Practical Insights for Compliance Officers [Webinar] - Personal Liability

Personal Liability

Mr. Cipperman will assess the most impactful regulatory developments of 2016, review results of the recent CCS survey of financial industry C-Suite opinion leaders, and give you his take on the fluid regulatory environment.This webinar was co-hosted with Todd Cipperman of Cipperman Compliance Services on Nov 17th.


 You can download a full copy of the slides from this webinar.



Full video transcript available below:

Let’s talk about personal liability. This is something that always gets everybody’s attention. Essentially what’s going on is the SEC is very focused on holding individuals accountable


If you look, and there has been a lot of accountability, a lot of enforcement cases, the SEC just released its enforcement statistics for fiscal 2016 ended September 30th and there were 868 enforcement cases filed in fiscal 2016, which is up from ’15. It’s a record high. Over four billion in discouragement and Chair White in announcing these statistics said it was a very good year for them. They brought a lot of innovative cases, particularly, and it’s really important that they held executives accountable, which I think scares a lot of people in the industry.

In a recent speech, Andrew Ceresny the head of SEC enforcement said that the SEC has named an individual in 80% of enforcement cases over the last five years, 80%. I know anecdotally in talking to people that are in enforcement that it’s very hard for them to bring a case if they don’t name an individual. It is key to their enforcement effort. Why? Well, both Mr. Ceresny and Ms. White have said, “Look. This is about to deterrence. When people see their friends getting prosecuted and thrown out of the industry and barred it has a huge deterrent effect.

It’s a ripple effect of the prosecutions and I think partially it’s also both of their legacies as a prosecutor. They believe that individuals are accountable, not just entities. In addition to personal liability, there has been an added focus on criminal liability, not just civil liability. That is bringing criminal cases against individuals and trying to put people in jail. Chair White has certainly said that she wants to bring more criminal prosecutions and that she is going to be an innovator to do that using things like section 20 of the 34 Act to do that. Why? Again, the deterrent effect. Criminal prosecutions really have a profound impact on deterrents. Related to that, now, you may know that the SEC actually can’t bring criminal cases. In fact, they refer matters to the Justice Department if criminal cases should be brought. Some of the areas that have been focused on around valuations and false valuations, how people charge fees, essentially tantamount to stealing if you overcharge or hidden fees. Excuse me. Well, interesting luck. At the same time, the Justice Department is also very interested in criminal prosecutions against individuals

There is what’s become a famous thing called the Yates Memo that was put out by Deputy Attorney General Sally Yates, which basically says, and I’m paraphrasing, that individual accountability is the heart of the DOJ’s corporate enforcement strategy. They really want to bring individual wrong doers to heel. What we’re seeing is a lot more criminal cases following on SEC cases so they’ll hover in the background as the SEC is doing the investigation and then they’ll pounce if they see an opportunity to bring a case against one of the corporate individuals.

There has been a lot of case work. All of this is sort of boiling up and there has been a lot of cases against individual executives. Certainly, cases against senior executives and I’m going to. The one I’m going to talk about a little bit today is the Cooperman Case. You may be familiar. Mr. Cooperman ran a company of hedge funds. He was just accused of insider trading. The interesting thing is that he took a significant equity ownership/interest in some private companies and he didn’t sell them. No, in fact, he found out good information. He actually bought more.

The argument was that his increased ownership position was what the trading on material and nonpublic information was. I think what’s interesting about this there was some discussion in the analysis that Mr. Cooperman did plead the 5th amendment as part of the response to the SEC because he was concerned about the Justice Department and what’s interesting from a jurist prudence standpoint, it is actually the SEC in the civil case can use the 5th amendment assertion as an inference that the facts you’re alleging are true.

They can actually use that 5th amendment plea against you in the civil case and it’s really hard when you have the Justice Department lingering in the background and you’re afraid of a criminal case. Something to keep in the back of your mind and sort of very important you discuss with your lawyers and then make sure you don’t just have an SEC lawyer but, perhaps, a criminal lawyer in your court when you’re going to through these cases, but there have been several other cases alleging liability in senior executives.

This year the Web Bush securities case, this had to do with a sponsored access business. Interesting, the SEC brought a case against the senior executives running that business and notthe compliance professionals. The Bloomberg Case where a broker dealer was routing trades to an offshore affiliate allegedly to jack up commissions. They went directly after Mr. Bloomberg who ran that activity within the organization saying he knew about the activity, encouraged it, in fact, helped hide it.

Very interesting cases, these are sort of examples. Even outside the investment management world, a really interesting case is Emory, Sherman, and Cummings. In this case, the SEC brought an action against the CEO and CFO of a public company for their misrepresented Sarbanes Oxley certifications. You know those certifications that corporate executives sign every year for financials. What they said was that both the senior executives they knew about the misrepresentations. They said that they knew the internal controls at the firm were not adequate, yet they signed anyway.

Be careful about those certificates you sign. They can be used as a basis of personal liability. Interestingly enough though, the cases are not solely against the senior executives and I think that’s what’s really scaring more people. There has been several cases against what I would refer to as midlevel executives who really didn’t have any tangible personal benefit. I think a big case here was it’s the Novak Case. Excuse me. Yeah, the Novak Case. Excuse me. It was the Harbinger Case.

The Chief Operating Officer of Harbinger now, Harbinger is Phil Falcone’s firm and the allegation was Mr. Falcone who was runs the firm was making insider loans to himself and the allegation is the chief operating officer is he didn’t stop Mr. Falcone was doing that and they brought a case directly against him. The question becomes what exactly is he supposed to do. He told his boss not to take the loans. The boss went ahead and did that. Why is he accountable? I think the SEC’s view is everyone in the firm is a fiduciary.

There has also been several cases in the FINRA context, particularly when it’s Fin Ops and CCOs for personal liability. What’s interesting about the midlevel executive cases, these are sort of, as I would say, working people doing their jobs and not really getting any huge bonuses or huge salaries being held accountable for the actions of their firms and their bosses so it’s reaching down very deeply into the organization.

Interesting about that midlevel executive, you say to yourself, “Okay. What am I supposed to do if my boss says no? What are my options? Do I resign? Do I become a whistleblower?” Well, let’s talk about whistle blowers just a little bit. I think you could turn the page guys, no? On the slide. Talking about whistleblowers, the SEC started a whistleblower program. Oh, go back up one. Thank you. Whistleblowers as a part of Dodd Frank, and now there is an office of the whistleblower at the SEC and the SEC just announced about a month ago that they exceeded 100 billion in total awards.

They just actually gave one two days ago for $20 million and, basically, a whistleblower can get a percentage of the total amount in excess of a million dollars that’s awarded so there is real money involved. What we’re seeing is the rise of two things very interesting in the whistleblower world. One, is the rise of what we call competitive whistle blowing. We are seeing firms essentially telling on each other and I’ve been in exams where the SEC has come in. We’ll say, “What brings you here?” They’ll say it’s a competitive whistle blowing situation.

In other words, a competitor of yours thinks you’re doing something wrong so people are using, essentially, the SEC as a lever against their competitors. The other thing we’re seeing the rise of what I call the whistle blower lawyers. In a recent speech, Andrew Ceresny was talking about the whistleblower program. He is the head of enforcement again. He said he was encouraging these whistleblower lawyers who essentially are taking cases on contingency much like the old plaintiff’s class action lawyers used to do.

They’re encouraging whistleblowers to come forward and they’re taking a piece of the action from these whistleblowers. We’re seeing the rise of these whistleblower lawyers and we’re seeing a rise of this competitive whistle blowing. You have a real issue in firms. Let’s go to the first polling question, I believe. This kind of goes to the individual liability and whistle blowing and the first polling question is: Has your firm changed its policies and procedures out of concerns about the SEC’s enforcement polities focused on individual liability? I’ll give everyone a second to go through that.

Wow, 64% no change. That’s very interesting. As we’ll talk about in a little bit, that’s very consistent with our survey that we did this year. It’s sort of interesting despite all this concern and especially publicly that firms are not changing their procedures


This webinar was co-hosted with Todd Cipperman of Cipperman Services LLC. To learn more visit

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