The SEC Adds a New Weapon: How Does the New Admission Requirement Change the Landscape?

Over the past several years, the Securities and Exchange Commission (the “SEC”) has settled the vast majority of the cases it has brought. Some people have suggested, however, that settlements by public agencies such as the SEC should be scrutinized more closely. For instance, in a series of recent opinions, Judge Jed S. Rakoff of the Southern District of New York has “question[ed] the wisdom” of the SEC’s well-established practice of permitting defendants to enter into consent judgments while neither admitting nor denying the allegations. During the past two years, the SEC has implemented new policies that have altered its established settlement practices. On January 6, 2012, the SEC’s then Director of Enforcement, Robert Khuzami, announced that defendants who are found guilty or admit to wrongdoing in criminal cases may only settle parallel civil cases with the SEC if they agree to admit to the allegations in the charge. More significantly, on June 18, 2013, SEC Chair Mary Jo White announced a further alteration to the SEC’s settlement policy, stating that the SEC will require admissions in particularly severe cases in which a large number of investors had been defrauded and the fraud was egregious. This Article will examine the SEC’s revised settlement policy in the aftermath of Judge Rakoff’s concerns about the SEC’s longstanding “no admit, no deny” policy

Chiarella v. United States and its Indelible Impact on Insider Trading Law

Insider trading cases, which are typically prosecuted as securities fraud, carry a mystique rarely present in securities litigation. As a former U.S. Attorney for the Southern District of New York once observed, the cases involve \u27basically cops and robbers. . . .[d]id you get the information and did you trade on it? It is no wonder that each insider trading case featured in this symposium presents a captivating story. But for two distinct reasons, Chiarella v. United States occupies a special place in history. It was the first prosecution under the federal securities laws for the crime of insider trading. And the U.S. Supreme Court\u27s iconic holding--regarding the circumstances under which insider trading constitutes securities fraud--not only profoundly changed the law in 1980 but also continues to define insider trading\u27s contours right up to the present day. Chiarella\u27s facts are straightforward and memorable. The defendant was employed by a financial printing firm hired to publish announcements of takeover bids. On several occasions he managed to deduce from code names the identities of the actual companies, and then used that confidential information to surreptitiously purchase stock in the acquisition targets. After settling a civil securities fraud action brought by the Securities and Exchange Commission, Chiarella was indicted in New York federal court for criminal securities fraud, found guilty by a jury, and unsuccessfully appealed to the Second Circuit. The Supreme Court, however, overturned his conviction. While the case is famous, important aspects of Chiarella have gone unnoticed or been long since forgotten. This essay sets out to explore these aspects in order to better understand how a seemingly mundane SEC settlement involving just over $ 30,000 in ill-gotten gains morphed into a groundbreaking insider trading prosecution and Supreme Court decision. The exploration draws from a close analysis of the civil and criminal litigation record as well as interviews with most of the principal attorneys involved in the case at its various stages, all of whom went on to extraordinary careers in public service, private practice, or law teaching (with many toggling between two or all three). This distinguished cadre includes: Stanley S. Arkin, Judge Frank H. Easterbrook, Ralph C. Ferrara, Robert B. Fiske, Jr., Paul Gonson, Professor Donald C. Langevoort, Judge Jed S. Rakoff, Lee S. Richards III, John S. Siffert, and John Rusty Wing, and extends as well to their remembrances of Stephen Shapiro. Insider trading law in the U.S. is routinely depicted as judge-made or judicially created. The description is apposite. Although Congress statutorily authorized the SEC rule prohibiting fraud in connection with the purchase or sale of any security, it is courts that must determine, as a matter of federal common law, whether securities trading on the basis of material nonpublic information constitutes a deceptive device or contrivance under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and thus a fraud within Rule 10b-5\u27s prohibition. But the description also leaves unacknowledged the essential role of the SEC, DOJ, and defense attorneys in framing the arguments on which the judicial rulings are based. Nowhere have attorneys influenced the development of insider trading law more profoundly than in the various phases of the Chiarella litigation. This story therefore suggests, with no hint of exaggeration, that Chiarella\u27s indelible impact results as much from the case\u27s lawyering as from the ruling announced by the Court in its landmark decision

USA v. Carl Rose

USDC for the Eastern District of Pennsylvani

The Cost of Doing Business: Corporate Crime and Punishment Post-Crisis

For many years, law and economics scholars, as well as politicians and regulators, have debated whether corporate criminal enforcement overdeters beneficial corporate activity or in the alternative, lets corporate criminals off too easily. This debate has recently expanded in its polarization: On the one hand, academics, judges, and politicians have excoriated the DOJ for failing to send guilty bankers to jail in the wake of the financial crisis; on the other, the DOJ has since relaxed policies aimed to secure individual lability and reduced the size of fines and number of prosecutions.A crucial and yet understudied piece of evidence in this conversation is how crime has responded to our enforcement regime. In the last few decades, the DOJ has embraced many law and economics enforcement tenents including entity liability over individual liability, fewer prosecutions and a greater number of settlements, and high fines over jail time. And several papers have documented these enforcement trends in detail. However, unlike every other type of crime, the government does not collect data about corporate crime levels. Therefore, we cannot tell how corporations are responding to these enforcement practices.In this paper, we take important first steps in determining how corporate crime, and financial institution crime in particular, is responding to the DOJ’s enforcement regime and its shifting priorities. Specifically, we proxy for financial crime using three novel sources: the Financial Crimes Enforcement Network (FinCEN) Suspicious Activity Reports (SARs), consumer complaints made to the Consumer Financial Protection Bureau (CFPB), and whistleblower complaints made to the Securities and Exchange Commission (SEC). Each source reveals a steep increase in complaints or reports indicative of financial institution misconduct. We also examine levels of public company recidivism, which are also on the rise. And we document a potential cause: recidivist companies are much larger than non-recidivist companies, but they receive smaller fines than non-recidivist companies (measured as a percentage of assets and revenue). In theory, high fines can supply adequate deterrence by themselves, but our results indicate that it might not be politically feasible to levy a sufficiently high fine to deter future incidents of corporate crime. Put differently, for large companies, criminal penalties may be just another cost of doing business — and quite a reasonable cost at that. We conclude by offering recommendations for enforcement agencies and policymakers. In particular, we observe that many of the assumptions inherent to classical law and economics theory are inacurrate with respect to white-collar crime. Fines large enough to deter malfeasance are large and potentially infinite — well outside the possibility set for policymakers. The DOJ should therefore consider other ways of securing deterrence, such as by increasing penalties against guilty individuals

Admit or Deny: A Call for Reform of the SEC\u27s Neither-Admit-Nor-Deny Policy

For four decades, the SEC’s often-invoked policy of settling cases without requiring admissions of wrongdoing, referred to as the “neither-admit-nor-deny” policy, went unchallenged by the courts, the legislature, and the public. Then in 2011, a harshly critical opinion from Judge Jed Rakoff in SEC v. Citigroup incited demands for reform of this policy. In response to Judge Rakoff’s opinion, the SEC announced a modified approach to settlements. Under the modified approach, the Commission may require an admission of wrongdoing if a defendant’s misconduct was egregious or if the public markets would benefit from an admission. Many supporters of the neither-admit-nor-deny policy argue that it is the most efficient way to compensate harmed investors. In contrast, many critics condemn the ministerial role of the judiciary in approving SEC settlements. Other interested parties express uncertainty about how aggressively the SEC will pursue admissions under the modified approach and whether admissions will have collateral estoppel effects in subsequent private litigation. Both supporters and critics are mistaken in their approach to the policy, and those in the third category are justifiably uncertain. This Note emphasizes the need for an overhaul of the neither-admit-nor-deny policy, arguing that the policy is plagued by ambiguity, affords too much discretion to the SEC, and does not sufficiently punish wrongdoers. As a result of its use of the neither-admit-nor-deny policy, the SEC fails to achieve the objectives of transparency, accountability, and deterrence that are paramount to enforcing federal securities laws. By requiring specific admissions of wrongdoing in settlements and limiting the preclusive effect of those admissions in private litigation, the SEC would adopt a more aggressive and disciplined approach to enforcement—better serving the public interest—without the risk of costly litigation with defendants who refuse to settle

In Re: Towne, Inc

USDC for the District of New Jerse

New Methods of Financial White-Collar Criminal Investigation and Prosecution: The Spillover of Wiretaps to Civil Enforcement Proceedings

To have a proper understanding of the questions presented by the Rajaratnam cases, a basic understanding of the criminal and civil cases is necessary. Accordingly, Part II will briefly discuss the facts of the two cases, the investigation, and relevant court rulings. Part III will briefly discuss the history and relevant provisions of Title III of the Omnibus Crime Control and Safe Streets Act , the “comprehensive scheme” for regulating the authorization and disclosure of wiretaps. Part IV will discuss the primary theories the SEC could have used to obtain wiretap recordings for use in its civil enforcement proceeding, namely disclosure from the U.S. Attorney’s Office and from the civil defendant. This Part will also discuss timing as a factor for disclosure. Finally, in Part V, I will conclude with policy recommendations regarding how the issue can be more clearly resolved by congressional action and what the SEC can do to increase the likelihood of disclosure during discovery or otherwise

Admit or Deny: A Call for Reform of the SEC\u27s Neither-Admit-Nor-Deny Policy

For four decades, the SEC’s often-invoked policy of settling cases without requiring admissions of wrongdoing, referred to as the “neither-admit-nor-deny” policy, went unchallenged by the courts, the legislature, and the public. Then in 2011, a harshly critical opinion from Judge Jed Rakoff in SEC v. Citigroup incited demands for reform of this policy. In response to Judge Rakoff’s opinion, the SEC announced a modified approach to settlements. Under the modified approach, the Commission may require an admission of wrongdoing if a defendant’s misconduct was egregious or if the public markets would benefit from an admission. Many supporters of the neither-admit-nor-deny policy argue that it is the most efficient way to compensate harmed investors. In contrast, many critics condemn the ministerial role of the judiciary in approving SEC settlements. Other interested parties express uncertainty about how aggressively the SEC will pursue admissions under the modified approach and whether admissions will have collateral estoppel effects in subsequent private litigation. Both supporters and critics are mistaken in their approach to the policy, and those in the third category are justifiably uncertain. This Note emphasizes the need for an overhaul of the neither-admit-nor-deny policy, arguing that the policy is plagued by ambiguity, affords too much discretion to the SEC, and does not sufficiently punish wrongdoers. As a result of its use of the neither-admit-nor-deny policy, the SEC fails to achieve the objectives of transparency, accountability, and deterrence that are paramount to enforcing federal securities laws. By requiring specific admissions of wrongdoing in settlements and limiting the preclusive effect of those admissions in private litigation, the SEC would adopt a more aggressive and disciplined approach to enforcement—better serving the public interest—without the risk of costly litigation with defendants who refuse to settle

RICO Reform: How Much Is Needed?

RICO reform has been one of the most time-consuming and difficult issues in the 101st Congress. The House Subcommittee on Crime has held three full-day hearings on RICO reform, listening to testimony from a vast array of witnesses on both sides of the reform issue, and several in the middle. From a personal perspective, hardly a day has passed in the last nine months that I have not had a meeting, a discussion with a House colleague, or a staff session on the subject of RICO reform.At the outset I should mention that I do not have a magic silver bullet for this extremely complicated statute and the numerous controversies it has engendered. RICO contains more than forty federal felonies as predicate offenses, and nine generic state statutes. The large number of predicate offenses, combined with such nebulous terms as enterprise, and pattern of racketeering activity, leaves many ob-servers wondering whether RICO eventually will sustain a constitutional attack. Indeed, Justice Antonin Scalia virtually asked for such a challenge in his recent concurring opinion in H.J. Inc. v. Northwestern Bell Telephone Co. , when he stated: No constitutional challenge to this law has been raised in the present case, and so that issue is not before us. That the highest Court in the land has been unable to derive from this statute anything more than today\u27s meager guidance bodes ill for the day when that challenge is presented. Combined with this invitation, there is a long list of prominent organizations that have petitioned Congress to amend civil RICO. They include: The American Bar Association, National Association of Manufacturers, American Civil Liberties Union, United States Chamber of Commerce, AFL-CIO, American Institute of Certified Public Accountants, Securities Industry Association, American Bankers Association, Independent Bankers Association of America, Future Industries Association, American Council of Life Insurance, Credit Union National Association, Grocery Manufacturers of America, National Automobile Dealers Association, State Farm Insurance Companies, Alliance of American Insurers, and The American Financial Services Association. At the same time, there is impressive opposition to drastic change in civil RICO. This opposition includes such organizations as: The Public Citizen-Congress Watch, The United States Public Interest Research Group, National Association of Attorneys\u27 General, National District Attorneys Association, National Association of Insurance Commissioners, and The North American Securities Administration Association.Even these organizations, however, concede that some changes may be appropriate. During my presentation I will outline my views of RICO; offer some specific comments on the mail and wire fraud predicates and the role they play in the problems experienced with RICO, on both the criminal and civil sides; make some general observations about the statute; and comment on the status of the reform efforts before Congress. At the end of my presentation I will outline my thoughts on resolving some of the existing problems, as well as my commitment to pursue answers to future problems