Risk & Compliance

An Agency Ready to Roar?

The SEC under new chief Mary Schapiro has gotten off to a slow start on the enforcement front, but attorneys expect a burst of energy in 2010.
Alix StuartNovember 1, 2009

When Mary Schapiro took over the chairmanship of the Securities and Exchange Commission, she enjoined the staff to “act like our hair is on fire” in curing the agency of various ills such as the botched investigation of Bernard Madoff’s Ponzi scheme. But in the past nine months, a daunting slate of projects, including a reorganization of the enforcement department and a renewal of the SEC’s commitment to international financial reporting standards, has led to more delays than dousings. Experts say, however, that all signs point to a fiercer SEC emerging.

To be sure, there has been a notable lack of headline cases for most of 2009. The Madoff situation sparked a string of smaller Ponzi-scheme investigations, and insider-trading charges continued apace, but “so far they still seem to be trying to clear out the inventory of old cases,” says Randall Fons, former head of the SEC’s Central Regional Office and now a partner at Morrison Foerster. Commissioners have also unexpectedly delayed several projects. They offered yet another deadline extension for small companies to comply with Section 404 of the 2002 Sarbanes-Oxley Act, and also deferred a decision on shareholder access to proxies until next year, meaning companies won’t have to comply until 2011 at the earliest.

Still, attorneys say they’re already seeing a difference in the SEC’s intensity when it comes to pending litigation, and they expect that to continue. “Between the $1 billion budget [proposed for 2010] and the need to project that it’s tough, it’s reasonable to expect a pretty aggressive enforcement program,” says Eugene Goldman, co-chair of the SEC Defense Group at McDermott Will & Emery. He notes that the SEC is playing offense in a number of areas, including in its case regarding Bank of America’s purchase of Merrill Lynch. Although a federal court judge struck down the SEC’s initial settlement with the bank and ordered the case to trial, the agency has come back swinging, using the process to seek more information from the bank in hopes of filing additional charges against it.

A July clawback lawsuit against a former CEO should also “make officers of publicly traded companies very nervous,” says Fons. The SEC asked a federal court in Arizona to order Maynard Jenkins, ex-CEO of CSK Auto, to repay $4 million in bonuses and stock-sale profits after frauds allegedly involving other officers led to two restatements, even though Jenkins himself was not accused of any wrongdoing. (Jenkins is currently seeking to have the case dismissed.) The first case using Section 304 of Sarbanes-Oxley is “clearly an area where they’ve plowed new ground,” says Fons.

How the structural changes will play out remains unclear. In response to two unfavorable reports by the Office of the Inspector General (OIG), the enforcement department plans to improve its processes for analyzing complaints and create national specialized units to handle complex topics like structured securities and the Foreign Corrupt Practices Act. Conceptually, that’s a good idea, says Fons, “but it presents some logistical problems in terms of oversight and communication,” both skills that the OIG report suggested were in short supply at the SEC.

On the Front Lines, Serious Angst

A survey of nearly 800 enforcement staffers this past summer found that a good number have strong doubts about their mission.

54% of enforcement staffers stated they did not have adequate resources to successfully perform their job.

53% were not familiar with the performance goals and measures in the SEC’s annual performance and accountability report.

42% disagreed with the idea that the enforcement department has an effective process in place for selecting cases to pursue.

Survey comments cited in the report:

“Priorities change like the flavor of the day. Whatever’s ‘hot in the news’ becomes our priority. Often it feels like we’re the dog chasing its own tail.”

“Everyone is afraid of making a mistake, so they take on every case, then make every case a priority, and, a year later, when the dust settles, they have to close the cases they never looked at on the grounds that they don’t have sufficient resources.”

Source: Office of the Inspector General for the SEC

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