The following comes to us from Michael Rivera, a partner at Venable LLP in Washington, D.C.
Securities and Exchange Commission Chair Mary Jo White warned that the SEC will pull no punches under the leadership of the former federal prosecutor. During a speech delivered to the Council of Institutional Investors last week in Chicago, Ms. White stated that the SEC would use its enforcement tools aggressively and creatively to ensure that its settlements “have teeth” and send a strong message of deterrence. Ms. White’s monumental achievements as a prosecutor warrant that market participants should pay close attention to her comments or risk being victims of her enforcement arsenal.
SEC will seek stiffer monetary penalties and impose broader forward-looking undertakings on companies. Ms. White said she has encouraged the SEC’s Enforcement Division to assess whether the proposed remedies in each case would sufficiently redress the wrongdoing and cause would-be wrongdoers to reconsider their actions. Ms. White believes that imposing major fines and penalties is a significant deterrent of future wrongdoing. Meaningful monetary penalties “make companies and the industry sit up and take notice of what our expectations are and how vigorously we will pursue wrongdoing,” Ms. White stated. Ms. White reiterated her frustration with current laws that limit the SEC’s authority to impose penalties to defendants’ ill-gotten gains, which are usually much lower than the amount of investor losses. Ms. White supports legislation introduced in Congress that would allow the SEC to seek penalties calculated as the greater of three times the amount of investor gains or the amount of investor losses and would permit the SEC to pursue additional penalties against recidivists. In the interim, Ms. White said the SEC “must make aggressive use of our existing penalty authority” against companies and individuals.
Ms. White signaled a willingness to move away from the SEC’s 2006 guidance that outlined relevant factors the SEC would consider in deciding whether corporate penalties should be imposed and to what degree. Ms. White observed that the current Commissioners each have the discretion to determine whether penalties against corporate entities are appropriate. Ms. White stated unambiguously that “corporate penalties will be considered in all appropriate cases.” This could portend stiffer monetary penalties against corporations, which in the past often received lighter penalties to limit the impact on blameless shareholders.
Ms. White warned the public to expect the SEC to mandate in settlement agreements – particularly those involving systems control failures – that companies institute new policies, procedures and controls to prevent similar wrongdoing in the future. Such “forward looking measures” are often included in FCPA settlements, but Ms. White stated they could be useful in other types of cases as well to prevent future violations.
SEC will pursue a continued and expanded use of admissions of guilt in settlements. As has been widely reported, in 2012 the SEC began to require admissions of guilt in settlements with parties that had pled guilty in a related criminal action. Ms. White reiterated her support for expanding this policy, explaining that “there are certain other cases not involving any parallel criminal case where there is a special need for public accountability and acceptance of responsibility.” To respond to the public demand for guidance in this area, Ms. White identified the following types of cases as “potentially requiring admissions” in settlement agreements:
- cases where a large number of investors have been harmed or the conduct was otherwise egregious;
- cases where the conduct posed a significant risk to the market or investors;
- cases where admissions would assist investors in determining whether to engage a particular party in the future; and
- cases where a recitation of “unambiguous facts” would send an important message to the market about a particular case.
SEC will seek more bars and other sanctions against individuals. Ms. White is intent on pursuing “responsible individuals wherever possible” because “[w]hen people fear for their own reputations, careers or pocketbooks, they tend to stay in line.” To that end, Ms. White has encouraged the Enforcement Division to “shift” its usual investigative routine of focusing on corporate liability in the first instance. Ms. White explained she wants “to be sure we are looking first at the individual conduct and working out to the entity, rather than starting with the entity as a whole and working in.” Ms. White added that the SEC would not shy away from imposing bars on individuals preventing them from serving on the boards of public companies or working in the securities industry.
SEC will police the “whole market.” More broadly, Ms. White expressed the importance of the SEC flexing its muscles in every corner of the securities market. Ms. White said the SEC needed “to have a presence everywhere and be perceived to be everywhere bringing enforcement actions against violators in every market participant category and in every market strata.” In particular, Ms. White said the SEC would continue focusing its enforcement efforts on punishing: (1) misconduct among investment advisors at hedge funds, private equity funds and mutual funds; (2) financial statement and accounting fraud; (3) insider trading; and (4) fraud in connection with microcap securities. Moreover, Ms. White advised market participants to expect to see more enforcement actions this year relating to sophisticated trading strategies, dark pools and other trading platforms.
SEC will enhance its trial readiness in anticipation of increased litigation. Recognizing that a more aggressive approach to settlement agreements would likely result in more defendants opting for trial, Ms. White emphasized a need for the SEC to enhance its trial readiness. Ms. White dispelled the notion that the SEC is litigation-shy and lauded the SEC’s “well-established record of winning when we go to trial.” With respect to the latter, Ms. White highlighted the SEC’s recent trial victory against former Goldman Sachs trader Fabrice Tourre.
Market participants would be wise to heed Chair White’s warnings. Ms. White’s successful tenure as the U.S. Attorney for the Southern District of New York provides ample proof of her strong commitment and ability to punish wrongdoers. Indeed, the SEC has filed a deluge of enforcement actions over the last few weeks against a broad array of market participants, including a prominent settlement requiring J. P. Morgan to pay a $200 million penalty and to publicly acknowledge that it violated the federal securities laws. Consistent with Ms. White’s warning, the J. P. Morgan investigation reportedly is continuing to determine the liability of individuals.