Last Friday, the U.S. Securities and Exchange Commission held its annual “SEC Speaks” conference, which offers a glimpse into the prevailing trends and priorities at the Commission.  As always, the Commission devoted a significant amount of time to exploring and explaining the undertakings of its Division of Enforcement.  During the conference, some noteworthy themes and trends emerged with regard to the SEC’s enforcement priorities, which we address below.

SEC Chairman Mary Schapiro set the tone during her opening remarks at  the conference, which emphasized the Commission’s ability to “aggressively and effectively” fulfill its mandate to “protect investors and ensure the integrity of [the US] markets.”  Schapiro explained that the SEC’s Division of Enforcement has “revamped its operations, putting additional talented attorneys back on the front lines, creating specialized units, and streamlining procedures.”  According to Schapiro, “last year the SEC brought a record 735 enforcement actions” and “obtained $2.8 billion in penalties and disgorgements.”  Schapiro insisted that “there are more actions to come.” 

The SEC Whistleblower Program

Chairman Schapiro highlighted the efforts of the SEC’s new Office of the Whistleblower, noting that in 2011 the Commission “established a whistleblower program that is already providing the agency with hundreds of higher-quality tips, helping us to avoid investigatory dead-ends and – and the same time – prodding companies to enhance their internal compliance programs.” 

Sean McKessy, Chief of the SEC’s Office of the Whistleblower, offered additional insight.  He explained that the Whistleblower Office’s “number one priority” is acting as liaison between whistleblowers and the Division of Enforcement.  Other priorities for McKessy’s office include:

• Communicating with whistleblowers and their counsel, including responding to inquires about the process for submitting tips and/or claiming an award.
• Triaging tips, complaints and referrals received from whistleblowers, which the office is receiving at a rate of approximately seven per day.
• Tracking the SEC’s growing inventory of settled cases to indentify matters that might have arisen from a whistleblower complaint.
• Processing claims for awards based on settled cases.

With respect to the oft-repeated complaint that the SEC’s whistleblower rules do not require whistleblowers to report internally before submitting a tip to the Commission, McKessy underscored the Commission’s stance that the rules strike an appropriate balance between incentivizing whistleblower reports and showing consideration for corporate compliance programs.  According to McKessy, the SEC’s balanced approach is working.  In the “significant majority” of the whistleblower reports he has personally reviewed, McKessy insisted, the whistleblower did, in fact, report the potential violation internally before coming to the Commission.  In fact, he recalls only one instance in which a “serious” tip was not first reported internally. 

Enforcement Cooperation Program

David Bergers, Director of the SEC’s Boston Regional Office, highlighted several noteworthy aspects of the Commission’s Enforcement Cooperation Program.  The program, Bergers explained, is designed to encourage individuals with knowledge of wrongdoing to cooperate with the Commission early in its investigation.  Since the cooperation program was announced in January 2010, the SEC has entered into cooperation agreements with 37 individuals.  Under its cooperation agreements, the SEC often agrees to “toll prosecution” – or offers lesser sanctions – in exchange for cooperation in ongoing investigations and enforcement actions.  According to Bergers, in determining whether a cooperation agreement is appropriate, the SEC will consider the following factors: (1) the assistance provided by the individual, particularly the timing, nature, and voluntariness of the assistance; (2) the “importance” of the underlying enforcement matter; (3) the “social interest” in holding a particular individual accountable; and (4) the appropriateness of giving “cooperation credit” in light of the individual’s “profile” (e.g. whether the person is a recidivist or has accepted responsibility).

As part of the cooperation initiative, the SEC has also entered into several agreements with corporations, including one deferred prosecution agreement (DPA) and three non-prosecution agreements (NPA).  Like the agreements with individuals, the availability of DPAs and NPAs is designed to encourage corporations to cooperate in SEC investigations and enforcement actions.  While the Commission will consider a number of factors in deciding whether to enter into an agreement with a corporation, Bergers highlighted its agreements with Tenaris S.A. (a DPA) andCarter’s Inc. (an NPA) as examples of the nature and quality of cooperation the SEC expects. 

Pursuit of New Legal Theories

Mary Jo Gillette, Director of the SEC’s Chicago Regional Office, discussed several expanded legal theories the SEC is pursuing in enforcement matters, as well as new remedies available.  First, Gillette explained that the Dodd-Frank Act expanded the scope of aiding and abetting liability in SEC actions.  As a result of Dodd-Frank, the SEC is now authorized to assert aiding and abetting claims in new areas, including claims under the Securities Act of 1933 and the Investment Advisers Act of 1940.  Dodd-Frank also expanded the “state of mind” element required for aiding and abetting liability to include not only knowing participation, but also reckless assistance. 

Second, Gillette explained that Dodd-Frank made clear certain remedies available in control person liability cases.  Importantly, Dodd-Frank authorizes the SEC to seek injunctive relief in actions brought under Section 20(a) of the Securities Exchange Act.  The federal courts were previously split on the availability of injunctive relief in 20(a) actions; the standard for obtaining injunctive relief, however, varies among the courts. 

Gillette noted that Dodd-Frank also provides an affirmative defense to control person claims.  To wit, injunctive relief is not available against control persons who “acted in good faith and did not induce the [wrongful] conduct.  Compliance with internal controls, she says, will likely be a key consideration in relying the affirmative defense.   

Finally, Gillette emphasized that Dodd-Frank enables the Commission to seek “enhanced penalties” in cease and desist (C&D) proceedings.  The SEC is now authorized to ask for monetary penalties in C&D matters, where it was previously limited to seeking only disgorgement of ill-gotten gains.  The SEC is also empowered under Dodd-Frank to penalize secondary actors in C&D cases who caused violations of the federal securities laws, in addition to primary actors. 

Anticorruption Enforcement

The Commission now has a “cross-border group” charged with ferreting out corruption in corporations that trade on US exchanges, but are headquartered abroad.  The group is particularly interested in the accounting policies and financial disclosures of cross-border companies, many of which rely on “small US audit firms.”  As a result, the SEC is leaning on audit firms, which the SEC regards as “gatekeepers.”  To that end, the SEC issued guidance in 2010 and again in 2012, advising that they conduct risk-based analyses of their overseas clients.  According to Kara Brockmeyer, head of the SEC’s FCPA Unit, the SEC has seen a spike in Form 8-K reports of accounting irregularities, as well as a jump in Rule 10A reports.  She expects additional 10A reports to flow in through the Office of the Whistleblower. 

Brockmeyer noted that the SEC is also devoting significant resources to Foreign Corrupt Practices Act (FCPA) enforcement.  The SEC’s FCPA Unit is focusing heavily on international cooperation, teaming with regulators around the world.  She highlights the FCPA Unit’s cooperation with Switzerland, Russia, and China, each of which recently enacted anticorruption laws.  The FCPA Unit brought 20 FCPA enforcement cases 2011, including 19 against companies and one against an individual.  Brockmeyer cautioned, however, that the 2011 numbers should not be seen as a model.  Indeed, in 2012 the SEC has already charged 14 individuals with FCPA violations, compared with only five companies charged. 

Change to the SEC’s Settlement Policies

The SEC’s Chief Litigation Counsel, Matthew Martens, spoke briefly about the SEC’s settlement practices.  When the Commission elects to settle a case, he said, its policy is to accept only settlements that reflect what the Commission believes it could reasonably expect to obtain in a successful trial.  If the terms of the settlement reflect what the SEC might achieve at trial, Martens said, there is no reason to forego settlement simply because a defendant does not admit liability. 

In defense of SEC settlements, Martens noted that the agreements include great detail of the violations alleged – more information, in fact, than other agencies provide.  And importantly, while the SEC may not require an admission of guilt, it does not allow settling parties to denyguilt.  The SEC has settled more than 2,000 cases in the past three years, and the judges presiding over those matters requested additional information about the settlement less than 10 times. 

Nevertheless, Martens insisted that the SEC is committed to trying cases in appropriate circumstances, noting that the SEC has an “impressive record” in litigated matters.  The SEC has prevailed in 80% of its trials since October 2010, he says. 

* * * * *

For those that follow the ebbs and flows of SEC enforcement matters, some of these themes and trends may come as little surprise.  It is important, however, for regulated entities to track – or periodically remind themselves of – the SEC’s enforcement priorities.  

Q: I am chief of staff for a Senator, and I have a question about providing services to our constituents. Our office constantly receives requests from constituents to help with matters pending before federal agencies, often from campaign contributors. Sometimes it makes me uneasy to help contributors. It almost feels like bribery to use our office’s influence on behalf of people who have given money to our Senator’s campaign. On the other hand, constituent services is an important part of a Senator’s job, and it would seem arbitrary, or even political suicide, to refuse to provide services for some constituents merely because they happen to have contributed to our Senator’s campaign. Is it OK to do favors for campaign contributors?

A: Yes, it is OK to provide services to contributors. In fact, the Senate Ethics Manual encourages it. It calls assisting constituents before government agencies “an important function of congressional oversight” and says specifically that providing constituent services to contributors is “a legitimate and appropriate senatorial function.”

Senate Rule 43 confirms this. Adopted in 1992 in the aftermath of the Keating Five S&L scandal, it affirms that “a Member of the Senate, acting directly or through employees, has the right to assist petitioners before executive and independent government officials and agencies.” Under the rule, that assistance might include requesting a status report, urging prompt consideration, arranging for interviews or appointments, expressing judgments or even calling for reconsideration of an administrative response with which the Senator disagrees.

However, as the Senate Ethics Committee has acknowledged, things are a little more complicated when requests for help come from contributors. “Special issues of ethics and propriety are raised when Members intervene ... on behalf of a ... contributor to ... or fundraiser for their campaigns or other causes,” the Senate Ethics Manual says. Because a Senator must rely on numerous individuals and organizations to contribute to their campaigns, it is likely that at some point some of those individuals will seek assistance from the Senator. If a contributor has a matter that a Senator “reasonably believes he or she is obliged to press because it is in the public interest or the cause of justice or equity to do so, then the Senator’s obligation is to pursue” it.

The key is that Senators should try to treat contributors and noncontributors essentially the same. This follows from what the Senate Ethics Committee has called the “cardinal principle” in this area: The decision about whether to intervene for an individual should be made “without regard to whether the individual has contributed, or promised to contribute.” Senate Rule 43 codifies this principle. It prohibits basing the decision to assist a constituent on whether the constituent has contributed to a Senator’s campaign or causes. Given the frequency with which Senate offices receive requests for assistance, all Senate offices should be mindful of this rule.

Moreover, beyond the actual substance of the decision to help a constituent, there is also the issue of appearances. The Senate Ethics manual is full of reminders that appearances matter. The general concern is that the public’s respect for the law might decline if there is the perception that the governmental process reflects the desires of special interests rather than the public good.

The Ethics Manual provides guidance regarding how to minimize this concern when handling requests for assistance from contributors. It says that several factors warrant attention. First, there is the merit of the individual’s request. Second, there is the amount of the contribution or contributions the individual has made or raised, including whether the amount is more than the average contribution. Third, there is the history of the individual’s donations, including whether the individual has made donations in the past. Next, there is the nature of the individual’s request, including whether it would require the Senator to take an action that would deviate from normal conduct. And, finally, there is the proximity of time between an individual’s contribution and the request for assistance.

None of these factors is controlling or by itself requires or prohibits a particular course of action. In fact, the Ethics Manual makes a point of saying that, when fielding requests for help from contributors, the Ethics Committee does not endorse or require any particular procedure as it “does not seek to elevate form over substance.”

So, by all means, continue to help your constituents — contributors and noncontributors alike. I am no expert in fundraising, but I suspect that a sure way to see a drop in campaign funds is to implement a policy against helping contributors. The good news is that nothing in the ethics rules requires you to stop helping contributors. Just remember to take care while you are doing it.

Q: I am a Senate staffer with a question about the STOCK Act. I have a friend who is an attorney, and he said that one of the biggest consequences of the act is a possible expansion of the law forbidding Members and staffers from accepting gratuities from constituents. I know that this has been a tricky area for Members and staffers in the past, and we have always been very careful in our office in handling gifts from constituents. Is the gratuities law expanding?

A: Last week, by a 417-2 vote, the House approved a bill widely known as the STOCK Act. As the bill wound its way through Congress, much of the media coverage focused on the bill’s ban of “insider trading” by Members and staffers. This is understandable, given its name: the Stop Trading on Congressional Knowledge Act. Less attention has been received by some key amendments made to the bill in the Senate before it was sent to the House.

Those amendments, authored by Senate Judiciary Chairman Patrick Leahy (D-Vt.) and Sen. John Cornyn (R-Texas), would significantly affect several key anti-corruption laws, including the one you mention, the law prohibiting “gratuities.” To understand the proposed changes requires a little legal history.

The so-called gratuities law is, in fact, a subsection of the statute banning bribes, which never actually mentions the word “gratuity.” The subsection that has come to be known as the gratuities law prohibits giving “anything of value” to a public official “for or because of any official act performed or to be performed by such public official.” In short, you can’t tell a Member: “Thanks for your vote on that very helpful legislation. Here’s $50,000.”

The Supreme Court clarified the scope of this law in an important 1999 decision called U.S. v. Sun-Diamond Growers of California. A lower court had convicted Sun-Diamond Growers of California of violating the gratuities law for making several gifts to the secretary of Agriculture even though no link had been established between the gifts and an official act. Sun-Diamond appealed, arguing that the court had wrongly concluded that all that is required for a conviction under the gratuities law is that a gift be given because of the recipient’s official position. The prosecution responded that the statute should apply wherever a gift is “motivated, at least in part, by the recipient’s capacity to exercise governmental power or influence in the donor’s favor.”

In a unanimous decision, the Supreme Court sided with Sun-Diamond, ruling that the gratuities law, on its face, applies to gifts given for or because of some official act. Therefore, the law does not apply to gifts that are given on the basis of the recipient’s position, even if the donor is hoping to establish good will with the recipient that might affect future official acts.

The Supreme Court noted that “peculiar results” would flow if the law were interpreted so broadly as to criminalize gifts given on the basis of the recipients’ position. For example, the court said, the statute would then criminalize token gifts such as the replica jerseys given to the president by championship sports teams each year during ceremonial White House visits. The court stated a statute “that can linguistically be interpreted to be either a meat axe or a scalpel should reasonably be taken to be the latter.”

After the Sun-Diamond decision, reform groups immediately began lobbying Congress to respond. They urged Congress to revise the gratuities law to make it a crime for someone to give a gift on the basis of the recipient’s official position. Those efforts never made much progress until this year, when the Senate passed a version of the STOCK Act with the amendments expanding the gratuities law.

Specifically, the amendments would make it a crime to give a gift worth $1,000 or more “for or because of ... the [recipient’s] official position.” This means that for prosecutors to obtain a conviction under the law, they would no longer need to establish a link between a gift and some specific official act.

The amendments do include an exception for actions taken “as provided by law, for the proper discharge of official duty, or by rule or regulation.” The amendments define “rule or regulation” in this context to include rules and regulations governing the acceptance of gifts and campaign contributions. This appears to mean that gifts made in accordance with Congressional gift rules and campaign finance regulations would, by definition, not be violations of the gratuities law.

As it turns out, the version of the bill passed by the House did not include the amendments expanding the gratuities law, meaning their fate is now up in the air. While some consider the amendments to be as good as dead, Leahy has urged that they be considered in conference, where House and Senate negotiators will work to resolve the differences between the two versions of legislation.

To return to your question, it remains unclear whether the gratuities law will expand. But, whatever the fate of the proposed amendments, Members and staffers certainly have plenty of other reasons not to accept gifts, and constituents have plenty of reasons not to give them. As you are no doubt aware, the House and Senate gift rules greatly restrict gifts to Members and staffers. And, the Honest Leadership and Open Government Act of 2007 makes it a crime for lobbyists to knowingly make a gift that violates those rules.

So, while the gratuities law might not expand, this is no reason for Members and staffers to be any less careful about gifts from constituents. Continue to proceed with care.

The U.S. Securities and Exchange Commission announced recently that it had settled insider trading charges with Diamondback Capital Management LLC. As required by a recent SEC policy change, the proposed settlement appears to be the first not to include a representation that the defendant “neither admits nor denies” the SEC’s charges.

Under the proposed settlement, Diamondback agreed to pay more than $9 million and consented to a judgment that permanently enjoins it from future violations of federal anti-fraud laws. In itself, the settlement is not unusual. As the New York Times reports, however, this settlement marks “a departure from the SEC’s historical practices” because it “does not include language that the fund ‘neither admits nor denies’ any wrongdoing in the case.”

The Diamondback settlement appears to have roots in a new SEC policy prohibiting companies that admit to fraudulent conduct in parallel criminal proceedings from settling SEC charges without admitting guilt of the same conduct.

In the Diamondback case, the company entered into a nonprosecution agreement with the U.S. Department of Justice which contains an agreed statement of facts acknowledging that certain Diamondback employees traded securities based on material nonpublic information. As a result of this admission, Diamondback was not permitted by the SEC to settle charges on a “neither admit nor deny” basis.

There has been widespread speculation — by Reuters and the Washington Post, et al. — that the SEC’s policy change and the Diamondback settlement are, in fact, reactions to criticism from federal district court judges who have questioned the adequacy of the facts typically admitted in consent judgments.

The SEC vigorously denies that there is a tie between the new policy and this heightened judicial scrutiny of SEC settlements. Nevertheless, in the Diamondback case, the SEC took the unusual step of obtaining from the company an agreed statement of facts, which it reportedly submitted to the court for consideration in weighing up the proposed settlement agreements.

Those looking for a template for the factual allegations the SEC might include in future settlement will be sorely disappointed: the proposed agreement is not yet publicly available and, we have been informed by the SEC that it will not become available unless and until the presiding judge approves the settlement.This lack of transparency is uncharacteristic in SEC matters, and it comes as a surprise in a case pending in the same district where Judge Jed Rakoff in November derided the SEC for failing to make clear that the public interest was served by a proposed settlement.From what we know about the proposed Diamondback settlement, it appears the case may be a harbinger of a new era in SEC settlements. The takeaways are simple: (1) where a company admits to criminal conduct, the SEC is prepared to stick to its new policy of prohibiting regulated entities from settling charges on a “neither admit nor deny” basis; and (2) regulated entities should be prepared to negotiate and submit to the court more fulsome factual allegations in support of a proposed settlement agreement.