SEC Focus On Administrative Proceedings: Midyear Checkup

Transcription

1 Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY Phone: Fax: SEC Focus On Administrative Proceedings: Midyear Checkup Law360, New York (May 27, 2015, 10:25 AM ET) -- Enforcement activity in the first half of fiscal year 2015 indicates that the U.S. Securities and Exchange Commission is on track for another strong year of new enforcement actions filed. The SEC continues to bring the vast majority of its enforcement cases as commission administrative proceedings before administrative law judges, a venue that has received intensifying scrutiny for allegedly favoring the SEC. In the past two years, the SEC has increased its use of administrative proceedings for many areas the commission designates high priority. Growing Use of Administrative Proceedings Fiscal year 2014 (ending Sept. 30, 2014) saw a record level of enforcement activity by the SEC. The commission initiated almost 1,000 new investigations and filed 755 new enforcement actions. The majority of the enforcement actions were filed in the second half of the fiscal year, consistent with historical trends. Data collected on new enforcement actions in the first half of fiscal year 2015 (October 2014 through March 2015) show that the high level of enforcement activity continues. In the first half of fiscal year 2015, the SEC filed over 300 new enforcement actions, on par with the 310 new enforcement actions filed in the same period a year earlier. The SEC also remained committed to bringing new actions primarily as administrative proceedings. The number of cases filed as administrative proceedings has increased steadily in the past five years. Prior to the passage of the Dodd-Frank Act in 2010, the SEC historically brought approximately 60 percent of its new cases as administrative proceedings. In contrast, over 80 percent of the new enforcement actions in the first half of fiscal year 2015 were filed as administrative proceedings, consistent with the trend observed in 2014 and higher than any previous year.

2 SEC Enforcement Actions by Fiscal Year % 36% 37% 31% 19% 18% 63% 64% 63% 69% 81% 82% FY 2010 FY 2011 FY 2012 FY 2013 FY H FY 2015 Focus on SEC-Designated High-Priority Areas In a May 2015 speech, Andrew Ceresney, the director of the SEC s Division of Enforcement, commented that the overriding goal of the division is to achieve strong and effective enforcement of the federal securities laws in a fair and efficient manner and that, in deciding where to file its enforcement actions, the division would recommend the forum that would best utilize the Commission s limited resources. [1] The SEC recently issued guidance on the factors it considers when determining whether to bring a case in federal district court or in a commission administrative proceeding.[2] The guidelines illustrate that the SEC has substantial discretion in choosing where to file a case. Despite continued criticism of the administrative proceeding forum, the SEC significantly increased its use of this venue for enforcement areas it has designated high priority. In particular, cases involving allegations of insider trading, violations of the Foreign Corrupt Practices Act and violations of financial reporting and issuer disclosure have increasingly been filed in the administrative proceeding venue. Insider Trading In the first half of fiscal year 2015, insider trading cases designated by the SEC as a high priority for the year[3] were increasingly brought as administrative proceedings. In fiscal year 2013, the SEC filed only 2 percent of its insider trading cases as administrative proceedings. In contrast, it filed 23 percent

3 of these cases as administrative proceedings in fiscal year In the first half of 2015, the portion of insider trading enforcements filed as administrative proceedings was 35 percent. Insider Trading Enforcement Actions by Fiscal Year % 84% 90% 98% 77% 35% 23% 16% 10% 2% FY 2011 FY 2012 FY 2013 FY H FY 2015 Ceresney recently stated that the vast majority of the uptick in administrative proceedings results from SEC actions that were filed and settled simultaneously.[4] This trend is evident in the insider trading cases filed in the first half of fiscal year Of the six cases filed as administrative proceedings, five settled on the same day. By comparison, only five of the 11 insider trading cases filed as civil court actions settled on the same day. One possible explanation for the growing trend in administrative proceedings is that the SEC is settling more insider trading cases simultaneous to filing charges, and it uses the administrative proceeding venue as a matter of convenience. A contributing factor to the increase of concurrent settlements could be a defendant s apprehension toward litigation in the administrative proceeding forum. Foreign Corrupt Practices Act The SEC has also increasingly brought FCPA cases as administrative proceedings. Of the nine FCPA actions filed thus far in fiscal year 2015, eight (89 percent) were filed as administrative proceedings. This compares to 57 percent in fiscal year 2014 and only 20 percent in fiscal year Unlike the insider trading trend, all of the FCPA cases in 2013, 2014 and thus far in 2015 regardless of litigation forum have settled simultaneous to charges being filed. This consistency in concurrent settlements with charges filed demonstrates that the increasing use of administrative proceedings is likely not driven by settlement efficiency.

4 FCPA Enforcement Actions by Fiscal Year FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 To Date In addition to the increasing use of the administrative forum for FCPA cases, the SEC has brought more FCPA cases thus far in fiscal year 2015 and more cases against individuals than it did in all of fiscal year In a November 2014 speech, Ceresney commented that in the FCPA arena [the SEC is] very focused on attempting to bring cases against individuals due to the larger deterrent impact, but will continue to bring actions against companies.[5] He also stated that the SEC had a robust pipeline of investigations into FCPA violations. This pipeline has resulted in substantially more SEC actions related to FCPA violations filed in fiscal year 2015 compared to At just over halfway through fiscal year 2015, the SEC has already filed nine new FCPA enforcement actions, compared to only seven in all of fiscal year And, as projected by Ceresney in his November 2014 speech, two of these nine 2015 actions are against individuals. By comparison, there were no FCPA actions filed against individuals in fiscal years 2013 or The increasing number of actions filed in 2015 combined with the focus on individuals could materialize into a strong deterrent impact. Financial Reporting and Issuer Disclosure The SEC has publicized an increased focus on financial reporting fraud, beginning with the formation of the Financial Reporting and Audit Task Force in July As Chairwoman Mary Jo White highlighted in February 2015, the SEC experienced a 40% jump in financial reporting cases filed in 2014.[6] Consistent with the trends in other high-priority areas discussed above, the SEC has also shifted financial reporting cases from civil court actions to administrative proceedings.

5 In fiscal years 2011 through 2013, 57 percent of the enforcement actions brought by the SEC for financial fraud and issuer disclosure violations were filed as administrative proceedings. In fiscal year 2014, the first full fiscal year after the formation of the task force, this number increased substantially to 88 percent of the cases filed. Financial fraud cases can involve complex accounting issues that frequently require assistance from experts, and the additional time available for preparation and pre-trial discovery in federal court (relative to an administrative proceeding) is extremely valuable. Therefore, this shift to the administrative proceeding forum could prove burdensome for financial fraud defendants. Looking forward, financial reporting actions predominantly brought as administrative proceedings are expected to increase. The accounting and auditing enforcement releases (AAERs) filed in the first half of fiscal year 2015 serve as a good indicator of this trend. Of the 55 AAERs filed in the first half of fiscal year 2015, 93 percent were filed as administrative proceedings. This compares to only 74 percent of the 43 AAERs filed as administrative proceedings in the same period in fiscal year 2014, and only 63 percent of the 35 releases filed in the same period in fiscal year Accounting and Auditing Enforcement Releases by 1H Fiscal Year % 37% 26% 93% 63% 74% 1H FY H FY H FY 2015 By Sara Gilley, Heather Lazur and Alberto Vargas, Cornerstone Research Sara Gilley is a principal in the Chicago office of Cornerstone Research. Heather Lazur is a manager in the firm s Boston office. Alberto Vargas is an associate in the firm s Washington, D.C., office.

6 The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. [1] Andrew Ceresney, director, SEC Division of Enforcement, Keynote Speech at New York City Bar 4th Annual White Collar Institute, May 12, 2015, [2] SEC Enforcement Division, Division of Enforcement Approach to Forum Selection in Contested Actions, [3] Mary Jo White, chairwoman of the SEC, Chairman s Address at SEC Speaks 2015, Feb. 20, 2015, [4] Andrew Ceresney, director, SEC Division of Enforcement, Keynote Speech at New York City Bar 4th Annual White Collar Institute, May 12, 2015, [5] Andrew Ceresney, director, SEC Division of Enforcement, Remarks at 31st International Conference on the Foreign Corrupt Practices Act, Nov. 19, 2014, [6] Mary Jo White, chairwoman of the SEC, Chairman s Address at SEC Speaks 2015, Feb. 20, 2015, All Content , Portfolio Media, Inc.