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SEC Enforcement Will Be Aggressive, But Lack of Clarity Problematic, Panel Says

Friday, January 10, 2014
By Rob Tricchinelli

Jan. 8 --The Securities and Exchange Commission will be more aggressive in pursuing individuals in fraud cases this year, but the effectiveness of changes in overall enforcement standards remains to be seen, a panel of lawyers and consultants said Jan. 8.

The SEC will likely expand the kinds of entities and individuals it targets and continue its work in several high-profile cases, according to panelists on a Securities Docket webcast recapping the SEC's major activities in 2013 and looking ahead to this year. The panel disagreed on how accounting fraud cases have changed over time.

The panel included William R. McLucas and Douglas J. Davison, partners and leaders of the securities department at Wilmer Cutler Pickering Hale & Dorr LLP in Washington, and Martin S. Wilczynski and Jason S. Flemmons, senior managing directors at FTI Consulting in Washington.

Risks of Aggressive Enforcement
“I think the tone of what we're hearing out of the commission is critical to what we're going to see in the enforcement program” in 2014, McLucas, a former director of enforcement at the SEC, said. “The statements from the new chair . . . continue to reflect the very aggressive posture” the agency intends to take in its enforcement program.

“That raises some ominous risks for people in the markets,” McLucas said. He pointed to the agency's statements that it will continue filing charges against individuals and expand its focus on pursuing so-called gatekeepers, going beyond lawyers and accountants to investment company boards and financial officers.

“And as the agency gets tougher [and] demands more, more and more people are willing to go to trial, and the risk, I think, for the agency's trial record is increasing,” McLucas said.

The panel also took issue with SEC Chairman Mary Jo White's plan for companies to admit wrongdoing when settling cases that have a “special need for public accountability and acceptance of responsibility.”

No-admit, no-deny has “worked quite well,” McLucas said, and the new standards for when to press for an admission are “not particularly enlightening.”

He said there have only been three cases so far, including an action against the “London Whale,” in which the SEC has required a company to admit wrongdoing in a settlement.

“If you look at the three cases, I don't think you can come away from it with a coherent takeaway, in my view, of what dictates admissions [or] no admissions,” McLucas said. “I don't believe this is a very precise or clear road map.”

McLucas did observe, however, that the SEC intends soon to clarify its standards for seeking an admission.

On the accounting front, the panelists noted that the SEC is bringing fewer accounting cases. But, they disagreed on whether reforms such as the Sarbanes-Oxley Act have led to a drop in accounting fraud.

“I think there continues to be a lot of skepticism as to whether financial fraud [has] evaporated in any meaningful way,” Wilczynski said.

While the “really huge mega-cases” from the early 2000s, like WorldCom and Enron, “are likely going to be considerably rarer,” Wilczynski said, “I think most people in the enforcement bar would probably agree that the instances of companies pushing the envelope on financial reporting has increased. It has gradually crept back up.”

McLucas disagreed, crediting improved standards of professional accounting and such regulatory reforms as Sarbanes-Oxley and the creation of the Public Company Accounting Oversight Board.

“I do think that the incidence and level of accounting [fraud] is down,” he said.

To contact the reporter on this story: Rob Tricchinelli in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

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