The following is an edited excerpt of a speech given Nov. 21 by Andrew Ceresney, director of the Securities and Exchange Commission Division of Enforcement, before the American Bar Association Business Law Section's fall meeting in Washington.
I am pleased to be here this morning to talk about the latest developments in the SEC's Enforcement Division. The SEC recently completed its fiscal year, which was my first full fiscal year as enforcement director and [Mary Jo] White's first as chairman. As a result, I wanted to spend a little time today highlighting some of our successes over the past year, look briefly at what to expect in the coming year, and then talk about some areas that have been the focus of much discussion in recent months: administrative proceedings, admissions and our increased use of big data.
Let me begin by providing a brief recap of the division's accomplishments over the past year. By any measure, [The] enforcement [division]had a banner year last year. We filed ground-breaking cases that affected every corner of the industry — from market structure to financial reporting, asset management to insider trading, municipal securities, the [Foreign Corrupt Practices Act] and more — and we obtained significant monetary penalties and other relief.
RECORD YEAR IN ENFORCEMENT
In total, we filed 755 actions last year — the most ever filed in the history of the commission. And we obtained orders for over $4 billion in monetary sanctions — nearly 20% above than our previous high. But as I always say, numbers only tell a small part of the story. What made our year particularly noteworthy was the breadth and impact of our actions. And the violations we pursued — large and small — sent important messages to the market, protected investors and served as a strong deterrent to would-be violators.
Last year, for example, we brought a number of first-of-their-kind actions, including our first series of cases involving violations of the market access rule, our first action enforcing the “pay to play” rule for investment advisers, our first action against a private-equity firm relating to its allocation of fees and expenses, and our first case charging violations of the whistleblower anti-retaliation provisions. We also announced a whistleblower award of over $30 million, our largest ever, to someone who provided key original information that led to a successful enforcement action.
As our year-end numbers indicate, we also used our penalty authority more aggressively last year, including a $16 million penalty for net-capital violations — the largest ever imposed for such misconduct by a factor of 40, the largest penalty to date against an alternative trading system, and the largest penalties ever assessed against individuals in an FCPA case.
We brought significant actions against financial institutions last year, including cases related to misconduct dating back to the financial crisis and cases involving serious failures in controls. We also made progress this past year in our efforts to combat microcap fraud, bringing impactful cases and using our temporary suspension authority much more frequently to cut off pumps before they turned into dumps. And we brought a number of cases involving pyramid schemes that targeted low-income and minority communities, a trend we are seeing more and more.
We saw our numbers of financial reporting cases rise by almost one-half as we increased our focus on this area. We also continued to bring significant insider-trading cases — charging 80 people this past year, including industry insiders, husbands who traded on information they learned from their wives, and a group of golfing buddies and other friends.
LITIGATION AND TRIAL RECORD
The most recent fiscal year also was a banner year for our litigation program, including trial victories, summary judgment wins, the imposition of robust remedies and positive decisions from federal appellate courts.
We tried more cases in federal court this past year than in any of the previous 10 years. And we tried more cases before juries this year than in the three previous years combined. Overall, we had 30 trials this past year. That is a big number for us, almost twice the number as the previous year.
Our trial results are consistently strong over time — we win around 80% of the time at trial — and this year we scored a series of strong wins in challenging cases of all stripes against experienced defense counsel. In fact, we have prevailed in our last ten jury trials and administrative proceedings, for example. Key trial wins include two recent jury trial victories by our Boston and Fort Worth offices. The former involved investment adviser Charles Kokesh for defrauding his firm's advisory clients by systematically looting around $35 million in client funds over many years. The latter case concerned Lee Benjamin Grant for misleading his brokerage customers into transferring their assets to Grant's new advisory firm. And our home office prevailed before a jury in an epic fraud case against the Wyly brothers — Texas billionaires who hid hundreds of millions of dollars in an elaborate offshore trust system and used the trusts to profit secretly in companies they controlled.
Even as we prevail consistently at trial, I am reminded that the cases we try in court are the toughest securities cases around. Our strongest cases typically become criminal actions or are settled, or we prevail on summary judgment. I understand, therefore, that we won't win all of our cases. What is important to me is that we aggressively bring impactful cases and put our strongest case forward in court, and that is what we have been doing.
And we are not just winning at trial and on summary judgment — we also are helping investors by winning strong remedies that help compensate victims and protect the investing public. In the Wyly trial, for example, the judge issued a preliminary decision requiring Sam Wyly's and Charles Wyly's estates to pay disgorgement of approximately $187 million, and our total relief is expected to rise to $300 million or even more. We also recently secured an asset freeze against the defendants and their family members to help make sure the anticipated judgment gets paid.
We also are seeing a maturation of our cooperation program. This past year saw our first litigated action that featured a testifying SEC cooperator. In the Gonnella case, we prevailed in an administrative hearing. We also brought other actions in which cooperators played key roles in positive outcomes, including our first-ever nonprosecution agreement for an individual who provided early, extraordinary and unconditional cooperation that led to findings of liability against multiple tippers and insider traders.
So this past year was an outstanding year. But of course, we are now looking forward, and our pipeline of cases is as strong as ever. I expect significant cases in all aspects of our program in the next year, including:
• Significant market structure cases against exchanges, alternative trading systems and broker-dealers.
• Important financial reporting and audit cases, including fraud cases, cases against auditors, and violations of the internal controls requirements.
• Insider trading cases against traders of all different types.
• Microcap fraud cases against repeat players, including promoters who have spearheaded many schemes and attorneys who have facilitated them.
• FCPA cases involving unique facts, using the broad definition of “anything of value.”
• Asset management cases, including misrepresentations of fund performance and failures to disclose conflicts of interest.
• Important cases relating to complex products and credit ratings from our Complex Financial Instruments Unit.
• There will be other ground-breaking cases in the muni markets, expanding our reach to new areas and bringing cases under our Municipalities Continuing Disorder Cooperation initiative.
I wanted to spend a bit of time speaking about our use of the administrative forum, which has been a frequent topic of discussion at gatherings such as this in recent months.
Let me begin with some basics about our use of the administrative forum. Contrary to the impression some may have, we have been using administrative proceedings throughout the 42-year history of the Division of Enforcement, and the commission used them even before its enforcement activities were consolidated in one division. SEC administrative law judges have adjudicated hundreds of enforcement matters over the years. Many of these cases were against regulated entities and individuals, and involved extensive factual records, complex and novel legal issues, and claims for significant financial penalties. So ALJs have been presiding over and adjudicating complex securities cases for decades.
Until 2010, while we could proceed against unregistered persons in administrative proceedings, the relief that we could obtain against them was limited. In the Dodd-Frank Act, however, Congress provided us authority to obtain penalties in administrative proceedings against unregistered parties comparable to those we already could obtain from registered persons.
Before that, penalties against unregulated entities or individuals were available only in district court. That legislative change allows us to obtain many — though not all — of the same remedies in administrative proceedings as we could get in district court. And so what we are doing now is simply making use of the administrative forum in cases where we previously could only obtain penalties in district court.
This change, however, does not mean that we will choose the administrative forum in every case. For settled matters, we often — but not always — choose to file in an administrative forum, largely because of efficiency. The filing ends the matter after the parties have agreed to a settlement, and there is no need to have implementation of the parties' agreement subject to the competing demands of busy district court dockets. This practice was recently endorsed by the 2nd Circuit Court of Appeals in the Citi decision, where the court noted that the commission “is free ... to employ its own arsenal of remedies” rather than bring settlements to district court.
As for litigated cases, we evaluate each case to determine the appropriate forum based on the facts and circumstances. There is no question that we are using the administrative forum more often now than in past years, given the changes under Dodd-Frank. Contrary to the notion some have that we are running away from cases in district court, however, if you look at actions we filed last year on at least a partially litigated basis, roughly 57% were filed in district court and around 43% were filed in the administrative forum. So we clearly are not shunning federal court in our litigated actions.
BENEFITS OF FORUM
There are a number of benefits to using the administrative forum that can lead us to file cases there. First, administrative actions produce prompt decisions. An ALJ normally has 300 days from when a matter is instituted to issue an initial decision. That deadline can be extended in certain cases, but the hearings are still held promptly. For cases we file in district court, we can often go 300 days and still be just at the motion-to-dismiss stage or part of the way through discovery, with any trial far down the road. Proof at trial rarely gets better for either side with age; memories fade and the evidence becomes stale.
And from the standpoint of deterrence and investor protection, I think we can all agree that it is better to have rulings earlier rather than later. Doing so allows us to have timely public findings of fact and law, and where we are successful, to obtain remedies like industry bars more promptly.
Second, administrative proceedings have the benefit of specialized factfinders. The ALJs are focused on hearing and deciding securities cases, year after year. They develop expert knowledge of the securities laws, and the types of entities, instruments and practices that appear frequently in our cases. Many of our cases involve somewhat technical provisions of the securities laws, and ALJs become knowledgeable about these provisions.
Third, the rules governing administrative hearings provide that ALJs should consider relevant evidence. In practice, what this means is that ALJs are guided by, but not obligated to strictly apply, the Federal Rules of Evidence. They are free to give each piece of evidence the weight that they deem appropriate. Finally, certain types of charges, such as failure to supervise or “causing” violations, can be brought only in the administrative forum.
I should note that these features of the administrative forum can also benefit the respondents. Either side can benefit when witnesses' recollections are fresher. And the relaxed rules of evidence may likewise give them more flexibility in offering evidence.
With all this said, there are situations where district court is the more appropriate forum. In certain cases, we need certain types of discovery that we can only get in district court. For example, where we file our case on an expedited basis to stop an ongoing fraud, a district court might be the only option that allows us to act quickly while still being able to gather evidence.
In certain cases, we need emergency relief, such as an asset freeze or receiver, and that requires an order from a district court. We also may believe that we can obtain summary judgment in district court. The bottom line is that we make a case-by-case determination of which forum is appropriate, based on the particular facts of the case.
There has been some -criticism recently of our use of administrative proceedings against unregistered entities and individuals and suggestions that these proceedings are unfair. I reject that assertion. ALJs call it like they see it, and I note that we have lost some significant proceedings before ALJs in the last few years.
Some have raised concerns about the lack of a jury in administrative hearings. But the Supreme Court has considered and rejected the argument that there is a constitutional right to a jury trial for government claims based on statutes such as the federal securities laws.
Some also have claimed that the procedural rules that govern administrative proceedings, including the time frames for the hearings and the rarity of depositions, are unfair to respondents. Some have even suggested they create a due-process concern.
Of course, as I suggested previously, we have been using this forum for years in complicated proceedings involving registered parties and no due-process violations have been found in those cases. But in any event, the rules for administrative proceedings provide extensive procedural protections.
ALJs commonly require us to provide our witness lists and exhibit lists well in advance of the hearing, putting respondents on further notice about the specific content of our case. A respondent and the division each has the right to request third-party subpoenas for witnesses and documents. In any event, the rules for administrative proceedings provide extensive procedural protections. These rules require us to commence making available our entire investigative file within seven days of the filing of our allegations, and we typically provide the whole file in that time frame.
And apart from all of the information we turn over, it also is worth noting that in many cases, respondents know full well what the important evidence is, either because they produced it to us themselves, because it was testimony from their own employees or someone else to whom they have access before the hearing, or because we have shared it with them in testimony or in the course of Wells discussions. So the bottom line is that there are extensive procedural protections in our proceedings, and defendants have transparency into the nature of our case and proof well before the hearing commences.
It is true that there generally are no depositions under the administrative Rules of Practice. But I do not think that due process requires the ability to conduct depositions. In a former life, I was a criminal prosecutor, and I saw many people sentenced to prison without any chance of deposing the government's witnesses before trial.
The Federal Rules of Criminal Procedure allow for depositions only in “exceptional circumstances,” which is similar to what the commission's Rules of Practice allow. If that approach is acceptable where someone's liberty is on the line, then it is hard to see how due process requires more for respondents in administrative proceedings.
Some have raised the concern that the use of administrative proceedings will impair the proper development of the law by district court judges. But using the administrative forum furthers the balanced and informed development of the federal securities laws, just as it does in other specialized legal areas in which administrative agencies function. SEC commissioners have great expertise in the securities laws, and the administrative agency structure that Congress created leverages that expertise to help shape the law's development.
The commissioners review ALJ decisions de novo, or afresh. The parties have the right to appeal an adverse commission decision to a circuit court, where panels of federal judges may have the final say on the development of the law.
So the commission has input on important questions, but legal rulings either supporting or reversing the commission frequently are made at the circuit or Supreme Court level. I also would note that two seminal insider trading cases, In the Matter of Cady, Roberts & Co. and Dirks vs. SEC, followed that path, starting in the SEC's administrative forum and, in the case of Dirks, ending up in the Supreme Court. So this process has worked well over the years in developing the securities laws.
Of course, the changes within our enforcement program extend beyond our increased use of administrative proceedings. As many of you no doubt are aware, we modified the commission's longstanding no-admit, no-deny settlement protocol by considering requiring admissions in certain types of cases where heightened accountability and acceptance of responsibility are in the public interest.
The practice of settling our cases primarily on a no admit/no deny basis has served the SEC — and other agencies — well for many years. These settlements speed up our ability to return funds to wronged investors, avoid the delay and uncertainty inherent in trials, and allow us to use our finite resources more effectively.
As I noted, earlier this year, the 2nd Circuit reaffirmed the significant deference accorded to the commission in determining on what terms to settle with parties. For these reasons, settlements without admissions have been — and will continue to be — an important part of our enforcement regime.
That being said, a little over a year ago, Chairman White announced a change in our settlement approach by which we would consider requiring admissions in certain categories of cases where there is a greater need for public accountability. Her years in the U.S. Attorney's Office for the Southern District of New York taught her — and me — the power and importance of defendants' admitting that they broke the law. As you probably know, in the criminal realm, all guilty pleas are accompanied by factual admissions, which eliminate any doubt about the defendant's conduct and provide additional accountability for the crime.
I am happy to report that the program is working well as we have obtained admissions in over a dozen cases under the new policy. The Wedbush settlement is just the latest, and more are in the pipeline. These admissions have come from a broad range of defendants — firms and individuals, as well as regulated and unregulated entities — and involve a broad range of violations. And each successive case where we obtain admissions has helped illuminate the circumstances in which we will conclude that they are appropriate.
Admissions will be considered in certain types of cases, including those involving egregious conduct, where large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the wrongdoer posed a particular future threat to investors or the markets, where the defendant engaged in unlawful obstruction of the commission's processes or where admissions would significantly enhance the deterrence message of the action. And our admissions cases to date have touched on each of these respective categories.
Overall, I think there is no serious question that our new approach to admissions has strengthened our enforcement program and ensured greater public accountability, and has provided us with another important tool in punishing and deterring misconduct.
DATA AND TECHNOLOGY
Finally, I want to say a few words about another important trend in our enforcement efforts — our use of big data to detect and investigate violations. The division and the agency as a whole have made great strides in using data and technology to enhance our ability to detect and pursue misconduct. With the proliferation of big data, and growing complexity of our markets, we need to better harness technology in order to keep up with wrongdoers. So we are developing new analytic tools designed to process data more efficiently.
Let me give some examples. A key development for us in connection with our insider-trading efforts is our use of new analytical tools to increase our capability of detecting insider trading. We have developed sophisticated tools that allow us to detect parties trading in unison, which then enables us to work our way back to the source of the inside information. A number of cases we have brought this year were built using this sort of data analytics, and we have numerous additional investigations in the pipeline that originated from these tools.
We are doing similar things in many other areas, as well. Our Financial Reporting and Audit Task Force is using technology in a number of ways. It is working closely with the Division of Economic and Risk Analysis, for example, to refine a tool they developed that compiles public company filing data, compares it with results of other companies in the same industry, and detects anomalous results that might call for further investigation.
We also are sifting through nonpublic-clearing-firm data for problematic patterns in the sale and trading of certain asset-backed securities and other complex products. Through this process, we are deploying proprietary data analytics to identify troubling trends in the sale of complex financial instruments to retail investors that might serve as the basis of a suitability or failure-to-supervise case.
Finally, our Broker-Dealer Task Force has developed initiatives utilizing technology and data-driven analysis to target excessive trading in customers' accounts and inadequate compliance with the anti-money-laundering and Bank Secrecy Act regulations.
Through these efforts, we are becoming more effective and efficient at uncovering and pursuing misconduct, and improving our ability to keep pace with our rapidly transforming markets.