United States: 2011 Year In Review: Select SEC Enforcement Cases And Developments Regarding Investments Advisers And Investment Companies

EXECUTIVE SUMMARY

This Outline highlights key U.S. Securities and Exchange Commission (the "SEC" or the "Commission") enforcement developments and cases involving investment advisers and investment companies during 2011.*

Summary of Key Statistics and Enforcement Developments

The SEC brought a record number of enforcement actions in FY 2011.¹ In its first complete fiscal year since the Division of Enforcement's extensive reorganization, the Commission filed 735 enforcement actions. Although senior Commission officials continue to caution that statistics alone do not tell the whole story, the measures traditionally used to assess the SEC's enforcement activity demonstrate that, in FY 2011, the Division of Enforcement vigorously pursued securities law violators. Some of the key statistics from FY 2011 are described below:

• Last year, the Commission brought 735 enforcement actions, an 8% increase from the 681 cases initiated in FY 2010.
• At the end of FY 2011, National Priority or High Impact cases represented 5.11% of the Division of Enforcement's active docket up from 3.26% in FY 2010.
• Of particular note is the big jump in cases against investment advisers and investment companies. In FY 2011, the Commission brought 146 enforcement actions in this area. This is a single-year record and represents a 30% increase over the prior year. SEC actions against broker-dealers also increased significantly to 112 cases in FY 2011 from 70 in the prior year. This represents a 60% increase year-over-year.
  
  Moreover, cases against investment advisers, investment companies, and broker-dealers represented about 35% of the SEC's total enforcement docket.
• The Division opened 578 formal investigations last year. By comparison, in FY 2010, the SEC issued 531 formal orders of investigation.
• Last year, there were 134 criminal actions relating to Commission cases, down slightly from FY 2010's 139 cases.
• The Commission also works closely with other regulators. In FY 2011, 586 SEC investigations were referred to self-regulatory organizations or other state, federal and foreign authorities for enforcement, up from FY 2010 when 492 such referrals were made. In addition, the SEC increased the number of occasions (772) when it sought assistance from foreign regulatory authorities and it received an increasing number of requests (492) for assistance from such regulators.
• Last year, almost 18.5% of the investigations opened during FY 2011 came from referrals within the Commission or other internal analysis. This represents a slight decrease from FY 2010 (21.9%).
• The Commission sought emergency relief in federal courts in 39 cases; that technique was used 37 times in FY 2010. The Commission also sought 42 asset freezes to preserve money for the benefit of harmed investors in FY 2011 versus 57 such actions in the prior year.
• In FY 2011, the Commission filed 61% of its first enforcement actions within two years of starting an investigation or inquiry, well below its target rate of 70%.
• For FY 2011, the SEC reported that it had obtained orders requiring the payment of approximately $928 million in penalties by securities law violators. This is slightly less than the $1.03 billion the SEC reported for FY 2010. It is interesting to note that, like FY 2010, a relatively small number of cases seemingly account for a substantial portion of the fines imposed last year. Specifically, it appears that ten cases represent approximately 46% of the $928 million in penalties imposed by the SEC in FY 2011.
• The Commission obtained orders requiring disgorgement of $1.878 billion in illicit gains last year, a small increase from the $1.82 billion in FY 2010.

Last year there were also a number of important enforcement developments at the Commission, including the SEC's first ever deferred prosecution agreement, the finalization of the Dodd-Frank whistleblower rules, and the continued focus on individual liability in enforcement actions. The SEC also started the process of seeking Congressional approval to enhance its penalty authority and reportedly began leaning toward filing negligence charges rather than scienter-based fraud claims in connection with certain cases.

In 2011, the SEC's long-standing settlement practice, which includes defendants neither admitting nor denying the allegations against them, came under increasing judicial attack. In March 2011, Judge Jed Rakoff of the Southern District of New York took issue with this practice in connection with his review of a proposed settlement between the SEC and a corporation and two individual defendants. Judge Rakoff ultimately approved the agreement and reserved for another time the substantial questions the SEC's settlement practices raised. That time came in November 2011, when Judge Rakoff rejected another SEC settlement with a large financial institution, finding that the proposed agreement was neither fair, reasonable, adequate nor in the public interest. That case is now on appeal to the Second Circuit.

As the calendar turned to 2012, the Commission reportedly changed its "no admit or deny" policy in cases involving parallel criminal actions. In such cases, the SEC will no longer allow a settling defendant to neither admit nor deny the Commission's allegations while at the same time admitting to a criminal violation or entering into a deferred prosecution agreement with the Department of Justice. Congress will hold hearings on the SEC's settlement policy in early 2012.

Summary of Investment Adviser and Investment Company Enforcement Trends

Last year, the SEC focused its attention on investment advisers and investment companies in several of its traditional areas of interest, including conflicts of interest, inaccurate or inadequate disclosure, valuation, misappropriation of client assets and fraudulent trading schemes, misallocation of investment opportunities, false or misleading performance claims, market manipulation and insider trading. In connection with its efforts to investigate misconduct during the financial crisis, the Commission continued to be active in the collateral debt obligation and mortgage-backed securities areas. Late 2011 also brought a number of enforcement actions growing out of specific initiatives within the Division of Enforcement's Asset Management Unit. These include mutual fund fee arrangements, a focus on compliance programs and hedge fund performance.

These developments and cases are described in more detail on pages 28 through 60 of this Outline.

KEY STATISTICS AND ENFORCEMENT DEVELOPMENTS

Personnel Changes²

In 2011, there were a number of significant personnel changes in the SEC's Enforcement, Risk and Examination groups. These include the following:

• In January, SEC Chairman Mary L. Schapiro appointed Dr. Jonathan S. Sokobin as Acting Director of the SEC's Division of Risk, Strategy, and Financial Innovation ("RiskFin"). RiskFin was created in September 2009 and serves as the agency's "think tank" for policymaking, rulemaking, enforcement, and examinations. Dr. Sokobin has been with the SEC since 2000 and most recently served as Director of the former Office of Risk Assessment. Before holding that position, he served as the SEC's Deputy Chief Economist from 2004 to 2008. In May, the SEC appointed Craig M. Lewis as the Chief Economist and Director of RiskFin. Dr. Lewis was a professor of finance at Vanderbilt University and, at the time of his appointment, was a visiting scholar at the SEC. In August, the Commission announced that Kathleen Weiss Hanley was named as Deputy Director and Deputy Chief Economist of RiskFin. Dr. Hanley had previously served at the Board of Governors of the Federal Reserve System and the SEC.
• On January 18, 2011, the Commission announced that Eileen Rominger had been appointed Director of Investment Management. Ms. Rominger has almost 30 years of experience in the asset management industry, most recently serving as the Global Chief Investment Officer of Goldman Sachs Asset Management. Ms. Rominger replaced Andrew J. "Buddy" Donohue, who left the agency in November 2010.
• Also in January, the agency announced that Askari Foy had been promoted to Associate Regional Director for Examinations in the SEC's Atlanta Regional Office. Mr. Foy directs a staff of approximately 40 accountants, examiners, attorneys, and support staff responsible for the examination of broker-dealers and investment advisers in Alabama, Georgia, North Carolina, South Carolina and Tennessee.
• On February 4, 2011, Mark D. Cahn was promoted to General Counsel in the SEC's Office of the General Counsel, replacing David M. Becker. Mr. Cahn joined the SEC in 2009 and previously served as the agency's Deputy General Counsel for Litigation and Adjudication. Also in the spring, Anne K. Small was named as Deputy General Counsel in the Office of General Counsel.
• Sean McKessy was appointed in February to oversee the new Whistleblower Office in the Division of Enforcement (an office created to administer the whistleblower provisions called for by the Dodd-Frank Wall Street Reform and Consumer Protection Act). The Office handles whistleblowers' tips and complaints and helps the SEC determine rewards made to individuals who provide the agency with information that leads to successful enforcement actions.
• In mid-April, Rose Romero left her position as Director of the SEC's Fort Worth Regional office after five years at the SEC. In August, David Woodcock was named as the Regional Director of the Fort Worth office. Mr. Woodcock had previously been a partner at Vinson & Elkins and practiced public accounting for several years at two major firms.
• Also in April, Sanjay Wadhwa was promoted to Associate Regional Director for Enforcement of the SEC's New York Regional Office. He joined the SEC in 2003 and was named as the Deputy Chief of the Enforcement Division's Market Abuse Unit in early 2010.
• Julius Leiman-Carbia joined the SEC in April as Associate Director of the SEC's National Broker-Dealer Examination Program (part of the agency's Office of Compliance Inspections and Examinations) ("OCIE"). In that capacity, he oversees 300 attorneys, examiners and accountants responsible for inspecting broker-dealers. Prior to joining the SEC in 1989, Mr. Leiman-Carbia worked in the private sector for several firms, including Citigroup Global Markets, JP Morgan and Goldman Sachs.
• On April 25, 2011, the SEC announced that Gene Gohlke, the long-time Associate Director for Examinations in OCIE, was retiring from the Commission. Dr. Gohlke had spent more than 35 years at the SEC, serving under 10 Commission Chairmen during his tenure.
• Also on April 25, 2011, the Commission announced that Cameron Elliot joined the agency as an Administrative Law Judge. These judges act as independent judicial officers who preside over public hearings involving allegations of securities law violations instituted by the Commission. Mr. Elliot had previously been an Administrative Law Judge for the Social Security Administration.
• SEC Commissioner Kathleen L. Casey left the Commission on August 5, 2011 after completing her five-year term earlier in the year. In the press release announcing her departure, the Commission noted her active engagement on international matters, particularly her role as Chair of the International Organization of Securities Commission's Technical Committee and as the SEC's representative to the Financial Stability Board.
• The SEC announced on September 19, 2011 that James Brigagliano, Deputy Director of the Division of Trading and Markets, was leaving the agency at the end of September. Mr. Brigagliano served at the SEC for 25 years, the past 13 in the Division of Trading and Markets.
• On October 4, 2011, the Commission named Michael A. Conley as Deputy General Counsel in the Office of General Counsel. Mr. Conley's portfolio includes enforcement matters, appellate cases and adjudications.
• Also in October, the Commission appointed Andrew J. Bowden as an Associate Director heading OCIE's National Investment Adviser/Investment Company examination program. Mr. Bowden succeeds Gene Golke; he joined the SEC from Legg Mason.
• Daniel M. Gallagher was sworn into office as an SEC Commissioner on November 7, 2011. Mr. Gallagher took the place of former Commissioner Casey. Among other things, Mr. Gallagher had previously served at the SEC in a number of senior positions, including as Deputy Director of the Division of Trading and Markets.
• In late November, Kristin Snyder was promoted to head the examinations program in the San Francisco Regional Office.
• On December 8, 2011, Louis A. Aguilar began his second term as an SEC Commissioner.
• Finally, on December 19, 2011, Michael E. Garrity was appointed to head the examination program in the Commission's Boston Regional Office. In addition to the foregoing individual personnel changes, it is important to note that the Division of Enforcement has hired various specialists to help it in its investigations. In particular, in February 2011, it was reported that Enforcement had recently hired 10 industry specialists to assist it with investigations, training and initiative planning. The specialists include a former portfolio manager, a former trading desk head and a former municipal bond trader.³

Enforcement Statistics

In its first complete fiscal year since the Division of Enforcement's extensive reorganization, the Commission filed a record 735 enforcement actions in FY 2011. The SEC has suggested that its record performance was brought about due to the Division's reorganization, the close collaboration among SEC offices and the increased use of technology to identify and stop illegal activity. For example, the SEC has stated that the Division of Enforcement has forged closer ties with OCIE, developed specialized skills and new approaches for investigating potential wrongdoing, and utilized new information technology resources to develop analytical tools and to process the large amount of data that it receives in connection with investigations.⁴

Although senior Commission officials continue to caution that statistics alone do not tell the whole story,⁵ several of the measures traditionally used to assess the SEC's enforcement activity demonstrate that, in FY 2011, the Division of Enforcement actively and aggressively pursued misconduct affecting the U.S. markets.⁶ The year's statistics are described below.

A Record Number of Enforcement Actions

Last year, the Commission brought 735 enforcement actions, an 8% increase from the 681 cases initiated in FY 2010. FY 2011's 735 cases is the highest number of actions ever brought by the SEC.

"National Priority" or "High Impact" Actions

The SEC is focusing on its "National Priority" or "High Impact" actions, which the Commission hopes will be widely covered by the media and affect the future conduct of market participants. At the end of FY 2011, National Priority or High Impact cases represented 5.11% of the Division of Enforcement's active docket, up from 3.26% in FY 2010. Eighty-five of the SEC's 735 enforcement actions were designated as National Priority cases last year.

Categories of Cases

The major categories of cases and the number of actions within each include:

Of particular note is the big jump in cases against investment advisers and investment companies. In FY 2011, the Commission brought 146 enforcement actions in this area. This is a single-year record and represents a 30% increase over the prior year. SEC actions against broker-dealers also increased significantly to 113 cases in FY 2011 from 70 in the prior year. This represents a 60% increase year-over-year. Cases against investment advisers, investment companies, and broker-dealers accounted for about 35% of the SEC's enforcement docket. Taken together, it is clear that the SEC devoted significant resources and placed regulated financial institutions under increased scrutiny in the last year.

Consistent with the SEC's aggressive stance on insider trading, the SEC brought 57 insider trading cases, up from 53 in FY 2010 (an 8% increase). The SEC charged 124 individuals and entities in these actions versus 138 defendants charged in the prior year.

Formal Orders of Investigation

The Division opened 578 formal investigations last year. By comparison, in FY 2010, the SEC issued 531 formal orders of investigation.

SEC Coordination with Criminal Authorities and Referrals to Other Agencies

In the last several years, a significant amount of attention has been paid to the increasing "criminalization" of the federal securities laws. In FY 2011, the evidence reflects that the SEC continued to work closely with criminal prosecutors. Last year, there were 134 criminal actions relating to Commission cases, down slightly from FY 2010's 139 cases.

The Commission also works closely with other regulators. In FY 2011, 586 SEC investigations were referred to self-regulatory organizations or other state, federal and foreign authorities for enforcement, up from FY 2010 when 492 such referrals were made. In addition, the SEC increased the number of occasions (772) when it sought assistance from foreign regulatory authorities and it received an increasing number of requests (492) for assistance from such regulators. The amount of such requests to and from the SEC increased from the prior year.

Internally Generated Cases, Emergency Relief and First Time Actions

As part of its retooling efforts since 2009, the SEC has tried to enhance its ability to turn internally generated tips, audits or other prospects into investigations. Last year, almost 18.5% of investigations opened during FY 2011 came from referrals within the Commission or other internal analysis. This represents a slight decrease from FY 2010 (21.9%).

Over the last several years, the SEC leadership has indicated that a top priority is to move quickly to stop and punish misconduct affecting the securities markets. However, last year two statistics used to examine how quickly the SEC moved to stop ongoing misconduct reflected a mixed record in this area. The Commission sought emergency relief in federal courts in 39 cases; that technique was used 37 times in FY 2010. The Commission also sought 42 asset freezes to preserve money for the benefit of harmed investors in FY 2011 versus 57 such actions in the prior year. Of course, these two measures may not necessarily indicate that the SEC moved more slowly than in the past, but rather can also be explained by the fact that there may have been about the same or fewer cases that required such emergency action.

On a related note, last year the Commission filed 61% of its first enforcement actions within two years of starting an investigation or inquiry, falling further behind its target rate of 70%. That 61% figure represents a 6% decrease year-over-year and compares even more unfavorably to the Commission's statistics in prior years.

Successful Outcomes

Last year, the Commission continued its record of "successfully" resolving the vast majority of its cases. Specifically, in FY 2011 the SEC reported that it had obtained a "favorable" outcome, including through litigation, settlement or a default judgment, in 93% of its cases. (The Commission calculates this measure on a per-defendant basis.) This figure is 1% higher than the Commission achieved between FY 2007 and FY 2010.

Penalties, Disgorgement and Distributions to Injured Investors

For FY 2011, the SEC reported that it had obtained orders requiring the payment of approximately $928 million in penalties by securities law violators. This is slightly less than the $1.03 billion the SEC reported for FY 2010. It is interesting to note that, like FY 2010, a relatively small number of cases account for a substantial portion of the fines imposed last year. Specifically, it appears that ten cases represent approximately 46% of the $928 million in penalties imposed by the SEC in FY 2011.

The Commission also obtained orders requiring disgorgement of $1.878 billion in illicit gains last year, a small increase from the $1.82 billion in FY 2010.

Below is a chart reflecting fines and disgorgements between FY 2004 and FY 2011.

Focus on Individuals

Over the last year, it appears that the SEC has continued to focus on the potential liability of individuals in its investigations. For example, since 2009 and through December 16, 2011, in connection with financial crisis cases alone, the Commission reported that it had charged 87 entities and individuals. This included 45 CEOs, CFOs and other senior corporate officers. It also noted that 25 officer and director bars, industry bars, and Commission suspensions had been imposed on individuals. Finally, the Commission ordered $1.2 billion in penalties in these cases over a roughly three-year period.⁸

In addition to the statistics, this trend can also be seen in several cases summarized below.

Judicial Criticism of SEC Settlement Practices

In 2011, the SEC's long-standing settlement practices came under increasing judicial attack.

In March 2011, Judge Jed Rakoff of the Southern District of New York, took issue with the SEC's practice of accepting settlements in which the defendants neither admit nor deny the allegations against them. Writing in SEC v. Vitesse Semiconductor Corp., et al., 10-Civ-9239 (S.D.N.Y. Mar. 21, 2011), Judge Rakoff questioned whether such agreements met the legal standards required for the Court to approve a settlement.

In recounting the procedural facts of the case, Judge Rakoff noted:

Unhappy with this lack of information, Judge Rakoff ordered the SEC to submit a letter brief and convened a hearing.

In its opinion, after finding the financial and injunctive portions of the settlement to be fair and reasonable, the Court went on to express its concern about the SEC's long-standing practice of allowing a defendant to settle without admitting or denying the allegations, but also requiring that the defendant not publicly deny the charges.

Judge Rakoff contrasted the SEC's settlement practice to the Department of Justice's policy of rarely allowing defendants to plead nolo contendere, clearly suggesting that this was the preferable protocol. The Court then added, "for now, however, the S.E.C.'s practice of permitting defendants to neither admit not deny the charges against them remains pervasive, presumably for no better reason than it makes the settling of cases easier."

Judge Rakoff ultimately approved the Consent Judgments in this matter because the two individual defendants had pleaded guilty in parallel criminal cases and the company had, despite its financial difficulties, paid $2.4 million to a class action settlement fund and would pay an additional $3 million under the settlement. As Judge Rakoff stated: "No reasonable observer of these events could doubt that the company had effectively admitted the allegations of the complaint in the way that, for a company, is particularly appropriate: by letting its money do the talking."

Judge Rakoff reserved for another time the "substantial questions" of whether it was permissible to approve other settlements in which the defendant neither admits nor denies the allegations against it.

That time came only six months later. On October 29, 2011, the SEC announced that Citigroup had agreed to pay $285 million in penalties, disgorgement and prejudgment interest to settle charges that it had negligently misled investors in connection with its 2007 structuring and sale of a CDO tied to the housing market. Like the SEC's well publicized case against Goldman Sachs in 2010, the SEC alleged that Citigroup failed to disclose that it had bet against the CDO's mortgage collateral. The proposed settlement included the usual provision that Citigroup neither admitted nor denied the allegations in the SEC's complaint, which was filed on the same day in the U.S. District Court for the Southern District of New York.⁹

Like the Vitesse case, the Citigroup action was assigned to Judge Rakoff.¹⁰ In the Citigroup case, Judge Rakoff responded to the proposed settlement by issuing an Order setting a hearing to determine whether the settlement was "fair, reasonable, adequate, and in the public interest." Judge Rakoff also asked the SEC and Citigroup to answer at least nine questions at the hearing that addressed such topics as the "no admit or deny" language in the settlement, the manner in which the penalty amount was determined, how the SEC enforces injunctions and treats recidivist financial institutions, and why, given the facts cited in the Complaint, the SEC charged Citigroup with negligence instead of fraud.

The SEC responded to Judge Rakoff's questions with a forceful submission, arguing, among other things, that the proposed settlement "reflects the scope of relief likely to be obtained by the Commission under the applicable law if successful at a trial on the merits, also taking into account the litigation risks likely to be presented, the benefits of avoiding those risks, the willingness of Citigroup to consent to a judgment and not deny liability, and the opportunity to detail publicly in this forum the facts that led the Commission to pursue this action." The SEC also strongly defended its "no admit or deny" policy, noting that such settlements had long been endorsed by the U.S. Supreme Court and observing that Justice Department civil settlements, as well as settlements by other federal agencies such as the Federal Trade Commission, include similar provisions. Finally, the SEC argued that Judge Rakoff should base his analysis of the proposed settlement solely on the allegations in the Complaint, should not seek information about the SEC's investigation or its settlement negotiations, and should give substantial deference to the Commission.

Despite the SEC's arguments, as well as similar arguments raised by Citigroup, Judge Rakoff rejected the Citigroup settlement in a 15-page opinion issued on November 28, 2011. Although he noted that the SEC's views about the appropriateness of the settlement are entitled to substantial deference, Judge Rakoff determined that he "must still exercise a modicum of independent judgment" in evaluating whether the settlement serves the public interest. According to Judge Rakoff, this was particularly true when the Court is asked to employ its injunctive and contempt powers in support of a settlement.

Applying that judgment to the proposed settlement, Judge Rakoff found it to be neither fair, reasonable, adequate, nor in the public interest because, among other things, it allowed Citigroup to neither admit nor deny the Complaint's allegations. Referring to this policy as "hallowed by history, but not by reason," Judge Rakoff complained that such settlements "deprive[] the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact." He further opined that such settlements, and the comparatively modest penalties they impose, are viewed "as a cost of doing business" by the business community. In a not-so-subtly veiled criticism of the SEC, Judge Rakoff further wrote that the settlement offers little to the public, and nothing to the SEC besides "a quick headline." He concluded his opinion by stating that the "application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous," and that only admissions or trials can establish such facts. Judge Rakoff ordered the parties to proceed to trial in the summer of 2012.

On December 15, 2011, Enforcement Director Robert Khuzami announced that the SEC would appeal Judge Rakoff's ruling to the U.S. Court of Appeals for the Second Circuit.¹¹ Calling the ruling "unprecedented" and harmful to investors, Mr. Khuzami stated that requiring defendants to admit facts or go to trial "is at odds with decades of court decisions that have upheld similar settlements by federal and state agencies across the country." He also warned that a broader application of Judge Rakoff's standard would mean "that other frauds might never be investigated or be investigated more slowly because limited agency resources are tied up in litigating a case that could have been resolved."

While the case makes its way through the appellate process, another federal court took note of Judge Rakoff's decision and has questioned the SEC's proposed settlement with Koss Corporation and its CEO and CFO.¹² On December 20, 2011, Judge Rudolph Randa of the U.S. District Court for the Eastern District of Wisconsin issued a letter to the SEC asking it to provide a "written factual predicate" for why it should approve the settlement. Judge Randa's letter cited to Judge Rakoff's November 28, 2011 opinion and questioned both the injunctive relief he was being asked to enter and the basis on which the SEC had determined the disgorgement amount. The SEC has until January 24, 2012, to submit a brief to Judge Randa addressing these issues.

In early January 2012, furthermore, Mr. Khuzami announced a significant change in the SEC's "no admit or deny" policy in cases involving parallel criminal actions. In such cases, the SEC will no longer allow a settling defendant to neither admit nor deny the SEC's allegations while at the same time admitting to a criminal violation or entering into a deferred prosecution agreement with the Justice Department. Rather, under the new policy, the SEC's action will cite the admissions made in the parallel criminal case. SEC critics had noted the inconsistency between the Commission's approach and that of the Department of Justice in such recent cases as the Wachovia Bank, N.A. municipal securities bid-rigging matter. In that case, Wachovia settled the SEC's action without admitting or denying the allegations leveled against it but, at the same time, settled with the Justice Department by admitting, acknowledging and accepting responsibility for the same conduct.¹³ However, the new SEC policy will not affect the majority of its cases – those in which it alone is resolving a case against a company. Finally, Congress has indicated that it will hold a hearing to examine this issue in early 2012.¹⁴

Insider Trading and Parallel Proceedings

Although federal criminal prosecutors have made major headlines in the insider trading area over the last two years, the SEC also continues to be active and aggressive in pursuing such cases. To support this view, Mr. Khuzami stated, in late March 2011, that the SEC "continue[s] to vigorously enforce insider trading laws."¹⁵ Indeed, a total of 57 actions were brought in FY 2011 alleging insider trading violations, an 8% increase from the prior year. Defendants included individuals from hedge funds, broker-dealers, corporate boards, and even a former Nasdaq managing director. High profile cases were brought against a former board member of Goldman Sachs and involving a new product – exchange traded funds.

Many insider trading cases involve both criminal and SEC charges. Speaking generally about the close collaboration between the DOJ and the SEC, Deputy Director of the Division of Enforcement Lorin Reisner commented in June 2011 that, of the Commission's highest priority cases, approximately 55-65% have "some type" of parallel criminal investigation.¹⁶

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Footnotes

* This Outline was prepared by Jennifer L. Klass, partner, and Joshua R. Blackman, associate, in the Investment Management Practice Group of Morgan Lewis with substantial assistance from associates Michael K. Carlton, Kaitlyn L. Piper and Erica L. Zong Evenson. Significant sections of this Outline are also set forth in the 2011 Year in Review: SEC and SRO Selected Enforcement Cases and Developments Regarding Broker-Dealers, which is a companion piece that is being published simultaneously with this Outline. As noted below, certain sections of the Outline were drawn from Law Flashes published by the Firm. Morgan Lewis served as counsel in certain actions described herein. Copyright 2012, Morgan, Lewis & Bockius LLP.

1 The SEC's fiscal year begins on October 1. References to FY 2011 are to the year that commenced on October 1, 2010 and ended on September 30, 2011.

2 Unless otherwise noted, the information regarding these personnel changes was drawn from SEC press releases available on the Commission's website.

3 "Enforcement Adds Industry Specialists," Compliance Reporter (Feb. 14, 2011).

4 SEC's 2011 Performance and Accountability Report available at: http://sec.gov/about/secpar2011.shtml at pages 12 and 13.

5 Testimony of Robert Khuzami, November 16, 2011 before the United States Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Securities, Insurance and Investment "Khuzami Congressional testimony", available at: http://sec.gov/news/testimony/2011/ts111611rk.htm.

6 As noted previously, the SEC's fiscal year begins on October 1st. References to FY 2011 refer to the year that began on October 1, 2010 and ended on September 30, 2011. The FY 2011 statistics in this section were taken from the Commission's Select SEC and Market Data – Fiscal 2011 report available on the SEC's website at: http://www.sec.gov/about/secstats2011.pdf and the SEC's 2011 Performance and Accountability Report.

7 Prior to FY 2011, the SEC characterized this group of cases as "Issuer Reporting and Disclosure" and included Foreign Corrupt Practices Act ("FCPA") actions in this group. Last year, FCPA actions were tracked separately.

8 See "SEC Enforcement Actions Addressing Misconduct that Led to or Arose from the Financial Crisis," available at: www.sec.gov.

9 SEC v. Citigroup Global Markets Inc., Case No. 1:11-cv-07387-JSR.

10 Interestingly, in 2009, Judge Rakoff had raised significant objections to the fine in a proposed SEC settlement with Bank of America over disclosures relating to its purchase of Merrill Lynch. Ultimately, after the parties renegotiated the settlement, which called for an increased penalty, Judge Rakoff approved the agreement.

11 The level of discord between the SEC and Judge Rakoff even flowed over to the initial stages of the appeal. Just before the Christmas holiday, the SEC asked Judge Rakoff to stay the district court proceedings while the appeal is pending. Anticipating that Judge Rakoff might deny its motion, the SEC sought an emergency order from the Second Circuit staying the lower court action. The SEC apparently did not inform Judge Rakoff of its application for an emergency order, which resulted in him issuing an Order on December 27, 2011, denying the SEC's motion at virtually the same time that the Second Circuit issued an Order granting the SEC's motion for an emergency stay. Judge Rakoff shot back at the SEC on December 29 by issuing a Supplemental Order accusing the SEC of misleading both him and the Second Circuit.

12 SEC v. Koss Corp. et al., Case No. 11-C-991 (E.D. Wisc.)

13 "SEC Changes Policy on Firms' Admissions of Guilt," Edward Wyatt, New York Times (Jan. 7, 2012).

14 Id.

15 Remarks at SIFMA's Compliance & Legal Society Annual Seminar, March 23, 2011.

16 "Interaction of SEC's Bounty Program, Cooperation Initiative Remains to be Seen," BNA Securities Regulation and Law Report (June 13, 2011).

Copyright 2012. Morgan, Lewis & Bockius LLP. All Rights Reserved.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.