United States: SEC Annual Conference Highlights 2014 Accomplishments And Promises To Turn Up The Heat In 2015

With Chair Mary Jo White in her second year at the helm, the Securities and Exchange Commission showcased its efforts, improvements, and enforcement successes at this year's SEC Speaks Conference. The Commission highlighted that it brought a record number of cases—755 enforcement actions—in fiscal year 2014, and obtained $4.1 billion in monetary relief. The Commission continues to emphasize its increased use of data analytics in both its regulatory efforts and enforcement investigations. As usual, the Commission, and the Division of Enforcement in particular, used the Conference to present their case that the SEC is firing on all cylinders.


According to Division of Enforcement leadership, insider trading continues to be a priority; the SEC has named 580 defendants in insider trading cases over the last 5 years and strong cases are still in the pipeline. The Staff's evolving ability to analyze trading, both within a single account and across the accounts of multiple entities and individuals, enables the staff to identify traders and their information sources who may be potentially violating the insider trading laws. This, in turn, has helped the Staff discover, investigate, and initiate many cases, and has helped fill the Enforcement Division's inventory for the upcoming year.

It was no surprise that Enforcement staff commented on the Second Circuit's decision in U.S. v. Newman.1 The decision—vacating two criminal convictions for insider trading—could have a significant impact on insider trading enforcement as it appears to potentially raise the standard for finding liability by tippers and tippees in insider trading cases. As a result, the Commission has joined the U.S. Attorney in seeking a modification of the ruling. However, the Staff indicated that despite its disagreement with the Newman ruling, the majority of its current cases will not be affected by the decision.


Chair White and the Staff praised the Division's renewed focus on financial reporting and auditing cases. The Financial Reporting and Audit (FRAud) Task Force is "bearing fruit," according to Chair White, who predicted a continued uptick as the Task Force continues to focus on identifying cases through its use of new resources. Some key areas under scrutiny include revenue recognition, expense recognition, auditor independence, faulty valuations, related-party disclosures, and deficient audits.

David Woodcock, Regional Director of the Ft. Worth Regional Office and Chair of the FRAud Task Force, and Margaret McGuire, Senior Counsel to the Director and Vice-Chair of the FRAud Task Force, noted the marked decrease in restatements in recent years and suggested that companies, boards, and auditors are more in tune to the possibility of financial fraud. Mr. Woodcock highlighted some of the important financial fraud cases brought last year, including: SEC v. CVS Caremark Corp., where misleading disclosures resulted in a $20 million penalty, and SEC v. Diamond Foods Inc., a case of underreporting expenses to inflate income that led to a $5 million penalty against the company.

The Task Force heads also discussed several cases brought last year alleging faulty internal controls that stood without the usual accompanying fraud allegations. One example is an action against JDA Software, which agreed to settle allegations of improper revenue recognition for service agreements and inaccurate reporting of revenues. The violations stemmed from inadequate internal controls surrounding revenue recognition, including the lack of adequate revenue recognition policies and procedures and failure to identify all service-related contracts necessary for fair value testing.

In addition to the above cases, the staff reminded the audience that the conduct of financial reporting gatekeepers such as auditors remains under the microscope of Operation Broken Gate. And last year's broker-dealer audit sweep—handled in conjunction with the Public Company Accounting Oversight Board—netted settlements in eight cases alleging auditor independence violations.

McGuire highlighted issuer monitoring and Internal Control over Financial Reporting (ICFR) as two of the FRAud Task Force's initiatives. The Task Force has instituted its own review process, and is using internal and external data and tools to review and monitor issuers so they can spot potential areas of investigative interest early in the process. The Task Force has identified over 200 issuers of interest spanning various industries and accounting practices. According to McGuire, after reviewing each individual matter, the Task Force can decide either to close the matter because there is no reason to investigate further, to refer the matter to Enforcement because there is a clear need for further investigation, or to "incubate" the matter further within the Task Force.


Kara N. Brockmeyer, Chief of the FCPA Unit, reported that in fiscal year 2014 the Unit brought seven cases. In this fiscal year, beginning in October, the Unit has already filed as many cases as it filed in all of fiscal 2014. Ms. Brockmeyer indicated that the FCPA Unit remains focused on the perennial hot spots: China, Russia, and Africa. However, the Middle East and Southeast Asia have seen an uptick in bribery schemes. Going forward, the Unit is going to focus on small- and medium-sized companies that enter international markets for the first time.

Key to the Unit's ability to perform more efficient and effective investigations is its efforts to give meaningful credit for cooperation. Real-time reporting of investigative findings, bringing foreign employees to the United States or other jurisdictions where they can be interviewed, and advising the SEC of terminations prior to letting employees go, illustrate the high level of assistance that is expected in order to merit such credit. The recent case against Goodyear outlines many of the steps that a company can take to receive meaningful cooperation credit. The Unit has seen an uptick in self-reporting, according to Ms. Brockmeyer, as well as increasing levels of international cooperation and an increasing number of cases where the Unit works in tandem with foreign regulators and foreign prosecutors.


The Broker-Dealer Task Force was described by Director of the New York Regional Office Andrew Calamari as an "incubator of ideas." Its work includes initiatives relating to anti-money laundering regulations and recidivist brokerage firms that shelter rogue brokers and engage in abusive activities. In addition, the Broker-Dealer Task Force works closely with the broker-dealer program within the Office of Compliance, Inspections and Examinations, as well as the Division of Trading and Markets and FINRA. Here are some of the staff's announced priorities:

  • Churning, the practice of brokers recommending excessive trading for commissions, reappears on the Commission's task list more than 30 years after its peak.
  • A Bank Secrecy Act Review Group that functions within the Office of Market Intelligence is looking at anti-money laundering compliance by analyzing securities-related SARs to identify patterns and trends in the information. This type of analysis could help determine whether there are compliance-related violations and could assist in other ongoing investigations. Enforcement's so-called "17a-8 Working Group," with members nationwide, will take on AML-related investigations.
  • Investments in alternative products and IRA rollovers and retirement vehicles, given the greater imprecision in valuation and the opportunity to take advantage of investors, are of renewed interest.


Michael J. Osnato stated that the Complex Financial Instruments Unit under his direction works to keep the Enforcement Division on the cutting edge of complex financial instruments. The Unit looks for ways to streamline its investigations through the aggressive use of cooperation and resolution tools such as reverse proffers, in which the staff lays out the case for counsel and the firm at a relatively early stage with a view to cutting past much of the investigative work and heading straight to settlement discussions. In 2015, the Unit will maintain a significant focus on complex products and their impact on a bank or financial institution's financial disclosures.


Chief Litigation Counsel Matt Solomon recounted the Enforcement Division's litigation highlights, noting that the 30 trials in 2014 were the most trials for the Commission in a decade, and five times the number of trials in 2013. Two-thirds were federal court trials, with the balance adjudicated by administrative law judges. Overall, Solomon said, the Commission boasts an 80% win rate. The victories include some high profile cases, such as the verdict against Sam and Charles Wyly, Texas businessmen that the Commission accused of using offshore accounts to hide stock purchases and sales that netted more the $500 million in profits over a decade. Solomon said that Sam Wyly and the estate of his late brother are subject to the "staggering" penalties despite the army of defense lawyers involved in the case. Solomon stated that the Commission will not shy away from litigating difficult cases that could significantly impact securities jurisprudence. He summarized that the Commission "will be fair, but will throw hard punches. If we're not losing, we're not being aggressive enough."


Assistant Chief Counsel Sam Waldon discussed what he called the "most significant" Commission decision of the year, In the Matter of Flannery and Hopkins. Addressing interpretations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934, this decision puts issuers and members of the investing public on notice of the Commission's views regarding how these antifraud statutes and their subparts work together. Waldon stated that the Commission's interpretation of the anti-fraud statutes is both broader and narrower than those adopted by the Courts.

Waldon extracted the four key aspects of the case and the effect of the Commission's decision on longstanding judicial interpretation.

1. The subparts of Section 17(a) and Section 10(b) are mutually supporting, not mutually exclusive.

2. Primary liability under Section 17(a)(1) and(3) and under Rule 10b-5(a) and (c) extends to anyone involved in making a material misstatement as well as those who draft or devise the misstatement.

3. Only conduct that is manipulative or deceptive can violate Section 10(b). But Section 17(a) is not limited to conduct that is manipulative or deceptive. A defendant who engages in a legitimate transaction knowing that the transaction will be used to misstate financial information can be liable for violating Section 17(a).

4. Materiality is defined by two principles: the information is objectively material regardless of the sophistication of the investor; and materiality does not require a showing that the information would have caused the investor to change his decision. Rather, information is material as long as it would be important to the investor's analysis.

The Commission's straightforward pronouncement—which in some ways conflicts with federal appellate jurisprudence—demonstrates that the Commission will maintain its interpretation of what constitutes fraudulent conduct despite court decisions that could either extend or limit the reach of the securities laws.


A strong Enforcement Division continues to reign at the SEC, with an ever-increasing array of investigative bells and whistles at its disposal in the form of enhanced technology, dedicated task forces, and tools to increase cooperation and self-reporting. The Division will need these tools as the always-expanding list of priorities fills the Staff's pipeline.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Daniel Nathan
Brian N. Hoffman
Tiffany Rowe
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions