via Add the ABA to List of Proponents of Self-Funding for SEC – Compliance Week

Embarrassed after missing the warning signs of the financial crisis and the Ponzi scheme of Bernard L. Madoff, the agency’s enforcement division has adopted several new — if somewhat unconventional — strategies to restore its credibility. The S.E.C. is taking its cue from criminal authorities, studying statistical formulas to trace connections, creating a powerful unit to cull tips and assign cases and even striking a deal with the Federal Bureau of Investigation to have agents embedded with the regulator.

“We were given a once-in-a-lifetime opportunity to rethink what we do and how we do it,” said Robert Khuzami, the agency’s enforcement chief since 2009….

via With New Firepower, S.E.C. Tracks Bigger Game — DealBook

Now, a recent study co-authored by Frank D. Hodge of the University of Washington’s Foster School of Business has confirmed that video can make bad news worse. The study, published in The Accounting Review, examined the impact of using video to announce financial restatements. Hodge and his co-authors, W. Brooke Elliot of the University of Illinois and Lisa Sedor of DePaul University, discovered that announcing restatements via video is beneficial only when top management, according to Hodge, “accepts responsibility for the restatement.”

via Apologizing for Bad News? Be Careful with the Video — CFO Magazine

Surprisingly, there is little information available to institutional and individual investors alike as to how to mitigate the risk of losing money to fraudsters. The goal of this webcast is to empower investors to better protect themselves with knowledge of situations to avoid whenever possible. Attendees will hear experts talk about:

• Common causes of investment fraud;
• Enforcement and litigation trends relating to investment misdeeds;
• Lessons learned from financial scandals of the last decade;
• Role of the investment fiduciary in vetting service providers;
• Red flags to detect poor internal controls that could lead to fraud; and
• Regulatory action to stem financial fraud and preserve the integrity of the capital markets.

Speakers for this 75-minute event include:

• Dr. Susan Mangiero, CFA, FRM – Managing Director, FTI Consulting
• Jonathan Morris, Esq. – Day Pitney LLP / former General Counsel of Barclays Wealth
• Brian Ong – Senior Managing Director, FTI Consulting
• Karen Tyler, North Dakota Securities Commissioner and former president of the North American Securities

To attend this webcast scheduled for Wednesday, June 13, at 1 pm Eastern, please sign up below.

At a congressional hearing on Thursday officials from four agencies — the SEC, the Federal Reserve, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency — said requiring admissions of misconduct would hurt regulators’ ability to bring cases and would soak up limited resources….

Republican lawmakers on the House Financial Services committee agreed. ”A policy that has judges micro-managing federal agencies in their exercise of enforcement authority and requires the government to engage in lengthy and expensive trials in every instance would not serve the best interests of taxpayers or investors,” Spencer Bachus, who chairs the committee, said in opening remarks.

via Corporate settlement policy unlikely to be changed by Congress — Reuters

So its nice to see the Commission becoming a bit more assertive and fight back against these sort of challenges.  The appeal of Judge Rakoff’s decision to reject the Citigroup settlement and more broadly reject the use of the neither “admit nor deny” approach was a case in point.  Its risky appealing bad rulings by the district court.  Bad district court cases can become bad appellate court cases.  But this time, the SEC decided that it could not let the matter rest.  Even judges need to know that the SEC will fight back.

With that in mind, we note a small but important series of examples of the growing verve at the SEC….

via The SEC Fights Back – theRacetotheBottom

The Financial Services Authority is casting its net across three continents in the search to find a head of enforcement to replace Margaret Cole….

Three North American regulatory officials are also potential candidates: Lorin Reisner, who recently came from the US Attorney’s office in Manhattan from the Securities and Exchange Commission, Steven L. Cohen, SEC associate enforcement director, and Tom Atkinson, who heads enforcement at the Ontario Securities Commission.

via FSA searches for new enforcement chief – FT.com

U.S. securities regulators are investigating hedge-fund firm Magnetar Capital LLC, which bet on several mortgage-bond deals that wound up imploding during the financial crisis, according to people familiar with the matter.

While Magnetar has faced scrutiny over its role in various collateralized debt obligations, or CDOs, the Illinois firm itself now is a target of an investigation by the Securities and Exchange Commission, these people said.

via SEC Probes Role of Hedge Fund in CDOs – WSJ.com

Last summer, Robert Khuzami, director of the Securities and Exchange Commission’s Division of Enforcement, got tongues wagging among general counsels at public companies and in the SEC enforcement defense bar when he delivered an unusual speech to the Criminal Law Group of the UJA-Federation of New York.

In his remarks, Khuzami railed on what he called “sharp practices” and “questionable tactics” being employed by counsel defending SEC investigations that he believed were corrupting the “truth-seeking function of the investigative process.” Khuzami warned that the SEC had several tools it could and would use in response to such tactics, ranging from declining to extend typical courtesies to the lawyer’s client in litigation, all the way up to referring the worst offenders to the Department of Justice for possible criminal prosecution.

Over the year that has since passed, Khuzami and some of his colleagues at the SEC have repeatedly raised this issue in public statements, emphasizing that it is an ongoing focus of the agency. This was capped off by an April 30, 2012, article in The Wall Street Journal(“Legal Eagles in Cross Hairs”) which reported that the SEC is now further intensifying its scrutiny of lawyers who try to impede its investigations. The WSJ noted that in recent months, “direct obstruction of a few investigations and a larger number of probes where lawyers coach clients in the art of resisting and rebuffing” has resulted in increased frustration at the SEC. This has, in turn, led to even greater scrutiny of lawyers in private practice, as well as in-house counsel.

Based on the comments of SEC officials over the past year, the SEC is now looking very hard at the following practices by counsel and companies defending SEC investigations:

Multiple Representations

Multiple representations arise frequently and in some cases pose no issues, such as when one lawyer or a single law firm represents multiple employees who have no conflicting interests. The SEC’s concern about multiple representations is rooted in situations where some of the people (or the company) jointly represented have a material risk of legal exposure, or otherwise have divergent interests. One extreme such case cited by Khuzami in his June 2011 speech involved counsel who represented both a supervisor and the person he supervised in a “failure to supervise” case.

The SEC is also concerned about situations where multiple witnesses represented by the same counsel separately testify under oath and provide the “same implausible explanation of events.” Stephen Cohen, associate director of enforcement, noted in November 2011 that the agency is “incredibly suspicious” when 15 people represented by the same counsel “come in and testify to the word precisely the same way about their answers to every single question. That is, as a matter of human nature, incredibly unlikely.”

Representation of Forgetful Witnesses

According to Khuzami, the agency encounters witnesses who will testify, repeatedly, that they do not recall basic and uncontroverted facts that are documented in their own writings. While there is no doubt that memories fade over time, he said, some witnesses appear to have been instructed by counsel to only testify about those events that they recall with “near certainty.” For example, some witnesses will profess a “lack of recollection about nearly everything of any substance, including even the most basic facts, such as their own job responsibilities …” The agency also encounters witnesses for whom no amount of contemporaneous documents can refresh their recollection on inculpatory points, “but that same witness offers specific, detailed and consistent memories on most every point potentially helpful to his defenses, often down to minute details.” In short, as Khuzami reiterated at a conference in April 2012, the SEC views the problem of “less-than-candid” testimony as a serious one.

Questionable Internal Investigations

The SEC continues to express concerns about questionable internal investigations conducted by defense counsel and in-house counsel that appear to be, as Khuzami put it in November 2011, “more defensive than independent.” Specific concerns include investigative reports that aggressively promote exculpatory evidence while dismissing clear and identifiable red flags, or that scapegoat lower-level employees while protecting senior management with whom counsel have longstanding relationships.

Notably, it is not just the SEC that is concerned. Claudius Modesti, director of the Division of Enforcement and Investigations at the Public Company Accounting Oversight Board, reports that his staff has similarly found troubling examples of attorney conduct during investigations. These include:

• Failing to produce highly relevant documents in a timely manner, so that the documents only come to light after the completion of an investigation;
• Interrupting witnesses who appear to be about to give damaging testimony;
• Witnesses changing stories without coherent explanations after taking a break with their attorney; and
• Speaking objections by lawyers which clearly appear to be efforts to coach witnesses.

“We’re encountering lawyers who frankly should know better,” Modesti recently stated.

Both the SEC’s Khuzami and Cohen have acknowledged that the concerns with counsel noted above as well as many others are not universal and that “a significant percentage of the bar conducts itself perfectly appropriately.” For the minority who are using these tactics, however, the SEC is clamping down in various ways.

At a minimum, the SEC has made it clear that it will refuse to extend typical courtesies, such as agreeing to an extension of time for a potential defendant to respond to a Wells notice, in cases where the SEC believes counsel is engaged in questionable behavior.  For more serious misconduct, the SEC has other tools available to it— tools which reports indicate are now being used with greater frequency. These include referrals of counsel to the SEC’s Office of General Counsel under Rule 7(e) of the SEC Rules Relating to Investigations. If the general counsel finds unethical or improper professional conduct, counsel may face consequences including a suspension or bar from practice before the Commission, or censure.

To date, there has only been one SEC case in which counsel involved has been barred in this way. In 2010, attorney Steven Altman was permanently barred from appearing or practicing before the Commission after he allegedly requested in a recorded telephone call that his client receive certain severance pay, in return for which she would “evade the Division [of Enforcement]‘s service of a subpoena, and/or if served, testify falsely that she could not recall” certain damaging facts.

For the most serious instances of misconduct by counsel, such as where the SEC believes counsel is participating or assisting in a witness’s obstruction and perjury, the SEC can refer the witness and counsel to the Department of Justice (as well as to the relevant state bar association).

Through its nearly one-year campaign against “sharp practices” by defense attorney and in-house counsel, the SEC is trying to reinforce the message that obstructive tactics by counsel now carry a higher risk than ever before. This is true not only because of the previously mentioned consequences, Khuzami says, but also because counsel “serves as a prism” through which the evidence against a client is assessed. If counsel is deemed to lack credibility, the SEC may view the evidence in a harsher light, thereby damaging the client’s interests.

SEC enforcement defense counsel and in-house counsel should be alert, therefore, to the fact that the “sharp practices” discussed above are squarely on the SEC’s radar. The practices flagged so far by the SEC, however, are fairly extreme examples which do not seem to approach the gray areas where aggressive SEC defense lawyers may reasonably wish to tread. As Khuzami stated in his original speech on the subject, he does not want his words to chill a vigorous defense as “counsel are obligated to zealously defend and promote the interests of their clients, particularly when faced with the life-altering consequences of an SEC enforcement proceeding.” Indeed, he said, the investigative process benefits from strong and zealous representation.

Just don’t take it too far.

Originally published in Compliance Week. Reprinted with permission.
© 2012 Haymarket Media, Inc. All Rights Reserved. Compliance Week can be found at http://www.complianceweek.com. Call (888) 519-9200 for more information.

Allegations by and against people in the SEC’s Office of Inspector General spawn several new rounds of “investigating the investigator.”

via At the SEC, Investigations About Investigators Who Investigate Other Investigators – Compliance Week