Mary Jo White, Chair of the SEC, recently explained decisions in enforcement actions to a group of white collar crime lawyers.
Ever wonder why some cases draw both criminal and civil charges but others do not? Chair White talks through the progressive analysis but in the end notes “The bottom line is that the decision of whether a case will go criminal will typically turn on the strength of the evidence and the type of offense under investigation – which are the appropriate factors to consider in making such a determination.”
It’s news to me that many think the SEC doesn’t charge individuals often enough. But apparently it is a common enough misperception that Ms. White sought to dispel the notion. “The simple fact is that the SEC charges individuals in most of our cases, which is as it should be. A recent Harvard survey shows that since 2000, the SEC has charged individuals in 93% of our actions involving nationally listed firms in which we charged fraud or violations of books and records and internal control rules.”
And you can’t set about indirectly inducing someone else to violate the law and avoid being charged by the SEC (another non-surprise). Ms. White noted Section 20(b) imposes primary liability on a person who, directly or indirectly, does anything “by means of any other person” that would be unlawful for that person to do on his or her own. According to Chair White, the SEC is focusing on Section 20(b) charges where – as is frequently the case in microcap and other frauds – individuals have engaged in unlawful activity but attempted to insulate themselves from liability by avoiding direct communication with the defrauded investors.
In Ms. White’s view, negligence based charges are appropriate when an entity makes a material misstatement or omission in the offer or sale of securities and the evidence will not support holding any individual responsible. According to Ms. White holding the entity responsible for the misstatements is the right thing to do if the evidence demonstrates that the entity’s conduct fell below the standard of reasonable care – for example, because it failed to have appropriate policies or procedures, failed to properly train its employees, or failed to structure its operations so that people making disclosure decisions are provided with the necessary information to make those decisions on an informed basis.