On Tuesday, April 21, 2009, Michael MacPhail of Holland & Hart and Patrick Hunnius of White & Case discussed key issues emerging from the SEC's Enforcement Division, and the impact of these issues on regulated entities and the lawyers who represent them. MacPhail and Hunnius are both former senior attorneys with the SEC's Division of Enforcement. Their comments came in a Securities Docket webcast entitled, "SEC Enforcement Update: A Wounded Animal is a Dangerous Animal." (An archived version of the webcast as well as the presentation materials are available here).

MacPhail led off by stating that the financial crisis and the Madoff case led to the SEC's reputation being "shattered" and its very existence being called into question. Although new leadership has helped reinvigorate the agency, MacPhail stated, the SEC was "wounded but now more dangerous than ever" because its new aggressiveness has led to questions of fairness and due process for defendants.

MacPhail said the new "get-tough" SEC, for the first time, now touts litigation on the front page of the SEC's website, with an emphasis on Ponzi schemes and TRO orders. The SEC has also commenced a huge number of TROs, ushering in an era of "All TROs all the time." In 2008, MacPhail calculates that there were 32 TROs filed, only one of which was a Ponzi scheme. In 2009, by contrast, there have already been 34 TROs filed in 22 different judicial districts, 41% of which have been Ponzi schemes.

MacPhail considers the TROs brought by the SEC to be Draconian in nature, as everyone associated with the company is restrained from withdrawing any funds. Even advances on lines of credit are disallowed, he said, meaning companies and executives cannot spend money or even borrow money to pay for attorney or basic living expenses. He added that courts are essentially serving as "enablers" of this, and not providing much of a "check" on what is intended to be a drastic remedy. Accordingly, the public must depend on the discretion of SEC in when it decides to pursue a TRO.

MacPhail emphasized that the most important thing a company can do is avoid the TRO in the first place by being proactive. He said attorneys representing clients that may be forcing TROs should promptly review the activities of the client and any ongoing false statements. It may be advisable for the client seeking to avoid a TRO to do whatever is necessary to stop making public statements, including shutting down its website. A proactive dialogue between counsel and the SEC staff explaining why a TRO is unnecessary can also help. The goal is to show that there is no ongoing illegal activity and no communications with investors. Other options may include a voluntary asset freeze; an offer to set up an escrow acct subject to court supervision; and providing bank records showing that funds are not moving out of the company's control. A last option may be to file an unsolicited Wells submission to short-circuit any TRO based on misinformation.

If a TRO is unavoidable, counsel may ask the SEC to provide it with notice of any motion for a TRO, and ask the staff to limit the asset freeze to assets traceable to the fraud and also to carve out attorneys' fees and living expenses.

MacPhail also addressed another "fairness" issue: access by defendants to the SEC's investigative file during the Wells process. He said the process is supposed to be governed by the standards laid out in the SEC's newly-published Enforcement Manual, but one of those standards-whether it will be "productive" to allow it-is so broad, subjective and undefined that different SEC offices are applying the standard in completely different ways. In Denver, MacPhail stated, there is an "open" policy for reviewing the file. In other offices such as New York, Philadelphia and Los Angeles, however, access is routinely denied without explanation. MacPhail believes that a defendant's access to the investigative file should not depend on the office that is bringing the case. He said he has escalated this issue to the "number two" person in one of the SEC's Regional Offices, only to be told in a terse letter that it was that office's policy to deny such requests to view the file.

Patrick Hunnius focused on some interesting issues emerging under the Foreign Corrupt Practices Act. He first pointed out that there have been more FCPA prosecutions in the last two years than in the prior 28 years of the Act's existence. Already in 2009, the two largest FCPA settlements ever have occurred.

Hunnius noted that a new FCPA issue that may be "ripe for the picking" involves sovereign wealth funds (SWFs ) and the definition of foreign "instrumentalities." The FCPA prohibits bribes paid to "foreign officials" including "any officer or employee of [any] instrumentality" of a foreign government or "any person acting in an official capacity for or on behalf of any such ... instrumentality." "Instrumentality" is not defined, but the SEC and DOJ interpret the term to include state-owned enterprises. Hunnius stated that while some entities are obviously state-owned, some are more disguised, and the DOJ has already stated that minority ownership does not does not necessarily exclude something from being an "instrumentality."

To this mix, Hunnius said, we must now add the SWFs, which are investment funds run by foreign governments. He stated that, arguably, an SWF's investments can create an "instrumentality." He offered as an example City Center in Las Vegas, a joint venture between MGM Grand and Dubai World, which also owns a significant percentage of MGM Grand shares. The country of Dubai is effectively a co-owner, he said, meaning that someone wining and dining (or gifting) a Las Vegas real estate developer could unwittingly be subject to the FCPA. Hunnius observed that most compliance programs do not deal with this issue. He also noted that the flurry of bailout activity in countries like Iceland and Germany have created nationalized banks that are owned by countries. Again, he stated, compliance programs should address this.

Hunnius also discussed the SEC and the DOJ's recent focus on "gatekeepers," particularly attorneys. He noted the extraordinary Collins and Offill cases, in which deal lawyers were sued by the SEC and prosecuted by the DOJ for their alleged roles in corporate disclosures and offerings. Hunnius also offered a prediction that the government will begin to look hard at the conduct of private lawyers conducting internal investigations.