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Is the SEC's Recent Run of High-Profile Prosecutions a Flash in the Pan?
In the wake of the recent financial crisis and the passing of the Dodd-Frank Act, corporate oversight is being done through an ever-sharper microscope. Now that the Securities and Exchange Commission has gotten expanded authority to oversee Wall Street, internal missteps seem to be getting more and more expensive.
Over the past year alone, the SEC has prosecuted three high-profile cases of municipal bond fraud against such financial giants as Bank of America, UBS Financial Services, and JPMorgan Chase, all of which ended in multi-million dollar settlements. In December 2010, regulators reached a $137 million settlement with Bank of America over charges of provider misconduct in the municipal bond market; in May of this year, UBS Financial Services agreed to a $160 million settlement on charges of securities fraud for rigging bids as both a provider and a bidding agent; and earlier this month, JPMorgan Chase agreed to pay $211.2 million to settle charges that its securities division fraudulently rigged bond transactions in more than 31 states.
According to Richard Scheff—current chairman of Montgomery, McCracken, Walker & Rhoads, and a former consultant to the Assistant Secretary of the Treasury for Law Enforcement—these cases are not a "flash in the pan." Instead, they are a sign of things to come on the part of the SEC, with implications for what he calls a dialogue between companies and the enforcement community. CorpCounsel.com reporter Hannah D'Apice spoke with Scheff to discuss these implications; below is an edited version of their conversation.
CorpCounsel: Tell me about your background and experience with securities fraud-related cases.
Richard Scheff: I was with the Department of Justice from 1983-1990, working in the U.S. Attorney's office here in Philadelphia on fraud-corruption cases. I left in '90 to join my present firm. Over the years I've developed a white-collar practice, and so I represent corporations and individuals in any matter relating to interactions with government—I conduct investigations for boards, civil litigation when there is a fraud angle, fraud cases, pharmaceutical cases, whatever.
CC: Regarding the recent swath of SEC prosecutions for securities fraud—there's been some discussion that this is all just a few high-profile cases, as opposed to actual establishment of precedent on the SEC's part. What's your take?
RS: The SEC has been criticized over the years for not being as active as it should. What you are seeing is a much more organized effort, with the SEC now divided up into different subsections. There's more cooperation, more interaction with Department of Justice, and so that more coordinated approach, where possible, will result in more investigations. Where appropriate they'll bring cases. I personally don't believe this is a flash in the pan. At least for the present, for some period of time, we will see—we have seen—more resources being devoted, more pressure to build more cases.
Significant financial cases often take a substantial amount of time to develop. It's not something that happens overnight. A couple of years ago when the financial crisis hit, people were screaming for prosecutions, but the reality is that investigations were just starting at the time. Now you're starting to see the cases being filed, and more will continued to be filed. As you get a network of cooperation working, you're going to get more cases.
One issue going forward is whether or not you have these large institutions that get deferred prosecution agreements by paying significant amounts of money. Smaller companies and individuals, they don't generally get those agreements. You wonder whether significant dollars can be used to buy this kind of treatment. It's not a new issue, but it's an increased one.
CC: How do you see the whistleblower provision of the Dodd-Frank Act affecting compliance programs?
RS: Again, this concept is not a new concept, it's an old concept. If you look at the False Claims Act, it's been used for years to promote the reporting of wrongdoing by whistleblowers, and it's been very effective in the defense industry, in the pharmaceutical industry. The notion of rewarding people coming forward. . . There have been well-publicized cases in which whistleblowers received a very significant piece of the pie, so to speak. As long as that carrot is out there, you're going to get a lot of information coming [out]. Whether that's good information is a whole different story. Garbage can come out that can't be used in prosecution. But I think the agencies will see a flood of information coming to them because the opportunity is there.
CC: How do you see in-house counsel adapting?
RS: Most corporations are responsible, and the level of internal compliance and compliance programs for responsible corporations is radically different from what you saw 15 years ago. In-house counsel and compliance folks are genuinely concerned about making sure that the conduct within their corporations is appropriate and lawful. There will continue to be resources devoted to compliance programs—more monitoring, more self-investigation. . . They want to make sure that they avoid getting swept up in these potentially large cases that could be financially devastating to any corporation. Everyone gets it; I think it is a rare company that doesn't.
Lots of time is devoted to making [companies] run the right way. It's not just window-dressing, it's real. I applaud those that have been behind the formulation of these policies and programs, because they're important safeguards.
CC: Are there any compliance practices that you foresee companies having to reevaluate?
RS: You've got two competing things occurring—the concept of, if it ain't broke, don't fix it; but on the other hand, companies are looking for ways to improve their compliance systems and open up dialogues with enforcement authorities to understand what they want to see in terms of compliance. I think there's a reluctance on the part of the enforcement community to have that dialogue. It's a shame because you could have more of a partnership instead of the adversarial [relationship] that exists. I don't see the harm of having that dialogue, because not surprisingly, the purpose is the same—to make sure compliance gets done.
See also: "A Close Look at the New SEC Whistleblower Rules," CorpCounsel.com, May 2011.