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October 1, 2010
NACDL's 6th Annual Defending the White Collar Case Seminar – “An SEC Makeover: Restructured, Refocused, and … Back in the Game?,” Friday, October 1, 2010
Moderator: Gerald B. Lefcourt
What a panel. Susan Brune kicked off the discussion with thoughts on whether the SEC’s new cooperation policy will work. In her view, Bob Khuzami, as the SEC enforcement chief, will have to figure out how to make the SEC a bit more like a federal prosecutor’s office. One of his new big weapons, however, gives her pause. The SEC’s new cooperation scheme differs from the federal prosecution process, and some of the differences will impact the SEC’s effectiveness. AUSAs, in her experience, have much more autonomy than SEC staff attorneys. While they have to get supervisory approval to grant immunity or decline prosecution, the front office rarely reverses a line Assistant’s recommendation. With the SEC, in contrast, you never know until the staff attorney completes a long, formal, and inscrutable process that ends with the Commission itself weighing in, and often with political factors at play. And even then you don’t know. The SEC’s practice of including lengthy recitations of alleged conduct in its Consent Orders—facts to which the defendant does not agree—risks inflaming the judge, inciting Article III activism, and prompting Courts to reject carefully crafted agreements. This contrasts markedly with a sentencing hearing with a 5K motion by a USAO, where the federal prosecutor stands with your client shoulder to shoulder.
Rich Strassberg took the baton at that point and addressed the pitfalls of representing a client who has exposure to both the SEC and DOJ. Most clients who work in the securities industry cannot, as a practical matter, assert their 5th Amendment right and also keep their jobs. Clients may feel compelled to give testimony and effectively provide both the SEC and DOJ a roadmap for their investigations. Rich also touched on the public’s clamor for enforcement action in the wake of the Commission’s failure to anticipate the perils from credit default swaps and derivatives. The SEC’s perceived need to respond to the public’s furor with immediate action presents huge risks to clients. Wall Street has moved way beyond the stock market. The SEC needs to take the time to understand new markets, in Rich’s view, and to reflect on how complex industry norms inform the issue of criminal intent. A rush to respond to perceived enforcement lapses will deprive market participants of the benefit of a fair investigation that reveals the true context in which market participants worked. In short, the SEC has to work hard not to act too slowly, or too quickly, but to strike the balance just right.
Pam Rogers Chepiga then took the audience on a tour of the Dodd-Frank Act’s whistleblower provisions, the SEC’s prior rewards program--$159,000 paid out over 20 years—and the rulemaking process for the new rewards process on which the Commission will now embark. She then posed the following big questions for the audience: do securities fraud allegations lend themselves to whistleblower programs due to the heightened intent requirement that applies? Will the time and energy it takes to filter through leads drain agency resources from more important enforcement programs? Will the financial incentives undermine well thought out corporate compliance programs? And finally, how will defense attorneys counsel clients who have a choice between laying low and seeking a financial windfall?
Bob Khuzami attempted to address the concerns raised by the other panelists. Judicial scrutiny is what it is. The SEC, in his view, should be prepared to defend its charging decisions. While he doesn’t relish headlines, and is concerned a bit sometimes that judges don’t fully understand how a case evolved, he calmly accepts the scrutiny as part of the job.
Cooperation and whistleblowers offer fundamental intelligence that brings forward higher quality information sooner. The entire Commission supports these new initiatives and will not bog down approvals. They have already agreed on the basic parameters: wrongdoers won’t continue to work in industry; they also won’t keep the financial benefits they have wrought. As to interactions with DOJ, he expects better communication at an earlier stage between the two agencies.
Fear not, moreover. There will be no shortage of process; no rush to judgment under his watch. Bob also credited the talented and sector-focused divisions within the SEC; they all will weigh in with their expertise on cooperation agreements and whistleblower rewards.
The whistleblower program will not drain resources; it will serve as corollary to the SEC’s established office of market intelligence. The program will also not undercut the need to encourage employees to “report up” via their in-house compliance programs. The SEC will fashion financial incentives in a way that supports this valuable corporate compliance function, though Bob did not explain why (we will have to wait for the rules).
Eliot Spitzer then grabbed the microphone. Wall Street is rife with conflicts of interest, he noted. The SEC cannot and should not wait for information to come in. The Commission instead should anticipate. The recent financial collapse, in his view, reflects an intellectual failure by regulators. The solution? Smart people at the SEC should think about problems before the public suffers. Eliot cited mutual fund fees as a perfect example. We know that these fees—suggested to amount to billions of dollars each year--hurt the middle class. We have democratized investing through these funds; now the regulators have to make them transparent and fair.
No shortage of practical insight and forward looking thoughts from this group!
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