Friday, May 16, 2014

Too Big To Jail: Do Guilty Pleas Matter?

Here is an unusually sophisticated article about a white collar topic in today's NYTimes. The piece, by Floyd Norris, probes what are essentially debarment waivers obtained by many financial and brokerage institutions as part of their global deals with DOJ and SEC. A guilty plea or deferred prosecution agreement with DOJ, accompanied by an SEC fine and censure, in the past may have been a company's death knell. Now it is just another cost of doing business. Naturally, guilty pleas still look bad and companies want to avoid them. But there's a rather large difference between a short-term public relations nightmare (or even a long-term and expensive monitoring agreement) and a firm's demise. So when government officials say that no companies are too big to jail or too big to fail, it is important to understand the context of the particular global agreement in question. Because a company can't be jailed, and if the company is big and important enough, it won't be allowed to fail.

(wisenberg)

 

May 16, 2014 in Civil Enforcement, Current Affairs, Deferred Prosecution Agreements, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 8, 2014

NYU Conference - Deterring Corporate Crime: Effective Principles for Corporate Enforcement

I had the privilege of being at an NYU Conference titled, Deterring Corporate Crime: Effective Principles for Corporate Enforcement.  Hats off to Professor Jennifer Arlen for bringing together folks with some different perspectives on corporate crime. Individuals presented data, and I heard different positions presented (corporate, government, industry, judicial) on a host of topics.  The individual constituent (CEO, CFO, employee) within the corporation was not a key focus, unless it was a discussion of their wrongdoing or prosecution.   

From this conversation it was clear that deterring corporate wrongdoing is not easy.  Penalties have increased, yet we continute to see corporate criminality.  So the question is, how do we encourage corporations not to engage in corporate wrongdoing?

This is my top ten list of what I think exists and what needs to be changed -

1. Most companies try to abide by the law.

2.  Complying with the law is not always easy for corporations. In some instances the law and regulations are unclear, making it difficult to discern what is legal.  The array of different laws and regulations (e.g., state, federal, and international), as well as their complexity  makes corporate compliance problematic.

3.  Companies resort to internal investigations to get information of wrongdoing within the company. In some instances companies will threaten individuals with the possible loss of their jobs if they fail to cooperate with a corporate internal investigation. Individuals who provide information to their employers sometimes do not realize that the company may provide that information to the government and the information may then be used against them.

4.  If a company is criminally charged, it typically is financially beneficial for the company to fold, work with the government, and provide information to the government of alleged individual wrongdoing within the company.

5. DOJ's incentives to a corporation that causes it to fold and provide evidence to the government against alleged individual wrongdoers may be causing more harm because it pits corporations against its individual constituents.

6. We need a stronger regulatory system.  Our system is broken and one just can't blame agencies like the SEC.

7. If we expect agencies like the SEC to work, Congress needs to provide them with more money to engage in real regulatory enforcement.

8. There are many good folks in DOJ, including AG Holder, who look longterm at stopping corporate wrongdoing. But there are also individuals in DOJ who fail to see the ramifications of what may seem like short-term benefits.   

9. Corporate crime can be reduced if everyone - the corporation, government, and also the individual constituents would work together.

10. It would be beneficial in reducing corporate crime if there was more transparency.  We all need to hear what works - when there are declinations of prosecutions, or when an agency decides not to fine a company. We can learn from the good things companies do (anonymously) and when DOJ declines to proceed against the company.   

(esp)

April 8, 2014 in Conferences, FCPA, Prosecutions, Prosecutors, Qui Tam, SEC, Settlement | Permalink | Comments (0) | TrackBack (0)

Sunday, November 10, 2013

Non-GAAP Earnings: Isn't The Issue Disclosure?

Gretchen Morgenson has another one of her outstanding articles, Earnings, But Without The Bad Stuff, in today's NY Times. The piece explores some unintended effects of the SEC's Regulation G, which "allows companies to use non-traditional metrics in financial reports, but only if they present generally accepted accounting measures [GAAP] alongside so that investors can compare the two." According to Morgenson, and Jack Cieselski of Charm City's R.G. Associates, more companies are using Regulation G to put forward "[m]anagement's recommended measures." This in turn spurs other companies to do the same in order to stay competitive. My gut response is: "So what?" As long as the company is disclosing fully accurate figures according to GAAP, what do I care if they want to present alternative numbers alongside? After all, companies are still prohibited from presenting false or misleading non-GAAP figures, and the SEC has gone after companies who do this.

(wisenberg)

November 10, 2013 in SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Sunday, October 6, 2013

A Stacked Deck? The SEC's Administrative Route

The New York Times' Gretchen Morgenson should be declared a national treasure. She continues to write about the financial crisis, and legal and regulatory issues related to the crisis, at a level far above most of her contemporaries. In today's New York Times she explains the administrative law process through which the SEC brings many of its enforcement actions against individuals. The Administrative Law Judges deciding the cases are SEC employees and appellate reversals are rare. Dodd-Frank expanded the kinds of cases that can be heard by the ALJs. All of this is known to the securities bar, but not to otherwise intelligent and informed lay readers, because hardly anyone ever writes about it. Morgenstern's story is here.

(wisenberg)

October 6, 2013 in Media, News, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Monday, September 2, 2013

Second Circuit Rules 10(b) Does Not Apply Extraterritorially

In United States v. Vilar, the Second Circuit examined a post-Morrison decision with an issue of whether Section 10(b) of the Securities Exchange Act of 1934 applies to extraterritorial criminal conduct.  The government had argued that the Supreme Court's decision in Bowman allowed for an extraterritorial application and that civil and criminal conduct should be treated differently and thus Morrison should not apply. The Second Circuit  disagreed with the government saying that the Bowman decision was limited to conduct that was "aimed at protecting 'the right of the government to defend itself.'" In contrast, statutes such as 10(b) have as its "purpose [  ] to prohibit 'crimes against private individuals or their property,'"  and therefore "the presumption against extraterritoriality applies to criminal statutes, and Section 10(b) is no exception."

The court also noted that "[a] statute either applies extraterritorially or it does not, and once it is determined that a statute does not apply extraterritorially, the only question we must answer in the individual case is whether the relevant conduct occurred in the territory of a foreign sovereign." Despite this legal analysis and ruling, the court found that there was no plain error with respect to territoriality on the counts here and thus no need to reverse on this issue.

Other issues raised by the defendants, such as those relating to a search warrant, jury instructions, and the admission of statements were found not to be in error.  The court did, however, remand the sentence.

(esp) 

September 2, 2013 in International, Judicial Opinions, Prosecutions, SEC | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 2, 2013

Global-Tech? Can't Get No Respect!

by: Solomon L. Wisenberg

Yesterday, in United States v. Goffer, an insider trading/securities fraud criminal appeal, the Second Circuit again refused to alter a standard conscious avoidance jury instruction to comport more fully with the Supreme Court's opinion in Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060, 2068-72 (2011). According to Judge Wesley, Global-Tech was not "designed to alter the substantive law. Global-Tech simply describes existing case law." The instruction given by the trial court "properly imposed the two requirements imposed by the Global-Tech decision." Moreover, Appellant Kimelman's request "that the district court insert the word 'reckless' into a list of mental states that were insufficient" was unnecessary, because "Global-Tech makes clear that instructions (such as those in this case) that require a defendant to take 'deliberate actions to avoid confirming a high probability of wrongdoing' are inherently inconsistent 'with a reckless defendant...who merely knows of a substantial and unjustified risk of such wrongdoing."

I don't know. Sounds a little circular to me. According to Global-Tech, willful blindness has "an appropriately limited scope that surpasses recklessness and negligence." Why not just say it squarely in a jury instruction? The problem here is that district courts are generally afraid to alter standard jury instructions in light of emerging case law. And appellate courts are generally reluctant to vacate major securities fraud convictions unless the jury instructions are blatantly improper. The Goffer opinion can be found here.

(wisenberg)

July 2, 2013 in Fraud, Insider Trading, Judicial Opinions, Prosecutions, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 25, 2013

Second Circuit Affirms Rajaratnam Case - But Goes A Step Further in Supporting the Government

It's a relatively short opinion issued by the Second Circuit, and 24 of the 29 pages pertain to a summary of the holding, facts, and the wiretap order used in this case.  For background on the issues raised, the briefs (including amici briefs), see here. Judge Cabranes wrote the majority opinion, joined by judges Hon. Sack and Hon. Carney. A summary of the holding states:

In affirming his judgment of conviction, we conclude that: (1) the District Court properly analyzed the alleged misstatements and omissions in the government’s wiretap application under the analytical framework prescribed by the Supreme Court in Franks; (2) the alleged misstatements and omissions in the wiretap application did not require suppression, both because, contrary to the District Court’s conclusion, the government did not omit information about the SEC investigation of Rajaratnam with "reckless disregard for the truth," and because, as the District Court correctly concluded, all of the alleged misstatements and omissions were not "material"; and (3) the jury instructions on the use of inside information satisfy the "knowing possession" standard that is the law of this Circuit.

Some highlights and commentary:

1. The Second Circuit goes further than the district court in supporting the government's actions with respect to the wiretap order.

2.  The Second Circuit agrees with the lower court that a Franks hearing is the standard to be used with a wiretap order where there is a claim of misstatements and omissions in the government's wiretap application. The Second Circuit notes that the Supreme Court has "narrowed the circumstances in which ...[courts] apply the exclusionary rule."  But the question here is whether the Supreme Court has really addressed the wiretap question in this context and whether a cert petition will be forthcoming with this issue.

3. Although the Second Circuit uses the same basic test in reviewing the wiretap, it finds that "the District Court erred in applying the 'reckless disregard' standard because the court failed to consider the actual states of mind of the wiretap applicants."  The Second Circuit then goes a step further and finds that omission of evidence does not mean that the wiretap applicant acted with "reckless disregard for the truth."

4.  The court states that "the inference is particularly inappropriate where the government comes forward with evidence indicating that the omission resulted from nothing more than negligence, or that the omission was the result of considered and reasonable judgment that the information was not necessary to the wiretap application."  - This dicta provides the government with strong language in future cases when they just happen to negligently leave something out of a wiretap application.

5.  Does the CSX Transportation decision by the Supreme Court call into question Second Circuit precedent?  The Second Circuit is holding firm with its prior decisions.  But will the Supreme Court decide to take this on, and if so, will it take a different position.

Stay tuned.

(esp)

June 25, 2013 in Celebrities, Civil Enforcement, Judicial Opinions, Prosecutions, Prosecutors, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 19, 2013

New SEC Policy On Admissions Of Wrongdoing: Tangibles And Intangibles

by: Solomon L. Wisenberg

SEC Chair Mary Jo White has announced an end to the SEC's blanket "does not admit or deny" settlement agreement policy. In a select number of cases involving "widespread harm to investors" or "egregious intentional misconduct" the Commission will now insist on admissions of wrongdoing on the part of civil defendants who want to settle. The blanket policy was previously eroded, in January 2012, in cases where settling defendants had already pled guilty to related criminal charges. Yesterday's Reuters story is here. Todays Thomson Reuters News & Insight analysis is here.

I strongly suspect that the tangible impact of the policy shift will be minimal. Since almost no SEC civil defendants can afford to admit wrongdoing as a condition of settlement (except in cases where a guilty plea occurred or is anticipated), we can expect the instances in which the SEC will insist on such admissions to be extremely rare. And those very rare cases will result in trials.

But the intangible impact of annually insisting on admissions of wrongdoing in three or four cases may be greater over time. First, the trials, though few in number, should be well-covered by the media. Second, the SEC will regain some much needed respect for its toughness. Third, going to trial and airing the dirty laundry accumulated by malefactors of great wealth should have salutary educational and public policy benefits. Fourth, we may actually see some deterrent effect from all this, so that companies don't automatically view SEC settlements as a cost of doing business.

We will revisit this issue as the new policy is implemented.

(wisenberg)

June 19, 2013 in AIG, SEC, Securities, Settlement | Permalink | Comments (0) | TrackBack (0)

Sunday, February 10, 2013

New Scholarship - Scienter Pleading and Rule 10b-5

A recent publication in the Case Western Reserve Law Review by Dain C. Donelson and Robert A.
Prentice, Scienter Pleading and Rule 10b-5: Empirical Analysis and Behavioral Implications. From the abstract:

Pleading requirements are the keys to the courthouse. Nowhere is this more true than with rule 10b-5 class action securities fraud claims. Provisions of the Private Securities Litigation Reform Act of 1995 impose special pleading burdens upon plaintiffs regarding the scienter element and bar them from discovery when defendants file a motion to dismiss. This Article begins with a doctrinal history of the scienter element of a rule 10b-5 claim that indicates that many key legal questions remain unsettled and that application of legal rules to specific factual allegations regarding a particular type of defendant—external auditors—is extraordinarily muddled. To determine whether the impression arising from this extensive but nonsystematic examination of the case law is accurate, we also empirically examine rule 10b-5 claims against auditors and confirm that few facts are consistently viewed by the courts as indicating the presence (or absence) of scienter. This lack of clarity in the law and its application makes it difficult for either plaintiffs or defendants to evaluate the settlement value of claims. Furthermore, the law’s excessive vagueness affords judges virtually untrammeled discretion. The literature of behavioral psychology and related fields indicates that excessive discretion exacerbates problems that arise from unconscious judicial bias.

(esp)

February 10, 2013 in Scholarship, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 24, 2012

Rajat Gupta's Sentencing: Practice Notes

by: Solomon L. Wisenberg

The sentencing is today at 2:00 PM Southern District of New York Time. (And is there really any other time in the Universe?)

As I noted on Monday, Gupta's Guidelines Range, according to the Government and the Probation Office, is 97-121 months.That's a Level 30. Gupta's attorneys put Gupta's Guidelines Range at 41-51 months. That's a Level 22. The different calculations are based on different views of the gain and/or loss realized and/or caused by Gupta. Gupta's attorneys are seeking a downward variance and asking for probation, with rigorous community service in Rwanda. Serving a sentence in Rwanda is not as strange as it may sound on first hearing. After all, criminal defendants in Louisiana regularly do time in Angola.

But seriously, lawyers and germs, there is a practice pointer in here somewhere. Practitioners naturally strive to obtain the lowest possible Guidelines Range as a jumping off point for the downward variance. It is psychologically easier for a judge to impose a probationary sentence when the Guidelines Range is low to begin with. It is legally easier as well, because the greater the variance from the Guidelines, the greater the judicially articulated justification must be.

But too many lawyers push the envelope in their Guidelines arguments, thereby risking appellate reversal on procedural grounds. This is a particular danger when the judge is already favorably disposed toward the defendant and looking for ways to help him. Failure to correctly calculate the Guidelines is a clear procedural error. (Some of the federal circuits try to get around Booker, Gall, and Kimbrough by setting up rigorous procedural tests. The Fourth Circuit is the most notorious outlier in this regard.) Lawyers must be on guard against the possibly pyrrhic and costly victory of an incorrectly calculated Guideline range, followed by probation. One solution is to have the court rule on alternative theories. "This is the Guidelines Range. These are my reasons for downward variance. Even if the Guidelines Range was really at X, as the Government argues, I would still depart to Y for the same and/or these additional reasons." If the judge already likes your client, getting him or her to do this is often an easy task.

Of course, Judge Rakoff needs no instructions in this regard. One of our ablest and sharpest jurists, and a leading Guidelines critic, he will attempt to correctly calculate the Guidelines Range in an intellectually honest manner and will downwardly (or upwardly) vary as he damn well sees fit, with ample articulation.

(wisenberg)

October 24, 2012 in Fraud, Insider Trading, Prosecutions, SEC, Securities, Sentencing | Permalink | Comments (1) | TrackBack (0)

Thursday, September 6, 2012

Second Circuit Releases Magnum OBUS On Insider Trading

In SEC v. Obus (2d Cir. 2012), released yesterday, the Second Circuit provides a primer on insider trading law, with particular attention paid to tipper liability, tippee liability, and scienter. The Court also seeks to reconcile the supposed conflict between Dirks and Hochfelder with respect to the level of scienter that must be proved in tipping situations. Obus is required reading for anyone working in the white collar and securities fraud fields.

(wisenberg)

September 6, 2012 in Fraud, SEC, Securities | Permalink | Comments (1) | TrackBack (0)

Friday, June 15, 2012

Gupta Convicted On Some Counts & Acquitted On Others

Sunday, April 1, 2012

The Department of Justice and the Culture of Non-Disclosure

We don't need new legislation insuring that defendants receive the exculpatory information they are entitled to under the U.S. Constitution, because the DOJ has learned its lesson from the Ted Stevens case and will NEVER let something like that happen again.

For example, in the high-profile insider trading case of U.S. v. Rajat Gupta, the DOJ recently argued that its prosecutors did NOT have to review 44 SEC interview memos for Brady material, even though the memos summarized interview sessions jointly conducted by SEC and DOJ attorneys. According to SDNY prosecutors, the overall DOJ and SEC investigations were not technically "joint" in nature, so SDNY AUSAs had no Brady obligations with respect to the SEC memos. The SEC attorneys were capable of conducting the Brady review on their own. Yeah, right. Just like the FBI and IRS Special Agents were capable of conducting the Brady review in U.S. v. Stevens. I completely forgot about the Brady training that SEC attorneys receive on a regular basis. DOJ's position is not only contrary to SDNY and Second Circuit case law--it also violates the letter and spirit of the Ogden Memo, promulgated after Stevens to prevent future Brady debacles. I guess SDNY didn't get the memo. (They're special you know.)  Judge Jed Rakoff was having none of it. See his Gupta Brady Ruling, issued last week, for details. In truth, all of the SEC memos should be turned over in their entirety to the defense, just as all of the 302s and MOIs in Stevens should have been turned over. 

It is clear that the DOJ has learned almost nothing from the Ted Stevens case. Suppression of exculpatory and/or potentially exculpatory evidence is largely not an issue at the line level. The typical AUSA knows Brady/Giglio when he sees it, and knows to disclose it. The problems tend to arise in high profile cases, particularly those captained out of DC. The sickness extends to very high levels at the DOJ. The Stevens prosecution clearly showed this. The Bill Allen-Bambi Tyree subornation of perjury allegation, reported in 2004 to a federal judge by DOJ prosecutors in a sealed pleading, was classic Giglio material. It should have instantly been recognized as such by the Chief and Deputy Chief of the Public Integrity Unit and they should have ordered it turned over immediately to the defense. It wasn't and they didn't.

The DOJ has run out of scandals and excuses. Enough already. At long last, have they no shame?

(wisenberg)

April 1, 2012 in Insider Trading, Prosecutions, Prosecutors, SEC, Securities | Permalink | Comments (1) | TrackBack (0)

Monday, February 6, 2012

Will the SEC's Requiring Settling Parties to Admit Wrongdoing Increase the Number of Trials?

In criticizing Judge Jed Rakoff's refusal to rubber-stamp its proposed settlement agreement with Citibank, the SEC has claimed that if it has to require companies to admit wrongdoing as a condition of settlement, there will be far fewer settlements and more trials.  As a result, says the SEC, its resources would be so strained so that it would bring considerably fewer enforcement actions.  The New York Times on Friday, February 3, cited unnamed "legal experts" as endorsing that view, saying that companies will be less likely to admit facts which could be used against them in shareholder lawsuits.  See here.

There is a certain logic to that argument.  Companies that have committed misconduct now do choose to pay the SEC rather than admit or reveal their wrongdoing to the public (and to class action lawyers).  Companies that believe they have not committed misconduct sometimes decide it is less costly to pay the SEC than fight it.  Few SEC cases go to trial.  This settlement model works well for the SEC, which gets a check with less sweat, and for most defendants, which conceal their misconduct and/or save money.

But is that in the public good?  More trials should lead to more public knowledge, promote more curative government action, and add an additional deterrent to corporate misconduct.  Additionally, it should force the SEC to be more scrupulous in bringing marginal or questionable cases since they would more often be required to justify the charges in court.

I also question whether these "experts" are right in their expectation that there would be far more trials.  I am not so sure that many corporate executives want public airings of the factual details of the company's wrongdoing.  "Experts" predicted that the enactment of the Sentencing Guidelines would overwhelm the federal courts with trials since many more criminal defendants would exercise their right to trial because of the perceived (and actual) harshness and rigidity of the Guidelines upon a conviction.  That simply has not happened.  The percentage of cases settled by plea has remained relatively constant, if not increased, since the enactment of the Guidelines.

(goldman)

February 6, 2012 in Civil Enforcement, Fraud, SEC, Settlement | Permalink | Comments (0) | TrackBack (0)

Monday, January 30, 2012

New Financial Unit Raises Questions

Virtually every presidential State of the Union speech, or its gubernatorial equivalent, calls for tougher criminal laws and/or new investigative resources.  President Obama's address last week was no exception.  The President called for the establishment of a new unit "to crack down on large scale fraud and protect people's investments."  As blog editor Ellen S. Podgor wondered, see here, it was unclear how this unit would differ from the Financial Fraud Enforcement Task Force established in 2009.  I too asked whether this purportedly new unit was anything other than a repackaged version.

The announcement of a new prosecutorial unit also was perhaps an unintended implicit admission that existing federal law enforcement agencies had been less than successful in dealing with serious alleged crimes which some believed had caused the financial crisis.  Both Attorney General Eric Holder and SEC Enforcement Director Robert Khuzami defended their record, stating that not every mistake is a violation of law.  Holder said, "We also have learned that behavior that is reckless or unethical is not necessarily criminal," a statement which (aside from leading me to ask why it had taken him so long to realize it) should be painted on the walls of every prosecutorial office.

The principal apparent structural difference between this unit, entitled the Unit on Mortgage Origination and Security Abuses ("UMOSA"), and the prior one is, besides its more focused jurisdiction, that this is a joint task force of both federal and state officials.  One of its co-chairs -- albeit one of five, four being DOJ or SEC officials -- is New York State Attorney General Eric Schneiderman, who has shown his independence and aggressiveness toward Wall Street by pushing for stronger sanctions against financial institutions for robo-signing and other improprieties committed after the crisis arose.

Generally, joint federal-state task forces are a one-way street.  The feds take the best criminal cases and leave the dregs to the state.  One purported justification for such selection is that federal laws and rules of evidence make it easier for federal prosecutors to bring cases and win convictions.  Schneiderman has indicated somewhat to the contrary -- that New York and other state laws give state attorneys general greater means to bring both civil and criminal prosecutions.

The idea of combining federal and state resources is generally a good one.  Too often law enforcement agencies refuse to share information with other agencies, if at all, until they have determined the information was insufficient for them to act on, often too late for use by the other agencies.  On the other hand, I fear that some task force constituents might attempt to make an end run around constitutional and statutory laws and rules, specificially Fed.R.Crim.Pro. 6(e), which, generally, as relevant here, prohibits disclosure of grand jury information to non-federal officials.  Of particular concern is whether information secured by federal grand juries, much of which is through immunized testimony, will be provided for use by the states.  Both Attorneys General Holder and Schneiderman seem aware of this restriction, but both appear to view it as an obstacle to overcome rather than a right to ensure.  How scrupulous they will be in upholding the rule and spirit of grand jury secrecy will be seen.

(goldman)

January 30, 2012 in Current Affairs, Fraud, Grand Jury, Investigations, Mortgage Fraud, Prosecutors, SEC, Securities | Permalink | Comments (2) | TrackBack (0)

Monday, January 9, 2012

SEC Ends Orwellian Policy

Stop the presses. Hold the back page. Saturday's New York Times reports here on the SEC's decision to end its "does not admit or deny" policy, but only for SEC civil defendants who are also pleading guilty to criminal charges or admitting wrongdoing as part of a deferred criminal adjudication. In other words, the policy is similar in its immediate effect to Lincoln's Emancipation Proclamation, which (for the most part) merely freed slaves in rebel held territory. Why be so boastful about ending a policy that never made much sense in the first place, because it allowed individuals and entities to neither admit or deny civil allegations when they had already pled guilty to similar, and more serious, criminal charges? To hear the SEC tell it, the decision to abandon the old policy is NOT in response to Judge Rakoff's order rejecting the proposed Citigroup consent decree, as the new policy would not apply in the Citigroup case and the decision has been under consideration since Spring 2011. The decision itself may not be in response to Judge Rakoff, but it is hard to believe that its timing is not. Although Judge Rakoff should be commended for his thoughtful opinion, I am not without sympathy for Khuzami. He and the SEC are the only actors at the governmental level who appear to be systematically investigating and bringing actions against the elite financial entities largely responsible for our economic meltdown. (DOJ is on holiday.) Still, the SEC spends too much time on its public relations.

(wisenberg)

January 9, 2012 in SEC, Securities, Settlement | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 29, 2011

Speaking Truth To Power

Here is Judge Rakoff's Order Rejecting Proposed SEC-CITIGROUP GLOBAL MARKETS INC.Settlement. Here is the New York Times story. Judge Rakoff's Order repeatedly refers to Citigroup as a "recidivist." It is difficult to believe this Order would have ever seen the light of day had the Court truly believed that a comprehensive law enforcement effort was underway to investigate and hold accountable the persons and institutions whose actions "depressed our economy and debilitated our lives."

(wisenberg)

November 29, 2011 in Judicial Opinions, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 9, 2011

Becker Will Not Be Prosecuted

The Justice Department has decided -- properly, I believe -- not to file criminal charges against former SEC general counsel David M. Becker for participating in SEC policymaking relating to the distribution of funds from the Madoff estate when he had a personal stake in the outcome, a matter we discussed over five weeks ago.  See here.  Although I believe Becker's failure to recuse himself on his own was an exercise in poor judgment, he did report the potential conflict to his ethics officer, who approved his participation, and SEC chairwoman Mary L. Schapiro, who apparently failed to question it.  Hopefully, the SEC will not forget that errors in judgment should rarely, if ever, be actionable.

(goldman)

November 9, 2011 in SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 26, 2011

Rajat Gupta Charged and Arrested for Insider Trading

Here is the Reuters story. Nothing posted yet on PACER. WSJ Law Blog also has coverage. This will be a much tougher case than Rajaratnam was for the government to prove. This morning's WSJ has a decent background piece (subscription required) on the case.

(wisenberg)

October 26, 2011 in Fraud, Insider Trading, Prosecutions, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 27, 2011

SEC Counsel Criticized for Conflict of Interest

One would expect that the SEC, which brings actions against individuals or corporations based on their failure to disclose a material conflict of interest to the public, would be sensitive to conflicts of interest of its own employees.  Nonetheless, as a report released last week by SEC Inspector General H. David Kotz reveals, former SEC general counsel David M. Becker participated significantly in decisions relating to the distribution of SIPC funds relating to the Bernard Madoff case although he had a significant personal financial interest in the decisions.

Becker and two brothers in 2004 inherited and in 2009 liquidated $2 million in Madoff investment funds, $1.5 million of which were purported profits from the original investment.  Later in 2009, Becker was prominently involved in two substantial questions in which the SEC recommendations to the bankruptcy court, while not conclusive, would be expected to carry significant weight in the court, given the deference courts pay to administrative agency decisions.

One issue concerned what position the SEC would take as to what should be considered "net equity," the amount that customers can claim in a brokerage liquidation.  That question was essentially the same as what should be considered the "net equity" figure in a "clawback" action by the bankruptcy trustee, a decision in which Becker had a significant potential personal monetary interest, even though he and his family had not yet been sued (they were later).  Becker initially argued against the "money-in/money-out method" under which an investor could recover only the amount he invested and for the "last account statement method" under which an investor could recover the amount of the last - and fictitious - statement from Madoff.  The "last account statement method" would obviously have been beneficial to Becker in that it would have protected him in a "clawback" action by the Madoff bankruptcy trustee for the $1.5 million he and his brothers had received in Madoff "profits."

After consideration, Becker concluded that the last account statement method was unsupportable.  His position was in accord with that of the SEC, SIPC, the bankruptcy trustee, and ultimately the Second Circuit, In re Bernard Madoff Investment Securities, LLC, ___ F.3d ___ (2d Cir., August 16, 2011). Becker argued, however, contrary to the position of SIPC, for the "constant dollar approach" in which the recovery under the money-in/money-out method would be adjusted upward for inflation and lost real economic gain.  Under this approach, the bankruptcy trustee's potential clawback recovery from the Beckers would have been reduced by $138,500.

It is apparent, as any law student who has taken an ethics course would realize, and as the Inspector General determined, that Becker had a conflict of interest in the resolution of these questions.  Yet, the SEC's "ethics" officer, who reported to and was evaluated by Becker, saw no conflict.  The ethics officer, revealing a narrow view of conflict of interest, and an apparent misunderstanding of relevant securities law, found no conflict in part because there was "no direct and predictable effect" between the SEC's position and the trustee's clawback decision.

SEC Chairwoman Mary L. Schapiro was aware, to some extent, of Becker's Madoff financial interest, but she did not suggest he recuse himself.  She and Becker both contended before Congress last week that he had acted properly by reporting the conflict to her and others.  That defense, however, is limited and misplaced.

Reporting a conflict - especially if only to underlings and colleagues - is not sufficient.  Even public disclosure of Becker's personal interest - and it was not disclosed to the public, Congress, the courts, or four of the SEC's five commissioners - would not have cured the conflict.  Becker simply should have recused himself and not have participated at all in decisions as to the formulation of SEC policy relating to recovery of Madoff assets.

Schapiro was no doubt swayed by her respect for Becker's legal ability and integrity.  Becker, who has written that he did "not remember giving any consideration to how the various proposed outcomes would affect me," may well have believed that his personal interest would not affect his professional judgment.  In any case, his decision not to recuse himself and Schapiro's at least implicit condonation of this decision, demonstrate that the agency which polices conflicts of interest in the marketplace fails to appreciate them when they occur in its own house.

The Inspector General referred this matter to DOJ for consideration for criminal prosecution.  I do not suggest that Becker acted criminally with respect to 18 U.S.C. 208, the statute proscribing acts affecting a personal financial interest, or any other law.  He may well have lacked whatever scienter is required under the law based on his reporting to others or other acts or circumstances.  Not every improper act is criminal.

(goldman)

September 27, 2011 in News, SEC, Securities | Permalink | Comments (0) | TrackBack (0)