THE CIVIL INVESTIGATION OF AN ALLEGED SECURITIES VIOLATION MAY HAVE CRIMINAL LAW IMPLICATIONS

Both attorneys and the targets of civil securities investigations need to understand that the dotted line between civil and criminal investigations is becoming more hazy, and criminal prosecutions of alleged securities law violators are becoming more common. At Cosgrove Law, LLC, we have had civil defendants come to us that had previously and unknowingly waived their constitutional rights to remain silent and testified (and incriminated themselves) in response to a civil investigatory demand. Some of them were represented by prior counsel when they did so.

State securities regulators frequently and contemporaneously share the fruits of their investigations with federal and state criminal investigatory authorities, such as the FBI or the U.S. Postal Service. Some state regulators--namely Attorneys General--have contemporaneous civil and criminal jurisdiction. Although we had thorough written guidelines regarding the need to erect and maintain "Chinese Walls" and avoid crossover during parallel proceedings when I ran the Missouri Attorney General's Consumer Protection Division, and worked as the Chief Consumer Protection Prosecutor in the Massachusetts Attorney General's Criminal Division, many regulators confronted with the case law regarding the prohibitions against using civil compulsory process to feed a criminal investigation appear to have been confronted with alien information. Counsel for a civil defendant must quickly identify the potential for criminal exposure and understand the limitations on purported civil investigations. On the other hand, attorneys representing defrauded investors should have the knowledge and experience necessary to identify those situations when a report to a criminal investigatory agency is appropriate. They must also understand that threatening to do so in an attempt to foster a civil resolution is strictly prohibited.

On a side note, just this past week, the Missouri Securities Division's most recent Chief Enforcement Counsel joined our law firm. We expect that she will be a great asset to our versatile securities, white collar defense and commercial litigation practice.

THE ALTERNATIVE UPTICK RULE GAINS STRENGTH

On August 17, 2009, the SEC announced that it has reopened the comment period for its proposed "Amendments to Regulation SHO" for 30 days to allow additional feedback on the alternative uptick rule, an alternative short selling price test that would allow short selling only at a price above the current national best bid.

In its original "Amendments to Regulation SHO," proposed April 2009 in Securities Exchange Act Release No. 59748, the SEC proposed two approaches to restrictions on short selling: the "short sell price test," which would apply on a market-wide and permanent basis; and the "circuit breaker," which would apply only to a particular security during a severe market decline in the price of that security. The SEC also sought comment on the alternative uptick rule in its April 2009 proposal, including whether it would be preferable to the "short sell price test," and whether it would be more effective as a market-wide permanent price test restriction or in conjunction with the "circuit breaker" approach.

The SEC received almost 4,000 comments to its April 2009 proposal, and there was some evidence of support for the alternative uptick rule. As such, to ensure that investors and industry professionals have a full opportunity to comment on the alternative uptick rule, the SEC has published a supplemental request for comment specifically on the rule.

Click here for the SEC's complete notice of re-opening of the comment period and its supplemental request for comment.

THE SEC AND CFTC TO HOLD JOINT MEETINGS ON HARMONIZATION OF REGULATION

In June 2009, the Obama administration released its White Paper on Financial Regulatory Reform, which called on the SEC and CFTC (“Commodity Futures Trading Commission”) to “make recommendations to Congress for changes to statutes and regulations that would harmonize regulation of futures and securities.” On August 20, 2009, in accordance with the Obama administration’s recommendations, the two agencies announced that they will hold joint meetings to discuss assessments of the current regulatory scheme, harmonization of the agencies’ rules, and recommendations for changes to statutes and regulations. SEC Chairman Mary Schapiro said she hopes the joint meetings will help “increase transparency, reduce regulatory arbitrage and rebuild confidence in our markets.”

The meetings, which will be held on September 2-3, 2009, will consist of five panels and will cover a wide range of topics, including the regulation of exchanges and markets; the regulation of intermediaries; the regulation of clearance and settlement; enforcement; and the regulation of investment funds.

For more information on the joint meetings, please see the Meeting Notice.

THE SEC’S ENFORCEMENT DIVISION IS TAKING ON NEW ENFORCEMENT INITIATIVES

Since Robert Khuzami took over as Director of the SEC’s Enforcement Division (“Division”), the Division has introduced a number of new initiatives to increase its effectiveness. These initiatives include a restructuring of the Division, an overhaul of its operation, and a renewed effort to bring enforcement actions against wrongdoers.

In a recent speech by Mr. Khuzami before the New York City Bar Association, he acknowledged the criticism the SEC has endured as a result of the Bernard Madoff scandal, and responded by saying that the Madoff scandal “should not be permitted to obscure the 75-year tradition of vigorous enforcement [by the Division]…to protect the investing public.” With that mindset, Mr. Khuzami has put into motion four main initiatives with the goal of increasing investor protection.

First, the Division will be creating national specialized units focused on particular, specialized areas of securities law. Mr. Khuzami indicated that the Division will initially have five specialized units: (1) Asset Management Unit; (2) Market Abuse Unit; (3) Structured and New Products; (4) Foreign Corrupt Practices Act; and (5) Municipal Securities and Public Pensions. The goal of this initiative is to make the Division more efficient and more knowledgeable, thereby leading to better investigations.

Second, the Division plans to streamline its management structure and internal processes. With regard to the management structure, the Division will be moving away from its decentralized structure and redeploying its branch chiefs to focus on conducting investigations, thereby minimizing the number of managers (i.e., decision-makers). In addition, Mr. Khuzami will be assuming full power to issue formal orders of investigations, which he plans to delegate to senior officers throughout the Division. This initiative aims to move cases along more quickly, thereby giving the Division more time to focus on new matters.

Third, the Division has created an Office of Market Intelligence, which will have the sole responsibility of collecting, analyzing and monitoring all tips, complaints and referrals the SEC receives each year. This Office will give the Division the ability to focus its investigations on the most credible tips, thereby increasing the efficiency of its investigations.

Finally, the Division is working to increase the incentives offered to individuals to promote cooperation with SEC investigations. This would provide the Division with access to more concrete information, thereby allowing the Division to more effectively uncover wrongdoing.

As is evident, Mr. Khuzami has implemented a plan to once again make the SEC a powerful enforcement mechanism. The results are already apparent in that since late January 2009, the Division has opened 10% more investigations, has filed 147% more temporary restraining orders, and has filed roughly 30% more enforcement actions.

A complete copy of Mr. Khuzami's speech can be found here.

NEW SEC SHORT-SALE RULES ALREADY IMPACTING MAJOR STOCK EXCHANGES

On July 31, 2009, we briefly discussed the SEC's decision to make permanent its temporary Rule 204T, which attempts to curb short-sale abuses by strengthening the close-out requirements of Regulation SHO for failures to deliver securities resulting from investor short-selling in the securities market. As we noted, since the SEC's adoption of temporary Rule 204T, there has been a significant decline in the number of "failures to deliver" resulting from short-selling.

A recent article by the Wall Street Journal indicates that the SEC's permanent enactment of Rule 204T is already having an impact on the nation's largest stock exchanges. Specifically, "[b]oth NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ) are now aggregating daily company-by-company short-sale data on all trades that take place on their exchanges." According to the article, Nasdaq plans to eventually seek SEC approval to charge for this information, a request which seems clearly inconsistent with the SEC's purpose behind Rule 204T.

Our attorneys have more than two decades of combined experience in the areas of securities regulation and securities fraud litigation.

Click here to read the entire Wall Street Journal article.