SEC Enforcement in 2009: A Year of Changes, with More This Year

In our 2009 “Mid-Year Review of SEC Enforcement,” we reviewed the transformation that had begun in 2009 at the SEC’s Division of Enforcement under the agency’s new Chairman, Mary Schapiro, and the Division’s new Director, Robert Khuzami, as well as the measurable increase in enforcement activity that had resulted. Since then, Mr. Khuzami has articulated more specifically the changes the he plans to make, some of which are already in effect and others that have yet to be implemented. Nevertheless, the results of the Enforcement Division continue to reflect the heightened enforcement initiative that has been the calling card of this Commission. In this review of enforcement in 2009, we focus on the significant enforcement developments of the second half of the year, as well as notable cases and important trends revealed by annual enforcement statistics, both those disclosed by the SEC, as well as those that result from our own analysis. We also look ahead to the significant developments to anticipate this year.

I. Overview of 2009’s Second Half

A. Enforcement Director’s New Initiatives

In a speech delivered in August marking his first 100 days as Division Director, Mr. Khuzami outlined five new initiatives to reorganize the Enforcement Division and modify the process for investigations. While some of the changes became effective immediately, the more significant programmatic changes still await full implementation. For a more detailed description of Mr. Khuzami’s speech, see our alert, “SEC’s Enforcement Director Robert Khuzami Emphasizes Changes and Accomplishments in First 100 Days“.

1. Fostering Cooperation by Individuals

Mr. Khuzami described a number of steps underway to create greater incentives for individuals to cooperate in enforcement investigations. Probably more than any other change being discussed, the development of individual cooperators, if successful, has the greatest potential to accelerate and enhance the SEC’s ability to conduct investigations. However, there will be significant challenges to motivating individual cooperators, as we discuss below.

Mr. Khuzami outlined the following plans:

• Creating a “Seaboard Report” for individuals — that is, a public policy statement that will set forth standards under which to evaluate an individual’s cooperation;
• Expediting the process by which the Division Director is delegated authority to submit immunity requests to the Department of Justice;
• Exploring ways to provide witnesses early on in appropriate cases an oral assurance that the Division does not intend to file charges against them; and
• Recommending to the Commission, where appropriate, that the SEC enter into Deferred Prosecution Agreements, in which the Commission agrees to forego an enforcement action against a party subject to certain terms, including cooperation, waiver of statute of limitations and compliance with undertakings.

Mr. Khuzami emphasized, however, that the purpose of these tools is to reward only extraordinary cooperation, not simply responding to requests for information.

The development of cooperators has the potential to advance significantly SEC investigations. However, moving from theory to practice faces significant hurdles. In an article entitled “Courting Cooperators: The SEC’s Effort to Motivate Individual Cooperation,” we analyzed the challenges the SEC faces in trying to mirror in the civil enforcement context a practice more widely used in the criminal context.

Among the difficulties the SEC faces are the following:

• A historical lack of flexibility in the SEC’s imposition of sanctions, particularly with respect to individuals employed in the securities industry;
• The limited ability of the SEC to protect would-be cooperators from the risks of collateral consequences that could follow from cooperating, including criminal and other civil exposures;
• The potential for inconsistency between the admissions that could follow from cooperation and the SEC’s standard practice of settling on a “neither admit nor deny” basis; and
• The lack of transparency in SEC settlements that make it difficult for the public to see the benefits of cooperation to the individual cooperator.

According to recent public statements by Mr. Khuzami, we expect to see in early 2010 publication by the SEC of a framework for individual cooperators. However, more important than articulation of standards or programs, the true test of the SEC’s ability to motivate individual cooperators will be determined by how the agency implements its policies in practice in specific cases over an extended period of time. Put simply, the strongest motivation to cooperate will come from observable rewards that individuals receive in return for their cooperation.

2. Specialized Units

Mr. Khuzami announced plans to create five specialized units dedicated to particular areas of the securities industry and securities law. Each unit will be headed by a unit “chief” and comprised of staff from offices around the country. The staff in the units will receive specialized training, and the Division will also hire individuals with market experience or other expertise.

The five units will be as follows:

• The Asset Management Unit to focus on investment advisers, investment companies, hedge funds and private equity funds;
• The Market Abuse Unit to focus on large-scale market abuses and complex manipulation schemes by institutional traders, market professionals and others;
• The Structured and New Products Unit to focus on complex derivatives and financial products, such as credit default swaps, collateralized debt obligations and other securitized products;
• The Foreign Corrupt Practices Act Unit to focus on new approaches to identifying violations of the Foreign Corrupt Practices Act (“FCPA”), including being more proactive in investigations, working more closely with foreign regulators, and taking a more global approach to violations of the FCPA; and
• The Municipal Securities and Public Pensions Unit to focus on offering and disclosure issues, tax and arbitrage-driven activity, unfunded or underfunded liabilities, and “pay-to-play” schemes.

The move toward greater specialization is in part a reaction to criticism that the staff lacks sufficient expertise in particular high risk segments of the securities industry. Ironically, this initiative also represents a return to an organizational structure the Division followed for many years in which a significant portion of the staff was divided into groups along industry lines for investment advisers and broker-dealers. The plan also builds on “working groups” that have been in existence within the Enforcement Division for a number of years in areas such as hedge funds and the FCPA. As of the end of 2009, the reorganization remains a work in progress. Unit chiefs have not yet been selected and the staff members of each group have not yet been identified. Announcement of the further development of these groups should be forthcoming in early 2010.

3. Streamlining Management and Internal Processes

Mr. Khuzami is streamlining the Division’s management structure and internal processes, including:

• Redeploying first line managers — branch chiefs — to conducting investigations as staff attorneys;
• Delegating from the Commission to the Division Director and other Division “senior officers” the authority to issue formal orders of investigation, which authorize the staff to issue subpoenas. As a result, there has been an upsurge in the number of formal orders of investigation this year;
• Delegating from the Deputy Director to the Division’s senior officers the authority to approve routine case decisions, such as issuing Wells notices or settlement demands; and
• Limiting the use of tolling agreements by requiring the Director’s personal approval, which Mr. Khuzami has said he intends to grant sparingly.

4. Increasing Resources

Mr. Khuzami outlined areas to which the Division is devoting greater resources. The trial unit is expanding in order to handle the increasing litigation burden on the staff. The Division is also expanding its paralegal and support staff, as well as technology initiatives, including revamping how tips, complaints and referrals are handled and expanding the Division’s document management, reporting and case management capabilities. The Division has also hired a Managing Executive, in effect a chief operating officer, to manage information technology and oversee processes such as the distribution of Fair Funds to harmed investors, thus relieving staff attorneys of those responsibilities. Mr. Khuzami also announced the creation of an Office of Market Intelligence, which will be responsible for collecting, analyzing, evaluating, triaging, referring and monitoring the many tips, complaints and referrals received by the Division.

B. The Numbers and Trends

By virtually all statistical measures, the level of enforcement activity has increased substantially under this Commission. Below we look at some of the themes and trends that emerge from the numbers.

1. Enforcement Actions and Litigation

Looking at fiscal year 2009 (ended September 30, 2009), although the total number of enforcement actions is down slightly from 2008, the number of civil injunctive actions is up by almost 10%. This indicates a trend toward filing more enforcement actions as injunctive actions in federal court, rather than as administrative proceedings.

	Fiscal 2008	Fiscal 2009	Percentage Change
Total Enforcement Actions	671	664	(1%)
Injunctive Actions	285	312	9%

We took an independent look at civil injunctive actions filed during the calendar year, which provides a more focused analysis of the impact of the new Administration, which took office in January 2009. This comparison shows a much steeper increase in the number of civil injunctive actions filed (a 38% increase) and number of defendants charged (a 58% increase) in 2009 over 2008.

	Calendar 2008	Calendar 2009	Percentage change
Injunctive Actions Filed	232	320	38%
Number of Defendants	620	981	58%

As we did in our Mid-Year Review, we also looked at the percentage of defendants whose charges were settled at the time of filing. The results at year end show a significant decline. In 2009, only 24% of defendants settled at the time of filing, compared to 35% in 2008.

	Calendar 2008	Calendar 2009
Percentage of defendants settled at time of filing	35%	24%

This is significant in that it reflects a greater willingness by the SEC to file cases without settlements and to litigate those cases to final judgment. This may also be the result of the increase in Ponzi scheme cases, which are typically filed on an expedited basis to freeze assets without seeking negotiated resolutions in advance of filing It remains to be seen whether, even with recent increases, the staff has sufficient resources to manage the additional litigation burden.

2. Investigations Increased, but Closure Decreased

Another statistic that does not receive much attention, but that raises concern for subjects of investigations, is the increase by 6% in the number of pending open investigations at fiscal year end. This is due to a significant drop, by 47%, in the number of investigations closed during the fiscal year. There has always been a reluctance by the staff to close investigations. In the current enforcement environment, the staff may not be focusing as much as previously on closing cases. And in the wake of the Madoff case, the staff is more reticent than ever to close an investigation without an enforcement action.

	Fiscal 2008	Fiscal 2009	Percentage Change
Investigations opened	890	944	6%
Investigations closed	1,355	716	(47%)
Investigations pending at Fiscal Year End	4,080	4,316	6%
Formal Orders of Investigation	233	496	113%

This is cause for concern because it means that once an investigation is opened, it is less likely to be closed, even though it may not result in an enforcement action, causing the subjects of investigations to live with the overhang of an open, but inactive, investigation for years. In prior years, the Government Accountability Office (GAO) has criticized the SEC’s failure to close cases more timely. It will be worth noting in the future whether the staff focuses more on closing out the backlog of old, inactive investigations.

3. Coordination with Criminal Prosecutors

Another notable trend reflected in the statistics is an increase in the number of SEC investigations with criminal charges. For years, the collaboration between the SEC and criminal prosecutors has been close. These numbers indicate that in the current environment, the connection is stronger than ever.

	Fiscal 2008	Fiscal 2009	Percentage Change
Cases with Criminal Charges	108	154	43%

4. Remedies Obtained

A look at the remedies sought and obtained by the SEC — disgorgement, penalties, temporary restraining orders and asset freezes — shows a substantial increase in fiscal 2009. The significant increase in temporary restraining orders and asset freezes sought is likely attributable to the number of Ponzi scheme cases filed this year in the wake of the Madoff case. In contrast to prior years, and prior waves of financial scandal, we have not seen cases this past year with outsized penalties or disgorgement orders against public companies or financial services firms, likely due in part to the overarching financial crisis impacting public companies and their shareholders.

	Fiscal 2008	Fiscal 2009	Percentage Change
Disgorgement Ordered	$774 million	$2,090 million	170%
Penalties Ordered	$256 million	$345 million	35%
TROs Sought	39	71	82%
Asset Freezes Sought	46	82	78%

C. Significant Cases [1]

We highlight here the most significant cases of the last six months. These cases and others are discussed in more detail in subsequent sections focusing on specific areas of enforcement cases.

1. The Financial Crisis Remains a Priority

In our Mid-Year Review, we noted that the most significant cases the SEC filed in the first half of the year related to the financial crisis. These included cases against former executives of Countrywide Financial, American Home Mortgage, Beazer Homes and Reserve Management Company.

In the second half of the year, the emphasis on cases related to the financial crisis continued. In December, the SEC filed an action against three former executives of New Century Financial Corporation alleging misstatements regarding the company’s subprime mortgage business and financial results.

In August, the SEC filed a settled action against Bank of America alleging a failure to disclose bonuses being paid to Merrill Lynch executives in proxy materials seeking shareholder approval of the merger between Bank of America and Merrill Lynch. In an unanticipated turnabout, Judge Rakoff rejected the settlement and ordered a trial of the allegations which is currently scheduled for March 2010.

2. Insider Trading and Hedge Funds Take the Headlines

Perhaps the most significant cases focused on insider trading, and specifically insider trading by professionals at, or connected to, hedge funds and other private investment funds. In our Mid-Year Review, we discussed SEC v. Rorech, the SEC’s first case involving alleged insider trading in credit default swaps by a trader at a hedge fund.

In October, in conjunction with criminal prosecutors, the SEC filed SEC v. Galleon, an insider trading case against the hedge fund adviser Galleon Management, its principal and fifteen other individuals. Two weeks later, the SEC filed SEC v. Tang, an insider trading case against employees of private equity and venture capital funds and other individuals. One week later, in SEC v. Cutillo, the SEC charged another alleged insider trading ring involving lawyers from a major law firm and others with overlapping connections to Galleon. In all, within three weeks, the SEC had charged thirty individuals with insider trading and alleged over $60 million in profits or avoided losses.

The Galleon and Cutillo cases are significant for several reasons. First, according to Mr. Khuzami’s press conference statement, the Galleon case is “the biggest hedge fund insider trading case ever brought.” [2] Second, it also was the first time that the government had used wiretaps — an investigative tool more typically used for organized crime and narcotics cases — to investigate insider trading. As Mr. Khuzami warned in a recent speech, “Persons involved in illegal insider trading schemes now must rightly consider whether their conversations are under surveillance.” [3]

More broadly, these cases reflect an intensified scrutiny by the Enforcement Division on hedge funds. Mr. Khuzami made clear at the press conference announcing the Galleon case, that he intended the case to send a message to the hedge fund industry: “The involvement of hedge funds and their principals, consultants, and portfolio managers, in this case is of particular concern…. We at the SEC are committed to pulling back the curtain on hedge fund operations and taking a close look at their activity.” [4]

3. Pursuit of New Remedies

This year marked the SEC’s first use of Section 304 of the Sarbanes-Oxley Act to seek to “claw back” compensation from an executive not charged with any violation of the securities laws. The SEC has asserted the claim against the former chief executive officer of CSK Auto seeking over $4 million in bonuses and stock sale profits he received following the filing of financial statements that were subsequently restated. In an article entitled “Using SOX ‘Clawback’ Against Uncharged Execs?“, we discussed the substantial questions this case raises about the proper reach of Section 304, questions that will now await litigation for answers. In the meantime, Mr. Khuzami has signaled a willingness to continue to use Section 304 in the future. In a recent speech he stated, “Section 304 is . . . a powerful enforcement tool, and one that corporate executives should understand Congress has authorized the SEC to use in appropriate circumstances.” [5]

D. What to Expect in 2010

2010 will bring a continuation of changes begun in 2009. Most significant, it is likely that the Enforcement Division will soon announce guidelines for individual cooperation. Reorganization of the Enforcement Division into specialized units and the elimination of a layer of management will also be implemented in the coming year.

Many of the significant litigations the SEC filed in 2009, particularly those cases related to the financial crisis, will continue to play out over the course of 2010. The results of those litigations will be closely watched measures of the Enforcement Division’s effectiveness.

Finally, the continued addition of new senior staff will have a significant impact on the future direction of the agency generally, and the Enforcement Division and OCIE in particular. The new Director of OCIE, Carlo di Florio, will join the staff shortly and the SEC has recently hired other individuals with expertise in various sub-specialties of the financial markets. The focus on market participants will continue and intensify over the coming year. In this environment, the premium on anticipating and addressing compliance issues has never been higher.

II. Insider Trading Cases

The past six months have witnessed a series of high-profile insider trading cases. Many of these cases are testing the bounds of SEC enforcement regarding such issues as the use of wiretap evidence, the contours of the fiduciary duty element, and the application of the federal securities laws to credit derivatives.

A. Breaking New Ground in Hedge Fund Trading and Use of Wiretaps to Gather Evidence

1. SEC v. Galleon

On October 16, 2009 the SEC filed a civil suit in the United States District Court for the Southern District of New York against billionaire Raj Rajaratnam and Galleon Management LP (“Galleon”), the hedge fund that he founded, for their alleged involvement in a $25 million insider trading scheme. [6] Mr. Khuzami described the suit as “the biggest hedge fund insider trading case ever brought.” [7] In addition to Rajaratnam and Galleon, the complaint named six other defendants, including executives at major companies such as IBM, Intel and McKinsey & Company. The defendants were alleged to have traded on the basis of material, nonpublic information regarding various events — including takeovers, quarterly earnings announcements and joint ventures. On November 5, 2009, the SEC amended its Complaint to add 13 individuals and entities as defendants and alleged that the defendants generated more than $33 million in improper gains. [8]

The Galleon case represents an initial effort by the government with respect to alleged insider trading by hedge funds and other institutional investors. It is also the first time that the government has made use of intercepted conversations from a wiretap — a level of surveillance typically reserved for organized crime and drug syndicates. In his answer to the SEC’s complaint, Rajaratnam attacked the government’s unprecedented use of wiretaps in an insider trading case, claiming that it violated his constitutional rights and Title III of the Omnibus Crime Control and Safe Streets Act of 1968, which allows electronic surveillance only when necessary for the investigation of specific crimes and when alternative procedures have been tried or are unlikely to succeed. [9] U.S. District Judge Jed Rakoff has set a trial date of August 2, 2010 for the SEC case. Rajaratnam and other defendants also face charges in a parallel criminal investigation. [10]

2. SEC v. Cutillo

On November 5, 2009 the SEC also charged 14 additional Wall Street professionals for their alleged involvement in a related $20 million alleged insider trading scheme. The case, SEC v. Cutillo, [11] involves a former Galleon employee (Zvi Goffer) who allegedly obtained, transmitted and traded on inside information. The SEC alleges that Goffer’s sources included an attorney at Ropes & Gray, who allegedly received kickbacks for providing inside information. As in the Galleon case, investigators premised their claims in part on evidence obtained through the use of wiretaps.

3. SEC v. Tang

On October 30, 2009, the SEC filed an insider trading case against executives at a private equity fund and a venture capital fund alleging that the defendants traded, and tipped others, on the basis of information about their respective funds’ portfolio companies and investment decisions. In all, the complaint in SEC v. Tang [12] charged seven defendants and alleged $8 million in profits or avoided losses. The case is significant because it demonstrates the risk for private funds of not only preventing and detecting potential insider trading for the benefit of the fund, but also the risk of employees misusing information within the fund for their personal benefit or the benefit of others.

B. Expanding (and Contracting) the Scope of Insider Trading Law

1. SEC v. Cuban

In July 2009, federal courts issued two decisions that explored the contours of the duty required to establish insider trading liability. A third case will address the application of insider trading law to derivatives.

In SEC v. Cuban, [13] the SEC alleged that the defendant had engaged in insider trading by selling stock in a company, Mamma.com, after the CEO of the company had provided him with material, nonpublic information about a planned private investment in public equity (“PIPE”) offering and asked him to keep it confidential. By allegedly selling his stock in the company before the announcement of the offering, the defendant avoided losses when the stock price declined following the public announcement of the PIPE.

In ruling on the defendant’s motion to dismiss, the district court addressed the question of whether the SEC had adequately pleaded that the defendant had assumed a duty not to use the information sufficient to establish liability under the misappropriation theory of insider trading. In July 2009, the district court held that, absent a fiduciary relationship, an implied or express agreement to keep information confidential was insufficient to create an obligation not to trade if the agreement itself did not also include a promise to refrain from trading based on that information. In other words, “with respect to confidential information, nondisclosure and non-use are logically distinct.” [14] The SEC has appealed the district court’s decision to the Fifth Circuit Court of Appeals.

2. SEC v. Dorozhko

By contrast, the Second Circuit expanded the potential reach of SEC enforcement with its decision in SEC v. Dorozhko. [15] One of the questions raised in that case was whether an individual who steals inside information, but lacks a fiduciary duty to the source of the information or the issuer of the securities, can nevertheless be held liable under the federal securities laws. Dorozhko, the defendant in the case, allegedly hacked into a secure server, gained access to a confidential earnings report about IMS Health Inc., and purchased more than $40,000 worth of “put” options on IMS stock on the basis of this information. The district court denied the SEC’s request for a preliminary injunction freezing the proceeds of the transactions, finding that the defendant’s computer hacking was not “deceptive” within the meaning of Section 10(b) as the defendant was a corporate outsider who did not owe a fiduciary duty to any of the relevant entities. The SEC appealed.

In July 2009, the Second Circuit reversed, holding that computer hacking could be “deceptive” within the meaning of Section 10(b) even if the conduct did not involve a breach of fiduciary duty. While acknowledging that the SEC’s claim was not predicated on either of the two generally accepted theories of insider trading liability (classical or misappropriation theory), both of which require the breach of a duty, the Court found that insider trading jurisprudence does not expressly impose a fiduciary duty requirement where the alleged fraud is an affirmative misrepresentation, rather than silence or nondisclosure. The Second Circuit remanded the case to the district court to determine whether the computer hacking in this particular instance involved a fraudulent misrepresentation that was “deceptive” within the ordinary meaning of Section 10(b).

3. SEC v. Rorech

Another case testing the scope of SEC enforcement is SEC v. Rorech [16], the first insider trading case involving credit default swaps (“CDS”). As we discussed in our Mid-Year Review, the SEC filed a complaint in May 2009 against Jon-Paul Rorech, a former bond and CDS salesman at an international investment bank, and Renato Negrin, a former portfolio manager at a hedge fund, alleging that they engaged in insider trading of CDS related to VNU N.V., a Dutch media conglomerate.

In August 2009, the defendants filed separate motions for judgment on the pleadings, arguing, among other things, that the CDS at issue are not securities within the meaning of Section 10(b). More specifically, they note that the Commodity Futures Modernization Act of 2000 (“CFMA”) grants the SEC only limited authority to prosecute “securities-based” swaps (as defined in Section 206A of the Gramm-Leach-Bliley Act (“GLBA”)), of which a material term is based on the price, yield, value or volatility of a security. Since, according to the defendants, the material terms of the CDS contracts were not based on these enumerated characteristics, the SEC lacks authority to bring the suit. In its opposition brief, the SEC argues that the fundamental protection of the federal securities laws would be undermined if individuals were free to trade in unregulated derivative instruments that are essentially economic substitutes for their underlying securities. Moreover, it argues that Section 206A of the GLBA is broadly worded to give the SEC the flexibility needed to address developments in the market, including the rapid growth in the credit derivatives market. Rorech also argues that the SEC cannot bring an enforcement action involving CDS where it lacks jurisdiction over the underlying securities — in this case, the VNU bonds — which were issued by a foreign company and traded on a foreign exchange. The motions, which have been fully briefed, are currently pending before the court.

III. Financial Reporting Cases

Mr. Khuzami recently observed that financial statement and accounting fraud cases continue to comprise the single largest category of actions filed by the Division. [17] As in the first half of 2009, some of these actions in the second half of the year relate to the subprime mortgage market. The SEC’s financial reporting cases have also emphasized executive compensation, reflecting current public controversies. Most significant, the SEC filed civil suits expanding the scope of substantive claims and remedies, aggressively applying the “clawback” provision of Section 304 of the Sarbanes-Oxley Act of 2002 and alleging false disclosures of non-GAAP financial metrics in violation of Regulation G.

A. Use of SOX 304 “Clawback” Provision

In July 2009, for the first time, the SEC filed a civil suit under Section 304 of the Sarbanes-Oxley Act of 2002, seeking to “claw back” $4 million in compensation from a former chief executive officer who has not been accused of any securities law violation. [18] Earlier in 2009, the SEC had instituted a settled enforcement action against CSK Auto Corp. and filed unsettled enforcement actions against several former senior officers, alleging improper accounting. In its subsequent complaint against former CSK CEO, Maynard Jenkins, the SEC does not allege that Jenkins committed any violation of the securities laws, and instead relies on allegations that CSK was required to restate its annual financial reports for 2002-2004, due to its material non-compliance with financial reporting requirements and “as a result of [CSK’s] misconduct” (emphasis added). The SEC seeks a court order requiring Jenkins to reimburse CSK more than $4 million in bonuses and stock sale profits in the period following the filing of annual financial statements that were ultimately restated.

Section 304 provides that if an issuer “is required to prepare an accounting restatement due to material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws,” the CEO and CFO shall reimburse the issuer for any bonus or other incentive-based or equity-based compensation received, and any profits realized from the sale of the securities of the issuer, during the year following issuance of the original financial report. [19] Prior to this case, the SEC had only filed claims invoking Section 304 against CEOs and CFOs who were alleged to have been involved personally in wrongdoing leading to the restatement, such as options backdating cases. For a more detailed discussion of the legal and policy implications of this case, see our article entitled “Using SOX ‘Clawback’ Against Uncharged Execs?”

In a related development in the CSK case pending against other former executives of the company, in August 2009, the district court granted in part a motion to dismiss by two of the defendants in a decision that demonstrates difficulties the SEC can face in pleading primary liability. [20] The SEC’s complaint alleged that Martin Fraser, the former chief operating officer, had attended meetings of the disclosure group, reviewed the company’s 10-Ks for the years in question, and signed sub-certifications, due diligence certifications and management representation letters. The court rejected the SEC’s claims of primary liability, stating that the SEC offered nothing “beyond the mere assertion that he was present and somehow involved” because the complaint “contain[ed] no allegation that Fraser had any role in the actual drafting or editing of the Forms 10-K, much less the significant role in drafting and editing that is required.” [21] The court similarly rejected the SEC’s scheme liability theory, holding that “while the SEC ha[d] alleged a generalized scheme of misconduct, it ha[d] not pled sufficient facts to establish that Fraser’s own conduct had a deceptive purpose and effect.” [22] In dismissing a Section 13 claim against Fraser and another defendant, the court accused the SEC of “puzzle” and “shotgun” pleading, “resulting in an improper pleading format for a complex securities action such as this one.” [23] In essence, the court held that the SEC had incorporated into the claims sections of the complaint all preceding factual allegations (the shotgun) and left the court and the defendants to search the complaint and match up alleged facts to each claimed act of wrongdoing (the puzzle).

B. Subprime and Financial Crisis Related Cases

In December 2009, the SEC charged three former executives of New Century Financial Corporation, including the CEO, CFO and controller. [24] New Century was one of the nation’s largest subprime lenders until early 2007. The SEC alleges that the defendants failed to disclose negative information including increases in early loan defaults, loan repurchases and pending loan repurchase requests in its 2006 financial statements. The defendants also allegedly made undisclosed accounting changes in violation of generally accepted accounting principles (GAAP) in order to avoid substantial loan repurchase expenses.

In August 2009, the SEC instituted settled charges against Bank of America Corp. for allegedly failing to disclose bonus payments to Merrill Lynch & Co. executives when Bank of America acquired Merrill Lynch in the fall of 2008. [25] According to the complaint, Bank of America’s proxy materials for the proposed merger allegedly stated that Merrill had agreed not to pay year-end bonuses or other discretionary executive compensation prior to the merger without first seeking Bank of America’s consent but allegedly omitted to state that Bank of America had contractually authorized Merrill to pay up to $5.8 billion in executive bonuses several weeks before the proxy statement was filed with the SEC. According to the settlement, Bank of America consented to pay a $33 million penalty. However, on September 14, 2009, U.S. District Judge Jed Rakoff denied the proposed consent judgment because the proposed judgment was “neither fair, nor reasonable, nor adequate.” [26] The case has since been set on the court’s trial docket for March 2010. On December 31, the SEC filed a motion for leave to amend the complaint. [27] The SEC’s proposed amended complaint would have added a second count alleging a violation of Section 14(a) of the Securities Exchange Act for failing to amend the proxy materials to disclose increased losses at Merrill Lynch prior to the shareholder vote on the merger. On January 11, Judge Rakoff denied the SEC leave to amend the complaint, but permitted the SEC to pursue the allegations in a separate complaint.

C. Regulation G

In another extension of enforcement reach, the SEC filed its first action alleging violation of Regulation G, relating to the use of non-GAAP financial measures. In November 2009, the SEC instituted a settled civil action against SafeNet, Inc., its former CEO, its former CFO and three former SafeNet accountants for allegedly reporting false non-GAAP financial measures. [28] Regulation G requires companies to reconcile GAAP and non-GAAP financial measures in public releases and prohibits companies from providing false or misleading non-GAAP financial measures. According to the complaint, SafeNet allegedly disseminated misleading non-GAAP results from 2003 to 2005. SafeNet agreed to a settlement including a $1,000,000 penalty, and the officers and former accountants agreed to settlements including disgorgement and penalties.

The associate chief accountant for the Enforcement Division, Jason Flemmons, referenced the SafeNet action during a recent discussion about transparency in the reporting of non-GAAP financial measures. [29] Noting that non-GAAP financial measures may exclude non-recurring, infrequent or unusual expenses, Flemmons explained that the Commission’s decision whether to bring an enforcement action is influenced by whether a company has “stretched” recurring items to make them appear as non-recurring items.

D. Vendor Payment and Inventory Management Claims

Continuing the trend from the first half of 2009, numerous financial misstatement cases that were charged or settled involved vendor payment or inventory management issues. For example, the SEC alleged that several companies and/or their executives artificially inflated income through the following alleged errors: (1) using manual adjustments to inventory balances in accounting books, [30] (2) sending excessive product to distributors but granting undisclosed return rights and providing loans to a third party to purchase company products via a distributor, [31] (3) making undisclosed side deals with customers and recognizing revenue on merchandise shipped to customers before the customers agreed to accept the merchandise, [32] (4) creating interlocking three-party transactions to recognize revenue prematurely and inflate profits, [33] (5) negotiating undisclosed deal terms with customers, [34] and (6) funneling money to vendors through false transactions so that the vendors could make payments on earlier sales. [35]

In settled actions, the SEC also charged two companies with falsifying financial statements in order to avoid disclosing changes in inventory pricing methodology. In July 2009, the SEC initiated a settled administrative proceeding against LSB Industries, Inc. and its Chief Accounting Officer. [36] According to the SEC’s administrative order, LSB allegedly improperly reduced the company’s LIFO reserve when it changed from LIFO to FIFO inventory pricing in order to avoiding filing a restatement. Similarly, in July 2009, the SEC filed a settled civil action against West Marine, Inc. [37] alleging that the company improperly capitalized store occupancy expenses in order to avoid disclosing a decrease in earnings due to a change in inventory valuation.

E. Financial Misstatement Cases

In August 2009, the SEC commenced a settled action against General Electric Co. [38] The complaint alleges that, on four separate occasions in 2002 and 2003, GE used improper accounting methods. For example, the SEC alleges that GE increased its 2002 net earnings by $585 million by improperly accounting for sales of commercial aircraft engine spare parts. Pursuant to a settlement, GE agreed to pay a $50 million penalty.

In August 2009, the SEC initiated a settled civil action against former American International Group (AIG) CEO Maurice Greenberg and former CFO Howard Smith. [39] The SEC alleged that Greenberg and Smith participated in transactions that affected AIG’s financial results through improper accounting transactions such as improper reinsurance transactions, agreements with an offshore entity that masked underwriting losses, and round-trip transactions to report improper gains. Notably, the SEC complaint charged Greenberg only in his capacity as a control person of AIG for its violations of the securities laws, pursuant to section 20(a) of the Securities Exchange Act of 1934. Pursuant to settlements, Greenberg agreed to pay disgorgement of $7.5 million and a penalty of $7.5 million and Smith agreed to pay disgorgement of $750,000 and a penalty of $750,000.

In November 2009, the SEC charged Home Solutions of America, Inc. and seven of its executives for allegedly recording and reporting more than $40 million in improper revenue through an expense deferral scheme. [40] The SEC alleges that Home Solutions reported revenue from fictitious business deals and recognized the revenue of another public company as its own. Four of the individual defendants settled at the time of filing.

F. Auditor Cases

The SEC has indicated that it will continue to bring enforcement actions against auditors. Jason Flemmons, the associate chief accountant for the Enforcement Division, recently stated that the SEC may charge outside auditors even in cases of management fraud if the management’s “lies were hollow” and therefore should not have been relied upon. [41]

In mid-December, the Commission filed settled actions against the former CFO and the former controller of Bally Total Fitness Holdings, Inc., [42] and against its former independent auditor, Ernst & Young LLP, and several of its current and former partners. [43] The Commission’s claims alleged that Bally and its former officers engaged in improper revenue recognition of membership fees and dues and related costs. The orders as to the auditors assert that the auditors failed to correct these errors as required and incorrectly permitted Bally to characterize changes in revenue recognition accounting methods as the adoption of preferable accounting rather than as an error. To resolve the cases, the former CFO consented to an injunction, payment of $250,000 in disgorgement and civil money penalties, and an officer and director bar while the controller consented to an injunction and a two year suspension from practice before the Commission. As a part of its resolution, Ernst & Young consented to a cease and desist order as to certain statutory provisions of the securities laws and agreed in an undertaking to make an $8.5 million payment to the United States Treasury, and to analyze and, if necessary, modify certain internal firm policies and procedures. Various individual partners resolved the matter by consenting to cease and desist orders involving non-scienter based claims and suspensions of practice before the Commission for varying periods of time. One partner’s case was resolved by his consent to a censure alone.

In August 2009, the SEC charged Michael J. Moore and his public accounting firm Moore & Associates Chartered with securities fraud for issuing audit reports that failed to comply with PCAOB standards. [44] Among numerous alleged violations, the SEC alleged that Moore and his firm “failed to obtain sufficient competent evidential matter to afford a reasonable basis for an opinion regarding the financial statements under audit . . . even when there were red flags that the financial statements were materially misstated.” [45] Pursuant to a settlement, Moore and his firm consented to pay disgorgement and a penalty totaling approximately $320,000 and a suspension from practicing before the SEC.

G. Backdating Cases

The SEC continued to settle matters arising from outstanding stock option backdating investigations that began in 2005, including Ulticom, Inc., [46] Comverse Technology, Inc., [48] and the Hain Celestial Group, [49] and executives at Take-Two Interactive Software, Inc., [50] and Monster Worldwide, Inc. [51]

IV. Broker-Dealer Cases

In the later half of 2009, the SEC’s enforcement actions against broker-dealers continued to address the financial crisis, sales practices (particularly those related to sales involving senior citizens) and market operations.

A. Financial Crisis

In July 2009, the SEC filed separate enforcement actions against online broker TD Ameritrade, Inc. and Morgan Keegan & Company, Inc., in connection with each firm’s marketing and sales of auction rate securities (“ARSs”). [52] In each action, the SEC alleged that the firm’s registered representatives mislead investors regarding the liquidity risks associated with ARSs. In settling the SEC’s case, TD Ameritrade, among other things, agreed to offer to purchase eligible ARSs from individuals, charities, and those small businesses and institutions with assets at TD Ameritrade of $10 million or less. Morgan Keegan continues to contest the SEC’s charges.

Also in July 2009, the SEC filed a settled administrative action against Ameriprise Financial Services for allegedly receiving approximately $30.8 million in undisclosed compensation as a condition for offering and selling certain REITs to its brokerage customers. [53] These cash payments allegedly were in addition to standard sales commissions, dealer fees, expense reimbursements and other fees that Ameriprise received that were specified in its distribution agreements with the REITs. The SEC’s order alleged that Ameriprise: demanded and received the so-called “revenue sharing” payments related to its sales of REITs and failed to disclose the payments as required; issued a variety of mislabeled invoices to the REITs as a means of collecting the undisclosed revenue sharing payments and making the payments appear legitimate; and sold more than $100 million of unregistered shares of one particular REIT in violation of registration requirements. Pursuant to a settlement, the firm agreed to pay $17.3 million in disgorgement and penalties.

In December 2009, in another action related to the financial crisis, the SEC charged Brookstreet Securities and its President and CEO Stanley C. Brooks in connection with the firm’s sale of collateralized mortgage obligations (“CMOs”). [54] The SEC alleges that Brooks knew, or was reckless in not knowing, that Brookstreet and its registered representatives were selling particularly risky and illiquid CMOs to retail customers, including senior citizens and retirees, for whom the investments were unsuitable. Previously, in May 2009, the SEC charged ten registered representatives of Brookstreet for misrepresentations they made to investors in selling the CMOs.

In late December 2009, the SEC filed a settled administrative action against ICAP Securities and five ICAP brokers for their alleged role in creating false over-the-counter markets in securities, including mortgage-backed securities. [55] As an inter-dealer broker, ICAP matches buyers and sellers in over-the-counter markets for various securities, such as U.S. Treasuries and mortgage-backed securities, by posting information on computer screens accessed by its customers. The SEC’s order alleges that brokers on ICAP’s U.S. Treasuries desks displayed fictitious flash trades on ICAP screens and disseminated false trade information into the marketplace in order to attract customer attention to its screens and encourage trading by these customers. Pursuant to a settlement, ICAP agreed, among other things, to pay $25 million in disgorgement and penalties.

B. Sales Practices

SEC enforcement actions against broker-dealers in the latter half of 2009 focused on various sales practice violations, particularly those affecting senior citizens and retirees, which SEC Chairman, Mary Schapiro has referred to as “particularly pernicious.” [56] In August 2009, SEC Chairman Mary Schapiro issued an open letter to broker-dealer chief executive officers. [57] Schapiro’s letter reminded them of their “significant supervisory responsibilities . . . to oversee broker-dealer activities, particularly with respect to sales practices.” According to the letter, the reminder was prompted by recent news reports that some broker-dealers may have been engaging in vigorous recruiting programs for registered representatives.

In September 2009, the SEC filed suit against a Michigan man charging that, among other things, he failed to register as a broker-dealer. [58] According to the SEC, the defendant used so-called “investor seminars” to lure investors — mainly senior citizens and retirees — to invest in securities the defendant falsely claimed were safe investments.

In October 2009, the SEC filed suit against a promoter and group of brokers charging that they coaxed investors, mostly senior citizens, to invest in a purported real estate investment program by inviting them to free lunch seminars. According to the SEC, the defendants falsely advertised the seminars as educational workshops, when they were in fact sales presentations.

C. Short Selling Abuses

In August 2009, the SEC filed its first ever set of enforcement actions alleging violations of Regulation SHO, the rule to prevent abusive “naked” short selling. Regulation SHO requires broker-dealers to locate a source of borrowable shares prior to selling short, and to deliver securities sold short by a specified date. In two separate administrative actions, the SEC charged two options traders and their respective broker-dealers with violations of the “locate” and “close-out” requirements of Regulation SHO. [59] The SEC alleged that the traders and their firms improperly claimed that they were entitled to an exception to the locate requirement, and engaged in transactions that created the appearance that they were complying with the close-out requirements. The SEC alleges that the traders and their firms were, in fact, not entitled to the asserted exception to the locate requirement and were not in compliance with the close-out requirements. Both broker-dealers were ordered to pay disgorgement, but those amounts were suspended provided the respondents satisfied payment obligations imposed by their respective exchanges in related actions.

D. Pay to Play

In December 2009, the Commission issued a decision in a litigated administrative proceeding against a broker allegedly involved in so-called “pay to play” conduct. [60] The Enforcement Division originally commenced the proceedings against Guy Riordan in 2007. In 2008, an Administrative Law Judge issued an Initial Decision finding against Riordan. The Commission’s decision similarly found that Riordan had engaged in a fraudulent kickback scheme by making secret cash payments to the former New Mexico State Treasurer in exchange for obtaining agency securities transactions from the New Mexico State Treasurer’s Office. The Commission decision imposed, among other relief, disgorgement and penalties totaling nearly $2 million and a bar from association with a broker or dealer.

V. Investment Advisers

Cases against investment advisers continued to reflect an emphasis on fulfilling fiduciary duties of accurate and timely disclosure to clients of material information and potential conflicts of interest. In addition, to address investor concerns following the exposure of several massive Ponzi schemes in 2008 and 2009, the SEC adopted a new rule imposing more stringent requirements on investment advisers who act as custodians of investor assets.

A. Cases Related to the Financial Crisis

In June 2008, the SEC and Department of Justice commenced civil and criminal actions against two former Bear Stearns hedge fund managers, alleging that they misrepresented to investors the prospects of funds that were heavily invested in collateralized debt obligations based largely on subprime mortgage-backed securities. [61] In November 2009, the defendants were tried and acquitted in the criminal case. Nevertheless, the SEC announced that it was not deterred from proceeding with its enforcement action. Citing the different standard of proof in civil actions, Robert Khuzami, Director of the SEC’s Division of Enforcement, said that the SEC “filed a case based on the evidence from our investigation,” and that “we fully expect to proceed with our case.” [62]

B. Disclosure of Conflicts

The SEC filed administrative proceedings against an investment bank and an investment adviser representative, alleging that the representative, who worked in the bank’s investment advisory services division, operated under an undisclosed conflict of interest. According to the administrative order, the bank ran an investment advisory program in which clients were told that its investment adviser representatives would recommend money managers from an approved list. The list contained money managers who had been vetted by the bank after a due diligence review and remained subject to the bank’s continuing monitoring. The administrative order alleges that the respondent investment adviser representative recommended money managers who were not on the approved list, and the bank and the representative had undisclosed relationships with the money managers in which they received substantial brokerage commissions and fees. [63] The investment bank settled the administrative charges. [64]

C. Reporting Requirements

The SEC brought settled administrative proceedings against a hedge fund adviser for failing to disclose that it had purchased more than five percent of the common stock of a public company as required under the securities laws. According to the administrative order, the investment firm purchased about ten percent of the common stock of the acquiring company in a merger so that it could vote in favor of the merger from which the investment firm stood to benefit under a “merger arbitrage strategy” it had implemented. [65] The adviser sought to defer filing a disclosure in reliance on an exception under Section 13(d) for an institutional investor investing in the “ordinary course” of its business and not seeking to influence control of the issuer, in this case the acquiring company.

The SEC order concluded that under the circumstances, the hedge fund’s investments could not be in the “ordinary course” of its business. According to the SEC’s order, “When institutional investors acquire . . . the beneficial ownership of securities with the purpose of influencing the management or direction of the issuer or affecting or influencing the outcome of a transaction — such as acquiring securities or an interest in securities, for the purpose of voting those securities in favor of a merger — the acquisition of those securities cannot be said to be in the “ordinary course of [the institutional investor’s] business….” As we noted in an article on this case, the SEC’s order appears to conflate the two prongs of the exemption. That is, by acquiring more than five percent of any company to influence management or the outcome of a shareholder vote, you may not be seeking to “influence control,” but you are not acting in the “ordinary course” of your business. For a more detailed discussion of this case and its implications under Section 13(d) of the Exchange Act, see our article entitled “Enforcement Action on Section 13(d) Disclosure Requirements for Institutional Investors Clarifies Exception for ‘Ordinary Course’ of Business.”

D. Brokerage Arrangements

In November 2009, the SEC brought settled administrative proceedings against an investment adviser, as well as its CEO and its former compliance officer, alleging that the adviser defrauded its family of mutual funds by charging over $24 million in fraudulent brokerage commissions. The adviser allegedly arranged for an unaffiliated broker to execute, clear and settle the funds’ trades at a discounted commission rate. Instead of passing the discount on to the funds, the adviser allegedly arranged for the unaffiliated broker to bill the funds at an inflated rate and then “rebate” the difference between the inflated rate and the discount rate to the affiliated broker. In settlement of the charges, the parties agreed, among other things, to pay nearly $45 million in monetary remedies. [66]

E. Portfolio Valuation

In August 2009, the SEC brought an enforcement action against an investment adviser and its CEO and CFO, alleging that they overstated the value of substantial equity and debt investments in a portfolio they managed in order to generate fees. The complaint alleges that the defendants overvalued the portfolio’s investments in two private companies that they knew were facing severe financial difficulties. [67]

F. “Feeder” Funds

The SEC filed an enforcement action against a hedge fund and its manager, alleging that the fund acted as a “feeder” to a Ponzi scheme operated by Minnesota businessman Thomas Petters. The complaint alleges that the hedge fund invested over $2 billion with Petters, while falsely representing to investors that it was verifying the legitimacy of Petters’ business. According to the complaint, the hedge fund not only failed to perform adequate diligence of Petters’ business but also failed to disclose to its clients that Petters was previously convicted of crimes involving fraud and deception. In addition, the hedge fund manager allegedly participated with Petters in a scheme to conceal that Petters had been delinquent for months in repaying $130 million in investor notes. [68]

G. Rules Designed to Safeguard Investor Assets

On December 16, 2009, the SEC adopted rules to increase safeguards where investment advisors act as custodians of, or have access to, client assets. The new rules require an investment adviser to engage an independent public accountant and submit to unannounced examinations on an annual basis to verify that reported client assets exist. The new rules also strengthen reporting requirements relating to client assets. Under existing rules, investment advisers must obtain a written report by an accountant describing controls in place at the custodian of client assets. The new rules are designed to provide greater confidence in the quality of the reports by requiring the accountant which prepares the report be registered with, and subject to regular inspection by, the PCAOB. [69]

Endnotes

[1] The descriptions of SEC actions in this article are based on allegations made by the SEC in its charging documents and do not assume the truth of the facts alleged. Gibson, Dunn & Crutcher LLP represents various parties in certain of these matters. Thus, these descriptions do not reflect the positions of the firm, its lawyers or its clients.
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[2] Robert Khuzami, Director of Division of Enforcement, U.S. SEC, “Remarks at Press Conference,” (Oct. 16, 2009), http://www.sec.gov/news/speech/2009/spch101609rk.htm.
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[3] Robert Khuzami, Director of Division of Enforcement, U.S. SEC, “Remarks at AICPA National Conference on Current SEC and PCAOB Developments,” (Dec. 8, 2009), http://www.sec.gov/news/speech/2009/spch120809rsk.htm.
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[4] Robert Khuzami, Director of Division of Enforcement, U.S. SEC, “Remarks at Press Conference,” (Oct. 16, 2009), http://www.sec.gov/news/speech/2009/spch101609rk.htm.
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[5] Robert Khuzami, Director of Division of Enforcement, U.S. SEC, “Remarks at AICPA National Conference on Current SEC and PCAOB Developments,” (Dec. 8, 2009), http://www.sec.gov/news/speech/2009/spch120809rsk.htm.
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[6] See SEC v. Galleon Mgmt. LP, No. 09-CV-8811 (JSR) (S.D.N.Y. filed Oct. 16, 2009); see also SEC Litig. Release No. 21255 (Oct. 16, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21255.htm.
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[7] Robert Khuzami, Director of Division of Enforcement, U.S. SEC, “Remarks at Press Conference,” (Oct. 16, 2009), http://www.sec.gov/news/speech/2009/spch101609rk.htm.
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[8] See SEC v. Galleon Mgmt. LP, No. 09-CV-8811 (JSR) (S.D.N.Y amended compl. filed Nov. 5, 2009); see also SEC Litig. Release No. 21284 (Nov. 5, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21284.htm.
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[9] See Rajaratnam Answer at 2-3.
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[10] See United States v. Rajaratnam, 09-MAG-2306 (DFE) (S.D.N.Y. filed Oct. 15, 2009); United States v. Chiesi, 09-MAG-2307 (DFE) (S.D.N.Y. filed Oct. 15, 2009).
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[11] See SEC v. Cutillo, No. 09-CV-09208 (LAK) (S.D.N.Y. filed Nov. 5, 2009); see also SEC Litig. Release No. 21283 (Nov. 5, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21283.htm.
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[12] See SEC v. Tang, No. 09-CV-05146 (JCS) (N.D. Cal. filed Oct. 30, 2009); see also SEC Litig. Release No. 21271 (Oct. 30, 2009), http://sec.gov/litigation/litreleases/2009/lr21271.htm.
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[13] See SEC v. Cuban, No. 3:08-CV-2050-D, 2009 WL 2096166 (N.D. Tex. July 17, 2009).
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[14] Id. at *8.
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[15] See SEC v. Dorozhko, 574 F.3d 42 (2d Cir. 2009).
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[16] See SEC v. Rorech, No. 09-CV-4329 (JGK) (S.D.N.Y. filed May 5, 2009); see also SEC Litig. Release No. 21023 (May 5, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21023.htm.
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[17] Robert Khuzami, Director of Division of Enforcement, U.S. SEC, “Remarks at AICPA National Conference on Current SEC and PCAOB Developments,” (Dec. 8, 2009), http://www.sec.gov/news/speech/2009/spch120809rsk.htm.
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[18] SEC v. Jenkins, No. 2:09-CV-01510 (JWS) (D. Ariz. July 22, 2009) (available at http://sec.gov/litigation/complaints/2009/comp21149.pdf).
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[19] 15 U.S.C. § 7243.
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[20] SEC v. Fraser, No. 09-CV-00443 (PHx) (GMS), 2009 WL 2450508, at *8 (D. Ariz. Aug. 11, 2009).
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[21] 2009 WL 2450508, at *8 (internal quotations omitted).
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[22] Id. at *11.
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[23] Id. at *14.
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[24] SEC v. Morrice, Case 09-CV-01426 (JVS) (C.D. Cal. filed Dec. 7, 2009); see also SEC Litig. Release No. 21327 (Dec. 7, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21327.htm.
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[25] SEC v. Bank of America Corp., No. 09-CV-6829 (JSR) (S.D.N.Y. filed Aug. 3, 2009); see also SEC Litig. Release No. 21164 (Aug. 3, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21164.htm.
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[26] SEC v. Bank of America Corp., No. 09-CV-6829 (JSR), slip op. at 3 (S.D.N.Y. Sept. 14, 2009).
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[27] See SEC Litig. Release 21371 (Jan 11, 2010), http://www.sec.gov/litigation/litreleases/2010/lr21371.htm.
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[28] SEC v. SafeNet, Inc., No. 09-CV-2117 (D.D.C. filed Nov. 12, 2009); see also SEC Litig. Release No. 21290 (Nov. 12, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21290.htm.
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[29] Jason Flemmons, Associate Chief Accountant for the Division of Enforcement, U.S. SEC, “Remarks at AICPA National Conference on Current SEC and PCAOB Developments,” (Dec. 8, 2009), http://sec.gov/news/speech/2009/spch120809jsf.htm.
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[30] SEC v. Verifone Holdings, Inc., No. 09-CV-4046 (RS) (N.D. Cal. filed Sept. 1, 2009); see also SEC Litig. Release No. 21194 (Sept. 1, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21194.htm.
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[31] SEC v. Cotton, No. 06-CV-906 (C.D. Cal. 2006); see also SEC Litig. Release No. 21281 (Nov. 4, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21281.htm.
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[32] SEC v. Silva, III, No. 09-CV-5395 (PVT) (N.D. Cal. filed Nov. 17, 2009); SEC v. Bjorkstrom, No. 09-5394-PVT (N.D.Cal. filed Nov. 17, 2009); see also SEC Litig. Release No. 21302 (Nov. 17, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21302.htm.
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[33] SEC v. Milne, No. 3:08-CV-00505 (EBB) (D. Conn. filed Oct. 13, 2008); see also SEC Litig. Release No. 21247 (Oct. 13, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21247.htm. SEC v. Terex Corp., No. 3:09-CV-1281 (AWT) (D. Conn. Aug. 12, 2009); see also SEC Litig. Release No. 21177 (Aug. 12, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21177.htm.
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[34] SEC v. Isolon Systems, Inc., No. C-09-1293 (RAJ) (W.D. Wash. filed Sept. 14, 2009); see also SEC Litig. Release No. 21210 (Sept. 14, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21210.htm.
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[35] SEC v. Hardy, No. 09-CV-4414 (E.D. La. filed July 15, 2009); see also SEC Litig. Release No. 221137 (July 16, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21137.htm.; see also SEC Litig. Release No. 21236 (Oct. 5, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21236.htm.
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[36] In the Matter of LSB Industries, Inc., Admin. Proc. File No. 3-13555 (SEC July 17, 2009), http://www.sec.gov/litigation/admin/2009/34-60336.pdf.
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[37] SEC v. West Marine, Inc., No. 09-CV-3379 (PVT) (N.D. Cal. filed July 23, 2009); see also SEC Litig. Release No. 21150 (July 23, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21150.htm.
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[38] SEC v. General Electric Co., No. 3:09-CV-1235 (RNC) (D. Conn. filed Aug. 4, 2009); see also SEC Litig. Release No. 21166 (Aug. 4, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21166.htm.
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[39] SEC v. Greenberg, No. 09-CV-6939 (S.D.N.Y. filed Aug. 6, 2009); see also SEC Litig. Release No. 21170 (Aug. 6, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21170.htm.
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[40] SEC v. Home Solutions of America, Inc., No. 3:09-CV-02269 (DCG) (N.D. Tex. filed Nov. 30, 2009); see also SEC Litig. Release No. 21314 (Nov. 30, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21314.htm.
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[41] Jason Flemmons, Associate Chief Accountant for the Division of Enforcement, U.S. SEC, “Remarks at AICPA National Conference on Current SEC and PCAOB Developments,” (Dec. 8, 2009), http://sec.gov/news/speech/2009/spch120809jsf.htm.
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[42] SEC v. Dwyer, No. 09-CV-2386 (CKK) (D.D.C. Dec. 17, 2009), see also SEC Litig. Release No. 21342 (Dec. 17, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21342.htm.
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[43] In the Matter of Ernst & Young LLP, Admin. Proc. File No. 3-13725 (Dec. 17, 2009), http://sec.gov/litigation/admin/2009/33-9096.pdf.
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[44] SEC v. Moore, No. 2:09-CV-01637 (LDG) (GWF) (D. Nev. filed Aug. 27, 2009).
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[45] See SEC Admin. Release No. 60792 (Oct. 6, 2009), http://www.sec.gov/litigation/admin/2009/34-60792.pdf.
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[46] SEC v. Ulticom, Inc., No. 09-CV-02589 (JS) (ARL) (E.D.N.Y. filed June 18, 2009); SEC v. Roberts, No. 09-CV-02590 (LDW) (AKT) (E.D.N.Y. filed June 18, 2009); see also SEC Litig. Release No. 21091 (June 18, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21091.htm,
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[47] SEC v. Comverse Technology, Inc., No. 09-CV-02588 (DRH) (AKT) (E.D.N.Y. filed June 18, 2009); see also SEC Litig. Release No. 21090 (June 18, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21090.htm.
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[48] SEC v. Black Box Corp., No. 09-CV-1591 (W.D. Pa. filed Dec. 4, 2009); see also SEC Litig. Release No. 21323 (Dec. 4, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21323.htm.
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[49] SEC v. The Hain Celestial Group, Inc., No. 09-CV-3826 (DRH) (E.D.N.Y. filed Sept. 3, 2009); see also SEC Litig. Release No. 21195 (Sept. 3, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21195.htm.
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[50] SEC v. Selterman, No. 09-CV-6813 (S.D.N.Y. July 31, 2009); see also SEC Litig. Release No. 21163 (Aug. 3, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21163.htm.
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[51] SEC v. Treacy, No. 08-CV-4052 (RJS) (S.D.N.Y. filed April 30, 2008); see also SEC Litig. Release No. 21278 (Nov. 4, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21278.htm.
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[52] In the Matter of TD Ameritrade, Inc., Admin. Proc. File No. 3-13557 (SEC July 20, 2009), http://www.sec.gov/litigation/admin/2009/33-9053.pdf; SEC v. Morgan Keegan & Company, Inc., No. 09-CV-1965 (N.D. Ga. filed July 21, 2009).
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[53] In the Matter of Ameriprise Financial Services, Inc., Admin. Proc. File No. 3-13544 (SEC July 10, 2009) http://www.sec.gov/litigation/admin/2009/33-9051.pdf.
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[54] SEC v. Brookstreet Securities Corp., No. SACV 09-01431 (DOC) (ANx) (C.D. Cal. filed Dec. 8, 2009).
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[55] In the Matter of ICAP Securities USA, LLC, Admin. Proc. File No. 3-13726 (SEC Dec. 18, 2009), http://www.sec.gov/litigation/admin/2009/33-9097.pdf.
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[56] Mary L. Schapiro, Chairman, U.S. SEC, “Address before the Solutions Forum on Fraud” (Oct. 22, 2009), http://www.sec.gov/news/speech/2009/spch102209mls.htm.
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[57] Letter from Mary L. Schapiro, Chairman, U.S. SEC (Aug. 31, 2009) http://www.sec.gov/news/press/2009/2009-189-letter.pdf.
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[58] SEC v. Bluestein, No. 2:09-CV-13809 (BAF) (MKM) (E.D. Mich. filed Sept. 28, 2009), see also SEC Litig. Release No. 21223 (Sept. 28, 2009), http://sec.gov/litigation/litreleases/2009/lr21223.htm.
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[59] In the Matter of Hazan Capital Management LLC, Admin. Proc. File No. 3-13570 (SEC Aug. 5, 2009) http://www.sec.gov/litigation/admin/2009/34-60441.pdf; In the Matter of TJM Proprietary Trading, LLC, Admin. Proc. File No. 3-13569 (SEC Aug. 5, 2009), http://www.sec.gov/litigation/admin/2009/34-60440.pdf.
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[60] In the Matter of Guy P. Riordan, Admin. Proc. File No. 3-12829 (Dec. 11, 2009), http://www.sec.gov/litigation/opinions/2009/33-9085.pdf.
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[61] SEC v. Ralph R. Cioffi, No. 08-CV-2457 (FB) (E.D.N.Y., filed June 19, 2008), see also SEC Litig. Release No. 20625 (SEC June 19, 2008). United States v. Ralph Cioffi, et al., No. 08-CR-415 (FB) (E.D.N.Y., filed June 19, 2008), see also Press Release, Dept. of Justice, U.S. Attorney’s Office for the Eastern District of New York, Two Senior Managers of Failed Bear Stearns Hedge Funds Indicted on Conspiracy and Fraud Charges (June 19, 2008), http://www.justice.gov/usao/nye/pr/2008/2008jun19.html.
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[62] SEC Expects to Proceed with Bear Stearns Case, Reuters, Nov. 12, 2009, http://www.reuters.com/article/idUSTRE5AB5L020091112.
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[63] In the Matter of William Keith Phillips, Admin. Proc. File No. 3-13559 (SEC July 20, 2009), www.sec.gov/litigation/admin/2009/34-60344-o.pdf.
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[64] In the Matter of Morgan Stanley & Co. Incorporated, Admin. Proc. File No. 3-13558 (SEC July 20, 2009), http://www.sec.gov/litigation/admin/2009/34-60342.pdf.
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[65] In the Matter of Perry Corp., Admin. Proc. File No. 3-13561 (SEC July 21, 2009), http://www.sec.gov/litigation/admin/2009/34-60351.pdf.
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[66] SEC v. Value Line, Inc., Admin. Proc. File No. 3-13675 (SEC Nov. 4, 2009), http://www.sec.gov/litigation/admin/2009/33-9081.pdf.
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[67] SEC v. Brantley Capital Mgmt. LLC, No. 09-CV-1906 (N.D. Ohio, filed Aug. 13, 2009); see also SEC Litig. Release No. 21778 (Aug. 13, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21178.htm.
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[68] SEC v. Thomas Petters, No. 09-SC-1750 (ADM/JSM) (D. Minn., filed July 10, 2009), see also SEC Litig. Release No. 21124 (July 10, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21124.htm.
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[69] See SEC Press Release No. 2009-269 (Dec. 16, 2009), http://www.sec.gov/news/press/2009/2009-269.htm.
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