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Conference Panelists Review Enforcement and Litigation Trends

At the Practising Law Institute's recent conference on securities regulation, a panel of current and former enforcement directors discussed trends and priorities. Current Enforcement Director Linda Chatman Thomsen responded to the former directors' questions about actions involving the auction rate securities market, settlements in principle and deferred penalties, among other issues. Thomsen said there will be more enforcement activity involving auction rate securities, both from the SEC and from FINRA. A lot of people selling those products did not understand them, she said.

Stephen Cutler, the executive vice president and general counsel for JPMorgan Chase & Co. inquired about the circumstances in which the Enforcement Division deems settlements in principle appropriate. Thomsen said these settlements are a rarity because the Commission does not favor them. The settlements drag on, she said. When the Commission agrees to a settlement in principle, it is usually due to multiple parties coming to a conclusion at the same time. Cutler asked whether there had been any final settlements from the settlements in principle. Thomsen said "not yet." She added that the urgency is reduced once a settlement in principle is announced.

Deferred penalties follow the guidance issued in January 2006, according to Thomsen. In the auction rate cases, Thomsen said the SEC wanted to make investors whole and knew the process would take place over a period of time. Her hope is that the plan to return investors' money will go so well that no penalty will be imposed.

Richard Walker, the managing director and general counsel at Deutsche Bank AG, pointed to what he called a startling increase in manipulation cases and said they are hard to prove. Thomsen assured him that the SEC has people who are very good at those cases. Walker noted that insider trading cases are also up sharply. Thomsen said the insider trading cases include more professionals, more cases that are international in scope and more repeat offenders. She added that she has never seen an insider trading case with "boring facts."

Steven Bochner with Wilson Sonsini Goodrich & Rosati asked about enforcement cases involving Rule 10b5-1 plans. Thomsen once suggested that some of the plans were being used to conduct insider trading. She said that people paid attention once they knew the SEC was looking at the trading in the plans. Rule 10b5-1 plans have to be real plans, she said, and not plans that get changed all of the time. The Division will continue to monitor them.

Foreign Corrupt Practices Act cases continue to be an active area at the Division and at the Department of Justice. Thomsen said the staff often hears about these cases through self-reporting. The SEC is typically involved in all of the DOJ's FCPA cases. The agency which takes the lead is determined on a case-by-case basis.

Thomsen said that cases involving stock options are winding down because compensation practices have changed. There is nothing unique in what is coming, she said.

Private Securities and Derivative Litigation

Max Berger with Bernstein Litowitz Berger & Grossman believes the decline in federal court filings in 2005 and 2006 was due to the Sarbanes-Oxley Act. President Bush's appointees on the federal courts also restricted shareholder litigation, he said. By 2007 and 2008, the prophylactic effect of SOX had worn off. Greed is a growth industry, he said. Berger, a plaintiffs' lawyer, said that recent Supreme Court cases and the Private Securities Litigation Reform Act had an impact on the cases they bring.

Gregory Markel with Cadwalader, Wickersham & Taft LLP asked about the changes a new president and a stronger majority of Democrats in both houses of Congress would bring. Berger said he would like to see a reinstatement of aiding and abetting liability and scheme liability. He will push for a reversal of Stoneridge and its predecessor Central Bank. When a company goes bankrupt, a lot of attention turns to the auditors who issued opinions, he said. They may have been clear participants in wrongful conduct but cannot be sued.

Boris Feldman with Wilson Sonsini Goodrich & Rosati expects to see more public interest judges. There are a lot of district court openings, he said. Many new federal judges will be added. With respect to legislation, he said that Vice President-Elect Joe Biden is very close to the plaintiffs' bar so he is likely to be front and center on legislative changes.

Richard Clary with Cravath, Swaine & Moore LLP hopes that Congress will notice that "we are already awash in class actions" coming out of the financial crisis. The last thing that is needed is legislation to bring back aiding and abetting and scheme liability, in his view. The bigger change hopefully won't be in legislation but in the district courts, he said. District judges will be under pressure to let cases go forward against financial institutions, according to Abby Meiselman, associate general counsel at Bank of America.

Stanley Keller with Edwards Angell Palmer & Dodge LLP believes the current pleading standard is exceedingly high. He said cases have to be proved before then can move forward, he said. Since the passage of the PSLRA, plaintiffs have been forced to retool. Markel noted that the PSLRA was passed in large part by Democrats to eliminate the majority of frivolous cases. It would be a dubious policy to try to increase the number of class actions, he said. Keller agreed that frivolous cases should be eliminated, but said people should not get off the hook if they were involved in fraud.

Feldman called for strengthening the SEC and diverting enforcement energy to the government. He said an economist might conclude that government enforcement is more efficient because of costs.

Berger questioned whether rating agencies would have issued their ratings on credit default swaps if they did not consider themselves immune from liability. Feldman said they are not going to be immune, but investigations are still in the early stages. The regulators are going to be taking a look and in-house counsel at the rating agencies probably are not feeling immune, he said.

Feldman predicted that two volcanoes will soon erupt: derivative suits, which he said are as corrupt as ever, and settlements, which he referred to as all shams, involving payoffs to plaintiffs' lawyers. There are repeat players which are involved in a dozen cases, he said. He believes "someone's palm is getting greased." Otherwise, he asked why the same plaintiffs would be involved in so many cases.