(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

SEC Enforcement Officials Discuss Recent Developments

Peter Bresnan and Walter Ricciardi, deputy directors in the SEC's Division of Enforcement, discussed stock option backdating, hedge fund cases and other developments at a recent District of Columbia Bar program. The SEC currently has about 130 option backdating cases under investigation, but will not bring that many actions, according to Mr. Ricciardi. He added that stock option backdating cases often involve other problems as well, such as accounting, tax and governance issues. Companies have been encouraged to self-investigate for potential violations, he said, and those investigations should be run by the right people, which are those completely independent from the matter. Mr. Ricciardi said the staff will be skeptical about claims of mere sloppiness when the evidence suggests otherwise.

A member of the audience said that hundreds of law-abiding companies were backdating stock options rather openly, but it is now being characterized as fraud. He questioned whether people engaged in that activity really knew they were doing anything wrong, given that the SEC did not spot the problem until an academic analysis of backdating practices became public. Mr. Ricciardi responded that the SEC had brought a few cases involving financial fraud that included backdating before the academic study was made public.

Mr. Ricciardi said that he did not care how many companies backdated stock options, because it is illegal if they are aware of the accounting requirements and concealed the conduct. Mr. Ricciardi said that backdating is not a complicated issue and he does not think juries would have a problem recognizing the fraud. "Everyone is doing it" is not a defense, Mr. Ricciardi said, and emphasized that any outcry should come from the honest executives.

Mr. Bresnan agreed that the SEC was not "asleep at the wheel" on the backdating issue. It was part of a risk-based initiative at the SEC. As for law-abiding executives, he said the staff often found problems in other areas as well. If you are willing to "cheat in one area", you are usually willing to cheat in another, he said. When asked whether auditors were testing for backdating at all, Mr. Ricciardi said that in some cases individuals falsified documents to deceive the auditors. If the auditors knew of the illegal activities, he said they were at risk for an enforcement action.

The deputy directors were asked if backdating could escape an enforcement action if the external counsel had provided a letter stating that the practice was legal. Mr. Ricciardi said that would not address the accounting issue, and Mr. Bresnan added that the staff has not heard that defense. If anyone attempted to rely on an "advice of counsel" defense, Mr. Bresnan said they likely would have to waive privilege for it to be successful.

Mr. Bresnan turned to the topic of hedge funds and said the reason the SEC cares is that hedge funds hold over $1 trillion in assets and all of their managers are chasing the same profit opportunities. They are not all going to succeed, he said, but since investors have grown accustomed to returns ranging from 20 percent to 25 percent, they may be tempted to engage in fraud to reach that level.

There are two types of problems that crop up with hedge funds, according to Mr. Bresnan. There is fraud against hedge fund investors and fraud on the markets. Mr. Bresnan said he is less concerned about the loss of money by a multimillionaire, but is very concerned if the trading market is unfair since that would affect the "mom and pop" investors.

Hedge funds may be involved in any kind of trading violation, Mr. Bresnan added. In the future, he said the staff may want to look at trade leakage where a broker-dealer learns of a large trade planned by a mutual fund and relays that information to a more favorable hedge fund client who front-runs the trade. Another issue worth looking at is the trading by hedge funds through consultants. He cited a news account of doctors who provided information about clinical trials to an intermediary who then passed it on to a hedge fund that would trade on the basis of the information. Whether obtaining this informational advantage is illegal remains an open question, he said.

The deputy directors were asked whether the SEC is now working more closely with the Department of Justice than it has in the past. Mr. Ricciardi said that the Department of Justice has a much greater interest in white collar crimes since Enron. The SEC no longer has to make formal referrals, he said, because the Department of Justice calls the SEC when it hears about a case. Mr. Bresnan said he does not believe the SEC is working more closely with the Department of Justice, just more often.

Mr. Ricciardi also responded to a question about the SEC's position on the payment by companies of attorney fees. The SEC has no problem with that, he said, and would not view that as a lack of cooperation. His personal view is that if a person is convicted, a company should be able to take back the legal fees. The indemnification of penalties is a different matter, he said. That violates public policy and is different from attorneys' fees.

When asked about the Department of Justice's revised position on the waiver of attorney-client privilege, Mr. Bresnan said it comes closer to where the SEC has been. The SEC does not require a waiver, he said. It just wants to get to the facts. The staff will not hold it against a company that does not waive the attorney-client privilege but will credit a company for cooperating if it chooses to do so.