Tag Archives: SEC Speaks

An Open Memo to SEC Commissioner Aguilar on the Use of Officer and Director Bars

Memo for SEC Commissioner Luis Aguilar:

Dear Commission Aguilar,

In your speech at the SEC Speaks 2015 PLI Conference (if you’ve forgotten what you said, it’s here), you advocated for increased imposition of officer and director bars against SEC enforcement targets.  It was a brief discussion in a speech covering several topics, but it reflects a shameful insensitivity to the power and impact of imposing the SEC’s “nuclear” remedy to ruin people’s lives.  I very much doubt you believe in the use of lengthy harsh prison sentences or lifetime deprivations of rights more generally in our law enforcement process.  In fact, there is a growing bipartisan recognition among our politicians that ever heavier and lengthier penalties is one of the blights of our criminal system.  Yet, when it comes to our securities laws, you seem to crave being a “hanging judge.”

As a reminder, here is what you said on the subject (footnotes omitted):

The Commission has a number of tools available when it finds that fraudulent misconduct has occurred – it can seek to enjoin such activity, disgorge ill-gotten gains, and impose civil penalties against the wrongdoers.  In addition, the Enforcement Division can use trading suspensions and asset freezes to achieve immediate impact and halt ongoing fraudulent activities.  These are all important remedies.

In my view, however, one of the most potent remedies is for the Commission to prevent wrongdoers from being allowed to remain in a role that permits them to continue to hurt investors.  To that end, the Commission needs to be more aggressive in seeking permanent industry bars and officer and director bars.  These bars, not only serve to punish the wrongdoer, but also protect investors from future misconduct by such person. These bars send a clear message to the next potential fraudster.

An SEC enforcement action should not be viewed merely as a cost of doing business; rather, it should cause individuals and companies—whether or not they are part of the Commission’s specific action—to seriously reflect on their own conduct.  This is particularly true in the case of recidivist violators.  If our remedial sanctions were ineffective in reforming a fraudster, then we must seriously consider removing them from the industry—permanently.  The SEC must do this to protect American investors.

During my time as a Commissioner, I have witnessed defendants fight charging decisions on all fronts, including fighting tooth-and-nail to avoid being prevented from serving as officers or directors of public companies or from being suspended from appearing or practicing before the Commission pursuant to Rule 102(e).  They much rather have their company pay a sizable penalty to continue to do what they do, unaffected and undeterred.  Recently, this was demonstrated in the Gupta matter, where a director convicted of insider trading and given a lifetime officer and director bar, tried to appeal that bar to the U.S. Supreme Court.  As you may know, the Court rejected that appeal by denying cert.  It is interesting to note that the $13.9 million civil fine imposed against Gupta was not appealed to the Supreme Court.

Defendants’ vigor to avoid being barred is to be expected, as those bars and suspensions take fraudsters out of the industry, and often have a far more lasting impact than the imposition of a monetary fine.  Their fight is the best indicator that the Commission’s ability to bar wrongdoers is an effective tool that should be used whenever appropriate.

The importance of a strong and robust Enforcement program is vital to an effective capital market on which investors can rely.  The Commission has to use all of the tools at its disposal, including imposing permanent industry bars and officer and director bars.

Boy, do you have it wrong.  Although I think you  are likely to be considerably too willing to impose the “permanent industry bars” you favor — by which I assume you mean bars from industries regulated by the SEC — that at least falls within the overall regulatory framework of the SEC’s governance over the securities industry.  But your advocacy for penalties that prevent people from pursuing their livelihoods in non-regulated businesses is a shameful example of self-righteous hubris that unfortunately infects not only you, but many SEC employees.

To begin, it is at least refreshing that you recognize that officer and director bars are, in fact, a form of punishment (“These bars … serve to punish the wrongdoer”).  The SEC’s enforcement staff would prefer if you had left that admission out of your speech.  You see, the problem is that you’re not supposed to admit that the SEC is really punishing people.  We all know it’s true, but your enforcement staff does not accept that this “relief” is a form of punishment, and they argue the opposite in the courts all the time because the equitable remedies available to the SEC are, under the law, available only for remedial purposes, not punishment.  So, thank you for at least recognizing in this one respect that the Emperior has no clothes.

Your argument that permanent officer and director bars are needed to prevent “recidivist fraudsters” from plying their fraudulent trade is, with respect, a laugher.  I don’t want to question how you do your job, but do you actually look at the settlements and judgments that you approve that include officer and director bars?  It is rare that an officer/director bar is aimed at a recidivist violator.  In fact, it is effectively SEC enforcement policy to demand officer/director bars in every case involving alleged violations of section 10(b).  That’s like sending a first-time drug offender to jail for 30 years.  Do you think that’s the right thing to do?

More importantly, I’m disappointed that you show no cognition of what is really going on in many of the cases you are responsible for overseeing.  You mention with apparent pride that “defendants fight charging decisions on all fronts, including fighting tooth-and-nail to avoid being prevented from serving as officers or directors of public companies.”  I bet you would do the same if you were faced with being barred permanently from public employment for an alleged defalcation you contested.  Perhaps you don’t realize that the SEC uses the unlimited resources of the Government constantly to bludgeon individuals who can’t afford to defend themselves into accepting a penalty that destroys their future and the future of their families.  It is only the lucky ones that have the resources to fight the SEC’s demand for such “relief.”

And, no, Mr. Aguilar, these are not all “fraudsters” just getting what they deserve.  Even you, I expect, have some understanding of the value of due process in determining whether someone is a “fraudster.”  And the SEC staff’s distorted way of looking at fraud, in which unfortunate mistakes or oversights are regularly argued to be “reckless disregard of the law,” leaves a lot more than “fraudsters” as victims of the SEC’s love affair with the “nuclear” officer/director bar “remedy.”

Mr. Aguilar, I’d ask that you consider the possibility that depriving a person of a large portion of her savings, and leaving her branded as a securities law violator is not just “a cost of doing business,” and may actually be enough “punishment” without seeking to deprive her permanently of future employment in a (privately-owned and managed) public company.  I daresay that if you faced accusations of stepping over the line, you would appreciate it if your accusers understood that they too have human foibles, and that “the quality of mercy is not strain’d”:

That in the course of justice none of us
Should see salvation: we do pray for mercy;
And that same prayer doth teach us all to render
The deeds of mercy.

Best Regards,

Straight Arrow

February 23, 2015

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SEC Commissioner Michael Piwowar Comments on Increased Use of Administrative Enforcement Actions

At the 2015 SEC Speaks PLI Conference, Commissioner Michael Piwowar devoted part of his address to the SEC’s decision to make increased use of administrative proceedings in its enforcement actions.  He advocated that “In order to ensure that the Commission does not engage in arbitrary or capricious conduct in enforcement matters, the Commission should formulate and adhere to a consistent set of guidelines when conducting our enforcement proceedings.”  Here is what he said on the subject (footnotes omitted):

Our enforcement program could also benefit from a look through the lens of fairness.  In order to ensure that the Commission does not engage in arbitrary or capricious conduct in enforcement matters, the Commission should formulate and adhere to a consistent set of guidelines when conducting our enforcement proceedings.

Commission staff has recently indicated that they will recommend instituting more enforcement matters, including insider trading cases, through administrative proceedings rather than going through the federal district courts.  Announcement of this plan to increase the use of administrative proceedings in insider trading cases followed the Commission’s loss in two insider trading cases in federal district courts.  Regardless of whether these circumstances are linked, this change has the appearance of the Commission looking to improve its chances of success by moving cases to its in-house administrative system.

Even prior to the staff announcement, more cases were being brought in administrative proceedings as a result of the enactment in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd‑Frank Act).  Prior to the Dodd-Frank Act, the Commission only had the authority to seek monetary penalties in administrative proceedings against regulated entities and would have needed to file an action in federal court to obtain a monetary penalty against any other person.

In administrative proceedings, there is no jury and cases are presented to administrative law judges that are employees of the Commission.  In addition, discovery available to defendants is more limited.  The Commission has an extremely high success rate when litigating through administrative proceedings.  One Article III federal judge has stated that in fiscal year 2014 the SEC won 61 percent of federal court trials but was successful in 100 percent of its administrative proceedings.  To avoid the perception that the Commission is taking its tougher cases to its in-house judges, and to ensure that all are treated fairly and equally, the Commission should set out and implement guidelines for determining which cases are brought in administrative proceedings and which in federal courts.

The lack of any standards governing the SEC’s determination when to use the administrative process instead of the federal courts to pursue enforcement actions is one of the grounds used to challenge the constitutionality of those proceedings.  It is argued that according the SEC unfettered discretion over when to allow an enforcement target the right to a jury trial violates the Seventh Amendment and the equal protection clause of the Constitution, and also results in arbitrary and capricious agency decision-making.  Commissioner Piwowar’s suggestion does not vitiate the fundamental problem of denying key substantive and procedural rights to SEC enforcement targets by circumventing the federal courts, but it represents at least a small step in the direction of limiting unbridled power in the decision whether to strip an enforcement defendant of those rights.

The full speech is available here: Remarks at the “SEC Speaks” Conference 2015: A Fair, Orderly, and Efficient SEC.

Straight Arrow

February 23, 2015

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