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SEC Takes Steps to Stem Courtroom Defeats

Trial Unit Is Restructured as Agency's Win Rate Slips

By Jean Eaglesham
Updated Feb. 13, 2014 8:47 p.m. ET
http://online.wsj.com/news/articles/SB10001424052702304703804579381310253258646?mod=rss_whats_news_us

The Securities and Exchange Commission, faced with a recent run of courtroom defeats, is shaking up the way it prepares for trials.

Mary Jo White, who took charge of the SEC in April, has restructured the agency's trial unit in recent months, according to people familiar with the matter. The goal in part is to allow investigators and litigators to work closer together as a case develops, the people said.

The changes come as the SEC's win rate in court has slipped. The agency has won 55% of its trials since October, a sharp drop after three consecutive years when it prevailed more than 75% of the time, according to previously unreleased figures. Among the recent setbacks was the verdict finding billionaire Mark Cuban not liable on insider-trading charges.

The increase in courtroom losses could prove a short-term blip, and the cases were initiated well before Ms. White became SEC chairman. Still, defense lawyers say the trend will likely encourage more people to fight the agency rather than settle its allegations.

The weakened score card threatens to be a headache for Ms. White, who has pledged to take a tougher approach to enforcement.

In a speech last year, she said the agency's then-80% courtroom success rate "may explain why most lawyers counsel their clients against going to trial against the SEC and why we achieve strong settlements in most of our cases."

Ms. White's promise of a tougher enforcement approach "needs courtroom success to be credible," said Thomas Gorman, a partner at law firm Dorsey & Whitney LLP. "The agency has to reverse the trend of recent trial defeats for its enforcement program to be effective," he added.

Judges and juries have found in favor of 10 out of 25 individuals and firms in SEC courtroom battles since October, with the government losing five out of 11 trials, according to the agency's figures. This is a markedly worse track record than the 12 months through September, when only five of 34 defendants won against the SEC, the new data show. The latest figures don't yet include results from the SEC's own administrative judges, where historically it has won far more often than in federal courts.

"We're proud of our long record of success at trial in difficult cases, including victories in our three most recent trials in the last two weeks," Andrew Ceresney, the SEC's director of enforcement, said in a statement. "We will continue to bring aggressive cases to protect investors and hold wrongdoers accountable."

The agency's courtroom record stands in contrast to Manhattan U.S. Attorney Preet Bharara's 79-0 record in securing convictions or guilty pleas in criminal cases that have been resolved as part of its continuing insider-trading crackdown. SEC officials say privately that the comparison is unfair, particularly as most of the civil agency's enforcement actions—including what tend to be its strongest cases—settle before going to trial.

The SEC faces a high-profile courtroom test with its administrative case against hedge-fund billionaire Steven A. Cohen, a hearing that could take place later this year. The agency alleges the founder of SAC Capital Advisors LP failed to adequately supervise two senior employees at his firm to prevent them from engaging in insider trading. Lawyers representing Mr. Cohen have rejected any suggestion of wrongdoing by their client.

As part of the recent changes, the SEC's trial unit has been restructured into four groups to mirror more closely the work of the enforcement officials who investigate the cases, the people familiar with the matter said. Senior officials including Mr. Ceresney and trial unit chief Matthew Solomon also are personally conducting practice openings for upcoming trials, the people close to the agency added.

The trial unit "litigates what it's told by the commission to litigate" and gets blamed unfairly sometimes for losses on cases that shouldn't have been brought, said Bradley Bondi, a former SEC official. If the changes get the unit involved at an earlier stage in cases, "it would help the agency make the critical distinction between the suspicion of wrongdoing and evidence that will stand up in court," added Mr. Bondi, now a partner at law firm Cadwalader, Wickersham & Taft LLP.

Defense lawyers said the recent flurry of high-profile losses could make it more difficult for the agency to persuade some firms and individuals to settle, especially since the agency is demanding higher sanctions to resolve some cases.

"The indications of a vulnerable SEC, particularly coupled with tougher settlement terms, may lead more parties to roll the dice and litigate," said Marc Fagel, a former head of the SEC's San Francisco regional office who is now a partner at law firm Gibson, Dunn & Crutcher LLP.

Sam Lieberman, a partner at law firm Sadis & Goldberg LLP, said the "punishment no longer seems to meet the crime" in some of the settlements demanded by the SEC to resolve cases where there are clear risks the agency could lose at trial.

"The pendulum has swung so far toward aggressive enforcement that sometimes it seems clearly preferable to go to trial, rather than reaching a quick settlement," Mr. Lieberman said.

Write to Jean Eaglesham at [e-mail]

http://online.wsj.com/news/articles/SB10001424052702304703804579381310253258646?mod=rss_whats_news_us