(Sept. 20) – The world of white-collar criminal prosecutions and federal government enforcement actions is in turmoil or at least evolving significantly. Then, there is the so-called Trump effect on government regulation and prosecution of businesses.
Those are key topics so far at the University of Texas School of Law’s Fifth Annual Government Enforcement Institute underway in Dallas. The first half-day of the conference, which includes most of the highest ranking officials in federal corporate law enforcement, dozens of corporate general counsel and prominent white-collar criminal defense attorneys, provided the following headlines:
- Top officials at the U.S. Securities and Exchange Commission and the U.S. Department of Justice semi-admit that their agencies have refocused their enforcement efforts away from large financial and accounting fraud cases to focus more on frauds targeting retail investors.
- The SEC and DOJ are more aggressively targeting cryptocurrency, cybersecurity-related violations and so-called spoofing of the commodities markets.
- Corporate general counsel at the largest companies operating in Texas say that potential violations of the Foreign Corrupt Practices Act and cybersecurity breaches are the two biggest issues that keep them up most at night. They also gave insight into how they hire outside counsel to handle major internal investigations and defending large cases.
- And despite the growing menu of responsibilities demanding increased resources, the SEC continues to see a significant number of its most experienced enforcement lawyers leave the agency, which is causing a major shortage of resources because the SEC is unable to replace those lawyers due to severe budget restrictions.
Trump Effect?
The overwhelming discussion at the UT Law conference is whether the SEC under President Trump, who was a long-time critic of the agency, is changing its focus.
“I have not seen the Trump effect,” said Jason Rose, a senior SEC enforcement lawyer in the agency’s Fort Worth office. “The general trend has been toward more and more sophisticated actions, and this administration has not changed that trend.”
Houston-based Parker Drilling Associate General Counsel Kelly Thorman said she warns her executives against acting too much based on a change in administrations.
“A lot of people ask me how things are going to change on enforcement now that we have a new president,” Thorman said. “I say Jason is still Jason at the SEC. It is their job to pursue these cases. Many of these cases take years to investigation and develop. We cannot look at who is in office today to determine what controls and policies to put in place.”
Benjamin Singer, former head of DOJ’s financial fraud unit and now a partner at O’Melveny & Myers, said there is clear evidence of changing attitudes.
“There are some fundamental shifts in the statements that come out of the commission and messaging that come out of the DOJ,” Singer said. “We are 10 years after the financial crisis. The result of the crisis was negative reporting in the media and the agencies reacted to those reports.
“The department now is naturally and rightfully refocusing its efforts,” he said. “There’s a growing focus on consumers and if every day people out there are being defrauded. The shift from the top down has changed.”
Brian Kidd, who is now the assistant chief over the DOJ’s securities and financial fraud unit, pushed back.
“A lot of the shift is overblown a little bit,” Kidd said. “I don’t think we’ve shifted away from accounting fraud at all.”
Kidd and others did admit that there is a bigger push to focus on consumer fraud and retail securities violations.
“We currently have two major cases underway,” he said. “What we are doing now [focus on retail securities fraud] is something we’ve always done. It is just a bigger percentage of our portfolio. We are still looking to prosecute big financial frauds, but we have more prosecutors to shift to focus on consumer fraud. We are also focusing on cryptocurrency, which is new.
Eric Werner, associate regional director of enforcement at the SEC’s Fort Worth Regional Office, said the agency is still doing financial fraud cases, especially targeting executives, but they are a smaller part of the work.
“At no point have we been told to stop looking at cases or turn away from certain kinds of cases,” Werner said. “There is no area that the commission has pursued in the past that we are no longer pursuing. The chair said he wants to do more to protect retail consumers and that has filtered all the way down to the SEC’s regional staff.
Kidd said the DOJ is focused more on the financial fraud practice known as “spoofing.”
“We focus on commodities trading,” he said. “What we’ve seen is certain traders manipulating algorithms and placing orders that they never intend to execute. The purpose is to make it seem like there is a lot of demand or that the market is selling off or hoping that the algorithms pick it up. But then the original order is taken down and never executed.”
SEC Director: Attrition Causing Challenges
Stephanie Avakian, the SEC’s co-director of enforcement, kicked off the two-day conference at the Westin Hotel in downtown Dallas by telling the 150 lawyers attending that the agency is still achieving extraordinary success despite the challenges.
“The division has seen meaningful attrition of experienced attorneys over the past couple years, coupled with a hiring freeze that dates back to 2016,” Avakian said. “This wide gulf between our resources and responsibilities translates into a need to think carefully about how we allocate resources to carry out our investor protection mandate.”
The SEC’s Fort Worth Office, for example, has lost about a dozen top enforcement lawyers during the past two years and has not been allowed to replace them.
The SEC, Avakian notes, oversees about $82 trillion in securities trading of equities annually, 4,300 publicly-traded companies with an aggregate market cap of $30 trillion.
The SEC received more than 16,500 tips and complaints to investigate in 2016 – “a number I expect to be substantially higher this year,” she said.
To handle these duties, the SEC has only 1,400 employees and contractors.
Even so, Avakian said, “This has been a strong year for the division of enforcement.”
Despite the budget and staffing restrictions, Avakian said the SEC has significantly increased its oversight of cryptocurrency and fundraising for businesses in the sector.
General Counsel Insight: FCPA & Cyber are Scary
In a series of panel discussions, several corporate general counsel and senior corporate compliance officers talked about their biggest frustrations and fears, which includes investigations involving the Foreign Corrupt Practices Act and cybersecurity and data privacy breaches.
“If there is one thing that I lose sleep over, it is FCPA,” said Sabre Corporation Associate General Counsel Leonard Sherer. “The concern is that it only takes one person” to step over the line.
“It continues to be a major issue and a significant concern,” Sherer said.
Sherer and Exxon Mobil Assistant General Counsel Richard Vint said that DOJ and the SEC do not seem to be backing away from their aggressive stance toward FCPA.
“I don’t get a lot of sleep either” because of the worry about FCPA, Vint told the conference. “When you are doing business in other countries, you really need to know who you are doing business with. Due diligence is critical.
“No matter how much training you do, FCPA can come down to one individual’s judgment on the ground,” Vint said.
Vint and Sherer said FCPA cases are no longer exclusively a U.S. legal issue.
“These cases have become global because of things such as social media,” Vint said. “Something that started for a U.S. company in Brazil can quickly entangle you with French authorities because of recent anti-corruption or anti-bribery laws there.”
Sherer said the issue is that there is “a lot more cooperation in multi-national investigations.”
“Corporate executives always want to know what it will cost the company, but now we just don’t know because we don’t know how many strings are going to be pulled by other countries,” Sherer said. “When going into a new country or region, companies seek insiders to help guide them. Now, it requires much more due diligence on hiring those folks because the risks are much higher.”
The key, according to general counsel, are truly effective and aggressive compliance efforts.
“An effective corporate compliance program is more than a paper tiger. It must be meaningful and has frontline buy in by top executives and actually meets its goals,” said Drive Time General Counsel Clay Scheitzach.
Brent Benoit, chief compliance officer at National Oilwell Varco, agrees.
“A good corporate compliance program identifies the key touch points,” Benoit said. “It is important to get into the business and how it operates and how sales are made. It needs to be tailored to the company or it isn’t going to work.”
Chesapeake Energy Deputy General counsel Patrick Craine said “truly effective compliance programs” are about more than just compliance.
“The programs must be practical and meaningful,” Craine said.
The panel agreed that there is now a trend by companies to push enforcement of compliance down the supply chain.
“Everyone wants an indemnity for suppliers,” Benoit said. “But if we hand out indemnities like candy, someone is going to get bitten. There should be risk apportionment. When a client or supplier comes to you seeking a $200 million check for reimbursement for an internal investigation, it is going to catch a lot of people by surprise.”
The corporate in-house lawyers said they get picky in selecting outside counsel to handle their defenses or to conduct internal investigations.
“Whoever I select, I kind of married to them,” Benoit said. “Experience is important. And word of mouth is critical. If you brought in six people to take notes, in-house lawyers talk and we talk about firms that do that. There is a list of law firms I just will not hire.”
Scheitzach agrees.
“Don’t have your marketing folks to put together a big, thick glossy document that claims you are number one in this ranking or survey,” he said. “All the RFPs and proposals look the same. Instead, bring in your key expert lawyer and let me get to know your team, including the associates who will work on our matters.”
More details to come.