December 12, 2013 / 11:30 PM / 7 years ago

Analysis: SEC plans to take more cases to trial despite losses

WASHINGTON (Reuters) - Securities and Exchange Commission Chair Mary Jo White says her team will not shy away from high-stakes trials, and not just strike settlements with wrongdoers, but a string of recent court setbacks shows she has her work cut out for her.

SEC Chair Mary Jo White testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on Capitol Hill July 30, 2013. REUTERS/Jose Luis Magana

On Tuesday, a federal judge in California rejected a securities fraud case brought by the SEC and said the agency had “not carried its burden of proof” against two former senior executives at Basin Water Inc who were accused of fraudulently boosting their company’s revenue.

That defeat came one week after a Kansas jury cleared Stephen Kovzan, an executive at technology company NIC Inc. The SEC had accused him of concealing a payment of more than $1.18 million used to fund perks for the then-CEO, including vacations, clothing, houses, spa treatments and a luxury car. But a jury disagreed and rejected all of the SEC’s claims.

The most high-profile defeat this year came in October, when a Texas jury cleared billionaire Mark Cuban, owner of the National Basketball Association’s Dallas Mavericks, of insider-trading charges brought by the SEC. After the verdict, Cuban slammed the SEC attorneys who tried the case.

David Kornblau, a partner with Covington & Burling LLP, said he thinks the SEC’s hit-or-miss track record could improve if the agency more carefully chooses which cases it brings.

“I think the issue is case selection, not the competence of the SEC’s trial lawyers,” he said. “It is easy for Congress and pundits to demand more aggressive SEC enforcement, but much harder to prove fraud to a neutral judge or jury.”


While the SEC selected the cases long before White became SEC chair earlier this year, two of the recent losses come less than a month after she told a Washington legal audience that her team is “ready to go up against the best of the white-collar defense bar.”

Her remarks addressed concerns that her new policy to seek admissions from defendants in some circumstances would prompt more of them to litigate cases rather than settle the charges. Historically, the SEC has always settled far more cases than it takes to trial.

White, a former federal prosecutor, is no stranger to the courtroom, and experts said her background could help the SEC better assess how a case might play in front of a jury.

“What you have now is a very, very, very experienced trial lawyer as chair of the SEC, and you have never had that before,” said Stephen Crimmins, a former SEC trial attorney who is now a partner at K&L Gates.

He added that under White’s watch, she may be more likely to empower trial attorneys to weigh in before the SEC votes to bring cases.

“They need to take greater account of how something will play in front of a jury,” he said.

In a sign the SEC is taking White’s pledge seriously, it recently filed a procurement request for a jury consulting service to provide mock jury sessions to help the agency determine the effectiveness of its arguments.

SEC spokesman John Nester said the SEC uses jury consultants “when it’s appropriate,” and that this is not the first time the SEC has used a mock jury.


The SEC has won close to 80 percent of its cases before juries, judges and SEC administrative law judges in the last three fiscal years, SEC statistics show.

But a handful of high-profile losses in cases stemming from the 2007-2009 financial crisis, including one against a Citigroup Inc manager and one against the founder of the Reserve Primary Fund, have left the SEC scrambling to defend its mostly winning record.

The SEC did score a major victory in July when a jury found former Goldman Sachs Vice President Fabrice “Fabulous Fab” Tourre liable for fraud in connection with a failed mortgage deal. It also won two lesser-known cases in connection with offering frauds this fall, including one against financial services firm AIC Inc and another involving a real estate fund in Minneapolis.

In the case from earlier this week, the SEC had alleged that former Basin Chief Financial Officer Thomas Tekulve Jr and former Chief Executive Peter Jensen intentionally misled investors by using accounting techniques that fraudulently boosted the company’s revenue.

The judge said the SEC failed to present any direct evidence to back up its claims.

“We’re proud of our successful record in often difficult cases on behalf of the investing public,” an SEC spokeswoman said.

Reporting by Sarah N. Lynch and Aruna Viswanatha; editing by Matthew Lewis

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