Conclusion: SEC Enforcement Trends And Priorities, 2008
The SEC’s enforcement program has long been known as having at least two key facets. On the one hand is a “cop on the beat,” essential to maintaining the integrity of the nation’s capital markets. On the other, it has engaged in “regulation through litigation,” often pushing the edges of, and in some instances redefining, the law.
Both of the program’s historic characteristics are evident in the cases brought last year. At the same time, a review of the SEC’s enforcement program over the last year leaves more questions than it answers as to its direction and overall vitality.
The increased number of cases suggests that the program is more robust. At the same time, a number of those cases involve the delisting of largely micro-cap companies for failing to file periodic reports. This alone raises questions about that statistic, suggesting, at a minimum, that they do not tell the entire story.
More questions are raised by the significant drop in the amount of court-ordered disgorgement and penalties. While some reduction can be explained by the lack of huge cases such as Worldcom, the 50% drop in these numbers last year raises clear questions and concern. Those questions are amplified by the recent efforts of the Chairman to defend the enforcement program results before Congress by claiming that this year penalty and disgorgement orders are at record levels. That might be true if the $600 million figure from the settlement of Dr. McGuire is included. Trouble is, most of that sum is from the private actions the SEC combined with its settlement. Reportedly, the Commission made little if any contribution to the private case settlements.
A review of key policies and procedures not only raises questions, but suggests an entrenched program that may be unwilling to consider improvements. To date, the impact of Chairman Cox’s new corporate penalties program is debatable, at best. At the same time, it does raise significant concerns about the vitality of the settlement procedures. Those concerns are not ameliorated by the fact that the agency seems to have ignored the suggestions for reform by Congress and others calling for new procedures and that cooperation policies. This apparent unwillingness to improve the program may ultimately undermine its goals. This may be particularly true if conduct such as that approved in Stringer – where SEC attorneys acted as stalking horses for DOJ prosecutors under the guise of Form 1662 – is permitted to continue. Such tactics cannot be expected to yield cooperation.
These questions are amplified by matters such as the botched Pequot investigation, SEC v. PacketPort.com, which was dismissed for want of prosecution and SEC v. Jones, where much of the relief sought by the Commission was denied as time barred. Equally troubling are the hedge fund/PIPES cases, where the courts have raised questions not only about the legal theory being argued by the SEC, but its candor in presenting the case.
At the same time, the Commission has continued to focus in its traditional enforcement areas with success. While the number of insider trading cases may not have significantly increased last year, there should be little doubt that the agency has placed a renewed emphasis on the area and in many instances is taking an aggressive posture. This is clearly evident in actions such as the Barclays Bank case and the repeated warnings about the misuse of Rule 10b5-1 plans.
The enforcement program also has a renewed emphasis on the FCPA. While this has long been a traditional enforcement area, the re-emphasis last year will clearly continue into this year. That focus will be keyed to bringing actions against individuals. It can also be expected to continue to take an expansive approach to interpreting the statutes.
In other traditional areas such as financial fraud, the Commission will no doubt continue to bring cases. Earnings management, the misuse of reserves, premature earnings recognition and similar improper conduct will continue to be probed. At the same time, many of the cases brought in this area reflect long past conduct. These often ancient actions raise significant questions regarding the necessity for the traditional SEC injunction and whether such relief is really to prevent future violations or punish past transgressions.
Overall, there is no doubt that the enforcement program continues to be “cop on the beat,” and, in some instances, to push the edges of the law. Cases are being brought in traditional areas such as insider trading, FCPA and financial fraud. Yet, repeatedly ignoring calls for reform or improvement, as well as criticisms by the courts and others, presents significant concerns about the vitality of the program.
The key to the enforcement program has always been strong direction and leadership from the top. As the Commission likes to say “tone at the top” is critical. So too, for the enforcement program. Tone at the top, and strong leadership from the top, is a necessity. The current program seems in search of these qualities.