LAW 540
SECURITIES REGULATION: ENFORCEMENT PROCEDURES AND ISSUES
Fall 2010
Professor Gregory G. Faragasso 202-551-4734
Professor Brad Bennett
202-639-7935
gregfaragasso@gmail.com
brad.bennett@bakerbotts.com
Thursdays 6:20 to 8:10
Room 318 Lab
SYLLABUS
This course will examine the enforcement of the federal securities laws from the
perspectives of both the SEC and defense counsel. The required weekly reading will
consist of recent enforcement cases or rulemaking, related statutes and rules, law review
articles and other commentary. We will distribute this material by PDF. If anyone
wishes to purchase a hard copy of the material, please advise us and we will make it
available in the bookstore. The Class is based on the assumption that you have
completed the reading and all students are expected to contribute to the class discussion
based on their understanding of the assigned material. Most classes will begin with a
short discussion of recent developments. As things occur during the semester, we will
supplement the reading materials described below with additional PDFs and handouts in
class. We may also periodically secure the services of guest instructors to address
specific topics. We will offer you the option of taking the course as either a paper course
or examination course. (Note, however, that those who choose the paper option will also
have to take the short-answer portion of the examination, which asks students to very
briefly identify certain basic concepts/entities/individuals which were discussed in some
depth during class.) Your paper or examination will count for the majority of your grade,
however class participation is strongly encouraged and will also count toward your final
grade. Because of the importance of class participation, we will strictly enforce the
school's attendance policy. Failure to meet the deadlines for submission of first drafts or
final papers will lower your final grade. You are welcome to use your laptops in class so
long as laptop use does not interfere with your ability to contribute to the class
discussion. Please contact either of us at one of the above numbers or email addresses if
you have any questions.
1.
Thursday, August 26
Course Overview
We will discuss the mission of the SEC and the role of self-regulatory organizations,
private plaintiffs and defense counsel in securities law enforcement. Other topics will
include the general statutory framework governing enforcement actions and the resource,
policy and political considerations relevant to the SEC’s Enforcement Division.
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Reading:
SEC Enforcement Manual, January 13, 210 (rev. March 3, 2010), pp. 1-41, available online at http://www.sec.gov/divisions/enforce/enforcementmanual.pdf
2.
Thursday, September 2
The SEC Investigative Process
The genesis and development of an informal inquiry/formal investigation. We will
discuss the SEC’s investigative authority and various investigative techniques, including
subpoenas compelling the production of documents and the testimony of witnesses,
telephone interviews, and chronologies. We will also discuss the rights of witnesses, the
manner in which the SEC enforces its subpoenas, the SEC’s internal deliberative process,
and ways in which the Enforcement Division coordinates its actions with the SEC’s other
divisions and offices and the SEC’s cooperation with and referrals to or from selfregulatory organizations such as the NASD and the various stock exchanges. We will
also briefly discuss the Enforcement Division’s formal recommendations to the
Commission and the various types of enforcement actions.
Reading:
SEC Enforcement Manual, pp. 41-101
Securities Act Release No. 33-5310 (Sept. 27, 1972) (the “Wells” release)
SEC Form 1662 (“Supplemental Information for Persons Requested to Supply
Information Voluntarily or Directed to Supply Information Pursuant to a Commission
Subpoena”)
3.
Thursday, September 9
Securities Enforcement and the Internet
This class will explore the use of the internet as a vehicle for both securities enforcement
and illegal conduct. Topics will include on-market and off-market activity, offerings and
manipulations.
Guest instructor: Thomas Sporkin, Chief, Office of Market Intelligence
Reading:
Exchange Act Section 10(b) and Rule 10b-5
Securities Act Sections 5 and 17
A Very Brief Encyclopedia of Securities Fraud, Business Law Today, March/April 2007,
pp. 35-39
SEC v. Berliner, (S.D.N.Y. April 24, 2008)
In the Matter of Kenneth Terrell, et al., Exchange Act Rel. No. 424483 (March 2, 2000)
In the Matter of Jonathan Lebed, Exchange Act Rel. No. 43307 (September 20, 2000)
In the Matter of Mark S. Jacob, Litigation Rel. No. 16671 (August 31, 2000)
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4.
Thursday, September 16
Financial Fraud Part I
Overview of Enforcement Division’s role in ensuring that public corporations accurately
report their financial results and fully disclose material information relating to the
performance of the corporation. We will discuss the creation of financial statements, the
role of the independent auditor in financial reporting, and the importance of accurate
financial statements to investors.
Reading:
“Financial Statements Fraud ‘The Basics’”
Staff Accounting Bulletin 99 (materiality)
Financial Fraud Investigations Outline
5.
Thursday, September 23
Financial Fraud Part II
The difference between accounting mistakes and deliberate efforts to defraud the
investing public. Topics will include the requisite mental state for fraud, i.e., scienter,
individual and corporate responsibility for financial fraud, the likelihood for criminal
prosecution, and the range of sanctions typically imposed in financial fraud cases.
Reading:
In the Matter of Livent Corp., Exchange Act Rel. No. 34-7627 (Jan. 13, 1999) Litigation
Rel. No. 16022 (January 13, 1999)
SEC v. Jerald Banks, Litigation Rel. No. 16251 (August 12, 1999)
In the Matter of Sensormatic Electronics Corp., Exchange Act Rel. No. 39791 (Mar. 25,
1998)
6.
Thursday, September 30
Gatekeepers
An expanded discussion of the role of the in-house and outside attorneys, internal
accountants, independent auditors, audit committee of the board, officers and directors in
financial reporting.
Reading:
SEC v. Collins, 07 CV 11343 (S.D.N.Y. December 18, 2007)
In the Matter of Google and Drummond, Admin. Proc. File 3-11795 (January 13, 2005)
In the Matter of Isselmann, Admin. Proc. File 3-11678 (September 23, 2004)
In the Matter of Hall and Meyer, Admin. Proc. File 3-12208 (December 14, 2009))
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Standards of Professional Conduct for Attorneys, 17 C.F.R. § 205.1 et seq.
7.
Thursday, October 7
Hot Enforcement Topics
The Dodd-Frank Wall Street Reform Act, the sub-prime meltdown, the Foreign Corrupt
Practices Act, and the responsibilities of regulated entities to ensure the integrity of their
operations.
Reading:
SEC v. Goldman Sachs, et al, 1O-CV-3229 (BSJ), Complaint and Consent
SEC v. Bernard Madoff, 08 CV 10791 (S.D.N.Y. December 11, 2008)
Lay-Person’s Guide to the FCPA
SEC v. Halliburton Company, Civ. Action No. 4:09-399 (SD Tex. February 11, 2009)
8.
Thursday, October 14
Insider Trading
The elements of the offense of insider trading, including the two basic theories of
liability: the misappropriation theory and the classical theory. We will also discuss the
liability of tippers and the lesser standard of liability for insider trading in the context of a
tender offer. We will discuss other informational advantages between market players,
such as selective disclosure to analysts by corporate officers, and the SEC’s efforts to
level the playing field.
Reading:
Dirks v. SEC, 463 U.S. 646 (1983)
US v. O’Hagan, 117 S.Ct. 2199 (1997)
9.
Thursday, October 21
Insider Trading, Part II
Insider Trading Investigation Packet
SEC v. Galleon Management, et al. 09 CV 8811 (S.D.N.Y. November 5, 2009)
SEC v. Cuban, 3-08CV2050-D (Memorandum Order and Opinion, July 7, 2009)
10.
Thursday, October 28
Criminal Aspects of Securities Enforcement
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This class will address the difficulties and advantages created when SEC investigations
proceed in tandem with a criminal investigation of the same conduct. Topics will include
the investigative techniques available to the criminal authorities; the benefits of
cooperation to the target of the investigation; the effect of immunity from prosecution;
assertions of the Fifth Amendment privilege against self-incrimination; the effect of the
Federal Sentencing Guidelines; the additional charges (such as money laundering,
perjury, obstruction, false statements, bank fraud, wire fraud, mail fraud and tax fraud)
available to criminal authorities; and the receptiveness of judges and juries to securities
fraud cases.
Reading:
"White Collar Crime, Blue Collar Tactics", Brad Bennett
“To Tell or Not to Tell: Weighing the Benefits and Pitfalls of Self-Reporting Corporate
Wrongdoing”, Bennett and Brauer
Remarks of Deputy Attorney General Mark R. Filip, August 28, 2008
11.
Thursday, November 4
Remedies Part 1
Discussion of the various remedies available to the SEC, including injunctions, ceaseand-desist orders, officer and director bars, administrative sanctions, civil penalties,
disgorgement, Section 21(a) reports and stop orders.
Reading:
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (“Remedies
Act”) Pub. L. No. 101-429, 104 Stat. 931 (1990)
Senate Report No. 337, 101st Cong., 1st Sess., 18 (1990).
12.
Wednesday, November 11
Remedies Part II and Wells Submissions
Continued discussion of various remedies available. We will also discuss the treatment
of “good soldiers” and the possible rewards for cooperation. Discussion of the settlement
process and the preparation and utility of a Wells submission.
Reading:
Report of Investigation Pursuant to Section 21(a) of the Securities and Exchange Act of
1934 and Commission Statement on the Relationship of Cooperation to Agency
Enforcement Decisions, Exchange Act Rel. No. 44969 (October 23, 2001)
SEC Enforcement Manual, pp. 108-140
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13.
Thursday, November 18
SEC Testimony Workshop
Using a hypothetical fact pattern provided in class, each student will play the role of an
SEC enforcement attorney taking the investigative testimony of a witness in an insider
trading investigation. Each witness will be represented by defense counsel.
Reading:
Testimony Techniques Outline
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