and certainly not verbatim accounts of what is being said.
This post covers what is essentially the SEC process panel.
Phil Khinda at Steptoe & Johnson moderating.
Brad Karp at Paul Weiss: We represented Citi in its case with the SEC. The model had worked just fine for JPMorgan, but our case landed on Judge Rakoff’s desk. We couldn’t provide the court with findings of fact with exposing Citi to huge private liability. Rakoff decided to pose nine questions to the parties, which turned out to be mostly rhetorical. He issued a ruling rejecting the settlement as unfair, unreasonable, inadequate, and not in the public interest. Second Circuit stayed the trial in a per curiam opinion wrote a blistering opinion attacking Rakoff’s opinion. Emphatic rejection of the district court. Then merits briefing. Oral argument in February 2013. Then we waited and waited. Finally in June 2014, the Second Circuit vacated Rakoff’s denial of the settlement and announced a new standard for reviewing federal consent judgments. Fair and reasonable are appropriate criteria. Adequacy doesn’t have a role in this context, and had seeped in from class actions. It’s a procedural review only, not a substantive one. SEC has showed some flexibility in seeking admissions. It is a harrowing take with a relatively happy ending.
Khinda: I want to ask about APs. The SEC has been keeping more of the work in-house as judge, jury, and executioner.
Russ Ryan at King & Spalding: I see three main issues. APs have at most a 300-day clock before a decision must be issues. Hearing within four months. Some extensions, but few. Back in the day with one-broker cases that was no big deal. Now more complex cases, multiple defendants. Very hard to get adequately prepared in time. Enforcement has to turn over the files in seven days, but it can be millions of pages dumped on defense counsel that are not organized in any way. Even if they could get through the material, many defendants can’t afford the document review. Basically no Fifth Amendment right because silence can be used against you. But the main problem is these APs are being used as penal law enforcement when it used to be for technical regulatory violations. Separation of powers issue because the SEC is acting as both prosecutor and judge. Most of the litigation so far has been respondents going to the court so far before exhausting their administrative remedies. Interesting case filed a couple weeks ago filed by Joseph Stilwell raising an interesting issue. Appointments Clause argument. Drawing an analogy to a PCAOB case. ALJs are technically appointed by the Commission and can’t be removed except for good cause. Commissioners are appointed by the President and can’t be removed except for good cause. Constitutional argument is that you can’t have that much discretion vested in ALJs with that much insulation.
Khinda: What thought has the staff given to pushback on Constitutional grounds?
Scott Friestad, Associate Director at SEC: We’re not really considering that. My starting presumption is either federal court or an AP is appropriate. Question is what is best for the Commission? We have high winning percentages in federal court and in APs. The lack of discovery affects us, too. We have to investigate cases differently knowing that discovery might not be available after we file. We might have to have experts lined up as well. We might benefit from that discovery in some cases. My decision is based in what’s better for us, not what’s better for you.
Ryan: You’re being honest about saying the query is what makes it better for us to win the case. Canellos was up here saying it’s not appropriate to think about it that way.
Friestad: Should I be filing where I’m most likely to lose? I still have to convince an ALJ that our theory is a good theory. And we’ve had a lot of success in federal courts as well. The playing field has been leveled to a certain degree by Dodd-Frank. There are good reasons to go to federal court. I don’t think internal review by GC or the Secretary’s office has ever affected my decision not to do an AP.
Khinda: What about the pre-Wells calls? Are those more prevalent?
Tom Sporkin at Buckley Sandler: There are six month deadlines for Wells notices, but they can be extended up to a year. You have to set the expectations with the client and try to cabin the staff’s scope, too. You’re trying to hit certain hot button issues. The first factual recitation is very important. When you meet with the staff. If your client can afford a formidable team with consultants and experts and you know the case well, you have a better chance of getting a better resolution.
Khinda: Exploit the procedural opportunities. We’ve been thinking about trial issues from the first day. You’re not writing for Enforcement. You’re writing for the GC’s office and the other worriers. The vibe is that they’re going to litigate. It doesn’t need to be written like an opposition brief. It needs to read like an amicus brief, and talk to the staff like they would talk to each other.
Karp: You have to pick your battles. Hyperbole and hysteria don’t work. Keep the endgame in mind and think about the entities that will be charged. Focus on the powerful individuals in the organization. Signal that if there isn’t an appropriate resolution, you will respectfully fight if necessary. Acknowledge where you’ve crossed the line.
Sporkin: Have to think about what meetings to ask for above the frontline staff level. I recently was in a meeting with Andrew Ceresney and I’ve never seen an Enforcement Director get into the weeds the way he did.
Khinda: Have to ask yourself, why did someone in the Division stop what they were doing and come looking at you? What I say to the staff is independence is a proxy for intellectual integrity. If I seem tired it’s because I’ve been running around trying to get at what the issues are. The staff wants to know that you are thinking about the issues and trying to learn them the way they would. Pick your spots and understand from the beginning why the staff is looking around. Some people say that more and more, the staff’s approach depends on who you get.
Friestad: You should care most about consistency in enforcement decisions at the end of the process. Our process is about fairness within a case and across cases. The outcomes ought to be substantially similar. Each case has nuanced facts and circumstances and the staff has to use their own best judgments.
Karp: Profound sense in the defense community that many different regulators and law enforcement authorities have been overly politicized and that the fines, suspensions, bars, etc. are only going up and up and up. Something of a foodfight among different agencies to show they are the cop on the beat.
Friestad: I’m proud of our track record on that and think we’ve done a good job on bringing cases only when they’re warranted. I think we’ve withstood that pressure to bring cases just for headlines.
Khinda: What we miss is a time when the SEC was the chief regulator and was first in line before the NY AG’s office and DOJ and others.
Friestad: There clearly is pressure because we’ve taken our fair share of criticism for not being first. From my perspective, we want not to be first, but right. When Harvey Pitt was the chairman, realtime enforcement was the mantra. Nobody since then has said let’s slow things down and have things take longer. APs fit with that approach, and can add to the deterrence value of cases.
Ryan: Welcome trend I’ve seen anecdotally. When you do get the first subpoena, I’m finding more and more that the staff sometimes will lay out chapter and verse, we think these three employees did these three things. If you can help us get to the bottom of that, we’ll limit the subpoena to that. Tremendously welcome development. If you just ask the staff, what is it you’re looking for, you might get somewhere.
Friestad: In many cases, it’s perfectly appropriate for the staff to lay its cards on the table early and can speed the investigation along. More efficient from our perspective sometimes. It doesn’t foreclose us from coming back later.
Ryan: I think the courts will eventually limit these APs to some degree.
