Tag: SEC investigations

Fund Advisers and Fee Disclosure in SEC Enforcement Action

Veronica Rendón Callahan is a partner at Arnold & Porter LLP and co-chair of the firm’s Securities Enforcement and Litigation practice. This post is a based on an Arnold & Porter memorandum by Ms. Callahan, Ellen Kaye Fleishhacker, Daniel M. Hawke, Robert E. Holton, and Kevin J. Lavin.

October 7, 2015, the US Securities and Exchange Commission (the Commission or SEC) entered into a settlement agreement with Blackstone Management Partners L.L.C., Blackstone Management Partners III L.L.C., and Blackstone Management Partners IV L.L.C. (collectively, Blackstone) regarding certain Blackstone fee and expense disclosure practices. Without admitting or denying the Commission’s findings, Blackstone consented to a cease-and-desist order and agreed to pay nearly $40 million to settle the charges consisting of $26,225,203 of disgorgement, $2,686,553 of prejudgment interest, and $10,000,000 of civil money penalties. This action represents a continuing focus by the SEC on fee and expense allocation and disclosure practices of private fund advisers. [1] It serves as a reminder of the need for advisers to private investment funds to review and revise as necessary their compliance and disclosure policies and procedures related to the allocation of fees and expenses.


Building Effective Relationships with Regulators

Norm Champ is a lecturer at Harvard Law School and the former Director of the Division of Investment Management at the U.S. Securities & Exchange Commission. This post is based on a Keynote Address by Mr. Champ at the CFO Compliance & Regulation Summit.

Today [September 10, 2015] I will try to bring together my experience at the SEC in the Division of Investment Management and the Office of Compliance Inspections and Examinations to talk about how you can build effective relationships with regulators. Each business, no matter what the industry, must decide what strategy it is going to pursue with regulators. As a former CCO of an investment management business and a former regulator, I propose that you follow a strategy of constructive engagement with the regulator in your industry. I know there are those who disagree with that strategy and advocate a posture of avoidance of your regulator and even those who advocate a strategy of opposition to your regulator. I have dealt with that advice in my ten years in a regulated financial services business and seen it in action in five years as a regulator. I’m going to argue that the strategies of avoidance and opposition are misguided and that constructive engagement is the only viable choice for a business seeking an effective relationship with its regulator.


SEC Proposed Amendments to Rules for Administrative Proceedings

Barry R. Goldsmith is a partner at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client alert by Mr. Goldsmith, Joel CohenMarc J. Fagel, Monica K. Loseman, and Mark Schonfeld.

On September 24, 2015, the Securities and Exchange Commission announced it had voted to propose amendments to rules governing its administrative proceedings. SEC Chair Mary Jo White noted that the “proposed amendments seek to modernize our rules of practice for administrative proceedings, including provisions for additional time and prescribed discovery for the parties.” [1] These proposals follow the SEC’s June 2014 announcement that it intended to bring more cases through administrative proceedings rather than in federal court [2] and the release of the Division of Enforcement’s May 2015 guidance entitled “Approach to Forum Selection in Contested Actions,” explaining how the SEC chooses between administrative proceedings and federal court to litigate its claims. [3]

Federal Court Injunction Against SEC Prosecution

John J. Falvey, Jr. and Daniel J. Tyukody are partners in the Securities Litigation & White Collar Defense Group at Goodwin Procter LLP. This post is based on a Goodwin Procter Financial Services Alert.

A federal judge in Manhattan recently granted a preliminary injunction against the Securities and Exchange Commission in the latest of a series of rulings raising issues with the SEC’s use of in-house proceedings before its administrative law judges (“ALJs”) rather than proceed with its charges in federal court. The SEC has prevailed more frequently in its administrative proceedings than it has in federal court, where defendants have more robust procedural rights. This ruling by a judge in the Southern District of New York indicates the federal courts’ ongoing concerns with the SEC’s increased preference for administrative proceedings before its own ALJs. But the SEC has the ability to correct the constitutional flaw that the court found to exist with its appointments of ALJs, suggesting that this and similar rulings will likely only raise a short-term disruption of the SEC’s use of its in-house courts.


A Few Things Directors Should Know About the SEC

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the Twentieth Annual Stanford Directors’ College; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The SEC today has about 4,200 employees, located in Washington and 11 regional offices across the country, including one in San Francisco that is very ably led by Regional Director Jina Choi, who is here [June 23, 2014]. Many of you have likely had some contact with our Division of Corporation Finance, which, among other things, has the responsibility to review your periodic filings and your securities offerings. Some of you that work for or represent a company that we oversee know our staff in our National Exam Program, and I imagine a few of your companies know something about our Enforcement Division staff. Our other major divisions are Investment Management, Trading and Markets and the Division of Economic and Risk Analysis.

So that is just a quick snapshot of the structure of the SEC and as you undoubtedly know, the SEC has a lot on its regulatory plate that is relevant to you—completion of the mandated rulemakings under the Dodd Frank Act and JOBS Act, adopting a final rule on money market funds, enhancing the structure and transparency of our equity and fixed income markets, reviewing the effectiveness of disclosures by public companies, to name just a few. But what you may not be as focused on is the mindset of the agency on some other things that are also relevant to you as directors.


The Robust Use of Civil and Criminal Actions to Police the Markets

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the Securities Industry and Financial Markets Association (SIFMA) 2014 Compliance & Legal Society Annual Seminar; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I have participated in this event for many years and have always considered this conference to be all about the compliance and legal issues that are most important to the integrity of our securities markets. Now, as Chair of the SEC, I would like to thank you for the work you do day in and day out to protect investors and keep our markets robust and safe.

In about a week, I will have completed my first year at the SEC. It has been quite a year. We have made very good progress in accomplishing the initial goals I set to achieve significant traction on our rulemaking agenda arising from the Dodd Frank and JOBS Acts, intensify our review of the structure of our equity markets, and enhance our already strong enforcement program.


SEC Investigations and Enforcement Related to Financial Reporting and Accounting

The following post comes to us from Randall J. Fons, partner and co-chair of the Securities Litigation, Enforcement, and White-Collar Defense Group and the global FCPA and Anti-Corruption Task Force at Morrison & Foerster LLP, and is based on a Morrison & Foerster publication by Mr. Fons.

“One of our goals is to see that the SEC’s enforcement program is—and is perceived to be—everywhere, pursuing all types of violations of our federal securities laws, big and small.”
— Mary Jo White, Chair of the SEC, October 9, 2013

“In the end, our view is that we will not know whether there has been an overall reduction in accounting fraud until we devote the resources to find out, which is what we are doing.”
— Andrew Ceresney, Co-Director of the SEC Division of Enforcement, September 19, 2013

“The SEC is ‘Bringin’ Sexy Back’ to Accounting Investigations”
New York Times, June 3, 2013

Much has changed since the collapse of Enron in 2001 and the ensuing avalanche of financial fraud cases brought by the SEC. For example, Sarbanes-Oxley raised auditing standards, imposed certification requirements on public company officers and required enhanced internal controls for public companies. The Public Company Accounting Oversight Board (PCAOB) was formed “to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit
reports.” [1] In pursuit of that goal, the PCAOB has conducted hundreds of audit firm inspections, adopted numerous auditing standards and brought dozens of enforcement actions against auditors for violating PCAOB rules and auditing standards.


Ten Changes to Expect from the SEC’s New Enforcement Program

The following post comes to us from Jon N. Eisenberg, partner in the Government Enforcement practice at K&L Gates LLP, and is based on a K&L Gates publication by Mr. Eisenberg.

Investors, borrowers, financial institutions, and the economy were not the only casualties of the financial crisis. Regulators were casualties too, and the SEC was one of the hardest hit. Two Harris Polls—one conducted in 2007 before the financial crisis and the other in 2009 after much of the damage had been done—tell the story. Between 2007 and 2009, favorable ratings of the SEC dropped from 71% to 29%, while the percentage of the public rating it fair or poor rose from 25% to 72%. “By a wide margin,” the Harris organization stated, “[this was] the biggest change in an agency’s ratings since these questions were first asked in 2000.” Indeed, the SEC’s 29% positive rating was a full 15 points worse than even the second-lowest rated agency in the survey. Congress attacked the Commission as well, as when Long Island Representative Gary Ackerman burst out in a hearing, “Whose job is it to protect the investors? Because I wanna tell them that they suck at it.” And the press was also merciless, as when reporter Charlie Gasparino urged, “the SEC should be disbanded.”


SEC Forecasts an Increase in Whistleblower Cases and Awards

The following post comes to us from Michael T. Jones, partner in the Litigation Department at Goodwin Procter, and is based on a Goodwin Procter client alert by Mr. Jones and Jennifer Chunias.

On June 12, 2013, the U.S. Securities & Exchange Commission announced its second-ever whistleblower award under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Having received over 3,000 whistleblower tips in the first year of the revamped program, the SEC made its first whistleblower award in August of 2012 and is expected to issue an increasing number of awards in the coming months.

Among other things, Dodd-Frank provides a direct mechanism for whistleblower complaints to the SEC and enhanced protection for eligible whistleblowers who come forward and cooperate in SEC investigations and proceedings involving the corporation that employs them. Dodd-Frank also authorized the SEC to provide incentives in the form of financial awards to eligible whistleblowers who voluntarily provide the SEC with original information about a violation of federal securities laws that leads to successful enforcement proceedings—10 to 30 percent for penalties collected over $1 million. Particularly in light of the recent awards and the expected uptick in the coming months, companies that fail to take appropriate steps to respond to the increased risks associated with the program could pay a steep price.


Court: Disclosure of SEC Investigation Insufficient to Plead Loss Causation

The following post comes to us from Adam Hakki, partner and global head of the Litigation Group at Shearman & Sterling LLP, and is based on a Shearman & Sterling client publication.

The US Court of Appeals for the Eleventh Circuit recently issued an important decision that addresses two types of allegations that plaintiffs routinely rely on to plead loss causation in federal securities fraud cases. In Meyer v. Greene, 2013 US App. LEXIS 4187 (11th Cir. Feb. 25, 2013), the Eleventh Circuit appears to have become the first federal court of appeals to rule definitively that the mere announcement of an investigation by the US Securities and Exchange Commission (“SEC”) followed by a decline in a company’s stock price is insufficient to plead loss causation. The Court also ruled, consistent with decisions from other federal circuits, that a negative third-party analyst presentation is not a corrective disclosure for purposes of pleading loss causation if the presentation is based on publicly available information.


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