SEF D.C. -- Masterclass: Managing a True Corporate Crisis, Major Internal Investigation and/or Whistleblower
Here is a transcript from the investigations masterclass at the excellent post-election Securities Enforcement Forum in Washington, D.C. The panelists were:
Brad Bondi, Partner, Paul Hastings LLP
Susan Markel, Managing Director, AlixPartners
Claudius Modesti, Partner, Akin Gump Strauss Hauer & Feld
Steven Peikin, Partner, Sullivan & Cromwell
Lorin Reisner, Partner, Paul, Weiss, Rifkind, Wharton & Garrison
You can find the video here and the full agenda here.
00:00 - 00:42
Kurt Wolfe: All right, thank you for joining us again for this panel. This is MasterClass, Managing a True Corporate Crisis, Major Internal Investigation, and or Whistleblower. We have another excellent panel for you this afternoon. Our moderator for this panel is Brad Bondi. Brad is a partner at Paul Hastings in Washington, D.C. And New York. He is the global co-chair of the Investigations and White Collar Defense Practice at Paul Hastings, and Brad previously held senior positions in government, including at the SEC, where he served as counsel to two commissioners for enforcement actions and regulatory rulemaking. Next to Brad is
00:42 - 01:25
Kurt Wolfe: Susan Markel. Susan is a partner and managing director at Alex Partners here in Washington D.C. Susan oversees matters involving corporate financial reporting, regulatory investigations, whistleblower actions, FCPA enforcement, and internal controls. Previously, she served at the SEC for nearly 15 years, including serving as chief accountant in the SEC's Division of Enforcement. Next to Susan is Claudius Modesti, who is a partner at Akin Gump, also here in Washington, DC. Claudius previously served for 14 years at the PCAOB, where he was the first director of the Division of Enforcement. Prior to the PCAOB, Claudius served with the fraud section
01:25 - 02:04
Kurt Wolfe: of the DOJ's Criminal Division as a trial attorney, the SEC as an enforcement attorney, and the U.S. Attorney's Office for the Eastern District of Virginia as a federal prosecutor in the Financial Crimes and Public Corruption Unit. Next to Claudius is Stephen Peikin, who is a partner at Sullivan and Cromwell in New York, where he leads Sullivan and Cromwell's Securities and Commodities Investigations Practice. From 2017 to 2020, Steve served as co-director of the SEC's Division of Enforcement. He also previously served for eight years as a prosecutor in the U.S. Attorney's Office in the S.D.N.Y., including as chief
02:04 - 02:32
Kurt Wolfe: of the Securities and Commodities Fraud Task Force. And all the way at the end, last but not least, is Lorin Reisner, who is a partner at Paul Weiss in New York. He is co-chair of the White Collar and Regulatory Defense Practice and a member of the firm's Management Committee. Lorin previously served as Chief of the Criminal Division of the U.S. Attorney's Office in the S.D.N.Y. He also served as Deputy Director of the Enforcement Division at the SEC.
02:32 - 02:33
Kurt Wolfe: Brad, why don't you get us started.
02:34 - 03:13
Brad Bondi: Terrific, thank you. We're going to divide this panel into really three parts. One is to talk about what happens when a crisis hits, especially in the context of recent events. The second is an in-depth discussion about how to best position your client during the investigation, including keeping the investigation on track, effective advocacy with the SEC and the Department of Justice, cooperation strategy, and the like. And then we'll conclude with some closing remarks, particularly around the events of yesterday and what might be at the road ahead. So let's talk about what to do when a crisis hits.
03:14 - 04:06
Brad Bondi: Let's talk first about some statistics and diagnostics. These days companies face a broad array of potential crisis situations, including short seller reports and whistleblowers, sometimes in combination. one study suggests that the SEC investigated or a securities class action ensued in response to 43% of activist short seller campaigns. As you know, whistleblowers have enormous and increasing financial incentives to self-report. In its fiscal year 2023 report to Congress, which is the one most recently available, the SEC reported that it had awarded nearly $600 million to whistleblowers, the highest total in the SEC's history, which included a record 279
04:07 - 04:56
Brad Bondi: million award in a single case. In March of 2024, the DOJ announced a pilot program to pay whistleblower awards to individuals who report misconduct. And while the DOJ's whistleblower program is relatively new, there's quite a lot of talk about what the impact of it would be. The DOJ just published guidance on it in August of 2024. So starting with that, Steve Peikin, would you tell us about the DOJ's new pilot program and how it compares to the SEC's program and how does the DOJ's program change the dynamic of responding to a corporate crisis?
04:57 - 05:38
Steve Peikin: Yeah, thanks Brad. So I think that the program is intended to try to fill some interstitial gaps that exist in existing whistleblower and qui tam programs. And what it provides is that if a whistleblower provides original information to the Department of Justice that results in a forfeiture of at least a million dollars in net proceeds, the whistleblower is eligible for presumptively 30% and perhaps more of that award. I think the big carve out is that the program does not apply if the conduct itself is subject to an existing whistleblower program or qui tam regime. And so in the
05:38 - 06:17
Steve Peikin: case of most securities law violations, you know, they're going to be covered by the SEC's whistleblower program, and so, you know, this won't be additive to it. And I think you can think of maybe some kind of obscure situations that wouldn't be covered by the SEC's program. So for example, if you had an FCPA violation for a domestic concern that wasn't an issuer, that wouldn't be covered by the SEC's whistleblower program and presumably one could report to the DOJ. So I think probably it has only incremental effect for securities enforcement, but whistleblower programs, particularly in recent
06:17 - 07:00
Steve Peikin: years where the process for adjudicating whistleblower claims has been made much more rational at the SEC, the flow of awards has increased. And I think awards beget tips, which beget more awards. And so I think all practitioners have to think about, whenever confronted with a situation, that there is a significant risk that someone will be reporting. I would say one thing about the DOJ whistleblower program, which I think is an effective and appropriate provision of it is that a company that is a subject of whistleblower report has 120 days to make its own self-report. And if
07:00 - 07:17
Steve Peikin: it meets that deadline, it's still eligible for the sort of declination and disgorgement presumption that applies in DOJ cases. So it's just another sort of sign to us all to be kind of on our toes when confronted with misconduct and thinking about self-reporting.
07:18 - 07:37
Brad Bondi: Terrific. Lorin Reisner, parallel SEC and DOJ proceedings seem to be more commonplace these days. Have you seen an increase in these types of parallel proceedings and investigations, and how do they impact your approach to dealing with an
07:38 - 08:22
Lorin Reisner: investigation? Sure. When we used to think about parallel proceedings, it was the SEC and the Department of Justice. And how do you handle, coordinate, collaborate with the SEC and the DOJ in a parallel proceeding? But it was a two-lane highway. It was the SEC. It was the DOJ. These days, parallel proceedings seem to involve 5, 6, 7, eight-lane highways with the SEC, multiple DOJ components, state law enforcement authorities, state regulators, industry regulators, and others. So it's a lot to handle. Parallel proceedings still present a lot of the same issues, but the issues are moving even more quickly with
08:22 - 09:02
Lorin Reisner: more interested parties. But the principles have pretty much stayed the same. And I think of those principles as including the following. First, at the beginning of a crisis, this is a panel about crisis management, enterprise stability is going to be in everybody's best interest, the government's best interest and the client's best interest. Chaos at the beginning of the crisis almost serves nobody's interest. So trying to provide in the immediate term with enterprise stability is critical. How do you do that? The first thing you need to do is manage and communicate with the relevant constituencies. The board
09:02 - 09:52
Lorin Reisner: of directors, the audit committee, the chair of the audit committee, members of management who are appropriate to coordinate with based on the nature of the investigation, the outside auditor, and government representatives, sometimes principal shareholders. Coordinating, communicating, getting input from each of the relevant constituencies is critical in crisis management. Fact investigations. Inevitably, one of your first priorities when you're managing a crisis is going to be to investigate the facts as quickly as possible. We all know how to do it, document collection, witness interviews, analysis, expert input where necessary. But sometimes the government will only give you a
09:52 - 10:32
Lorin Reisner: limited time period to develop your facts and understand the issues before there'll be an expectation of a presentation. So you can't let the perfect be the enemy of the good. You need to do your investigation or as much of your investigation as you can do as quickly as possible. Last principle I'll raise, which you sometimes don't hear on the list, is fairness. You really do wanna try to be as fair as you can to everybody involved in these crisis situations. Don't rush to conclusions that aren't warranted and fully supported based on the evidence that you've collected.
10:33 - 10:57
Lorin Reisner: Don't try not to come in with preconceptions. Try not to let recency bias affect you, what the last person said to you, controlling what you do next in the investigation. I mean, fairness is, I think, an essential part of an effective investigation and an investigation that's going to be well respected by the government when and if it's time to communicate with the government.
10:59 - 11:28
Brad Bondi: Terrific. Lorin, we've heard one development in these investigations is that the SEC is now starting to send routinely subpoenas directly to current and former executives of companies in order to obtain information from their personal devices here, even where they're sending subpoenas directly to the company. Thoughts on that and how you're dealing with that?
11:28 - 12:14
Lorin Reisner: Yeah, I've heard those rumors as well. And look, personal devices is an area, you know, fraught with sensitivities and potential for misstep. When you're conducting an investigation for a company or an audit committee, what you think of, of course, in the first instance is collecting company communications. But if you learn during the course of your investigation that corporate representatives have been using their personal devices for business purposes, you pretty much have an obligation to take all necessary and available steps to at the very least image those devices so that there's never any question about losing access
12:14 - 12:58
Lorin Reisner: to potentially relevant evidence. Like telling the CEO of a public company that you've got to image their device is not always such an easy thing. Telling the chairman of a board that you've got to image their device is not such an easy thing. But it's often necessary in order to do your job properly. And there is a significant difference between imaging the device and beginning to access the contents of the device. And I'm sure that lots of us in this room have dealt with that. There's a mix, inevitably, of personal information and business information on those
12:58 - 13:44
Lorin Reisner: devices. I think practices have developed where the government respects that to some degree, usually a reasonable degree and there are mechanisms that can be put in place so that the corporate investigator is getting the information that they need from the device while preserving and protecting personal communications that are really none of the outside lawyers' business and frankly none of the government's business either. Sending subpoenas directly to individuals for their contents of their devices, it happens. DOJ subpoenas and SEC subpoenas. one of the things you try to do if you're managing the investigation properly is to try
13:44 - 14:00
Lorin Reisner: to give the government confidence that you've got control over the devices as the investigator. So maybe they'll feel they don't have the need to take that extra step of directing a subpoena to the individual for their devices. But It's a delicate
14:01 - 14:13
Brad Bondi: dance. And how do you deal with the so-called ephemeral messages, the Signals of the world and Telegrams of the world, and when you come across executives who are using those types of message programs?
14:13 - 15:02
Lorin Reisner: Similar to the text messages and the personal devices. If you're doing an audit committee investigation or a company investigation and you learn that executives have been using Signal or another ephemeral device application, you've gotta take every available step to image or capture or preserve that information. We probably all know that there are often limitations, practical limitations to being able to do that. Really the best advice you can give clients is to take care of this on the front end. Corporate executives should not be using those types of messaging applications for business purposes. Almost every reputable public
15:02 - 15:33
Lorin Reisner: company forbids the use of those types of applications for business purposes. It still probably happens from time to time, but it's a terrible situation for a company to be in because very often those messages cannot be obtained, preserved, and inevitably there are going to be negative inferences drawn as to the company and as to the individuals who have been using those types of applications.
15:35 - 15:57
Brad Bondi: Let's shift to talking about self-reporting. Claudius Modesti, when do you start thinking about self-reporting? When in terms of the chronology? And how do you ultimately determine whether to recommend to your client to self-report, and is self-reporting even worth it these days?
15:57 - 16:33
Claudius Modesti: Thank you, Brad, and thank you to Bruce Carton again for putting on a great event. It's an important threshold question when to self-report. It puts you at the front end of a process. So you're assuming that certain facts have come to the company's attention, outside counsel's been retained, and you're trying to get your arms around the problem, trying to define the problem, so then you can make an assessment, is this the type of problem that justifies self-reporting? It's gonna require a robust discussion with the client. Your client may be the audit committee, the board of directors,
16:33 - 17:13
Claudius Modesti: it may be management at this stage. And you have to start thinking about how quickly can you get your arms around the facts so that you can make an assessment about whether it's worth going to the government with self-reporting. Some of the things you're going to have to think about is how significant is the problem in terms of how it contributed to the company's historical financial picture? To what extent are there allegations that upper management was involved? How pervasive is the problem, at least initially as you're trying to understand the parameters of the issue? And then
17:13 - 17:49
Claudius Modesti: you get to the calculus, What are the pros and cons? You think about the pros and you educate the client about the opportunity to try to reduce any sanctions from the government prosecution of the matter. The DOJ and the SEC have placed a lot more emphasis recently on self-reporting as one of the tenants of robust cooperation. So you have to educate the client about that. You have to educate the client that if you do self-report there's a chance the government will give you more leeway in terms of controlling the investigative process, in terms of your internal
17:49 - 18:32
Claudius Modesti: review, and reporting out information, and you may have some control over that, a little more control over that flow because you've initiated the matter through self-reporting. But the downsides can be significant. The disruption to the business, if you open up your matter to the government scrutiny, you don't know if the government is gonna come up with a disproportionate response to the facts and really require a very costly process, very protracted process to potentially run down an issue that may not be that significant. And so you have to weigh those pros and cons as you're deliberating and
18:32 - 19:09
Claudius Modesti: as you're asking the client to deliberate on that question. And then if there's a prospect of a DOJ case, you have to, and that's really your first concern is the risk of a DOJ case, is you have to think about where and when DOJ will give you credit for self-reporting. And it has to be done according to the cooperation enforcement policy before there's an imminent threat of disclosure or government investigation. You have to do it within a reasonable period of discovering the facts. And when you do do it, you have to provide all the relevant information,
19:10 - 19:47
Claudius Modesti: including what you know about individual culpability. So that puts a lot of pressure on this front end decision about when to embark on self reporting. And then you have the whole question around whether the whistleblower or the government's gonna get ahead of you while you're trying to get your arms around the facts enough to make an informed decision from the client's perspective. And it could be that you already have indications that there may be a whistleblower rattling around, maybe they only complained internally, but as you're doing a review around the facts to understand what you're dealing
19:47 - 20:23
Claudius Modesti: with and how significant of a problem you have, you have to think about how to do that discreetly because in the process you could provoke a whistleblower just by doing that initial inquiry and then you have to explain why you didn't disclose the case sooner. And then finally, if you decide not to disclose the case, it's important that the client think carefully about what explanation will provide the government if the government comes knocking. How did it respond to the problem? Did it remediate the problem in a timely and appropriate way so that when the government does
20:23 - 21:00
Claudius Modesti: show up, if they do show up, you have a good position to explain yourself in. The last thing I'll say is the SEC has said on multiple occasions now that self-reporting is the most important factor for getting reduction in the civil money penalty. And to me at least, it appears It's very hard to make up for the lack of self-reporting by bundling other cooperative steps. And so the question is, is can you actually put yourself in the position of getting a lower civil money penalty in a significant way if the government comes back and says, well,
21:00 - 21:11
Claudius Modesti: you should have self-reported this one, notwithstanding the fact that it's a very significant judgment call. So that's something that's putting even more pressure on companies as they make this front-end decision.
21:12 - 21:41
Brad Bondi: A large number of investigations involve accounting issues, including those related to short seller reports or responding to a whistleblower. Susan Markel, one of the preeminent accountants in the investigation SEC world, Can you describe how you work with outside counsel in an investigation and what is effective and what is really less effective?
21:42 - 22:13
Susan Markel: Sure, I think in terms of working with outside counsel, it's best to work as a team. So, the thing that works best is to get involved very early, so you're basically lockstep. You talked about short seller reports and a whistleblower report. While they're very similar, they're also different. And it goes into whether or not something is going to be public or not. If it's a short seller report, you know, if your company's been, you know, Muddy Watered or Hindenburg already, that's out there in the public. So you treat that differently and you probably have to move
22:13 - 22:45
Susan Markel: faster on that. Depends on the time that that report comes in. If it comes in three weeks before you're gonna file your Q or your K, that's your timeline that you've gotta deal with. And so you've really gotta focus on that to get your constituents happy. And in that situation, the auditors are probably one of your most important constituents because they're the ones who can hold up your filing of your K or your Q. So you've got that. The whistleblower is a little bit different because it could just be an internal one. Obviously, it must be
22:45 - 23:18
Susan Markel: something there. They wouldn't have already gone out to engage outside counsel and then to engage a firm to assist with that. But once you get those reports in either way, you have to look through them, see what's actually being said. If it's an accounting issue, do you have the right accounting support on that? Does it sound like it's right or not? So doing the research around that. How broad is it? Is it just a particular transaction? Is it a type of transaction that goes across many different entities? Is there a broad being alleged? Revenue recognition, people
23:18 - 23:49
Susan Markel: are falsifying documents or things. So it's really analyzing what you have there and then figuring out beyond that, okay, how do we tackle it? I like to think of things on a day one document request. If you hit the ground, what actually do you need right away? And some things that come to mind. Again, understanding the matter, understanding the players involved, you know, is it just the accountings wrong? Or is it fraudulent? It does involve senior management. Might it just be some sales folks? So understanding the area of scope that you're looking at as far as
23:49 - 24:20
Susan Markel: that goes. You know, looking at the client profile, the org chart, just trying to understand your client really to get started. What is their experience with auditors? Do they have a good experience with their auditors or is it something that's going to be frictioned right from the start that you have to deal with? And then you get in, you do your early case assessment and get your document requests going. Again, if you've got just a couple-week window with short seller reports, you've got to really go immediately and start bringing people in. And to that you need
24:20 - 24:49
Susan Markel: to figure out who's under the umbrella or not. Are there people that you don't even, you don't even wanna tell them you're doing this. You have to be very protective about that too to make sure that the information doesn't come out in the wrong way. And then it's really just going point by point. Another thing about short sellers is understanding from the company, how public do they want their response to be? I mean, some companies may get it and look at it and say, I don't even wanna do anything. But if they called counsel already, they've
24:49 - 25:12
Susan Markel: realized they gotta do something, but do they wanna do it just for themselves so that if the government does come knocking, then they'll be able to say this is what we've done and this is why we do or don't have a problem. Or do they want to go out publicly? You know, you've got this 20-page report, do they want to, you know, do they want to respond to that, you know, just to keep the noise out of the market? So those are, you know, just some of the things that, you know, come into play along the way.
25:13 - 25:20
Brad Bondi: Susan, is it difficult to know when you've done enough to investigate that you can rule out issues?
25:21 - 25:50
Susan Markel: Yes, and lots of people come into play with that and that decision. It depends on what it is. Again, if it's a tip that's fairly isolated, you don't necessarily wanna just expand for the sake of expanding. You know, that's not what you want to do. If it's a rev rec issue, a certain area, you focus on that. And if there's nothing that takes you anyplace else, you leave it there. You know, what often happens is you're starting to look at something, something else comes up along the way. Or if you see that it touches upon perhaps
25:50 - 26:20
Susan Markel: a key executive that's involved, that will then help tell you how far you have to go and around. But you really wanna be in the position that if you're faced across the table from the government investigators, you're anticipating what their question will be and you can say yes we've already done this or not. Sometimes how much you do is also not totally in your control because you have the auditors and they're not going to be comfortable until you've done X, Y, and Z. Sometimes they're more prescriptive than others. Sometimes they'll say, you know, they don't want
26:20 - 26:36
Susan Markel: to get involved in that from an independence perspective, but, you know, eventually you kind of hear where their concerns are and they'll take you down a certain path. And obviously if you have the government already knocking and you've got the subpoena and interviews, you'll kind of know what more you have to do to finish.
26:37 - 26:58
Brad Bondi: Shifting gears to the second topic of how best to position your client during the investigation. Susan, picking up from where you left off here is what's the most effective way that an outside counsel can use a forensic accountant when working to resolve an SEC investigation? What do you recommend about that?
26:58 - 27:29
Susan Markel: First, you call them early and often. But you're kind of using them for what assistance do you need? Do you need the technical accounting side? Do you need e-discovery? Do you need data analytics? A lot of things these days, the cases are very complicated and there's not just thousands of transactions, millions of transactions. How are you gonna deal with that? Do you have to pull down the full general ledger, which is not an easy thing to do? To be able to talk to the government and say, this is what we've done, and we've taken all of
27:29 - 27:40
Susan Markel: these steps. Again, putting yourself on the side, government would expect you to have done X, Y, and Z, and you go in and you say, we've done X, Y, and Z, and oh, by the way, we did Q&R because this is why we had to do it.
27:43 - 28:42
Brad Bondi: Moving on to the Seaboard factors, which everyone in the room should know and have been reinforced as recently as May of 2024 in a speech at the Securities Enforcement Forum West by Director Grewal. He cited self-policing, self-reporting, remediation, and cooperation, the four key factors. But interestingly, he added a fifth factor, collaboration. And he said, quote, collaborate with enforcement staff early, often, and substantially. He emphasized quantity and quality of the communication with the enforcement staff. Steve Peikin, is collaboration now a required element and how do you collaborate more? How do you take what then-director rules said and apply that to an investigation?
28:42 - 29:22
Steve Peikin: Yeah I don't think it's a new element of cooperation I think that you know if you've decided to cooperate if your cooperation is a binary decision, if you've been directed by the client to cooperate with the SEC, you're trying to win a gold medal, and you're trying to cooperate to the gold standard. And collaboration, meaning regular iterative discussions with the SEC to help them advance their investigation is part of that standard. And when we're cooperating, we try to set up a regular cadence of communications with the staff so that we're talking to them every week or
29:22 - 29:55
Steve Peikin: two. You know, there are inevitable bumps and issues that arise in an investigation. You want to learn about those as early as possible so you can fix them. And you want to be thinking creatively about what can we do to make the SEC's, you know, efforts easier that has reciprocal benefits on the company, but you know, looking for things to investigate and present on, translating documents, bringing matters to their attention. So I think that kind of back and forth and communication is sort of part and parcel of cooperation.
29:57 - 30:52
Brad Bondi: Claudius, some have said that the bar for receiving cooperation credit has increased over the years. In fact, Director Grewal said in May of 2022 that cooperation is more than the absence of obstruction, it's affirmative behavior. And then he went on to describe examples of good cooperation credits, such as self-reporting remediation and making documents and witnesses available, identifying hot documents and making presentations to the staff. Not such ridiculous requirements. In fact, some would say that's expected. But is the cooperation bar higher now than it has been in the past. And how do you see that playing out in interactions with the staff?
30:53 - 31:27
Claudius Modesti: I don't know if it's higher. I like Steve's point about you're trying to win a gold medal. I like cake, so I'm thinking about a gold medal for the best cake. And my sense of things, watching historically the staff engage on cooperation, is that it used to be that a one layer cake suffice. Now I feel like you need like a three-layer cake. And so the ingredients are more robust. You need to cook it a little longer and maybe decorate it a little bit more. But at the end of the day, your cooperation should be
31:27 - 32:09
Claudius Modesti: designed to save the government time, resources, get them reliable, timely information. My sense of things is that's still what's driving the cooperation program, that hasn't changed. I do think the emphasis on self-reporting has changed And that's because I think the SEC is not finding cases from its typical sources, like restatements of financials. And so the emphasis is let's get companies to self-report so we can maintain a robust enforcement program. So I think it's making up for the lack of other sources of information. I think the emphasis on individual culpability, it's always been there, but it's evolved,
32:09 - 32:50
Claudius Modesti: and it's putting more pressure on companies to identify culpable executives, and to discipline, engage in clawbacks, things like that. So I think that's another factor that's made the recipe for this cake a little more robust. And then finally I'd say that the quality of your pre-existing compliance program, there's probably slightly more emphasis on that, And then the quality of remediation. I think the staff is much more focused on how deep and wide and comprehensive your remediation is, even without an independent monitor being imposed. So that's why I think it's a multi-layered cake instead of a single layered cake, but it's still a cake.
32:52 - 33:19
Steve Peikin: I would just say one of the challenges, I think, is that there isn't necessarily an equal grading field, personnel's policy. And there are people who are tougher graders than others. And so you can do the same level of cooperation and get sort of mild scorn or even worse from some person and then plaudits from the other. And that's inevitable in a large organization with a lot of different people.
33:20 - 33:22
Brad Bondi: How tough of a grader were you Steve?
33:24 - 33:29
Steve Peikin: I was part of the soft on crime administration so we were egasy.
33:31 - 34:10
Lorin Reisner: Look there's also a danger when you're trying to win the gold medal, and it goes back to sort of the fairness principle that I was discussing earlier. Look, there's going to be a lot of pressure from the SEC or other government agencies at times to push you to identify facts that support a particular pet theory of an investigator or identify individual culpability of a particular individual executive that the SEC or the enforcement attorney might be unhappy with. And you got to both try to win the gold medal, but you got to be fair. And you got
34:10 - 34:57
Lorin Reisner: to push back on occasion to the staff when they push you to support theories that may not be supported by the evidence or to implicate individuals that the evidence really may not support pursuing. And that's where the rubber meets the road, because everything goes swimmingly while you're cooperating and winning that gold medal and running down the lane. But there are almost always, or many times, instances in investigations where, despite how hard you're trying to win the gold medal that you can't always give give the staff or the investigators what they might think they want to receive
34:57 - 35:07
Claudius Modesti: And you add to that Lorin you don't have visibility into how your cooperation will be credited, because you're just not sure where that line is being drawn and that makes it all the more challenging, right?
35:09 - 35:41
Brad Bondi: It seems like there have been some gold medals given out, including one in February of 2024, where in a SEC enforcement matter, The SEC charged, I think I'm pronouncing it correctly, Cloopen Group Holdings Limited with Section 10b and Rule 10b-5 violations, but declined to impose a penalty in view of Cloopen's cooperation and remediation efforts. There was some accounting into that. Susan, can you tell us as an accountant about that matter?
35:42 - 36:20
Susan Markel: Sure, so this is pretty much accounting Fraud 101. This was a company that was provided cloud servicing, mainly in China. They had filed for an IPO in February of 2021. And almost immediately after that, kind of the fraud started. This company had set up a certain sales program and had certain people assigned for certain specific accounts and they set out certain targets, you know sales targets for certain individuals including penalties that they didn't hit them. So it's not even just the incentives on the upside, but there's incentives on the downside. And so what certain salespeople did
36:20 - 36:50
Susan Markel: over there is the typical revenue recognition. They accelerated revenue recognition, they recognized revenue before a project was completed, or in some cases before it was even started. So pretty basic. This happened for a couple of quarters and then towards the year end, the auditors are the ones who actually caught it. And so brought it forward, they did the investigation, but again, it's rev-rec, that's probably the single most common type of fraud that's out there. So from that standpoint, it's pretty much bread and butter.
36:52 - 36:56
Brad Bondi: Lorin, anything to add to that from the legal side?
36:56 - 37:45
Lorin Reisner: Yeah, well, I guess the director of enforcement at the time gave three reasons why the enforcement division was not pursuing penalties in that case. The first was that the defendant self-reported the issues. The second was that there was extensive cooperation, which consisted of presentations to the staff, fact presentations on different topics to the staff, that key documents were identified and translated, that there were reports on witness interviews as they took place. And the third reason given was significant remedial measures were imposed, including terminating or disciplining employees, strengthening the accounting controls in the areas that Susan just
37:45 - 38:19
Lorin Reisner: described, and clawing back compensation from executives who were responsible for the business unit and I think the company as a whole. But Brad, you know, query whether the gold medal was not having a penalty imposed. It seems like the gold medal really would have been, and Stephanie was referring to this earlier, not having an enforcement action pursued against a company that was sort of in distress and undertook all of those steps to try to apparently do the right thing under the circumstances.
38:20 - 38:51
Brad Bondi: We're just a little over five minutes left, and the fear that Bruce will give me the hook here if I go over. Let's shift to last night and the effects of the election here. I would be remiss if I didn't ask this distinguished panel here what you think and what you can predict and the road ahead with the SEC enforcement and cooperation credit. Does anyone want to tackle that first?
38:52 - 39:24
Steve Peikin: Sure, I'll take a step. You know when I left the Commission and would talk to clients and they would ask you know what's gonna happen under the new administration, my sort of stock line was well you know it's a career workforce and they mostly didn't listen to me and Stephanie when we were there, so they're probably not gonna listen to these next crew and things are gonna stay more the same than they would change. And I think that's proven to be really wrong. I think the last four years have been significantly different in terms of willingness
39:24 - 40:02
Steve Peikin: to pursue aggressive legal theories and penalties have ratcheted up. So I think it's hard to predict. It's really gonna depend on who comes in as the new chair and what their priorities are and who leads the enforcement division. But you could see, certainly I think we're gonna have a, one of the things I've observed is there's been a lot of re-emphasis toward crypto enforcement, digital assets, and that's come at the expense of some traditional core areas that the SEC traditionally polices. I think you could see a move back in that direction. But I think everybody struggles
40:02 - 40:14
Steve Peikin: with trying to incentivize cooperation and self-reporting, and I think that will continue to be something that whoever's running this ship will want to promote. Claudius?
40:15 - 40:59
Claudius Modesti: I mean, I'd like to see a reconsideration of charging negligence. I think it should be the rare exception. And the sense I get is that negligence and almost quasi-strict liability situations get charged as very significant enforcement cases. And I don't think that produces the type of general deterrent effect that some have suggested it does. And I think that would apply to all the capital market regulators. They should be focused on reckless, knowing intentional conduct, which I think will best serve the capital markets in terms of investor protection and not negligence-based cases. And try to make the
40:59 - 41:08
Claudius Modesti: case for why are your enforcement cases actually producing tangible investor protection? I'd like to see that discussion get reinvigorated.
41:11 - 41:14
Lorin Reisner: Well, I want to turn the question back on you, Brad.
41:15 - 41:18
Brad Bondi: You can't do that. I'm the moderator.
41:20 - 42:11
Lorin Reisner: But I agree with almost everything Steve and Claudius said. But I'm an optimist, and I'm an institutionalist. So my prediction is going to be that the best traditions of the Enforcement Division will continue in the future. I think there'll be, there'll definitely be carve backs in resources dedicated to things like crypto and digital assets. But you know, fraud is really, it's a nonpartisan issue. So I'm cautiously hopeful that the best traditions of the Enforcement Division will continue. I'm worried a little bit about, you know, if you believe some of what you read in the papers about, you
42:11 - 42:29
Lorin Reisner: know, rooting out agencies of certain types of people who may not be with the program. I'm worried about that. I'm hoping that that is more rhetoric than reality. But I'm gonna stay cautiously optimistic. Brad, what do you think?
42:32 - 43:10
Brad Bondi: Well, I did see my friend John Stark crying and there were crypto miners that were collecting his tears to pour on their machines, to cool off their machines from their crypto mining. So it seems like the crypto world is celebrating and those who are critics are a little upset, but I don't know what the future holds otherwise. Susan, anything on your side, what do you think? You were at the SEC. Can we expect some radical changes ahead or more business as usual?
43:10 - 43:39
Susan Markel: I think one of the things that we'll have to see when things come through in addition to who's running the Commission, who's running enforcement, it's just the amount of resources that are dedicated, you know, to the agency, to enforcement, etc., because that number alone just drives so many of the decisions that get made along the way. And another area that If I was at the Commission, I think I would be worried about myself is just the amount of whistleblower tips that they do get in. You know, it's gone from 5, 000 consistently for many years during
43:39 - 43:58
Susan Markel: the pandemic to 6,000 to 12,000 to last year 18,000. And obviously they can't do them all. And I just wonder, you know, the things that are in there that they don't pick up and does that ever blow up on them someday too because once they have the information they have the information what do they do with it so if I was sitting back in my old chair I would probably lose some sleep over that.
43:59 - 44:27
Steve Peikin: Yeah I think that one of the things that I worried about, you know, was you don't want to miss something big. And you have to, the only way, you're not going to get every one of those calls right. And so, you know, the Office of Market Intelligence was appropriately resourced and you could defend the process, even if, you know, you didn't get every single one right, you could, if called to account, you would be able to say, well, we gave the right resources, we gave the right training, and we look at 20,000 things, and we're
44:27 - 44:40
Steve Peikin: not going to get 20,000, we're not going to get about 1,000. But fortunately, I think, you know, the agency has largely escaped, you know, any of, you know, sort of the disasters that preceded the development of those structures.
44:43 - 44:44
Brad Bondi: I think we're out of time.
44:46 - 44:49
Kurt Wolfe: So thank you, Brad and our esteemed Master Class panel.