On October 22, 2015, the Securities and Exchange Commission (SEC) announced that in fiscal year 2015 (ending September 30), the Enforcement Division brought 807 enforcement actions covering a wide range of misconduct and obtained orders totaling approximately $4.2 billion in disgorgement and penalties. Of the 807 enforcement actions, 507 were independent actions for violations of the federal securities laws and 300 were either actions against issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders. The SEC separated “independent” cases from other “follow on” cases in an apparent response to criticism that the agency has inflated its enforcement count in past years by combining these cases. This distinction can be important for the SEC when seeking appropriations from Congress, as well as for the general perception of the agency in the regulated community.
By any measure, 2015 fiscal year enforcement actions exceeded last year’s 755 enforcement actions pursuant to which $4.16 billion in disgorgement and penalties was assessed. The 755 enforcement actions filed in fiscal year 2014 represented 413 independent actions and 342 follow on actions. The SEC congratulated itself on bringing certain “first-of-their-kind” cases, including the KKR case involving the alleged misallocation of broken deal expenses, as well as actions involving dark pool operators, high-frequency traders, and new applications of the Foreign Corrupt Practices Act.
During fiscal 2015, the SEC brought 87 cases involving allegations of insider trading. As you may recall, the Supreme Court recently declined to review a Second Circuit Court of Appeals case that overturned the insider trading conviction of two hedge fund portfolio managers, thereby leaving in place the Second Circuit’s ruling that prosecutors must prove both that the tipster received a personal benefit from leaking confidential information and that those who traded on the information knew of the benefit. As a result of the Supreme Court’s decision to not hear U.S. v. Todd Newman and Anthony Chiasson appeal, Preet Bharara, the U.S. Attorney for Manhattan, dropped charges against seven defendants that had been charged with insider trading.
Of course, the Newman/Chiasson case was brought by the U.S. Attorney’s office and involved alleged criminal conduct. The SEC does not bring criminal cases, only civil matters that involve fines and penalties. However, the guidance from the Second Circuit and the Supreme Court should instruct the SEC with respect to the types of insider trading cases that the agency believes would survive the revised insider trading standard even in civil court. Accordingly, it will be interesting to watch in the coming months whether the number of insider trading cases brought by the SEC declines. My guess is it will not. There are more than enough insider trading cases based on the misappropriation theory or the classic theory to make up for “remote tippee” cases. Remember, the SEC exercises significant “prosecutorial discretion” when deciding whether to bring any type of enforcement action, often times based on considerations having little to do with the actual merits of a potential action.
For chief compliance officers who have their own SEC issues to worry about, the Second Circuit affirmation could not have come at a worse time. Monitoring the behavior of portfolio managers and research analysts for compliance with insider trading policies was already a difficult task filled with murkiness and subjectivity. Now, these CCOs have yet another set of variables to factor in when attempting to make a decision on whether to place a security on a restricted list or whether an employee’s conduct has brought the firm “over the wall.” In the short term, the industry will need to work these issues out for itself. It is unlikely that this Congress or the next one will provide clarity, and illumination from the SEC is almost certain to come in the form of enforcement cases or lack of them. Stay tuned.
For further information on SEC Enforcement Actions, keep reading here.