J. RANDLE HENDERSON. ATTORNEY at LAW F. M. 529 SUITE HOUSTON, TEXAS Ph Facsimile

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1 J. RANDLE HENDERSON ATTORNEY at LAW F. M. 529 SUITE HOUSTON, TEXAS Ph Facsimile FINANCIAL PROFESSIONALS 2012 YEAR IN REVIEW 2012 saw a number of developments and trends that should be of interest and concern to financial professionals. This presentation will focus on primarily the lengths to which the regulatory agencies have targeted, investigated and prosecuted analysts, brokers-dealers, investment advisors, lawyers and other professionals (and not so professional). Many events over the last four to five years not only show a shift in strategies employed but attitudes developed by the various regulators, and how financial professionals must be aware how their actions are coming under more and more scrutiny of agencies with criminal jurisdiction. Securities and Exchange Commission. Madoff and Stanford are the usual suspects when massive fraud affecting thousands of investors comes to mind. However, the SEC has brought enforcement cases both as federal court actions and administrative actions (with the law judges employed by the SEC) in cases seeking as little as

2 $15,000 in disgorgement and fines. Sarbanes-Oxley and Dodd-Frank encouraged the SEC to seek maximum civil penalty fines and set forth a Three-tier range of maximum fine amounts depending on the severity and frequency of the alleged violations. Mini-Ponzi schemes, insider trading, pump-and-dump and Foreign Corrupt Practices Act cases litter the website daily with details of new actions described on the Litigation and Administrative Proceedings links. Unless the SEC determines that an action must be filed in federal court without notice to the defendants, most targets of an investigation are notified via a Wells Notice from the Division of Enforcement that it intends to recommend to the Commission that an action be brought seeking various forms of relief, including disgorgement and civil penalties. Although recipients of Wells Notices are given an opportunity to respond with reasons why an action should not be brought against them, the number of responses is very low. Irrespective whether a response is made, the initiating of an enforcement action by the Commission is rarely tempered by the effects of a Wells response. SEC and Department of Justice Cooperation. Historically the SEC would determine whether an investigation at some point should be referred to the DOJ for possible criminal prosecution. Generally this procedure bode well for the target because either the SEC staff did not want to expend time on preparing a Criminal Referral to DOJ or DOJ had little taste for a case not generated by the FBI, IRS or Postal Inspector criminal divisions.

3 Since the inception of the Holder-DOJ, the SEC and DOJ frequently work together early in the SEC s investigation so that the hand-off from SEC to DOJ is more efficient and criminal prosecution expedited. For example, with the fall of Stanford Financial in February 2009, the FBI and SEC began working together at the moment that the Receiver seized the assets of Stanford and closed its doors. Plea agreements were reached as early as April 2009 and the rest is a matter of public knowledge. One draconian spawn of the Stanford fiasco was the DOJ s privately announced policy of investigating ABCs, Anybody with a Bar Card. DOJ has assumed that major financial fraud cannot be carried out without substantial assistance from lawyers and accountants. In May 2012 a former Stanford employee appeared before the DOJ, IRS, Department of Labor, United States Attorney and FBI in Houston. At the conclusion of the meeting no agency expressed any interest in pursuing the former employee; however, on August 31, 2012 the SEC brought actions against four (4) former Stanford employees in administrative actions seeking to bar those individuals for life from the securities industry and fines in an amount that they could never expect to pay. In the securities regulation arena, it s never over until it s over. Financial Institutions Regulatory Authority (FINRA). FINRA has jurisdiction solely over its member brokers and dealers. It has an array of examination types, ranging from announced bi-annual routine exams to sudden causal exams initiated without warning. Many insider

4 trading and pump and dump cases begin with FINRA s reviewing unusual trading patterns at one or more dealer firms. Because FINRA has limited authority and cannot bring an action against suspected customers, it exerts tremendous pressure on the firms to throw brokers under the bus in hopes of referring suspected customer fraud activity to the SEC for further investigation and prosecution. Individual brokers find themselves in untenable positions: they must cooperate fully or lose their registration with FINRA (followed by a loss of license from the issuing state(s). Texas State Securities Board. TSSB regulates the registration of brokers and advisors in Texas. TSSB has a very aggressive and effective registration and compliance program and uses its personnel to generate millions of dollars in fines which significantly underwrites its enforcement division s search for persons preying upon the gullible and uninformed (and usually greedy) Texas resident investors. Enforcement at the TSSB is more akin to a posse pursuing bank robbers. Primary targets of enforcement are (i) sellers of various forms of oil and gas interests in wells that do not exist or are flawed with title issues, (ii) sellers with past criminal (securities or otherwise) violations/convictions and (iii) professionals (unlicensed salesmen, lawyers, accountants, geologists etc.). The TSSB works closely with the district attorneys in Texas. Although most district or county attorneys do not possess the knowledge to comfortably prosecute a securities criminal action, TSSB has personnel whose only job is to prosecute state criminal actions as specially deputized assistant district

5 attorneys. These individuals carry great sway over the county officers and are difficult to negotiate non-prison time agreements. Summary. The relationship between the financial professional and the regulators (and plaintiff s bar) has unfortunately become very combative and suspicious. There was a time when the examiners assisted firms and individuals with the idea that financial experts had their clients best interests in mind. Now regulation has become a mean game of gotcha played by examiners and investigators who had never worked in or ever seen the inside of a brokerage or advisory firm, much less the professionals daily efforts to do what is best for their client. J. Randle Henderson January 7, 2013