In a recent speech, new SEC Chair Mary Jo White, the former top prosecutor in New York, proclaimed that the SEC will be focusing its enforcement efforts on individuals, as opposed to institutions, even when the SEC can prove at most negligent, not fraudulent, conduct. More specifically, she says the SEC under her will be a “tough cop” whose “core principle” will be “to pursue individuals whenever possible.” When it cannot prove fraud, she vows, the SEC will bring a “negligence case.” Either way, she asserts, executives “risk it all” if they do not play by the rules. The SEC will be “looking first at the individual conduct and working out to the entity.” “When people fear for their own reputations, careers or pocketbooks, they tend to stay in line.”1
The SEC will deploy its “full enforcement arsenal” in this effort. More often, the SEC will require actual admissions to wrongdoing, especially where the alleged conduct affected large numbers of investors, was egregious, or in the SEC’s view “would send an important message.” Additionally, the SEC plans to seek higher penalties in order to warn and deter others from similar conduct. And “[o]ne of the most potent tools … [is] imposing a bar on an individual” from the securities industry or as serving as an officer or director of a public company. She recognizes that more people will say: “‘We’ll see you in court.’ But that will not deter us,” she asserts.
In addition to continuing the insider trading and microcap investigations which have come in record numbers over the past four years, the SEC will focus on hedge, private equity and mutual funds and on “financial statement and accounting fraud.” Indeed, the SEC recently created a special Financial Reporting and Audit Task Force to concentrate on corporate financial statements. Additionally, the SEC will bring actions “in the new markets and regulatory regimes” resulting from the Dodd-Frank and JOBS Acts.
Now more than ever, individuals and companies alike must be prepared to actually go to trial, if the SEC demands unreasonable admissions, penalties or bars from continued employment. Experienced securities trial counsel, not just securities enforcement attorneys, should be part of your defense team from the outset. If the SEC knows and respects your trial counsel, you may be less apt to have to go to trial and more apt to be able to reach an acceptable accommodation.