by T. GormanPosted on Posted in SECActions

There is more than a renewed emphasis on insider trading, if last week is any indicator. Insider trading is dominating the regulatory landscape, again suggesting that issuers and executives carefully review compliance procedures and trading programs and carefully consider the timing of securities transactions not made within the confines of a Rule 10b5-1 plan. Key events from last week support this thought.

DHB INDUSTRIES, INC. – The SEC and DOJ have brought insider trading charges against former top executives of this defense contractor. In SEC v. Brooks, Civil Action No. 07-61526 -CIV-Althonaga/Turnoff (S.D. Fla. Filed October 25, 2007), the Commission filed fraud charges against David H. Brooks, former DHB CEO and COB. The complaint alleges a pervasive accounting fraud between 2003 and 2005 and insider trading by Mr. Brooks. At the same time the SEC filed its complaint, the U.S. Attorney’s Office for the Eastern District of New York announced that it was filing criminal insider trading and securities fraud charges against Mr. Brooks, who was arrested in Florida on October 25. Previously, criminal securities charges had been brought against former DHB CFO Dawn Schlegel and former COO Sandra Hatfield. U.S. v. Hatfield, 06-CR-550 (E.D.N.Y.). A superseding indictment will be filed in that case including Mr. Brooks. The Commission’s Litigation release, which also summarizing the criminal action, can be viewed here.

SEC TEMPLATE – The SEC Office of Compliance and Exanimations announced that it is testing out a new template for its inspections which includes an insider trading component. Frequently, when the SEC conducts examinations, firms do not perform testing for potential insider trading problems. This new template will require the firms to focus on and assist the SEC staff in reviewing the issue.

This action follows a staff request in an August letter to hedge funds seeking selected information about persons who have access to inside information. The apparent purpose of this information request, which is raising privacy concerns among many, is to create some type of inside trader profile.

RULE 10b5-1 PLANS – The SEC enforcement staff has commented previously on the fact that it is reviewing Rule 10b5-1 plans to determine whether executives are using the plans in a manner which gives them some type of trading advantage in the markets – something that was not intended when the safe harbor was created. These comments come in the wake of an academic study suggesting that executives using the plans are achieving above market returns. That conclusion at least raises a question as to whether the plans are being properly used. No cases have been brought to date, although there have been media reports of SEC inquiries focused at least in part on the question such as those regarding the Countrywide investigation.

The word from the SEC staff, however, is “watch for something shortly” on this issue. This is the substance of a comment made by a senior enforcement staff official at the ABA National Institute on Securities Fraud which is concluding today in Washington, D.C.

FOREIGN MARKETS – The increasingly intensifying focus on insider trading is not just the U.S. Congress, SEC and DOJ. Rather, for months there have been reports of rampant insider trading around the globe. Last week was no exception. There were reports of insider trading investigations or actions not just in the U.S., but also Singapore, Belgium, France, South Africa and Canada. This continuous stream of reports is no doubt the cause of the increasing global and national efforts of the SEC and DOJ to detect and prosecute insider trading. In the weeks to come, expect to see this trend continue. Again, prudent issuers and executives should consider the clear warning.

by T. GormanPosted on Posted in SECActions

SEC Commissioner Paul Atkins recently called for the formation of a “new ‘Wells-like’ advisory committee to review the policies and procedures of our enforcement program. The Commission and the staff should welcome, not fear, such a review.” Remarks at the Eighth Annual A.A. Sommer, Jr. Corporate, Securities and Financial Law Lecture, October 9, 2007 (the full text of Commissioner Atkins’ comments can be viewed here). 

The purpose of this Committee would be much the same as the original Wells Committee formed in 1972. According to then-Chairman Casey, that Committee was formed because it is “essential for the Commission to redouble its efforts to keep in touch with the best thinking on investor protection at the private bar, in the accounting profession, and in the financial community generally.”

Chairman Casey’s comments are as true today as they were when he made them thirty-five years ago – perhaps even more so. Today, the Division of Enforcement faces continued, difficult challenges. While the staff of that division has and continues to serve with distinction, working tirelessly to carry out its mission, a breath of fresh air and an induction of new ideas would serve to continue propelling it forward and continue its critical mission. This is particularly true now in the wake of various reports calling for reform and more. The recent GAO and Senate reports, for example, both point to a need for reform and improvement.

The recommendations of those reports are fortified by a review of cases brought by the Division. Despite many significant successes, some recent cases brought by the Division are years old – to the point of being stale. In other instances, courtroom losses such as the one in SEC v. PacketPort.com, Inc., Civil Action No. 3:05cv1747 (D. Conn. Filed November 16, 2005), discussed here last week, serve point to the obvious need for a new look and fresh ideas.

The mandate of this new Committee should be forward looking and not respective. Its charge should be to seek out the best ideas to assist the Division and the Commission as it moves forward to meet the increasing challenges of tomorrow, not to be critical of the past. In view of the critical and daunting mission of the Enforcement Division and its role in safeguarding the nation’s capital markets, we should demand no less. Hopefully, Commissioner Atkins’ call for new advisory committee on enforcement procedures will be quickly heeded.