2014 Top 10 SEC Enforcement Highlights

Mary Jo White was confirmed in April 2013 as Chair of the Securities and Exchange Commission (the "SEC"), becoming the first former United States Attorney to serve in that role. Given her background, and despite criticism from some quarters for overarching tactics best left for criminal authorities, not civil administrative regulatory agencies, Chair White has worked to reshape the SEC's Enforcement Division into something akin to a criminal prosecutor's office. Under her direction, the Staff in 2014 continued to deploy prosecutorial tools such as deferred prosecution agreements, non-prosecution agreements, and cooperation agreements. Concepts such as public accountability, which prior to her arrival were foreign to a civil regulatory body, continued as an SEC focus in 2014, through settlements requiring admissions by defendants.

On October 16, 2014, the SEC issued a press release touting "a very strong year for enforcement" in the past fiscal year (ended September 30), including a record 755 enforcement actions and orders totaling $4.16 billion in disgorgement and penalties.1 The release quoted Chair White as praising the SEC's "aggressive" enforcement efforts, and quoted Andrew Ceresney, Director of the SEC's Division of Enforcement (and another former DOJ prosecutor), as stating, "I am proud of our excellent record of success and look forward to another year filled with high-impact enforcement actions." On November 17, 2014, the SEC issued its Agency Financial Report for fiscal 2014, in which it identified five notable jury trials over the past year that resulted in verdicts in favor of the SEC.2

These results followed Chair White's speech, delivered in September 2013 and titled "Deploying the Full Enforcement Arsenal," in which she espoused "public accountability" as a goal of SEC enforcement actions, acknowledged that much of her thinking on that issue was shaped by the time she had spent as a criminal prosecutor, and set out the hope that the SEC would become - and be perceived as - "the tough cop."3

Not mentioned in either the SEC's press release or its Agency Financial Report was the large number of insider trading cases it had brought that resulted in pre-verdict dismissals of the SEC's charges or verdicts in favor of the defendants. The SEC lost at least nine federal court cases in its fiscal 2014 in the insider trading sphere alone. Moreover, as seen in the first highlight we discuss - one of the more significant Circuit Court decisions in the past generation on the boundaries of insider trading violations - the prospects for aggressive SEC enforcement in this area appear to have taken another hit.

1. The Reversal of the Insider Trading Conviction in U.S. v. Newman

   Though the SEC continued to aggressively pursue insider trader charges in 2014, bringing at least 30 new cases last year,4 its ability to achieve successful insider trading convictions was severely curbed by the Second Circuit's decision in United States v. Newman, issued by the United States Court of Appeals for the Second Circuit on December 10, 2014.5 In that case, the Second Circuit vacated insider trading convictions of two former hedge fund portfolio managers, Todd Newman and Anthony Chiasson, directing that charges against them be dismissed with prejudice. Though Newman and Chiasson were remote downstream tippees (neither received information directly from a tipper-insider), both were initially convicted for trading on material, nonpublic information relating to shares of public companies in advance of earnings reports.

   The Second Circuit reversed the convictions and held that, to establish that a tippee engaged in insider trading, the government must prove - in a criminal case, beyond a reasonable doubt - that the tippee had knowledge of the personal benefit to the tipper. The Court further held that a personal benefit in the context of insider trading requires a quid pro quo relationship. The Court based its analysis on the early 1980s Supreme Court's insider trading decisions of Dirks v. SEC 6 and Chiarella v. United States,7 which established that "insider trading liability is based on breaches of fiduciary duty."

   Though Newman was a criminal, not civil, case, the Second Circuit delivered a significant blow to the SEC's ever-expanding insider trading enforcement efforts. Indeed, the holding in Newman appears to have had an immediate impact on the SEC's Enforcement Division. Just a few days after the Court's decision, the SEC dropped a high profile insider trading case, In re Peixoto, against an alleged tippee in connection with Herbalife Ltd. shares.8 The SEC claimed that it sought to drop charges because two key witnesses were in Poland and could not be compelled to testify, yet this seems unlikely, as the SEC had been aware of this fact for weeks. Instead, the SEC seemed unsure that it could meet the new burden of proof articulated by the Second Circuit, since the agency never claimed that the alleged tippee shared any of his earnings with the alleged tippers, or that a tipper knew of the trading or received any benefit.

   The Newman decision may also affect the SEC's pending case against Michael Steinberg, whose criminal conviction may be overturned in light of the Newman holding.

2. New High Frequency Trading Cases

   High frequency trading (HFT) firms came under much scrutiny last year after the publication of Michael Lewis's book, "Flash Boys: A Wall Street Revolt," in which Lewis argued that HFT firms exploit ultrafast technology to gain an unfair advantage in trading. Following publication of the book, scores of investors filed a plethora of federal lawsuits seeking class action certification in HFT matters.9 The SEC was quiet on this front for the first half of the year but ramped up its efforts in the fall of 2014, settling two cases against HFT firms and adopting new rules which require additional safeguards by exchanges and "dark pools."

   In September 2014, the SEC settled a case against Latour Trading LLC, a New York-based HFT firm for an alleged violation of the net capital rule, which requires all broker-dealers to maintain minimum levels of net liquid assets or net capital.10 Latour paid a $16 million penalty to settle the charges, making it by far the largest-ever net capital violation fine (the previous high was a $400,000 penalty in 2004). The SEC also charged the firm's CEO with causing the violations; that case was settled for $150,000.

   In October 2014, the SEC settled its first HFT manipulation case, against Athena Capital Research, imposing a fine of $1 million.11 The SEC claimed that Athena used a sophisticated algorithm to manipulate closing prices of thousands of NASDAQ stocks by entering large volumes of orders in the final two seconds of...