Quarterly Securities Enforcement Briefing
- SEC and DOJ Continue to Intensify Foreign Corrupt Practices Act (FCPA) Enforcement for 2014
- Shakeup in SEC Leadership May Impact SEC Rulemaking
- SEC Holds Overall Winning Record But Loses Several High Profile Cases in 2013
- Supreme Court Case May Curtail Private Suits for Securities Fraud, But Public Enforcement Actions Will Not Be Affected
- Largest Bank Secrecy Act Settlement in History Entered Into by JPMorgan Chase
At the American Conference Institute’s 30th International Conference on the FCPA, held in the end of November last year, regulators from the SEC and DOJ both indicated that 2014 will prove to be another year of increased FCPA scrutiny and enforcement. Both agencies touted strengthened relationships with other U.S. agencies and overseas regulators, which will allow the SEC and DOJ to identify FCPA violations and bring more enforcement actions in 2014.
The SEC’s co-director of the enforcement division indicated that, in particular, the SEC expects FCPA violations will become “increasingly fertile ground” for the Dodd-Frank whistler-blower program. We previously reported on the SEC’s whistleblower award program under Dodd-Frank here. The DOJ estimated that it is currently investigating more than 150 cases of potential FCPA violations and expects to bring “very significant cases, top 10 quality type cases” in 2014. Officials from both the SEC and DOJ emphasized their continued focus on individual prosecutions, and cited several pending FCPA actions against high-level executives.
Both the SEC and DOJ discussed the importance of self-reporting potential FCPA violations by companies, and restated their willingness to show leniency for those who quickly self-report and work with the agencies to find solutions.
Shakeup in SEC Leadership May Impact SEC Rulemaking
By John A. Goldmark
At the end of last year, Mary Shapiro announced that, after four years of leading the SEC, she will be stepping down as chairman. President Obama designated Elisse Walter, a current SEC commissioner, as chairman and she will serve in that position until a long-term successor is found. This change in SEC chair is unlikely to create any significant changes at the top, as Ms. Walter is regarded as a close ally of Ms. Shapiro.
One interesting issue with this leadership change, however, is the potential impact on pending SEC rulemaking initiatives. Ms. Walters, a Democrat, was one of five commissioners, and her departure will leave a 2-2 party-line split among the commissioners until President Obama nominates a successor who is confirmed by the Republican-controlled Senate.
SEC Holds Overall Winning Record But Loses Several High Profile Cases in 2013
By Candice M. Tewell
2013 ended on a tough note for the SEC. The public and the media have repeatedly wondered why, five years after the financial collapse, the SEC has yet to hold any prominent Wall Street executives accountable for the enormous damage done to the global economy. Of course, one reason may be that there is a difference between allegedly unethical behavior and illegal conduct, and securities violations often involve complex and uncertain evidence. Nevertheless, the SEC’s record at trial against those executives who have been the subject of enforcement actions has been spotty lately. Although the SEC continues to win about 80 percent of its trials, including several victories in 2013 (not to mention settlements), the SEC closed the year with three high profile losses.
Securities and Exchange Commission v. Jensen: Most recently, on Dec. 10, 2013, after an eight-day bench trial, Judge Manuel Real in the U.S. District Court for the Central District of California rejected all of the SEC’s accounting fraud allegations against two former executives of Basin Water Inc. The SEC had accused Basin’s former CEO Peter Jensen and former CFO Thomas Tekulve of engaging in “sham transactions” to boost reported revenues from the sale of their groundwater pollution purification systems. But Judge Real found that the SEC failed to present sufficient evidence that Jensen and Tekulve intentionally misled anyone or were reckless in their accounting practices.
Securities and Exchange Commission v. Kovzan: Just one week earlier, on Dec. 2, 2013, a federal jury in Kansas acquitted Stephen Kovzan, CFO of NIC Inc., of all charges brought by the SEC. In January, the SEC had charged Kovzan with 12 counts of securities fraud, violation of the internal controls provisions, and aiding and abetting NIC’s alleged securities law violations. The charges all related to a scheme to conceal $1.18 million in payments to former NIC CEO Jeffery Fraser to cover personal expenses, including vacations, spa treatments, clothes, and commuting by private jet (these payments should have been reported as compensation). The SEC sought financial penalties, injunctive relief, and to bar Kovzan from serving as an officer of a publicly traded company. But after a three week trial, the jury answered every question posed on a 15-page verdict form in Kovzan’s favor and acquitted Kovzan on all 12 counts
Securities and Exchange Commission v. Cuban: Perhaps the highest profile SEC case of the year, the SEC took on billionaire Mark Cuban (owner of the Dallas Mavericks) and lost. In January 2008, the SEC filed insider trading charges against Cuban related to his sale of his stake in a Canadian Internet company. But on Oct. 16, 2013, a jury in Dallas (in the U.S. District Court for the Northern District of Texas) acquitted Cuban of all charges after less than five hours of deliberation. The jury explicitly found that the SEC failed to prove that Cuban had received material, non-public information or that he had promised not to act on that information.
In an upcoming case, Halliburton Co. v. Erica P. John Fund, Inc., the U.S. Supreme Court will reassess the pivotal “fraud-on-the-market” presumption that aids private plaintiffs in securities fraud class actions. We analyzed the potential impact of Halliburton in a previous release. In private class actions, this presumption typically allows plaintiffs to allege and satisfy the element that they relied on the defendant’s alleged public misstatements in purchasing a security without having to prove actual reliance. In the context of civil and criminal enforcement actions brought by the SEC and the DOJ, however, the government need not prove the reliance element. The government may bring securities enforcement actions based on, for example, false statements in public company filings, without having to prove that any investors relied on the statements. Thus, if the Court abandons or weakens the doctrine, private securities litigation—particularly class actions—will suffer, but SEC and DOJ enforcement actions should not be affected.
In fact, SEC enforcement has ballooned in recent decades, and Halliburton will likely do nothing to abate it. The Commission has extracted over $10 billion in disgorgement judgments between 2002 and 2007, and over $2 billion each in 2009 and 2011. Since 1988, its budget has increased nearly ten-fold. The SEC also may seek remedies not generally available in private litigation, such as injunctive relief and bars precluding individuals from serving as officers or directors of publicly traded companies. The DOJ, of course, may also seek prison time in criminal enforcement cases.
Largest Bank Secrecy Act Settlement in History Entered Into by JPMorgan Chase
By Jeffrey B. Coopersmith
Although not a securities enforcement case, a recent case arising under the Bank Secrecy Act is nevertheless worth noting here because it underscores that the federal government is increasingly using criminal enforcement tools to address alleged violations that historically would have been the subject of only regulatory, administrative, or civil actions. This applies to all areas of government enforcement, including enforcement of federal securities laws and regulations.
On Jan. 7, 2014, Chase agreed to pay a total of $1.7 billion to the U.S. Department of Justice and $350 million to the Office of the Comptroller of the Currency (the bank’s primary federal regulator). The payments were made in order to settle allegations that the bank violated the Bank Secrecy Act by maintaining a banking relationship with the Ponzi schemer, Bernie Madoff. The $1.7 billion paid to the DOJ was required by the terms of a “deferred prosecution agreement.” A deferred prosecution agreement, or DPO, is a mechanism where the DOJ files criminal charges, but final resolution of the charges is deferred and then later dismissed upon compliance by the defendant with specified terms, including compliance requirements and payment of the fine. Unlike a typical civil settlement, a DPO requires an actual admission of criminal liability.
The admission of liability in the Chase settlement came in the form of a 17-page statement of facts agreed to by the bank and the DOJ. The factual statement was meant to support two criminal charges: (1) willfully failing to establish or maintain an effective anti-money laundering (AML) program, and (2) willfully failing to file a Suspicious Activity Report (SAR) regarding Madoff’s activities. Commentators have debated whether the conduct of Chase as set forth in the factual statement truly satisfies the requirement for the bank to have acted “willfully.” Some commentators assert that the factual statement does not show that anyone at Chase actually made an intentional (willful) decision to have a non-effective AML program or to help Madoff. Apparently, different business units within Chase, including a banking group in New York that handled Madoff’s accounts, a London-based derivatives trading group called the “equity exotics desk,” as well as various compliance groups, did not communicate well with each other. For example, the London-based group was very concerned about exposure to fraud risk at one point, and it even filed an SAR with U.K. authorities shortly before Madoff was arrested. However, the New York-based banking group was not informed.