40th Annual Rocky Mountain Securities Conference: SEC Enforcement Panel

The second panel of the morning of the 40^th Annual Rocky Mountain Securities Conference was SEC Enforcement in 2008, with Linda Thomsen (Director, SEC Division of Enforcement), Walter Ricciardi (Deputy Director, SEC Division of Enforcement), Lou Mejia ( SEC Chief Trial Counsel), Dan Shea (SEC Former Regional Director, currently with Hogan & Hartson) and moderated by John McDermott (Holme Roberts & Owens).

While the panel addressed several topics, the theme was clearly “Cooperation with the Commission will get you closer to where you want to be.” Ms. Thomsen stressed this idea no less than three times, worded as “Companies get credit for extraordinary cooperation.” While addressing areas of current enforcement emphasis, Ms. Thomsen was also quick to point out that the enforcement division “covers the waterfront” of issues through four working groups which are addressing subprime issues (Berliner bad rumor case), options backdating, municipal finance, and insider trading cases, particularly amongst hedge fund and institutional traders.

Insider trading is big. 110 people (read, professionals) were prosecuted this year. Mr. Ricciardi had several justifications for this prosecutorial emphasis. After Stoneridge made it difficult to go after aiders and abettors, the only recourse seems to be SEC action. Integrity in the marketplace is crucial, and insider trading weakens consumer confidence. And finally, there is—according to SEC enforcement officials--absolutely no public sympathy for people in positions of power who resort to insider trading.

Mr. Mejia (who was the chief prosecutor of Enron) recounted some cases and trial statistics, quietly making the point that if you go up against the SEC, chances are you’ll lose. SEC has won against 18 of 23 defendants in 15 trials this year; 46 wins over 56 tried in the past few years.

Mr. Ricciardi reassured the mostly-attorney audience that the SEC is not interested in second-guessing management’s good faith judgments. But if valuations are wrong because inputs are wrong, or there have been “top side” adjustments to staff reports, that will be investigated. Mr. Shea echoed this sentiment by saying that the SEC looks to bring actions for attorney misconduct, not attorney bad advice.

The panel ended with a “do and don’t” list.

Ms. Thomsen: Do worry about insider trading; the tendency in a bear market is to fudge a bit. Be ultra vigilant.

Mr. Mejia: Don’t use so much paper. “Dump trucking” is not appreciated.

Mr. Ricciardi: Assess conflicts earlier in the process. Approach an investigation as if you have the burden to prove your guys are good.

Mr. Shea: Don’t forget that pre-wells discussions can change staff minds.

And the final reminder: The SEC settles over 90% of its cases, which usually relates to cooperation. Try to play nice.