In March 2009, it struck me that SEC Commissioner Luis Aguilar, who had only joined the SEC in July 2008, seemed to have quickly positioned himself as the SEC Commissioner with the strongest interest in enforcement issues.  In his less than a year at the SEC, Aguilar had already taken strong positions advocating changes in the enforcement program and even being critical of certain SEC policies and practices. Impressed, I wrote a post on this blog entitled, “Luis Aguilar: The Enforcement Commissioner” that noted his obvious interest in the enforcement program and that analyzed key points in what was then his most recent speech on the subject.

I had to smile when I saw that last week, in his speech at the annual SEC Speaks conference, Commissioner Luis Aguilar mentioned this “Enforcement Commissioner” reference, stating:

When I was referred to as the “Enforcement Commissioner” in Compliance Week, it was a title that I never expected, but it’s one I don’t run away from. The continued reinvigoration of Enforcement is essential.

Commissioner Aguilar stated that he was particularly pleased that an initiative he advocated last year at SEC Speaks–streamlining the formal order process–had been launched at the SEC, with positive benefits already evident.  This was a reference to the SEC’s relatively new process that delegates to senior staff the power to issue a subpoena. Under the prior system, Commissioner Aguilar noted, it would often take staff many months to pass through all the bureaucratic hoops required to obtain the Commission’s approval for a routine subpoena. Now, he noted, the new process vastly improves the speed and efficiency by which the SEC’s enforcement staff can conduct an investigation: “Last October, staff in San Francisco discovered a fraud and managed to investigate and file the case within a three-week timeframe. This would have been virtually impossible under our prior system.”

Commissioner Aguilar added that that the streamlined process provides the additional benefit of dismantling a regime that micro-managed a routine process. He believes it helps him and his fellow commissioners send the message that they support the staff.

Commissioner Aguilar also reiterated two proposals that he has been championing since he arrived at the SEC. First, he repeated his call for the SEC to revise its current “Penalty Statement of 2006,” which he described as a “misguided approach to how to weigh factors one considers when deciding whether to seek a corporate penalty.” This Statement prioritizes two factors

• The presence or absence of a direct benefit to the corporation as a result of the violation; and
• The degree to which the penalty will recompense or further harm the injured shareholders.

Commissioner Aguilar said these guidelines could be significantly improved and do not reflect his views because the conduct itself becomes of secondary importance, and the Commission fails to appropriately focus on deterrence. “Every day these guidelines are in place they adversely impact the cases we are working on,” he stated.

He also reiterated his continued support for the SEC to be self-funded, a subject I discussed at length in this column back in September.  Doing so would be “transformational,” he believes, because it would enable the SEC to set multi-year budgets and respond promptly to drastically changing markets, while also maintaining appropriate staffing.

Throughout the week over at Securities Docket, I highlight the most interesting columns and blog posts from around the web (on the subjects of SEC enforcement and securities litigation). Here is a digest of my picks for the week ending January 29:

More About D&O Insurance Coverage for Special Litigation Committee Expenses ( Jeff Kiburtz and Cindy Forman, The D & O Diary)
The D&O Diary | February 5, 2010
Having recently ended an unusual week straight of rain in normally sunny Los Angeles, the saying “when it rains it pours” comes to mind. This phrase aptly describes the situation in which many companies find themselves when revelations of accounting irregularities or other alleged misconduct surface - first there is a story in the press, then a letter indicating the SEC opened an informal investigation, next a DOJ subpoena, and, sometime during this period, the company’s stock drops and a shareholder makes a demand for an investigation or forgoes the demand and files a derivative suit. The response to this downpour is immediate and expensive.

BofA Settles with SEC Over Merger Disclosures: Novel Governance Reforms Included (Broc Romanek, TheCorporateCounsel.net Blog)
TheCorporateCounsel.net Blog | February 5, 2010
Yesterday, the SEC announced that it has settled its two actions against Bank of America regarding alleged disclosure deficiencies in connection with BofA’s acquisition of Merrill Lynch (one action regarding bonus amounts; the other over operating losses). Not only will BofA pay $150 million to the SEC (to be distributed to harmed shareholders), it will adopt seven governance reforms - if Judge Rakoff approves the settlement (he rejected a $33 million settlement last September).

I know there have been a number of “governance by gunpoint” settlements driven by judges over the past decade, where institutional investor plaintiffs obtained governance reforms from companies whom they had sued and then settled. But is this something new for the SEC?

SEC’s Khuzami Needs Results After Biggest Overhaul in 30 Years (Joshua Gallu and David Scheer, BusinessWeek)
Business Week | February 5, 2010
In less than a year as head of the Securities and Exchange Commission’s enforcement division, Robert Khuzami has led the agency’s biggest overhaul in at least three decades. This year will show whether he succeeded in restoring the SEC’s credibility as Wall Street’s sheriff.

Paying a Bribe with Zero (Doug Cornelius, Compliance Building)
Compliance Week | February 3, 2010
In India, petty corruption is pervasive. Its citizens often face situations where they are asked to pay bribes for public services that should be provided free. The 5th Pillar is advocating for paying the bribe with a zero-rupee note as a polite way of saying “no.”

Trial Lawyers Contribute, Shareholder Suits Follow (Mark Maremont, WSJ)
The Wall Street Journal | February 3, 2010
It is legal for lawyers, like anyone else, to give campaign money to politicians. But questions arise when the politicians are local officials with influence over the selection of legal counsel for shareholder lawsuits filed by public pension funds, a role that can be lucrative.

A Wall Street Journal analysis documented the extent of campaign giving by plaintiffs’ law firms specializing in shareholder litigation.

Take Five: What to Expect from the SEC in 2010 (Boardmember.com)
Boardmember.com | January 30, 2010
The Securities and Exchange Commission Division of Enforcement has been reorganized with an eye toward fighting corporate corruption. New speciality units have been created to focus on asset management, market abuse, and the Foreign Corrupt Practices Act, to name a few. Corporate Board Member asked Mark K. Schonfeld, former director of the SEC’s New York regional office and current partner at Gibson, Dunn & Crutcher, what the most significant developments are, what those developments might mean for board members, and what he predicts for SEC enforcement actions in the coming year.

As I discussed here last month, reports counting the number of securities class action lawsuits filed in 2009 have been pouring in, with the authors reaching varying conclusions (capped off, of course, by Joe Grundfest’s annual proclamation that “the pig has moved through the python” … just kidding, Joe!).

According to securities defense lawyers, however, another kind of securities lawsuit has been surging recently: shareholder lawsuits over mergers and acquisitions. The Recorder reports that an increase in M&A activity recently has also led to “more cases filed over the last three months than in the comparable period the year before, both here in California and in Delaware,” according to Kevin Muck of Fenwick & West.

Litigator Boris Feldman of Wilson Sonsini Goodrich & Rosati believes that the number of traditional securities fraud lawsuits has fallen, leading plaintiffs lawyers to “replenish their inventory” with M&A cases. Others like William Freeman of Cooley Godward believe the situation has reached the point where a lawsuit is “almost an automatic response to a public company M&A transaction…. now it seems that virtually no deal is safe from lawsuits.”

Today in Washington, DC, a day when the town has predictably already lost its mind over an imminent snowfall of “historic” proportions, and when virtually every other activity of any kind through the entire weekend has been preemptively canceled, the annual “SEC Speaks” conference is still going on. Speaking today to an audience of people who may well be about to spend the weekend (or more) snowbound in DC, SEC Chairman Mary Schapiro gave an interesting speech entitled, “Looking Ahead and Moving Forward” that roughly marks her one year anniversary as Chairman.

Schapiro noted that when she spoke at last year’s SEC Speaks, she had been Chairman for a full 10 days, the markets were just emerging from an economic crisis that threatened our financial system, and someone named Bernard Madoff was fast becoming a household name. The spotlight was squarely upon the SEC, she said, and Americans weren’t sure the SEC was up to the job.

She says the SEC “got to work”—bringing in new leaders across the agency, streamlining procedures, and revamping systems. As a result, Schapiro believes that a year later, the SEC has “turned a corner” but still has quite a long distance to go.

Looking back on the last year, Schapiro highighted several achievements, including:

• Removing a layer of middle management and redeploying “dozens of superbly qualified attorneys back to the front lines.”
• Creating specialized units to concentrate expertise and better connect the dots.
• Encouraging corporate insiders to come forward with evidence of wrongdoing.
• Seeking more than twice as many temporary restraining orders and asset freezes (restraining orders: 79 compared to 36 - a 119 percent increase) (asset freezes: 89 compared to 42 - a 112 percent increase).
• Issuing well over two times as many formal orders of investigation (558 compared to 245 - a 128 percent increase).
• Obtaining about $540 million more in disgorgement orders and more than twice as much in penalty orders (disgorgement orders: about $1.73 billion compared to about $1.19 billion - a 45 percent increase) (penalty orders: about $410 million compared to about $193 million - a 112 percent increase).
• Filing nearly 10 percent more actions overall, including nearly twice as many involving Ponzi-like schemes. (Overall actions: 725 compared to 665 - a 9 percent increase)  (Ponzi-specific: about 60 compared to about 35 - a 71 percent increase).

Schapiro noted that the SEC has begun revamping its technology and focusing on the way it handles the massive number of tips and complaints we receive. This is also the subject of my upcoming monthly column, which includes a interview with Tom Sporkin, the new head of the Office of Market Intelligence, and which will be out next week on ComplianceWeek.com

The White House released its proposed budget for FY 2011 on Monday, and the SEC learned that it had dodged the “spending freeze” threatened in President Obama’s State of the Union address.

To the contrary, the president’s budget requests $1.258 billion for the SEC, which represents a 12 percent increase over its FY 2010 budget. SEC Chairman Mary Schapiro stated that if enacted, “the President’s request will do a great deal to help us keep pace with the continuing growth of the markets and provide necessary resources to support important regulatory initiatives in 2011.”

The proposed budget is in line with Schapiro’s request last year for a significant increase in FY 2011, and is approximately $139 million over the SEC’s FY 2010 funding level of $1.119 billion. Many other departments or agencies, including the Department of Justice, were not as fortunate, and were hit by the freeze. They include:

On Monday, the SEC filed an insider trading case against Bruce A. Macdonald, the husband of the VP of Human Resources for a company called Memry. After a careful review, I am placing it in the Guarded category (”Counseling Required”) on Enforcement Action’s Familial Betrayal Advisory System.

The SEC alleges that Mr. Macdonald traded in Memry’s common stock prior to the announcement on June 24, 2008 that an Italian public company called SAES would acquire Memry, profiting by over $25,000. The SEC’s complaint claims that his wife was intimately involved in the due diligence process at Memry and regularly provided Macdonald with updates as to the progress of the company’s efforts to be acquired, including the names of the final three bidders. She further advised him that Memry had imposed a trading blackout. The SEC charges that without telling his wife, Macdonald purchased shares of Memry common stock while in possession of the material. nonpublic information she had provided to him.

Based on our Familial Betrayal Advisory System precedents, this case belongs in the Guarded category. As I similarly stated when discussing another Guarded case, SEC v. Goodman, the Macdonald case simply does not reach the level of outrage required to rise to the level of Elevated (”Clothes Thrown Out Window”). Cf. SEC v. Edelman (”Elevated” case involving express caution from girlfriend not to trade, a supposed agreement not to do so, and a post-betrayal break-up).

In Macdonald, the betrayal merely involved alleged “trading behind the wife’s back,” with no further cautions or promises. Plus, the wife was not sued and appears to have kept her job.

To recap, the full list now looks like this:

Severe (”Hell Hath No Fury”): SEC v. Devlin
High (”Restraining Order”): SEC v. Stummer
Elevated (”Clothes Thrown Out the Window”): SEC v. Edelman
Guarded (”Counseling Required”): SEC v. Goodman; SEC v. Rocklage, SEC v. Macdonald
Low (”Someday We’ll Laugh About It”): SEC v. Melton, SEC v. Gangavarapu

Throughout the week over at Securities Docket, I highlight the most interesting columns and blog posts from around the web (on the subjects of SEC enforcement and securities litigation). Here is a digest of my picks for the week ending January 29:

Can the S.E.C. Get the Galleon Wiretaps? (Peter Henning, DealBook)
DealBook | January 28, 2010
The Galleon Group insider trading case is quite unusual in many ways, perhaps most strikingly in the government’s use of wiretaps to record telephone conversations of the defendants while they were apparently exchanging inside information. Those recordings are valuable evidence, and there is a fight going on over whether the Securities and Exchange Commission can force the defendants to give them up.

Odd as it may sound, one arm of the federal government - the S.E.C. - cannot get the wiretaps from another arm - the Department of Justice - with which it is working closely because under federal law the wiretaps can only be disclosed by prosecutors in limited circumstances. Instead, the S.E.C. wants the defendants to provide the recordings, evidence that may well lead to their being found liable for insider trading.

Securities Regulation Institute, Concluded (Matt Kelly, The Big Picture)
The Big Picture | January 28, 2010
Both the Galleon Group case and the recent bribery sting by the Justice Department are an order of magnitude larger than any other enforcement action Corporate America has seen in decades. Where most enforcement actions in white-collar crime have been single arrests of a rogue individual running a scam, these were take-downs of systemic corruption-and compliance officers should take note of that. Not only should you worry about your own company and its suppliers; you should ponder whether corruption exists elsewhere in your industry, and you might get pulled into the orbit of a massive enforcement action even if your company’s compliance isn’t at issue.

Is There an Exit Plan for a Ponzi Scheme? (Did Madoff Have an Exit Plan?) (Christine Hurt, The Conglomerate)
The Conglomerate | January 27, 2010
So what about Bernard Madoff? He’s a smart guy, surely smarter than Carlo Ponzi, who dropped out of the University of Rome and was in and out of prisons most of his early adulthood. Surely he understand the math of the Ponzi scheme — that at some point there aren’t enough people on the earth to keep the finances of the Ponzi scheme going. But Madoff’s fraud was different in some ways that might have bought him more time, allowing his fraud to go on for 15-25 years.

Subprime-Related Section 11 Claim Dismissed (Kevin LaCroix, The D & O Diary)
The D&O Diary | January 26, 2010
While there have been other dismissal motions granted with prejudice in subprime-related securities class actions, the dismissal in ACA Capital Holdings stands out because the ACA plaintiffs’ claims were asserted under the ‘33 Act. Research by Jon Eisenberg of the Skadden law firm regarding subprime dismissal motion rulings shows that all of the cases he studied that only asserted ‘33 Act claims had survived motions to dismiss, in part, he speculates because of the absence of scienter pleading requirements for ‘33 Act claims.

FCPA Undercover (Mike Koehler, FCPA Professor)
FCPA Professor | January 25, 2010
The Africa Sting case is indeed the largest and most dramatic use of pro-active, undercover investigative techniques in an FCPA investigation.

However, contrary to numerous reports and even statements attributed to DOJ officials, the Africa Sting case is not the first time that pro-active, undercover investigative techniques have been used in an FCPA investigation. In other words, this is not a new development.

Earlier this week, Commodity Futures Trading Commission Chairman Gary Gensler clarified that no matter what you might have assumed back in 1983, Billy Ray Valentine (Eddie Murphy) and Louis Winthorpe III (Dan Aykroyd) did not commit insider trading when they made millions trading on orange juice futures in the movie Trading Places. As you may recall, Billy Ray and Winthrop intercepted a confidential Department of Agriculture “crop report” on orange crop forecasts, and used it to successfully sell short and corner the orange juice futures market before the report was publicly announced (and to simultaneously ruin the Duke brothers, who lost $394 million based on a false copy of the report).

In a speech on Wednesday, Gensler reiterated the CFTC’s position that the insider trading laws in the securities world should be expanded to the futures world, making it illegal to trade on non-public information from agencies like the U.S. Treasury, Federal Reserve and Department of Agriculture. Gensler cited “Trading Places” to explain why such an expansion of the law should occur, saying the CFTC wants to implement an “Eddie Murphy” rule.  In real life, he said, Billy Ray and Winthrop’s trading based on “misappropriated government information is actually not illegal under our statute.”

It all sounded so good. So promising.

From the wreckage of the economic crisis and the Madoff case, the screaming need for more and better resources at the SEC had become apparent. Reports from the Government Accountability Office and the SEC’s Inspector General’s office flagged huge deficiencies in the SEC’s basic resources. The GAO report showed the dramatic impact a hiring freeze had on the SEC between 2004 and 2008, and concluded that as a result of its dwindling personnel numbers and surging workload, the SEC simply could not pursue, maintain, or efficiently resolve certain worthwhile cases. It also revealed the severe disadvantages the enforcement staff faced in its litigation and investigations due to little or no administrative or paralegal support and outdated technology. The IG similarly called for improved or new training, resources, working groups, and more to remedy failings in the Enforcement Division.

Congress responded, or at least promised to respond. An initial plea from Chairman Mary Schapiro for an additional $200 million in the SEC’s 2011 budget seemed to be well-received by key Congressmen. Most recently, the House passed the Investor Protection Act that would go even further and increase the SEC’s budget from $1.12 billion today to $2.25 billion by 2015—doubling it in just five years.

In last night’s State of the Union address, however, President Obama stated that:

Starting in 2011, we are prepared to freeze government spending for three years. Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will.

It is not completely clear that this applies to the SEC, but it sure would appear so. Other reports have confirmed, for instance, that this freeze would likely apply to law-enforcement initiatives at the Justice Department. We will know soon enough, as the White House is scheduled to release its proposed 2011 budget on February 1. For the moment, however, it looks like the SEC’s window to secure the increased budget that appeared to be within its grasp could have just slammed shut.

Sky News has an interesting video* (below) on “Enron, the Play,” a musical (and future feature film) now playing in London about the financial fraud at Enron Corp. As previously discussed here, the show is improbably bringing down the house and getting rave reviews.

*If anyone can explain why a video with an English-speaking narrator requires English sub-titles, can you please explain in the comments section below? Thanks!