SEC chief's aggressive moves show she's more than just a tough talker

SEC Chairman Mary Jo White, true to her prosecutor roots, is pushing for more accountability in enforcement settlements, part of her confirmation pledge to make enforcement “bold and unrelenting” on her watch.

A clear signal of that toughness came July 19, when the Securities and Exchange Commission charged Steven A. Cohen, founder and CEO of S.A.C. Capital Advisors LP, with failure to supervise two senior employees and stop them from conducting insider trading within S.A.C. affiliated hedge fund managers.

Another shock wave was felt that week when SEC commissioners rejected a staff-proposed settlement with New York-based hedge fund manager Harbinger Capital Partners and its founder, Philip A. Falcone.

Private fund managers are getting the message. “The sense is that they are going for a different approach to hold people accountable,” said Richard Heller, a partner with law firm Thompson Hine LLP in New York and chair of the Hedge Fund Association's regulatory and government advisory board. “I think the agency is going to try to be more aggressive. It's a much stronger enforcement group, and (Ms. White) has got more of a prosecutorial perspective,” said Mr. Heller.

“In 25 years, I have never seen a regulatory or enforcement environment like this.”

Ms. White, who served as U.S. attorney for the Southern District of New York before becoming a partner at Deveboise & Plimpton, signaled a less accommodating approach in remarks at an industry conference in June, saying the SEC will push for admissions of guilt in particularly egregious cases. While most will still be resolved on a “no admit, no deny” basis, sources said that Ms. White told attendees, “we'll be scrutinizing this.”

The co-directors of the SEC enforcement division, Andrew Ceresney and George Canellos, both former criminal prosecutors as well, underscored that shift in a June internal memo spelling out three criteria for when admissions of guilt might be sought: misconduct that harmed large numbers of investors or posed potential market risk; egregious intentional misconduct, and obstruction during SEC investigations.

Sen. Elizabeth Warren, D-Mass. — a member of the Senate Committee on Banking, Housing, and Urban Affairs which oversees the SEC and an outspoken critic of federal regulators' proclivity to settle instead of litigate — welcomes the change. “I am very pleased that Chairman White is taking a hard look at the SEC's enforcement policies and moving in a better direction,” she said in an e-mailed response to request for comment. “We need to make sure that large financial institutions are held accountable when they break the law and that the penalties are tough enough to deter future violations.”

A tougher stance also might appeal to judicial critics of the SEC's non-admission settlement approach like District Court Judge Jed Rakoff, who in February rejected a $285 million agreement with Citigroup Inc. because it “represented the cost of doing business” with the agency without serving the public interest.

Ms. White is also asking Congress for resources to add 131 enforcement staff positions in fiscal year 2014. Some of those new staffers would work on investigations, while others would go to “strengthen the litigation function ... by adding experienced trial attorneys to prosecute a growing number of highly complex enforcement actions,” according to the budget request, which also called for hundreds more staff positions for the divisions monitoring financial reports and conducting risk analysis, where enforcement cases often develop.

Another new tool the SEC is using is Form PF, the required reporting by private funds. So far, reports have been filed from 2,300 advisers managing $7 trillion in hedge, liquidity and private equity funds.

“Form PF is used to prioritize the more aggressive hedge fund strategies that are out there,” said Mr. Heller. “If everything doesn't match up and if your risk analysis doesn't embody that, you're going to see more and more of these (enforcement) actions going forward.”

There are many different avenues SEC officials are using now to identify bad actors, said Mr. Heller. “They are looking for a top-down culture of compliance, which is going to be more material than ever.” The agency also recently renewed a memorandum of understanding with the Department of Labor to share information on retirement and investment matters to boost their respective enforcement programs.

Yet even with the extra manpower and new information, limited SEC resources will continue to require the agency to be strategic about enforcement tactics, pursuing decisions that so far have relied heavily on settlements. In fiscal year 2011, that approach racked up a 90% success rate, with nearly 700 cases settled and only 14 litigated. While saving face for the firms that settle without admitting guilt, “the approach also helps the agency efficiently accomplish its goals of deterrence and compensation to harmed investors,” said Bradley Bondi, a partner in the business fraud and complex litigation group of Cadwalader, Wickersham & Taft LLP in Washington. “It's a way to resolve enforcement matters without unnecessary expenditure of resources.”

A harder SEC stand against settlements also raises the prospect of fewer settlements and more time-consuming litigation. “Requiring an admission is a powerful sword. If they do start waving it around, we will see companies start to push back,” said Mr. Bondi, who expects the agency's practical and political realities to prevent a major shift away from settlements without admissions or denials. “If an admission of responsibility in an enforcement action becomes the norm, companies will opt to fight in court.”

“Firms with unlimited resources will fight harder,” said Kurt Schacht, the New York-based managing director of the CFA Institute's standards and financial market integrity division. “You sort of wonder whether that makes things worse, but at the end of the day it's about these things not being traffic tickets. Getting rid of "neither admit nor deny' would be helpful and also upgrading penalties. It'd be nice to see that there are some consequences. I think the new sheriff in town sends a very interesting message to the defense bar.”