Source: http://compliance.grc-daily.com/dsp_getFeaturesDetails.cfm?CID=3458
Timestamp: 2019-11-12 02:05:16
Document Index: 546724670

Matched Legal Cases: ['§ 77', '§ 78', '§ 80', '§ 80', '§ 201', '§ 205']

All-Encompassing Enforcement: The Robust Use of Civil and Criminal Actions to Police the Markets
Compliance : Thought Leader : :
Keynote Address to SIFMA’s Compliance & Legal Society Annual Seminar
Thank you, David Prince, for that kind introduction. I have participated in this event for many years and have always considered this conference to be all about the compliance and legal issues that are most important to the integrity of our securities markets. Now, as Chair of the SEC, I would like to thank you for the work you do day in and day out to protect investors and keep our markets robust and safe.
All-Encompassing Enforcement
Today, March 31, 2014, I thought I would talk about the SEC’s Enforcement program, and in particular, the importance of all-encompassing enforcement of the securities laws. By that, I mean the appropriate, but vigorous, use of criminal, civil, and regulatory tools to enforce the securities laws. Before I begin, let me assure Preet Bharara, one of my very distinguished successors as United States Attorney, that Congress did not give the SEC criminal authority as we were flying in last night. And, although I often emphasize how essential our examination function is to achieving comprehensive compliance with all of the regulatory requirements, today’s focus will be the SEC’s enforcement function—investigating and bringing cases.
So why am I, the Chair of the SEC, talking about civil and criminal enforcement? It is because I know, from both my years as United States Attorney working alongside the SEC and now from inside the SEC, that the SEC’s expertise and extensive cooperation and partnership with the criminal authorities is essential to all-encompassing enforcement of the federal securities laws. So, too, are the much greater number and variety of standalone cases the SEC brings for violations that are not prosecuted criminally.
There are, of course, no more powerful tools than a criminal conviction and the prospect—and reality—of imprisonment. When they are added to the wider range of actions the SEC brings and the unique remedies available to us, law enforcement can best fulfill its collective obligation to investigate, charge, and address the full range of securities law violations. And my message today is that a robust combination of criminal and regulatory enforcement of the securities laws is not only appropriate, but also critical to deterring securities violators, punishing misconduct, and protecting investors.
All-Encompassing Enforcement on the Rise
As you undoubtedly know, essentially any violation of the federal securities laws and regulations can be a criminal violation if done willfully, that is, with intent to violate the law.[1] <#_ftn1> This means that many of the SEC’s investigations can give rise to criminal cases, although obviously not every one of our cases that could be prosecuted criminally is. But, in the last 20 years, there has been a significant rise in criminal prosecutions of securities cases.
A couple of statistics make the point. When I became U.S. Attorney in 1993, there were 67 criminal cases that were related to SEC proceedings.[2] <#_ftn2> That number now has doubled.[3] <#_ftn3> And the number of instances where we grant access to our files to other law enforcement authorities—a rough proxy for the number of cases where we have parallel investigations—has also more than doubled.[4] <#_ftn4>
And there is more to the story than the numbers. We now coordinate our efforts with the criminal authorities on many types of securities law offenses that did not garner much, if any, criminal attention in the past. Insider trading has, of course, been the subject of criminal cases for many years, as have offering frauds and Ponzi schemes. But accounting fraud prosecutions were relatively rare before Enron, WorldCom, and Adelphia. More recently, our parallel efforts have also yielded a significant increase in criminal actions in the FCPA space and in other areas, including actions against investment advisers for false valuations, overcharging, and hiding fees. Although the SEC is certainly not the source of or involved in every securities fraud prosecution, my sense is that many criminal authorities across the country are more willing and better able to pursue these prosecutions because the SEC devotes significant resources to uncovering and building these complex cases, and then working in parallel with the prosecutors to bring our respective cases.
In the vast majority of criminal securities fraud prosecutions, the SEC’s Enforcement staff works closely with the criminal authorities, whether it be DOJ, the FBI, or state and local law enforcement. These parallel investigations are entirely appropriate under the law, as long as we conduct our investigations, as we do, independently, but in cooperation with the criminal authorities.[5] <#_ftn5> Criminal investigations unquestionably bring great value—search warrants, wiretaps, and undercover operations are not in the SEC’s toolbox.
In many of these cases, it is the lawyers, accountants, and other professionals from the SEC’s enforcement and exam programs who initially detect the misconduct and put the preliminary case together. Every day, our staff sorts through dozens of tips, complaints, and whistleblower submissions, pursues leads derived from our exam program and SRO referrals, and analyzes large volumes of transactional data generated from our risk analytic initiatives. Many of these sources lead to investigations that we pursue.
When we find sufficient evidence of a serious violation to justify criminal involvement, we alert the criminal authorities, and we may conduct parallel investigations. The criminal authorities will sometimes decide to conduct undercover investigative operations, while we take the lead in documentary review and analysis of records. As many of you here know, we also often interview witnesses together.
When we work together and bring parallel actions, we will typically file our actions on the same day, unless there is some investigative reason for one of us to act first, such as a need for an emergency asset freeze or to stop a flight risk. Often, you will see that the SEC action names additional defendants who are not part of the criminal case, including those who did not necessarily act with intent to advance the scheme, such as the gatekeeper who permitted the scheme to proceed[6] <#_ftn6> or the supervisor who failed to appropriately supervise the wrongdoers. [7] <#_ftn7> We charge these additional defendants because it is very important to proceed broadly against other participants in a scheme to ensure that they too are called to account.
Importance of Standalone SEC Actions
The SEC’s partnership with the criminal authorities in parallel cases represents a very important component of our enforcement program, but most of our cases are standalone, as we operate independently under a broad 80-year old statutory mandate to enforce the federal securities laws. We, for example, often bring cases based on negligence, while most criminal statutes require intent or at least willful blindness. Some of our statutes are also strict liability, which do not require intent, recklessness, or negligence. And because of the higher, beyond a reasonable doubt evidentiary standard in criminal cases, the SEC has more flexibility to bring important cases that send a strong message of deterrence when the evidence may not be enough for a criminal case.
In our standalone cases, we also have unique remedies to protect investors, beyond disgorgement of ill-gotten gains and civil monetary penalties. One of the SEC’s most effective tools is our ability to bar wrongdoers from their particular roles in the securities profession, and, thanks to the Dodd-Frank Act, from the entire securities industry.[8] <#_ftn8> So whether it is the broker who charged hidden commissions, or the investment adviser who misused investor funds, we can ensure they are not in a position to abuse the trust of investors again. We can also seek orders barring the officer of a public company who committed accounting fraud from serving as an officer or director of any public company, and prevent the microcap promoter from being involved in penny stocks. We also have the authority to prohibit certain professionals who engaged in misconduct from appearing or practicing before the SEC—an accountant can be prohibited from signing an audit report for a public company and an attorney can be prohibited from advising on documents that will be filed with the Commission.[9] <#_ftn9>
The SEC also has the authority to obtain asset freezes, trading suspensions, and temporary injunctions to stop fraud in its tracks before illicit profits are dissipated or the fraudsters can complete their schemes. Finally, through our Fair Fund authority, we are able to distribute money recovered through disgorgement and penalties back to harmed investors.
Although standalone criminal prosecutions and parallel actions send important messages of deterrence, our ability, in civil standalone actions, to broadly punish wrongdoing also sends an important and additive message to the market on appropriate standards of conduct. My strong sense, from all of the different vantage points I have occupied, is that the SEC’s cases are closely watched by industry participants, as well as those in this room who represent them. As a result of that dynamic, compliance programs are enhanced, training is intensified and behavior changes. Our efforts thus have a multiplier effect by having meaningful impact on market participants who are not involved in the particular misconduct that has been charged.
All-Encompassing Enforcement in Practice
So how does this all fit together in practice? I will briefly talk about just three areas—insider trading, microcap fraud, and financial fraud. Obviously, there are others, such as FCPA and investment adviser fraud, where the same takeaways apply.
Unlawful insider trading always receives significant enforcement attention and has historically been a staple for both the SEC and criminal prosecutors. In the last five years, Preet and his team in the Southern District of New York have done a tremendous job bringing cases against over 75 defendants who have all either pled guilty or been convicted after trial. This remarkable record and the sheer number of criminal cases send an unmistakable message of strong deterrence.
The SEC’s record in insider trading cases, while not perfect, is also very impressive. Over the last five years, we have charged over 570 defendants in civil insider trading cases, the vast majority of which have been successfully concluded either through settlement or a finding of liability after trial.
Behind the headlines is the important story of how many of these cases originated and how they are made. Many insider trading cases, whether criminal, civil or both, start out as a referral to the SEC from FINRA or the Options Regulatory Surveillance Authority (“ORSA”) containing an informational nugget suggesting suspicious trading, or are triggered by our own trade data analytics that identify possible patterns of insider trading.
Some of our newer technologies have augmented our ability to identify suspicious trading. In addition to our traditional issuer-based approach, we now also use a trader-based approach—focusing on identifying similar trading trends among traders. SEC staff engage in hours of painstaking trade analysis, detailed electronic scrutiny of phone records, bank records, emails, and texts, and relentlessly dig for evidentiary scraps left behind by these often very careful and sophisticated wrongdoers that are necessary to build a case.
Let me give you one example where we used the trader-based approach and a dogged search for evidence in a parallel action. A couple of weeks ago, the SEC filed a civil action against a registered representative at a large broker-dealer and the managing clerk at a prominent international law firm.[10] <#_ftn10> The SEC charged that the two engaged in a four-year insider trading scheme that generated $5.6 million in trading profits by trading in advance of more than a dozen corporate transactions for which the law firm provided advice.
This action resulted from the efforts of the SEC staff and the U.S. Attorney’s Office for the District of New Jersey and the FBI. Working together, investigators uncovered illegal tips that allegedly were conveyed, as if from a movie scene, through a middleman who met with the trader at Grand Central Station, showed him hand-written notes of the stocks he should trade, and then ate the notes to cover his trail. On the same day that the SEC filed its case, the U.S. Attorney’s office announced that they had arrested the trader and his source.
Our insider trading cases are not limited to cases brought in parallel with criminal prosecutions. Since October 2009, about 20% of the insider trading charges we brought involved a parallel criminal prosecution. In contrast to many criminal cases, which often have some recording or cooperator testimony, our standalone cases are usually based on more indirect evidence—brokerage records suggesting suspicious trading, phone records indicating contact with an insider close in time to the trading, a chronology detailing material non-public events soon after the trading, and maybe, if we are lucky, cryptic emails or text messages indicating some knowledge of a relevant event or a breach of duty. In other words, ours are usually highly circumstantial cases.
For that reason, these cases can be very challenging to try and win. But they are very important because strong deterrence requires that there be punitive consequences for insider trading even if the evidence is insufficient to criminally prosecute and difficult to successfully try civilly.
Another civil tool we have and use in insider trading cases is our ability to freeze assets and obtain temporary injunctions based on suspicious trading so illicit profits do not disappear while we investigate. We used this tool to great effect in July 2012 when the SEC obtained an emergency asset freeze against unknown traders just days after an announcement of the acquisition of an energy company.[11] <#_ftn11> The SEC team moved quickly to file an emergency action after discovering that traders using brokerage accounts in Hong Kong and Singapore stood to make millions in potentially illegal profits. Once the freeze was in place, SEC investigators carefully scrutinized the trading records to identify the traders, setting the stage for a string of successful settlements against a number of firms and individuals that unfolded over the next year and a half. Thanks to the staff’s swift action, the SEC recovered nearly $30 million in ill-gotten gains, plus financial penalties from the foreign traders.
Microcap fraud is another area where effective law enforcement requires both extensive cooperation with the criminal authorities and pursuit of many standalone cases. As you know, these are most often pump-and-dump schemes where the volume and price of the stock are artificially inflated by means of a misleading promotional campaign that lures investors to buy shares. Then, the wrongdoers sell their stock, the share price plummets, and retail investors are left holding practically worthless stock.
Like insider trading cases, these sorts of cases typically originate with a trading analysis that shows patterns of trading suggestive of illegal activity. We then need to identify the promotional statements feeding the trading activity, investigate whether and how those statements may be actionable, identify the promoters and other participants orchestrating the scheme, and follow the stock and money, often through nominee entities with complex corporate structures, transfer agents, broker-dealers, banks, and often, off-shore financial institutions.
This methodical work can serve as the genesis for a parallel criminal case. And these cases are uniquely conducive to criminal methods, where cooperators and undercover agents can interact with the wrongdoers and collect very powerful evidence. We, in fact, used these methods when I was United States Attorney and were able to bring cases, along with the SEC, against over 120 defendants on a single day in connection with what we called Operation Uptick.[12] <#_ftn12>
These kinds of joint efforts continue today. A number of our regional offices have been conducting parallel investigations with the FBI and various U.S. Attorneys to uncover penny stock schemes and involving corporate insiders, stock promoters, gatekeepers, and issuers. In one office alone, since 2009, we have brought actions against 41 individuals and 24 companies, obtaining injunctive and other relief against all of them. The U.S. Attorney’s Office has secured criminal convictions against 40 of the same defendants.
Parallel investigations only tell part of the microcap fraud story. Here, too, our standalone actions have significant consequences for those trying to manipulate thinly-traded stocks for their own profit. We often bring Section 5 charges under the Securities Act—a strict liability offense—against microcap fraud participants, suing them for directly or indirectly transacting in unregistered securities or aiding and abetting such violations. We can bring cases against not only the issuers, but also the promoters, attorneys, auditors, broker-dealers, and others who give life to and facilitate these elaborate schemes. If they commit fraud, we bring those charges too.[13] <#_ftn13>
We also rely on our temporary suspension authority to stop trading in securities that are the objects of pumps-and-dumps. Just last month, we suspended trading in 255 companies, any one of which might have been the next vehicle for stock manipulators.[14] <#_ftn14> There were more than 1,000 similar suspensions over the last two years.[15] <#_ftn15> These trading suspensions perform a critical investor protection function—not only do they stop trading in the company’s stock for ten days, but they also have the effect of preventing market makers from displaying quotes in those securities until the company updates its public disclosures. We also have been using our trading suspension authority more frequently to cut off trading while the pump-and-dump is in progress.
Obtaining emergency asset freezes is another essential tool in the battle against microcap schemers. Just a couple of weeks ago, the SEC obtained an asset freeze at the outset of a case against a promoter who was charged with directing a sophisticated, international microcap stock promotion operation.[16] <#_ftn16> We were able to demonstrate a complex series of movements of funds and securities through various foreign and domestic investment and bank accounts and obtain an order to freeze $2.5 million that had just been received from the sale of the alleged wrongdoer’s interest in a private jet that was about to be transferred to an off-shore account.
The last area of parallel cases I will mention is financial reporting fraud. Here, we add another layer of expertise—that of our outstanding accountants. The Enforcement Division has over 100 accountants, each of whom has unique and important expertise that is critical to these cases. Knowledgably sifting through accounting records and audit work papers is not always glamorous work, but it is essential to making these cases, which are often based on specific and complex GAAP violations.
Just recently, we worked with the Manhattan District Attorney’s Office to bring such a case against the former chairman, executive director, and several accounting personnel from another prominent international law firm.[17] <#_ftn17> This case required sophisticated analyses of the firm’s accounting systems. Among the accounting misstatements alleged were the treatment of salaried partners as equity partners so that payments to them would not be treated as expenses; reclassifying uncollectible receivables and disbursements as collectible; and treating loans from partners as income received from clients.
Good financial reporting and vigilant auditing obviously go to the heart of the integrity of our markets and strong investor protection—which is why we have again intensified our focus on this area. Last year, we created the Financial Reporting and Audit Task Force, whose objective is to focus on trends or patterns of conduct that are risk indicators for financial fraud, including in areas like revenue recognition, asset valuations, and management estimates, and through their work identify potential cases for investigation. Our Cross-Border Working Group also has been focused on accounting fraud cases against foreign issuers whose shares trade on U.S. exchanges. Nearly all of these cases have been standalone SEC cases. Through this initiative, the SEC has thus far filed fraud actions against over eighty issuers, officers, and directors; instituted proceedings against auditors; revoked the registration of more than sixty issuers; suspended trading in the securities of seven issuers; approved enhancements to listing standards at the three major exchanges; and issued a related investor bulletin.[18] <#_ftn18> This is all part of the SEC’s all-encompassing internal effort to address serious securities law violations.
Let me stop here. Hopefully, I have given you a bit of an inside baseball glimpse into what enforcement looks like at the SEC, and how we go about making our cases, both on our own and with the criminal authorities. The SEC lawyers, accountants, and other professionals that make and bring these cases are truly impressive. They are deeply committed to the mission of the agency and make tremendous contributions not only to the cases that we bring but also to the cases brought by our criminal law enforcement partners. That approach unquestionably gives us stronger and broader coverage that is good for investors, good for the markets, and good for the industry.
Version:1.0 StartHTML:0000000149 EndHTML:0000013507 StartFragment:0000000199 EndFragment:0000013473 StartSelection:0000000199 EndSelection:0000013473 [1] <#_ftnref1> See Section 24 of the Securities Act of 1933, 15 U.S.C. § 77x; Section 32(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78ff(a); Section 49 of the Investor Company Act of 1940, 15 U.S.C. § 80a-48; and Section 217 of the Investor Advisor Act of 1940, 15 U.S.C. § 80b-17. In the criminal context, the Court of Appeals for the Second Circuit “has defined willfulness as ‘a realization on the defendant's part that he was doing a wrongful act’ under the securities laws, in a situation where the ‘the knowingly wrongful act involved a significant risk of effecting the violation that has occurred.” United States v. Cassese, 428 F.3d 92, 98 (2d Cir. 2005) (internal citations omitted).
[2] <#_ftnref2> See U.S. Securities and Exchange Commission 1993 Annual Report, at 1, available at http://www.sec.gov/about/annual_report/1993.pdf.
[3] <#_ftnref3> The average for the five most recent fiscal years is 136. See Select SEC and Market Data for Fiscal Years 2009-2013, available at http://www.sec.gov/about/secreports.shtml.
[4] <#_ftnref4> The number of such requests in 1993 was 205. See U.S. Securities and Exchange Commission 1993 Annual Report, at 1, available at http://www.sec.gov/about/annual_report/1993.pdf. The average for the three most recent fiscal years is 535. See U.S. Securities and Exchange Commission FY 2013 Annual Performance Report, at 150, available at http://www.sec.gov/about/reports/sec-fy2013-annual-performance-report.pdf.
[5] <#_ftnref5> See United States v. Kordel, 397 U.S. 1, 11 (1970); see also SEC v. Dresser Indus., Inc., 628 F.2d 1368, 1377 (D.C. Cir. 1980); United States v. Stringer, 535 F.3d 929, 939 (9th Cir. 2008).
[6] <#_ftnref6> See “SEC Files Anti-Bribery Charges Against Former Finance Executives and Senior Employees Of Global Tobacco Company” (Apr. 29, 2010) (alleging that a controller formalized the accounting methodology used to record bribes made in violation of the FCPA), available at https://www.sec.gov/litigation/litreleases/2010/lr21509.htm.
[7] <#_ftnref7> See In the Matter of Ronald S. Rollings, Admin. Proc. File No. 3-15392 (Jul. 29, 2013) (finding that a Chief Compliance Officer failed properly to supervise an associated person who was convicted of misappropriating assets from client accounts), available at http://www.sec.gov/litigation/admin/2013/34-70058.pdf; In the Matter of Comprehensive Compliance Mgmt., Inc., Admin. Proc. File No. 3-15393 (Jul. 29, 2013) (finding that the investment advisory firm also failed to supervise the associated person), http://www.sec.gov/litigation/admin/2013/ia-3636.pdf .
[8] <#_ftnref8> See Dodd-Frank Wall Street Reform and Consumer Protection Act, Section 925 (providing for collateral bars in Sections 15, 15B, and 17A of the Exchange Act and Section 203 of the Investment Advisers Act).
[9] <#_ftnref9> 17 CFR § 201.103(f)(2); 17 CFR § 205.2(a)(1)(iii).
[10] <#_ftnref10> Press Release No. 2014-55, “SEC Charges Stockbroker and Law Firm Managing Clerk in $5.6 Million Insider Trading Scheme,” (Mar. 19, 2014) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541172895.
[11] <#_ftnref11> See Press Release No. 2012-145, “SEC Freezes Assets of Insider Traders in Nexen Acquisition (Jul. 27, 2012), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171483502 ; Press Release No. 2014-26, Two Hong Kong-Based Firms to Pay $11 Million for Insider Trading Ahead of Nexen Acquisition by Company in China (Feb. 11, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540775561
[12] <#_ftnref12> See, e.g., “Feds nab 120 for fraud: Mob members, securities dealers, charged with bilking victims of more than $50 million,” (Jun. 14, 2000), available at http://money.cnn.com/2000/06/14/companies/fraud/
[13] <#_ftnref13> See Press Release No. 2013-249 “Penny Stock Financier Agrees to Pay $1.4 Million to Settle SEC Charges” (Nov. 25, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540410863; Press Release No. 2013-155, “SEC Announces Charges Against Florida-Based Penny Stock Schemes” (Aug. 14, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539776014; Press Release No. 2013-114, “SEC Charges San Diego-Based Promoter in Penny Stock Scheme,” (Jun. 18, 2013) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171605883; Press Release No. 2013-39, “SEC Charges San Diego Lawyers and Others in an International Market Manipulation Scheme” (Mar. 13, 2013) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171513254.
[14] <#_ftnref14> See Press Release No. 2014-21, “SEC Continues Microcap Fraud Crackdown, Proactively Suspends Trading in 255 Dormant Shell Companies,” (Feb. 3, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540714936.
[15] <#_ftnref15> The SEC suspended trading in 371 issuers in fiscal year 2013, and 651 issues in fiscal year 2012. See Select SEC and Market Data for Fiscal Years 2012-2013, available at http://www.sec.gov/about/secreports.shtml.
[16] <#_ftnref16> See Press Release No. 2014-52, “SEC Obtains Asset Freeze Against Promoter Behind Microcap Stock Scalping Scheme,” (Mar. 13, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541128311
[17] <#_ftnref17> See Press Release No. 2014-45, “SEC Charges Five Executives and Finance Professionals Behind Fraudulent Bond Offering by International Law Firm,” (Mar. 6, 2014) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540889964.
[18] <#_ftnref18> See, e.g., Press Release No. 2014-47, “SEC Charges Animal Feed Company and Top Executives in China and U.S. With Accounting Fraud,” (Mar. 11, 2014) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541102314; (Nov. 7, 2013); Press Release No. 2013-205, “SEC Charges New Jersey-Based Accounting Firm and Founding Partner for Failed Audits of China-Based Company,” (Sep. 30, 2013) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539849819; Lit. Release No. 22755, “SEC Files Fraud Charges Against China Intelligent Lighting and Electronics, Inc.; NIVS Intellimedia Technology Group, Inc.; and Their Sibling CEOs,” (Jul. 22, 2013) available at http://www.sec.gov/litigation/litreleases/2013/lr22755.htm.