ETHICAL AND OTHER RECENT DEVELOPMENTS IN NSTITUTE FINANCIAL I REGULATION AND LITIGATION Prepared in connection with a Continuing Legal Education course presented CLE at New York County Lawyers’ Association, 14 Vesey Street, New York, NY scheduled for May 24, 2011. Program Co-Sponsor: NYCLA’s Federal Courts Committee PROGRAM CHAIR AND FACULTY: Vincent T. Chang, Wollmuth Maher & Deutsch LLP FACULTY: Gordon Eng, Debevoise & Plimpton LLP NYCLA Craig Carpenito, Alston + Bird, LLP Sarah Warren, Fried, Frank, Harris, Shriver & Jacobson LLP 3 TRANSITIONAL AND NON-TRANSITIONAL MCLE CREDITS: This course has been approved in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 3 Transitional and Non-Transitional credit hours; 1.5 Ethics; 1.5 Professional Practice This program has been approved by the Board of Continuing Legal Education of the Supreme Court of New Jersey for 3 hours of total CLE credit. Of these, 1.5 qualify as hours of credit for ethics/professionalism, and 0 qualify as hours of credit toward certification in civil trial law, criminal trial law, workers compensation law and/or matrimonial law. Information Regarding CLE Credits and Certification Ethical and Other Recent Developments in Financial Litigation May 24, 2011, 6:00PM to 9:00PM The New York State CLE Board Regulations require all accredited CLE providers to provide documentation that CLE course attendees are, in fact, present during the course. Please review the following NYCLA rules for MCLE credit allocation and certificate distribution. i. You must sign-in and note the time of arrival to receive your course materials and receive MCLE credit. The time will be verified by the Program Assistant. ii. You will receive your MCLE certificate as you exit the room at the end of the course. The certificates will bear your name and will be arranged in alphabetical order on the tables directly outside the auditorium. iii. If you arrive after the course has begun, you must sign-in and note the time of your arrival. The time will be verified by the Program Assistant. If it has been determined that you will still receive educational value by attending a portion of the program, you will receive a pro-rated CLE certificate. iv. Please note: We can only certify MCLE credit for the actual time you are in attendance. If you leave before the end of the course, you must sign-out and enter the time you are leaving. The time will be verified by the Program Assistant. Again, if it has been determined that you received educational value from attending a portion of the program, your CLE credits will be pro-rated and the certificate will be mailed to you within one week. v. If you leave early and do not sign out, we will assume that you left at the midpoint of the course. If it has been determined that you received educational value from the portion of the program you attended, we will pro-rate the credits accordingly, unless you can provide verification of course completion. Your certificate will be mailed to you within one week. Thank you for choosing NYCLA as your CLE provider! New York County Lawyers’ Association Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646 Ethical and Other Developments in Financial Litigation Tuesday, May 24, 2011 6:00 PM – 9:00 PM Table of Contents SEC Enforcement Developments, by Gerald Russello Litigation Implications of the Financial Crisis, by Vincent Chang H.R. 4173, submitted by Sarah Warren Ethics Materials, compiled by Gordon Eng Faculty Biographies New York County Lawyers’ Association Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646 Ethical and Other Recent Developments in Financial Regulation and Litigation Tuesday, May 24, 2011, 9:00 AM – 12:00 PM Program Co-sponsor: NYCLA’s Federal Courts Committee Moderator & Faculty: Vincent T. Chang, Wollmuth Maher & Deutsch LLP Faculty: Gordon Eng, Debevoise & Plimpton LLP; Craig Carpenito, Alston + Bird, LLP; Sarah Warren, Fried, Frank, Harris, Shriver & Jacobson LLP AGENDA 5:30 PM – 6:00 PM Registration 6:00 PM – 6:10 PM Introductions and Announcements 6:10 PM – 7:00 PM Recent Developments in Financial Regulation Craig Carpenito, Alston + Bird, LLP; Sarah Warren, Fried, Frank, Harris, Shriver & Jacobson LLP 7:00 PM –7:10 PM BREAK 7:10 PM – 8:00 PM Recent Development in Financial Litigation Vincent T. Chang, Wollmuth Maher & Deutsch LLP 8:00 PM – 8:10 PM BREAK 8:10 PM – 8:50 PM Ethical Developments Gordon Eng, Debevoise & Plimpton LLP 8:50 PM – 9:00 PM Questions from the Audience SEC Enforcement Developments NYCLA March 29, 2011 Gerald J. Russello Partner 1 New Enforcement Division Units • Announced on Aug. 5, 2009 and heads for each division named on Jan. 12, 2010 • Asset Management (Bruce Karpati and Robert B. Kaplan) – Focus on investment advisors, investment companies, hedge funds, and private equity funds – Disclosure, valuation, portfolio performance, transactions with affiliates, due diligence and diversification, transactions with affiliates, misappropriation and conflicts of interests • Market Abuse (Daniel M. Hawke) – Focus on preventing market abuses and complex manipulation schemes, including insider trading – Unit will use tools to target suspicious activity across markets, including equities, debt securities and derivatives, and across different corporate announcements and market events • Structured and New Products (Kenneth R. Lench) – Focus on complex derivatives and financial products, including CDS, CDOs, securitized products and newly-developing products • Foreign Corrupt Practices Act (Cheryl J. Scarboro) – Focus on new and proactive approaches to identifying violations of the FCPA – Unit will take a more global approach to these violations by working with foreign counterparts • Municipal Securities and Public Pensions (Elaine C. Greenberg) – Focus on potential abuses in municipal securities including offering and disclosure issues, tax and arbitrage activity, unfunded or underfunded liabilities and “pay to play” schemes Gerald J. Russello Partner Bingham McCutchen LLP 2 Cooperation Guidelines • SEC announced measures to strengthen its enforcement program by encouraging greater cooperation. • Initiative establishes a structure for individuals and companies to truthfully cooperate and assist: – Could result in increased credit – Oral Assurances that Staff will not recommend charges – Cooperation Agreements/Deferred Prosecution/Non-Prosecution Agreements – Carter’s case first example of this new approach – Effects of the new policy remain to be seen • SEC provided an analytical framework to evaluate whether, how much, and in what manner to credit cooperation: – Assistance Provided – Importance of Matter – Interest in Holding Party Accountable – Profile of the Individual Gerald J. Russello Partner Bingham McCutchen LLP 3 Recent Cases in Aftermath of Economic Crisis: Disclosures • SEC v. Mozilo (2009) – Charged former Countrywide CEO Angelo Mozilo and several other Countrywide officers with securities fraud for misleading investors about the significant credit risks being taken in an effort to build and maintain the company’s market share. – Investors were assured Countrywide was a prime quality mortgage lender, when in fact, Countrywide was writing increasingly risky loans and the senior executives knew defaults and delinquencies would rise. – Mozilo also charged with insider trading. – Mozilo settled for $67.5 million in penalties and disgorgement-- the highest fine ever given to an executive of a public company. Gerald J. Russello Partner Bingham McCutchen LLP 4 SEC v. Goldman Sachs & Co. (2010) • Alleged Goldman structured and marketed a synthetic CDO tied to performance of subprime residential mortgage-backed securities (RMBS) – Goldman failed to disclose important information about the CDO, specially, the role a major hedge fund, Paulson & Co., played in the portfolio selection process and the fact it had taken a short position against the CDO. – Paulson shorted the portfolio it helped select by entering into credit default swaps with Goldman to buy protection on certain layers of the CDO capital structure. Thus, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. – Goldman paid $550 million to settle the charges. – Investigation into these structures is continuing. Gerald J. Russello Partner Bingham McCutchen LLP 5 Recent Cases: Sales Practices • SEC v. ICP Asset Management (2010) – SEC charged the investment advisor and three affiliated firms with fraudulently managing investment products tied to the mortgage markets. – At the direction of its owner and president, ICP defrauded four CDOs by directing more than a billion dollars of trades for them at inflated prices. – ICP repeatedly caused the CDOs to overpay for securities in order to make money for ICP clients and protect other clients from realizing losses. – ICP caused the CDOs to lose tens of millions of dollars while obtaining millions in advisory fees and profits. – Court recently denied motion to dismiss. Gerald J. Russello Partner Bingham McCutchen LLP 6 Recent Cases: Sales Practices • SEC v. State Street Bank (2010) – Alleged to have mislead investors during the subprime mortgage crisis about the extent of subprime mortgage-backed securities held in certain funds under management and selectively disclosed more complete information about subprime investments to certain investors. – State Street established a fund in 2002