Salman is in. Newman is out. Justice Alito writes the opinion for an 8-0 Court. Here is the opinion in Salman v. United States.
Tag: SEC
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You are the CEO, General Counsel, or Audit Committee of a big publicly traded company. Some whistleblower dimes the company out to the SEC and DOJ. It seems very likely that a crime has been committed. Class action lawsuits, qui tam complaints, and DOJ and SEC investigations are a foregone conclusion. What are you gonna do? Tell the SEC and DOJ to f… off? No, you are going to commence your own internal investigation and promise to cooperate with the government by sharing your Investigative Report's essential findings. And if the internal investigation reveals that some of your employees acted illegally, you will promise to serve them up to the DOJ. This is the reality in today's business and legal environment. A corporate entity owes no particular duty to an employee who commits fraud. Professor Podgor's complaint here and here that both the old (Filip) and new (Yates) DOJ policies encourage companies to throw their employees under the bus is certainly true. But to the companies involved it makes a lot of sense. Tell the DOJ that it's on its own and what will happen? You will still get hit with costly and onerous document requests and a federal criminal investigation that you cannot control. The publicity is awful and when it all hits the fan you can't even say that you are cooperating with DOJ. You've got a real mess and a pissed off prosecutor. To some extent, becoming a government quasi-agent is inevitable in this scenario.
The more interesting question to me is: "Who gets thrown under the bus?" Former SEC Enforcement Chief Robert Khuzami complained years ago that too many outside counsel with longstanding ties to a given corporation's leadership are willing to sacrifice mid-level employees to the government sledgehammer, letting the big boys go scot-free. That was true then. It's true now. Until the DOJ shows a willingness and ability to seriously investigate and prosecute a company's top leadership, when it is clearly called for, no memos, speeches, or other fanfare will mean diddly squat.
Yes, the occasional CEO finds himself/herself in the crosshairs and the occasional internal investigation results in a CEO resignation. But in the vast majority of cases it is middle management that gets slow roasted by both the company and an all-too-willing DOJ. Trust me. It happens. If the policies announced in the Yates Memo have any chance of changing this dynamic, so much the better.
Meanwhile, are there any concrete things the Department can do to change the situation? More on that in a future post.
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Gretchen Morgenson has another one of her outstanding articles, Earnings, But Without The Bad Stuff, in today's NY Times. The piece explores some unintended effects of the SEC's Regulation G, which "allows companies to use non-traditional metrics in financial reports, but only if they present generally accepted accounting measures [GAAP] alongside so that investors can compare the two." According to Morgenson, and Jack Cieselski of Charm City's R.G. Associates, more companies are using Regulation G to put forward "[m]anagement's recommended measures." This in turn spurs other companies to do the same in order to stay competitive. My gut response is: "So what?" As long as the company is disclosing fully accurate figures according to GAAP, what do I care if they want to present alternative numbers alongside? After all, companies are still prohibited from presenting false or misleading non-GAAP figures, and the SEC has gone after companies who do this.
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The New York Times' Gretchen Morgenson should be declared a national treasure. She continues to write about the financial crisis, and legal and regulatory issues related to the crisis, at a level far above most of her contemporaries. In today's New York Times she explains the administrative law process through which the SEC brings many of its enforcement actions against individuals. The Administrative Law Judges deciding the cases are SEC employees and appellate reversals are rare. Dodd-Frank expanded the kinds of cases that can be heard by the ALJs. All of this is known to the securities bar, but not to otherwise intelligent and informed lay readers, because hardly anyone ever writes about it. Morgenstern's story is here.
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Stop the presses. Hold the back page. Saturday's New York Times reports here on the SEC's decision to end its "does not admit or deny" policy, but only for SEC civil defendants who are also pleading guilty to criminal charges or admitting wrongdoing as part of a deferred criminal adjudication. In other words, the policy is similar in its immediate effect to Lincoln's Emancipation Proclamation, which (for the most part) merely freed slaves in rebel held territory. Why be so boastful about ending a policy that never made much sense in the first place, because it allowed individuals and entities to neither admit or deny civil allegations when they had already pled guilty to similar, and more serious, criminal charges? To hear the SEC tell it, the decision to abandon the old policy is NOT in response to Judge Rakoff's order rejecting the proposed Citigroup consent decree, as the new policy would not apply in the Citigroup case and the decision has been under consideration since Spring 2011. The decision itself may not be in response to Judge Rakoff, but it is hard to believe that its timing is not. Although Judge Rakoff should be commended for his thoughtful opinion, I am not without sympathy for Khuzami. He and the SEC are the only actors at the governmental level who appear to be systematically investigating and bringing actions against the elite financial entities largely responsible for our economic meltdown. (DOJ is on holiday.) Still, the SEC spends too much time on its public relations.
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Here is Judge Rakoff's Order Rejecting Proposed SEC-CITIGROUP GLOBAL MARKETS INC.Settlement. Here is the New York Times story. Judge Rakoff's Order repeatedly refers to Citigroup as a "recidivist." It is difficult to believe this Order would have ever seen the light of day had the Court truly believed that a comprehensive law enforcement effort was underway to investigate and hold accountable the persons and institutions whose actions "depressed our economy and debilitated our lives."
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The Justice Department has decided — properly, I believe — not to file criminal charges against former SEC general counsel David M. Becker for participating in SEC policymaking relating to the distribution of funds from the Madoff estate when he had a personal stake in the outcome, a matter we discussed over five weeks ago. See here. Although I believe Becker's failure to recuse himself on his own was an exercise in poor judgment, he did report the potential conflict to his ethics officer, who approved his participation, and SEC chairwoman Mary L. Schapiro, who apparently failed to question it. Hopefully, the SEC will not forget that errors in judgment should rarely, if ever, be actionable.
(goldman)
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One would expect that the SEC, which brings actions against individuals or corporations based on their failure to disclose a material conflict of interest to the public, would be sensitive to conflicts of interest of its own employees. Nonetheless, as a report released last week by SEC Inspector General H. David Kotz reveals, former SEC general counsel David M. Becker participated significantly in decisions relating to the distribution of SIPC funds relating to the Bernard Madoff case although he had a significant personal financial interest in the decisions.
Becker and two brothers in 2004 inherited and in 2009 liquidated $2 million in Madoff investment funds, $1.5 million of which were purported profits from the original investment. Later in 2009, Becker was prominently involved in two substantial questions in which the SEC recommendations to the bankruptcy court, while not conclusive, would be expected to carry significant weight in the court, given the deference courts pay to administrative agency decisions.
One issue concerned what position the SEC would take as to what should be considered "net equity," the amount that customers can claim in a brokerage liquidation. That question was essentially the same as what should be considered the "net equity" figure in a "clawback" action by the bankruptcy trustee, a decision in which Becker had a significant potential personal monetary interest, even though he and his family had not yet been sued (they were later). Becker initially argued against the "money-in/money-out method" under which an investor could recover only the amount he invested and for the "last account statement method" under which an investor could recover the amount of the last – and fictitious – statement from Madoff. The "last account statement method" would obviously have been beneficial to Becker in that it would have protected him in a "clawback" action by the Madoff bankruptcy trustee for the $1.5 million he and his brothers had received in Madoff "profits."
After consideration, Becker concluded that the last account statement method was unsupportable. His position was in accord with that of the SEC, SIPC, the bankruptcy trustee, and ultimately the Second Circuit, In re Bernard Madoff Investment Securities, LLC, ___ F.3d ___ (2d Cir., August 16, 2011). Becker argued, however, contrary to the position of SIPC, for the "constant dollar approach" in which the recovery under the money-in/money-out method would be adjusted upward for inflation and lost real economic gain. Under this approach, the bankruptcy trustee's potential clawback recovery from the Beckers would have been reduced by $138,500.
It is apparent, as any law student who has taken an ethics course would realize, and as the Inspector General determined, that Becker had a conflict of interest in the resolution of these questions. Yet, the SEC's "ethics" officer, who reported to and was evaluated by Becker, saw no conflict. The ethics officer, revealing a narrow view of conflict of interest, and an apparent misunderstanding of relevant securities law, found no conflict in part because there was "no direct and predictable effect" between the SEC's position and the trustee's clawback decision.
SEC Chairwoman Mary L. Schapiro was aware, to some extent, of Becker's Madoff financial interest, but she did not suggest he recuse himself. She and Becker both contended before Congress last week that he had acted properly by reporting the conflict to her and others. That defense, however, is limited and misplaced.
Reporting a conflict – especially if only to underlings and colleagues – is not sufficient. Even public disclosure of Becker's personal interest – and it was not disclosed to the public, Congress, the courts, or four of the SEC's five commissioners – would not have cured the conflict. Becker simply should have recused himself and not have participated at all in decisions as to the formulation of SEC policy relating to recovery of Madoff assets.
Schapiro was no doubt swayed by her respect for Becker's legal ability and integrity. Becker, who has written that he did "not remember giving any consideration to how the various proposed outcomes would affect me," may well have believed that his personal interest would not affect his professional judgment. In any case, his decision not to recuse himself and Schapiro's at least implicit condonation of this decision, demonstrate that the agency which polices conflicts of interest in the marketplace fails to appreciate them when they occur in its own house.
The Inspector General referred this matter to DOJ for consideration for criminal prosecution. I do not suggest that Becker acted criminally with respect to 18 U.S.C. 208, the statute proscribing acts affecting a personal financial interest, or any other law. He may well have lacked whatever scienter is required under the law based on his reporting to others or other acts or circumstances. Not every improper act is criminal.
(goldman)
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Politico has a story about it here. The new regs implement Section 21F of the Dodd-Frank Act, which authorizes the SEC to award 10 to 30 percent of the monetary sanctions it recovers in a given case to a qualified whistleblower. What seems to most annoy the business community about the implementing regs is the SEC's insistence that whistleblowers are under no obligation to make use of a company's internal complaint procedures before running to the SEC. But the regs do say that an employee who goes through internal company whistleblower protocols is eligible for a Dodd-Frank whistleblower award if his/her employer subsequently self-reports to the SEC, based on the whistleblower's complaint, and a recovery is had. Further, an employee has a 120-day grace period after whistleblowing to his/her company, within which to bring his/her complaint to the SEC. Finally, in determining the amount of a whistleblower reward, the SEC will consider whether the whistleblower made use of his/her internal company procedures. The new regs contain enhanced anti-retaliation provisions as well, which prohibit direct or indirect retaliation for making whistleblower complaints to the SEC and other government entities.
There is an inherent tension between the anti-retaliation provisions and the SEC's and DOJ's often-emphasized warnings to companies that they should have vigorous and authentic internal whistleblower procedures. What if a company's pre-existing compliance policy requires the prompt internal reporting of whistleblower complaints? Can a company punish an employee who ignores such a provision and goes straight to the SEC? What if the employee declines to internally report, even after going to the SEC, because he/she feels that the company procedure is a sham? My guess is that such punishments will occur and that they will be deemed to run afoul of the anti-retaliation provisions. The retaliatory response is an instinctiual, persistent, and virtually universal impulse. It is really hard to eradicate.
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Last week was Family Week for insider trading actions. Two highly-publicized cases concerned the disclosure and misuse of inside information received from a close relative — one a spouse, the other a parent.
Both cases implicate the question of whether disclosure of confidential information to a close relative should form the basis of a criminal or regulatory proceeding. While the law provides no safe haven from prosecution for unlawful disclosure to a spouse or child (although the marital privilege may provide some protection to a spouse), respect for family relations may in some cases militate against such a prosecution. Here, however, the facts and circumstances of each case – one justifying prosecution, the other working against it – seem to make that issue moot.
In one, SEC v. William A. Marovitz, 1:11-CV-05259 (N.D. Ill. August 3, 2011), the husband of former Playboy Enterprises CEO Christy Hefner agreed (with the usual non-admission and non-denial of wrongdoing) to pay approximately $170,000 to settle a civil action. The husband, William Marovitz, according to the SEC, traded and made profits on sales of Playboy stock based on information he received from his wife concerning, among other things, a sale of the company. According to the SEC, Hefner had talked with her husband about her concerns with his trading and had the company counsel also speak with him. The counsel sent Marovitz a memo warning of the "serious implications" of his trading Playboy shares and asked him to consult counsel before he did. According to the complaint, Marovitz never did.
Hefner was not charged. Not only was she uninvolved in his trading, she took precautions, however unsuccessful, to prevent her husband’s purported misuse of the information. Of course, she could have prevented any misappropriation of insider information by him by simply not disclosing it.
The settlement amount includes civil penalties. One wonders what, if any, additional penalties Hefner will inflict upon her husband for his apparent betrayal of marital trust.
In another case, U.S. v. H. Clayton Peterson, 11 Crim. 665 (S.D.N.Y.) (see also SEC v. H. Clayton Peterson, etc. al., 11-CV-5448 (S.D.N.Y.)), a father and son both pleaded guilty to criminal securities fraud and conspiracy violations in connection with providing, using, and disseminating inside information concerning the 2010 takeover of Mariner Energy in Denver by the Apache Corporation. H. Clayton Peterson, a Mariner director, pleaded guilty to tipping off his son, Drew Peterson, who traded for himself, clients and a friend for a $150,000 profit and tipped off another friend, reportedly Bo K. Brownstein, a hedge fund executive, who traded for his fund and relatives and friends for profits of more than $5 million.
Peterson Sr. apparently took an active role in the wrongdoing, not only on several occasions providing confidential information to his son, but also directing him on two occasions to purchase Mariner stock for his sister. His conduct, thus, was apparently far more culpable than Hefner’s.
Drew Peterson is reportedly cooperating against Brownstein and others, as, to the extent he can, most likely is his father. Often, the family that steals together squeals together.
(Goldman)
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