There are culpable officers and directors who are escaping the consequences of their own evil-doing, while their corporations (and thus implicitly their shareholders) pay large penalties to the SEC. Political pressure may or may not be involved, but the regulators are out to remedy that regulatory misdirection by pursuing individuals in addition to their companies. This was the message at today’s Boston meeting of the National Association of Corporate Directors–New England.
Former SEC chair Christopher Cox was not clear as to what impact the recent election might have on SEC enforcement. He was sure that Congress would press the SEC to finalize the long-overdue regulations under the JOBS Act to permit public advertising in private placements. [Retiring SEC Chair Mary Shapiro took big heat for allegedly delaying implementation of the regulations, mandated no later than July 4, 2012 by the Act, allegedly for fear that her legacy would be harmed by adopting such regulations on her watch notwithstanding required by (literally) an act of Congress.]
He did note that many in Congress were pressing for greater heat on individuals committing financial transgressions and contributing to the economic collapse, including heat on “gatekeepers” (code word for lawyers), but suggested this was unrelated to election results.
George Canellos, Deputy Director of Enforcement at the SEC, similarly noted that enforcement was not politically driven and, in fact, operated independently of the Commission in many ways, and that he personally did not think that enforcement should create policy; it should just enforce the law. But having said that, Canelllos made clear that his idea of enforcement of existing laws meant greater heat on individuals:
*Under Dodd Frank, the SEC now has the power to bring civil suit internally before an SEC administrative judge (not in Federal Court) and assess penalties against individuals who violate the law in connection with disclosure, trading and the failure to supervise a corporation; previously SEC actions prosecuted internally only could be brought against individuals affiliated with regulated entities such a brokers and advisers.
*The SEC can pursue people who “cause” a violation of securities law by a company (the company itself typically is absolutely liable for many failures to comply). That new standard for personal liability does not require someone to intend to do evil, either as an actor or as an aider and abetter. It is now enough to incur SEC enforcement that an officer or director is negligent in supervising the affairs of a company, where the company fails to meet a performance standard mandated by law. (At the surface, it is hard to parse this standard with the so-called business judgment rule that protects directors against liability if they are loyal to the corporation and use their best judgment; at the edge of each doctrine there is an overlap where someone does his/her best using best judgment but that judgment is so off-base that someone finds it to be negligent; in any event, the business judgment rule does not protect officers — SMH.)
*The speakers touched on the lead article in today’s Wall Street Journal, headlining investigations by the SEC into executive insider trading. The regulators warned against: relying on blanket so-called 10b5-1 plans (self executing trading plans that are set in place and trade someone’s stock automatically based on certain criteria but without direction by the executive or director, thus avoiding claims of use of inside information in the trading decision) when those plans are set up at a time when the executive then had material inside information; reliance on expert networks (where experts for a fee discuss a company with paying investors, sometimes providing information not otherwise available); and, claiming the insider trading defense know as “mosaic” (traders claiming they did not acquire material inside information but just non-material tid-bits on which they did not improperly rely, but just used those tid-bits to create a “mosaic” of facts that became trade-able intelligence by reason of the intellect of the trader).
Lots is happening in the securities field, but one real development is a growing insistence on holding individuals accountable at least monetarily if not criminally where they participate in actions leading to great financial harm to others. The populist plaint that the financial community got bailed out and paid bonuses when they caused the mess that impoverished so many innocents is getting resonance in the regulatory community; whether or not this is related to the election and a subtle shift in the flavor of government seems irrelevant, as the trend seems well-established without regard to its genesis.