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.
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