Class 1 Notes

Sources of Enforcement
o Justice: criminal or civil.
o SEC: civil. Subpoena power, investigatory power Elaborate whistleblower. But no
criminal.
o Private: class action.
SEC
o Regulates: all public cos, brokerage industry, investment advisors, mutual funds,
hedge funds, non-public cos doing private placements and crowd funding.
o Tools: injunctions/consent decree (eg start a compliance program, put 3 new
members on your bd, etc), cease and desist orders, compensatory damages,
penalties, officer/director bars.
Injunctions seen as more powerful than penalties. Cos can always gin up
more $.
DOJ
o Prison, fines, bars from industry, etc.
Private class actions
o Compensatory damages and attorneys fees.
FINRA
o Fin ind reg authority. Brokerage firms required to be finra members, pay dues.
FINRA enforces its own rules and is first line of discovery. Can discipline violaters,
inform SEC/DOJ.

Sec Regs Class 1: Introduction to the Securities Law Enforcement Toolkit: Criminal
Prosecution, Civil Enforcement, Private Enforcement
Article 1
Mary Jo White is chairwoman of SEC, criticized for ineffectiveness. House is hostile. Her view:
reduce systemic risk by regs on products, not companies. Treasury disagrees. Should work
together. One liberal gripe: Dodd-Frank bars financial firms from betting against the
securities they created, as Goldman Sachs and Magnetar did. Four years later, the rules that
would turn this law into reality remain stalled in the S.E.C.s bureaucracy. chair doesnt have
a strong policy background, she is extremely dependent on her staff. S.E.C.s actions on
high-frequency trading have been lacking. public has lost faith. People believe the system is
rigged.
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SEC used to be crown jewel.

With texts and wiretaps, insider trading is easy case to make now.
Really good lawyers have left because of the low morale in SEC now.

Question
- Does SEC have enough resources and talent?
Article 2
BOA settled for over 16 bil. It long argued that it should not be harshly penalized for the
misdeeds of Countrywide Financial and Merrill Lynch, the companies it bought in the

financial crisis. It lost. Some still critical though. brag that the settlement dollar amount with
Bank of America sets yet another record. But will D.O.J. provide the public with the key
information on investor losses, Bank of America profits, the names of involved executives?
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Rakoff very critical of SEC practices. Rejected SEC/Citigroup settlement.

His presence in BOA case is significant. Holder calling Moynihan is unprecedented.

Questions
- Should there have been criminal penalties? Is 17 bil just a cost of doing biz? Or was
it too burdensome?
Article 3
Halliburton Company v. Erica P. John Fund.
To prove a case of securities fraud, shareholders must show that they relied on the
fraudulent statement in buying or selling a companys shares. For class actions, need to quiz
each shareholder on whether they actually saw and relied on the fraudulent statement
would destroy the ability of lawyers. 1988 case Basic v. Levinson, reliance would be
presumed in class actions. The effect of the Basic case was to open a broad avenue for
plaintiffs lawyers to bring suit. in a 2013 case, Justice Samuel A. Alito Jr. called for the
doctrine of the Basic case to be revisited.
In Halliburton, SC refused to overrule the decision made in the Basic case. They noted that
markets may not be totally efficient, but what was going on here was not a binary, yes or
no question. Instead, the issue was whether the companys price had been affected. SC
however, will allow companies to raise the issue that a stock wasnt impacted by the
fraudulent statements at the class certification stage.
- Are class action claims frivolous?

Class 2
Langevoort Article
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3 Narratives for SEC after Madoff:

o Corruption with perverse incentives, gross incompetence all around, and bumbling
from mid-ranks with little resources.
Langevoort Narrative
o Lack of Resources: huge problem with 12000 public cos.
SEC takes on smaller manageable cases. No one wants the SECs equivalent
of Vietnam wardiscouragingly costly efforts that produce no readily
definable victory.
Congress is at fault. Low budget even though SEC takes in more in fees than
it costs to operate.
o Poor Incentives
Sensitivity to the risk of failure. Part of SEC culture and somewhat due to lack
of resources.
Pay: they can go get jobs on Wall St. Author downplays, but I think its bigger
than he says.
o Some incompetence: Excessive reliance on lawyers at the SEC and the need to
introduce far greater financial sophistication into the agencys thinking
o But what about Madoff?
Assumption of sophisticated investors due diligence, avoidance of
embarrassment with no smoking gun evidence.
Higher value on cases targeting retail investors. wealthy investors lower
priority due ability to protect themselves more.
No corruption per se with regard to Madoff. But abundance of tools and
resources that might make going after him more likely can too easily be put
to use to threaten more sensitive interests of Wall St.
My answer?
o Bans: Instead of civil fines, kick way more people out of the securities industry.
Deterrence would be almost as great as jail time. Civil fines are seen as a cost of
doing business. A banker is gonna do a DCF analysis calculating potential profit
and the probability of getting caught and fined.
Theres also a fairness argument: in order to deter firms, you have to fine
them separate amounts. Same wrong act, but a BOA fine has to be much
greater than a mid-size investment bank fine.
Industry bans would act as a huge deterrent across the board (although the
you do run into scapegoat problem). But even if you have some unfair bans,
it will change the culture of firms.
o

Class 3: SEC Investigatory Process

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Kinds of cases the SEC brings

SEC can go after any records and talk to your accountant, ex-wife etc without giving
notice. (Jerry OBrien case)
o But your accountant, lawyer, etc can give assurance that the first person they call
will be you if they are contacts.
Companies often disclose SEC investigations in 10-ks, although the law on this
somewhat murky.