SEC Enforcement 1Q13, A Need to Rejuvenate

The end of the first calendar quarter is a good point to take stock of securities enforcement actions and the efforts of regulators, focusing first on basic statistics and then on significant cases filed and decided. Statistics for the quarter reflect a drop in the number of SEC enforcement actions filed for the period. In the past quarter the Commission filed just 47 enforcement actions compared to 51 during the first quarter of 2012, excluding tag-along and 12(j) proceedings.

While a drop in the number of actions being filed might be expected after two years of record setting numbers, an analysis of significant cases brought during the period raises additional concerns. To be sure, there were significant actions brought and decided centered largely on insider trading. Those include:

Netflix 21(a) Report: The report is significant not just for the prudent exercise of prosecutorial discretion in choosing not to bring an action but, more importantly, for the updating of Commission disclosure policy to recognize the impact of social media such as Facebook and Twitter. Exchange Act Release No. 69279 (April 2, 2013), Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934, Netflix, Inc., and Reed Hastings.

SAC Capital: This insider trading case was settled for over $600 million, the largest such settlement. SEC v. CR Intrinsic Investors, LLC, Civil Action No. 12 Civ. 8466 (S.D.N.Y. Amended complaint filed March 15, 2013). SAC Capital was only a relief defendant. Mr. Martoma, who is at the center of the case, has yet to go to trial. In addition, the Court has not approved the settlement, although that may stem from the unusual posture of the case since the civil action has been tentatively settled prior to the criminal case and the Second Circuit is considering the role of the district court in approving SEC settlements in the Citigroup action. See also SEC v. Steinberg, 13 CV 2082 (S.D.N.Y. Filed March 29, 2013); U.S. v. Steinberg, S 4 12 Cr. 121 (S.D.N.Y. Unsealed March 29, 2013)(based on essentially the same conduct charging another affiliate of SAC Capital).

H. J. Heintz: This is another of the SEC's very aggressive "suspicious trading" insider trading actions, filed just one day after the transaction announcement based largely on the outsized trading in the case. SEC v. Certain Unknown Traders in the Securities of H.J. Heinz Co., Civil Action No. 13-CIV-1080(S.D.N.Y. Filed Feb. 15, 2013). While the Commission has yet to identify the traders, in the past the agency has had good success in this regard. See, e.g., SEC v. Well Advantage Ltd., Civil Action No. 12 cv 5786(S.D.N.Y.) (filed against a number of unknown traders, several of whom were recently identified and settled).

Valuation: In the Matter of Oppenheimer Asset Management Inc., Adm. Proc. File No. 3-15238 (March 11, 2013) is significant because it appears to be part of a new trend which is an outgrowth of recent initiatives by the Enforcement Division to add expertise and refine its investigative approach.

In addition to these actions there were three significant court decisions during the quarter:

Statute of limitation: In Gabelli v. SEC, No. 11-1274 (S.Ct. Decided February 27, 2013) [an enhanced version of this opinion is available to lexis.com subscribers] the Supreme Court, in a unanimous decision, rejected the SEC's efforts to write a discovery provision into the five year statute of limitations for seeking a penalty under Section 2462 of Title 28. While the decision is hardly surprising in view of the plain language of the Section, what may become more significant is its application to an issue not raised in Gabelli. The Supreme Court did not consider the application of the limitation period to the Commission's equitable remedies. That issue was considered in SEC v. Bartek, No 11-1-594 (5th Cir. Decided Aug. 7, 2012) [enhanced version]. There the Fifth Circuit not only rejected the SEC's view of Section 2462 before the Supreme Court's decision, but declined to issue and injunction or an officer and director bar in view of the age of the claims. The Commission initially requested that the Supreme Court review both rulings but recently secured an order dismissing its petition in view of Gabelli. Thus Bartek stands and the agency has effectively acquiesced in the ruling which could significantly expand in the impact of Gabelli.

Personal jurisdiction/FCPA: SEC v. Straub, No. 11 Civ. 9645 (S.D.N.Y. Opinion issued Feb. 8, 2013); SEC v. Sharef, No. 11 Civ. 9073 (S.D.N.Y. Opinion issued Feb. 19, 2013). The rulings in these two cases give definition to the reach of the Commission in FCPA cases against individuals. Both cases stem from settled corporate FCPA cases. Both were brought against individuals alleged to have been involved in the wrongful conduct, all of which took place overseas. In Straub the court sustained the Commission's efforts while in Sharef it did not. The difference was the role of the individuals in the case. In Strauf the defendants were alleged to have executed false certifications which directly impacted the financial statements filed with the Commission. Both courts agreed that type of action was sufficient to sustain jurisdiction. In Sharef the defendant had a role in the overseas bribery scheme but there was no allegation of any actions directly tying the actions of the defendant to the U.S.

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Beyond the few cases cited above what is perhaps most significant about the first quarter of 2013 is the absence of cases. The decline in the number of enforcement actions filed this past quarter is, standing alone, not significant. The critical point is the type and quality of the cases being brought along with the remedies being obtained not just the numbers.

The mission of SEC enforcement is to fret out possible and actual violations and ensure that they do not reoccur. It is difficult to accomplished by bringing only a few cases largely concentrated in one area. This is particularly true when the agency is not even a part to what is perhaps the most significant securities action brought this year: The suit by the Department of Justice against Standard and Poors. U.S. v. McGraw-Hill Companies, Inc., Case No. CV 13-00779 (C.D. Cal. Filed Feb. 4, 2013). This securities case does not focus on just one transaction as did key SEC market crisis cases. To the contrary, it centers on a continuing course of conduct over a period of years through the market crisis. Yet the agency charged by Congress with policing the securities markets is not even a party. If SEC enforcement is to be effective, it needs to do more than bring a handful of cases or grab a headline with big dollars on occasion. It must broaden and energize its approach to effectively monitor the market place.

For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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