Not long ago, Mike O'Sullivan predicted in the Corp Law Blog that as the result of numerous developments such as changes in SEC settlement policies, the SEC's future tagline may well be "In Court Everyday." After reviewing the SEC's enforcement activity this fall for the recently-published article below, I think, in the words of former Redskins' coach George Allen, that the future is now. In that spirit, I offer another SEC tagline: "SEC Everywhere".

Commentary: "SEC Everywhere"
By Bruce T. Carton, Executive Director of ISS's Securities Class Action Services

The SEC is playing hardball, and it's hurling fire. That's good news for investors seeking reassurance that the SEC is aggressively pursuing and punishing securities fraud.

Since August, the SEC has been on an enforcement tear. It has sued people for pocketing less than $1,000 from insider trading. It has repeatedly gone to court to compel the production of documents from those who have stalled or refused to comply with SEC subpoenas. It has vigorously gone after those who facilitate the ability of others to commit securities fraud. And it has taken to court those who refuse to settle an SEC case against them.

Quite simply, the SEC is doing a good job lately of appearing to be everywhere at once, aggressively going after securities fraud with near "zero-tolerance" zeal. The SEC's recent flurry is notable not only for the number and types of new cases brought by the Commission, but also with respect to the high impact it has created through the scope of its actions and even through some of the language it has used. Consider the following:

Insider Trading Cases

The SEC has brought an extraordinary number of insider trading cases recently, including 10 such cases this year in the 15 business days between Sept. 24 and Oct. 14. The number of cases, however, is only part of the story. On Sept. 24, the SEC brought an insider trading case against a North Carolina lawyer despite the fact that the lawyer allegedly reaped illegal profits of just $4,272.

While SEC-watchers were checking their files to see if $4,272 was a record low-dollar amount for an SEC insider-trading case, the SEC sued a California lawyer the very next day alleging that this lawyer's insider trading had permitted him to avoid losses of $922. If this isn't "zero-tolerance," it's less than a thousand dollars away!

The SEC also has stepped up its use of officer-and-director bars as remedies against corporate executives who wish to settle insider-trading cases against them. In just the three days between Sept. 29 and Oct. 1, the SEC announced the settlement of three cases, each of which required executives to consent to the entry of an order barring them from serving as an officer or director of a public company.

Subpoena Enforcement Actions

The commission has also put the screws to people or parties challenging its subpoenas for documents or testimony. When faced with such challenges, the SEC has historically tended to avoid the subpoena enforcement process, a resource-sapping procedure that requires commission litigators to take the issue before a judge to obtain a court order requiring compliance.

But the agency has shown no such reticence lately. Since mid-August, the SEC has filed no fewer than five subpoena enforcement actions, including high-profile actions against R.J. Reynolds Tobacco Holdings Inc. and former Enron Corp. CEO Kenneth Lay.

Going After the Facilitators and Gatekeepers

In recent months, the SEC has emphasized in word and deed that it will go after not just the person or entity committing the fraud itself, but also facilitators or gatekeepers such as customers, vendors, insurers, auditors, lawyers, investment bankers or even outside directors who "knowingly assist" in fraudulent practices or who are "reckless in their oversight of management and asleep at the switch."

Last month, the commission brought several such cases, including a case against a customer of a public company whose alleged participation in side letters that permitted certain deals to be cancelled helped the company book phony revenue; a case against insurance giant American International Group Inc. for allegedly selling a "a new ‘insurance' product that AIG had developed and marketed for the specific purpose of helping issuers to report false financial information to the public;" and a case against a vendor to a public company who allegedly knowingly signed a false audit confirmation letter confirming that the vendor owed the company millions in advertising co-op receivables.

New "Firsts"

Aided by the Sarbanes-Oxley Act (SOX), the SEC has had numerous opportunities since to trumpet several new "firsts." For instance, on Aug. 15, the agency said it filed the first case under the new CEO and CFO certification requirements of SOX Section 302. Less than a week later, the SEC announced that it had filed its first enforcement action involving an investment company SOX certification.

Then on Sept. 9, the SEC filed what appears to be the second case yet to allege violations of Regulation FD (as in full disclosure), bringing charges against Schering-Plough Corp. and its former CEO. The SEC announced that the company agreed to pony up $1 million, by far the largest penalty the SEC has obtained for a Regulation FD violation, and that the former CEO agreed to pay a $50,000 penalty – the first that the SEC has obtained from an individual in a Regulation FD case.

But the regulators got additional mileage out of the Schering-Plough case through some unsettling language in its complaint, which alleged that the CEO improperly disclosed negative and material, nonpublic information to analysts regarding the company's earnings prospects "through a combination of spoken language, tone, emphasis, and demeanor." This troubling phrase has created widespread angst among legal counsel and investor relations professionals, who must now consider whether executives' body language will be under the SEC's microscope.

Finally, on Oct. 9 the commission announced a case against a 19 year old who avoided roughly $37,000 in options losses by hacking into an unsuspecting victim's online brokerage account. The SEC stated that the case was "the first SEC fraud prosecution to allege both computer hacking and identity theft as components of the fraudulent scheme."

Jury Verdicts

This month, the SEC announced success in two rare occurrences: jury trials in SEC lawsuits. Again on Oct. 9, the SEC announced that a Massachusetts federal jury returned a verdict in its favor after a two-week trial over insider trading in the stock of Galileo Corp. The trial resolved the SEC's charge that the defendant had illegally avoided losses of $34,758. On Oct. 16, the agency announced that following a five-day trial, a Washington, D.C., federal jury found two defendants liable for financial fraud based on their overstating the assets of C.E.C. Industries Corp.

Uncharted Waters

And the SEC is stretching beyond its traditional areas of jurisdiction to new ones such as hedge funds, corporate governance of self-regulatory organizations such as the NYSE, shareholder voting rights and mutual funds. This proactive approach is well-illustrated by a news report in this month that the SEC's director of enforcement recently ordered his staff to comb through financial industry trade journals in order to find questionable practices of which the SEC may currently be unaware. With more than 500 new enforcement-related personnel slated to be hired and in place by the end of 2003, look for the SEC to continue to step up to the plate.

Versions of this article appeared in the most recent ISS Friday Report and the November 2003 edition of the SCAS Alert.