Dodd-Frank Act’s Impact on Securities Litigation and Enforcement

1. Dodd-Frank Act’s Impact on Securities Litigation and Enforcement September 22, 2011 Presented by David A. Greene, Esq.

2. Dodd-Frank – What is it? • The Dodd-Frank Wall Street Reform and Consumer Protection Act • Proposed on December 2, 2009 by Barney Frank and Chris Dodd • Signed into law on July 21, 2010

3. What does it do? To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect consumers from abusive financial services practices, and for other purposes.

4. How does it work? • Oversee and regulate financial markets as a whole by: • Increasing regulation of individual companies with potential to compromise market stability • Implementing regulation of certain areas of the financial services sector

5. How else does it work? • Addresses consumer protection by: • Creation of new agencies with broad consumer protection powers • Promulgation of new rules

6. How does it achieve its goals? • Changing existing regulatory structure • Increasing oversight • Promoting transparency • Advance warning system • Compensation and corporate governance rules • Eliminating loopholes

7. What agencies does it impact? • Federal Deposit Insurance Corporation • Securities and Exchange Commission • Office of the Comptroller of the Currency • Federal Reserve • Securities Investor Protection Corporation • Office of Thrift Supervision (eliminated)

8. Today’s Focus • Whistleblower award and protections • Aiding and abetting violations in SEC actions • Imposing monetary penalties in cease and desist proceedings • SEC authority to ban or limit use of mandatory arbitration provisions • Expanded clawback of executive incentive-based compensation • Tips for compliance

9. Whistleblower Awards/Protections • Rule adopted in July • Rule effective last month • The “centerpiece” of Dodd-Frank • Driver of new litigation

10. Empowering Whistleblowers • Substantial financial incentives to whistleblowers who come forward to report information to the SEC • Significant protections from retaliation or mistreatment for whistleblowers who come forward with information

11. Whistleblower Bounty Programs • Insider trading • Limited effectiveness • False Claims Act • Significantly more effective • Dodd-Frank • Will accomplish even more?

12. Dodd-Frank’s Bounty Program • Information • Provided by a whistleblower • Leads to SEC enforcement action • Monetary sanctions exceeding $1 million • Bounty = 10-30% of monetary sanctions

13. Bounty Program Basics • Program began upon enactment • Investor Protection Fund • Bounty payable even when enforcement action by another agency • Cooperation agreements • No internal reporting required

14. Who is a whistleblower? • Individual or individuals acting jointly • Provide information • To Commission • Relating to securities law violation • In a manner established by rule or regulation

15. Whistleblower Requirements • Provides information voluntarily • Information derived from whistleblower’s independent knowledge or analysis • Information not known to SEC from other sources • Information led to successful enforcement

16. Anonymous Whistleblowers • Remain anonymous by acting through counsel • SEC prohibited from disclosing identifying information

17. Violators as Whistleblowers • Bounties available to violators who are whistleblowers, unless criminally convicted • Whistleblower’s portion of monetary sanctions excluded from calculation of bounty • No amnesty provided

18. Who is not a whistleblower? • Corporate entities • False information • Information acquired while employed by: • Regulatory agency • Law enforcement agency • Self-regulatory organization

19. Information that Qualifies • Information that causes SEC to: • Commence examination • Open/Reopen investigation • Inquire into new/different conduct • Information that would not have been obtained and was essential to success of enforcement proceeding

20. Information that Doesn’t Qualify • Not voluntarily provided • Publicly-available • Obtained from or through: • Attorney-client privileged communications • Internal compliance programs • Criminal means

21. Amount of Award • Percentage of monetary sanctions • Penalties • Disgorgement • Interest • Must be between 10% and 30% AWARD

22. Factors in Determining Amount • Significance of information to success of enforcement action • Degree of assistance • Deterrence of future violations • Other factors

23. Whistleblower Protections • Existing whistleblower protection laws • Construed too narrowly • Statute of limitations too short • Employers too successful

24. Laws Impacted • Adds/expands protections provided by: • Securities Exchange Act of 1934 • Commodities Exchange Act • Consumer Financial Protection Act • False Claims Act

25. Prohibited Retaliation • Discharge • Demotion • Suspension • Threats • Harassment • Direct or indirect discrimination in any other manner

26. Remedies Available • Reinstatement with seniority • Double back pay • Compensatory damages • Litigation expenses, including: • Attorney fees • Court costs • Expert costs

27. Covered Entities • Banks and savings institutions • Loan brokers • Property appraisers • Check cashers and money transmitters • Debt collectors

28. Protected Conduct • Providing information • Testifying • Objection/refusal to participate in violations

29. Whistleblower Litigation • Egan v. Tradingscreen, Inc., 2011 WL 1672066 (S.D.N.Y. May 4, 2011) • Riddle v. Dyncorp International, Inc., 2011 WL 128572 (N.D. Tex. Jan. 14, 2011)

30. Aiding and Abetting • Lowered state of mind standard • Additional statutes impacted • No private right of action created … yet! • Central Bank of Denver • Stoneridge Partners • Rejected amendment • Study and report required

31. Aiding and Abetting Case • Securities and Exchange Commission v. Daifotis, 2011 WL 2183314 (N.D. Cal. June 6, 2011)

32. Monetary Penalties in Cease and Desist Proceedings • SEC now authorized to seek monetary penalties • Benefits include: • Limited discovery • No jury trial • Less strict application of evidentiary rules • Compressed time line • Decision reviewed by SEC commissioners

33. Mandatory Arbitration Provisions • Rule possibilities: • Investors selects forum • Parties agree to forum • Continue to allow mandatory arbitration, but require more forum choices • Limitation of mandatory arbitration clauses • Prohibition of mandatory arbitration clauses

34. Benefits to Customers • No confidentiality that applies to arbitration proceedings • Pretrial discovery • Jury trial • Legal issues ruled on by judges • Decisions subject to judicial review

35. On the other hand … • More expensive • More time to resolve • Possible attorney’s fee awards if investor does not prevail

36. Arbitration Cases • Pezza v. Investors Capital Corporation, 767 F.Supp.2d 225 (D. Mass. 2011) • Henderson v. Masco Framing Corporation, 2011 WL 3022535 (D. Nev. July 22, 2011)

37. Pre-Dodd-Frank Clawback • CEOs and CFOs only • Misconduct required • 12-month window • Enforceable only by SEC

38. Dodd-Frank’s Clawback • Present and former executive officers • Any excess incentive-based compensation • Three-year window • Fraud/misconduct not required

39. Tips for Compliance • Internal Controls • Watch our for gimmicks and improprieties • Control environment • Internal reporting • Hiring and promotion

40. More Compliance Tips • Code of Conduct/Ethics • Anti-Retaliation Policy • Internal auditors • Training • Insurance

41. Conclusion • Be proactive • Ensure compliance

42. Contact Information David A. Greene, Esq. 561.804.4441 dgreene@foxrothschild.com