Alison Frankel

On Thursday, the Securities and Exchange Commission released its annual report on the activities of the whistle-blower office it established in late 2011, at the direction of the Dodd-Frank Act. The office’s eight lawyers received 3,001 whistle-blower tips in the SEC’s fiscal year 2012, which ended on Sept. 30. A total of 547 tips involved alleged misconduct in corporate disclosure, 465 alleged offering fraud and 457 related to stock manipulation. At least one bore fruit: In August, the SEC made its first bounty payment to a whistle-blower whose tip led to a judgment of more than $1 million. The agency said the whistle-blower office is processing an undisclosed number of additional whistle-blower bounty applications.

In an odd quirk of timing, on the same day that the SEC reported on the whistle-blower tips it has received, it was hit with a $20 million suit by a former member of its own inspector general’s office. David Weber, who was terminated last month from his post as assistant IG for investigations, claims he was fired for blowing the whistle on misconduct by former IG David Kotz, the aggressive ethics cop known for probes of the SEC’s former general counsel David Becker and enforcement director Robert Khuzami.

Weber’s 77-page complaint, filed by his lawyers at Joseph, Greenwald & Laake in federal district court in Washington, portrays the SEC IG’s office as a hotbed of sexual tension and professional backstabbing — irony indeed, considering that the office’s entire purpose is to police the conduct of SEC employees. From Weber’s telling, the top echelon of the IG’s office seemed to spend a disproportionate amount of time on internecine accusations and investigations. His own downfall, he asserts, was triggered by his report to the five SEC commissioners that the acting IG, who allegedly had a sexual history with Kotz, was covering up Kotz’s conflicts of interests in high-profile investigations. (Seriously, the allegations in Weber’s complaint could be the basis of a prime-time soap opera.)

Kotz had already resigned by the time Weber went to the commissioners in March 2012, but Weber claims that the acting IG and other higher-ups in the office began a campaign of retaliation against him. He asserts he was accused of threatening others in the office and stripped of support staff. In May, only five months after Weber began working at the SEC, he was placed on administrative leave and barred from entering his office by armed guards. (According to Weber, the head of SEC security, who participated in the action against him, was himself under investigation by the IG’s office, as was the SEC’s chief operating officer, who signed the order placing Weber on leave.) After Weber was removed from the SEC building, press reports about him wanting to carry a gun to work began to surface. Weber claims in his suit that the press leaks were designed not only to punish him professionally but also to impair his chances of gaining full custody of his three children in a dispute with his first wife.

Weber claims that SEC Chairman Mary Schapiro — also allegedly under IG investigation for lying in congressional testimony — perjured herself when she told Congress in the spring of 2012 that Weber was found to be a security risk. (The security assessment, according to Weber, was conducted by a contractor whose ethics he had questioned, but he claims that the assessment nevertheless concluded that he presented a low risk of violence in the workplace.)

Last April, as a follow-up to revelations that Wal-Mart had allegedly covered up bribes paid by its Mexican subsidiary, the great Corporate Counsel reporter Sue Reisinger ran a very surprising piece. Despite the scandal engulfing Wal-Mart, defense lawyers told Reisinger that the company may have made a strategically smart decision not to disclose the matter to the government. Smart? Really? Would Wal-Mart’s alleged bribery have blown up into a public relations fiasco that cried out for governmental consequences if the company had quietly admitted the facts to the Securities and Exchange Commission or the Justice Department?

I figured Dodd-Frank’s whistle-blower provisions would make corporate self-reporting even more of a no-brainer, since insiders now have not only a moral and legal incentive but also a powerful financial motive to alert the SEC when they suspect wrongdoing. According to BuckleySandler partner Thomas Sporkin, who until last June was chief of the SEC’s Office of Market Intelligence, the commission receives 1.2 whistle-blower tips a day, on average. If I were a corporate official wondering whether to self-report, I’d assume that one of those tips was about my company and run to the feds before they came to me.

But according to several of the most prominent SEC enforcement advisers in Washington, w ho were speaking Thursday at Securities Docket’s Securities Enforcement Forum, corporations should think hard about the decision to confess their sins or handle problems internally. “You have to decide whether the issue merits the government’s involvement,” said William McLucas of Wilmer Cutler Pickering Hale and Dorr in a follow-up phone conversation Friday. Even in an era in which “you have to assume there are no secrets,” McLucas said, problems that fall short of systemic wrongdoing call for judgment, not reflexive confession. “That’s why you have compliance systems and controls,” he said.

For good or ill, one of my themes over the last 18 months has been frustration with the Securities and Exchange Commission’s enforcement efforts. And according to a recently published study by Berkeley Law professor Stavros Gadinis, I’m not alone. Gadinis’s paper, posted Wednesday at the Harvard Law School Forum on Corporate Governance, said that it’s been three decades since any academic analysis of SEC enforcement actions against broker-dealers. In that time, Gadinis wrote, the information vacuum has been filled with complaints about the commission’s perceived foot-dragging and questions about the so-called revolving door between the SEC and private law firms. To add some substance to the discussion, Gadinis undertook what he said was the first systematic examination of SEC enforcement actions against broker-dealers — a category that includes major financial institutions — in 30 years, analyzing more than 400 cases finalized in 1998 and 2005-2007. (Gadinis added 1998 to the study so it would include cases brought in a Democratic administration.) His overall conclusion: Size matters, at least when you’re a broker-dealer facing off against the SEC. According to the prof’s data, firms with more than 1,000 employees fared much better than their smaller counterparts in terms of whether cases are brought against individual defendants; whether the SEC brought cases as administrative proceedings; and what kind of sanctions the SEC extracted.

“Big firms get different treatment,” Gadinis said in a phone interview Thursday. “That could be for many reasons (but) it’s not a nice result for the SEC, which is supposed to be a unbiased regulator of markets. Whatever the motivation, the results are not good.”

Gadinis said it’s too soon to opine on the SEC’s actions since the first four months of 2007, which is when his study ended. He also said that ideally, his data would have included SEC investigations that did not result in enforcement actions, but, as I’ve noted, those aren’t captured in publicly available materials. But with those caveats, Gadinis said his study indicates that, historically, the SEC “is reluctant to bring cases against individuals connected with big firms.”

My hat is off to the four authors of a new study called “Does the Revolving Door Affect the SEC’s Enforcement Outcomes?” which was to be presented Monday at the American Accounting Association. As the New York Times was the first to report, researchers from Emory, Rutgers, the University of Washington and Singapore’s Nanyang Technological University set out to reach a quantitative answer to a question everyone thinks they already know the answer to. Instead, the study found that there’s no measurable impact on enforcement from lawyers moving in and out of the SEC.

I wasn’t surprised that there’s scant statistical evidence of ambitious lawyers at the Securities and Exchange Commission punting on cases to curry favor with future clients; most SEC lawyers expect to go work for law firms, and firms like to hire regulators with a reputation for toughness, not laxity. (Remember the bidding wars for former Enron prosecutors?) But I was taken aback by a secondary finding in the study: Firms with a high concentration of SEC alumni don’t achieve measurably better results than other firms for clients in enforcement actions. That should cause some eyebrows to rise among the clientele of firms like Wilmer Cutler Pickering Hale and Dorr and Paul, Weiss, Rifkind, Wharton & Garrison, which pride themselves on offering clients counsel based on the collective experience of their corps of SEC alums. If clients really aren’t faring any better when they hire firms with specialized SEC enforcement defense practices, why bother to pay for their experience?

But there’s one big reason to take that aspect of the study with a grain of salt. It comes down to the inability of even the most nuanced statistical analysis to measure the unmeasurable.

If you’re the Securities and Exchange Commission, it’s tough to find a silver lining in Tuesday’s jury verdict for Brian Stoker, a onetime midlevel banker at Citigroup. Not only did the eight jurors in federal court in Manhattan determine that Stoker was not liable for misleading investors in a $1 billion collateralized debt obligation, they also offered a backhanded slap at the SEC. “This verdict should not deter the SEC from continuing to investigate the financial industry, to review current regulations, and modify existing regulations as necessary,” the jury said in a highly unusual note accompanying the verdict. For the SEC, which has been roundly criticized for its failure to bring civil charges against executives implicated in the financial crisis, the jury’s note has to read like one more reminder that the public is still waiting for corporate accountability.

But, ironically, the verdict could improve the odds of a 2nd Circuit Court of Appeals ruling that U.S. Senior District Judge Jed Rakoff improperly rejected the SEC’s $285 million settlement with Citi in the agency’s parallel suit against the bank.

As you probably recall, the appeals court has already expressed considerable skepticism about Rakoff’s decision last November to reject the settlement. At the time, Rakoff said he had the right to determine whether the deal was in the public interest. And it wasn’t, he said, because Citi hadn’t acknowledged wrongdoing and was paying what amounted to “pocket change” to make the SEC case go away. The truth matters, Rakoff said in his opinion, and for all he and the public knew, the truth of this case could be that Citi hadn’t actually done anything wrong. For good measure, Rakoff ruled in December that the SEC must proceed with its case even though the agency and Citi filed a joint appeal of his November ruling to the 2nd Circuit.

More than four years after the Financial Accounting Standards Board first proposed a stringent new standard for corporate disclosure of litigation loss contingencies, it voted Monday to drop the effort, citing increased scrutiny of litigation exposure by the Securities and Exchange Commission and the Public Company Accounting Oversight Board. The accounting rulemaker’s decision has to be considered a relief for public corporations, many of which have bitterly opposed the FASB’s litigation disclosure proposals as a gift to plaintiffs’ lawyers.

The controversy over exactly what corporations must say in their financial statements about potential litigation losses actually dates back to the 1970s, when accountants and defense lawyers compromised on a standard mandating the disclosure of a litigation contingency when there’s a “reasonable possibility” of a loss. The FASB – which is responsible for setting generally accepted accounting principles – eventually decided that there was too much wiggle room in the “reasonable possibility” standard. In 2008, the accounting board proposed new rules that called for corporations to disclose virtually all litigation exposure, including the company’s assessment of its maximum exposure. Defense lawyers, according to Eric Roth of Wachtell, Lipton, Rosen & Katz, read the proposal as a dangerous encroachment on privileged communications about litigation prospects. “You can’t adopt a rule that strips companies of attorney-client privilege,” Roth said. “That was seen as an attack on the adversary system.”

Michael Young of Willkie Farr & Gallagher, who has been talking to FASB board members about litigation contingency disclosure for years, said that if the 2008 proposal had been adopted, plaintiffs’ lawyers arguing for damages could simply have shown juries excerpts on maximum exposure from a defendant’s own financial statements. “To the FASB’s credit, it took the board about two minutes to understand the problem,” Young said.

If you haven’t already, read Jesse Eisinger’s piece for ProPublica and the New York Times on the Securities and Exchange Commission’s case against the upstart credit-rating agency Egan-Jones. The SEC sued Egan-Jones – which challenged the traditional business model for rating agencies by charging users, not issuers, to opine on the riskiness of securities – for exaggerating its bona fides in a 2008 filing. Eisinger questioned the wisdom of sending Egan-Jones “to the guillotine” while letting bigger players, with business models that are susceptible to corruption, off the hook for their patently ridiculous ratings of toxic mortgage-backed securities. “This is your S.E.C., folks,” Eisinger wrote. “It courageously assails tiny firms, and at the pace of a three-toed sloth. And when it goes after its prey, it’s because it has found a box unchecked, rather than any kind of deep, systemic rot.”

Inspired by the piece, I went back to take another look at the SEC’s Apr. 12 complaint against Option One, a relative small-timer in the mortgage-backed securities market. Could Eisinger’s criticism of the SEC’s credit-rating enforcement – that the agency is netting minnows while the sharks swim away – apply just as well to MBS issuers?

Well, yes. But I’m getting tired of asking why the SEC has been so slow to enforce accountability for banks that packaged and sold securities backed by subprime mortgages that didn’t meet even the lax underwriting standards they warranted. So instead, I’m choosing to regard the Option One case as a model for the kinds of actions the already much-maligned mortgage fraud task force keeps promising to bring. From my reading, there’s no reason other MBS defendants can’t be held liable for the same disclosure problems that Option One agreed to settle for $28.2 million.

There’s a very good chance that former Securities and Exchange Commission general counsel David Becker owes absolutely nothing to the folks who lost money in Bernard Madoff’s Ponzi scheme. Nevertheless, on Monday, Becker and his two brothers agreed to turn over every penny of the proceeds they received from their mother’s long-ago Madoff investment account, a total of $556,017. Becker, a partner at Cleary Gottlieb Steen & Hamilton, didn’t return my call seeking comment. But he is doubtless hoping that the $556,017 settlement with Madoff bankruptcy trustee Irving Picard of Baker & Hostetler puts an end to the ugliest chapter in his career.

For a brief while last year, you’ll recall, Becker was the favorite whipping boy of Madoff victims and their congressional champions. Becker and his two brothers were what’s known as net winners in the Madoff pyramid. After their mother’s death in 2004 they transferred the approximately $2 million in her Madoff investment account to a Smith Barney probate account. By September 2006, the will was probated and the account was liquidated. But in December 2010, Picard sued Becker and his brothers, demanding the return of $1.5 million in allegedly fraudulent profits from their mother’s estate.

At the time, Becker was the SEC’s general counsel. And though he informed the agency’s ethics office of his inheritance (and SEC Chairman Mary Schapiro was aware of Becker’s Madoff proceeds), the GC was not asked to step out of SEC deliberations — and did not recuse himself from the debate — on the appropriate method for compensating investors. When word got out of Becker’s Madoff money, Schapiro took a beating in Congress.

If the Securities and Exchange Commission were an ordinary investor, it would already be too late in trying to sue the banks that issued (allegedly) deficient mortgage-backed securities.

The SEC is not, of course, an ordinary investor. On Wednesday night, the Wall Street Journal broke the news that the SEC plans to send Wells notices, otherwise known as target letters, to several banks that issued mortgage-backed notes and certificates. The Journal said the agency is looking at whether the banks misled investors about the quality of mortgage loan pools underlying securities issued in 2007 and 2008.

But here’s the thing: The first federal-court MBS class action, against Countrywide, was filed in 2007. By 2008, bond insurers and private investors were busily suing MBS issuers in state and federal courts in New York, starting the clock on the three-year statute of limitations for suits under the federal Securities Act of 1933 and the two-year time limit for fraud cases under the Exchange Act of 1934. Private investors who entertained thoughts of bringing federal claims for mortgage-backed notes issued in 2007 and 2008 would be tossed out of court quicker than you can say “time-barred.”

Late Friday the Securities and Exchange Commission confirmed in a statement what the New York Times first reported Friday morning: it has changed its policy on the boilerplate “neither admit nor deny” language in most SEC settlement agreements. But don’t get too excited. The change will affect only cases in which the defendant has admitted guilt or been convicted in a related criminal action. In settlements with those criminal defendants, the SEC will delete “inconsistent” concessions and instead “recite the fact and nature of the criminal conviction or criminal [admission] in the settlement documents.”

In other words, defendants whose guilt has already been established under the higher standard of criminal law can no longer evade responsibility for civil charges. Which leads, of course, to the question of why it took the SEC 40 years to change such a ridiculous policy.

In the weeks since U.S. Senior District Judge Jed Rakoff of Manhattan federal court rejected the agency’s proposed $285 million settlement with Citigroup for misleading investors about a synthetic CDO, the SEC has argued long and loud that the boilerplate Rakoff scorned is intrinsic to its ability to reach settlements with defendants worried about liability in follow-on civil suits by private plaintiffs lawyers. I get that. And as I’ve reported, just about every other federal agency with enforcement power has a similar practice of permitting defendants to settle without conceding they’ve done anything wrong. I have my doubts that deleting pro forma “neither admit nor deny” language from settlement agreements would result in a dramatic change in the value of follow-on private settlements, but perhaps I, like most federal judges, have become inured to boilerplate.