An article in Friday’s Wall Street Journal discussed a "major shift" in the SEC strategy, claiming the Commission "could file more civil cases in which defendants are accused of negligence only, rather than harder-to-prove charges of intentional wrongdoing or recklessness." The article, by Jean Eaglesham, entitled "At SEC, Strategy Changes Course," is available here, registration required.
The article quoted Ken Lench, who heads the Commission’s structured and new products enforcement unit, regarding the duty of care:
Firms and executives have a duty of care. Failure to check properly that investors are being provided with fair and accurate information could, under some circumstances, be a breach of that duty, even if there is no intent to defraud them.
The article cited a settlement between the SEC and two former executives from Citigroup, Inc. (former chief financial officer Gary Crittenden and former head of investor relations Arthur Tildesley, Jr.), who agreed to pay $100,000 and $80,000 respectively to settle charges based on negligence (the SEC asserted the two men "should have known" that statements made by Citigroup were materially misleading).
The article also cited a recent enforcement matter filed in federal court in New York on June 21, 2011 as "the biggest example in the SEC’s change in tactics." In that case, the SEC brought charges against Edward S. Steffelin, a former executive employee of GSC Capital Corporation (which was managing the assets in a synthetic collateralized debt obligation ("CDO") known as "Squared," which J.P. Morgan Securities structured and marketed). The SEC alleged that Mr. Steffelin, who was in charge of the team responsible for selecting the portfolio for Squared, was accused of negligence for permitting the Magnetar Capital LLC hedge fund (which was poised to benefit if the CDOs defaulted) to select collateral and review and edit the term sheet and pitch book before those materials were provided to investors. Investors were not told that Mr. Steffelin was seeking employment with Magnetar during the relevant period.
The article also quoted Mr. Lench as criticizing financial firms who engage in "lawyering up" in transactions, saying they "should not assume they are protected simply because in-house lawyers have been copied on the relevant e-mails or seen the document in question."
