The Five Biggest SEC Cases and Regulatory Decisions of 2011

  • By: Staff Editor
  • Date: February 03, 2012
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The following five cases may be regarded as the biggest SEC cases in 2011, although in some of them, the SEC itself was the defendant.
1. Conviction of Raj Rajaratnam and Co-conspirators
The insider trading at Galleon should easily qualify as one of the biggest SEC cases of 2011. Although many have been charged in the past with insider trading what stood out in this case was the use by authorities of wire taps. The evidence produced by the prosecutors was the recorded versions of wiretapped phone calls between Mr Rajaratnam and what the prosecutors called ‘co-conspirators’. Many co-conspirators pled guilty although Rajaratnam himself maintained that he merely pieced together information from several sources to make an investment decision.  
Prosecutors described it as Mr Rajaratnam’s involvement in the largest hedge fund insider trading scheme in history. According to them, Mr Rajaratnam obtained non-public, material insider information from insiders and others at hedge funds, public companies and investor relation firms which led him to execute trades in the stock of public companies like Goldman Sachs, Clearwire, AMD and Intel. 
The prosecutors made the charges stick and Mr Rajaratnam, the main accused in the case, was sentenced in Oct 2011 to 11 years in prison. Conspiring to commit securities fraud or for that matter, committing securities fraud are serious crimes and hedge funds had better stay away from such malpractices and ensure compliance with the law.
2. SEC decides against requiring whistleblowers to report to their employer first
On May 25, 2011, the SEC finalized the rule for implementation of Section 922 of the Dodd-Frank Act concerning whistle blower incentives. The bone of contention was whether whistleblowers should be mandated to raise their issues with the corporate employer before they report to the SEC or should they be allowed to bypass the employer and report directly to the SEC. 
The SEC decided against mandating the whistleblowers to first report to their employer. However, it decided to encourage the whistleblowers to first report to their employer.   Mary Schapiro, the SEC boss, justified the decision by stating that the SEC-accepted version of the rule struck the right balance: on the one hand, it encouraged the whistleblowers to take the conventional route of internal compliance. On the other, if it is not convenient, they have the option of directly approaching the SEC. Towards this end, the SEC-accepted version of the rule has been fine-tuned. Accordingly,
  • the whistleblower has up to 120 days to report to the SEC, after reporting to the employer internally.
  • The SEC, while deciding on the amount of the award, will consider to what extent the whistleblower has participated in the internal compliance process or interfered with the internal compliance process
  • The SEC will give credit to the whistleblower even if she reports only to the employer and the employer passes the information along to the SEC
In the circumstances, courtesy the SEC decision, it is hoped that employers / corporations will rather comply with the law than violate it. 
3. The D.C. Circuit Vacates SEC Exchange Rule 14a-11
Exchange Act Rule 14a-11 permitting 3% (or larger) shareholders to use the company proxy statement to nominate directors was challenged by Business Roundtable and the U.S. Chamber of Commerce in the D.C. Circuit. They claimed that the SEC had failed to consider the rule’s effect upon efficiency, competition, and capital formation," in terms of the Exchange Act and the Investment Company Act of 1940.
On July 22, 2011, the D.C. Circuit Court of Appeals issued an Opinion vacating the Rule. It said the SEC had inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters."
Surprisingly, the SEC announced on September 6 it would not seek rehearing of the decision. Chairman Mary Schapiro said she remained committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards. She wanted to be sure that the SEC carefully considered and learned from the Court's objections even as it determined the best path forward.
4. The Jenkins Litigation: Settlement Negotiations in Clawback Case Resolved after collapsing initially
The SEC's Division of Enforcement Staff agreed to resolve a case with Maynard Jenkins, the former CEO of CSK Auto Corporation. However, the five SEC Commissioners rejected the settlement.
In July 2009, the SEC filed a suit against Mr. Jenkins, asking that he be ordered under Section 304 of the Sarbanes-Oxley Act to reimburse the company and its shareholders the more than USD 4 million that he received in bonuses and stock sale profits even as CSK Auto was committing accounting fraud. The complaint did not say that the conduct of Mr. Jenkins led to the fraudulent accounting, vide. SEC v. Jenkins, No. 09-cv-01510 (D. Ariz. filed Jul. 22, 2009). The SEC even declared that it was the first action seeking reimbursement under Section 304 from an individual who was not alleged to have otherwise violated the securities laws.
On March 24, 2011, the parties informed the Court that Mr. Jenkins and the SEC Staff had reached a tentative settlement agreement which was subject to approval by the Securities and Exchange Commissioners." According to Washington Post, the proposed settlement was for less than half the amount the SEC originally sought. However, in July 2011, the Commissioners rejected the proposal. According to a reliable source, some Commissioners felt the amount of the settlement was on the low side. Another view surfaced, stating that the case should not have been brought at all.
However, on November 15, 2011, the SEC announced that it had reached a new settlement with Mr. Jenkins. Accordingly, the SEC had agreed to settle for approximately USD 2.8 million of bonus compensation and stock profits that Mr. Jenkins received while the company was committing accounting fraud. What prompted the SEC to settle for the lower amount was not disclosed. The settlement was approved by the Court the following day.
If the SEC’s rejection of the staff's proposed settlement becoming public was odd, it was even odder that the SEC settled for an amount which was well below what it originally demanded!
5. SEC’s Destruction-of-Documents Policy
Through a letter dated August 17, 2011, Senator Chuck Grassley of the Senate's Judiciary Committee sought to know from SEC Chairman Mary Schapiro whether the SEC had destroyed files relating to some of its more high-profile and controversial matters, such as its investigations of Bernie Madoff, Goldman Sachs, Bank of America, Lehman Brothers and others. Senator Grassley's inquiry came about because of the allegations made in a letter by Darcy Flynn, a thirteen-year veteran of the staff who through a counsel, advised the SEC that documents were still being destroyed and an injunctive relief may be sought from a federal court if the SEC did not freeze its document-destruction policy. This led to SEC General Counsel Mark Cahn instructing the Division of Enforcement staff to stop the existing record-destruction procedures for closed cases, until further notice.
In a second inquiry, the SEC's Inspector General examined the SEC's policy of destroying documents gathered in pre-investigation inquiries known as Matters Under Inquiry ("MUI"), as well as statements made by the SEC to the National Archives and Records Administration ("NARA") regarding that policy. He found that the SEC had a policy in place for nearly 30 years which called for the destruction of such documents and that the documents that should have been preserved had been destroyed. When he asked NARA about the destruction of documents, the SEC did not disclose the existence of the policy and stated it did not know if such documents had been destroyed. Although his office did not conduct an exhaustive audit, the Inspector General said that none of the investigations was hampered by the destruction of records for a MUI. He made a series of recommendations for the SEC to address these issues.
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