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The SEC’s new leadership and the Fair Funds disgorgement provision of the Sarbanes-Oxley Act of 2002 were the focus of discussion at a recent DC Bar panel session on new enforcement developments at the federal regulatory agency, moderated by Jenner & Block Partner Larry P. Ellsworth.
Among other things, the panel predicted a continued aggressive enforcement policy of the securities laws under the SEC’s new chairman, Christopher Cox, and new Enforcement Chief Linda Chatman Thomsen. Panelist and former SEC enforcement official Kevin Harnisch noted that Ms. Thomsen “has always been known as a tough and aggressive investor advocate,” and opined that she will continue her predecessor’s focus on financial fraud cases.
Mr. Ellsworth identified the Fair Funds provision of the Sarbanes-Oxley Act of 2002 as one issue that may require her attention. This provision allows the SEC to deposit civil penalties paid in an enforcement action into a “disgorgement fund” – a fund containing the illegally-gained money – which is then used to compensate the investors who lost money because of financial fraud. As a result of the provision, he noted, enforcement staff have sought to impose much larger penalties against companies with “deep pockets” in the name of “victim compensation.”
Disgorgement is intended to target unjust gains, said panelist and former SEC Chief Litigation Counsel Daniel Hurson. Abuse of the Fair Funds provision, he warned, could result in compensation “that bears no semblance to how much investors lost by the fraudulent conduct.”
Other topics included the potential overuse of staff requests for attorney/client waivers of privilege and the recent decision by the U.S. Court of Appeals for the District of Columbia in Rockies Fund Inc. v. SEC, which partially overturned an SEC decision dealing with stock manipulation.
Mr. Ellsworth was formerly Assistant Chief Litigation Counsel for the U.S. Securities and Exchange Commission’s Trial Unit, and currently serves as Chair of the DC Bar Committee on Broker-Dealer Regulation and SEC Enforcement of the Corporation, Finance and Securities Law Section.
In addition to Messrs. Ellsworth, Harnisch and Hurson, the panel included SEC Assistant Director of Enforcement Mark Kreitman and Laurence Storch, an attorney at Fulbright & Jaworski.