Securities Enforcement
MARCH 2004
SEC Enforcement Officials Outline New Tactics
and Priorities
At the Practising Law Institute’s “SEC Speaks”
conference on March 5, 2004, top SEC officials
outlined recent trends, future plans, and top priorities
for the SEC’s Enforcement Division. As even the
most casual observer of the SEC knows, the
enforcement program became far more aggressive in
2003, bringing more cases and obtaining significantly
greater penalties. The constant theme from SEC
speakers at the conference was that this aggressive
program would continue and expand, and that
penalties would increase even more. SEC Chairman
William Donaldson emphasized that SEC enforcers
have made a concerted effort to increase their
resources by doing a better job of coordinating their
efforts with those of other divisions of the
Commission and by strengthening their cooperation
with state enforcement agencies.
Enforcement Division Chief Steven Cutler and his top
deputies noted that the SEC is moving more quickly
and more aggressively than ever before, resulting in a
record number of enforcement actions in 2003. They
also stressed that the Commission is better prepared
than ever to litigate cases before U.S. federal courts
and the Commission’s own administrative law judges,
noting that the Commission had increased their
stable of trial lawyers by 35% and that they had
achieved a perfect record of success before ALJs in
2003. The Commission did not, however, state how it
defined a “victory” and whether respondents
actually received less of a penalty by litigating than
what was offered in settlement discussions. In
addition to the escalating pace of civil litigation,
Associate Director Thomas Newkirk pointed out that
an increasing number of investigations are
proceeding on parallel criminal tracks, both at the
federal and state level. Throughout the conference,
SEC officials observed that, despite increased
cooperation from the subjects of SEC enforcement
investigations, the Commission is now insisting upon
stiffer penalties and other sanctions than it has in the
past.
Cutler acknowledged that the Enforcement Division
has adopted a more “risk taking” approach, by
looking for more difficult cases, by initiating
investigations before “solid evidence” of a securities
violation is apparent, and by accelerating the pace of
investigations once they begin. Associate Director
Paul Berger also revealed that the Division has
started hiring specialists with industry expertise to
help identify issues that may be worth investigating
and by seeking more Section 21(a) orders from the
Commission that authorize the staff to conduct wideranging inquiries into issues that may be endemic
within a particular industry. Cutler noted that a major
advantage of a Section 21(a) order is that it allows
the staff to circulate interrogatories that require
sworn responses from industry members, which is
more efficient than having the staff wade through
mountains of documents.
The enforcement staff repeatedly warned that they
have become increasingly impatient with firms and
individuals that do not respond quickly to their
requests for documents and testimony. Cutler
announced that the Commission plans to bring a case
soon regarding a firm’s failure to deliver documents
on a timely basis.1 Enforcement panelists observed
that cooperation in the production of documents and
witnesses is an increasingly important factor in
determining the magnitude of penalties upon which
the Commission will insist. The staff indicated that
they have also expedited the Wells process and the
pace of settlement discussions, and are more willing
than before to file complaints before discussing
settlement. On the criminal side, Newkirk noted that
prosecutors are no longer waiting to build
Kirkpatrick & Lockhart LLP
“blockbuster” cases, but are more willing now to
bring criminal actions in segments when each
component is ready for indictment.
Chairman Donaldson and others repeatedly noted the
increasing focus of the Enforcement Division on
investigations of the mutual fund industry and on
financial institutions that may aid and abet improper
activity. Randall Lee, the director of the
Commission’s Pacific Regional Office, stated that late
trading and market timing investigations are one of
the Division’s highest priorities, with every district
and regional office participating. While 16
enforcement actions have already been brought
against 24 firms and 26 individuals accused of late
trading and/or market timing, Lee promised that many
more enforcement actions are in the works.
The staff discussed the increasing significance of
Section 1103 of the Sarbanes-Oxley legislation, which
allows the SEC to petition a federal court to escrow
“extraordinary” payments that firms might otherwise
make to officers or directors who are under
investigation. The SEC has already sought such
relief in three cases, including the Gemstar case (SEC
v. Gemstar-TV Guide, No. CV 03-4376 NM, 2003 U.S.
Dist. LEXIS 8707 (Cal. Dist. Ct. 2003)), which is now
on appeal to the U.S. Court of Appeals for the Ninth
Circuit.
At the conference’s enforcement workshop, members
of the Commission staff emphasized the increasing
importance of e-mails in SEC investigations and the
Commission’s increasing propensity to bring
enforcement actions against firms that fail to retain emails as required under Rules 17a-3 and 17a-4 of the
Exchange Act. The Commission’s trial attorneys also
discussed the staff’s efforts to obtain corporate
records that may be in the possession of former
employees, noting that Judge Lamberth recently
ruled, in a case involving Ken Lay, that the so-called
Hubbell doctrine does not extend Fifth Amendment
protection to such documents (SEC v. Lay, 295 F.
Supp. 2d 52 (D.D.C. 2003)).
Panelists discussed several pending legislative
initiatives that, they hope, will improve the
Commission staff’s access to information. For
instance, the Commission supports legislation now
pending in the U.S. House of Representatives that
would grant the Commission the same access to
grand jury materials that bank regulators now have.
In addition, the Commission hopes that this
legislation will facilitate the staff’s access to the
fruits of internal investigations by allowing firms to
disclose such information to the Commission staff
without waiving the attorney-client privilege or the
protections of the attorney work product doctrine.
Although the SEC has been active as an amicus in
arguing against waiver in several cases, the case law
has generally gone the other way, suggesting that a
legislative fix may be necessary.
1 On March 10, 2004, the SEC published Release
No. 49386, finding that Banc of America Securities
(“BAS”) violated the recordkeeping and access
requirements under Sections 17(a) and 17(b) of the
Exchange Act and Rule 17a-4(j) thereunder. In the
Matter of Banc of America Securities, LLC, Exchange
Act Release No. 49386, Mar. 10, 2004, available at
http://www.sec.gov/litigation/admin/34-49386.htm.
The SEC determined that BAS failed to timely
produce documents that had been requested by the
staff, provided the staff with misinformation about
the status of the document requests, and performed
dilatory actions which delayed the investigation.
BAS consented to a censure and a $10,000,000
penalty in connection with this Release. Cutler was
likely referring to this case when he noted the
Commission’s plans to bring a documents case within
the next few weeks.
MICHAEL J. MISSAL
202.778.9302
mmissal@kl.com
BRIAN A. OCHS
202.778.9466
bochs@kl.com
GLENN R. REICHARDT
202.778.9065
greichardt@kl.com
NICOLE A. BAKER
202.778.9018
nbaker@kl.com
ERIC C. RUSNAK
202.778.9212
erusnak@kl.com
Kirkpatrick & Lockhart LLP
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Andrew C. Glass
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Ronald W. Stevens
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NEW YORK
Simon P. Levine
Eugene R. Licker
Richard D. Marshall
Keith W. Miller
William O. Purcell
Loren Schechter
James A. Tricarico, Jr.
Steven A. Yadegari
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PITTSBURGH
David A. Brownlee
Mark A. Rush
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SAN FRANCISCO
Eilleen M. Clavere
Sandra L. Geiger
David Mishel
Richard M. Phillips
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WASHINGTON
Nicole A. Baker
Alan J. Berkeley
Christopher E. Dominguez
Andrew J. Dubill
Charles L. Eisen
Andrew H. Feller
Paul Gonson
Stephen W. Grafman
Rebecca L. Kline
Erin Ardale Koeppel
202.778.9018
202.778.9050
202.778.9404
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202.778.9434
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202.778.9420
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afeller@kl.com
pgonson@kl.com
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rkline@kl.com
ekoeppel@kl.com
Jeffrey B. Maletta
Charles R. Mills
Michael J. Missal
Brian A. Ochs
Glenn R. Reichardt
Eric C. Rusnak
Kathryn A. Sellig
Nicholas G. Terris
Stephen G. Topetzes
202.778.9062
202.778.9096
202.778.9302
202.778.9466
202.778.9065
202.778.9212
202.778.9083
202.778.9408
202.778.9328
jmaletta@kl.com
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mmissal@kl.com
bochs@kl.com
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nterris@kl.com
stopetzes@kl.com
Stavroula E. Lambrakopoulos
202.778.9248 slambrakopoulos@kl.com
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dmishel@kl.com
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© 2004 KIRKPATRICK & LOCKHART LLP. ALL RIGHTS RESERVED.