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A Look Back at Enforcement Developments in 2012

Bruce Carton | January 15, 2013

2012 was another eventful year for enforcement actions against securities law scofflaws.

The period was marked by several high-profile convictions for insider trading and financial fraud, and also by a series of departures by several significant figures in the enforcement world. Before we dive into the new year, here is look back on some of the most important and interesting enforcement developments from 2012.

After six years of being studiously ignored by lawmakers and languishing in obscurity, a bill called the STOCK Act finally burst onto the scene when President Obama lobbied for it in his State of the Union address last January. Congress was understandably not eager to pass the STOCK Act, which eliminated a legal loophole that arguably allowed members of Congress to engage in insider trading based on knowledge gained while working on Capitol Hill. “Send me a bill that bans insider trading by members of Congress, and I will sign it tomorrow,” Obama told Congress and the nation, and he made good on that promise when he signed the STOCK Act into law in March 2012.

In February, the criminal trial of Allen Stanford, accused of orchestrating a massive Ponzi scheme, finally got underway in earnest after years of endless, circus-like efforts by Stanford to delay the proceedings. Soon after Stanford's final “Hail Mary” effort to delay the trial (a claim that he had developed total amnesia following a prison fight) was rejected by the court, his lawyers told the jury that Stanford would testify in his own defense at trial. Alas, the spectacle of testimony by a man claiming total amnesia was averted when the defense rested its case without ever calling Stanford as a witness. The following week, Stanford was convicted on 13 counts of securities fraud.

February also brought the first of three major departures that resulted in a wholesale “changing of the guard” in U.K. securities law enforcement. In February, Margaret Cole, who helped usher in a new era of aggressiveness as director of enforcement at Britain's Financial Services Authority, announced that she was leaving the regulator after seven years of service.

In March, Hector Sants, CEO of the FSA, announced that he, too, would be departing after eight years running the United Kingdom's top securities regulator. Sants worked closely with Cole following the financial crisis to try to change the perception of the FSA from that of a “light touch” regulator to one with real teeth and famously told industry in 2009 that “people should be very frightened of the FSA.”

March also ushered in more silliness in the ongoing Stanford Ponzi scheme saga, as his lawyers demanded a new trial because the judge overseeing the case “let reporters send Twitter messages from the courtroom, even while the judge and lawyers were talking outside the jury's presence, and failed to instruct jurors to stay off Twitter.” This motion was summarily denied.

In April, the trifecta of high-level U.K. departures was completed when Richard Alderman, the director of the U.K.'s Serious Fraud Office, stepped down at the end of his four-year term. Also in April, The New York Times broke an extraordinary story alleging widespread corrupt practices by Walmart in Mexico, and an effort by high-level executives to minimize and otherwise keep evidence of the corruption quiet. The Times article reportedly prompted multiple federal investigations into possible violations of the Foreign Corrupt Practices Act.

2012 was another eventful year for enforcement actions against securities law scofflaws. The period was marked by several high-profile convictions for insider trading and financial fraud, and also by a series of departures by several significant figures in the enforcement world.

In May, the high-profile insider-trading trial of Rajat Gupta got underway. Prosecutors alleged that Gupta, a former Goldman Sachs board member and former managing director of consulting firm McKinsey & Co., provided his friend, Raj Rajaratnam, with inside information concerning Goldman Sachs. This information allegedly allowed Rajaratnam, already a billionaire, to make millions of dollars from insider trading. And speaking of billions, Madoff trustee Irving Picard announced in May that the legal and other fees for the trustee's efforts to recover funds for Madoff victims was expected to reach a staggering $1 billion by 2014.

In June, a jury convicted Gupta on three counts of securities fraud and one count of conspiracy related to the insider-trading scheme involving Rajaratnam. Gupta was later sentenced to two years in prison. Two other high-profile defendants learned their fates in June, as well. On June 4, Matthew Kluger, an attorney who pleaded guilty to participating in an insider-trading scheme and accepted responsibility for his actions, was sentenced to 12 years in prison—one year more than Rajaratnam received and the longest sentence ever handed down for insider trading. After receiving the record sentence, Kluger referenced Rajaratnam, stating that “I guess it's better to take $68 million and go to trial and be unwilling to accept responsibility for what you did.” Also in June, U.S. District Judge David Hittner ignored one last outlandish request by Allen Stanford—that he be sentenced to “time served” for his crimes—and handed Stanford a sentence of 110 years in prison plus the forfeiture of $5.9 billion.

In July, the U.K. Bribery Act celebrated its first anniversary, marking a full year in which there was no visible enforcement and leaving businesses to wonder whether the furor that accompanied the Bribery Act's passage was nothing but hype.

The dog days of summer continued into August, but the SEC made history that month when it issued its first-ever award to a whistleblower pursuant to the bounty program established under the Dodd-Frank Act  in 2010. The $50,000 award went to an unidentified recipient whose tip helped the SEC obtain more than $1 million in sanctions. Across the pond in London in August, the summer Olympics were taking place but many companies and sponsors were afraid to engage in corporate hospitality due to uncertainty as to whether offering tickets to clients or prospects might be deemed “lavish,” and therefore run afoul of the Bribery Act.

In September, just weeks after the Closing Ceremonies marked the end of the Olympic Games, Britain's Serious Fraud Office belatedly announced that it was only interested in pursuing major cases under the Bribery Act—not corporate hospitality cases. The SFO stated that it would not be investigating “tickets to Wimbledon or bottles of champagne. We are not the ‘serious champagne office.'”

In October, the SEC brought arguably its most bizarre case of the year against a fraudster who raised millions from investors, but never used any of the funds for the investment purposes as promised. Instead, he withdrew hundreds of thousands of dollars for himself and his friends, gave at least $848,500 to three Las Vegas call girls so that they could have “a better type of life,” and sent $1 million to a favored investor he believed to be a “deserving person.” The defendant explained that he engaged in this scam known as “.44 Magnum” because a “one-eyed man” whom he knew only by an alias threatened to kill him and his family if he did not cooperate in the scheme. The one-eyed man also supposedly told the defendant that the program got its name because “when people found out they'd been ripped off, they would buy a .44 Magnum and shoot themselves in the head.”

In November, a full year after Assistant Attorney General Lanny Breuer promised that the Justice Department would issue detailed new guidance on the FCPA's criminal and civil enforcement provisions, the Justice Department joined with the SEC to finally issue the long-awaited “Resource Guide to the Foreign Corrupt Practices Act.” November also brought a major departure at the SEC, as Mary Schapiro announced that she would be leaving the agency in mid-December after serving as chairman since January 2009.

The year in enforcement wrapped up in December, when Robert Khuzami advised the SEC that he too planned to step down as the agency's director of enforcement as early as January 2013. Khuzami, who joined the agency in 2009, implemented a number of important changes to the enforcement division to help it get back on its feet following the Madoff debacle.

Finally, the last weekend of 2012 brought something unexpected that is likely unprecedented in the securities enforcement world. As part of the Queen of England's New Year Honours 2013, departing FSA CEO Hector Sants was awarded knighthood for “services to financial services and regulation.” So let's raise a glass to Sir Hector, and here's hoping that others toiling in the enforcement and compliance industry also gain knighthood in 2013!