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U.S. Supreme Court Rejects SEC's Bid for More Time to Bring Civil Fraud Enforcement Action
On February 27, the U.S. Supreme Court held that the clock on the five-year statute of limitations for the SEC to pursue civil fraud claims under the Investment Advisers Act begins to run when the fraud occurs, and not when it is discovered, because the “discovery rule” does not apply to government enforcement actions for civil penalties. Gabelli v. SEC, No. 11-1274, 2013 WL 691002 (Feb. 27, 2013). The Court’s holding followed an investment adviser’s appeal from a Second Circuit decision that, under the discovery rule, the statute of limitations had not accrued until the fraud was discovered or could have been discovered with reasonable diligence because the claims sounded in fraud. The Court reversed the Second Circuit’s decision and remanded for further proceedings on the basis that extending the fraud discovery rule to government civil penalty enforcement actions would improperly leave defendants exposed to government action for an uncertain period beyond the five years after their alleged misdeeds. The Court explained that the discovery rule is meant to preserve the claims of parties who have no reason to suspect fraud, but that the government, here the SEC, is different insofar as it is specifically tasked with rooting out fraud and possesses several legal tools to that end. The Court also observed that, unlike a standard victim of fraud seeking only recompense, the government also seeks remedies intended to punish.
SEC National Examination Program Publishes 2013 Examination Priorities
On February 21, the NEP published its examination priorities for 2013. The NEP’s market-wide priorities include (i) fraud detection and prevention, (ii) corporate governance and enterprise risk management, (iii) conflicts of interest, and (iv) technology. The NEP also identifies priorities for its (i) investment advisers and investment companies, (ii) broker-dealers, (iii) clearing and transfer agents, and (iv) market oversight program areas. For example, for the investment advisers and investment companies program area, the NEP plans to focus on certain ongoing risks including (i) safety of assets, (ii) marketing and performance advertising, and (iii) fund governance, as well as certain new and emerging risks.
New York Federal Court Holds SEC's FCPA Enforcement Theory "Far Too Attenuated" for Jurisdiction
On February 19, the U.S. District Court for the Southern District of New York held that the SEC’s allegations of personal jurisdiction over a former CEO of Siemens’ Argentinian subsidiary – a German citizen with no direct ties to the United States – were “far too attenuated from the resulting harm to establish minimum contacts,” and dismissed the case against him for lack of personal jurisdiction. SEC v. Sharef, No. 11-Civ-9073, 2013 WL 603135 (S.D.N.Y. Feb. 19, 2013). In the underlying case, the SEC alleged that, between 1996 and 2007, Siemens employees approved and paid millions of dollars of bribes to Argentinian government officials throughout the life of a contract with the Argentine government, during the renegotiation of that contract, and during an arbitration proceeding after the contract was canceled. The SEC alleged that the CEO participated in the renegotiation of the contract and “pressured” the CFO to approve the bribes. Applying the due process requirements of minimum contacts and reasonableness set forth in International Shoe v. Washington, 326 U.S. 310 (1945), the court reasoned, “[i]f this Court were to hold that [the CEO’s] support for the bribery scheme satisfied the minimum contacts analysis, even though he neither authorized the bribe, nor directed the cover up, much less played any role in the falsified filings, minimum contacts would be boundless.” This decision follows another recent decision in the Southern District of New York regarding personal jurisdiction over foreign FCPA defendants. In that case, the court reached the opposite outcome and found that the SEC had alleged personal jurisdiction because the defendants’ alleged conduct was “designed to violate” U.S. securities laws and thus was “directed toward the United States.” SEC v. Straub, No. 11-Civ-9645, 2013 WL 466600 (S.D.N.Y. Feb. 8, 2013). In Sharef, the court distinguished Straub on the basis that the individuals orchestrated a bribery scheme, “and as part of the bribery scheme signed off on misleading management representations to the company’s auditors and signed false SEC filings.”
SEC Names Acting Enforcement Director
On January 31, the SEC announced that George Canellos will serve as Acting Director for the Division of Enforcement. Mr. Canellos currently is the Deputy Director of that division, and effective February 8, 2013, will fill the director role vacated by the departing Robert Khuzami. Mr. Canellos was appointed Deputy Director in June 2012 and, according to the release, has been instrumental in developing the division’s Cooperation Program, in generating numerous programmatic, policy, and legislative initiatives, and in critical decisions on national priority enforcement actions. He previously served three years as Director of the SEC’s New York Regional Office.
President Obama Re-nominates Richard Cordray for CFPB Director, Nominates Mary Jo White for SEC Chair
On January 24, President Obama announced his re-nomination of current CFPB Director Richard Cordray. Mr. Cordray has led the Bureau since January 2012 when President Obama used his recess appointment authority to install the CFPB director. Absent Senate confirmation, Mr. Cordray’s recess appointment expires at the end of this year. Further, the constitutionality of that appointment may be called into question by a recent federal appellate court decision addressing other recess appointments. Also on January 24, President Obama nominated Mary Jo White for Senate confirmation to serve as Chairman of the SEC. Ms. White is a former U.S. Attorney for the Southern District of New York, during which time she led high-profile prosecutions of organized crime members and terrorists. Most recently she was in private practice.
Federal Agencies Announces Numerous Appointments
SEC Names Office of Market Intelligence Chief. On January 22, the SEC announced that Vincente Martinez will serve as the head of the Office of Market Intelligence, a unit of the Enforcement Division that collects and evaluates tips, complaints and referrals. Mr. Martinez rejoins the SEC from the CFTC where he served as the first director of that agency’s whistleblower office. He previously spent eight years in the SEC’s Enforcement Division, most recently helping to develop Enforcement Division and SEC-wide policies and procedures for handling tips, complaints, and referrals. Lori Walsh, who is currently serving as the Acting Chief of the Office of Market Intelligence, will serve as Deputy Chief of the office.
FHFA Announces Deputy Director for Housing Mission and Goals. On January 15, the FHFA announced that beginning in March Sandra Thompson will serve as Deputy Director of the Division of Housing Mission and Goals with responsibility for overseeing the FHFA’s housing and regulatory policy, financial analysis, and policy research and analysis of housing finance and financial markets. Ms. Thompson will leave her current position as Director of the Division of Risk Management Supervision at the FDIC where she led the agency’s examination and enforcement program for risk management and consumer protection. The FHFA also promoted Nina Nichols to serve as Deputy Director of the Division of Supervision Policy and Support.
OCC Announces Chief Counsel. Last week, the OCC announced Amy Friend as the agency’s Chief Counsel beginning in February, replacing Julie Williams who retired last fall. Ms. Friend is a former assistant chief counsel at the OCC and served as chief counsel to the Senate Banking Committee during the development of the Dodd-Frank Act.
SEC Announces Departure of Enforcement Director, Names New General Counsel and Chief Accountant
On January 9, the SEC announced that its Enforcement Director, Robert Khuzami, is leaving the agency. Mr. Khuzami was appointed to the position in February 2009. The SEC press release credits him with, among other things, restructuring the division and aggressively pursuing financial crisis-related cases and insider trading enforcement, which, together with other enforcement activities, yielded the all-time record number of 735 SEC enforcement actions in FY 2011 and another 734 actions in FY 2012. Earlier in the week, the SEC announced that Geoffrey Aronow will serve as the agency’s General Counsel. Mr. Aronow previously served as the Director of the Division of Enforcement at the CFTC for nearly four years, but most recently was in private practice. Last week, the SEC named Paul Beswick as Chief Accountant, head of the agency office responsible for establishing and enforcing accounting and auditing policy. Mr. Beswick joined the SEC in September 2007 and has filled the position in an acting role since July 2012.
SEC Names Acting Directors for Corporation Finance, Trading and Markets
On December 17, the Securities and Exchange Commission (SEC) announced that Lona Nallengara will serve as Acting Director of the Division of Corporation Finance, replacing Meredith Cross who recently announced her departure. Mr. Nallengara has served as Deputy Director for Legal and Regulatory Policy of the Division since March 2011 and has been responsible for overseeing the Division’s offices of Chief Counsel, Enforcement Liaison, International Corporate Finance, Mergers and Acquisitions, and Small Business Policy. The SEC also announced that John Ramsay will replace Robert Cook, Director of the Division of Trading and Markets, on an acting basis when Mr. Cook departs after a short transition period. Mr. Ramsay has served since September 2010 as a Deputy Director for the Division and is responsible for broker-dealer financial responsibility, risk oversight, and clearance and settlement functions. He has played a key role in the advancement of rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
SEC Chairman Announces Departure, President Obama Names Replacement
On November 26, SEC Chairman Mary Shapiro announced that she will step down from her position on December 14, 2012, after serving as Chairman for nearly four years. The SEC press release described her tenure as one during which she “strengthened, reformed, and revitalized the agency” while overseeing “a more rigorous enforcement and examination program” and implementing new rules. On the same day, President Obama designated SEC Commissioner Elisse Walter as Chairman.
Residential Mortgage-Backed Securities Working Group Announces Several New Cases
On November 20, New York Attorney General Eric Schneiderman, one of the Co-Chairs of the federal-state Residential Mortgage-Backed Securities (RMBS) Working Group, announced a new case filed in the New York State Supreme Court alleging Martin Act violations by a securities firm and several of its affiliates in connection with the offering of RMBS. The complaint charges that the firms made fraudulent misrepresentations and omissions to promote the sale of RMBS to private investors and deceived investors regarding the care with which the firms evaluated the quality of loans included in certain RMBS offerings. The suit claims that investors suffered cumulative losses over $11 billion on RMBS sponsored and underwritten in 2006 and 2007. The DOJ’s Financial Fraud Enforcement Task Force, of which the RMBS Working Group is a part, noted the significant federal-state coordination that led to the filing, including the “significant” contributions of the FHFA’s Inspector General, as well as assistance from the SEC and Assistant U.S. Attorneys from across the country.
On November 16 the SEC announced that it had obtained more than $400 million from two firms alleged to have misled investors in RMBS. In cases coordinated with the RMBS Working Group, the SEC charged that both firms failed to fully disclose their bulk settlement practices, which involved retaining cash from the settlement of claims against mortgage loan originators for problem loans that the firms had sold into RMBS trusts, and which they no longer actually owned. The SEC also claimed, among other things, that one of the firms misstated information concerning the delinquency status of loans that served as collateral for an RMBS offering it had underwritten, while the second firm allegedly applied different quality review procedures for loans that it sought to put back to originators and instituted a practice of not repurchasing such loans from trusts unless the originators had agreed to repurchase them.