By Mark S. Nelson, J.D.
Zachary T. Fardon, U.S. Attorney for the Northern District of Illinois, and David A. Glockner, Director of the SEC’s Chicago Regional Office, offered their views on the priorities and challenges faced by their offices regarding securities and commodities enforcement. Their regional views highlighted a few locally significant items, but also mirrored larger national trends.
Fardon and Glockner made their remarks at the 35th Annual Ray Garrett Jr. Corporate and Securities Law Institute held at Northwestern University Law School in Chicago. Wolters Kluwer Law & Business is a program sponsor of this year’s Garrett Institute.
The prosecutor’s view. Fardon noted that his office has many priorities, including ones that span a range of areas with national overtones, such as the interaction between police and citizens as exemplified by recent events in Baltimore, and the myriad national security issues posed by groups such as the Islamic State of Iraq and the Levant.
But Fardon’s office also has a group of lawyers that focuses on financial markets. The Northern District’s Securities and Commodities Fraud Section tracks issues and cases that involve publicly-traded companies and other regulated financial entities, such as trading exchanges. Fardon noted that his office brought the first criminal prosecution for commodity futures “spoofing,” a case that will proceed now that the defendant has failed to persuade a federal judge to dismiss the indictment.
Fardon noted that Chicago overall has changed for the better during the last 20 years, including by burnishing its image as a home for many corporations and as the host city for key trading venues. Despite his office’s many other activities, Fardon said the securities and commodities fraud section is important “because it matters” that federal prosecutors do their part to ensure the fairness and integrity on which U.S. markets rely. He cited a list of cases as examples of his office’s financial markets enforcement activities, including an ongoing investigation under the Foreign Corrupt Practices Act.
In addition to their separate remarks, Fardon’s and Glockner’s discussion included dialogues about enforcement against individual executives and how companies deal with whistleblowers. While the SEC has demanded admissions in some cases against individuals, Fardon said the criminal milieu of federal prosecutors poses the unique challenge of needing to prove each element of an offense beyond a reasonable doubt.
Fardon said many critics of prosecutors’ handling of financial crisis cases do not fully appreciate this last point, which also is influenced by the resources available to prosecutors. “I believe individual accountability is important,” said Fardon. But he said these cases will continue to be pursued based on their specific facts.
Glockner echoed Fardon’s observations about admissions in the SEC’s cases. Glockner added that few cases beget admissions because the conduct charged must be particularly egregious.
As for whistleblowers, Fardon responded to a question from the enforcement panel’s moderator about how companies deal with employees who come forward, saying he questioned what it says about the U.S. culturally when companies think only of whether anyone will learn of the whistleblower’s information. Glockner added that the SEC’s Dodd-Frank Act-mandated whistleblower program was intended to “raise the stakes for those kinds of discussions” at companies.
The federal government’s sequestration order remains a sore spot for federal prosecutors. According to Fardon, his office and other U.S. Attorneys’ offices are part of the “collateral damage” inflicted by the order. Fardon said his Chicago office is currently down 12 assistant U.S. attorneys as a result.
From the regulator’s desk. Glockner said his SEC regional office is now freer to pursue a wider range of enforcement priorities now that much of the office’s work on financial crisis-related matters is done. He also noted the special relationship between the SEC’s Chicago office and federal prosecutors, whose work is complementary, even though the two offices have different statutory missions. Specifically, Glockner said Fardon’s securities and commodities section offers opportunities for both offices to engage in joint training and to make referrals to each other. Fardon said Glockner, a former prosecutor himself, knows the type of cases prosecutors want to take on.
Glockner noted a 45 percent rise over last year regarding reporting fraud cases. He said this was the result of renewed SEC focus on these issues and the freeing up of resources previously devoted to Great Recession-era cases. He cited the example of the case his office brought against two former executives at Assisted Living Concepts Inc. (ALC). The hearing in the SEC’s administrative proceeding against ALC’s ex-CEO Laurie A. Bebo was set to take place April 20 in Milwaukee. Bebo recently lost her bid to get a federal judge to halt the proceeding on constitutional grounds, but she has appealed that decision to the Seventh Circuit.
Other priorities for Glockner include municipal securities and pensions. The focus here is twofold: the link between securities fraud and public corruption, and the accuracy of representations in offering documents. Glockner echoed Fardon’s general concerns about market structure and integrity. He also noted regulators’ interest in “protection of process” cases, especially ones like the compliance personnel action SEC Chair Mary Jo White mentioned in her address to the Garrett Institute yesterday. Subpoena enforcement actions are yet another area of concern for Glockner.
The future of regional enforcement, Glockner said, is for regulators to become more risk-based. Glockner’s observation is consistent with the risk-based focus many SEC staffers in Washington, D.C. began touting publicly a few years ago at Practicing Law Institute’s The SEC Speaks in 2013.
Glockner also said the Chicago regional office’s examination team is now working more closely with its enforcement program, especially on issues for seniors, cybersecurity, and private equity fees and expenses. In the case of seniors, Glockner said it is important to remember that many of those nearing retirement age belong to the first generation to have managed their retirement funds on their own.