William F. Johnson
William F. Johnson ()

‘It doesn’t matter what I believe. It only matters what I can prove,” barked Navy litigator Lieutenant Daniel Kaffee, Tom Cruise’s character in the movie A Few Good Men.1 Although Lt. Kaffee was commenting on proof he might offer to defend Marines in a court martial trial, his words are just as applicable to civilian government agencies. As the U.S. Securities and Exchange Commission rolls out new policies to enforce violations of securities laws, no matter how small, and to seek admissions from defendants in more settled cases, the SEC’s ability to prove what it believes will be tested. Recent trial results have suggested more belief than proof.

During her first six months leading the SEC, Chair Mary Jo White announced that the SEC would begin demanding that those deemed to have committed particularly egregious violations make certain admissions in order to settle SEC charges. She also announced an enforcement focus on charging any and all violations—no matter how small. Common consensus is that charging more defendants and making the settlement process more difficult will lead to more trials for the SEC. Although White recently championed the SEC’s 80 percent trial success rate over the prior three years,2 that success has taken a dive more recently due to a string of trial losses. Between October 2013 and mid-February 2014, the SEC won only 55 percent of its federal district court trials.3 If that trend continues, the SEC’s new enforcement policies may be challenged.4

Demanding Admissions

In August 2013, the SEC announced a settlement with Harbinger Capital Partners and its founder, Philip Falcone, in which Harbinger and Falcone were required to make certain admissions of fact.5Harbinger was the first notable settlement implementing the SEC’s new admission policy. Shortly thereafter, White indicated that cases featuring the following factors may require admissions: (i) egregious conduct or substantial investor harm; (ii) significant risks to the market or investors; (iii) where admissions would aid investors deciding whether to deal with a particular party in the future; and (iv) where admitted facts send an important message to the market.6 Both White and SEC Enforcement Director Andrew Ceresney have drawn parallels to the deferred prosecution agreements that criminal authorities frequently strike with companies—a strategy that White pioneered during her time as a prosecutor.7

No Violation Too Small

At the same time, White has announced that her goal is “to see that the SEC’s enforcement program is—and is perceived to be—everywhere, pursuing all types of violations of our federal securities laws, big and small.”8 As with the policy of seeking admissions, White has likened this focus on minor violations to an approach previously used in the criminal context. White contends that, in the securities markets, as in criminal law, “minor violations that are overlooked or ignored can feed bigger ones, and, perhaps more importantly, can foster a culture where laws are increasingly treated as toothless guidelines.”9

The confluence of these two new polices is straightforward: An increase in charges may make defendants more willing to fight rather than settle, particularly if a settlement requires a factual admission. Enter Lt. Kaffee, who might say it matters more now what the SEC can prove, not just what it believes. This presents two questions: How has the SEC failed to make its case before judges and juries in its recent spate of losses, and what, if any, lessons can be learned from these cases?

Slumping Trial Record

During the period from Oct. 1, 2013 to Feb. 1, 2014, the SEC took at least nine cases to trial, losing partially or entirely in seven of those trials.10 An analysis of these cases suggests that several failed because they rested on insufficient circumstantial evidence. In insider trading cases, for example, inferences from the mere timing of contemporaneous communications and trading were not enough to support a finding of liability. Defense counsel, on the other hand, have been successful at attacking the lack of direct evidence and challenging the SEC’s ability to prove materiality, scienter, and even the applicable duty under securities laws.

Insider Trading Cases

In Steffes, which went to trial in January 2014, the SEC relied on circumstantial evidence to prove its aggressive stance on the materiality of information allegedly tipped by an insider.11 The SEC alleged that rail company employees Gary Griffiths and Cliff Steffes discovered that the parent company of their employer was being acquired, that they traded on that knowledge, and that they tipped family members who also traded. The trial focused on how the two men had learned that the parent company was being acquired, a fact that the SEC argued was material nonpublic information.

The SEC alleged that Griffiths knew about the sale because, among other things: (i) the CFO asked Griffiths to prepare a comprehensive list and valuation of his employer’s locomotives, freight cars, trailers, and containers; (ii) Griffiths became aware of an “unusual number of [rail yard] tours,” which he believed were being provided to “investment bankers who were considering buying or investing” in the parent company; and (iii) shortly after the tours began, yard employees began asking Griffiths if the parent company was being sold and whether their jobs would be affected by any such sale.12

The SEC’s theory of how Steffes learned about the sale was similarly based on circumstantial evidence. He, too, had noticed “an unusual number of daytime tours” of multiple rail yards given to people “dressed in business attire.” The SEC made its case against Steffes by combining the knowledge of tours with the existence of workplace rumors, certain conversations among the defendants, and atypically large equity and options purchases by Steffes and the other defendants.13

The defendants challenged the materiality element of the SEC’s case, arguing that the information Griffiths and Steffes possessed—such as the fact that visitors were touring the company’s rail yards—could not reasonably be considered “material.”14 The SEC argued that materiality was demonstrated by the totality of the information, rather than any particular underlying fact.15 Although the SEC’s circumstantial evidence allowed it to escape summary judgment, it was not enough to sway the trial jury, which found in favor of all remaining defendants.16

Perhaps the most notable recent defeat for the SEC was in the long-running insider trading case against Dallas Mavericks owner Mark Cuban, in which the SEC’s circumstantial evidence failed to sway a Dallas jury.17 The SEC contended that Cuban sold shares based on material non-public information after promising the company’s CEO in a private phone conversation that he would not trade, and the case ultimately centered on testimony about what was said on that phone call. Cuban testified that he did not remember specifics of the 2004 conversation. Meanwhile, when the CEO, who resides in Canada, refused to appear for trial, the SEC was forced to rely on his videotaped deposition. The substance of that deposition, and evidence challenging the credibility of the CEO, led the jury to find in favor of Cuban in October 2013.18

In Yang, decided by a Chicago jury on Jan. 13, 2014, the jury concluded that mere circumstantial evidence of trading (primarily short-term, out-of-the-money call options) was insufficient proof of insider trading.19 It apparently was not persuaded by the SEC’s attempts to tie the defendant’s travels to the locations of computers used to enter trades. The jury did rule for the SEC, however, on charges related to front-running—entering trades on one’s own behalf in advance of large market-moving trades entered for one’s customers—and investment reporting requirements.20 Evidence of these violations was less circumstantial in that the SEC had evidence that Yang had, in fact, entered trades on his own behalf just prior to placing trades for an investment fund he managed. Additionally, Yang had failed to include the investments made on his own behalf, as was required, when he filed a Schedule 13D disclosing the investment fund’s holdings.

Material Misstatements

In Kovzan, the SEC alleged that Stephen Kovzan, the CFO of NIC, was involved in the preparation and signing of SEC filings that were materially false and misleading.21 The SEC claimed those filings failed to disclose as income the perks NIC granted to its CEO. According to the SEC, those perks were worth more than $1 million and included the costs of commuting by private aircraft, as well as reimbursements for personal homes, vacations, cars, and electronics. The SEC also alleged that Kovzan violated internal controls and books-and-records provisions of the Securities Exchange Act of 1934 and made misrepresentations to NIC’s auditors.22

During an 18-day trial begun last November, the parties battled over whether the various perks actually constituted compensation that should have been reported. Kovzan also argued via an expert witness that NIC’s alleged proxy statement misrepresentations about certain compensation were immaterial.23 The jury ruled unanimously in Kovzan’s favor, checking “No” for every potential violation listed on its 15-page verdict form. Notably, Kovzan was the only defendant in the SEC’s case willing to go to trial; the company, its CEO, and two other officers previously agreed to pay $2.8 million and settle the matter without admitting or denying wrongdoing.24 Unfortunately, the public record does not provide much insight into the rationale for the jury’s verdict beyond the obvious conclusion that the evidence was insufficient.

Bench Trial Losses

Jurors have not been the only fact-finders unwilling to base liability findings on the strength of the SEC’s circumstantial evidence. At least two recent bench trials ended with similar results.

In January 2014, the SEC lost a bench trial in SEC v. Schvacho in the Northern District of Georgia.25 In that case, the SEC alleged that Ladislav Schvacho misappropriated material non-public information from a close friend and business partner who was then the CEO of Comsys IT Partners. The SEC’s theory was that Schvacho had either learned this information directly and in confidence or by overhearing his friend’s deal-related phone calls and reading deal-related documents in the friend’s possession.

Following a bench trial, the court noted multiple times in its Findings of Fact and Conclusions of Law that the SEC failed to provide much direct evidence. For example, there was no direct evidence that Schvacho and his friend had discussed the acquisition, that their historical pattern of frequent phone communications changed at all during the period before the deal was announced, or that the friend had ever discussed Comsys business in Schvacho’s presence. The court concluded that the SEC’s interpretation of its evidence was contradicted “convincingly” by testimony from the friend himself, who stated that he did not disclose inside information to Schvacho and specifically did not disclose information relating to Comsys’s considerations of potential mergers.26

On Dec. 10, 2013, the SEC also lost a bench trial in SEC v. Jensen, which charged insider trading and financial reporting violations. In Jensen, the trial judge found that “[t]he SEC has not presented any direct evidence that [the defendants] knowingly or intentionally misled anybody. The SEC’s position that scienter can be inferred from circumstantial evidence is also not persuasive.”27


The SEC’s recent trial losses all came in cases filed before White’s tenure began and before the recent enforcement policy changes. It is not clear that cases like these would necessarily result from efforts to charge more minor violations or that these cases will be the select few in which the SEC would now seek an admission in order to settle. But for the trials of cases that are generated by the new policies to be successful, it appears that the SEC’s proof, and not just its belief, will need to be stronger.

For example, cases charging minor violations will still need to be supported with sufficient evidence. In addition, alleged violators from whom the SEC demands an admission in order to settle may decide to fight if the case, minor or not, is built largely on circumstantial evidence. Having seen an unwillingness from fact-finders in a variety of federal districts to simply defer to what the SEC believes the evidence shows, defendants are emboldened to take their chances at trial. Defense counsel considering whether to settle with the SEC or to require the Staff to prove its belief in court should consider the SEC’s recent losses. However, the recent results and small sample size may not reflect the future. White has pointed out several times that the SEC’s success rate over the last three years has been closer to 80 percent. The recent losses could just be a coincidence or a result of efforts to carry older cases through to completion. But Lt. Kaffee’s view remains true: In court, belief is no substitute for proof.

William F. Johnson is a partner in the special matters and government investigations practice group at King & Spalding in New York. Associates Matthew B. Hanson and Adam Yaeger assisted in the preparation of this article.


1. A Few Good Men (Castle Rock Entertainment, Columbia Pictures 1992).

2. Andrew Tangel and Jim Puzzanghera, “SEC’s Mary Jo White Wants Companies To Fess Up,” L.A. Times, Jan. 1, 2014.

3. Jean Eaglesham, “SEC Takes Steps to Stem Courtroom Defeats,” Wall Street Journal, Feb. 13, 2014.

4. White recently restructured the agency’s trial unit, reorganizing it into four sections to more closely correspond to the agency’s enforcement groups that investigate cases. Id.

5. SEC v. Falcone, No. 12 Civ. 5027 (S.D.N.Y. Aug. 16, 2013).

6. See “Mary Jo White Lays Out Criteria for Admissions in SEC Settlements,” Corporate Crime Reporter, Sept. 26, 2013.

7. See, e.g., Alison Frankel, “SEC Enforcement Co-Director: We’re Bringing ‘Swagger’ Back,” Reuters, Oct. 1, 2013.

8. Mary Jo White, Chair, Securities and Exchange Commission, Remarks at the Securities Enforcement Forum (Oct. 9, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370539872100#.UxKRYPldWSo.

9. Id.

10. Bruce Carton, “SEC Increasingly Taking Cases to Trial, but Recent Record Is Dismal,” Compliance Week, Feb. 11, 2014. The SEC did, however, win its trial against former Goldman Sachs vice president Fabrice Tourre last summer in one of the most high-profile cases stemming from 2008 financial crisis. SEC v. Tourre, No. 10-cv-03229 (S.D.N.Y. jury verdict Aug. 1, 2013).

11. SEC v. Steffes, No. 1:10-cv-06266 (N.D. Ill. Jan. 27, 2014).

12. SEC v. Steffes, 805 F. Supp. 2d 601, 605 (N.D. Ill. 2011).

13. Id. at 605–606.

14. Id. at 613.

15. Id. at 613.

16. Griffiths and one of the Steffes relatives had already settled with the SEC. See Stephanie Russell-Kraft, “Another SEC Insider Trading Case Rejected By Jury,” Law360, Feb. 4, 2014.

17. SEC v. Cuban, No. 3:08-cv-02050 (N.D. Tex. Oct. 16, 2013).

18. Ben Protess and Lauren D’Avolio, “Jury Rules For Cuban In Setback For S.E.C.,” The New York Times, Oct. 17, 2013.

19. SEC v. Yang, No. 1:12-cv-02473 (N.D. Ill.).

20. Lance Duroni, “Jury Clears Chinese Adviser on SEC Trading Claims,” Law360, Jan. 14, 2014.

21. SEC v. Kovzan, No. 11-CV-2017 (D. Kan. Dec. 2, 2013).

22. Id.

23. Press Release, “NERA Economic Consulting, NERA’s Role in Securities and Exchange Commission v. Kovzan,” (Dec. 5, 2013), available at http://www.nera.com/83_8352.htm.

24. David McAfee, “NIC CFO Cleared On All 12 Charges In Fraud Suit,” Law360, Dec. 3, 2013.

25. SEC v. Schvacho, No. 12-CV-2557 (N.D. Ga. Findings of Fact and Conclusions of Law entered Jan. 7, 2014).

26. Id. at 32-43.

27. 2013 U.S. Dist. LEXIS 173532, *75-86 (C.D. Cal.).