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By Yin Wilczek
June 11 — Going forward, the Securities and Exchange Commission will bring more insider trading cases through its administrative forum, Enforcement Director Andrew Ceresney said June 11.
Addressing a D.C. Bar event, Ceresney observed that the SEC has brought insider trading actions as administrative proceedings in the past, but those have been “pretty rare.”
“It will be a case-by-case determination, but” looking ahead, “I do think you will see more insider trading cases” going the administrative route, Ceresney said. He also stressed that this is not a reaction to the commission's recent trial losses, which he discussed and acknowledged were “almost wholly” in the insider trading arena.
The SEC official said he expressed his own opinions, which did not necessarily reflect those of the commission or other staff members.
The SEC's increasing use of its administrative venue over the last few years was spurred by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
The financial reform statute enhanced the SEC's enforcement powers in several respects, including giving it the authority to obtain monetary penalties in administrative proceedings against all individuals, not just those associated with regulated entities. The legislation also increased the amount of fines that the SEC can seek in administrative cases.
Ceresney told the legal gathering that one reason the administrative forum will be used even more frequently in the future—not just for insider trading, but for other areas as well—is that enough time has passed that the commission is now filing actions that involve post-Dodd-Frank conduct.
In choosing a forum, the Enforcement Division considers a “whole host of factors,” including whether discovery is required, whether the case would play well before a jury and whether the SEC would need additional time to prepare its case, given the expedited schedule for administrative proceedings, Ceresney said. He added that the commission will not be able to obtain through its administrative forum the “three-times” fines available through the courts, “so you sacrifice that,” but in certain cases, “that will not be a disadvantage.”
Section 21A of the 1934 Securities Exchange Act—which applies to penalties for insider trading violations—allows a court to impose penalties of up to three times the profit gained or loss avoided as a result of the misconduct.
Panel moderator Larry Ellsworth—a partner at Jenner & Block LLP, Washington, and co–author of Bloomberg BNA's “Portfolio 15: Inside Information: Prevention of Abuse”—asked Ceresney whether the U.S. Court of Appeals for the Second Circuit's SEC v. Rosenthal decision would impede the imposition of fines in insider trading administrative proceedings. The court ruled in the 2011 decision that §21A is the only basis to impose penalties in SEC insider trading cases in federal court and that the fines should be linked to the amount of profit gained or loss incurred.
The SEC's position is that “the Dodd-Frank amendment providing for penalties is not limited in any respect and applies to insider trading just as it applies to other types of cases,” Ceresney responded.
During the event, several attorneys suggested that the SEC has procedural advantages in its administrative forum and asked whether the commission would be open to amending some of the processes, such as allowing defendants to conduct some discovery. One asked whether the SEC would revise its rules to allow “some type of removal process.”
Ceresney said his “definitive answer” to the removal question was “no.” The SEC official also stressed that the administrative process is “fair and I don't think I will advocate for changes.” However, he added that his door is open and he will not “rule out a discussion or dialogue” about possible changes.
Another attorney asked Ceresney whether he was concerned—given the commission's procedural leg-up in administrative proceedings—about courts scrutinizing the constitutional basis of the rulings. “I think we are on pretty solid ground on the constitutionality” of administrative law judge holdings, Ceresney said.
In a discussion of the SEC's recent trial losses, Ceresney said that insider trading actions are “challenging cases for us.” Among other problems, the evidence is “typically circumstantial” and the SEC cannot produce “victim witnesses” to sway juries. He also said that juries—perceiving the SEC as similar to criminal authorities—apply a “higher standard than the preponderance of the evidence standard” to commission cases.
That said, if the SEC chooses not to bring a difficult insider trading case, “nobody will bring that case” and “misconduct will go unpunished,” Ceresney added. “The bottom line is we exercise tremendous rigor in deciding whether to bring cases and we will continue to do so.”
In the most recent loss, a jury June 6 absolved Manouchehr Moshayedi, the former chief executive officer of STEC Inc., of the SEC's insider trading allegations.
Ceresney also was asked to elaborate on SEC Chairman Mary Jo White's recent announcement that the commission will use 1934 Securities Exchange Act Section 20(b) to pursue individuals and to get around liability limitations imposed by the U.S. Supreme Court in Janus Capital Group Inc. v. First Derivative Traders. The provision imposes primary liability on a person who “by means of any other person” violates the federal securities laws.
Ceresney said §20(b) “provides a mechanism for attaining liability in appropriate cases where we haven't necessarily focused in the past.” He added that the provision will be used in the “coming months,” but not in every disclosure case pursued by the agency. The division will use the provision to advance its theory of liability “where it makes sense,” he said.
In other comments, Ceresney told the audience that the SEC's current approach to settlements will not change as a result of the U.S. Court of Appeals for the Second Circuit's ruling in SEC v. Citigroup Global Mkts. Inc.. The appellate court essentially affirmed the strong deference accorded to the SEC in settlements of enforcement actions.
The commission's current approach is that it will forego its traditional practice of allowing settling defendants to neither admit nor deny its allegations in certain cases—such as those involving egregious circumstances—and insist on admissions.
Ceresney also was asked when defendants and their attorneys will be informed that the commission has determined it wants an admission. He responded that the determination “certainly won't be early in the investigation,” adding that defendants generally will be told when settlement is raised and the terms are being discussed.
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