The Latest Wave of Securities Enforcement Actions And What To Do About It Robert Kent Chicago, IL 6 June 2012
Regulatory and Enforcement Environment
Regulatory and Enforcement History Looking Back on a Decade of Major Milestones Events of 9/11 Enron/Arthur Andersen/corporate cooperation/dpas Eliot Spitzer > SEC vows never again FCPA surge / UK Bribery Act / global anti-corruption movement Financial Crisis of 2008/Madoff > SEC vows never again again Enforcement authorities reorganize and get aggressive SEC, DOJ and FINRA Latest wave of insider trading cases Dodd Frank Act whistleblower bounty rules 2011 Baker & McKenzie 3
Financial Fraud Enforcement Trends SEC better funded and more aggressive than ever Under pressure to produce New cooperation o mechanisms: s DPAs, NPAs, oral assurancesa Special Units: (1) Market Abuse; (2) Foreign Corrupt Practices; (3) Structured and New Products; (4) Municipal Securities and Public Pensions; and (5) Asset Management Bolstered by FINRA s Office of Fraud Detection and Market Intelligence Aggressive enforcement against reverse merger China companies SEC Enforcement Division brought 735 enforcement actions in 2011 a 9% increase over 2010 Seven good Dodd Frank whistleblower reports each day 2011 Baker & McKenzie 4
Financial Fraud Enforcement Trends DOJ continues to be aggressive Fraud Section has reorganized into units specializing in: (1) Securities and Commodities Fraud; (2) FCPA; and (3) Health Care Fraud FCPA prosecutions continue to be on the rise USAO for the SDNY is aggressively prosecuting insider trading Greater cooperation, both domestically and internationally End result: more prosecutions of both companies and individuals for securities related offenses, and bigger penalties 2011 Baker & McKenzie 5
Surge in Insider Trading Prosecutions The USAO for the SDNY has criminally charged approximately 54 defendants for insider trading in the past two years, and to date has secured convictions of approximately 50 defendants In 2011 the SEC brought 57 insider trading actions against 124 individuals and entities Use of aggressive investigative techniques, including wiretaps Focus on hedge funds and expert networks Courts are meting out lengthy sentences On October 13, 2011, Raj Rajaratnam received the longest ever sentence imposed for insider trading: 11 years Dodd Frank Act expanded insider trading liability Other jurisdictions are also aggressively pursuing insider trading (e.g., g U.K., Hong Kong) 2011 Baker & McKenzie 6
Foreign Corrupt Practices Act Background FCPA was a post-watergate reform (enacted in 1977) A US federal securities statute with criminal (DOJ) and civil penalties (SEC) Punishes bribery of foreign government officials and for US issuers, inaccurate financial records and inadequate internal controls Applies to issuers, US domestic concerns and persons/entities conspiring with them or who take an act in furtherance in the US Very little enforcement until 2004, then annual number of enforcement actions went from 5 per year to approximately 50 in each of 2010 and 2011 2011 Baker & McKenzie 7
Anti-Corruption Enforcement Surge Corporations pay increasingly gy huge settlements More than $1 billion in penalties collected in 2010 Several hundred million dollars in 2011 8 out of top 10 cases have been in 2010 and 2011 Penalties can lead to collateral consequences such as debarment, damage to reputation and decreased shareholder value Individuals regularly receive multi-year sentences Other enforcement authorities get in the act Increasingly aggressive e prosecution o theories es Omega Advisors, Inc., Frederic Bourke and the ostrich instruction 2011 Baker & McKenzie 8
Hallmarks of an Effective Compliance Program
The Essential Elements of Corporate Compliance Leadership Risk Assessment Standards and Controls Training and Communication Monitoring, Auditing and Response 2011 Baker & McKenzie 10
The Essential Elements of Corporate Compliance (cont d) USSG s 7 Elements of an Effective Compliance Program 1. Standards and procedures to prevent and detect criminal conduct 2. Leaders understand / oversee the compliance program to verify effectiveness and adequacy of support; specific individuals vested with implementation authority / responsibility 3. Deny leadership positions to people who have engaged in misconduct 4. Communicate standards and procedures of compliance program, and conduct effective training 5. Monitor and audit; maintain reporting mechanism 6. Provide incentives; discipline misconduct 7. Respond quickly to allegations and modify program NOTE: A general provision requires periodic assessment of risk of criminal conduct and appropriate steps to design, implement, or modify each element to reduce risk 13 Good Practices by the OECD on Internal Controls, Ethics, and Compliance 1. Risk assessment as basis for effective internal controls and compliance program 2. Policy that clearly and visibly states bribery is prohibited 3. Training periodic, documented 4. Responsibility individuals at all levels should be responsible for monitoring 5. Support from senior management strong, explicit and visible 6. Oversight by senior corporate officers with sufficient resources, authority, and access to Board 7. Specific risk areas promulgation and implementation programs to address key issues 8. Business partners due diligence 9. Accounting effective internal controls for accurate books and records 10. Guidance provision of advice to ensure compliance 11. Reporting violations confidentially with no retaliation 12. Discipline for violations of policy 13. Re-assessment regular review and necessary revisions UK s 6 Principles for Adequate Procedures 1. Proportionate procedures 2. Top level commitment 3. Risk assessment 4. Due diligence 5. Communication 6. Monitoring and review 2011 Baker & McKenzie 11
Essential Elements of a Compliance Program 1. Leadership Governance Tone at t/f from the top Compliance responsibilities 2. Risk Assessment Foundation of a program External and internal risks 3. Standards and Controls Globalized Code of Conduct Written policies and procedures 2011 Baker & McKenzie 12
Essential Elements of a Compliance Program (cont d) 4. Training and Communication Determining i the right training i matrix Keeping it fresh 5. Oversight The challenge of monitoring Investigation protocols Remediation and compliance opportunities 2011 Baker & McKenzie 13
Questions? 2011 Baker & McKenzie 14