Skip to Main Content

Speech


 
 

Remarks to the American Bar Association's Business Law Section Fall Meeting

Andrew Ceresney
Director, SEC Division of Enforcement

Washington D.C.

Nov. 21, 2014

Before I begin, let me give the requisite reminder that the views I express today are my own and do not necessarily represent the views of the Commission or its staff.

I am pleased to be here this morning to talk about the latest developments in the SEC’s Enforcement Division. The SEC recently completed its fiscal year, which was my first full fiscal year as Enforcement Director and Chair White’s first as Chair. As a result, I wanted to spend a little time today highlighting some of our successes over the past year, look briefly at what to expect in the coming year, and then talk about some areas that have been the focus of much discussion in recent months — administrative proceedings, admissions, and our increased use of big data.

Record Year in Enforcement

Let me begin by providing a brief recap of the Division’s accomplishments over the last year. By any measure, Enforcement had a banner year last year. We filed ground-breaking cases that impacted every corner of the industry — from market structure to financial reporting, asset management to insider trading, municipal securities, FCPA, and more — and we obtained significant monetary penalties and other relief.

In total, we filed 755 actions last year — the most ever filed in the history of the Commission. And we obtained orders for over $4 billion in monetary sanctions — nearly 20% larger than our previous high. But as I always say, numbers only tell a small part of the story. What made our year particularly noteworthy was the breadth and impact of our actions. And the violations we pursued — large and small — sent important messages to the market, protected investors, and served as a strong deterrent to would-be violators.

Last year, for example, we brought a number of first-of-their-kind actions, including our first series of cases involving violations of the market access rule; our first action enforcing the “pay to play” rule for investment advisers; our first action against a private equity firm relating to its allocation of fees and expenses; and our first case charging violations of the whistleblower anti-retaliation provisions.[1] We also announced a whistleblower award of over $30 million, our largest ever, to someone who provided key, original information that led to a successful enforcement action.[2]

As our year-end numbers indicate, we also used our penalty authority more aggressively last year, including a $16 million penalty for net capital violations — the largest ever imposed for such misconduct by a factor of 40; the largest penalty to date against an alternative trading system; and the largest penalties ever assessed against individuals in an FCPA case.[3]

We brought significant actions against financial institutions last year, including cases related to misconduct dating back to the financial crisis and cases involving serious failures in controls.[4] We also made progress this past year in our efforts to combat microcap fraud, bringing impactful cases and using our temporary suspension authority much more frequently to cut off pumps before they turned into dumps.[5] And we brought a number of cases involving pyramid schemes that targeted low income and minority communities, a trend we are seeing more and more.[6]

We saw our numbers of financial reporting cases rise by almost one-half as we increased our focus on this area. We also continued to bring significant insider trading cases — charging 80 people this past year, including industry insiders, husbands who traded on information they learned from their wives, and a group of golfing buddies and other friends.

Our Successful Litigation and Trial Record

The most recent fiscal year also was a banner year for our litigation program, including trial victories, summary judgment wins, the imposition of robust remedies, and positive decisions from federal appellate courts.

We tried more cases in federal court this past year than in any of the previous 10 years. And we tried more cases to juries this year than in the three previous years combined. Overall, we had 30 trials this past year. That is a big number for us, almost twice the number as the prior year.

Our trial results are consistently strong over time — we win around 80 percent of our trials — and this year we scored a series of strong wins in challenging cases of all stripes against experienced defense counsel. In fact, we have prevailed in our last ten jury trials and administrative proceedings, for example. Key trial wins include two recent jury trial victories by our Boston and Fort Worth offices over investment advisors Charles Kokesh, for defrauding his firm’s advisory clients by systematically looting around $35 million in client funds over many years, and Lee Benjamin Grant, for misleading his brokerage customers into transferring their assets to Grant’s new advisory firm. And our Home Office prevailed before a jury in an epic fraud case against the Wyly brothers — Texas billionaires who hid hundreds of millions of dollars in an elaborate offshore trust system and used the trusts to secretly profit in companies they controlled.

Even as we prevail consistently at trial, I am reminded that the cases we try in court are the toughest securities cases around. Our strongest cases typically go criminal or settle, or we prevail on summary judgment. I understand, therefore, that we won’t win all of our cases. What is important to me is that we aggressively bring impactful cases and put our strongest case forward in court, and that is what we have been doing.

And we are not just winning at trial and on summary judgment — we also are helping investors by winning strong remedies that help compensate victims and protect the investing public. In the Wyly trial, for example, the judge issued a preliminary decision requiring Sam Wyly and Charles Wyly’s estate to pay disgorgement of approximately $187 million, and our total relief is expected to rise to $300 million or even more. We also recently secured an asset freeze against the defendants and their family members to help make sure the anticipated judgment gets paid.

We also are seeing a maturation of our cooperation program. This past year included our first litigated action that featured a testifying SEC cooperator — the Gonnella case, in which we prevailed last week in an administrative hearing — as well as other actions where cooperators played key roles in positive outcomes, including our first-ever non-prosecution agreement for an individual who provided early, extraordinary and unconditional cooperation that led to findings of liability against multiple tippers and insider traders.[7]

The Year Ahead

So this past year was an outstanding year. But of course, we are now looking forward and our pipeline of cases is as strong as ever. I expect significant cases in all aspects of our program in the next year, including significant market structure cases against exchanges, ATSs and broker-dealers; important financial reporting and audit cases, including fraud cases, cases against auditors, and violations of the internal controls requirements; insider trading cases against traders of all different types; microcap fraud cases against repeat players, including promoters who have spearheaded many schemes and attorneys who have facilitated them; FCPA cases involving unique facts, using the broad definition of “anything of value”; asset management cases, including misrepresentations of fund performance and failures to disclose conflicts of interest; important cases relating to complex products and credit ratings from our Complex Financial Instruments Unit; and more ground-breaking cases in the muni markets, expanding our reach to new areas and bringing cases under our MCDC initiative.

Administrative and Cease-and-Desist Proceedings

I wanted to spend a bit of time speaking about our use of the administrative forum, which has been a frequent topic of discussion at forums like this in recent months.[8]

Let me begin with some basics about our use of the administrative forum. Contrary to the impression some may have, we have been using administrative proceedings throughout the 42-year history of the Division of Enforcement, and the Commission used them even before its enforcement activities were consolidated in one division. SEC administrative law judges (ALJs) have adjudicated hundreds of enforcement matters over the years. Many of these cases were against regulated entities and individuals, and involved extensive factual records, complex and novel legal issues, and claims for significant financial penalties. So ALJs have been presiding over and adjudicating complex securities cases for decades.

Until 2010, while we could proceed against unregistered persons in administrative proceedings, the relief that we could obtain against them was limited. In the Dodd-Frank Act, however, Congress provided us authority to obtain penalties in administrative proceedings against unregistered parties comparable to those we already could obtain from registered persons.[9]

Before that, penalties against unregulated entities or individuals were only available in district court. That legislative change allows us to obtain many — though not all — of the same remedies in administrative proceedings as we could get in district court. And so what we are doing now is simply making use of the administrative forum in cases where we previously could only obtain penalties in district court.

This change, however, does not mean that we will choose the administrative forum in every case. For settled matters, we often, but not always, choose to file in an administrative forum, largely because of efficiency. The filing quickly ends the matter on a settled basis, among parties that have agreed to a settlement, and there is no need to have implementation of the parties’ agreement subject to the competing demands of busy district court dockets. This practice was recently endorsed by the Second Circuit Court of Appeals in the Citi decision, where the court noted that the Commission “is free . . . to employ its own arsenal of remedies” rather than bring settlements to district court.[10]

As for litigated cases, we evaluate each case to determine the appropriate forum based on the facts and circumstances. There is no question that we are using the administrative forum more often now than in past years, given the changes under Dodd-Frank. Contrary to the notion some have that we are running away from cases in district court, however, if you look at actions we filed last year on at least a partially litigated basis, approximately 57 percent were filed in district court, and around 43 percent were filed in the administrative forum.[11] So we clearly are not shunning federal court in our litigated actions.

There are a number of benefits to using the administrative forum that can lead us to file cases there. First, administrative actions produce prompt decisions. An ALJ normally has 300 days from when a matter is instituted to issue an initial decision. That deadline can be extended in certain cases, but the hearings are still held promptly. For cases we file in district court, we can often go 300 days and still be just at the motion to dismiss stage or part of the way through discovery, with any trial still far down the road. Proof at trial rarely gets better for either side with age; memories fade and the evidence becomes stale. And from the standpoint of deterrence and investor protection, I think we can all agree that it is better to have rulings earlier rather than later. Doing so allows us to have timely public findings of fact and law, and where we are successful, to obtain remedies like industry bars more promptly.

Second, administrative proceedings have the benefit of specialized factfinders. The ALJs are focused on hearing and deciding securities cases, year after year. They develop expert knowledge of the securities laws, and the types of entities, instruments, and practices that frequently appear in our cases. Many of our cases involve somewhat technical provisions of the securities laws, and ALJs become knowledgeable about these provisions.

Third, the rules governing administrative hearings provide that ALJs should consider relevant evidence. In practice, what this means is that ALJs are guided by, but not obligated to strictly apply, the Federal Rules of Evidence. They are free to give each piece of evidence the weight that they deem appropriate. Finally, certain types of charges, such as failure to supervise or “causing” violations, can be brought only in the administrative forum.

I should note that these features of the administrative forum can also benefit the respondents. Either side can benefit when witnesses’ recollections are fresher. And the relaxed rules of evidence may likewise give them more flexibility in offering evidence.

With all this said, there are situations where district court is the more appropriate forum. In certain cases, we need certain types of discovery that we can only get in district court. For example, where we file our case on an expedited basis to stop an ongoing fraud, a district court might be the only option that allows us to act quickly while still being able to gather evidence. In certain cases, we need emergency relief, such as an asset freeze or receiver, and that requires an order from a district court. We also may believe that we can obtain summary judgment in district court. The bottom line is that we make a case by case determination of which forum is appropriate based on the particular facts of the case.

Now there has been some criticism recently of our use of administrative proceedings against unregistered entities and individuals and suggestions that these proceedings are unfair. I reject that assertion. ALJs call it like they see it, and I note that we have lost some significant proceedings before ALJs in the last few years. Further, I would challenge anyone to identify a case in which an ALJ erroneously ruled for us where the Commission did not reverse the decision.

Some have raised concerns about the lack of a jury in administrative hearings. But the Supreme Court has considered and rejected the argument that there is a Constitutional right to a jury trial for government claims based on statutes like the federal securities laws.[12]

Some also have claimed that the procedural rules that govern administrative proceedings, including the time frames for the hearings and the rarity of depositions, are unfair to respondents. Some have even suggested they create a due process concern. Of course, as I suggested previously, we have been using this forum for years in complicated proceedings involving registered parties and no due process violation has been found in those cases. But in any event, the rules for administrative proceedings provide extensive procedural protections. These rules require us to commence making available our entire investigative file within seven days of the filing of our allegations, and we typically provide the whole file in that time frame.

We also have affirmative Brady obligations to disclose material, exculpatory information and Jencks Act obligations to turn over statements of our witnesses — neither of which apply in our district court proceedings. ALJs commonly require us to provide our witness lists and exhibit lists well in advance of the hearing, putting respondents on further notice about the specific content of our case. A respondent and the Division both have the right to request third-party subpoenas for witnesses and documents. And apart from all of the information we turn over, it also is worth noting that in many cases respondents know full well what the important evidence is, either because they produced it to us themselves, because it was testimony from their own employees or someone else to whom they have access before the hearing, or because we have shared it with them in testimony or in the course of Wells discussions. So the bottom line is that there are extensive procedural protections in our proceedings and defendants have transparency into the nature of our case and proof well before the hearing commences.

It is true that there generally are no depositions under the administrative Rules of Practice. But I do not think that due process requires the ability to conduct depositions. In a former life, I was a criminal prosecutor, and I saw many people sentenced to prison without any chance of deposing the government’s witnesses before trial. The Federal Rules of Criminal Procedure allow for depositions only in “exceptional circumstances,” which is similar to what the Commission’s Rules of Practice allow.[13] If that approach is acceptable where someone’s liberty is on the line, then it is hard to see how due process requires more for respondents in administrative proceedings.

Some have raised the concern that the use of administrative proceedings will impair the proper development of the law by district court judges. But using the administrative forum furthers the balanced and informed development of the federal securities laws, just as it does in other specialized legal areas in which administrative agencies function. SEC commissioners have great expertise in the securities laws and the administrative agency structure that Congress created leverages that expertise to help shape the law’s development. The commissioners review ALJ decisions de novo. The parties have the right to appeal an adverse Commission decision to a circuit court, where panels of federal judges may have the final say on the development of the law. So the Commission has input on important questions, but legal rulings either supporting or reversing the Commission frequently are made at the circuit or Supreme Court level. I also would note that two seminal insider trading cases, Cady Roberts and Dirks, followed that path, starting in the SEC’s administrative forum and, in the case of Dirks, ending up in the Supreme Court. So this process has worked well over the years in developing the securities laws.

My bottom line is that, while we are using administrative proceedings more, we are still bringing significant numbers of contested cases in district courts. And our use of the administrative forum is eminently proper, appropriate, and fair to respondents.

Admissions

Of course, the changes within our enforcement program extend beyond our increased use of administrative proceedings. As many of you no doubt are aware, we modified the Commission’s longstanding no-admit, no-deny settlement protocol by considering requiring admissions in certain types of cases where heightened accountability and acceptance of responsibility are in the public interest.

The practice of primarily settling our cases on a no admit/no deny basis has served the SEC — and other agencies — well for many years. These settlements speed up our ability to return funds to wronged investors, avoid the delay and uncertainty inherent in trials, and allow us to use our finite resources more effectively. As I noted, earlier this year, the Second Circuit reaffirmed the significant deference accorded to the Commission in determining on what terms to settle with parties. For these reasons, settlements without admissions have been — and will continue to be — an important part of our enforcement regime.

That being said, a little over a year ago, Chair White announced a change in our settlement approach by which we would consider requiring admissions in certain categories of cases where there is a greater need for public accountability. Her years in the United States Attorney’s Office for the Southern District of New York taught her — and me — the power and importance of defendants admitting that they broke the law. As you probably know, in the criminal realm, all guilty pleas are accompanied by factual admissions, which eliminate any doubt about the defendant’s conduct and provide additional accountability for the crime.

I am happy to report that the program is working well as we have obtained admissions in over a dozen cases under the new policy. The Wedbush settlement announced yesterday is just the latest,[14] and more are in the pipeline. These admissions have come from a broad range of defendants — firms and individuals, as well as regulated and unregulated entities — and involve a broad range of conduct that includes both scienter and non-scienter-based violations. And each successive case where we obtain admissions has helped illuminate the circumstances in which we will conclude that they are appropriate.

Admissions will be considered in certain types of cases, including those involving egregious conduct, where large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the wrongdoer posed a particular future threat to investors or the markets, where the defendant engaged in unlawful obstruction of the Commission’s processes, or where admissions would significantly enhance the deterrence message of the action. And our admissions cases to date have touched on each of these respective categories.

Overall, I think there is no serious question that our new approach to admissions has strengthened our enforcement program and ensured greater public accountability, and has provided us with another important tool in punishing and deterring misconduct.

Using Big Data

Finally, I want to say a few words about another important trend in our enforcement efforts — our use of big data to detect and investigate violations. The Division and the agency as a whole have made great strides in leveraging data and technology to enhance our ability to detect and pursue misconduct. With the proliferation of big data, and growing complexity of our markets, we need to better harness technology in order to keep up with wrongdoers. So we are developing new analytic tools designed to process data more efficiently.

Let me give some examples. A key development for us in connection with our insider trading efforts is our use of new analytical tools to increase our capability of detecting insider trading. We have developed sophisticated tools that allow us to detect parties trading in unison, which then enables us to work our way back to the source of the inside information. A number of cases we have brought this year were built using this sort of data analytics, and we have numerous additional investigations in the pipeline that originated from these tools.

We are doing similar things in many other areas as well. Our Financial Reporting and Audit Task Force is using technology in a number of ways. It is working closely with the Division of Economic and Risk Analysis, for example, to refine a tool they developed that compiles public company filing data, compares it with results of other companies in the same industry, and detects anomalous results that might call for further investigation.

We also are sifting through non-public clearing firm data for problematic patterns in the sale and trading of certain asset-backed securities and other complex products. Through this process, we are deploying proprietary data analytics to identify troubling trends in the sale of complex financial instruments to retail investors that might serve as the basis of a suitability or failure-to-supervise case.

Finally, our Broker-Dealer Task Force has developed initiatives utilizing technology and data-driven analysis to target excessive trading in customers’ accounts and inadequate compliance with the anti-money laundering and Bank Secrecy Act regulations.

Through these efforts, we are becoming more effective and efficient at uncovering and pursuing misconduct, and improving our ability to keep pace with our rapidly transforming markets.

Conclusion

I’m going to end here, but not because I’m out of things to say about the exciting work going on throughout the Division of Enforcement. Far from it. I suspect that many of you in this room could attest to the fact that we are moving forward in cutting-edge investigations across the full span of the industry. This is why our most recent fiscal year was such a success, and why I’m confident that there are many more great things to come.

Thank you for your attention, and enjoy the rest of this conference.



[1] See Press Rel. No. 2013-222, SEC Charges Knight Capital With Violations of Market Access Rule (Oct. 16, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539879795; Press Rel. No. 2014-115, SEC Announces Charges Against Wedbush Securities and Two Officials for Market Access Violations (June 6, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542011614; Press Rel. No. 2014-120, SEC Charges Private Equity Firm With Pay-to-Play Violations Involving Political Campaign Contributions in Pennsylvania (June 20, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542119853; Press Rel. No. 2014-41, SEC Announces Charges Against Arizona-Based Private Equity Fund Manager in Expense Misallocation Scheme (Feb. 25, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540849548; Press Rel. No. 2014-118, SEC Charges Hedge Fund Adviser With Conducting Conflicted Transactions and Retaliating Against Whistleblower (June 16, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542096307.

[2] See Press Rel. No. 2014-206, SEC Announces Largest-Ever Whistleblower Award (Sept. 22, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543011290.

[3] See Press Rel. No. 2014-199, SEC Charges N.Y.-Based High Frequency Trading Firm With Violating Net Capital Rule For Broker-Dealers (Sept. 17, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542972403; Press Rel. No. 2014-147, Citigroup Business Unit Charged With Failing to Protect Confidential Subscriber Data While Operating Alternative Trading System (July 25, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542371114; Lit. Rel. No. 22923, SEC Concludes Its Case Against Former Siemens Executives Charged with Bribery in Argentina, Obtaining Judgments over $1.8 Million (Feb. 10, 2014), available at http://www.sec.gov/litigation/litreleases/2014/lr22923.htm.

[4] See, e.g., Press Rel. No. 2014-220, SEC Charges Bank of America With Securities Laws Violations in Connection With Regulatory Capital Overstatements (Sept. 29, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543065483; Press Rel. No. 2014-172, Bank of America Admits Disclosure Failures to Settle SEC Charges (Aug. 21, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542719632; Press Rel. No. 2014-144, Morgan Stanley to Pay $275 Million for Misleading Investors in Subprime RMBS Offerings (July 24, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542355594; Press Rel. No. 2013-261, SEC Charges Merrill Lynch With Misleading Investors in CDOs (Dec. 12, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540492377.

[5] See, e.g., Press Rel. No. 2014-215, SEC Suspends Trading in Nine Penny Stocks in Ongoing Initiative to Combat Microcap Fraud (Sept. 25, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543040229.

[6] See, e.g., Press Rel. No. 2014-79, SEC Halts Pyramid Scheme Targeting Dominican and Brazilian Immigrants (Apr. 17, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541520559; Press Rel. No. 2014-60, SEC Halts Pyramid Scheme Targeting Asian and Latino Communities (Mar. 28, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541324305.

[7] See In re Thomas C. Gonnella, Initial Decision Rel. No. 706 (Nov. 13, 2014), available at http://www.sec.gov/alj/aljdec/2014/id706jeg.pdf; Press Rel. No. 2014-85, SEC Charges Six Individuals With Insider Trading in Stock of E-Commerce Company Prior to Acquisition by eBay (April 25, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541642140.

[8] My comments today are meant to be general observations and are not directed at any particular proceeding. Additionally, for the sake of simplicity I use the term “administrative” to refer to any matter brought before an ALJ. This includes both cease-and-desist proceedings and administrative actions against regulated entities and associated persons.

[9] See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, § 929P(a).

[10] SEC v. Citigroup Global Markets, Inc., 752 F.3d 285, 297 (2d Cir. 2014).

[11] These numbers do not include certain types of actions including delinquent filings cases or follow-on administrative proceedings.

[12] Atlas Roofing v. Occupational Safety and Health Review Commission, 430 U.S. 442, 450 (1977).

[13] See Fed. R. Crim. P. 15; SEC Rule of Practice 233(b).

[14] See Press Rel. No. 2014-263, Wedbush Securities and Two Officials Agree to Settle SEC Case (Nov. 20, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543504806.

Print Facebook Twitter Email Share
Facebook Twitter Email
Modified: Nov. 21, 2014