Close

Are you in compliance?

Don't miss out! Sign up today for our weekly newsletters and stay abreast of important GRC-related information and news.

A Look Back at the Significant Enforcement Developments of 2013

Bruce Carton | January 14, 2014

2013 was the latest in a string of busy years for securities enforcement and litigation, and also a year of turnover in the leadership ranks of the primary regulators in this area—the Securities and Exchange Commission and the Department of Justice.

As we usher in 2014, here is a look back at the most important and interesting developments from the past year.

In January, SEC Director of Enforcement Robert Khuzami set the tone for a year of change when he announced that after four years of service, he was leaving the agency. Khuzami's announcement prompted unexpected praise of Khuzami from U.S. District Judge (and SEC critic) Jed Rakoff, who lauded Khuzami for restoring a sense of “pride and purpose” to a demoralized SEC enforcement division in the wake of the Madoff scandal. “We are all the better for it,” Rakoff said.

Later that month, President Obama revealed his pick of Mary Jo White, a highly respected securities lawyer and a former U.S. attorney for the Southern District of New York, to be the next chairman of the SEC. “You don't want to mess with Mary Jo!” President Obama warned during the announcement. 

Judge Rakoff made big news again in February in connection with an extraordinary oral argument before the U.S. Court of Appeals for the Second Circuit in SEC v. Citigroup. At the trial court level, Rakoff refused to approve the SEC's proposed settlement in which Citigroup “neither admitted nor denied” the agency's charges. Rakoff's stand prompted a number of other federal judges to similarly reject such settlements with “defiantly mute” defendants, wreaking a bit of havoc on the SEC's ability to efficiently settle its cases.

Rakoff wasn't the only one criticizing enforcement proceedings against big banks. Later that month newly elected Senator Elizabeth Warren placed White on the hot seat, calling her and the heads of the nation's other top financial regulators to testify before the Senate Banking Committee. She questioned whether they were doing enough to hold big banks accountable for the financial crisis.  “The question I really want to ask,” Sen. Warren asserted, “is about how tough you are. About how much leverage you really have in these settlements [with Wall Street financial institutions].”

Perhaps regulators heard the message: The SEC secured a huge settlement in March when it announced that hedge fund advisory firm CR Intrinsic Investors, an affiliate of SAC Capital Advisors, had agreed to pay more than $600 million to settle an SEC insider-trading lawsuit. The settlement was the largest ever in an SEC insider-trading case, and served as an ominous sign for the barrage of legal troubles that would befall SAC Capital and its billionaire founder, Steve Cohen, later in 2013. Also in March, a federal judge denied Mark Cuban's motion to dismiss the SEC's insider-trading case against him, thereby teeing up a high-profile trial for October 2013.

In April, the Senate confirmed Mary Jo White as SEC chairman by unanimous consent. Two weeks later, White made a bit of history when she named George Canellos and Andrew Ceresney as co-directors of the Enforcement Division. The use of co-directors was a first in the Enforcement Division's nearly 40-year history.

2013 was the latest in a string of busy years for securities enforcement and litigation, and also a year of turnover in the leadership ranks of the primary regulators in this area—the Securities and Exchange Commission and the Department of Justice.

April also featured an extraordinary FBI sting that netted a “rogue audit partner” from KPMG who was photographed accepting an envelope full of cash in a Starbucks parking lot in exchange for inside information about the companies he audited. The rogue partner, Scott London, pleaded guilty to securities fraud and is scheduled to be sentenced this month.

The SEC's White made more news in May when she acknowledged that she had ordered a review of the agency's policy of allowing defendants to settle cases without admitting or denying guilt, which had been under continued attack by Rakoff, Sen. Warren, and others. White stated that while the policy allowed the agency to wrap up certain cases quickly, often with nearly the same relief as it could have obtained through litigation, she also understood the need for accountability.

SEC Gets Tough on Settlements

In June, White followed up the review with an announcement that the SEC had, in fact, decided to make a significant change to its nearly three-decade old practice of always allowing defendants to settle charges without admitting or denying wrongdoing. Under the revised policy, the SEC said it would demand admissions of wrongdoing in cases involving “egregious intentional misconduct” or “misconduct that harmed large numbers of investors.”

Also in June, after a 10-month drought in which no whistleblower bounties were awarded and many questions were raised about the health of the SEC's whistleblower program, the SEC finally issued its second-ever award expected to tally about $120,000 to three whistleblowers for helping the SEC stop a “sham hedge fund.”

The SEC filed charges against SAC Capital's Steve Cohen in July for failing to supervise two senior employees and prevent them from engaging in insider trading—despite his having allegedly received “highly suspicious” information that the SEC claimed should have caused him to investigate the basis for certain trades. Just days later, federal prosecutors in the SDNY filed a criminal insider-trading case against SAC (but not Cohen), contending that the firm had become a “magnet for market cheaters” and enabled insider trading by looking the other way “despite red flags all around.”

July also brought the SEC's high-profile trial against former Goldman Sachs vice president Fabrice Tourre related to the sale of subprime mortgage-backed securities during the financial crisis. At the conclusion of the SEC's case against him, a “visibly upbeat” Tourre rested his case without calling a single witness to testify on his behalf.  His confidence was misplaced; a jury found Tourre liable on six of the seven counts alleged against him by the SEC.

In August, the composition of the SEC changed significantly as two of the five members of the Commission, Troy Paredes and Elisse Walter, departed and were replaced by new commissioners Michael Piwowar and Kara Stein. The SEC also announced the first settlement under its new settlement policy that month, when it reached an agreement with hedge fund adviser Philip Falcone and his advisory firm Harbinger Capital Partners. The defendants agreed to admit wrongdoing in the SEC's case alleging misappropriation of client assets, market manipulation, and betraying clients, and also to pay more than $18 million.

In September, President Obama nominated Leslie Caldwell, former director of the Justice Department's Enron Task Force, to replace Lanny Breuer as head of the agency's Criminal Division. On Sept. 30, the most significant event in the short history of the SEC's whistleblower program occurred when the SEC announced that it was giving a single, unidentified whistleblower a massive $14 million award. New SEC Commissioner Piwowar also abruptly introduced himself to his new colleagues when, at his first SEC open meeting in September, he reportedly “lambasted” White for not giving him enough time to review a rule that was up for discussion.

October began with a 16-day shutdown of the federal government. The SEC was able to sustain most of its operations, however, by using certain unspent money it still had from fiscal year 2013. In an October speech, White announced her “Broken Windows” approach to enforcement, which follows the idea that law enforcement must attempt to pursue all infractions, no matter how small, to avoid an environment of disorder and to send a message of law and order.

Cuban's Victory

On Oct. 16, following a two-week trial, a federal jury found that Dallas Mavericks owner Mark Cuban did not violate insider-trading laws, as alleged by the SEC, when he sold stock in Mamma.com in June 2004. Cuban said following the verdict that his case showed the holes in the Broken Windows approach because unlike breaking a window, which is clearly illegal, there are few bright lines when it comes to securities laws.

In November, Twitter, which had announced its plan to go public in September (via a tweet, of course), got an advance taste of life as a public company when it was sued for secondary market fraud a week ahead of its IPO.

Also in November, the U.S. Supreme Court sent shock waves through the securities class-action bar when it agreed to hear an appeal in the case of Halliburton v. Erica P. John Fund Inc. In that case, which is scheduled to be heard in March 2014, Halliburton is asking the court to overturn the “fraud on the market” presumption that is a crucial weapon for investors bringing private securities actions. A victory by Halliburton would likely cripple securities class actions based on alleged misrepresentations.

Finally, in December, the SEC suffered a loss at trial in its case against former executives of Basin Water. The loss was the third trial loss for the SEC in a two-month period, including the Cuban trial and another unsuccessful December trial against Stephen Kovzan, CFO of NIC Inc. On the criminal side, however, Preet Bharara's prosecutors in the Southern District of New York obtained a conviction in their insider-trading case against SAC Capital's Michael Steinberg. Following the Steinberg conviction, Bharara's office now has a perfect 77 for 77 record in obtaining convictions in insider-trading cases since he became U.S. attorney for the SDNY in August 2009.

Buckle up! Early indications are that 2014 will be just as action-packed as 2013 for securities litigation and enforcement.