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Enforcement Division Reports on Past Year's Activities

The SEC announced that Linda Chatman Thomsen, the director of the Enforcement Division, is returning to the private sector. Thomsen was a co-host of the Practising Law Institute's recent "SEC Speaks" conference at which her staff provided an update of recent activities. Deputy Director George Curtis reviewed the working groups which have focused on stock option backdating, municipal securities, insider trading and hedge funds. The options backdating group is winding down, according to Curtis.

The enforcement staff is hoping to move more quickly and bring more streamlined cases going forward, Curtis said. The staff will work as a unit nationally more than in the past and is reviewing the Wells process with an eye to ensuring uniformity. The staff is working to improve the efficiency of its collections and distributions group and to better track the assignment and distribution of complaints, tips and referrals. Curtis noted that tips are real time information from real investors.

Former Commissioner Edward Fleischman was a commentator on the enforcement panel. He said the staff received an admirable settlement in the auction rate securities cases, but asked whether investors should have gotten an inkling of the crisis before it hit. Associate Director Frederic Firestone said there was no warning to either investors or the staff. The auction rate securities market collapsed very fast. The staff focused on getting a resolution for investors rather than turning over every stone, he said, but it obtained sufficient evidentiary materials to make its cases.

Los Angeles Regional Director Rosalind Tyson reported that the SEC currently has 25 very active investigations in the subprime area involving securities sellers, mortgage originators, securitizers, credit rating agencies and others. The cases involve complex fact situations, she said. She assured that the staff recognizes that poor business judgment does not equate to securities fraud.

Deputy Director and Chief Counsel Joan McKown reviewed the enforcement manual which was posted on the Division's Web site last October. The manual includes a compilation of long-standing policies, both formal and informal. McKown said the publication of the manual was a major nationwide effort. The manual is not a static document. New policies will be added. McKown dispelled the notion that the manual is the so-called red book, a guide to taking testimony. It is much broader than the red book, she said.

The enforcement manual focuses on the investigative process from the beginning through the Wells process. It does not cover settlements and court procedures. McKown emphasized that the guidance is for the staff. People have asked if they may comment on the document. McKown said people may pass along their comments, but the manual has no legal precedent and creates no legal obligation for the staff. Some areas are dictated by statute, such as the right to financial privacy. Interested parties should check the document from time to time for changes. McKown added that a number of changes will be made in the near future, but only to correct drafting errors.

Fleischman asked if the staff will flag the updates to make them easier to identify. McKown said that flagged updates had not been planned but she will consider doing so. She reported that there is nothing new in the Wells process which is covered by the manual. The staff has received a lot of questions about the post-Wells process, she said, which has been examined by a focus group. A broad spectrum of conduct is appropriate depending on the facts and circumstances of the case, she said. McKown also pointed out that the bullet list which is contained in Section 2.4 is not exhaustive and the staff has wide discretion. McKown also reported that the section on waiver of privilege is not a new process but reflects the Division's long-standing policy.

Denver Regional Director Donald Hoerl said the Division has brought an average of three Ponzi schemes a month in recent years. Since the Madoff case, the Division has filed four Ponzi cases. The number of cases is typical, he said, but their magnitude is greater.

Associate Director Antonia Chion reported on insider trading cases, which represent approximately 9% of the enforcement program. Chion said the staff has had great success in mining trading information for evidence of insider trading. She also reported a perfect win rate in the last fiscal year in the cases that were brought to trial. The criminal authorities have also been active in insider trading cases.

Associate Director Christopher Conte reported on Foreign Corrupt Practices Act cases and said there are additional important FCPA cases on the horizon.