Publications
White Collar, Investigations & Government Controversies

Quarterly Securities Enforcement Briefing

July 2013
Print this page
Articles  

SEC May Require Public Companies to Disclose Political Spending
By John A. Goldmark

The Securities and Exchange Commission (SEC) is approaching a crucial decision on whether to require publicly traded companies to disclose their campaign spending to shareholders. This proposed rule has engendered heated debate, with the SEC receiving over 500,000 comments in support of it—the most ever for an SEC proposal. 

Supporters, led by the Coalition for Accountability in Political Spending, argue that shareholders should be given information that allows them to evaluate their company’s use of its resources and that SEC regulations already require disclosure of similar information, like executive compensation. Opponents, led by the U.S. Chamber of Commerce, contend the SEC is ill-equipped to wade into the morass of campaign finance issues, which are generally the province of the Federal Election Commission. Advocates say the proposal is about transparency in corporate political spending, while opponents say it would only serve to chill corporate speech. 

The push for this new disclosure rule finds its roots in the U.S. Supreme Court’s Citizen’s United decision in 2010, which allowed corporations to spend freely on politics. Much of that spending—at least $300 million in 2012 alone—has flowed from tax-exempt organizations that are not required to reveal their donors. Under existing SEC rules, companies generally need only apprise shareholders of expenses that exceed 3 percent of a company’s value. Nothing requires companies to inform investors about political spending. 

If enacted, new disclosure rules could have major ramifications for corporate political spending, including the potential to increase shareholder scrutiny and objections to such spending. 

SEC Chair Mary Jo White Announces Potentially Significant Change to SEC’s Settlement Policy
By Jeffrey B. Coopersmith

In a June 17, 2013 internal email to the SEC’s enforcement staff, and then on June 18, 2013 at a conference in Washington, D.C., Securities and Exchange Commission Chair Mary Jo White announced that the SEC would depart in certain cases from its traditional policy of allowing corporate and individual defendants to settle with the agency while neither admitting nor denying the SEC allegations of wrongdoing. Chair White said that, although “neither admit nor deny settlements” would remain the norm, defendants will now be required to admit wrongdoing in “certain cases where heightened accountability or acceptance of responsibility through the defendants’ admission of misconduct may be appropriate, even it if does not allow [the SEC] to achieve a prompt resolution.” The SEC’s co-enforcement chiefs, Andrew Ceresney and George Canellos, added, also on June 18, that defendants might be required to admit violations in cases of “egregious misconduct,” such as cases involving obstruction of the SEC’s investigation or harm to large numbers of investors. 

It remains to be seen when, if ever, the SEC will invoke this new policy, which appears to have arisen from skepticism about “neither admit nor deny” settlements expressed by Judge Jed Rakoff in declining to approve a 2011 settlement between the SEC and Citigroup in a financial crisis case, and subsequently by other federal judges and U.S. senators (led by Elizabeth Warren).  Defendants (or at least those with defense resources) will obviously be more likely to go to trial against the SEC if settlement means admitting to wrongdoing. This is particularly so because of the impact that such admissions would have on parallel private securities class actions and shareholder derivative cases, the possibility of criminal actions, and the availability of insurance proceeds for indemnity and defense costs. Knowing this, and knowing that financial fraud trials consume tremendous resources, it seems likely that the SEC will insist on admissions only in high profile cases that receive substantial public attention.  

Further, although The New York Times reported on June 21, 2013, that “[t]here’s little doubt that extracting admissions of wrongdoing gives the S.E.C. enormous new leverage  .  .  .,” in fact it appears that the SEC would have less settlement leverage in cases where it insists on admissions, because avoiding admissions is a substantial reason many defendants decide to settle rather than fight the SEC.  However, the SEC could gain considerable settlement leverage by threatening or implying that it will insist on admissions at a later time in the event the defendant refuses to settle on the SEC’s preferred schedule, such as before the defendant is able to use the discovery process to undermine the SEC’s case.  Such a heavy-handed SEC settlement approach was not part of Chair White’s announcement, but the specter that the SEC will engage in this type of bargaining comes with that announcement.    

Whether the SEC’s announced new approach to settlement is a fig leaf to appease Congress (to head off any legislative changes that would tie the agency’s hands), or a policy change that will have real impact on the settlement dynamics of SEC enforcement cases, remains to be seen. We will continue to monitor this issue as it develops.

FINRA Fines Financial Institutions, Suspends Executives for Inadequate AML Policies
By Omar E. Vasquez and Jeffrey B. Coopersmith

On May 8, 2013, the Financial Industry Regulatory Authority (FINRA) announced that it had issued $900,000 in fines to three financial firms and four executives for failure to implement or even establish reasonable anti-money laundering (AML) procedures. One of the firms, Atlas One Financial Group, LLC, caught the attention of FINRA after a series of failures to flag several suspicious accounts. For example, Atlas failed to identify 18 of its own accounts that shared the same suspicious name (“HP”) and mailing address (Costa Rica) as six other Atlas accounts that had been frozen by the Department of Justice in connection with a criminal investigation into a scheme to launder millions of dollars to bribe members of the Italian judiciary. Further, Atlas failed to report clients who did little trading, and instead used their account primarily to send and receive wire transfers, including transfers that vastly exceeded the client’s reported net worth and annual income. FINRA fined the firm $350,000 and its AML compliance officer $25,000. Two other firms, Firstrade and World Trade Financial (WTF) were fined $300,000 and $250,000 respectively after failing to report suspicious account activity typically associated with money laundering schemes, including market manipulative trades and trades in unregistered, nonexempt securities. Two WTF executives were also fined ($40,000 and $5,000, respectively), and were suspended from serving in a principal capacity for several months.

FINRA’s crackdown comes pursuant to the Bank Secrecy Act’s AML program requirement, 31 U.S.C. § 5318(h), which instructs all financial institutions to create policies to combat money laundering. Section 5318(h) provides that all AML programs shall at a minimum establish internal policies, designate a compliance officer, implement ongoing employee training, and allow for independent auditing. The SEC, the Financial Crimes Enforcement Network (FinCEN), the Commodity Futures Trading Commission, and the Banking agencies have prepared guidance for compliance with the AML program requirements.

Regulators are increasingly focused on money laundering compliance and enforcement, and are raising the bar for AML compliance to the highest it has ever been. Last year, AML fines totaled $1.1 billion, increasing 131-fold from the previous year. And this year, regulators are on pace to doubling the number of AML fines as compared to last year. One regulator notes that many banks continue to lack even the most basic AML components, particularly small and midsize institutions like credit unions, which often lack the AML expertise of larger banks. All financial institutions should be aware of the regulatory risk for failing to establish adequate AML procedures.

Government Eyes Executive Trading Plans in Wake of Press and Investor Pressure
By Jean M. Flannery

Corporate insiders often buy and sell an issuer’s securities under “10b5-1” trading plans to guard against insider-trading allegations. But these plans have come under heightened scrutiny in 2013. The Securities and Exchange Commission (“SEC”) is “looking into” allegations by the Council of Institutional Investors (“CII”) that corporate insiders have been abusing these plans. And a Wall Street Journal article on potentially improper trading at public companies prompted federal officials to issue subpoenas mere days after the article’s publication.

Enacted in 2000 to clarify the meaning of “insider trading,” SEC Rule 10b5-1 prohibits trading “on the basis of” material nonpublic information about a security or issuer in breach of fiduciary duties. But the rule also gives company insiders affirmative defenses to insider-trading charges, including the “10b5-1 plan” defense: First, the insiders must have established the written plan before learning the material nonpublic information. Second, the 10b5-1 plan must either (1) specify the quantity, date, and price of the trades; (2) include a formula for arriving at these figures; or (3) not permit the insider to have any influence over the trades (provided that whoever does exercise that influence does not know the material nonpublic information).

On April 25, 2013 The Wall Street Journal published an article highlighting directors’ increasing use of 10b5-1 plans to sell heavily in a short period, sometimes in investment funds they run. In one instance, a director at Tesla Motors Inc. set up a 10b5-1 plan at the private equity fund he runs in November 2011. In February 2012, a Tesla investor told Tesla that he planned to sell a large amount of Tesla stock. In March, the director sold $31 million of Tesla stock over the course of eleven days. Tesla’s stock sank when the investor sold $100 million in Tesla stock in early April. The article gave other examples of suspicious trading, including directors amending existing trading plans without explanation shortly before issuers released information that jolted their stock price.

On April 30, the Journal reported that the U.S. Attorney’s Office for the Eastern District of New York had issued subpoenas requesting information from the companies and funds cited by the April 25 article. That article also apparently prompted the CII to send its second letter to the SEC on May 9, 2013, criticizing Rule 10b5-1. The CII, which represents large pension funds, believes that the current rule permits many company insiders to adopt practices inconsistent with the rule’s spirit, if not its letter. The CII urges the SEC to curb these practices by putting in place new 10b5-1 restrictions. For example, CII argues, there should be a mandatory three month or more delay between putting a 10b5-1 plan in place and making the first trade. In addition, the SEC should restrict the number of modifications or cancellations that insiders can make to these plans—and insiders should have to disclose these changes. CII also proposes that company boards should have to adopt policies for and monitor 10b5-1 plans.

The SEC has not indicated that it intends to amend Rule 10b5-1.But given the government’s recent scrutiny, corporations should consider revisiting and reviewing their Rule 10b5-1 plans and policies.

SEC Makes Second Dodd-Frank Whistleblower Award and Hints at Larger Awards to Come
By Jean M. Flannery

On June 12, the Securities and Exchange Commission (“SEC”) announced its second-ever whistleblower payout under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).

The whistleblower program began operating in August 2011, but enforcement actions can take several years to complete. This award arose from a 2011 action alleging that Andrey Hicks sold “wholly fictitious” investment fund shares to investors. Hicks pled guilty to criminal charges and received 40 months in prison, and a U.S. district court ordered $7.5 million in disgorgement and penalties.

The whistleblower payout will award each of three whistleblowers 5 percent of whatever funds the SEC ultimately collects from the enforcement action. As we reported last year, the SEC made its first payout under Dodd-Frank in August 2012. That award amounted to only $50,000, but constituted 30 percent of the amount the SEC had collected.

The Chief of the SEC’s Office of the Whistleblower commented, “We are likely to see more awards at a faster pace now that the program has been up and running and the tips we have gotten are leading to successful cases.” And the SEC Division of Enforcement Associate Director recently warned of a “likely change in the discussion about the magnitude of some of these awards over the next six to twelve months”—a prediction supported by the whistleblower program’s substantial funding and financial incentives for employees. 

Related Articles