Dave Michaels

Bloomberg News
dmichaels5@bloomberg.net

George Bluth should have known:

The SEC cant arrest you
Its a civil law enforcement agency
They dont have boats
* it would be cool if they did!
Remedies include authority to seek
sanctions (disgorgement, penalties,
interest) and to bar participants
from regulated industries
Under Sarbanes-Oxley, SEC has authority to
return money to harmed investors

Regulator of Wall Street

Companies that raise money in the public
markets (IPOs, debt offerings, etc.)
Stock exchanges and similar trading platforms
Brokerages and securities dealers
Goldman, JP Morgan, Credit Suisse, etc.

Investment advisers: mutual fund sponsors,

hedge fund managers, private equity

Debt Markets: $39T

In billions
2903.3
2,028.7

1,336.5
3,652.4

Municipal
Treasury
Mortgage Related
12,504.8

7,845.3

Corporate Debt
Agency Debt
Money Markets

8,728.3

Asset-Backed

US Stock Market: $23T

Broker-Dealers

Investment Advisers
Who is this hedge fund manager?
http://www.adviserinfo.sec.gov/IAPD/Content
/Search/iapd_Search.aspx
Assets under management
Owners of fund adviser (general partner)
Fees they charge

Mutual Funds
Total net assets in mutual funds (millions):
18,000.00
16,000.00
14,000.00
12,000.00
10,000.00
8,000.00
6,000.00
4,000.00
2,000.00
0.00
2009

2010

2011

2012

2013

2014

Mutual Funds
https://www.sec.gov/edgar/searchedgar/mut
ualsearch.htm
Additional disclosures on the fund companys
webpage:
Prospectus
Statement of Additional Information (more on
fees, relationships with broker-dealers)
Statement of Holdings

Disclosures
Securities laws are based on idea that
investors can make good decisions if they are
fully informed
Thus, its a disclosure-based regime: companies
must share material information in 10Ks, 10Qs,
8Ks, etc.

Bad guys often in trouble not for what they

do, but what they didnt say they would do

Company Filings
S-1: The registration statement; filed when
companies go public or issue new stock
10-Ks, 10-Qs: Keep an eye out for Legal
Proceedings, Managements Discussion and
Analysis, and Risk Factors
13-D: Reports of major shareholders; filed
when investor exceeds 5% of outstanding
shares
8-K: Current report of material information

Report of the whale (8-K)

From JP Morgan 8-K, 9/19/13:

Annual Proxy Reports

In SEC-speak, form DEF 14A (for searching)
How much is the CEO paid? What was his/her
bonus?
Annual vote on the board of directors
What shareholder-initiated ballot items are up
for a vote? What is managements position on
them?
Advisory vote on CEO pay

Insider Transactions Form 4

https://searchwww.sec.gov/EDGARFSClient/jsp/EDGAR_MainAccess.jsp

A Commission

Rulemaking and Enforcement Actions

Require Commission Votes
``Expectations were high for White, who came
to the job with a reputation as a tough
prosecutor. That reputation has been
dented at the SEC. The pace of rulemaking has
been so slow that some staff have labeled
Whites office the cheese cellar: Its where
policy goes to age.

Agency Structure
Commissioner

Trading and
Markets

Commissioner

Investment
Management
Enforcement

Chairman

Corporation
Finance
Examiners

Commissioner
Commissioner

General
Counsel

Enforcement
Commissioner votes on settlements and
decisions to litigate
Subpoenas are issued by staff under delegated
authority
Defendants can be sued in federal district
court or SEC administrative court
http://www.sec.gov/litigation/litreleases.shtml
http://www.sec.gov/litigation/apdocuments.shtml

The SEC just sued Mark Cuban!

Check: Federal Court or Administrative Proceeding?
Names of defense counsel on SEC news release (202-551-4120)
Read the SEC Complaint (linked from news release)

What does any of this mean?

Call law professors who are experts in securities law:
Columbias John Coffee, Dukes Jim Cox, Michigans Adam
Pritchard, etc.

Five National Specialized Units

Asset Management (mutual funds, hedge
funds, private equity)
Municipal Securities and Public Pension
Complex Financial Instruments
Foreign Corrupt Practices (Bribery)
Market Abuse (Insider Trading, Cases Against
Exchanges or Trading Venues)

Financial Crisis
As of 2002, highest penalty ever was $10M vs.
Xerox for accounting fraud
2010: Goldman Abacus (CDO) case: $550M
2014:
Morgan Stanley - $275 million
Credit Suisse - $196 million
Alcoa - $175 million
RBS - $150 million

SEC Enforcement Trends

Source: Steinway, Sonia SEC Monetary Penalties Speak Very Loudly, But What Do They Say?
Yale Law Journal, October 2014

Administrative Proceedings
* SECs in-house court
* Trial by SEC-appointed
judge, not by jury
* Authority expanded by
2010 Dodd-Frank law
* Win rate is 90%,
versus 69% in federal
court (WSJ, 5/6/15)

Administrative Proceedings vs.

Civil Court Actions
800
700

145

600
500

285

312

252

266

272

207

400
610

300
200

386

352

2008

2009

429

469

462

469

2010

2011

2012

2013

100
0
2014

Municipal Bonds
A debt security issued by a state, municipality or
county to finance capital expenditures
Municipal Securities Rulemaking Boards EMMA
site is source for disclosures and price
information/trade data
http://emma.msrb.org/home

Other Fun Stuff

Political contributions by municipal securities
dealers:
http://emma.msrb.org/MarketActivity/PoliticalCo
ntributions.aspx
Find any issuers in your home state or region:
http://emma.msrb.org/issuerhomepage/Map
Sign up for alerts:
http://emma.msrb.org/EmmaHelp/ManagingAler
ts.aspx

Enforcement Cases vs. Munis

Disclosures are good source of info re: local finances

and economies

Source: City of Dallas Official Statement, GO Bonds, issued: 12/22/2014, CUSIP: 235219KF8

Disclosures cover balance sheet info,

legal matters, pension obligations

Munis face increasing scrutiny

Calpers, at $300 billion the largest public
pension in the U.S., reported in July that it
earned 2.4 percent in its last fiscal year, less
than one-third its 7.5 percent target.
``Dallas is facing increasing financial pressure
as lower-than-forecast returns cause the
shortfall in its police and firefighters pension
fund to more than triple to $4.7 billion,
Moodys Investors Service said.
Source: Making U.S. Pensions Honest About Returns Means Bigger Deficits,
Bloomberg, 9/13/15