Speech by SEC Commissioner:
Remarks Before the First Annual Southeast Securities Enforcement Conference
Commissioner Kathleen L. Casey
U.S. Securities and Exchange Commission
March 27, 2008
Thank you, Kit, for that kind introduction. Kit invited me to speak last fall at the Southwest securities enforcement conference in Ft. Worth, and then she promptly moved back to Atlanta. So I’m glad to see her here today. And you’re lucky to have her back in Atlanta serving the people of this region.
It is a particular honor to speak with you today at this inaugural event for enforcement professionals in the Southeast. Always, but especially where resources are limited, leveraging expertise through events such as these is extremely valuable.
Before I proceed, as you may know, the Commission is now down from five commissioners to three. And although our dwindling numbers minimize the risk of me speaking for others, I am still obligated to remind you that my comments are my own, and do not necessarily reflect those of the Commission or my fellow Commissioners.
To Kit and the other sponsors, I commend you for initiating this most useful event, and I hope that it only grows from this auspicious beginning; and to all participants, I congratulate you for wisely choosing to spend these two days of your limited time here, learning, sharing, and networking. It’s always hard to tear yourself away from other pressing work — work that is certainly piling up on desks and email in-boxes as we speak — to attend training. But we will be much better for it.
The conference looks to be a good one, touching on such timely topics as receiverships, investor education, emerging exam issues, and other current topics in securities enforcement. But just as important as the substantive aspects of this training is a critical byproduct: networking that forges friendships and relationships that will last for years. I am reminded of the Southwest securities enforcement conference that I spoke of a moment ago: I attended the 31st annual meeting of that group and witnessed participants who had known each other for years reunite, share stories and insights, and enjoy friendships.
And I was entertained to learn of the roots of the conference: in the early years attendees met at a dude ranch, complete with campfires, pit beef and beer. Like the current version of that conference, this one looks to be somewhat tamer — but I do note a happy hour tonight that I’m sure will be well attended.
Enforcement Work is Highly Challenging and Rewarding
Enforcement work is some of the best work lawyers, accountants or investigators can find. You get to spend your days piecing together complex puzzles, peering into events that you might otherwise never witness, and then leave work at night — or perhaps sometimes as the sun comes up — and get to hang your white hat on the coat rack at home. You even occasionally get to read about your excellent efforts in the morning papers. It’s rewarding work; and there can be no doubt that it is critical work — this is particularly so here in the Southeast where more and more senior Americans are retiring and investing their money.
Like so many times over the last seven decades since the principal federal securities laws were created, and even longer since Kansas enacted the first blue sky law almost 100 years ago, the present is an exciting time to do enforcement work.
This decade has been headlined with complicated financial frauds that required enforcement, regulatory and legislative responses. State and Federal regulators continue to focus on the giant failings of Enron, WorldCom, Adelphia, and other companies as they work cases through the courts and Fair Funds. Next came the research analyst cases that grabbed the headlines and the focus of state and federal authorities; then the mutual fund industry garnered significant attention during the market timing and late trading scandals; followed by the backdating activity concentrated largely in the tech industry. And of course, during all of this we continued to see the steady flow of microcap, market manipulation, internet fraud, and insider trading cases that always occupy enforcement resources. It seems that every decade has its scandals, so there’s never a dull time to be doing enforcement work.
In responding to any allegations of wrongdoing in our securities markets, and particularly where there is a bright public light on a potential impropriety that may have systemic implications, such as the subprime turmoil that has roiled our markets, enforcement agencies carry a heavy burden. We are expected to respond, and respond swiftly, but we are expected to get it right. We are judged if the public and investors believe we are not acting quickly or comprehensively, but we are also judged throughout the process. This is good, because we enjoy a public trust, and the scrutiny encourages our best efforts.
The Enron collapse provides an excellent example of the enduring focus we receive as we respond to crisis. When Enron collapsed in the fall of 2001, there were the initial questions such as whether the government failed to appreciate the risks or missed red flags, and more generally, who was to blame?1 These are the questions always on the mind of the investing public, and were not unique to Enron.
Next, there was what I will call the score-card of progress, measured by indictments and lawsuits. At least in some instances, the government was being measured by the number of cases that we had yet to publicly file even though, internally, we were working carefully and diligently.2 Whether such a yardstick is proper is highly debatable. As our Director of Enforcement, Linda Thomsen, has noted, “toughness is not the only measure of an enforcement program. It must also be fair.”3 I couldn’t agree more.
Once the cases started coming, our successes or failures in the courts became the subject of review. Reversals or acquittals in some Enron cases, and the recent appeal of Jeffrey Skilling in the Fifth Circuit, have invited commentary on the propriety of those prosecutions or the tactics of government lawyers.4 The indictment of Arthur Andersen that led to its dissolution has caused vigorous debate about the conditions under which companies should be indicted.
On the regulatory side, now that we have had a few years to work with Sarbanes-Oxley — the landmark legislation that responded to the Enron collapse and other corporate failures — it has become clear that SOX may have unintentionally placed unnecessary burdens on companies and their shareholders; such has been the case of Section 404 dealing with internal controls. Thus, in recent years we have been scrutinized and judged by the thoroughness and effectiveness of our efforts to realign the costs and benefits of 404. I believe we have responded prudently to these concerns over 404, but our success will, and should, continue to be the subject of public review and debate.
Indeed, how effectively we responded to Enron or the other huge corporate failings early in the decade may take years to fully answer. But this heavy scrutiny and judgment is, in my view, a very good thing. As I noted a moment ago, public service is extraordinarily rewarding both personally and professionally.
But we must never forget that it is work for, and on behalf of, the public.
With Expanded Power Comes Increased Responsibility
In recent years, enforcement agencies have enjoyed an expanded tool belt which enables us to do our work more effectively. SOX created certain reporting-up and whistleblower provisions that help alert the government to wrongdoing, and it gave us new enforcement tools such as broader use of Fair Funds, the ability to secure Section 304 reimbursements related to restated financial statements, and it expanded use of industry bars. Greater collaboration between state and federal regulators, and criminal and civil authorities, has also fostered more effective responses to corporate wrongdoing.
Further enhancing these powers, particularly with regard to companies, is the fact that the law is on the government’s side: as Mary Jo White, former U.S. Attorney for the Southern District of New York was quoted as saying in a 2006 symposium, “the law is very much a prosecutor’s friend, not the company’s friend. A company is criminally culpable if even one of your employees . . . commits a crime in the course of his or her employment that benefits the company at least in part.”5 She was speaking of criminal prosecutions, but noted that civil and criminal laws are very similar, so her comments can easily apply to the work of the Commission or its state counterparts’ civil litigation programs.
The Commission’s issuance of the Seaboard Report has further empowered the Commission to obtain critical evidence through its emphasis on cooperation.6 This has fostered the Commission’s ability to pursue cases and obtain settlements against corporations, and has also facilitated a lively and important debate about the extent to which law enforcement agencies should be seeking waiver of the attorney-client privilege.
Recognizing the enormous leverage that the law and enforcement tools give federal prosecutors and the Commission, each has responded by publicly identifying key factors that must be considered before indicting or penalizing corporations. DOJ created the McNulty memo, and the Commission issued a January, 2006 statement concerning financial penalties.7
The Commission has also approached the issue of waivers of the attorney-client privilege from issuers carefully and thoughtfully. As our Enforcement Director has noted, “first, we do not — indeed we cannot — require waiver of the attorney/client privilege. Second, waiver of a privilege or protection is not a pre-requisite to obtaining credit in a Commission investigation.”8 The Enforcement Division has a process that elevates waiver decisions within the Division and requires consideration of various factors before even discussing waiver with a company, and the Commission itself gives careful consideration to our activities in this area.
Even within these parameters that seek to moderate our enforcement activities in favor of fairness and due process, our power remains substantial. Faced with a potential complaint by the Commission, companies tend to cooperate, seek credit for that cooperation, and often settle with the Commission. For all of these reasons, and the special obligations imposed upon us by the Constitution, government attorneys are held to a higher standard.
We are expected to be beyond reproach. We are expected to refrain from using the media to further our cases. Although criminal and civil authorities may coordinate investigations, we are properly expected to, and do, guard against abuses of the criminal process by use of the civil process. Our attorneys operate under ethical rules often requiring a higher degree of ethical behavior than state professionalism rules. Codes of conduct applying to government employees, including attorneys, scrutinize conflicts of interest and require disclosure or recusal obligations beyond those imposed upon private attorneys.
The Commission’s Provision of Due Process
These are high standards; but, down the line, I believe that Commission professionals pride themselves on satisfying these higher standards, and I think the same is true of the great majority of all state and federal public servants.
Like the other organizations represented here today, much of the work of the Commission goes unnoticed. Rarely does the public have the opportunity to view our decisions that result in restraint, or understand how carefully we struggle with fairness considerations. But like other regulators, this work goes on, beyond the public eye.
At the Commission, we have significant safeguards in place to ensure that our efforts are fair. Our investigations are conducted and supervised by professional lawyers and accountants who take an oath to defend the Constitution. Subpoena power is only granted by the Commission itself. When the staff believes it may be appropriate to recommend suit against a person or company, it engages in the “Wells process” in which the potential defendant or respondent is told about the views of the staff and can respond. That response is seen by supervisory attorneys, other divisions, and the Commission. All staff recommendations to the Commission are reviewed by the General Counsel’s office and by any Division or office that has an interest in the substance of the recommendation.
The Commission, when it considers a recommendation, is guided not only by the thoughtful recommendations of the staff in all responsible divisions, but also by Wells responses, precedential cases, and public pronouncements of policy such as the January, 2006 penalties statement, and the Seaboard Report. And of course, the Commission is accountable to the Congress, and many of our decisions are tested in the courts.
We also continue to evaluate our processes in an effort to improve. Indeed, we are engaged as we speak in just such an effort on a comprehensive scale, largely in response to concerns identified by the Congress and the Government Accountability Office. I am hopeful that this self-evaluation process will produce even better policies that will further the interests of fairness and more efficient and effective law enforcement.
Current Market Conditions
It is against this backdrop of high standards and expectations that I turn to the recent current and ongoing in our credit markets. Much has been written — and will continue to be written — about its genesis, contributing factors, and fallout. Earlier this month, the President’s Working Group on Financial Markets, of which the Commission is a member, released a “diagnosis” of what it currently believes are the principal causes.
It points to a breakdown in underwriting standards for subprime mortgages, lax market discipline in the securitization process for those mortgages, flaws in credit rating agencies’ assessments of various products tied to these securitizations and other complex structured financial products, risk management weaknesses at some large institutions, and regulatory policies that failed to mitigate those risk management weaknesses.9
The Commission’s role in responding to these breakdowns is defined by its jurisdiction and its mission of protecting investors and fostering orderly markets. We have created an agency-wide task force so that all of our subject-matter experts can share information among themselves and with the Commission. And we are focused in several key areas such as ongoing supervision of several of the largest investment banks through our CSE program, examination of credit rating agencies, consideration of reforms to the credit ratings process, and review of periodic filings for appropriate and adequate disclosure.
But often the most visible work of the Commission is conducted through our enforcement program. In that capacity, investors and the public will look to us to help determine the extent to which misconduct — rather than bargained-for risks inherent in our markets -- contributed to the market turmoil or was derivative of it. Thus, once again, we are called upon not only to act swiftly — but to get it right.
In our investigations we are working to determine whether market participants violated securities laws by issuing misleading disclosures, engaging in accounting fraud, implementing improper sales practices, or perhaps through other activities. We are working quickly, but I am confident that we are acting prudently.
As always, our Division of Enforcement closely consults with other divisions of the Commission to ensure that its strategic investigative decisions and its legal theories are based on the best information available and are consistent with the views of other divisions. I believe the result of our careful and thorough efforts will be our usual practice of avoiding second-guessing honest decisions made by market participants who were required to make difficult judgments in complicated markets.
That being said, we should, and we will, pursue our investigations with every tool we possess, and we will bring the full strength of our enforcement authority when we uncover any wrongdoing. To those on the front line with whose work I am most familiar — SEC enforcement lawyers and accountants — I am highly confident that you will fill this tall order. Please know that you have my support and that of other policymakers as we sift through the fallout from the credit and mortgage market problems.
I am also proud to stand alongside this group, the enforcement lawyers, prosecutors, accountants and investigators, which will prove to be an important component in the government’s response to the stress facing our markets. Your role is highly visible, and your response must be vigorous, swift and reasoned. You are held to high standards, but I know that in this crisis, as in any, you will exceed those standards. The public expects nothing less.
Thank you for allowing me to speak today, and to participate in this most useful conference.
1 See, e.g., opening statement of Chairman Paul Sarbanes, Oversight Hearing on “Accounting and Investor Protection Issues Raised by Enron and other Public Companies,” February 12, 2002.
2 See, e.g., Behind the Scenes of the Enron Trial, Hueston, John, FN14 and accompanying text, 44 Amer. Crim. L. Rev. 197 (2007) (discussing Lou Dobbs feature noting only one criminal indictment in Enron case as of August 28, 2002).
3 Remarks of Linda C. Thomsen to the Director’s College, June 21, 2005, available at www.sec.gov.
4 Enron revisited: Is Jeffrey Skilling innocent? Our business columnist thinks the unthinkable,” Economist.com, March 18, 2008.
5 “A Roundtable Discussion,” special advertising supplement to New York Law Journal and the National Law Journal, April 2006, available at http://10b5.pwc.com/PDF/ROUNDTABLEAPRIL.PDF.
6 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and the Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Release No. 44969 (Oct. 23, 2001).
7 Statement of the Securities and Exchange Commission Concerning Financial Penalties (January 4, 2006), available at www.sec.gov/news/press/2006-4.htm; Memorandum from Paul J. McNulty, Deputy Attorney General, to Heads of Department Components and United States Attorneys (Dec. 12, 2006), available at http://www.usdoj.gov/dag/speeches/2006/mcnulty_memo.pdf.
8 Remarks of Linda C. Thomsen before the 27th Annual Ray Garrett, Jr. Corporate and Securities Law Institute, May 4, 2007, available at www.sec.gov.
9 Policy Statement on Financial Market Developments, the President’s Working Group on Financial Markets (March 2008), available at http://www.treas.gov/press/releases/reports/