Over at the FCPA Professor blog, Mike Koehler has a take on the year the SEC has had with bribery, an increasingly important remit for the agency's enforcement lawyers.  The topline - action is slightly up from last year, but down from its peak a couple of years ago.  Some intriguing details:

The range of SEC FCPA enforcement actions in 2013 was, on the high end, $153 million in the Total enforcement action, and on the low end, $735,000 in the Ralph Lauren enforcement action.  Of the $300 million the SEC collected in 2013 corporate FCPA enforcement actions, approximately $219 million (73%) were in two enforcement actions (Total – $153 million and Weatherford – $66 million).

Two corporate FCPA enforcement actions from 2013 were SEC only (Philips Electronics and Stryker).

Of the 8 corporate enforcement actions from 2013, 3 enforcement actions were administrative actions (Philips Electronics, Total, and Stryker) and 1 action (Ralph Lauren) was a non-prosecution agreement.  In other words, there was no judicial scrutiny of 50% of SEC FCPA enforcement actions from 2013.  The settlement amounts in these actions comprised approximately 57% of the SEC’s $300 million collected in 2013 corporate FCPA enforcement actions.

In 2013, the SEC collected approximately $208 million in disgorgement and prejudgment interest in enforcement actions that did not charge anti-bribery violations (either administrative actions that did not charge any FCPA violations or settled civil complaints that did not charge anti-bribery violations).  In other words, approximately 69% of the $300 million the SEC collected in 2013 FCPA enforcement actions was no-charged bribery disgorgement. 

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After over four years of work, my book Law, Bubbles, and Financial Regulation came out at the end of 2013.  You can read a longer description of the book at the Harvard Corporate Governance blog.  Blurbs from Liaquat Ahamed, Michael Barr, Margaret Blair, Frank Partnoy, and Nouriel Roubini are on the Routledge’s web site and the book's Amazon page. The introductory chapter is available for free on ssrn.

Look for a Conglomerate book club on the book on the first week of February!

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SAC Capital is paying a huge fine, but individuals aren't (yet) being charged for the insider trading committed by the firm.  How should we evaluate this?

On the one hand, it makes sense to target the company if you believe that it was essentially set up to trade on inside information on behalf of its clients.  The regrettable thing, maybe, is that the clients, who presumably flocked to the firm because they knew this, aren't taking haircuts out of the deal.  But Cohen, the owner, certainly is.  Here's James Stewart:

And given Mr. Cohen’s ownership of the firm, the $1.2 billion fine, as well as a previous $600 million settlement with the S.E.C., will come out of his pocket, rather than public shareholders’. With a fortune estimated at $9 billion, Mr. Cohen will still be a billionaire many times over, but the fine is nonetheless more than a dent in his personal fortune.

This aspect even mollified a critic like Professor Burton. “At least the target is the same as the alleged villain,” he said, referring to Mr. Cohen. “This is almost never the case when you sue and indict a public company.”

SAC Capital didn’t even pay lip service to the idea that it would unconditionally cooperate with the government’s investigation, let alone make a “timely and voluntary disclosure of wrongdoing,” which is another factor in the Justice Department’s guidelines that SAC flouted. “It’s extraordinary that they said publicly they would not cooperate,” Professor Friedman said. “They evidently thought they would get away with it with impunity.”

I don't get too hung up on this stuff - it is insider trading, after all, the constant obsession of the American prosecutor.  One doubts that the aggresive policing of it is really making the financial system much safer.  But there is something satisfying in sanctioning the vehicle designed to break that weird law hugely for, in fact, doing so.

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Britain and the United States are increasingly matching one another stride for stride when it comes to supervision of the financial markets.  Today, the meme was copying - Britain has announced a qui tam whistleblower program that may work like the one rolled out by the SEC.  Earlier this year, it was about improving a flawed model; sick of being subjected to American deferred prosecution agreements, Britain came up with its own DPA scheme - and actually passed a law and went through notice and comment before doing so.  And at times in the past, the model has been harmonization through a deal, which was the case for the first Basel capital adequacy accord, which only developed after the US and UK concluded a tentative arrangement on bank reserves that threatened to shut the rest of the world out of those then dominant financial markets.

These different approaches - copying, improving, negotiating - are distinctions that matter; but the consistent transmission of American rules into British financial markets is pretty interesting, given that we used to be talking about how Sarbanes-Oxley had made America distinctively bad, and Britain distinctively attractive, to public issuers.

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Over at Dealbook, Brandon Garrett and I take the temperature of the DPA.  A taste:

These agreements are a form of regulation — except it is a single company or entity rather than an entire industry that is ordered to adopt structural reforms. Regulatory programs are supposed to receive consultation and careful judicial review, but deferred prosecution agreements usually do not.

The larger picture is similar. The deferred prosecution agreement has not been endorsed by Congress, or vetted by an agency. Moreover, the agreements – settling a case before it can be filed – are designed to avoid even the deferential judicial review that occurs if a company enters a plea deal before a judge.

Britain’s impending adoption of the agreements, on the other hand, exemplifies the cautious embrace offered by good administrative law.

Britain’s proposed program comes with a code governing its use, and a requirementthat a court conclude that the agreement is both “in the interests of justice” and “fair, reasonable, and proportionate.” Moreover, the proposal itself has been opened for comment from the public.

We wish deferred prosecution agreements had been similarly vetted in the United States. Instead, American prosecutors have used agreements in cases of great public importance without any meaningful oversight.

Do give the whole thing a look, and let us know what you think.

 

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Lehman Brothers failed five years ago, and the statute of limitations for most federal crimes is five years, so the restrospectives are full of recountings of the fact that no one important has been prosecuted over what happened.  Here's an example, and, look, I'm surprised as well.  If you could convict Ken Lay over things his subordinates did and his own "we won't stop trying to save this company and I'm confident we will succeed" statements, it's pretty surprising that not a single banking CEO has faced a similar fate.  

But no jail time doesn't mean nothing, and the SEC's decision to reject a settlement over the mutual fund that broke the buck after Lehman failed, basically destroying the whole asset class until the Fed jerry-rigged an insurance scheme to save it, is an example of this.  It shows that the government is looking to civil, rather than criminal penalties.  It isn't clear to me that those cases are more winnable.  But that appears to be the strategy.  Along those lines, here's a nice argument that the government has changed some things since the crisis unfolded.

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Over at Compliance Week, they've found a gap in the federal government's market surveillance, and they've gone and given it to the world:

This morning, the Daily Intelligencer reports, CNBC's Jim Cramer asked Preet Bharara, the U.S. Attorney for the SDNY, if Snapchat can be used to share insider trading tips without leaving a trail. Bharara's response: "I don't even know what you're talking about."

That's from the brilliantly titled Snapchat: The New Way to Tell Everyone that "Blue Horseshoe Loves Anacott Steel".  You'll have to click on the link if you do not recall the reference.

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I'm for them - do give it a look.  Here's a taste:

The new policy, however, will make pursuing the big fish draining. For the large cases, it will mean that there are only two possible outcomes: a civil trial with a verdict, or an admission of guilt by the defendant, which will lead to serious follow-on litigation.

It is particularly troubling given that the new S.E.C. chairwoman, Mary Jo White, has said she would like to prioritize securities fraud cases. Those cases are hard enough to win to begin with. They frequently involve large public companies that may balk rather than make an admission and face litigation from plaintiffs’ lawyers who did not discover and bring cases on their own before the S.E.C. action.

One can also assume that making the price of admissions high will make the price of fines correspondingly low.

 

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Mary Jo White has vowed to bring more financial fraud cases as the SEC Chair, and Peter Henning has a nice column outlining the ways she might do so.  Policing accounting misstatements and the like often strike your average outside observer as more noble work than insider trading cases.  But:

The number of corporate accounting cases at the Securities and Exchange Commission has dropped to its lowest level in a decade, with only 79 such cases filed in the most recent fiscal year.

Over at Corp Counsel, Broc Romanek has an explanation for the decline:

From the Staff's perspective, financial fraud cases are a real bear. They chew up a lot of resources and require special expertise as an accounting background is necessary for some members of the investigatory team. Unlike insider trader cases - which often can be a slam dunk - financial fraud cases typically take years to bring, rather than months. And since the SEC tends to be graded - by Congress and the media - by how many cases it brings, financial fraud cases are mainly a lot of risk and little reward for the agency. So it will be interesting to see if the SEC's approach does change and how it goes about pulling it off...

Plausible, but unfortunate.  The IRS devotes a lot of its resources to auditing the most sophisticated filers; you have to wonder whether the SEC wouldn't be well served to take a similar sort of focus.

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Money is pouring out of SAC Capital fast fast fast.  When expert networker John Kinnucan told the world that he'd told two FBI agents who asked him to wear a wire to get lost, everyone stopped doing business with him.

Why does Wall Street run when it hears about an investigation?  I'm not sure I know every jot and tittle of the answer, but in addition to looking into it myself, I bent the ear of former proseuctor, and current academic, Miriam Baer.  Some speculations, and if there's a forfeiture law out there that I missed, let me know in the comments:

• The Kinnucan case isn't so hard to suss out.  The SEC/DOJ concluded that what he was doing was insider trading.  Hiring someone to do market research for you, when the content of that market research will be based on tips from insiders, could make you a co-conspirator, if the government establishes you knew this to likely be the case.  The government has basically killed the expert network niche with its prosecutions, and you can understand why hedge funds have stopped hiring consultants like Kinnucan.  (Here, fwiw, is part of his defense: "If major banks, whose compliance departments are presumably staffed with former Securities and Exchange Commission lawyers, regularly publish industry data like iPhone build and Dell motherboard production changes, the rest of us can reasonably conclude that this must have regulators’ blessing.").
• But SAC is a little harder.  Investors in the fund are passive.  They certainly don't precisely know whether their money is being put to work based on illegal tips obtained by the fund managers.  They aren't likely to know what the fund is investing in at all.  Moreover, SAC presumably has risk management systems in place meaning that its investments will either be stable or sold the moment its principals are led away in handcuffs.  We don't freeze the assets of shareholders of public companies who benefit from insider trades commited by their managers, after all.  Why should investors of SAC run when we can presume that shareholders of I dunno, BlackRock, have nothing to worry about? 
• Still, an indictment could really tie up investor resources.  SAC will stop doing anything. Nearly all of the company's records will become evidence.  Portfolio managers will be distracted, lawyer up, etc.  That doesn't sound like a profitable opportunity.
• There could be a reputation cost to staying with SAC even after it was indicted. 
• Or, if you want to be dark about it: all sophisticated investors assume that funds look for "black edge " (i.e., basically illegal) investment behavior. But once that fund's bad behavior becomes public, or even is subject to indictment, the fund is no longer valuable to the investor.

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I mean, sure, I have an article in issue 2 of 2013, but so does Paul Robinson, Janet Cooper Alexander, and Chris Elmendorf/David Schleicher.  It's a murder's row, present company excepted, so I'm sure you'll want to check it out.

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I've got a piece up over at the Times/DealBook on the SEC's whistleblower program, picking lots of nits. Here's a taste, and there's more here:

a whistle-blower program is a privatization approach, not unlike hiring a private company to run a prison. But for the S.E.C., it is law enforcement that is being privatized. Rather than being able to take aim at particularly worrisome corners of the securities markets, the program leaves the S.E.C. beholden to tippees. Moreover, if Congress believes whistle-blowers, rather than the agency, are doing the work, it will have yet another justification for placing tight limits on the agency’s budget.

Do check it out, and let me know your thoughts, either down below or thataway.

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The SEC just announced that it would split the post of enforcement chief between two lawyers, both alumni of the US Attorney's Office at the SDNY.  I've never heard of such an arrangement outside of the Roman Empire; why do it?

Conflict of interest.  One of the enforcement directors worked closely with Mary Jo White at her New York firm; the other one can handle Debevoise cases until they age out of the problem.  Which means that this does not need to be a permanent arrangment, and perhaps fittingly, the conflict enforcement chief plans on leaving reasonably soon.

But it is also a statement about how such problems come up more the closer you get to the top of an agency.  Mary Jo White is hardly the first appointee to bring her favorite person at her law firm along for the ride.  But special assistants and assistant deputies are easy to wall off; it used to be that there was only one enforcement director.

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In exchange for $614 million.  The case against Cohen always looked pretty strong to me, and he's certainly not too big to jail, like, say, HSBC.  But still, it's just an insider trading case, and I have found this indictment of the "after he heard from x, he phoned y" method of proof, which would be combined with, presumably, testimony from a former employee about a conversation had with Cohen, to be pretty convincing.

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• Here's Bainbridge on the SEC's suit against Illinois: "Why do I call this a stunt? No fine. No relief for the affected bondholders. No benefits for Illinois pensioners, although I grant that that's largely beyond the SEC's jurisdiction. And no additional changes beyond what Illinois has already done."
• Ben Walsh is right, this dodgy hedge fund manager is "hilariously ostentatious."  And no master criminal, either - he got really rich doing things that were really obviously fraudulent.  At the very least the SEC can catch those guys.  
• The NY soda ban injunction isn't really business law, but it is a good illustration of the arbitrary and capricious standard's downside, which can undo compromised, but potentially promising regulation, which in turn might be a byword for your average SEC rulemaking.  As the New York judge observed:  
  • The simple reading of the Rule leads to ... uneven enforcement even within a particular City block, much less the City as a whole...The loopholes in this Rule effective defeat the stated purpose of the Rule.  It is arbitrary and capricious because it applies to some but not all food establishments in the city, it excludes other beverages that have significantly higher concentrations of sugar sweeteners and/or calories on suspect grounds, and the loopholes inherent in the Rule, including but not limited to no limitations on refills, defeat and/or serve to gut the purpose of the Rule.

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