Securities Regulation Daily SEC’s West Coast enforcement contingent discuses recent initiatives
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Friday, August 21, 2020

SEC’s West Coast enforcement contingent discuses recent initiatives

By Amanda Maine, J.D.

While the SEC’s West Coast offices encounter similar types of cases as the rest of the country, certain types tend to dominate more, especially in Silicon Valley.

In a recent "patio chat" sponsored by Morrison & Foerster, regional directors and associate regional directors in the SEC’s Department of Enforcement’s offices in San Francisco and Los Angeles talked about their offices’ approach to the enforcement process, including the kinds of cases seen frequently by their offices, as well as the possible impact of recent changes at the Commission. The program was also sponsored by the Women in Securities (WISe) Network, an organization founded in 2012 to promote women in securities litigation.

San Francisco and Los Angeles offices. Erin E. Schneider and Michele Layne, regional directors in the SEC’s San Francisco and Los Angeles offices, described the work their offices do, including types of cases and issues that frequently arise. According to Schneider, the San Francisco office, which has jurisdiction in Washington, Oregon, Alaska, Montana, Idaho, and Northern California, oversees more than 700 public companies, including the largest concentration of "unicorns." She noted that issues facing investors in Northern California tend to be different than those facing investors in Oregon and Idaho, for example. In addition to its multi-year focus on Silicon Valley, the staff in the San Francisco office also focuses on retirement products that are sold to teachers in California.

As for the Los Angeles office, Layne said it has jurisdiction over more than one thousand investment advisers. Issues involving registered investment advisers and investment companies also make up a big part of the office’s referrals for enforcement actions, she said. Recent initiatives in the L.A. office include examining big wire houses and their anti-money laundering programs as well as broker-dealer platforms that had deficient practices for filing Suspicious Activity Reports. The L.A. office has also brought a number of proceedings involving "cherry-picking" by investment advisers, according to Layne. Identifying these "insidious" patterns can be hard to identify, so her office has leveraged the experience of the SEC’s Division of Economic and Risk Analysis (DERA) to root out these violations, Layne said. The regions’ associate regional directors also weighed in on frequent issues they have encountered. Monique Winkler from the San Francisco office remarked that her office often deals with companies in the pre-IPO stage, particularly in the technology, biopharmaceutical, and software industries. She added that her office anticipates seeing more cases arising from the economic downturn associated with the COVID-19 pandemic. Things that once looked bright no longer look so bright, she remarked.

Alka Patel from the Los Angeles office said that her office frequently encounters possible cases involving information technology companies, financial fraud, FCPA violations, and cryptocurrency. She also noted that her office sees a lot of offering fraud and Ponzi schemes that target the specific demographics in the region, including retirees, immigrants, and members of the military. Echoing Winkler’s comments, Patel said that the COVID-19 crisis, which has resulted in many ups and downs in the market, has caused issuers to make market-moving announcements, presenting an opportunity for insider trading and market manipulation.

Personnel and bringing enforcement actions. Moderator Jina Choi, a partner at Morrison & Foerster and a former director of the SEC’s San Francisco regional office, inquired about recent personnel changes at the SEC, including the departure of Enforcement Co-Director Steve Peikin and the appointment of Mark Berger as deputy director of Enforcement. Schneider said that while national leadership at the SEC does get involved, especially in cases that are particularly nuanced or complicated, the regional offices have a lot of autonomy when it comes to who they hire, where to put resources, and which cases to pursue. She added that the recent addition of Caroline Crenshaw to the Commission may end up having a bigger impact, noting that with Commissioners Peirce and Lee, three of the five current commissioners are women.

Choi asked if the panelists agree with reports that the SEC’s enforcement has been less aggressive under the current administration and what will happen as the election approaches. Layne said she disagrees that administrations headed by Democrats or Republicans are necessarily more or less aggressive than the other; it is more of a function of the economy. For example, some of the biggest enforcement cases brought by the SEC in terms of money recovered were in response to the financial crisis of 2008 and other instances such as the accounting scandals including Enron, the dotcom bubble, and stock options backdating, Layne advised.

Layne added that many large cases were brought under Chairman Christopher Cox, who was not seen as super pro-enforcement. She also remarked that current Chairman Jay Clayton has been completely supportive of the SEC’s enforcement efforts, despite speculation that they would "wither and die" under his watch. In addition, she pointed out that the economy has until recently been very strong, which might contribute to the perception that the SEC has fallen behind on its enforcement mandate.

The panelists also discussed the mechanics of bringing enforcement actions, such as the submission of Wells notices. Patel said that when lawyers ask for a meeting with the SEC after it has already made a decision to recommend an enforcement action to the Commission, the staff will usually grant the request for a meeting, especially if it involves a complex case. However, if it is seen as premature and a waste of everyone’s time or as a delaying tactic, the staff will be less receptive, she advised.

Kate Zoladz, associate regional director in the Los Angeles office, commented that the most effective defense lawyers she’s come up against are those that have credibility. Layne agreed, remarking that the most persuasive type of counsel are those that come prepared, don’t overstate evidence or case law, and use a targeted approach at a weak part of the SEC’s case. Layne also emphasized the importance of taking the high road. It’s not a good strategy to make digs at the staff, even when done in a seemingly benign way, she cautioned.

Companies: Morrison & Foerster LLP

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