August 29, 2005

Court Ruling May Prompt SEC To Alter Use of Civil Injunctions

Last Thursday, the WSJ ran this article regarding the recent 11th Circuit decision in SEC v. Smyth. Russ Ryan, a former Assistant Director of the SEC’s Enforcement Division, who is now at King & Spalding LLP explains further:

“In a startling footnote 14 at the very end of the opinion, the court dropped a bombshell that questions the enforceability of just about every injunction the SEC has obtained in recent memory. The court essentially said an injunction can’t be just a broad prohibition against future violations of a statute or rule, because all that does is tell the defendant to “obey the law” without specifying what particular acts are prohibited.

Although the footnote is dictum in a technical sense, the case could have far-reaching consequences for the SEC’s enforcement program. The injunctions in Smyth were no different than any other SEC injunction, at least as far as settled cases go. That is, they simply tracked the language of the relevant statutes and rules, and told the defendants and their cohorts not to violate them again.

At a minimum, district courts within the 11th Circuit presumably won’t be signing off on future settlements with similarly worded injunctions. So unless the 11th Circuit somehow retracts it criticism of such language, the SEC is going to have to get more specific in any injunctions it seeks within that circuit, or it will have to file its cases elsewhere. And, of course, if other federal courts are persuaded to follow Smyth’s logic, they won’t sign off on the usual form of SEC injunctive language either, and will probably dismiss any SEC contempt proceedings that are based on injunctions already out there.

But beyond forcing the Commission to reassess the breadth of its typical injunctions, I hope Smyth will get people thinking about whether the SEC should even be seeking injunctions in a lot of its cases. When many enforcement cases are filed, there is no ongoing misconduct or realistic threat of repetition, and the SEC can achieve adequate punishment and deterrence through monetary penalties, yet the Commission invariably insists on an injunction anyway, often tanking potential settlements. Smyth presents a good opportunity to consider whether that approach still makes sense in every case.”

Believe It or Not: Sarbanes-Oxley for Dummies

A small blurb in Friday’s WSJ alerted me to the upcoming publishing of a “Sarbanes-Oxley for Dummies” book, due sometime in February. A few immediate thoughts: Is there really a market for this stuff outside our small niche of compliance practitioners – and ain’t it a little late?

By the way, if you are new to SOX and want to “one-stop” it (rather than drill down through the 200+ Practice Areas on our site) – we have highlighted some comprehensive memos about SOX in our “Sarbanes-Oxley” Practice Area. Surely, the Latham Watkins and Fried Frank memos posted there – both over 200 pages – will serve you better than a “Dummies” book…

KPMG Avoids Death Penalty

It is reported that KPMG has finalized an agreement that will not include an indictment for the firm itself – although indictments against some former KPMG partners, as well as members of investment banks and law firms who helped structure the deals, which is rumored to be announced separately today.

Apparently, there is a detailed and lengthy statement of facts in the agreement, in which KPMG admits to developing and selling questionable tax deals to hundreds of wealthy clients – and KPMG agrees to pay $456 million and submit its tax unit and compliance efforts to a stringent 16-month review by former SEC Chair Richard Breeden.