Download Securities Enforcement: Overview

Securities Enforcement: Overview
Stavros Gadinis
Professor
Berkeley Law School
The SEC: A Primer
• Independent Federal Agency created by the 1934 Act
-
5 Commissioners appointed for 5-year terms upon
recommendation of the President and confirmed by the Senate
‣ 1 Chair, 2 Commissioners chosen from the President’s party
‣ 2 Commissioners chosen from other Party
-
Cannot be dismissed prior to expiry of tenure unless for cause
-
Budget set by Congress
• The SEC is huge
-
about 4,500 staff
-
1,300+ enforcement staff
The Enforcement Toolkit: Actions and Venues
• Civil Actions
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SEC Enforcement Actions
‣ Civil Lawsuits: brought by the SEC before federal courts
‣ Administrative Proceedings: brought by the SEC before
Administrative Law Judges, specialized judicial personnel
within the SEC itself
-
Private lawsuits - typically class actions
‣ The SEC may join
• Criminal Actions
-
Brought by the Department of Justice (DoJ), or State Attorneys
General (AGs)
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In cooperation with the SEC
The Enforcement Toolkit: Sanctions
• Monetary Sanctions
-
Fines (Civil Penalties)
‣ requested by the SEC, imposed by courts or ALJ, or agreed
by defendants in settlement
‣ paid to the US Treasury, but can be used as investor relief
-
Disgorgement: recovering illicit gains
‣ requested by the SEC, imposed by courts or ALJ, or agreed
by defendants in settlement
‣ distributed to victims of misconduct through Fair Funds
• Non-monetary Sanctions
-
cease-and-desist, censure
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bans from securities activities (temporary or permanent)
Typical Timeline
Referral
• Data Research
• Inspection
• Whistleblower
• Press Report
Formal
Investigation
Subpoenas
Opens
Matter Under Inquiry
Informal Investigation
Commission
initiates action
Defendant
Settlement
Proposal
Staff
Recommends
Action
Resolution
• Settlement
• Ruling
Hearings
Witnesses
The Enforcement Toolkit: By The Numbers
Civil actions in 2016
868 (564 stand-alone)
Criminal actions in 2016
134
Private federal securities
class actions in 2015
189
Requests to/from foreign authorities
for assistance
SEC wins at least in part
929/531
92% of all actions brought
Average months between MUI and
commencing action
20
Penalties and disgorgement 2015
$4.195 billion
Distributed to investors 2015
$158 million
Individuals and Admissions of Wrongdoing
Holding Individuals Accountable
• Sarbanes-Oxley (2002) certification requirements
-
CEOs and CFOs must personally certify that company
disclosures and financial statements do not contain untrue facts
or omit material ones
-
Auditors must assess the adequacy of the company’s internal
controls
• Sarbanes-Oxley imposed criminal liability for violations of the
certification requirements
• In September 2015, Deputy Attorney General Sally Yates issued a
memo redirecting efforts to holding individuals accountable
-
Providing evidence about individuals could become a condition
for corporate resolution
Prevalent Settlement Policy
• When settling with the SEC, most defendants “neither admit nor
deny wrongdoing”
-
Limits reputational fallout for the defendant
-
Allows defendant to continue fighting other litigation (criminal,
investor)
• Many such settlements involve corporate entities, and not
individuals
-
Precludes any finding of intent, knowledge, or recklessness
‣ even if board members are found liable, they are deemed
“not in bad faith”
‣ any payments can come from D&O insurance rather than out
of pocket
Criticisms and Justifications
• Criticisms?
-
Too lenient, no accountability
-
Does not deter future wrongdoers
-
Favors managers in big corporations with deep pockets, but
harms shareholders
• How does the SEC justify this approach?
-
Without this clause, most defendants would opt to fight the SEC
in court, thus diverting the agency’s resources from other
matters
-
In many cases, particularly those against big corporations,
decision-making is decentralized
‣ identifying individual wrongdoers is very hard
-
Achieves the key mission: to punish the wrongdoing and obtain
funds to relieve harmed investors
A New SEC Policy
• In 2011, Judge Rakoff (SDNY) criticized the SEC’s approach
rejecting Citigroup’s settlement
-
Mounting criticism from Congress, academics
• In 2013, SEC Chairman Mary Jo White announced a change in
policy
-
The SEC would now seek admissions where appropriate
• How have things changed?
-
In the last 3 years, they have gotten about 40 entities, 30
individuals to admit
‣ egregious intentional misconduct
‣ particularly used against auditors
-
“Neither admit nor deny” remains by far the prevalent strategy
The SEC Whistleblower Regime
Statutory Framework: Overview
•
•
Dodd-Frank Act (2010) introduced whistleblower provisions
-
If original information voluntarily provided by a whistleblower
leads to successful SEC enforcement action with over $1m in
sanctions…
-
…the whistleblower is entitled to between 10% and 30% of
collected sanctions
The SEC has discretion to determine the exact amount to be
awarded (between 10-30%) but must consider:
-
Significance of information to success of action
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Degree of assistance provided by the whistleblower
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Interest of SEC in deterring violations
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Other factors it may establish
SEC Rules: Exclusions and Anti-Retaliation
•
Individuals Excluded:
•
Officers, directors, trustees, or partners of the target
•
Compliance or internal audit personnel
-
•
Unless they have reasonable basis to believe that disclosure
was necessary to prevent company from violations
Expanded protection against retaliation
-
Private right of action against employers
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Reinstatement, double back-pay, reimbursement of costs
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Coverage expanded to subsidiaries, affiliates
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Bars enforcement of confidentiality agreements: the SEC is
taking action against companies that seek to constrain their
employees contractually
SEC Rules: Should Whistleblowers Report
Internally First?
•
Companies pushed the SEC to include a requirement that the
whistleblower first reports internally, and goes to the agency only
after internal measures are exhausted
•
The SEC did NOT require this in the end – so whistleblowers can
go directly to the SEC
•
But the SEC provides for incentives to whistleblowers to report
internally first
-
It will matter in determining the award
-
It will allow them to use the internal report date as the initial date
of their report to the agency
The Success of the Whistleblower Program
•
The SEC has granted $111 million to 34 whistleblowers in 3 years
-
It has gained $584 million in related enforcement actions
•
4,200 whistleblower tips reached the SEC in 2016
•
But the SEC provides for incentives to whistleblowers to report
internally first
-
It will matter in determining the award
-
It will allow them to use the internal report date as the initial date
of their report to the agency
The Foreign Corrupt Practices Act (FCPA)
FCPA's Jurisdiction
•
The FCPA applies to:
•
Any ISSUER under the U.S. securities laws
•
Public companies, domestic or foreign, that are registered
under Section 12 of the 1934 Act or are required to file
periodic reports with the SEC
•
DOMESTIC CONERNS: U.S. companies, citizens,
nationals, and residents
•
ANY PERSON OR ENTITY that engages in ANY ACT in
furtherance of a corrupt payment while in the territory of the
U.S.
18
FCPA’s Anti-Corruption Provision
•
Prohibits corruptly making, offering or promising to make, a
payment, gift, or anything of value, directly or indirectly, to a
foreign government official for the purpose of obtaining or
retaining business
• A payment, offer, or promise is unlawful if the purpose is to
• (1) influence an official act or decision, or
• (2) induce an official to act or not act, in order to
obtain, retain, or direct business or secure an
improper advantage
• “Anything of value” is very broadly defined
• Includes gifts, entertainment, travel, and hospitality;
contractual payments; personal favors; donations to an
official’s favorite charity; cash; stocks/bonds; and more
• "Indirectly": Through an intermediary (third party) while
"knowing" the payment or gift will corruptly be passed on
19
Who Is A Government Official?
•
Very broadly defined
•
Not limited to high-level officials
•
Includes people acting officially on behalf of a government
entity
•
Includes employees of government-owned or
government-controlled entities
•
Fact-specific analysis (“instrumentality”)
•
Includes relatives of government officials
•
Includes political parties, party officials, and candidates
•
Includes employees of international organizations
20
Third Parties
•
Companies may be liable for an FCPA violation committed by
third parties (distributors, agents, contractors, suppliers, etc.),
even if they do not participate directly in the corrupt activity
•
FCPA violations can occur through payments to third parties
while "knowing" that money will corruptly be passed on to
foreign government officials
•
"Knowing" means that you knew, or should have known,
about “red flags” indicating a risk of corruption – You
cannot put your head in the sand
21
FCPA Cases in Practice
• Self-reporting
-
Compliance officers get hold of tips about an FCPA violation
-
After internal investigation, they typically self-report to the SEC
to obtain benefits at settlement
• Resolving the criminal aspects
-
Companies and DoJ typically enter into a Deferred Prosecution
Agreement (DPA)
‣ Company agrees to a fine
‣ Company agrees to undertake reforms in its internal
governance to prevent similar violations in the future
‣ Often criticized as lenient