The panelists said that transitioning to remote meetings has gone smoothly for the most part, but they lamented the lack of personal interaction in interviews and testimony.
This year’s SEC Docket Securities Enforcement Forum, the first to be held virtually, featured a panel of five former directors of the Division of Enforcement as well as the current enforcement director, Stephanie Avakian. The directors talked about the difficulties of litigating in a virtual environment, recent cases involving cryptocurrency, the future of disgorgement as a remedy after Kokesh and Liu, and the pressure on management to meet earnings targets in an economic downturn.
Avakian on legacy and COVID. Brad Bondi of Cahill Gordon & Reindel, who moderated the panel discussion, asked Avakian about her biggest lesson learned as Enforcement Director and how she views the impact of her tenure. Avakian replied, "Don’t let the noise get to you." By that, she explained that you have to do what is right and not get distracted by the press, the industry, the bar, or the views of a single commissioner. It is important to take a step back and think about the consequences of actions taken, she added.
Regarding whether she thought her term as director would leave a lasting impact, Avakian mused that it would depend on who answers that question, but she counted the creation of the SEC’s Cyber Unit, as well as a focus on the whistleblower program in creating efficiencies in the speed with which the Commission grants awards, as some of her successes.
Bondi also asked about the challenges presented by the COVID-19 pandemic and switching to a remote working environment. Avakian said that the staff has taken remote testimony, participated in remote meetings, and even took part in a remote trial. Bondi inquired if the SEC will keep parts of its remote work in the long term. Avakian remarked that participating on panels at conferences such as the Enforcement Forum is easier via remote means, but it takes away the human element of interacting with other participants in person. She added that interviews will most likely go back to being in-person. However, Avakian also noted that Wells meetings have been much easier to schedule in a virtual environment because they don’t involve travel.
Former directors weigh in. Bondi asked Linda Chatman Thomsen of Davis Polk & Wardwell (Enforcement Director, 2005-2009) about the defense bar’s view of the SEC’s response to COVID-19. Thomsen said that meetings, including Wells meetings, have gone smoothly since transitioning to remote means, but there is a premium placed on both preparation and brevity. Be ready to give access to requested documents and ideally, a meeting should not last more than an hour, she recommended.
The most difficult aspect of working in a virtual environment is taking testimony and conducting trials, Thomsen said. It is hard on witnesses and less efficient than in-person testimony. She advised that counsel are looking to alternatives to these situations, such as proffers and conducting interviews that are not "testimony."
Steve Peikin, who served with Avakian as co-director of Enforcement until this August and will be returning to Sullivan & Cromwell on November 2, was asked about two litigated cases involving cryptocurrency that were victories for the SEC during his tenure: Telegram and Kik. These were the first two litigated matters where the judge opined that the cryptocurrencies at issue were in fact securities offerings that must be registered with the SEC. According to Peikin, these opinions will have a significant impact on future efforts to conduct initial coin offerings, which will be difficult to do without registration.
Bondi asked Andrew Ceresney of Debevoise & Plimpton (Enforcement Director, 2014-2017) about the impact on disgorgement of Supreme Court’s decision earlier this year in SEC v. Liu, which held that disgorgement not exceeding amount of net profits is permissible equitable relief. He said that in cases where there is a clear victim, disgorgement can be distributed to victims though a fair fund. However, he advised that in cases where victims are harder to identify, such as insider trading cases, disgorgement questions may be trickier. Ceresney added that there are cases where the Commission will impose a higher penalty because they are unable to collect disgorgement, but he noted that penalties can also be distributed via a fair fund, so this may become more common in the future.
Peikin noted that since the Supreme Court held that disgorgement was subject to a five-year statute of limitations in Kokesh, the Enforcement Division had been pursuing disgorgement remedies in the manner that was eventually outlined in Liu, since they anticipated the issue finding its way to the high court. He doesn’t envision insider traders paying a one-time penalty and no disgorgement—that would incentivize insider trading, he said. In those cases, expect an increased monetary penalty if disgorgement is not feasible, he explained.
Asked about how CEOs and CFOs should respond to the Division’s Earnings Per Share (EPS) Initiative, which uses risk-based data analytics to uncover potential accounting and disclosure violations caused by earnings management practices, Dick Walker of King & Spalding (Enforcement Director, 1998-2001) said it highlights the importance of disclosure controls and robust disclosure committees. He also stressed the importance of documenting controls meant to prevent management manipulation of EPS figures. Walker noted that in one case, a firm actually had policies and procedures in place but still deviated from them, illustrating the need for effective accounting and disclosure controls.
Bondi asked WilmerHale’s Bill McLucas (Enforcement Director, 1989-1998) what advice he would give companies for setting internal targets. McLucas replied that this is as much of an issue of corporate governance as internal controls. There is pressure to deliver results by the company, the C-suite, and the boardroom: these constituencies will demand performance but you cannot fudge numbers or overreach—this does not serve shareholders or adhere to concepts of good governance, he said. McLucas advised that it is particularly difficult to endure these pressures when companies are under stress, such as the current business environment in light of the pandemic. In six months to a year, the SEC may be bringing cases where management tried to deliver certain numbers regardless of what the actual sales were, he predicted.
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