The SEC issued a report today under Section 21(a) of the Securities Exchange Act of 1934 “cautioning credit rating agencies about deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings.” Under Section 21(a), the agency may investigate violations of the federal securities laws and at its discretion “publish information concerning any such violations.”

The SEC’s report, available here, follows the Enforcement Division’s inquiry into whether rating agency Moody’s Investors Service, Inc. (MIS) violated the registration provisions or the antifraud provisions of the federal securities laws. The SEC notes in the report that it decided not to bring an enforcement action against MIS because of “uncertainty regarding a jurisdictional nexus between the United States and the relevant ratings conduct.” However, it found that

an MIS analyst discovered in early 2007 that a computer coding error had upwardly impacted by 1.5 to 3.5 notches the model output used to determine MIS credit ratings for certain constant proportion debt obligation notes. Nevertheless, shortly thereafter during a meeting in Europe, an MIS rating committee voted against taking responsive rating action, in part because of concerns that doing so would negatively impact MIS’s business reputation.

When MIS subsequently applied in June 2007 to be registered with the SEC as a nationally recognized statistical rating organization (NRSRO), the “European rating committee’s self-serving consideration of non-credit related factors in support of the decision to maintain the credit ratings constituted conduct that was contrary to the MIS procedures used to determine credit ratings as described in the MIS application to the SEC,” the report states.

The report cautions NRSROs that, when appropriate, the SEC will pursue antifraud enforcement actions against deceptive ratings conduct. In a statement today, Enforcement Director Rob Khuzami added that

Investors rely upon statements that NRSROs make in their applications and reports submitted to the Commission, particularly those that describe how the NRSRO determines credit ratings. It is crucial that NRSROs take steps to assure themselves of the accuracy of those statements and that they have in place sufficient internal controls over the procedures they use to determine credit ratings.

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 August 27:

Do Defendant Companies Financially Underperform Following Securities Lawsuit Settlements?

The D&O Diary | Kevin LaCroix | Aug 27, 2010

Most securities lawsuits settle. The common assumption is that once the cases are settled, the litigation wraps up and everybody moves on. But does the litigation have a lingering effect on the defendant company? Is there a “hidden dark side” for companies that settle securities lawsuits? That is the question asked in a March 18, 2010 paper entitled “Lying and Getting Caught: An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms”

The SEC Needs a Win Against Mozilo

Zamansky & Assoc. Blog | Jacob Zamansky | Aug 26, 2010

A win for the SEC against Mozilo would provide its enforcement team with the leverage they need to negotiate stiffer terms for settlements. Future settlements could and should include admissions of liability, as well as personal financial liability of the wrongdoer and his or her manager if applicable. For the SEC, this is a “bet the farm” lawsuit and one that could lay the groundwork for the future of enforcement on Wall Street.

SEC: No longer a doormat

FT | Jean Eaglesham and Brooke Masters | Aug 26, 2010

The far-reaching reforms instigated by Ms. Schapiro have two prime objectives – to make the regulator both more efficient and much better able to anticipate crises before they occur. In interviews with the Financial Times, senior SEC officials explain the work under way to achieve those aims – and the impact they hope it will have on Wall Street and corporate America.

The Subprime Mortgage Crisis on Trial

DealBook | Peter Henning | Aug 26, 2010

The Mozilo trial is scheduled to begin on Oct. 19, assuming the case is not dismissed. Look for the S.E.C. to try to make Mr. Mozilo the face of the mortgage crisis that led to the financial meltdown in 2008 to show that he misled investors in his company. Whether that proves securities fraud remains to be seen.

Giffen’s Contribution to FCPA Case Law

FCPA Professor | Mike Koehler | Aug 24, 2010

Notwithstanding its mysterious conclusion, the Giffen enforcement action was instructive because it represented a rare instance in which an FCPA defendant mounted an aggressive legal defense. As a result, the long enforcement action yielded FCPA case law, even though the issues subjected to judicial scrutiny did not involve core FCPA elements. So what did we learn from the Giffen case law?

I’ve written here previously about “sleeper” provisions in the Dodd-Frank Act that may have major consequences, and here is one more: Under Section 342 of the Act, each of the 30 federal financial agencies and departments–including the SEC–must establish an “Office of Minority and Women Inclusion.” Section 342 provides that not later than 6 months after the date of enactment of Dodd-Frank, each agency shall establish such an Office “that shall be responsible for all matters of the agency relating to diversity in management, employment, and business activities.” The L.A. Times reports that the Act covers the SEC and all federal financial agencies and departments, including all 12 Federal Reserve banks.

Each Office will be responsible for developing standards for equal employment opportunity and diversity of the workforce, as well as the increased participation of minority-owned and women-owned businesses in the programs and contracts of the agency. To that end, each Office will also establish procedures “for review and evaluation of contract proposals and for hiring service providers [that] shall include, to the extent consistent with applicable law, a component that gives consideration to the diversity of the applicant.” If the Director of the Office determines that an agency contractor or subcontractor has failed to make a good faith effort to include minorities and women in their workforce, “the Director shall make a recommendation to the agency administrator that the contract be terminated.”

The provision further specifies that it applies to

“all contracts of an agency for services of any kind, including the services of financial institutions, investment banking firms, mortgage banking firms, asset management firms, brokers, dealers, financial services entities, underwriters, accountants, investment consultants, and providers of legal services.”

The impact of this little-known provision, which was championed by Rep. Maxine Waters (D-Los Angeles), is just now starting to be realized and discussed. Some observers such as Diana Furchtgott-Roth, who was the Labor Department’s chief economist under President George W. Bush, believe the effects could be quite dire. “This will destroy the financial industry,” she warned. “If the CEOs of American financial institutions have to be worried about the diversity regulations, whereas those in other countries are worrying about their profits, we are going to fall behind.”

Minority and women’s advocates, however, say the provision is ground-breaking. Michael Yaki, a member of the U.S. Commission on Civil Rights, told the L.A. Times that “This is a wake-up call for Wall Street: women, black Americans, Asian Americans, Latino Americans, they all pay for your bailouts. Firms must take steps to be more reflective of America.”

The 2300-plus pages of the Dodd-Frank Wall Street Reform and Consumer Protection Act are a lot to take in, and even harder to make sense of. On Wednesday, September 15, 2010, at 2 p.m. Eastern, I am hosting a webcast that will address the likely impacts of the Act on the regulatory landscape, corporate governance practices, financial reporting and accounting, among other topics.

The panel for this webcast features Salvatore Graziano, a partner at Bernstein Litowitz Berger & Grossmann LLP, and Peter J. Henning, Professor of Law at Wayne State University Law School and columnist for The New York Times‘ Dealbook (“White Collar Watch”), where he follows issues involving securities law and white-collar crime. Please join us as we discuss the Act’s significant impact on public companies and investor protections, and what that means for institutional portfolios.

To attend this free webcast, please register here.

The SEC is seeking candidates for the key position of Chief Counsel in its Enforcement Division–a position that has not been available for 17 years. As previously discussed here, Joan McKown announced in July that she would be leaving the SEC to join law firm Jones Day as a partner in its Washington, D.C. office. McKown, whose last day with the agency was July 30, had held the Chief Counsel position since 1993.

The Chief Counsel plays a key role in establishing enforcement policies at the SEC and in reviewing proposed enforcement actions before they are recommended to the Commission for approval. The position is described in detail in this job posting. In short, as described by the SEC,

the Chief Counsel of the Division of Enforcement serves as principal advisor and consultant to the Director, and other high ranking officials of the Division, on a wide range of matters including technical, and/or precedent-setting, aspects of the federal securities laws.

The SEC says that it is accepting applications for the position until September 15.

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 August 20:

Subprime Securities Suit Headed to Trial Following Summary Judgment Rulings

The D&O Diary | Kevin LaCroix | Aug 20, 2010

But perhaps the most interesting thing about this ruling is Judge Ungaro’s grant of partial summary judgment for the plaintiffs on the issue of falsity. It is relatively rare for any case to get to the point where a decision on this kind of issue is even ripe, and in most cases courts are inclined to leave these kinds of issues to the jury. I actually can’t recall ever having seen a court granting summary judgment in the claimants’ favor on the issue of falsity. The plaintiffs will still have to prove that these false statements were materially misleading, were made with scienter, and cause damages. However, it will be a singular development when the court instructs the jury that the court has already concluded that the statements are false.

FASB’s Tort Bar Gift

WSJ | Aug 20, 2010

In the eternal war between the plaintiffs bar and corporations, the lawsuit pack already owns the Senate and many state courts. Now it seems the nation’s accountants want to give the lawyers another edge. The Financial Accounting Standards Board (FASB) will soon begin considering whether to require companies to account for the potential cost of ongoing litigation. Supporters insist this is merely about disclosure, but the proposal would hurt investors by offering roadmaps for new litigation and bigger settlements.

Can the S.E.C. Avoid Scrutiny of Its Settlements? - DealBook Blog

DealBook | Peter J. Henning | Aug 17, 2010

Unlike a federal court case, an administrative proceeding is instituted before the S.E.C. commissioners, who can approve the filing and settlement without further outside review. Because those commissioners voted to approve the proposed settlement already, the successful — and unquestioned — resolution of the case would be a foregone conclusion.

The Latest Securities Litigation Target: For-Profit Educational Companies

The D&O Diary | Kevin LaCroix | Aug 17, 2010

Among the very, very latest trends in securities class action lawsuit filings are suits against for-profit educational companies. Just since the middle of last week, at least five companies in this sector have been tagged with new lawsuits, four of which were securities class actions.

In Lehman’s Demise, an Elusive Search for Culprits

DealBook | Peter Henning | Aug 16, 2010

The Chimera of Greek mythology was a grotesque beast that ravaged the countryside. In the Lehman Brothers bankruptcy, one search for such a beast involves looking into whether short-sellers spread false rumors about the firm to drive down its stock price in the months before its demise. The latest object of that search is the Och-Ziff Capital Management Group, which bankruptcy lawyers contend may have received and passed on a false rumor about Lehman before the firm declared bankruptcy in September 2008.

PRC Foreign Investment: SEC Unfurls FCPA Enforcement Flag

Westlaw Precedent Watch | Helen H. Chan | Aug 16, 2010

While the FCPA is technically U.S. law, its jurisdiction extends to all U.S. listed companies regardless of their domicile. The GE settlement demonstrates that the SEC is more than capable of reaching into other countries, even China, to discipline U.S. securities issuers.

The Southern District of New York Offers Riches

The Conglomerate | David Zaring | Aug 16, 2010

I’ve been perusing the fates of lawyers in the US Attorney’s Office in the Southern District of New York…. My guess is that a gig in the Southern District is the greatest path to wealth maximization in the federal government that there is - I say this impressionistically, of course, but the fact is that the financial regulators rarely get picked up by investment banks, and the SEC enforcer to partner rate is pretty low.

Usually when the SEC has juicy facts in enforcement cases it goes out of its way to flag them for us in the headline of its litigation release or elsewhere. For instance, when the SEC announced a final judgment in an insider trading case against James McDermott, Jr., the former CEO of Keefe, Bruyette & Woods, Inc., and a woman named Kathryn B. Gannon, it made sure to state right up front that Gannon was “a.k.a. ‘Marilyn Starr’, a former actress in adult films.”

And yet in the SEC’s insider trading case that settled this week against James Gansman, a partner at a Big Four accounting firm, the agency has been lulling me to sleep since 2008 by simply stating that Gansman tipped a “friend” concerning the confidential identities of at least seven different acquisition targets of clients. The SEC noted that the friend traded in the securities of the target companies, and allegedly made recommendations to others who traded as well, resulting in total illegal trading profits of $596,000.

But there are friends and then there are friends, and as a July 2009 WSJ article that I just discovered explains, there was much more to this friendship than described by the SEC. It turns out that Gansman met his friend, Donna Murdoch, on Ashleymadison.com, a Web site for people in search of extramarital affairs. The WSJ reports that the two began meeting in hotel rooms in various cities, and made more than 7,000 phone calls in two years. At some point,  Gansman began tipping Murdoch off on deals he was working on by giving her hints about market cap or industry and making her guess, and later just telling her more directly, the WSJ reports.

But there’s more. To obtain the money to make the insider trades, Murdoch then found financial suport from a different man she met on Ashleymadison.com! Murdoch also shared Gansman’s tips with this other man, without telling either man about her relationship with the other, the WSJ reports.

In February 2010, Gansman was sentenced to a year and a day in prison after being convicted of six counts of securities fraud related to the insider trading (for which he never made a penny).

As discussed here, on July 14, 2009, SEC Chairman Mary Schapiro testified and answered questions at a House Financial Services Committee hearing (”SEC Oversight: Current State and Agenda“). At the hearing,  Rep. Gary Ackerman of New York praised Schapiro for her accountability following a February 4, 2009 hearing that left both Congress and (according to Ackerman) Schapiro “aghast.” At the February hearing, none of the five panelists present from the SEC were willing or able to answer Congress’ questions on how the SEC missed the Madoff scam. The SEC witnesses repeatedly stated that they could not answer that question because of an ongoing Inspector General investigation, which “frustrated [Ackerman] beyond belief.”

At the subsequent July 2009 hearing, Ackerman applauded Schapiro for the fact that within a couple of weeks, two of the the panelists from the SEC “were gone from the agency,” which he said was a type of accountability that he had never seen in his 14 years in Congress.

The SEC witnesses at that fateful February 2009 hearing were:

* Ms. Linda Thomsen, Director, Division of Enforcement;
* Mr. Andrew J. Donohue, Director, Division of Investment Management;
* Mr. Erik Sirri, Director, Division of Trading and Markets;
* Mr. Andy Vollmer, Acting General Counsel, U.S. Securities and Exchange Commission; and
* Ms. Lori A. Richards, Director, Office of Compliance Inspections and Examinations

In the two weeks following the February 4 hearing, the SEC announced Linda Thomsen’s departure (February 9) and Andrew Vollmer’s departure (February 18). The SEC subsequently announced Erik Sirri’s departure on March 31, 2009, and Lori Richards’ departure on July 8, 2009.  It has now been 18 months since the February 2009 hearing, and it seems unlikely that there is any connection at this point, but for the record: today, the last survivor from that hearing– Donohue–announced that he will be leaving the SEC in November 2010.

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 August 13:

Be the Mayor, not the Sheriff

Compliance Building | Doug Cornelius | Aug 13, 2010

The primary function of compliance should be educating the employees about the rules. You should evaluate rules that are causing problems and see if there is a better way to deal with the issue. You should look for weaknesses in the company’s operations and policies so you can improve them. Be the mayor. Wear a sash instead of a badge.

Messy Divorce Leads to Whistleblower Bounty in Pequot Capital Case

The Connecticut Law Tribune | Douglas S. Malan | Aug 13, 2010

Karen Kaiser made headlines last month when the federal government gave her a $1 million whistleblower bounty for finding evidence allegedly implicating her ex-husband and his former employer, the Westport, Conn.-based Pequot Capital Management Inc. But less has been written about the emotionally charged child custody battle that led to the discovery of computer files, the continuing investigation by the SEC and the two attorneys who aided Kaiser.

How Can You Tell If A CEO Is Lying?

WSJ Deal Journal | Kyle Strock | Aug 13, 2010

Conference call Q&As are a confusing and cryptic dance. Executives try to be attractive to investors, without giving away too much. In many cases, they are trying to put a good spin on bad results. But what if an investor could read right through all of the posturing and careful prose to know if they were being strung along? A pair of professors at Stanford recently built a model that tries to do just that.

FCPA Training: How to “Resist” a Solicitation for a Bribe

FCPA Compliance and Ethics Blog | Thomas Fox | Aug 13, 2010

At most FCPA compliance and ethics training sessions there is usually one or more archetypal story about “someone I know” who was solicited to pay a bribe or “I heard about someone” from whom a bribe was solicited. Sometimes this solicitation story can be better described as extortion. One question for the FCPA compliance trainer is how to handle such questions and is there an authoritative source to fall back upon for answering such questions?

Guilty but Not Liable: Does Section 10(b) Require Revision?

The Legal Intelligencer | Stephen G. Stroup | Aug 13, 2010

How can a corporate attorney convicted and imprisoned for participating in a multibillion-dollar securities fraud scheme subsequently obtain a motion to dismiss in a Section 10(b) securities fraud class action based on the very same conduct?

Applying the Supreme Court’s Limits to “Foreign Squared” Litigation

Harvard Law School Forum on Corp. Gov. | George T. Conway III | Aug 10, 2010

In the first significant opinion applying the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., the U.S. District Court for the Southern District of New York ruled yesterday that Section 10(b) of the ‘34 Act and SEC Rule 10b-5 do not apply to “foreign squared” claims — claims asserted by American investors who have purchased securities of foreign issuers on foreign exchanges.