The Challenge of Coverage, Accountability and Deterrence in Global Enforcement

Chair Mary Jo White

IOSCO 39th Annual Conference, Rio de Janiero

Oct. 1, 2014

I. Introduction

Thank you, David Wright, for that kind introduction.  As securities regulators from around the globe gather this week for the IOSCO Annual Conference, there is complete unanimity among us that strong enforcement of our securities laws is critical to protecting investors and maintaining their confidence and to safeguarding the stability of our markets.  We also all face the challenge of ensuring that we have the resources and reach to police our increasingly global markets, bring wrongdoers to account and to send the strongest possible message of deterrence to would-be fraudsters. 

Essential to meeting those challenges is strong global cooperation as all of us recognize and support.  This afternoon, I will briefly discuss the SEC´s enforcement program and how we are continuing to strive to enhance our efforts and effectiveness both in the United States and abroad, with the vital assistance of our fellow regulators around the world.

II. SEC Enforcement

Maintaining a robust enforcement program is always a principal area of focus for the SEC and has, not surprisingly, been one of my top priorities. Much of my career has been spent in enforcement, first as a federal prosecutor and now as Chair of the SEC, the primary agency charged with enforcing the U.S. securities laws, using the wide array of civil remedies the SEC is authorized to deploy. 

We have a staff of about 1,300 lawyers, accountants, analysts and other professionals in the SEC´s Enforcement Division, who work in our Washington, D.C. headquarters or in one of our 11 offices around the United States.  They do outstanding work year after year, despite our need for more resources to increase our coverage and to reach all market participants. 

In fiscal year 2013, we brought more than 675 enforcement actions and obtained orders for $3.4 billion in total penalties and disgorgement.  We will soon be announcing the results for our 2014 fiscal year, which ended yesterday.  It was another very productive year as those numbers will show. 

But numbers only tell part of the story. The quality and breadth of actions are really the more meaningful measure of an effective enforcement program.  At the SEC, we concentrate on bringing high quality cases, spanning a wide swath of the securities markets, to send very strong messages of deterrence to all market participants. 

Our cases include actions against securities exchanges to ensure they operate fairly and in compliance with applicable rules; cases against investment advisers for taking undisclosed fees and for other violations of their clients´ trust; cases against broker-dealers for disrupting the markets through failures in their automated trading systems; financial reporting actions against issuers; actions against auditors and others who serve as gatekeepers to our financial system; Foreign Corrupt Practices Act cases against international corporations; and a broad variety of cases involving insider trading and offering frauds.

The SEC also concentrates on bringing new and innovative actions to enlarge our enforcement footprint and to strengthen deterrence of wrongdoing.  For example, we recently filed our first set of actions charging violations of our market access rule, which requires firms to have adequate risk controls in place before providing customers with access to the market.[1]  This past year, we also filed enforcement actions involving Bitcoin,[2] our first case against an individual for misleading and obstructing a compliance officer of an investment adviser,[3] and our first case applying Dodd-Frank Act whistleblower anti-retaliation authority against a firm that demoted and marginalized an employee after learning of his whistleblower submission to the Commission.[4]

The SEC also continued to make effective use of some unique and tough investor-protection remedies we have, beyond the disgorgement of ill-gotten gains and civil penalties.  One of the key tools in our enforcement program is the ability to bar wrongdoers from the securities industry, and to seek orders barring officers or directors of public companies who commit fraud from serving in those roles again.  We also have the authority to bar certain professionals, like lawyers or accountants, from practicing before the SEC.  These are important forward-looking remedies that we are increasingly using.  Stopping someone from participating in the securities industry has bite and sends a powerful message that market participants watch, notice and remember.  We also use asset freezes and trading suspensions, particularly in microcap fraud and insider trading cases, to stop fraud in its tracks and prevent wrongdoers from accessing their ill-gotten gains.

I am very proud of our Enforcement Division´s accomplishments.  But there is always more to be done and we continuously make changes to enhance our effectiveness in achieving the goals of greater coverage, accountability and deterrence.

III Enhancements to the Enforcement Program

Since I became Chair of the SEC in April 2013, we have implemented a number of changes.   I will mention just three of them: the creation of new task forces to target particular types of misconduct, a change to our settlement protocol to require public admissions of wrongdoing in certain types of cases and our new whistleblower program. 

Task Forces

In a renewed effort to combat accounting frauds, the SEC in June 2013 established a Financial Reporting and Audit Task Force.[5]  This is an essential area for enforcement focus – accurate, honest and reliable financial reporting is at the core of market integrity and investor protection.  This task force has taken advantage of new sources of data on financial reporting, using innovative analytical tools to more quickly identify potential issues in financial statements and disclosures that merit further investigation.  

The task force has only been in existence for a little more than a year, but its new approaches and efforts to increase focus on financial reporting and auditing have already begun to bear fruit.  We have seen a significant jump in the number of financial fraud and issuer disclosure cases that have been filed in the past year and an increased awareness by companies and auditors that the SEC is closely focusing on them and the quality of their financial reports and audits.

We also established a Microcap Fraud Task Force to bolster our efforts to root out fraud in the microcap industry.[6]  The fraudulent pattern of "pump and dump" is familiar to us all: fraudsters inflate -- pump -- the volume and price of a stock artificially by using misleading promotions to induce investors to purchase shares, then sell -- dump -- their own shares at the artificially inflated price, the stock price plummets, and the victims are left with virtually worthless shares.  It is a perennial enforcement problem where large numbers of particularly vulnerable retail investors are harmed.  Increasingly, the Internet and social media are being used to carry out these fraudulent microcap schemes, which give the fraudsters the means of reaching and defrauding even more of our less sophisticated, retail investors.  So, our task force is proactive, staying ahead of the curve, and increasingly is obtaining trading suspensions to stop misconduct sooner, often before the dump of shares can occur, and limiting the ability of wrongdoers to profit from their wrongdoing before they are caught.  

These frauds are global.  We need to -- and do -- help each other in policing microcap fraud in the global markets.  And as many of you know, the SEC´s Microcap Fraud Task Force has worked closely with our international partners, including many agencies represented in this room.  Thank you for your assistance.

International cooperation has been vital to building these cases.  In one case, we pursued a Bahamas-based firm for its role in an international pump-and-dump scheme involving publicly traded U.S. companies.[7]  We worked extensively with our Bahamian and Canadian counterparts to obtain evidence reflecting the true ownership of the shares and, through that assistance, were able to charge the firm and a group of stock promoters in Canada, among others.  

In another case, we charged a promoter operating behind stock promotion websites, which he used to send e-mails to approximately 700,000 people to tout a stock and fraudulently inflate the price.  Those e-mails triggered a massive increase in the share price and volume, after which the promoter dumped his undisclosed holdings for more than $1.9 million in ill-gotten gains. 

This case was truly a model of cooperation under the IOSCO Multilateral Memorandum of Understanding -- the MMoU.   It was one where evidence, perpetrators and actions were literally located all around the world.  The promoter lived in Los Angeles, but was a Canadian citizen.  He had passports from Lebanon, Nevis, and Guatemala, and traded through a bank and broker in Switzerland, with companies incorporated in the Seychelles and Guatemala[8].

Admissions

Another change we have made in our enforcement program since I became Chair was to modify the SEC´s longstanding no admit-no deny settlement protocol.  We now require public admissions of wrongdoing in certain types of cases that we think require a greater measure of public accountability.  These are cases that involve particularly egregious conduct, a large number of harmed investors, significant risk to the markets or to investors, conduct that obstructs or impedes our investigation, ones in which the wrongdoer poses a particular future threat to investors or to the markets, and cases in which admissions would meaningfully enhance the deterrence message of the case.

We changed the protocol to strengthen the impact and message of our enforcement program.  In the first instance, admissions do indeed bring about greater public accountability.  There is nothing quite like a company or corporate executive who violated the securities laws openly and publicly admitting their guilt.  That acknowledgment, in turn, boosts investors´ confidence in the SEC´s enforcement program and in our markets.  Admissions also serve as a strong deterrent to would–be violators of our securities laws, and as a clear warning sign for future would-be victims of the defendant.  We will continue in the coming year to obtain more admissions in more cases where it is important to do so.

Whistleblowers

A third successful addition to our enforcement program -- one that came about as a result of the Dodd-Frank legislation, is our new Whistleblower Program.[9]  This program gives whistleblowers a strong financial incentive to voluntarily come forward with original information that leads to a successful enforcement action.  When the case results in monetary sanctions more than $1 million, the whistleblower may be eligible to receive between 10-30 percent of the money ultimately collected.  We have received more than 3,000 tips in each of the last two years, many of high quality.

In the last year, we have seen just how impactful this innovative program can be.  For instance, last month, we made our largest-ever award of more than $30 million to a whistleblower who provided essential, original information that led to a successful enforcement action.[10]  This record award follows several other significant awards, including one of nearly $15 million to a whistleblower whose information allowed the Enforcement Division to take swift action resulting in the recovery of substantial investor funds.[11]  We believe these awards will encourage even more whistleblowers – including those who live outside the United States – to report misconduct and help our enforcement team continue to bring wrongdoers to justice. 

IV. International Cooperation

International cooperation is essential to the SEC´s enforcement program, and indeed, to all of our enforcement programs.  In today´s global marketplace, fraudulent schemes and other misconduct commonly have cross-border elements, and the need for seamless cooperation among us has never been greater.

The SEC´s investigations and enforcement actions often involve witnesses and evidence in different countries around the world.  And I know that the same is true in your investigations and enforcement cases.  

Faced with this simple reality, if we are to continue to conduct these investigations successfully, and prosecute the offenses and wrongdoers to the fullest extent of our laws, broad and effective use of the MMoU, and our bilateral agreements, is more important than ever.

No one knows that better than the SEC.  Virtually every week, I meet with my fellow Commissioners to decide which cases to bring.  Rarely is there a week when one or more of the cases recommended by the enforcement staff does not involve critical international assistance.  In fact, in the last fiscal year, the SEC made more than 900 requests for international assistance and, as a result, we were able to obtain critical evidence that helped us prosecute wrongdoers for a vast array of serious offenses.

In one recent FCPA case, for example, the SEC obtained valuable evidence -- bank and other corporate records -- from German prosecutors. And, we received great support from regulators in Australia, Guernsey, Liechtenstein, Norway, Canada, Switzerland, and the United Kingdom in another major FCPA action.[12]

This critical international assistance provided to the SEC was not limited to FCPA cases.  Indeed, we receive invaluable assistance from our international partners in virtually every kind of case we bring -- financial reporting and accounting fraud, [13] microcap fraud, insider trading cases, [14] and the list goes on.

As we all recognize, international cooperation is not a one-way street.  In fiscal year 2014, the SEC responded to more than 500 requests for assistance from our international partners, most made under the MMoU.  The feedback about the value of the evidence we were able to provide has been very positive.  We are strongly committed to continuing to be a strong partner to all of our fellow regulators in their enforcement matters.  Securities fraud is global and our efforts to be effective must be global as well.

V. Conclusion

As we survey the global enforcement landscape today, there is no doubt that our collective efforts have been highly successful.  Our investors and our markets have never been as well protected as they are today.  But the challenge to achieve greater coverage, accountability and deterrence is significant and real.

To meet that challenge, we must remain vigilant in combating fraud and other misconduct, whether in our own backyards or across the globe.  We must continue to work together through the MMoU and our bilateral agreements, and we must assess these tools constantly, making sure that they are as effective as they can be in our rapidly changing world.  We want the fraudsters who seek to prey on our investors and manipulate our markets to know that there is no place to run and no place to hide.  The investors who place their faith and their trust in us deserve no less. 

Thank you for the opportunity to participate on this panel.