July 24

Steve Cohen, SAC, the SEC & Unintended Consequences


Approximately four months ago, the hedge fund company owned and run by Steve Cohen agreed to pay the SEC approximately $616 million to settle allegations relating to insider trading.

At the time of the settlement, attorneys for SAC told the court that SAC was willing to pay the large sum because it wanted to put the matter behind them. A few days ago, the SEC announced new civil charges against Steve Cohen, individually.

There are at least four potential unintended consequences of the SEC’s action:

1. Steve Cohen might decide to fight the new administrative action. If he doesn’t fight it and agrees to the sanction the SEC is seeking, he will be out of business because he will be banned from managing money for others.  (Or he may not. Mr. Cohen has amassed a large enough fortune that he might just put this matter behind him and manage his own money.) If he fights, there is a chance that he could avoid this severe penalty. In any case, the SEC has substantially harmed his business by spooking his investors with this second action.

October 18

Will the Spitzer Wall Ever Come Down?

Since the global settlement of various enforcement actions in the investment banking industry in 2003 and 2004 timeframe (known as the “Spitzer Settlement” or “Global Settlement”), the industry has maintained a Chinese wall between equity research and investment banking functions. The purpose of the firewall is to prevent firms from putting out misleading research in favor of firm clients.

July 19

Will this be the summer of SEC settlements relating to the mortgage-backed securities crisis?

On July 18, 2012, the SEC announced that it had reached a settlement with Mizuho Securities USA for $127.5 million in connection with charges that Mizuho had mislead investors in a CDO by using  “dummy assets” to inflate the deal’s credit ratings. The CDO, known as Delphinus, was backed by subprime bonds.

The firm that served as collateral manager on the deal and the portfolio manager involved in the transaction, Alexander Rekeda, also reached a settlement with the SEC. As part of the settlement, Rekeda has agreed to a suspension from the industry for 1 year and to pay a civil money penalty of $125,000.

In February 2012, the WSJ reported that Rekeda had received a Wells notice in October 2011.

Back in September 2011, Standard & Poor’s reported that it had received a Wells notice in connection with the same Delphinus CDO.  Is there a SEC settlement with S&P in the wings or has the SEC decided not to move forward with prosecuting S&P for this transaction?

Should we expect to see more settlements related to the mortgage-backed securities crisis soon?

We know that JP Morgan received a Wells notice in January 2012 in connection with two separate investigations being conducted by the SEC, including one  “relating to settlements of claims against originators involving loans included in a number of Bear Stearns securitizations.” We also know that the government has been investigating  Wells Fargo, Bank of America, Citigroup, and Ally Financial for misconduct relating to the mortgage crisis. The billion dollar question is whether deals are in the works, whether the banks have convinced the SEC/DOJ to back down, or if these cases will be litigated (unlikely).

There is also a five year statute of limitations that limits the SEC’s ability to bring claims against the banks, but this statute may be tolled by the banks as part of the process of cooperating with the SEC’s investigations. Given that the relevant information is getting stale, it is reasonable to believe that if the SEC and/or DOJ plan to take any action relating to the mortgage-backed securities crisis, it will be soon.


The RMBS Working Group filed its first case on October 2, 2012.



January 6

New S.E.C. Settlement Policy — If you admit to criminal liability, you must admit to civil liability if charged for the same conduct.

As reported today by the WSJ and Forbes.com, the S.E.C. announced a change in its settlement policy. Under its previous policy, a defendant could be found guilty of criminal conduct but still settle parallel SEC charges related to the same conduct without admitting or denying civil liability. Under the policy announced today, SEC Enforcement Division Director Robert Khuzami announced that the S.E.C. had reached the conclusion that it was “unnecessary for there to be a ‘neither admit’ provision in those cases where a defendant had been criminally convicted of conduct that formed the basis of a parallel civil enforcement proceeding.”

This seems right and unremarkable, except for the fact that it took so long for the S.E.C. to reach this uncontroversial conclusion.

What is remarkable is how limited this change is.  It only applies to cases, “involving parallel (i) criminal convictions or (ii) NPAs or DPAs that include admissions or acknowledgments of criminal conduct.” It does not affect the settlement of civil actions where the Justice Department has not also pursued criminal charges. In those cases, the S.E.C. is sticking to its approach of accepting settlements where defendants “neither admit nor deny” even while agreeing to pay large fines or make significant operational changes.

Khuzami stated that the new policy was not a result of, or reaction to, Judge Rakoff’s recent decision slamming the “S.E.C.’s long-standing policy – hallowed by history, but not by reason – of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations.” The new policy does not address the problem noted by Judge Rakoff where the defendant of a S.E.C. enforcement action has not also been charged by the Justice Department with criminal wrongdoing in a parallel proceeding.

Instead, the limited nature of the new policy means that the only time that defendants will be required to admit civil liability to settle with the S.E.C. is when they have already admitted criminal liability (which carries much greater penalties).  But if the Justice Department does not also pursue criminal charges, the defendants will still be able to settle with the S.E.C. without admitting or denying liability.  As I’ve noted before, if the S.E.C. did require defendants to admit to liability as part of a settlement, there may be fewer settlements but increased enforcement.