Prosecutorial Priorities — A Litigation Laundry List for 2010

If you want to fill a ballroom with corporate officers and board members, invite the SEC and Department of Justice for breakfast.   

Larry Ranello of PricewaterhouseCoopers and Paul Bessette of GreenbergTraurig led the annual Directors Roundtable outlook on securities enforcement and litigation, featuring a local perspective by Stephen Korotash, associate regional director in the Fort Worth office of the U.S. Securities and Exchange Commission and Alan Buie, assistant U.S.Attorney, Criminal Fraud Section for the Northern District of Texas.

It’s a heads up on areas of compliance-related hot spots for the coming year — a very helpful stay-out-of-jail guide, if you will, for those charged with governance of public companies and investment vehicles, as well as those professionals inside the company in accounting finance and audit roles.  This will not be the year for a CFO to scrimp on a skeleton crew.   

Here are some highlights:

  • A new multi-agency initiative has been formed, The President’s Corporate Fraud Task Force.  This is the prism through which the federal government will view fraud, with much more cooperation and collaboration of various government agencies.
  • Hot buttons for the Department of Justice local federal prosecutors will include scrutiny of financial reporting, SEC filing misrepresentation and close attention to insider trading.
  • Electronic media has provided a ”treasure trove” for the U.S. Attorney’s office.  Company emails are quick and easy to obtain — with evidence neatly laid out and sortable by subject, sender, recipient, date/time.  ”That’s where the bodies are buried,” declared Buie.  ”You can’t beat it.”
  • The SEC, chastened by the failure to note or stop Bernie Madoff’s high-end ponzi scheme is poised to come roaring back, prompted by an internal re-organization and the aggressive leadership of Robert Khuzami, former chief of the securities fraud unit at the U.S. attorney’s office in Manhattan, as the new head of the Enforcement Division.
  • Already the SEC has increased its enforcement activities — with double the formal orders, emergency actions and 50 more investigations than in the previous year.
  • The ”tone at the top” of SEC is prosecutorial.  They are targeting tough, swift action and a surge in productivity.
  • Expect an emphasis on individuals, not just corporations, particularly what Korotash describes as the gatekeepers — board members and company officers.      
  • The SEC has restructured with emphasis on specialization, decentralization and less bureaucracy.   Opening a case no longer requires Washington approval.  It only takes one day to launch an investigation.
  • Hedge funds are at the top of the list for potential SEC investigations, as their purpose is to seek an “unfair market advantage,” according to Korotash. 
  • Other areas of focus for the coming year include:  private equity, investment advisors, insider trading, market abuse, structured/new products, municipal securities and public pensions.
  • The SEC is expanding its arsenal of prosecutorial tools, taking a cue from traditional criminal investigations that cooperation and plea bargaining.  They will be seeking whistleblowers (i.e., controllers, financial reporting managers, internal auditors, etc.) who will “come in first” to help with the investigation in exchange for favorable sentencing consideration.  There will be more effective subpoena power available to the agencies under the new Task Force umbrella.
  • There will also be an emphasis on returning money to shareholders as a result of restatements.  Watch for actions requiring reimbursement of bonuses paid to C-level executives.  No wrongdoing need be demonstrated in order to enforce this correction in favor of investors.  

In general, the governmental agencies are adding teeth to their enforcement oversight.

Best sound bite of the day was from the SEC’s Korotash, recounting a discussion with his young daughter on the importance of a strong work ethic:  ”Why does Daddy work so hard?”

“To make up for Madoff,” she postured.  How perfectly fitting.

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Copyright © 2012 Nancy Keene