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Yesterday, the Securities and Exchange Commission announced that in fiscal year 2014, new investigative approaches and the innovative use of data and analytical tools contributed to a very strong year for enforcement marked by cases that spanned the securities industry. The SEC has taken an aggressive approach, bringing more cases, pushing first-ever cases, and collecting record setting penalties. And, SEC Chair Mary Jo White plans on keeping it that way.

The SEC reported that in the fiscal year that ended in September, the SEC filed a record 755 enforcement actions covering a wide range of misconduct, and obtained orders totaling $4.16 billion in disgorgement and penalties, according to preliminary figures. In FY 2013, the Commission filed 686 enforcement actions and obtained orders totaling $3.4 billion in disgorgement and penalties, while the Commission filed 734 enforcement actions and obtained orders totaling $3.1 billion in disgorgement and penalties in FY 2012.

The agency’s enforcement actions also included a number of first-ever cases, including actions involving the market access rule, the “pay-to-play” rule for investment advisers, an emergency action to halt a municipal bond offering, and an action for whistleblower retaliation.

SEC Chair Mary Jo White stated: “(a)ggressive enforcement against wrongdoers who harm investors and threaten our financial markets remains a top priority, and we brought and will continue to bring creative and important enforcement actions across a broad range of the securities markets." She continues, "(t)he innovative use of technology – enhanced use of data and quantitative analysis – was instrumental in detecting misconduct and contributed to the Enforcement Division’s success in bringing quality actions that resulted in stiff monetary sanctions.”

In typical Government fashion, the SEC highlighted all of its WINS and none of its huge LOSSES. So, I'll highlight a few of them here:

  • Securities and Exchange Commission v. Jensen: After an eight-day bench trial, Judge Manuel Real in the U.S. District Court for the Central District of California rejected all of the SEC’s accounting fraud allegations against two former executives of Basin Water Inc. The SEC had accused Basin’s former CEO Peter Jensen and former CFO Thomas Tekulve of engaging in “sham transactions” to boost reported revenues from the sale of their groundwater pollution purification systems. But Judge Real found that the SEC failed to present sufficient evidence that Jensen and Tekulve intentionally misled anyone or were reckless in their accounting practices.
  • Securities and Exchange Commission v. Kovzan: A federal jury in Kansas acquitted Stephen Kovzan, CFO of NIC Inc., of all charges brought by the SEC. In January, the SEC had charged Kovzan with 12 counts of securities fraud, violation of the internal controls provisions, and aiding and abetting NIC’s alleged securities law violations. The charges all related to a scheme to conceal $1.18 million in payments to former NIC CEO Jeffery Fraser to cover personal expenses, including vacations, spa treatments, clothes, and commuting by private jet (these payments should have been reported as compensation). The SEC sought financial penalties, injunctive relief, and to bar Kovzan from serving as an officer of a publicly traded company. But after a three-week trial, the jury answered every question posed on a 15-page verdict form in Kovzan’s favor and acquitted Kovzan on all 12 counts.
  • Securities and Exchange Commission v. Cuban: The SEC took on billionaire Mark Cuban (owner of  the Dallas Mavericks) and lost. In January 2008, the SEC filed insider trading charges against Cuban related to the sale of his stake in a Canadian Internet company. But on Oct. 16, 2013, a jury in Dallas (in the U.S. District Court for  the Northern District of Texas) acquitted Cuban of all charges after less than five hours of deliberation. The jury explicitly found that the SEC failed to prove that Cuban had received material, non-public information or that he had promised not to act on that information.
  • Securities and Exchange Commission v. Steffes: An Illinois federal jury rejected the the Securities and Exchange Commission’s insider trading case against several former Florida East Coast Industries Inc. employees, representing another trial defeat for the Commission. Following a nine-day trial, an eight-person jury declined to find Rex C. Steffes and his three sons – Cliff M. Steffes, Bret W. Steffes, and Rex R. Steffes – liable for violating federal securities laws when they purchased securities of Florida East Coast.
  • Securities and Exchange Commission v. Manouchehr Moshayedi: A federal jury found the former chief executive of sTec Inc. not liable for trading on inside information, a major loss for the SEC. Manouchehr Moshayedi, 55, a co-founder of the computer storage device company, was cleared of insider trading on non-public information about a major customer's reduced demand for a key product, enabling him and his brother to reap roughly $260 million.
  • Securities and Exchange Commission v. Nelson Obus:  A federal jury in Manhattan found Nelson Obus, a fund manager at  Wynnefield  Capital Inc, not liable on an SEC claim he traded on inside information about a 2001 takeover of industrial products supplier SunSource Inc. The jury also found Peter Black, a Wynnefield analyst, and Thomas Strickland, a former employee at General Electric Co's GE Capital who worked on the deal, not liable on insider trading charges.

From where I stand, the more aggressive the SEC gets, the more we are going to see SEC losses... as long as there are companies that can afford to fight when the over-zealous charges are brought, that is.

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