In fact, the abuses are much more pervasive than the presence of outright fraud would indicate, according to Kelly. They include “aggressive practices to get transactions into a quarter, to improve the profitability for a particular time period,” he said, noting that such activities on the fringes of fraud have also attracted less attention from regulators than they would have before the financial crisis.
That period is over, however. “Without a doubt, I can tell you that I’ve been to various SEC offices in the last several months for lots of different clients, and there is no question that they are taking this topic very seriously” and employing their new technological tools to search for fraud, according to the consultant.
What’s more, investigators are paying particularly close attention to whistleblower complaints. “It’s just become fashionable, quite frankly, to fire off a letter to the SEC if you’re a disgruntled employee or upset about something, whether or not there’s any merit” to those complaints, Kelly said. “And there’s certainly an uptick in the [regulators'] attention.”
Another indication of the SEC’s new-found aggressiveness is its recent insistence that fraudulent companies and individuals admit publicly to the facts of the fraud. Previously, the commission’s policy had been to settle cases on “a no-admit-no-deny basis,” Andrew Ceresney, the SEC’s co-director of its enforcement division, noted in a September speech.
That approach, which helped the commission get fast results, conserve resources and avoid litigation risk, “will typically trump the need for admissions in order to better achieve the goals of our enforcement program,” according to Ceresney. Recently, however, the SEC changed that approach and is now seeking admission in cases of criminal or regulatory settlements.
Further, Ceresny said, there’s “a group of cases where a public airing of unambiguous facts — whether through admissions or a trial – serve such an important public interest that we will demand admissions, and if the defendant is not prepared to admit the conduct, litigate the case at trial.”
Speaking at last week’s program, Christopher Garcia, a partner, at Weil, Gotshal and a former chief of the Securities & Commodities Fraud Task Force of the U.S. Attorney’s Office for the Southern District of New York, predicted that while there will continue to be no-admit-no-deny settlements, there will be fewer of them.
Indeed, the SEC’s policy of demanding that fraudsters acknowledge their misdeeds is “here to stay,” Garcia said. Further, “the extent to which people admit their conduct,” he added, “makes it more likely that the government will be successful in extracting admissions in the future. I think the SEC is very serious about this.”