Recharged with a new chairman and two new co-directors within its Division of Enforcement, the Securities and Exchange Commission is poised to make some significant waves under the direction of its revamped enforcement team.
The SEC certainly has a full plate, as it wrestles with a backlog of rulemaking under the Dodd-Frank Act, money market fund reform, high-frequency trading, and plenty more. Chairman Mary Jo White, however, who was sworn in as SEC chairman in April and is a former federal prosecutor herself, recently stated that the SEC is above all else an enforcement agency.
“This new era completes the transition of the SEC from a regulatory agency to a law enforcement agency,” says Stephen Crimmins, a partner with law firm K&L Gates and a former litigation attorney with the Enforcement Division.
Historically, he says, the SEC has been more of a regulatory body whose rule pronouncements grabbed the headlines; the enforcement unit played more of a supporting role (even though the single largest portion of the SEC budget does go to enforcement staff). “That dynamic has changed pretty significantly,” with the Enforcement Division being “very much the core of the SEC,” Crimmins says.
White herself brings decades of experience as a prosecutor in complex securities and financial fraud cases—on both sides of the courtroom. Prior to joining the SEC she headed the litigation department at law firm Debevoise & Plimpton, and before that was U.S. attorney for the Southern District of New York in the 1990s.
White named George Canellos and Andrew Ceresney co-directors of the Enforcement Division in April—another first for the Enforcement Division, to have two directors at once. Canellos had been serving as acting director since January, and previously served as the division's deputy director since June 2012. He also served as director of the SEC's New York Regional Office, where he and White crossed paths.
Ceresney comes to the SEC with experience as a trial attorney and criminal prosecutor, and plenty of experience working with White as well—first as deputy chief appellate attorney in the U.S. attorney's office, where he focused on securities fraud, and later at Debevoise where he was a partner.
With those résumés, “that gives [Canellos and Ceresney] a level of access to the SEC chair that enforcement directors just haven't had in the past,” Crimmins says.
“By being more judicious about seeking injunctions, the SEC may reduce the kind of scrutiny it is currently getting from federal judges.”
—Russ Ryan,
Partner,
King & Spalding
Enforcing What?
Many securities law enthusiasts expect the SEC to step up its focus on financial fraud, accounting fraud, insider trading, municipal securities, and anti-corruption cases. Cases stemming from the financial crisis of 2008, on the other hand, are expected to wane as the five-year statute of limitations approaches.
Enforcement could also increase as high-value tips and complaints analyzed by the Whistleblower Office, now in its second year of existence, result in filed cases. “In time, we'll see more cases flow from the vetting of whistleblower complaints submitted at a heavy clip over the last few years,” says Eugene Goldman, a partner with law firm McDermott, Will & Emery and formerly senior counsel in the SEC's Enforcement Division.
On June 12, the SEC issued its second-ever whistleblower award to three unnamed tipsters, who helped the SEC with its enforcement action against sham hedge fund Locust Offshore Management and its Chief Executive Officer Andrey Hicks. The defendants, who defrauded investors out of $2.7 million, have been ordered to pay $7.5 million in disgorgement and prejudgment interest, with the whistleblowers positioned to receive five percent of what the SEC ultimately recovers.
Barry Goldsmith, a partner with Gibson, Dunn & Crutcher and a former chief litigation counsel at the SEC, notes that former SEC Chairman Mary Schapiro, who served from 2009 through 2012, often had her priorities set by external events such as the financial crisis and major legislation in Congress. Now that the financial crisis has receded, the new SEC has “more flexibility to define its own mandate,” he says.
ENFORCEMENT DIVISION HEAD BIOS
The following are the biographies of George Canellos and Andrew Ceresney, who were named by Chairman Mary Jo White as co-directors of the Securities and Exchange Commission's Division of Enforcement on April 22.
George Canellos, who had been serving as acting director of the SEC since January, previously served as the division's deputy director. Since June 2012, he played a key role in developing the division's cooperation program and in generating numerous programmatic, policy, and legislative initiatives and critical decisions on national priority enforcement actions.
From July 2009 to June 2012, Canellos served as director of the SEC's New York Regional Office, overseeing 400 enforcement attorneys, accountants, investigators, and compliance examiners involved in the investigation and prosecution of enforcement actions and the performance of compliance inspections in the New York region. The New York office has responsibility for the largest concentration of SEC-registered financial institutions, including more than 4,000 investment banks, investment advisers, broker-dealers, mutual funds and hedge funds.
A former federal prosecutor, Canellos became an Assistant U.S. Attorney in the Southern District of New York in 1994. During his nine years there, Canellos served in a number of positions including chief of the Major Crimes Unit, senior trial counsel of the Securities and Commodities Fraud Task Force, and Deputy Chief Appellate Attorney. After leaving the U.S. Attorney's Office and before joining the SEC, Canellos spent more than six years as a litigation partner at the law firm of Milbank, Tweed, Hadley & McCloy. He began his legal career as a litigation associate at Wachtell, Lipton, Rosen & Katz.
Andrew Ceresney served as a deputy chief appellate attorney in the U.S. Attorney's Office for the Southern District of New York, where he was a member of the Securities and Commodities Fraud Task Force and the Major Crimes Unit. As a prosecutor, Ceresney handled numerous white collar criminal investigations, trials and appeals, including matters relating to securities fraud, mail and wire fraud, and money laundering.
Most recently, Ceresney served as a partner in the law firm of Debevoise & Plimpton, where he focused on representing entities and individuals in white collar criminal and SEC investigations, complex civil litigation and internal corporate investigations.
“As head of the New York Regional Office and the Deputy Director and Acting Director of Enforcement, George has distinguished himself at the SEC as a highly respected leader with a keen intellect and extensive knowledge of the securities laws,” SEC Chairman Mary Jo White said in a prepared statement. “I have had the pleasure of working with Andrew both at the U.S. Attorney's Office and in the private sector. He has proven himself to be an extraordinarily talented and versatile lawyer with tremendous judgment and creativity.”
The Enforcement Division is the agency's largest unit, with more than 1,200 investigators, accountants, trial attorneys and other professionals. In recent years the division has achieved success prosecuting financial crisis cases, insider trading and other violations.
Ceresney served as a law clerk to the Honorable Dennis Jacobs, Chief Judge of the U.S. Court of Appeals for the Second Circuit from 1997 to 1998, and previously served as law clerk to the Honorable Michael Mukasey, formerly Chief Judge of the U.S. District Court for the Southern District of New York, from 1996 to 1997.
Source: SEC.
The SEC's departure from its longstanding policy of not requiring companies to admit wrongdoing in enforcement settlements, for example, is one sign that White intends to “shake things up,” Goldsmith says.
In fairness, the agency's decision to require admission of wrongdoing more often was spurred by external pressure as well. Numerous federal judges have complained that the no-admission approach was too lenient. In response, White has signaled the SEC will start requiring admissions of guilt in the most egregious cases, such as in cases where conduct was intentionally fraudulent and resulted in substantial harm, or risk of harm, to the public.
Crimmins says that policy change should affect a “relatively small number of cases.” It would only start to hinder the SEC's ability to reach settlements if the agency began applying it in less egregious offenses.
The SEC may also reconsider its use of injunctions—which have been a cornerstone of SEC enforcement for decades but also encounter skepticism from the federal bench from time to time. Injunctions are standard in any civil enforcement action, but are no longer the most powerful tool in the SEC's enforcement arsenal.
The SEC has plenty of other more punitive remedies at its disposal, such as monetary penalties and cease-and-desist orders. “In many cases—if not most—there's simply no plausible basis for an injunction,” says Russ Ryan, a partner with law firm King & Spalding and a former SEC enforcement attorney. “By being more judicious about seeking injunctions, the SEC may reduce the kind of scrutiny it is currently getting from federal judges.”
Enforcement Initiative
One hallmark of Schapiro's tenure was the creation of multiple specialized units within the SEC—high-level divisions, such as the Division of Enforcement or the Division of Economic and Risk Analysis, but also smaller units within each division to focus on specific tasks. Within the Enforcement Division, for example, are units to handle the Foreign Corrupt Practices Act and fraud in municipal securities. Coordination among those units and feeding expertise back to Enforcement Division attorneys, was a priority under Schapiro and is likely to remain so under White.
As one example, the Division of Economic Risk and Analysis is developing the “Accounting Quality Model” (AQM to provide a set of quantitative analytics that could be used across the SEC to identify anomalies in financial statements. With the AQM, SEC staff could harness such analytics to focus their investigations, or use these metrics to evaluate claims that come in from tipsters.
“You're going to see enforcement working much more closely with the [Office of Compliance Inspections and Examination] group in developing cases,” Goldsmith says. “You're seeing much more coordination early on and I think that's going to continue as well.”
Continuing the priorities under Schapiro, White has made clear that the SEC will not be bound by traditional models. From the establishment of specialized units to hiring more subject-matter experts to hone in on the latest technological advances, the SEC will continue to be a force to reckon with.
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