Electronically reprinted from SEC Enforcement Year in Review: Actions and Issues From 2013 By Daniel Marx and Lisa Wood ot since the Great Depression has so While recent years have been defined by much changed so fast. In 2008 and these new securities laws and the unprec- 2009, the global financial crisis dev- edented levels of enforcement activity, the astated securities markets and the past year in particular has featured many financialN services industry. In 2010, Congress new faces in the senior leadership at the SEC responded by enacting the Dodd-Frank Wall and its Enforcement Division. Most notably, Street Reform and Consumer Protection Act in April 2013, Mary Jo White became the (Dodd-Frank Act).1 Since then, the Securities new Chairman of the SEC, replacing for- and Exchange Commission (SEC) has pro- mer Chairman Elisse B. Walter.5 Chairman mulgated a vast array of new securities regula- White brings many years of experience as a tions,2 including regulations to enhance the federal prosecutor, having served as the US oversight of investment advisers.3 In addition, Attorney in Manhattan (from 1993 to 2002) in 2011 and 2012, the Enforcement Division of and Brooklyn (on an acting basis, from 1992 to the SEC brought new enforcement actions at a 1993). The nomination of a long-time prosecu- record-breaking pace, both in administrative tor, who spent much of her career prosecuting proceedings and also in federal court.4 Many high-profile criminal cases from international of these actions targeted investment advisers, terrorism to insider trading, sends a strong sig- from massive firms like The Galleon Group, nal to the investment community that aggres- run by Raj Rajarantam, to much smaller, sive enforcement will remain a central concern, unregistered advisers. if not the top priority, for the SEC. Ms. Wood and Mr. Marx are partners in the Boston office of Foley Hoag LLP. Ms. Wood chairs the Litigation Department and handles complex civil litigation, primarily in the area of securities. Mr. Marx works in the Business Crimes & Government Investigations Practice Group and handles a wide range of enforcement matters, including SEC actions. Ms. Wood and Mr. Marx have represented clients of Foley Hoag’s Investment Advisors and Private Investment Funds Practice Group in many litigation and enforcement matters, and both enjoy speaking and writing about such issues to trade groups and clients. They gratefully acknowledge the assistance of Stephany Collamore, an associate at Foley Hoag, with this article. Within the Enforcement Division, Director or “delinquent filer” actions, rather than new Robert Khuzami stepped down in January matters focusing on the SEC’s “core” concerns, 2013. During his nearly four-year tenure, such as insider trading.12 Nevertheless, the Khuzami oversaw an historic re-organization SEC made headlines with several high-profile of the Enforcement Division, led a Staff that cases in 2013, including its win against Rajat brought thousands of enforcement actions, Gupta, the former global head of McKinsey launched major enforcement initiatives (includ- & Co.;13 its loss at trial against Mark Cuban, ing the SEC’s Cooperation Initiative), and the owner of the Dallas Mavericks;14 and established the Office of the Whistleblower.6 its administrative proceeding against Steven In April 2013, Co-Directors George Canellos A. Cohen, the owner and manager of SAC and Andrew Ceresney took the helm at Capital Advisors, which has been stayed pend- the Enforcement Division.7 Canellos previ- ing the resolution of related criminal prosecu- ously served as the Deputy Director under tions against SAC Capital Advisors and two Khuzami and, before that, as the Director of of its former employees.15 The SEC also settled the New York Regional Office. Ceresney most a major insider trading action against Scott recently worked as the chief appellate lawyer London, a senior audit partner of KPMG in the US Attorney’s Office in Manhattan, and LLP,16 after London pleaded guilty in a related like Khuzami, both Canellos and Ceresney criminal case. worked for White as federal prosecutors, serv- Chairman White has repeatedly stated that, ing on the Securities and Commodities Task going forward, the SEC intends to litigate Force.8 All three can be expected to draw on more cases through trial to verdict.17 She has their shared law enforcement background with emphasized the benefits, for the SEC and the the Justice Department as they lead the SEC investment community, of trying cases: public and its Enforcement Division. trials bring needed visibility and accountabil- In May 2013, Chief Bruce Karpati ity to the enforcement process, thereby advanc- announced his decision to leave the Asset ing the Enforcement Division’s agenda.18 An Management Unit of the Enforcement experienced litigator, White may be embold- Division, which oversees investigations of ened to have her enforcement attorneys take investment advisers, investment companies and more cases to trial, because over the past three private funds.9 Among other initiatives, Karpati years, the SEC has won approximately 80 per- contributed to the Aberrational Performance cent of the time.19 Inquiry, which employs advanced data analy- At the same time, Chairman White has also sis to uncover suspected fraud by hedge fund acknowledged the need for the SEC to pur- managers, as well as the Compliance Program sue settlements in appropriate cases.20 In the Initiative, which focuses enforcement activity future, however, such settlements may increas- on registered investment advisers who repeat- ingly include admissions of guilt. For example, edly fail to implement effective compliance in August 2013, the SEC reached a global programs. A pioneer in combatting hedge settlement that included admissions of guilt fund fraud, Karpati helped to establish the in SEC v. Philip A. Falcone et al. and SEC v. SEC’s Hedge Fund Working Group in 2007. Harbinger Capital Partners, LLC.21 Falcone Co-Chiefs Julie Riewe and Marshall Sprung, admitted that, among other misdeeds, he who served as Deputy Chiefs under Karpati, improperly borrowed more than $100 million have stepped into his shoes.10 Both Riewe and from a fund that Harbinger Capital Partners Sprung have been involved in numerous inves- managed and also granted favorable redemp- tigations and enforcement actions concerning tion and liquidity terms to certain large inves- investment advisers. tors.22 More recently, the SEC settled charges Amidst these many personnel changes at against JPMorgan Chase & Co. alleging that the SEC and in the Enforcement Division, the the investment bank had misstated its financial pace of enforcement actions seems to have results and lacked proper internal controls.23 slowed.11 Between January 2013 and September As part of that resolution, JPMorgan admit- 2013, the SEC filed 526 new cases, but approx- ted certain facts, acknowledged publicly that imately 50 percent of them were “follow-on” it had violated federal securities laws and agreed to pay a civil monetary penalty of $200 against firms and individuals (mostly invest- million. ment advisers), and it has collected more than In summary, over the past year, the SEC $42 million in disgorgement, interest and pen- has actively pursued enforcement actions that alties.26 This program, perhaps more so than reflect both its traditional agenda and also its any other SEC initiative, reflects the “broken current regulatory priorities, such as promot- windows” approach to policing the securities ing basic compliance among investment advis- markets: by aggressively pursuing violators of ers. It has also reckoned with an important Rule 105, the Enforcement Division has tried decision from the Supreme Court concerning to “sen[d] a message that [it] will not tolerate the statute of limitations for enforcement any violations—big or small—that threaten actions, received thousands of complaints and the integrity of the capital raising process.”27 tips from whistleblowers and adopted new Consistent with this “zero tolerance” enforcement tactics, most notably its first approach, on September 17, 2013, the SEC deferred prosecution agreement with a fund announced charges against 23 firms and administrator who engaged in fraud but then one individual for violations of Rule 105.28 assisted the Enforcement Division with catch- Director Ceresney heralded this “crackdown” ing bigger fish. Like the dynamic securities by the Enforcement Division, stating that markets themselves, the enforcement activities “[t]he benchmark of an effective enforcement of the SEC have continued to evolve. program is zero tolerance for any securities law violations, including violations that do not require manipulative intent.”29 Andrew I. The SEC’s Enforcement Priorities Bowden, who heads the National Examination In addition to actively pursuing its tra- Program, emphasized the “coordination ditional agenda, such as combating insider between the enforcement and examination trading and outright fraud, over the past programs,” which “reaffirms that market par- year, the SEC brought many new cases that ticipants must be in compliance with Rule 105 clustered around several key rules and repre- to preserve and protect the independent pric- sented current priorities for the Enforcement ing mechanisms of the securities market.”30 Division concerning investment advisers: Rule This most recent wave of Rule 105 actions 105 of Regulation M, the Compliance Rule, ran the gamut from large cases, featuring the Custody Rule and valuation issues.