From the Horse’s Mouth: Highlights of “SEC Speaks” 2014
On Feb. 21 and 22, 2014, the SEC held its annual “SEC Speaks” conference featuring speeches by a number of senior SEC officials. The conference provided valuable insights into the SEC’s enforcement concerns and priorities, and these are summarized below.
Renewed focus on financial fraud cases
Financial fraud cases, such as accounting fraud cases against public companies and their officers and directors, have made up a declining percentage of the SEC’s workload in recent years. At the conference, the director of the SEC’s Fort Worth office, David Woodcock, explained that, in response to this trend, the SEC created a new task force, the “Financial Fraud and Audit Task Force.” Woodcock noted that this new task force would seek to increase enforcement in this area by, among other things, relying on whistleblowers and ramping up the use of data mining. For example, Woodcock described a tool known as the “Accounting Quality Model,” or AQM, being developed by the SEC’s Division of Economic and Risk Analysis. Details of the AQM are not clear, but it appears to be an earnings quality tool designed to examine such things as differences between actual cash flows and book income, in an effort to identify companies that may have improved their earnings using discretionary accounting judgments.
Increased use of administrative actions
The SEC’s Assistant Chief Counsel, Charlotte Buford, spoke about the SEC’s interest in bringing more cases as administrative actions instead of federal district court cases. Buford pointed to recent legislative changes that now allow administrative law judges as well as federal district judges to impose disgorgement and penalties against any company or individual rather than just regulated persons. Many defense lawyers perceive the administrative forum as a home court advantage for the SEC, although Buford did not mention that as a factor in her speech. Rather, Buford said that the SEC would elect to pursue cases through the administrative or federal court route depending on such factors as the need for speed in resolving the matter, the need for extensive discovery available in federal court actions, and the likelihood of settlement that may be more favorable to a defendant in the administrative forum.
The SEC’s FCPA Chief, Kara Brockmeyer, discussed the SEC’s continued focus on FCPA cases. Brockmeyer noted that issues with travel and entertainment expenses make up the bulk of the SEC’s current FCPA investigations. Brockmeyer also went through the factor that led the SEC to enter into a non-prosecution agreement with Ralph Lauren Corporation in connection with alleged bribes to government officials in Argentina. The company did not face formal enforcement because it very promptly self-reported to the SEC after discovering the issue through its internal compliance procedures, fully cooperated with the SEC’s investigation including by translating documents and bringing foreign witnesses to the United States, and undertook a worldwide compliance review that concluded that the issues were limited to Argentina. The SEC’s press release on the Ralph Lauren matter is available here. The release notes that the company did have to pay over $700,000 in penalties and interest to the SEC pursuant to the agreement, as well as an additional $882,000 penalty to the Department of Justice pursuant to a parallel criminal non-prosecution agreement.
Remarks by SEC Chair Mary Jo White
The SEC Chair, Mary Jo White, focused on her decision to require defendants “in appropriate cases” to admit wrongful conduct when settling with the SEC. We reported on this development previously—see here. Chair White said that the “appropriate cases” would be those that are “particularly egregious,” harmed many investors, placed markers at significant risk, or involved conduct that undermined the investigative process. Chair White also said that the SEC might require admissions if it would “send a particularly important message to the markets.” Obviously, these factors give the SEC a great deal of discretion in deciding when to require admissions of wrongdoing in settlements.