Post on 10-Jul-2020
SEC Investigations: Common Misconceptions
and Mistakes, Designing a Successful Response
Strategy
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.
THURSDAY, MAY 21, 2020
Presenting a live 90-minute webinar with interactive Q&A
Daniel M. Hawke, Partner, Arnold & Porter, Washington, D.C
Arthur Luk, Partner, Arnold & Porter, Washington, D.C
Tips for Optimal Quality
Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, you may listen via the phone: dial
1-877-447-0294 and enter your Conference ID and PIN when prompted.
Otherwise, please send us a chat or e-mail sound@straffordpub.com immediately
so we can address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the ‘Full Screen’ symbol located on the bottom
right of the slides. To exit full screen, press the Esc button.
FOR LIVE EVENT ONLY
Continuing Education Credits
In order for us to process your continuing education credit, you must confirm your
participation in this webinar by completing and submitting the Attendance
Affirmation/Evaluation after the webinar.
A link to the Attendance Affirmation/Evaluation will be in the thank you email
that you will receive immediately following the program.
For additional information about continuing education, call us at 1-800-926-7926
ext. 2.
FOR LIVE EVENT ONLY
Program Materials
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the link to the PDF of the slides for today’s program, which is located
to the right of the slides, just above the Q&A box.
• The PDF will open a separate tab/window. Print the slides by clicking on the
printer icon.
FOR LIVE EVENT ONLY
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved
arnoldporter.comarnoldporter.com
Responding to an SEC Investigation: Five Common Misconceptions
Daniel M. Hawke
Arthur Luk
May 21, 2020
arnoldporter.comarnoldporter.com
Today’s Presenters
Daniel M. Hawke
• Chief, Market Abuse Unit, SEC Division of Enforcement (2010-15)• Director, SEC Philadelphia Regional Office (2006-14)• Counsels clients on all manner of SEC enforcement, examination and
regulatory policy matters
Arthur Luk
• Counsel to corporations; directors, officers, and executives; and “Big 4” accounting firms and individual auditors
• Represents clients in investigations conducted by the SEC, DOJ, and PCAOB.
6
arnoldporter.comarnoldporter.com
© Arnold & Porter Kaye Scholer LLP 2020 All rights reserved. This publication is intended as a general guide only. It does not contain a general legal analysis or constitute an opinion of Arnold & Porter
Kaye Scholer LLP or any member of the firm on the legal issues described. It is recommended that readers not rely on this general guide but that professional advice be sought in connection with
individual matters. Attorney Advertising: Prior results do not guarantee future outcomes.
Today’s Topics
• Overview of SEC Investigations
• Five Misconceptions about SEC investigations
. . . and how to avoid them
7
arnoldporter.com
Overview of SEC Investigations
8
arnoldporter.comarnoldporter.com
SEC Mission
“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and
facilitate capital formation”
9
arnoldporter.comarnoldporter.com
SEC Structure
10
arnoldporter.comarnoldporter.com
SEC Enforcement
• Criminal prosecutions in federal court
• Criminal remedies, including fines and prison
• Parallel investigations with SEC
SEC DOJ
• Civil enforcement actions in federal courts and administrative tribunals
• Civil remedies, including fines
• Primary enforcement body for securities laws
11
arnoldporter.comarnoldporter.com
• Key Statutes oSecurities Act of 1933
oSecurities Exchange Act of 1934
oInvestment Company Act of 1940
oInvestment Advisers Act of 1940
oSarbanes-Oxley Act of 2002
oDodd-Frank Act of 2010
• Rules & RegulationsoCodified in CFR Title 17,
Chapter II (Parts 200-399)
SEC Enforcement
12
arnoldporter.comarnoldporter.com
Each year, the SEC:
• Conducts thousands of investigations
• Initiates hundreds of enforcement actions (826 in FY 2019)
• Collects billions of dollars in fines and disgorgements ($3.2B in FY 2019)
SEC Enforcement
13
arnoldporter.comarnoldporter.com
• Misconduct that may cause investigation: o Misrepresenting or omitting
information about securities
o Market price manipulation
o Stealing customer funds or securities
o Violation of broker-dealer duties
o Insider trading
o Selling unregistered securities
o Accounting fraud
SEC Investigations
14
arnoldporter.comarnoldporter.com
Stages of Investigation
15
arnoldporter.comarnoldporter.com
Administrative Proceedings vs. Civil Actions
• Filed in U.S. District Court
• Orders are enforceable by contempt of court: additional fines, imprisonment
• Broader discovery (e.g., depositions); summary judgment available
• 30% of the SEC’s FY 2019 standalone matters
Administrative Proceedings
Civil Actions
• Instituted before an ALJ
• ALJ makes findings of fact and law; recommends sanction
• Any portion of decision is appealable to the Commission
16
arnoldporter.comarnoldporter.com
Administrative Proceedings vs. Civil Actions
Available Sanctions:
• Injunction prohibiting conduct, or requiring audits, accountings, or supervision
• Civil monetary penalties
• Bars from service as corporate officer or director
• Civil monetary penalties
• Disgorgement
Administrative Proceedings
Civil Actions
Available sanctions:
• Cease & desist orders
• Suspension/removal of registration
• Censures
• Bars from associating with securities industry
• Civil monetary penalties
• Disgorgement
17
arnoldporter.comarnoldporter.com
Monetary Sanctions
Monetary Sanctions FY 2015-19
Source: Enforcement Division Annual Report for FY 2019
18
arnoldporter.comarnoldporter.com
Non-Monetary Sanctions
Non-monetary sanctions in FY 2019
• “Undertakings” to encourage compliance and prevent future misconduct
• 595 bars and suspensions of officers, directors, and accredited securities professionals
• Suspended trading for 271 securities issuers
• 31 court-ordered asset freezes
19
arnoldporter.com
SEC Investigations:Five Common Misconceptions
20
arnoldporter.com
Misconception 1:
“Staff” = “Commission”
21
arnoldporter.comarnoldporter.com
Misconception 1: “Staff” = “Commission”
• Commission = the five commissioners
• Presidentially appointedo Five-year terms
o Principal “officer of the United States”
• Sitting as deliberative body, makes final decisions on enforcement actions and rules
The Staff The Commission
• Everyone at the SEC other than the commissioners
• 1400 enforcement staff: home office, 11 field offices
• Responsible for conducting investigations
• Make recommendations to commission
22
arnoldporter.comarnoldporter.com
Misconception 1: “Staff” = “Commission”
The Staff:
• Investigates – it spends more time developing views on the facts, applicable law
• Presents enforcement recommendations to commissioners and their counsel o …but only two weeks before commission’s vote
• Before that time, does not know commissioners’ views of the matter
23
arnoldporter.comarnoldporter.com
Misconception 1: “Staff” = “Commission”
The Commission:
• Usually approves Staff recommendations in routine cases
• But controversial or novel cases can produce departures from Staff recommendations
24
arnoldporter.comarnoldporter.com
Misconception 1: “Staff” = “Commission”
Recommendations
• Know individual commissioner views o Speeches, dissents, writings
• Understand their economic, financial and political perspectives
• Enforcement staff know these things; you should too
25
arnoldporter.com
Misconception 2: The SEC is monolithic
26
arnoldporter.comarnoldporter.com
Certain commonalities do prevail:
• The Staff operates under the aegis of the Commission
• Common legal standards
• Common evidentiary rules
Misconception 2: The SEC is monolithic
27
arnoldporter.comarnoldporter.com
But there are differences:
• Different enforcement groups, units, and regional offices
• Different dockets
• Different cultures
• Different priorities and approaches to investigations
Misconception 2: The SEC is monolithic
28
arnoldporter.comarnoldporter.com
Misconception 2: The SEC is monolithic
Five Specialized Units in the Enforcement Division
1. Asset Management Unit
2. Municipal Securities and Public Pensions Unit
3. Complex Financial Instruments Unit
4. Foreign Corrupt Practices Act Unit
5. Market Abuse Unit
29
arnoldporter.comarnoldporter.com
Misconception 2: The SEC is monolithic
11 Regional Offices:
Atlanta, Boston, Chicago, Denver, Fort Worth, Los Angeles, Miami, New York, Philadelphia, Salt Lake City, and San Francisco
30
arnoldporter.comarnoldporter.com
Misconception 2: The SEC is monolithic
Recommendations
• Hundreds of attorneys in enforcement division oKnow the one(s) handling your case
• Understand your Staff attorneyo Flexibility on deadlines and scheduling requests?
o Degree of diligence and thoughtfulness?
o Relevant background experiences?
31
arnoldporter.com
Misconception 3: “Let sleeping dogs lie”
32
arnoldporter.comarnoldporter.com
• Some may think:
o No news is good news
o Contact with Staff could reawaken interest in dormant case
Misconception 3: “Let sleeping dogs lie”
33
arnoldporter.comarnoldporter.com
• But the reality is:
o Staff is accountable for cases
o Must provide periodic reports to superiors
o Most cases not actually dormant
Misconception 3: “Let sleeping dogs lie”
34
arnoldporter.comarnoldporter.com
• Risks of the sleeping dog approach: o Delay in stopping bad conduct
o Overlook interest from criminal authorities
o Months of needless uncertainty (business and personal)
Misconception 3: “Let sleeping dogs lie”
35
arnoldporter.comarnoldporter.com
Misconception 3: “Let sleeping dogs lie”
Recommendations
• Maintain contact with Staff
• Staff cannot discuss specifics but might signal pending closureoIf so: request termination letter
• Understand if case has been deprioritized: chance to resolve
• If case seems inactive but open: prepare for possible criminal investigation
36
arnoldporter.com
Misconception 4: Whether to Escalate
37
arnoldporter.comarnoldporter.com
• The temptation: escalate to more senior Staff supervising the investigation
• Why do this?
o More favorable outcome
o Reduce charges
o Reduce penalties
Misconception 4: Whether to Escalate
38
arnoldporter.comarnoldporter.com
• Director of Enforcement DivisionoFinal approval of recommendations to Commission
• Requesting Director’s review: o High stakes; unpredictable
o Often only one shot
o Often at end of investigations
Misconception 4: Whether to Escalate
39
arnoldporter.comarnoldporter.com
• Consequences of escalationo Review by unit chief or associate director, but also…
o Further review by investigative and trial staff
• Two possibilitieso Good: Staff is more critical; sees weakness
o Bad: Staff sees additional theories, errors, topics for inquiry
Misconception 4: Whether to Escalate
40
arnoldporter.comarnoldporter.com
Misconception 4: Whether to Escalate
Recommendations
• Avoid reflexive escalation
• BUT understand when escalation is warrantedo Be tactical: understand goals of appeal; prospect of success
o Adopt correct tone
o Frame question that is specific, reasonable, and within authority
o Be prepared for consequences
41
arnoldporter.com
Misconception 5: “The Perils of Delay”
42
arnoldporter.comarnoldporter.com
• False hopes for delay: o Staff or Commission might lose
interest
o Other matters may demand attention
• Some delay is inevitable: o Investigation time
o Coordinating parallel proceedings
o Resource constraints
Misconception 5: “The Perils of Delay”
43
arnoldporter.comarnoldporter.com
• But intentional delay likely will backfireo Staff antagonized
o Loss of cooperation credit
o Potential for additional charges
Misconception 5: “The Perils of Delay”
44
arnoldporter.comarnoldporter.com
• Where enforcement action is certain or likely: don’t wait
• With time, Staff positions harden
• Settlement offer may not improve
Misconception 5: “The Perils of Delay”
45
arnoldporter.comarnoldporter.com
Misconception 5: “The Perils of Delay”
Recommendations
• Know that much of the timing is beyond your controlo Prepare for the duration
o 18-22 month average for investigations
o Up to four or five years
• So, be responsive; resolve as quickly as possibleo Seize any chance for early resolution
46
arnoldporter.com
Questions?
47
arnoldporter.comarnoldporter.com
Contacts
Daniel M. Hawke
daniel.hawke@arnoldporter.com+1 202.942.6743
Arthur Luk
arthur.luk@arnoldporter.com+1 202.942.5393
48