Rejuvenating Enforcement

Rejuvenating Enforcement

 
This is the second in a series of articles examining future trends in securities enforcement
 
The SEC’s authority will almost certainly be augmented by Congress later this year as discussed in the initial segment of this series. What has received little notice is the fact that the Supreme Court may also have a significant impact on the Commission and particularly its enforcement program. The securities cases on the Court’s docket arise in suits which do not deal directly with the SEC’s enforcement program. Rather the issues involves private suits challenging investment adviser fees, the statute of limitations in damage actions, the constitutionality of the PCAOB and honest services fraud, a statute used to prosecute many executives in criminal securities fraud cases. Those cases are discussed here.
 
The High Court recently agreed to hear Morrison v. National Bank of Australia, another private damage action based on Exchange Act Section 10(b). This is the Second circuit’s so-called “foreign cubed” decision. The resolution of this case may impact the SEC’s Enforcement program.
 
In Morrison, discussed here, the Second Circuit concluded that the district court did not have jurisdiction over the securities fraud claims, essentially because the nexus to U.S. investors and markets was far too attenuated. In its brief opposing certiorari, the Solicitor General, joined by the SEC, argued that while the Second Circuit decision is correct but that the circuit court and most others have incorrectly phrased the question. The issue is not jurisdictional, but whether the conduct falls within the ambit of Section 10(b). If the issue before the Court is resolved by defining the reach of Section 10(b), the decision could have a significant impact on the Enforcement program since that Section is the typically the weapon of choice in most enforcement actions.
 
Regardless of the Court’s decision in Morrison or whether Congress gives the SEC new authority, the critical question for the Commission going forward is the retooling of Enforcement. Beginning with her confirmation hearings, Chairman Mary L. Schapiro promised to rejuvenate SEC enforcement. To most observers, the need for a retooling of the program was clear. Scandals such as the Madoff debacle, with the senior Commission staff invoking executive privilege before Congress when asked to explain the obvious failure to discover the fraud, and the Pequot inquiry, with its suggestions of favoritism, have taken their toll. Ms. Schapiro promised a new tone at the top which would emphasize speed, efficiency and coordination with other regulators.