Keynote Speech at New York City Bar 4th Annual White Collar Institute

Andrew Ceresney, Director, SEC Division of Enforcement

May 12, 2015

1. Introduction

Thank you for that kind introduction.  At the outset, let me give the requisite reminder that the views I express today are my own and do not necessarily represent the views of the Commission or its staff.[1]

I am very excited to be here in New York and am honored to be part of this terrific program.  Today I am going to talk about something that I am sure is of interest to this audience, if today's program is any indication – and close to my heart as a trial lawyer and former prosecutor – and that is the SEC’s national litigation program.  I plan to give an overview of the SEC’s litigation program and some of the recent success we’ve enjoyed – including in a few important areas that don’t usually get much exposure – as well as some of the challenges we face in our tougher cases.  I then will then turn to the question of the forum in which we bring our litigated cases, discussing some of the factors that we use in making recommendations to the Commission of a forum for litigation.  As you will see, my bottom line is that the Enforcement Division has been very successful litigating cases, in each available forum, despite the challenges we face at trial, and that we are using fair, reasonable and consistent factors in choosing where to bring cases. 

2. Overview of the SEC Litigation Program

I start from the premise that the SEC’s ability to successfully litigate cases is critical to its mission of protecting investors.  Successful litigation sanctions wrongdoers, provides relief to victims, and deters wrongdoing.  In addition to victories in the specific cases we bring to trial, the SEC’s litigation efforts also help us obtain strong settlements in other cases by making clear that we will go deep into litigation and to trial, if necessary, in order to obtain appropriate relief.  Litigation and trials are among the most important work of the Commission’s Enforcement staff and we have dedicated the necessary resources to ensure that we have and will continue to have a strong record of success.

In recent years, the Division’s litigators have handled an increasingly expansive docket of complex litigation and trials.  Our litigated cases run the gamut of securities laws violations from technical violations of SEC rules to core misconduct like insider trading, bribery of foreign officials, market manipulation, pyramid schemes and financial reporting frauds.  And as those of you who practice in this area know, the cases that we litigate can be complicated and challenging.  Many involve extensive factual records, sophisticated transactions, complex financial instruments, and challenging legal issues.  And there are often serious consequences on the line for the defendants in the form of monetary remedies, industry bars, injunctions and other equitable relief. 

The fact is that we usually don’t end up litigating the cases where we have obtained the strongest evidence of wrongdoing.  Those cases are typically brought by the criminal authorities or settle on terms favorable to the Commission, as they should.  The cases that litigate are typically those where the evidence is less clear cut, the law is unsettled, the defendants have determined to spare no expense in attempting to clear their names, or, in many cases, all of the above.  

Our litigation docket is busy.  Our 130 or so litigators in the national trial unit, who litigate cases alongside attorneys from the investigative staff, currently have more than 550 cases in litigation nationwide.  In FY 2014, we had 30 cases go to trial.  This was the largest number of trials we’ve had in any of the last 10 years and included more than five times the number of jury trials we had the year before. 

While the last fiscal year was an unusually active year in the courtroom – we probably won’t try 30 cases every year – I think our litigation docket will continue to expand.  We have filed more than 80 litigated actions and have already tried 16 cases in FY 2015.  Why the recent increase in litigation?  This may reflect an increased focus on individual liability, aggressive enforcement of the securities laws, and the significant sanctions that the Commission has been seeking.  Whatever the reason, the increase is noticeable. 

3. Recent Success
   1. Trials

So how are we doing at trial?  The answer is that our litigation program has achieved strong results both at trial and in other aspects of litigation.  I will start with our trial record, where we’ve recently had remarkable results. 

SEC litigators have won 22 straight trials in all proceedings.[2]  While this streak will undoubtedly end, this is a remarkable achievement.  In federal district court, we have won 7 straight jury trials and 12 of our last 14 jury trials.  Our last trial loss in federal court was almost a year ago in June 2014.  These include wins in difficult cases, dealing with complicated facts, sophisticated transactions and up against defendants with tremendous resources and top-flight defense counsel.

Let me highlight a few significant jury trial wins we’ve had just in the last year.

Last May, the Commission prevailed after a six-week jury trial here in New York on all claims against billionaire Sam Wyly and the late Charles Wyly for violations of multiple anti-fraud and reporting provisions of the federal securities laws.  This was a difficult case for a number of reasons, including the length and age of the misconduct (the scheme lasted more than a decade and ended in the mid-2000’s), the complexity of the transactions at issue, and the vigorous defenses thrown at us by the defendants’ very experienced trial lawyers.  Despite these challenges, we established at trial that the Wylys committed a long-running and complex fraud involving the creation of offshore trusts that were designed, in part, to conceal transactions in companies in which they held significant positions.  After a spirited closing argument where the defense charged that the government unfairly threw the kitchen sink of charges at their clients, defense counsel invited the jury to do the easy thing with the long and complex verdict form and to simply check a few “no” boxes for the defense and be done.  Instead, the jury checked 144 “yes” boxes for the SEC, finding the defendants liable on all counts.[3]

In December, the Commission won a six-week trial in Miami against BankAtlantic Bancorp, Inc. and Alan Levan, its CEO and Chairman, when the jury found defendants liable for violating Rule 10b-5 and various internal-controls and books-and-records provisions.  The case involved 2007 disclosures that concealed the extent of the bank’s problems with its loans to Florida homebuilders, and its failure to treat certain loans in that portfolio as held-for-sale on its financial statement, which resulted in a $53 million understatement of its losses.  This case was challenging, among other reasons, because it was the first case the Commission brought based on a held-for-sale violation – a complicated accounting concept that was the subject of expert testimony by 3 different defense experts and that was very difficult to explain to a lay jury.  Yet the trial team prevailed and did an excellent job with a tough case against very aggressive defense counsel.[4]

Other key trial wins include two recent jury trial victories by our Boston and Fort Worth offices over investment advisors Charles Kokesh, for defrauding his firm’s advisory clients by systematically looting around $35 million in client funds over many years,[5] and Lee Benjamin Grant, for misleading his brokerage customers into transferring their assets to Grant’s new advisory firm.[6]

And just last month, we had another jury trial win in Miami on 10(b) fraud claims, among others, against George Levin, who committed massive offering frauds through two companies he owned.  Levin raised more than $157 million from more than 150 investors to purchase discounted legal settlements being offered by a Florida attorney named Scott Rothstein.  Ultimately, Rothstein’s program was nothing more than a massive Ponzi scheme, and Levin’s companies were the largest feeder funds to Rothstein.  It took sophisticated trial skills and strong advocacy to distill this massive fraud into a trial presented succinctly and persuasively in 6 days.  In the end, it took the jury less than 3 hours - including their lunch break – to find for the Commission on every single count.[7]

Our litigators have also had a string of successes in administrative proceedings.  These proceedings include a number of cases against investment advisors and fund managers, where we have obtained initial decisions barring these people from the industry. 

For example, in January our trial team prevailed in a hard-fought trial against Wing F. Chau and Harding Advisory LLC.  This was a difficult case for a few reasons.  It dealt with issues regarding the duties of a collateral manager of CDOs and the representations that such managers make in the offering materials and transactional documents regarding their responsibilities – a seldom litigated area of the federal securities laws.  The team defeated an emergency motion to stay the proceedings and after a hearing that lasted 17 days and involved more than 1000 exhibits, the ALJ issued an initial decision concluding that respondents violated Section 17(a) of the Securities Act and Section 206 of the Investment Advisers Act.[8]

Although the ALJ did not agree with all of the staff’s theories, the initial decision imposed a cease and desist order, revoked Harding’s registration and imposed a permanent collateral bar against Chau.  The respondents were also ordered to pay more than $3 million in total disgorgement and penalties.  This was a great result in a very tough case.  I should note that the decision is currently on appeal to the Commission. 

We’ve had a remarkable run recently, which I attribute to thorough preparation, excellent advocates, and careful case selection.  But trial results will vary over time and, while important, one shouldn’t over-emphasize the current record of trial wins and losses at any given point in time.  Historically, we win approximately 80% of our trials so I know that we can’t win all of our cases.  Indeed, my own view is that if an enforcement agency never loses a litigated case, then it is probably not being aggressive enough.  What is important to me is that the agency continues to bring important and impactful cases, that it is willing to litigate those cases, and that it is always able to put its strongest case forward in court, which Enforcement’s litigators have been doing. 

2. Other Litigation Achievements

Whenever there is talk about the SEC’s litigation program, trial wins and losses dominate the conversation.  But they are only a part of our overall litigation program, and I want to talk about some of the Division’s other litigation achievements that are crucial to our efforts to protect investors.  These achievements include prejudgment relief, summary judgment wins, subpoena enforcement actions, post-filing admissions settlements and achieving robust remedies after we prevail on summary judgment or at trial. 

1. Prejudgment Relief

Our litigators have an impressive track record in obtaining prejudgment relief, including significant asset freezes that ultimately can facilitate distributions to investors.  Since the beginning of FY14, the Commission has obtained prejudgment emergency relief in more than two dozen cases, resulting in temporary restraining orders and freezing hundreds of millions of dollars in assets. 

These actions are important for at least a couple of reasons.  First, obtaining a TRO puts an immediate stop to the wrongful conduct so that investors will not suffer additional harm.  Second, defendants often are adept at hiding and moving assets offshore, and the Commission’s ability to obtain meaningful financial remedies – and to return money to injured investors – may therefore depend on the ability to obtain an asset freeze at the onset of the litigation.   

For example, in September 2013, the SEC obtained an ex parte TRO halting a $442 million Ponzi scheme and freezing the assets of Edwin Fujinaga.  Fujinaga falsely represented to his investors, most or all of whom lived in Japan, that all funds invested would be used to purchase medical accounts receivable and that the securities he was selling were guaranteed by state governments in the United States.  Instead, like a classic Ponzi scheme, he used the money from new investors to pay the principal and interest that he owed to existing investors.  And, as is typical in these cases, he siphoned off millions of dollars to pay for his lavish lifestyle.  The TRO froze Fujinaga’s palatial estate in Las Vegas, a horse farm in California, and a second mansion in Beverly Hills.  The TRO also froze several parcels of commercial real estate and an outpatient medical center located within a stone’s throw of the Las Vegas strip.[9]  With the scheme enjoined and assets frozen, the SEC obtained summary judgment against Fujinaga on all charges.[10]

2. Summary Judgments

This leads well to another important area where SEC litigators have had strong success – summary judgment.  The SEC wins a number of litigated federal court cases on summary judgment every year.  These include judgments on non-fraud claims or on specific elements, as well as victories on substantive fraud claims under Sections 10(b) and 17(a). 

A good example is e-Smart Technologies, a case in DC out of the home office where we recently won summary judgment against the CEO and Chief Technology Officer on claims that they ran a sham technology company, bilking investors of millions by claiming that e-Smart had a viable “smart card” that would generate hundreds of millions of dollars in revenues.  After lengthy briefing discussing the defendants’ technological claims, the Court concluded that the SEC proved that e-Smart’s card did not have the features defendants claimed.[11]  Summary judgment on the fraud claims allowed us to avoid the cost, time, and risk of a trial in a hard-fought case that has been in litigation since 2011.  The case is currently in the remedies phase. 

Since the beginning of FY 14, we’ve won summary judgment on substantive claims in more than 15 cases, and that does not count cases where there were criminal convictions in related proceedings.  These victories are just as valuable as wins at trial and are obtained without expending the additional resources necessary to win at trial.

3. Subpoena Enforcement Actions

Another important, but unsung, area where the Commission has had strong success is in subpoena enforcement actions compelling parties to produce documents or appear for investigative testimony.  Since the beginning of FY 2014, we have brought nearly a dozen successful subpoena enforcement actions throughout the country showing that federal courts are willing to enforce our investigative subpoenas and will do so in a timely manner. 

For example, the Northern District of California recently ordered a party to comply with the staff’s investigative subpoena and appear for testimony within 14 days of the order.  The Court promptly rejected his argument that the subpoena was improper because it was filed after he had received a Wells notice and issued the order less than 2 months after the subpoena enforcement action was filed.[12]  Similarly, the Southern District of New York rejected similar arguments and recently issued an order requiring an individual to appear for testimony less than a month after the SEC filed its subpoena enforcement action.[13]  These actions are critical to our ability to effectively investigate misconduct and protect investors.

4. Admissions Settlements

Another important area where our litigation efforts are leading to additional accountability and investor protection is admissions settlements.  As you likely know, in June 2013, the Commission changed its long-standing settlement protocol by requiring admissions of misconduct in certain cases where heightened accountability and acceptance of responsibility by a defendant are appropriate and in the public interest. 

This program is working extremely well and our strong litigation program is key to its success.  Parties will not agree to admissions settlements unless they face the prospect of liability findings after trial.  In fact, in a number of cases where the Commission has obtained admissions as an element of settlement, defendants had steadfastly refused to settle under those terms throughout our investigations only to change their mind after trying their hand at litigating against us.

In the Wyly case, in addition to Samuel and Charles Wyly, we also charged their main securities lawyer, who had helped set up the offshore trusts.  After fighting us for years, the lawyer agreed to settle with admissions right before trial rather than take his chances in front of the jury.[14]  The admissions were especially valuable in this case because the lawyer was an important witness at trial and was likely going to be the centerpiece of the defense.  The admissions we obtained from him as part of his settlement ensured that the jury would learn about this defendant’s own unambiguous wrongdoing and that we would know how he would testify at trial.

Another example of this kind of success is our case against Michael A. Horowitz, a Los Angeles broker, who we charged for his involvement in a variable annuities scheme to profit from the imminent deaths of terminally ill patients in nursing homes and hospice care.  Horowitz agreed to a settlement admitting the core facts related to fraud after we brought a litigated administrative proceeding against him.[15]

These settlements are great results for us because the Commission obtains the same findings and relief without the risk and expenditure of resources of a trial.

5. Remedies

Finally, our trial teams have had great success in winning robust remedies decisions from district court judges and ALJs after winning at trial.  In the Wyly case, after hearing our trial evidence, the judge imposed one of the largest disgorgement/PJI awards ever meted out against individuals – totaling around $300 million. We also secured an asset freeze against the defendants and their family members to help make sure the judgment gets paid.[16]

This amount was surpassed in January during the remedies phase of the Fujinaga case I mentioned earlier.  The court ordered over $442 million in disgorgement, $102 million in prejudgment interest, $40,000,000 in penalties, and permanent injunctions.[17]

And in another recent trial – the Life Partners case in Texas – where we prevailed before a jury on several non-fraud claims, the defendants argued that, in view of the jury’s findings on so-called “minor” charges, we were entitled to little if any relief.  In the press, one defendant went even further and likened the charges on which he was found liable to a “traffic ticket in the securities world.”  The judge disagreed.  He wrote: “These ‘minor’ charges are not minor at all. . . . [T]he jury found that [the company and its officers] deprived the investing public of the information it needed to make fully informed decisions about whether to invest in Life Partners. . . .  [T]hese are serious violations.”  The court then ordered over $45 million in penalties and disgorgement.  The company is now in bankruptcy and a trustee has been appointed to oversee the company's operations.[18]  And SEC litigators recently obtained writs of execution from the court and seized two airplanes and two luxury vehicles from the defendant which will be auctioned off and the net proceeds will be used to help pay the judgment.  This case also sends another powerful message – even when we are not successful on a scienter-based fraud claim, we still can obtain powerful remedies. 

These actions show that we are following through for investors in our litigated cases by finishing the job with strong remedies.  Remedies like these send very powerful messages of deterrence.

*                 *                 *

There are many more examples than I have mentioned today, but what these examples show is that when you litigate with the SEC you will find yourself at trial against a worthy courtroom adversary.  We will be fair but tough, with a proven record of success during all phases of litigation, and the ability to consistently achieve strong results for the agency.

4. Administrative Proceedings
   1. Litigated Cases in Administrative Proceedings

Now I want to talk briefly about a subject that has generated much interest as of late, particularly in the white collar community – the use of administrative proceedings for litigated cases. 

As most of you know, the SEC is generally authorized to bring its enforcement actions in either of two forums – a civil action in federal district court or an administrative proceeding (and/or cease-and-desist proceeding) before an Administrative Law Judge.  The SEC has been using administrative proceedings for many years; they are not new.  Nearly all of these cases historically were against regulated entities and individuals, and often involved extensive factual records, complex and novel legal issues, and claims for significant financial penalties. 

As part of Dodd-Frank, Congress expanded the SEC’s authority to obtain penalties against any person in an administrative proceeding including unregistered entities and individuals.[19]  Under this expanded authority, the Commission has been bringing more enforcement actions in the administrative forum, where it can now obtain the same remedies as in district court.

For settled matters, the Commission often, but not always, chooses to file in an administrative forum, largely because of efficiency.  The filing quickly ends the matter on a settled basis, among parties that have agreed to a settlement, and there is no need to have implementation of the parties’ agreement subject to the competing demands of busy district court dockets.  This practice was recently cited as appropriate by the Second Circuit Court of Appeals in the Citi decision, where the court noted that the Commission “is free . . . to employ its own arsenal of remedies” rather than bring settlements to district court.[20]  The vast majority of the uptick in the numbers of actions we have brought as administrative proceedings are settled actions.  That is a point often missed by commentators.

The Commission is also bringing more litigated cases in administrative proceedings than it did in the past.  However, it has not turned away from federal court and is still bringing more litigated cases in federal district court than in administrative proceedings.  In FY14, for example, the Commission filed more litigated cases in federal district court than in administrative proceedings.  And so far in FY 15, more than 60% of our litigated cases were filed in federal district court.  Indeed, out of our current overall caseload, about 75% of our pending litigated actions are in federal district court. 

And this includes tough cases.  For example, insider trading cases are some of the toughest cases to try.  Yet the SEC has traditionally brought, and continues to bring, the vast majority of its insider trading cases in federal court.  In fact, since the beginning of FY 14, approximately 90% of our litigated insider trading cases have been filed in federal district court.  Let me be clear:  The Enforcement staff does not shy away from litigating in district court, where we have had great success as I have outlined today, and we will continue to take tough cases to trial in both forums.

2. Forum Selection

So how do we determine which forum to recommend to the Commission in each case?  Last week, the Division of Enforcement issued public guidance on forum selection in contested actions.  We did this to increase the transparency in our forum selection process.  As explained in the guidance, which is posted on the Enforcement page of the SEC website,[21] there is no rigid formula dictating the choice of appropriate forum.  Our overriding goal is to achieve strong and effective enforcement of the federal securities laws in a fair and efficient manner and we try to recommend the forum that will best utilize the Commission’s limited resources to carry out its mission.  To be clear, the Division of the Enforcement recommends a choice of forum in each case but the Division’s recommendations are in all cases subject to review and approval by the Commission.

As we outline in the guidance, we consider a number of factors when evaluating choice of forum and our recommendation to the Commission depends on the specific facts and circumstances of the case.  The factors we consider include:

The availability of the desired claims, legal theories, and forms of relief, in each forum.  Certain claims, theories, and relief are only available in one forum.  For example, charges of failure to supervise or causing another person’s violation can only be pursued in the administrative forum while liability as a controlling person or as a relief defendant can only be pursued in district court actions.  Similarly, if we need prejudgment relief – like the TROs and asset freezes I talked about earlier - only a federal district court can grant this type of relief.

Whether any charged party is a registered entity or an individual associated with a registered entity.  Registered entities and associated persons – such as broker dealers and investment advisers – have long been subject to the Commission’s regulatory oversight, which has long included Commission administrative proceedings.  While we can bring actions against registered entities and persons in federal district court, there are some kinds of relief – like associational bars and suspensions – that we can only get in the administrative forum.  In cases where we want to get a time-out against a broker dealer, investment adviser, associated person, or other registered person or entity – or remove them from the industry entirely – it is often a more efficient and effective use of limited agency resources to bring all of our claims in the administrative forum, rather than litigating in district court for an injunction first and then instituting a follow-on administrative proceeding. 

The cost-, resource-, and time-effectiveness of litigation in each forum:  This factor can come into play in a number of ways.

• As I mentioned earlier, hearings are almost always held more quickly in administrative proceedings than in federal court.  This may allow us to avoid stale witness memories and to publicly air the facts more quickly, and we expend fewer resources in administrative proceedings than the often lengthy district court process.
• The ability to seek and obtain relief in a single proceeding also may enable the Commission to use its limited resources more efficiently.  This may be the case in a situation like I just described where we can get all of the relief we seek against a registered person or company in the administrative forum, or if there is a case against multiple parties and there is no single district court that has proper venue for all of the parties.  This may also be the case in district court, for example, if we are recommending charges against multiple parties, including relief defendants. 
• One forum also may be more efficient if the case can be decided on, or the disputed issues narrowed by, a motion for summary judgment in federal court (which generally addresses a broad range of claims and issues and is generally freely available) or a motion for summary disposition in the administrative forum (which generally requires leave from the Administrative Law Judge to file and typically addresses a narrower range of claims and issues).  
• In addition, the time and types of pre-trial discovery available in federal court may entail both costs and benefits, which we weigh under the facts and circumstances of a case. 

Fair, consistent, and effective resolution of securities law issues and matters.  As I mentioned earlier, Administrative Law Judges and the Commission have extensive knowledge and experience concerning the securities laws and complex or technical securities industry practices or products.  If a contested matter is likely to raise unsettled and complex legal issues under the federal securities laws, or interpretation of the Commission’s rules, it may make sense to file the case as an administrative proceeding so a Commission decision on the issue, subject to appellate review in the federal courts, may facilitate development of the law.  On the other hand, where application of state law or other specialized areas of federal law is integral to the matter, district court may be appropriate.  If similar charges are being or have been brought against similarly situated parties in the same or closely-related contested matters, it may be preferable to recommend charges against similarly situated parties in the same forum.

This list of factors I just went through is not exhaustive and the staff may consider some or all of these factors in a particular case.  For some cases, a single factor may be important enough carry the day. 

While forum selection will turn on the particular facts of a case, I hope the public release of these factors will provide increased visibility into our thought process while recognizing that each case turns on its specific facts and circumstances.  As I have said in the past,[22] I believe both federal district court and administrative proceedings are fair forums, and that the Commission should continue to use them both in appropriate cases. 

5. Conclusion

I hope this has given you a better sense of the SEC’s litigation program as a whole.  The message should be clear:  we will continue to aggressively bring impactful cases to protect investors and won’t hesitate to litigate tough cases in both our available forums.  Thank you for your attention today and enjoy the rest of the conference.