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Laughing Out Loud At Certain Portions Of SEC Chair Gensler’s Speech


Yesterday, SEC Chair Gary Gensler delivered this speech.

I literally laughed out loud as to certain portions of Gensler’s speech.

I didn’t laugh because what Gensler said was unreasonable. To the contrary, much of what he said represents sound policy. Rather, I laughed  because I have closely followed SEC enforcement practices (and speeches from enforcement agency officials) for over a decade.

Gensler began his speech as follows:

“Enforcement is one of the fundamental pillars in achieving the SEC’s mission.

One pillar is the policy framework — the laws set by Congress, and the rules enacted by the Commission.

But you’ve also got to examine against those laws and rules, and enforce those rules. That oversight and enforcement are the other two critical pillars.

Think about a football game without referees. Teams, without fear of penalties, start to break the rules. The game isn’t fair, and maybe after a few minutes, it isn’t fun to watch.

Without examination against and enforcement of our rules and laws, we can’t instill the trust necessary for our markets to thrive. Stamping out fraud, manipulation, and abuse lowers risk in the system. It protects investors and reduces the cost of capital. The whole economy benefits from that.

At the SEC, we follow the facts and the law, wherever they may lead, on behalf of investors and working families. That means holding individuals and companies accountable, without fear or favor, across the approximately $100 trillion capital markets we oversee.

It is critical that our enforcement program have tremendous breadth, be nimble, and penalize bad actors so we discourage misconduct before it happens.

That means bringing cases that matter to our three-part mission — whether deceptive conduct in the private funds space, offering frauds, accounting frauds, insider trading, market manipulation, Foreign Corrupt Practices Act cases, reporting violations, or fiduciary violations.”

The first laugh occurred when Gensler invited us to “think about a football game without referees.”

I have thought about this and this is precisely what SEC FCPA enforcement against issuers is – a game without referees.

In an enforcement action, the SEC and issuers are adversaries (on different sides of the ball to use the football analogy). However, one team (the SEC) gets to call all the penalties and there are not even referees. In fact, in the FCPA’s nearly 45 year history, the SEC has never been put to its ultimate burden of proof by an issuer in an FCPA enforcement subjected to judicial scrutiny (in other words, there have been no referees).

Gensler next talked about “accountability” and stated as follows.

“Accountability — whether individual or institutional — is an important part of the SEC’s enforcement agenda.

We’ll use all of the tools in our toolkit to investigate wrongdoing and hold bad actors accountable — including administrative bars, penalties, injunctions, or undertakings, where appropriate. We’ll be prepared to litigate or seek a robust finding of facts if we settle. The public benefits, and justice benefits, from the robust finding of facts.

It instills confidence in our financial markets when bad actors are held accountable. Moving efficiently and bringing bad actors to justice promotes confidence in our system.

Remedies, such as penalties and admissions, need to be carefully calibrated to have a specific and general deterrent effect. We need to leverage prophylactic remedies — like bars and injunctions — that protect investors from future harm.

When it comes to accountability, few acts rival admissions of misconduct by wrongdoers. When appropriate, and when the conduct warrants it, we may seek admissions in certain cases where heightened accountability and acceptance of responsibility are in the public interest.”

This rhetoric about individual accountability caused the second laugh because as highlighted in this recent post the SEC has not brought an individual FCPA enforcement action in over one year and this gap in individual enforcement represents the longest gap in eight years.

Gensler next talked about “timeliness” and stated:

“I think we should focus on bringing matters to resolution swiftly.

As the old legal saying goes, justice delayed is justice denied.

The defense bar often makes a strategic decision to burn clock. Memories fade; following evidentiary trails can get more difficult. I understand the bar’s incentives, but we at the SEC have a different mission to fulfill.

Thus, I’ve asked staff to cut back on meetings with entities that want to discuss arguments in their Wells submissions.

I believe it’s important for the people closest to these cases to be making decisions and eliminating unnecessary process. So if you request a meeting, please make it targeted.  Don’t expect multiple, repetitive meetings on the same issues.

We’ve got precious resources, we need to move the docket, and we will be bringing cases expeditiously.”

Gensler’s rhetoric about “timeliness” caused the third laugh given that the average length of FCPA scrutiny (including enforcement actions brought by the SEC) is approximately four years. (See here). Blaming “timeliness” issues on the defense bar is further laughable given that one of the SEC’s biggest struggles in litigated causes (in other words enforcement actions with referees) over the years has been statute of limitations issues.

For instance, as highlighted in this prior post in Gabelli v. SEC the Supreme Court unanimously rejected the SEC’s expansive statute of limitations period and stated:

“Statute of limitations are intended to ‘promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.  They provide ‘security and stability to human affairs.  [They] are ‘vital to the welfare of society [and] ‘even wrongdoers are entitled to assume that their sins may be forgotten.’”

Shortly after Gabelli, the Supreme Court once again bench slapped the SEC and its statute of limitations position in Kokesh. (See here).

Specifically, in the FCPA context, as highlighted in this prior post, a court dismissed FCPA and related charges against former Och-Ziff executives Michael Cohen and Vanja Baros. The reason – you guessed it – statute of limitations issues.

A fourth laugh occurred when reading Gensler’s statement that he has “asked staff to cut back on meetings with entities that want to discuss arguments in their Wells submissions.”

As explained in the SEC’s enforcement manual:

“A Wells notice is a communication from the staff to a person involved in an investigation that: (1) informs the person the staff has made a preliminary determination to recommend that the Commission file an action or institute a proceeding against them; (2) identifies the securities law violations that the staff has preliminarily determined to include in the recommendation; and (3) provides notice that the person may make a submission to the Division and the Commission concerning the proposed recommendation.”

Acceptance of a Wells Submission: […] [A] Wells notice informs a recipient that they may make a voluntary submission to the Commission regarding the Division’s proposed recommendation.”

The notion that entities who are faced with an enforcement action can’t make “arguments in their Wells submissions” is just plain laughable (and extraordinary).

Regarding last week’s speech by DOJ Deputy Attorney General Lisa Monaco (see here for the prior post), Gensler stated:

“I think we benefit from working in parallel with our fellow federal agencies, law enforcement authorities at the state level, international regulators, and self-regulatory organizations. For example, last week, Deputy Attorney General Lisa Monaco announced changes to several Department of Justice (DOJ) policies regarding corporate criminal enforcement. Among the changes, DOJ has instructed prosecutors to consider a corporation’s entire history of misconduct in making determinations about criminal charges and resolutions. The agency also strengthened prior guidance that, to qualify for cooperation credit, corporations must provide the Department with all relevant facts relating to individuals responsible for the misconduct. In addition, DOJ is considering whether resolutions such as non-prosecution and deferred-prosecution agreements are appropriate for certain recidivist companies. While our organizations are independent, and our enforcement tools, authorities, and missions are distinct, these changes are broadly consistent with my view of how to handle corporate offenders.”

Regarding the “sourcing of cases,” Gensler stated:

“[O]ur Enforcement staff themselves are a great source of cases. They’re the ones closest to the market. They might read a news story, find something curious, and open up a case. They’re the real cops on the beat. I can’t thank them enough for their dedication to the public.

There are also internal referrals from across our whole agency to the Enforcement Division. When it comes to enforcement referrals, I’ve asked Acting Director Dan Kahl of the Examinations Division and Director Gurbir Grewal of the Enforcement Division to evaluate existing practices and see how we can make improvements.

Moreover, we benefit greatly from the tips, complaints, and referrals of our robust whistleblower program. The program this year exceeded $1 billion in payouts since the passage of the Dodd-Frank Act in 2010.

Another source of cases is self-reporting. Look, if you mess up, and people do mess up sometimes, please, come talk to us. All things being equal, if you work cooperatively to bring wrongdoing to light, you fare better than if you try to mask it.

Cooperation — at least the type that gets credit — means more than meeting your legal requirements, such as responding to lawful subpoenas or making witnesses available for lawfully-compelled testimony. It means doing more than the bare minimum, like conducting a self-serving, independent investigation. It means taking steps that enhance our investigation, allow us to move quickly, and, if appropriate, help us to identify additional misconduct.”

Gensler’s suggestion that enforcement staff “might read a news story, find something curious, and open up a case” is laughable.

Going back to the original “football without referees” comment, it is laughable to suggest that issuer’s are only cooperating – “at least the type that gets credit” – unless they are taking “step that enhance [the SEC’s] investigation.”

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