On July 21, the SEC prevailed in a federal jury trial against Donald Fowler, a broker who had employed an in-and-out trading strategy for a number of his customers.  While the strategy, a close relative of churning, provided Fowler with enormous commissions, it dramatically depleted the values of the affected customer accounts.  Among other things, the SEC alleged that Fowler and his co-defendant, Gregory Dean, traded in and out of 27 customer accounts, including those of a retired Army veteran and a disabled retired aerospace engineer.  Wisely, Dean settled just before the trial began.

It’s gratifying to see the SEC litigate a case, even one that is not perfect in every conceivable way.  And although FINRA typically brings these types of enforcement action, it is certainly appropriate for the SEC to be more involved in policing bad broker conduct.  After all the SEC is the primary regulator for brokers, and it has many more investigative tools available to it than FINRA.  Moreover, SEC actions typically are more widely publicized and include greater sanctions.  An added benefit in the SEC bringing more of these types of cases, is that it may give their litigators a chance to practice their trial skills, something that can not realistically happen outside of a courtroom.  This successful action by the SEC is a step in the right direction.

This post was written for those of you who are considering whether to become a supervisor on the investigative side of the SEC’s Enforcement Division in the Washington DC office.   Here are a few things you might want to think about.

1. Most will have to work for many years as a staff attorney before getting a chance of getting promoted, at least on the investigative side of the Enforcement Division.  There are a number of supervisory positions, but, for a variety of reasons, most are filled and won’t open up anytime soon.  Once someone is promoted to supervisor, they tend to stay for many many years, meaning there are rarely any openings for promotion.  The reality is that some of the best investigative attorneys have worked for ten or more years as staff attorneys but have very little chance of becoming supervisors any time soon.  Currently there is a semi-permanent group of supervisors on the investigative side, some pretty good, some not so good and some  pretty bad.   Unfortunately, most of the bad and not so good ones aren’t going anywhere in the near future because there is no place for them to go.  Many of the good ones also stay because they enjoy the work and the flexibility the job provides.
2. You can increase your chances of promotion by working in one of the  specialty groups or the trial unit.  There tends to be more turnover in the specialty groups, resulting in more promotion opportunities.  There are also regular openings for supervisors in the trial unit, and those with real trial experience can get promoted relatively quickly (sometimes less than a year).  But there is not much trial work to go around at the SEC and SEC trial unit attorneys are really not sought after by the private sector.
3. Promotions are not strictly based on merit.  In fact, some of the the most qualified individuals may be passed up for promotion for many many years.  Sounds crazy but it is true.  Why?  Well, for a number of reasons.  First, it’s hard to figure out who is the most qualified, amongst the forty or so candidates who apply for each supervisory opening.  Accordingly, many of the vacancies are filled with a person the Associate Director or Unit Chief has worked with closely or personally knows well.  Second, the most effective attorneys in Enforcement, at least in my view, are those that are willing to push the envelope.  These attorneys make excellent prosecutors, bring great cases, but also make only a few friends along the way.  These individuals also tend to make many in the the SEC bureaucracy a little uncomfortable, particularly those who aren’t confident in their own abilities or that want to maintain a friendly relationship with the defense bar.  Third, it’s really hard to distinguish oneself, especially if your assigned cases or supervisor aren’t the best.  There are many talented staffers, and unless one has a strong mentor who is trusted by the front office to really advocate for them a very talented attorney may get passed over time and time again.
4. Do some due diligence on your potential boss.  You should try to work for an Associate Director or Unit Chief who truly excels.  What does this mean?  Well, work for someone who is fearless, persuasive, willing to speak the truth and has good judgment.  Unfortunately, each of these traits are in short supply in the SEC’s Enforcement Division and the combination of them is rarer still.  You may want to settle on an Associate or Unit Chief who is easy to work for and has good judgment.  Also, there is a fair amount of turnover at the top levels so you may not have to work for the same Associate or Unit Chief forever.
5. Do some due diligence on your potential subordinates.  You should figure out who is working in the group before signing up.   How many cases have they brought and what type of cases are they?  Why did the prior supervisor leave?  Hint:  if the group is known as the “Bad News Bears group” it probably won’t change and may even get worse.  Likewise, if there are two or more non performers (a.k.a. donkeys) in the group you will need to spend an inordinate amount of your time dealing with them, and you may end up having to do a lot of their work yourself, a recipe for disaster.  The non performers will also never be capable of bringing complex cases so you will have to find straightforward investigations that they can actually do, which will make the work less interesting and challenging than it could be.   Similarly, if there are crazies in the group, there is a chance they will try and take you out (their self preservation instincts are strong), and you may start driving yourself crazy dealing with the crazy.  On the other hand, if the staff is strong, your job will be extremely rewarding and challenging and you will actually learn a lot from your subordinates.
6. You don’t get to do much investigative work as a supervisor.  If you love doing investigations you might want to think twice before becoming a supervisor because you won’t be able to get very deep into the investigative work.  You will get exposed to more issues and more types of cases, if that’s what you are looking for, plus you get supervisory experience and a valuable title, which can be very useful if you are looking to jump to a law firm.  You also get more pay, more prestige, and more visibility if those are things that interest you.
7. It will take several years to get comfortable as a supervisor and you will need to work extremely hard to get to the point of being comfortable.  You will need to work late and to take work home, often.  The velocity of the work will change in a significant way from what you were accustomed to and any shortcomings you have will quickly be exposed to others.  You will be tested and you will need good guidance and help to succeed.  You also must be comfortable making mistakes because you will make plenty of them.  If you are not good at editing or being persuasive you will be in trouble unless you have staffers who can fill those roles.  You should have some trial experience or understand litigation so you can deal effectively with the trial unit.  Find a peer you can trust to bounce ideas off of.  After a few years of hard work, you may, however, be able to relax just a bit.
8. There is a ton of administrative stuff to do as a supervisor, along with your regular duties.  You must approve leave, certify time, write evaluations, settle disputes, respond to duplicative emails, and encourage staff to attend book clubs, speaker presentations, and what seem like weekly dedications or inclusivity functions.  Doing some of these things on a daily basis may cause you to wonder if the Enforcement Division is straying a bit from its mission and make you long for the time when you actually did real investigative work.  The administrative work does get easier to handle over time, however, even though it seems to increase in volume each year.

If you are just interested in the supervisory title or see the promotion as a stepping stone to your next job, you can ignore all of the above; it’s not really intended for you and won’t matter much if at all.   On the other hand, if you think of the SEC as a potential career and think the position sounds intriguing, you might want to consider some of the points above, particularly numbers 5 and 6.  In any event, like most important decisions, you should give it some very careful thought before deciding what to do.

 

 

It happens.  From time to time, an SEC investigation that you have invested considerable time and energy into, and that seems to be heading for a just and satisfying outcome, doesn’t end up quite the way up you expected it would.  Sometimes it’s entirely obvious why.

Other times things are not so simple or clear.  Something happens along the way to disrupt the normal course of events.

Many times you realize right away what has occurred; other times you later learn things that would have changed how you proceeded had you known them at the time.  Sometimes, if you are lucky, you are able to figure out the mystery or at least imagine that you have, and, sometimes, you are never able to understand at all what really happened.  Below, I list, in no particular order, based on real life events, some signs that things are not going to necessarily work out the way you had thought they would.

1. The SEC trial attorney assigned to your case, who just joined the SEC, has never tried a case in federal court before.
2. After a lengthy investigation, the SEC filed a complaint against a defendant in your case and the case is in the discovery stage.  The trial is not far off.  Then, suddenly, a new SEC trial attorney is assigned to the case to take over the case from the existing trial attorney.   This person is the seventh different SEC trial attorney who has been assigned to your case.
3. The putative defendant won’t agree to sign an agreement to extend the statute of limitations (a tolling agreement), and the statute of limitations for the fraudulent conduct will expire in just a few weeks.
4. The Enforcement Associate Director tells you he won’t be able to complete his review of your memo recommending enforcement action (a so-called action memo) before the statute of limitations will expire.
5. Defense counsel calls the Director of Enforcement.  During the call they the discuss the culpability of an individual under investigation and the Director of Enforcement provides confidential relevant information to defense counsel.  Yet you never learn about what was discussed on the telephone call or even of the existence of the call until years later.
6. You have diligently completed more than 70 different drafts of an action memo and the Associate Director who has reviewed all the drafts tells you that the memo is getting close to being done.
7. Defense counsel asks to meet with the Director of the Enforcement Division to discuss the penalty amount — alone, without staff present — and the Director agrees.
8. Even though you are the primary investigative attorney on the investigation, senior SEC executives meet regularly without you to discuss the merits of the case.
9. During a meeting with defense counsel to discuss the merits of your case, you find yourself nodding your head in agreement during the defense counsel’s presentation.
10. During a meeting with defense counsel to discuss the merits of your case, the head of the SEC trial unit sighs and makes a face during the SEC Associate Director’s  presentation.
11. You are the primary attorney assigned to the case and you call defense counsel to make a request for a tolling agreement.  To your surprise, defense counsel tells you that they have already talked to someone higher up in the Enforcement Division who told them that a tolling agreement is probably not necessary.
12. During a meeting with defense counsel to discuss the merits of the case, it becomes obvious that critical documents haven’t been studied, let alone looked at, by the primary investigative attorney  assigned to the matter.
13. During a meeting with defense counsel to discuss the merits of the case, the SEC trial attorney constantly interrupts the presentation, advancing new theories that haven’t been vetted or even discussed internally prior to the meeting.
14. During a meeting with defense counsel to discuss the merits of the case, the SEC trial unit attorney remains completely mute during the entire meeting.
15. The SEC trial unit attorney tells you before an important meeting with the Director of Enforcement to discuss the case that the best way to proceed has already been determined.  That information is news to you.

Being caught up in an SEC Enforcement investigation may be one of the most unpleasant life experiences one can ever have.  Investigations can be costly and time consuming, sometimes dragging on for months and often years.  During an investigation, the SEC staff may unearth embarrassing information about you or try to get you to implicate friends or colleagues–even if you were not personally involved in wrongdoing.  And, if you were involved in bad behavior, you could end up being barred from working in the securities industry or be ordered to pay stiff fines.  If things really go south, you could end up in federal prison.  Given the stakes involved, one of the most, if not the most, important decisions to make along the way is to figure out who should represent you.  Briefly, here are a few things to consider in making that decision.

Make sure that your attorney is persuasive and will advocate fiercely on your behalf.  It is extremely important that your attorney be able to communicate to the SEC staff persuasively while representing you.  This aspect is almost always the most important consideration in choosing counsel.  In addition, if the facts are in dispute or the law unclear in a particular situation, it might be useful to have an attorney with some degree of trial experience represent you.  A defense lawyer without litigation experience will seem much less imposing to the SEC investigative staff and trial unit than one who knows their way around the courtroom.  No doubt, the SEC staff will be much more concerned about litigating a case if your lawyer has spent extensive time in the courtroom.  I often heard those sentiments expressed by senior officers of the SEC while I worked there.

Make sure that your attorney is capable of handling the assignment.  Will the criminal authorities be involved or just the SEC?  Some attorneys are excellent SEC Enforcement attorneys while others specialize in criminal law.  A few are good at both.  If you have criminal exposure you should make sure that you don’t make the mistake of hiring experienced SEC counsel that doesn’t have the needed criminal experience.  On the other hand, if you are not exposed criminally, an experienced SEC attorney may be all you need–one who can navigate both the investigative progress and have insight as to the SEC personalities involved in the investigation. Believe it or not sometimes an experienced SEC practitioner will even know the strengths and weakness of the individuals assigned to the the SEC investigation, including the supervisors.  Because SEC staff abilities run the gamut, from highly capable and effective to borderline incompetent, such information may, depending on the situation, be useful to your cause.  Some attorneys that don’t specialize in SEC defense work can be excellent but their lack of knowledge of how the SEC operates and its personnel can sometimes be a downside.  These attorneys can perform well, but depending on the circumstances, maybe not as well as those steeped in SEC enforcement practices.

Don’t just hire the well know firm or counsel.  Often, the best known firms or highest profile attorneys may not be effective counsel.  It’s a sad fact that some well know law firms and attorneys are fantastic at marketing themselves but incredibly poor advocates.  In some large law firms you may also get lost in the shuffle unless you represent a significant client to the firm.  Moreover, in a big firm, the partners dealing with the SEC often don’t know the details that the junior staffer working on the matter know.  Of course, many of the large firms do have the necessary resources and expertise for some situations and some of those firms also have excellent securities defense practices.  Surprisingly, some well known national law firms also do not have capable securities defense attorneys running their practices, even though they market themselves as if they do.

It is also worth knowing that some high profile attorneys had such poor relationships with fellow SEC staffers while working at the SEC that, in my view, it would be a terrible mistake for you to have them to represent you in an SEC matter.  I know of several former SEC senior executives and staffers (and a couple of Commissioners) now in private practice who, for some reason, routinely treated their SEC subordinates and colleagues with disdain and disrespect while working at the SEC.  Human nature being what it is, the SEC staffers will not forget that dynamic when that former nemesis shows up to represent someone (or some entity) in an investigation.  At the same time, there are a fair number of former SEC senior executives and staffers who were universally well liked and respected by their colleagues while at the SEC.  They generated a lot of goodwill with their colleagues.  If at all possible try to determine which type of attorney you would be hiring because the attorney’s past relationship with the staff may have a bias effect (conscious or not) on how the staff deals with your counsel (and by extension you) and how the investigation proceeds as well as the resolution of the case.  On some occasions it may to your benefit to hire someone who has a good relationship with some of the senior officers of the Enforcement Division.

Similarly, other high profile attorneys have developed deserved reputations for lying or misleading staff on investigations, which causes SEC staff to generally distrust most things these attorneys say or do.  Again, if you choose to be represented by such an attorney, you are starting out with a big disadvantage and you will likely spend more time and money on the investigation than you should.

Make sure you get along with your lawyer.  You may be spending more than a fair amount of time with your lawyer, so make sure that you and your counsel work well together.  Take your time and interview several attorneys to make sure that your choice seems like the right fit for you; choosing who to represent you is not a decision to make casually or quickly.  If you are an individual don’t take the first person listed on the paper the firm you work for provides to you on its list of counsel recommendations.  If you a business, don’t necessarily use the same firm that you use for your general business matters to represent you in an enforcement proceeding.  Take recommendations from trusted advisors and talk to multiple attorneys to get a feel for who you would be dealing with.  After all, if the investigation lasts a while you will be spending a lot of time with this person.  It makes sense that you would have a good relationship with this person and be comfortable sharing your confidences with them.  Good counsel can, and often does, make a difference in how things proceed and then end up.

In sum, make a bad choice of counsel and what was a nothing burger could turn into a something burger.  Ineffective counsel may require you to spend more time and money than you need to, and, in some circumstances, get you you exposed you to criminal prosecution.  On the other hand, effective counsel can help you navigate the unique SEC Enforcement investigative process, help you negotiate a reasonable settlement with the SEC or possibly even persuade the SEC staff that no enforcement action is warranted in a close case.  Take your time, choose wisely

Listed below are a few tips for Enforcement Division investigative staff.  Some are fairly obvious, a few took me a while to realize, and a couple, well, those were based on my own failings.  In no particular order, here they are:

1.  Don’t let defense counsel unduly delay witness testimony.  Absent extraordinary circumstances you should not allow counsel to delay witness testimony for more a few weeks from the time you first contacted counsel.  Be reasonable, but also be ready to issue a subpoena for a day of your choosing if defense counsel won’t promptly provide you a with a reasonable date for the witness’ testimony.
2. Never ever permit a witness to get away with failing to comply with a testimony subpoena.  If you have determined that a subpoena was needed in the first place to compel the witness’ testimony then you must be willing to enforce that subpoena on a timely basis if the witness fails to appear.  Not doing so will undermine the Enforcement program in a significant way.
3. Rarely accept at face value what defense counsel tells you.  Trust but verify.  During my career, it was surprisingly common for defense counsel, including counsel associated with well regarded law firms, to make false representations to SEC staff.  Whether counsel lied intentionally to hide something that reflected poorly on their clients or lied just because they had gotten into the habit of lying, I was never quite sure.  More than a handful of times, defense counsel led me astray by providing me with information about evidence or events that didn’t hold up under scrutiny.  Though they weren’t lying per se, they nevertheless gave me unreliable information, probably just repeating what someone told them without verifying it independently.  Perhaps they were just making statements to the staff that their clients insist that they make.  Accordingly, if the facts are relevant to your matter, require defense counsel to commit their statements to writing, backed up with documentary support or affidavits.  Sometimes it is helpful to memorialize counsel statements in a letter to them describing what was said and asking them to concur or respond.
4. Work for the best supervisor you can find.   This can make a significant difference in both the cases you will be able to work on and the outcomes of your investigations.  If you supervisor doesn’t add value to the process, you will not be as effective as you could otherwise be.  A talented persuasive supervisor can make the difference between bringing a close case to a successful conclusion and nothing at all to show for your hard work. If you supervisor isn’t well respected and talented (you will know it when you see it), do your career a favor and move to another supervisory group.  Although the transition will be awkward it will not career limiting.  Don’t stick long with a mediocre supervisor when a much better one works right down the hall.
5. Just say no.  From time to time you may be asked to do something that you just want to do, whether to work on a particular investigation or to work with a particular individual.  Although it shouldn’t be your regular response to every unpleasant assignment, you can and should politely decline certain investigations or “opportunities” even when others try to strong arm you into doing them.
6. Do not expect much in the way of effort or help from SEC trial attorneys and don’t defer to their views unless they make complete sense to you.   Remember, many in the trial unit have spent little time inside of a court room and some have a limited understanding of how SEC investigations work.  It is not unusual for an SEC trial attorney to have only a basic understanding of finance or accounting.  Moreover, no matter how competent, no trial attorney is ever going to understand the facts of your investigation as well as you do.  In my experience, many SEC trial unit attorneys were often just trying to figure out how to avoid a trial, not trying to figure out how to make the case.   Most of the time it makes sense to keep the trial attorneys out of the picture until they absolutely must be involved.
7. Study the documents closely.  Most cases are made with the documents so be sure you review them carefully and understand them.   As best you can, make sure that all requested documents have been produced.  Study the documents carefully when you get them and study them again later on as the investigation proceeds.  Show them to others to see if they make the same sense of them when you can’t. Make sure you understand the documents completely, including the jargon in them.  This should be basic, but not everyone does this.
8. Be extremely wary when defense counsel tries to narrow a subpoena request.  Sometimes counsel does this because they know that a smoking gun or incriminating document has been requested and they are now trying to avoid producing it.
9. Develop relationships with others outside of your investigative unit so that you can use them as a sounding board.  These individuals can be a source of helpful wisdom and can sometimes confirm your beliefs when you think you might be correct but everyone around you is telling you that you are not.  They probably have ideas that you haven’t thought of.  Without a dog in the fight, these individuals can be valuable sounding boards.
10. Take careful contemporaneous notes when something seems amiss.  This is an big pain in the rear to do, but can very important to you or your career.  If someone, be it a colleague or defense counsel, suggests something or does something that seems out of bounds or just abnormal, document the event or discussion contemporaneously and carefully, with dates and times.  These notes may later prove invaluable if that issue becomes relevant.
11. Be suspicious of early settlement offers. If defense counsel makes a settlement offer soon after your investigation begins, that may suggest that you are close to uncovering something bigger and better.  Yes, you can accept the early settlement but it also might mean that you are foregoing the bigger prize.  By settling early counsel  is sometimes trying to protect individuals or keep hidden a problem unrelated to the investigation as you understand it.
12. If the case merits the cost, put the witness testimony on video tape.  A dry testimony transcript (often filled with ridiculous typos and misspellings) doesn’t capture the witness like a video recording of witness testimony
13. Don’t give up.  Sometimes a supervisor with limited information or insight might not like your approach to a problem or share your view about a potential violation.  Keep at it though until you are satisfied.  In general, others (particularly at the top of the supervisory pyramid) have only spent a fraction of the time that you have thinking about the issues associated with your case.  Keep trying if you don’t think your arguments have been adequately considered.  Sometimes as an Enforcement attorney you have to step on a few toes in order to accomplish your objectives.

A few observations on the SEC investigation of Elon Musk and Tesla and resulting settlements.

1. Unsurprisingly, the SEC enforcement division has highlighted its settlements with Elon Musk and Tesla in discussing the enforcement actions it brought during the  fiscal year ended September 30, 2018.   Because of the high profile nature of the defendants and the favorable outcome to the SEC, these settlements will be touted over and over again by SEC senior staff in the weeks and months to come.
2. The staff’s investigation into the allegations surrounding Musk’s tweet was completed very quickly.  Musk tweeted about taking Tesla private on August 7, 2018, and the SEC filed a complaint against Musk on September 27, 2018.  That is fast work for the SEC.
3. The case wasn’t as straightforward and obvious as many have suggested.  The core of the case concerned a tweet by Musk on August 7, 2018, in which he wrote:  “Am considering taking Tesla private at $420.  Funding secured.”  The SEC claim is that that statement was false and/or misleading.  But, Musk claimed that he had in fact met with three representatives of a Saudi investment fund on July 31, 2018 to discuss taking Tesla private and during the meeting, one of the representatives of the fund (an individual empowered to make investment decisions for the fund) expressed interest in taking Tesla private.  Musk further claimed that at the end of the meeting, the representative asked Musk to tell the fund how he wanted to do a going-private transaction and represented that so long as the terms were “reasonable,” the fund would be fine with them.  If Musk’s version of events is accurate, the case would then have to turn on what “Funding secured”  meant in the context of the first sentence of the tweet (where he is considering taking the company private) and whether having a deep pocketed investor say that it would be fine with whatever terms Musk came up with is significantly different from secured funding.  The answer to that question is certainly not free from doubt.  Moreover, I am far from convinced that a jury would be willing to do in a company and its charismatic leader for the difference between what Musk said on his Twitter account and the actual facts.
4. In reading the SEC complaint it appears that the staff’s investigation into Musk’s behavior was relatively comprehensive but that there was also at least one significant hole in the SEC’s case.  The complaint fails to describe what the three fund witnesses recalled related to the July 29 meeting with Musk.  I think the reason for this omission is significant and can only mean that the SEC never spoke to the three witnesses.  This would have been a major litigation risk if the case had moved forward.
5. The Commission and its staff moved heaven and earth to get the settlements completed and filed in federal court court before September 30, which just happens to be the SEC’s fiscal year end.  The staff filed a complaint in federal court against Musk on Thursday September 27, after settlement talks with Musk apparently unraveled earlier that day (if you believe the press accounts).  The SEC staff then filed  settlement papers in court on Saturday, September 29, the last possible day to file the papers before the SEC’s fiscal year expired.  The September 29 court filing likely was preceded by intense back and forth negotiations between the SEC and counsel for Musk and Tesla and then drafting and redrafting the settlement papers.  The staff then needed to get the filings in order with appropriate review and approvals by the counsel and then all the papers filed in the New York courthouse.  Moreover, since the Commission typically meets to vote on Enforcement recommendations each Thursday, in this situation SEC enforcement staff either had obtained so-called “stand-by” authority to accept the settlements without further approval by the Commission or the Commission convened some sort of special meeting to approve the proposed settlements, either on Friday September 28 or Saturday September 29.  Obviously, the SEC badly wanted the settlements to be included its 2018 year statistics and didn’t follow traditional protocol to achieve that goal.  Kudos to the staff for working round the clock to make this happen (Commission awards to follow), even though there doesn’t really seem to be a very compelling reason to file the settlement papers on a Saturday, unless, of course, the SEC wanted to juice its enforcement statistics for 2018.
6. Although Musk settled to a securities fraud charge, Tesla was only required to settle to a much less serious charge involving internal controls, even though Tesla could certainly have been charged with fraud under well-established legal principles.  It is unclear why Tesla was given such a break — whether the settlement represents a significant shift in policy for corporate settlements by the SEC or was simply a settlement compromise in this particular instance.  Either way, the SEC should have been more forthcoming and transparent about its rationale for not charging the company with fraud and subjecting them to a fraud injunction.   Under this new policy or settlement position, when will the SEC charge a company with fraud when a senior officer of the company is charged with fraud?  Precedents matter.
7. The settlement requires Tesla to create a committee of independent directors to monitor potential conflicts of interest.  This requirement has nothing whatsoever to do with Musk’s tweets so was probably included as a way to resolve another part of the SEC investigation.   The SEC was probably willing to close that part of the investigation in exchange for Tesla including that provision as part of the settlement.
8. The Wall Street Journal recently reported that the Department of Justice is investigating whether Musk or Tesla misled investors about production of its Model 3 vehicle but that the SEC is not investigating such conduct.  I suspect that this article is inaccurate or incomplete in some way.  In most instances of potential financial fraud concerning public company financial statements, the SEC is generally involved.  DOJ typically does not have the expertise or resources to do such investigations and therefore is not inclined to do them without SEC involvement.

I thought it would be interesting to look at some of the memorable statements made in the past by SEC senior executives and commissioners.  Some of the statements are colorful, others quite insightful and memorable, a few comical, even ridiculous.  A few of them turned out to be unfortunate in their timing.  Try to match each statement with the maker of the statement, not its drafter.  The answers are provided below.

1. “We are committed to vigorous enforcement as a means of protecting our seniors.”
2. “The opioid epidemic is so pervasive that it touches many investors, including our seniors”
3. “The retail investor must be a constant focus of the SEC – if we fail to serve and safeguard the retail investor, we have not fulfilled our mission.”
4. “In many ways, the most visible face of the SEC is what we do to enforce the law.”
5. “The SEC is not an enforcement agency …”
6. “When I believe that we ought not to have spent our Enforcement Division’s time and effort on a matter, I am likely to vote against it.”
7. “Well, we are against fraud, aren’t we?”
8. “As the head of the S.E.C., you’ve got to get back into reffing the game properly and end the demonization of Wall Street.”
9. “As our enforcement staff has heard me say exactly 2,735 times, I always start every case at “No” and must be persuaded to reach a “Yes.”
10. “We ought to hold individuals accountable, not shareholders.”
11. “It would be unusual for us to impose a fine against a publicly traded company because ultimately, it comes out of the pockets of shareholders who haven’t done anything wrong,”

12. “The bottom line for me is that corporate penalties will be considered in all appropriate cases … Strong penalties are just a starting point.”

13. “The commission in recent years has handcuffed the inspection and enforcement division. The environment was not conducive to proactive enforcement activity.
14. “We have got brokers’ advocates; we have got Exchange advocates; we have got investment banker advocates; and we are the investor’s advocate.”
15. “I blame no one. All I can [say] is that these problems did not arise overnight, and they certainly didn’t arise on my watch.”
16. In the action that the Commission brought against James O’Hagen, the Minneapolis lawyer whose case gave rise to the Supreme Court’s approval of the misappropriation theory, this person said that he intended to leave O’Hagen “naked, homeless, and without wheels.”
17. “Government would keep the shotgun, so to speak, behind the door, loaded, well-oiled, cleaned, ready for use but with the hope it would never have to be used.

In a blog post written a while back, I mentioned that the number of SEC actions and monetary sanctions seemed drastically lower than in past years.  These statistics are closely tracked and followed by the public and Congress and are generally considered a measure of the Enforcement Division’s effectiveness and productivity.  In the same blog post I further suggested that SEC leadership would realize the negative political consequences that could result from a sharp decline in Enforcement statistics and therefore would likely make a concerted effort to push cases forward to improve its  statistics before its fiscal year end.

I was definitely correct about the Enforcement statistics being way down but now admit that I was likely wrong to suggest that there would be a turnaround.  If you regularly visit the SEC’s website you will see the obvious:  that the Commission has not filed many Enforcement actions in the recent weeks and months.  Last week, the number of actions slowed to a mere trickle, none of which were particularly notable or newsworthy.  At this point in time, with only a handful of months left in the fiscal year, including  the notoriously slow summer months, it is almost impossible to make up for the shortfall.  If that isn’t enough evidence, the recent speeches by Commissioners Piwowar and Peirce and the Congressional testimony of the Enforcement co-heads show clearly that these SEC executives expect that the number of SEC actions and monetary sanctions will be much lower than in the past.  Here is a sample of paraphrased statements that SEC leaders made recently:

1.  We don’t judge our effectiveness in simplistic metrics such as the raw number of enforcement actions or total fines and disgorgements;
2. We have finite resources;
3. Some of the cases filed in the past were not significant;
4. Raw numbers are not the measure of our success;
5. We are spending our scarce resources going after individuals;
6. Pursuing individuals likely has an impact on the total number of enforcement actions we can bring in any given period;
7. The Supreme Court has made it difficult to collect monies from long ago; and
8. We are no longer measuring success by tallying up enforcement statistics.

So, statistics will be down, no doubt about it, and SEC senior management has all but conceded the inevitable.  They are now hard at work justifying the outcome before it becomes official.  An important question is what on earth has caused the drastic decline in SEC monetary sanctions and actions.

Maybe, as Enforcement co-head Steve Pieken claimed in a recent speech, the Enforcement Division is actually redoubling its efforts to pursue individual charges in each investigation.  If this was indeed a change in policy, it could certainly consume more staff resources and result in fewer enforcement cases filed.  I don’t think that is the situation though.  The Commission has for many years directed SEC staff to look long and hard at potential individual misconduct in its investigations and many securities law violations actually require some sort of individual culpability as a mater of law.  Moreover, if this Commission were in fact filing more cases against individuals than in past years, such actions would be well publicized.  That hasn’t been the case and, in fact, one of the enforcement actions involving potential individual misconduct that SEC officials regularly highlight is the litigated case against Rio Tinto and two of its former senior officers, which, as I suggested before, has some major shortcomings, particularly with respect to the allegations against the individuals.

Another possibility is that Commissioners Piwowar and Peirce are gumming up the works somehow.  In reading their recent speeches, it’s obvious that they don’t have much interest in SEC Enforcement actions, beyond those involving quasi criminal types of behavior.  They both also happen to have some peculiar views on a variety of SEC Enforcement topics, with Piwowar recently proclaiming in a speech that his initial reaction to every Enforcement action he sees is “No” and, if the proposed action involves corporate penalties, he has typically started and ended up with “Hell No.”  No doubt aware of his subtle irony, in the same speech he contended that he understood the ethical requirements he followed as a Commissioner “to mean that [h]e cannot allow public outcry, agency morale, politics, or jurisdictional turf battles to be reasons for pursuing, or not pursuing, an enforcement action.”

For her part, Commissioner Peirce has attempted to excuse her extreme anti-enforcement attitude in numerous ways, explaining her votes against enforcement actions as principled decisions.  Among other things, she cites concerns about adequate “due process” accorded defendants subject to Enforcement actions and worries that, if corporate entities pay SEC fines, shareholders of those corporations will end up paying twice for corporate wrongdoing.

I have to confess it’s difficult to understand her due process concerns, particularly since the SEC affords nearly every potential defendant seemingly endless opportunities to defend themselves and many lawyers in the securities defense bar tend to be quite sophisticated.  Do potential defendants need more meetings with staff and the Directors of Enforcement?   More white papers or wells submissions?  I suspect most defense attorneys would say “of course, yes please,” while suppressing a chuckle.  Perhaps her due process concerns would be easier to follow if she added a little more analytical substance to buttress them.  Or perhaps she is using the phrase due process to mean something other than its traditional legal meaning.

I also confess that I ran the numbers a few times, read and reread her example, and still could not understand Peirce’s claim that corporate shareholders end up paying twice for corporate wrongdoing if the SEC fines the corporation.  Though other Republican Commissioners (including Commissioner Piwowar) have repeated the same claim, so far none has been able to convince any serious person that that actually occurs.  Maybe some rigorous economic analysis or better examples would better illuminate this proposition.  Or maybe she is using the word “pay” to mean something other than what it usually means.

All this being said, I doubt seriously that Commissioners Piwowar and Peirce bear a significant portion of the blame for the scarcity of Enforcement actions  After all, they are just two of five Commissioners and cannot really make policy on their own or even together.  They can certainly make life more difficult and unenjoyable for Enforcement staff, but realistically they don’t have much say unless other Commissioners are recused from a particular enforcement matter, hopefully a rare situation.  Generally speaking, these two Commissioners don’t get to decide which Enforcement cases get brought before the Commission for a vote.

The individual that generally can decide which Enforcement cases are brought before the  Commission to approve is the Enforcement Director, or as it now stands, the Enforcement co-Directors.  I believe that the current co-Directors of Enforcement bear a large measure of the responsibility for the shortfall in Enforcement cases.  It falls to them to operate the Division productively and to move cases effectively through the approval process maze.  With the Enforcement Division now led by two seemingly competent Directors (rather than one, as has historically been the case) a reasonable person would expect to see more, not less, Enforcement actions filed than in those periods in which there was just one Director.

Most prior Enforcement Directors have seemed to have really enjoyed the position as well as the people working in the Enforcement Division and all seemed quite fond of the status and power that the position provides.  Prior directors usually worked extremely long hours, including many late nights and most weekends.  I suspect that the current co-Directors have similar work habits and attitudes, otherwise they wouldn’t have gotten the jobs.  It seems, however, that, for some reason, fewer enforcement cases are making it to a Commission vote, which suggests that something is amiss within the Enforcement Division.   Either the process of completing a case has slowed for some reason or legitimate cases are being stymied or killed.

By this juncture, more than a year into their jobs, the co-Directors should have shed their defense lawyer skins and should be relatively comfortable with the job demands.  They should have a good handle on the skill sets of a wide swath of their subordinates. They should know which supervisors in the Division they can count on to bring the high profile and challenging cases and which individuals they can trust and rely on to make sound decisions.  They should know which litigators have the skill sets and aptitude for trial and which are best working on litigation motions or even less intensive projects.  They should know which decisions are worth spending scarce time on and which are not and should be quite comfortable making independent decisions that involve some risk.  Perhaps most importantly, they should be exceptionally effective in advocating on behalf of the Division and investors.  If they have not yet become proficient in the director role and all that it involves, they may never be able to get there, and perhaps should start contemplating a return to the private sector, knowing that they have at least gained highly sought after experience that should significantly enhance their earnings power.

 

 

 

In early May, the SEC filed a subpoena enforcement action in federal court against Shawn Carter.  According to the SEC filing, on November 17, 2017, he SEC sent Mr. Carter a subpoena for testimony and he failed to appear on the date specified in the subpoena.  The SEC was kind enough to send him a second subpoena, and then, when he failed to show for that one, proposed a new date and then a deadline.  Last week, in a well-publicized rebuke to Mr. Carter and his attorneys, the judge assigned to the case ordered Mr. Carter to appear for testimony on May 15.

I commend the SEC for bringing the enforcement action and was gratified to see that the judge assigned to the action had no patience for further delaying the testimony.  Such SEC enforcement actions are pretty rare — most often testimony dates can be worked out and filing subpoena enforcement actions take considerable time, a tedious task most staffers aren’t overly enthusiastic to deal with.  At the same time, many defense attorneys have the mistaken belief that they can delay witness testimony for a considerable amount of time or set the terms or conditions of testimony.  While at the SEC, I observed more than a few defense counsel try to delay or limit client testimony and also saw a variety of responses by staff attorneys to such tactics and demands.  For some reason, many SEC staff attorneys (and more than a few supervisors) seemed to believe that it was often appropriate to give defense attorneys and their clients considerable latitude and deference, at times treating them with undeserved kindness bordering on affection.  Similarly, I often saw staff attorneys treat statements by defense counsel about important aspects of the investigation as actual facts.  That was almost always a serious mistake.  I admit that I too made many mistakes in dealing with such basic issues, and many times treated defense counsel with considerable deference and trust for much longer than I should have.

The most effective SEC attorneys I worked alongside with usually made sure to have witnesses appear for testimony within a couple of weeks of request, while the least effective took a month or more to schedule witness testimony only to be delayed further as defense counsel found some sort of new client obligation or situation to interfere with the testimony date (say a brief to be filed in another case. a long awaited vacation, a sick pet ,or some similar emergency.)  My belief is that how a staff attorney and the staff’s supervisors dealt with such basic issues often set the tone for the course of investigation and that a lackadaisical response to certain defense tactics could unduly delay an investigation or even throw an investigation completely off track.  Hopefully, the successful action against Shawn Carter will remind SEC staff  that at least with respect to the testimony demands of witnesses, SEC staff, not defense counsel, generally holds all of the cards.

An example of how, at least in my view, to effectively deal with difficult witnesses and defense counsel might be helpful here.  While working at the SEC, I heard of a situation in which a witness who was testifying pursuant to subpoena decided that he would stop testifying and just get up and leave (presumably the witness didn’t like how it was going).  The witness left the room and walked out of the SEC offices.  The staff attorney quickly cornered the attorney for the witness and told him that his client could certainly abandon the testimony but if he did there would be severe consequences:  the staff attorney would immediately begin drafting litigation papers for a subpoena enforcement action and the action would be filed in court the next day.  I have no doubt that the SEC enforcement attorney meant what he said.  Needless to say, the witness soon returned to the room and completed the testimony.  The SEC Enforcement program enjoys significant benefits from such perfectly appropriate yet demanding actions by its attorneys — its credibility and effectiveness are both greatly enhanced.