The Securities and Exchange Commission was pretty darn pumped about its $200 million settlement Thursday with JPMorgan Chase, part of the bank’s $920 million resolution of regulatory claims stemming from losses in the notorious “London Whale” proprietary trading. And why not? As George Cannellos, the co-director of enforcement, said in a statement, JPMorgan’s $200 million civil penalty is one of the largest in SEC history. The agency also showed that it’s serious about its new policy of demanding admissions of liability from some defendants. For those of us accustomed to the SEC’s “neither admit nor deny” boilerplate, it’s startling to see the words “publicly acknowledging that it violated the federal securities laws” in an SEC settlement announcement. So let’s permit Cannellos some chest-thumping: “The SEC required JPMorgan to admit the facts in the SEC’s order – and acknowledge that it broke the law – because JPMorgan’s egregious breakdowns in controls and governance put its millions of shareholders at risk and resulted in inaccurate public filings.”
In the first full year of operation for the Securities and Exchange Commission’s Dodd-Frank whistle-blower program, the agency received 324 tips from whistle-blowers working outside of the United States – almost 11 percent of all the whistle-blower reports received by the SEC. If those tips eventually result in sanctions of more than $1 million, the SEC whistle-blowers will be in line for bounties. But if they’re fired by their companies for disclosing corporate wrongdoing, they may not be able to sue under Dodd-Frank because the law’s anti-retaliation protection for whistle-blowers does not specify that it extends overseas. And as you know, the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank holds that civil laws should be presumed not to apply overseas unless they say otherwise.
If Khaled Asadi, a former GE Energy executive who lost his job after alerting his boss to concerns that GE might have run afoul of the Foreign Corrupt Practices Act, had sued his old employer in New York or Connecticut, things might have worked out differently for him. Several federal trial judges in those jurisdictions have ruled that whistle-blowers who report corporate wrongdoing internally are protected by the Dodd-Frank Act of 2010, even though the statute defines whistle-blowers as employees who report securities violations to the Securities and Exchange Commission. But Asadi, who worked in GE Energy’s office in Amman, Jordan, filed a claim that the company had illegally retaliated against him in federal district court in Houston. And on Wednesday, the 5th Circuit Court of Appeals – with hardly a nod to contrary lower-court decisions in other circuits – ruled that Asadi is not a whistle-blower under Dodd-Frank because he talked to his boss and not the SEC.
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.
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?
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.
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.
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.
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.
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.”