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Busted Again: More SEC Enforcement Developments

(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)

December 3, 2009

As I reported previously, the SEC enforcement staff is "loaded for bear," stepping up its enforcement activities to go after violations of the securities laws. Some recent stories reinforce that it is more important than ever to guard against these violations: The Wall Street Journal reported on Wednesday that the SEC has greatly expanded its insider trading investigations of broker-dealers and hedge funds (subscription required to view complete article). According to the report, the staff has sent at least three dozen subpoenas in the past month, including investigating the role of Goldman Sachs bankers. The staff is using sophisticated technology to examine the webs of relationships among traders, investment bankers, attorneys and others.

    Comment: There is no reason to think that the current investigations are limited to broker-dealers and hedge funds, and the trail could easily lead the SEC staff to company personnel. It is more important than ever for companies to monitor and enforce their insider trading policies.

The SEC last month reported that it entered into a consent decree with former officers and accountants at SafeNet in the first enforcement action by the Commission under Regulation G. Reg G regulates the use (and abuse) of "non-GAAP financial measures" by reporting companies. The complaint accused the personnel of engaging in a scheme to meet or exceed quarterly EPS targets through improper accounting adjustments. The company represented that it was excluding "non-recurring" expenses from its results, when in fact it was excluding recurring operating expenses to make its earnings look better.

    Comment: SafeNet obviously was engaged in outright fraud, and Reg G gave the SEC staff another means to go after bad people. However, it's no coincidence that the first Reg G proceeding is in late 2009 - again, the enforcement staff is actively looking for perceived wrongdoing, in part to justify the agency's continued existence. Public companies should be more careful than ever in complying with Reg G - for example, be careful about characterizing any excluded expenses as "non-recurring," which is a real hot-button issue with the SEC staff.

Westlaw Business Currents reported last week that there has been a "noticeable uptick" in companies disclosing Wells Notices relating to enforcement proceedings.

    Comment: Be careful out there. And don't get caught cheating.

No News. I keep checking the SEC calendar to see whether the Commission has scheduled a meeting to consider adoption of the new proxy disclosure rules. Nothing posted yet. It's hard to predict whether anything will be adopted this year, or whether the new rules will be effective for the 2010 proxy season.


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