Enforcement Priorities for New SEC Regional Director in Fort Worth

David Woodcock was recently named the Regional Director of the Securities and Exchange Commission’s Fort Worth Regional Office (FWRO). Woodcock has both accounting and law degrees, and he is an experienced securities enforcement and litigation practitioner. In his new role, he will have the opportunity to reshape the office’s public image and reinvigorate its enforcement efforts in Texas, Oklahoma, and Arkansas.

Since the Stanford Group was placed into receivership in early 2009, the FWRO has been the subject of intense internal and external scrutiny. An investigation by the SEC’s Office of the Inspector General (SEC OIG) concluded that over a ten-year period, the office failed to pursue an enforcement action against the Stanford Group in part because some former FWRO officials disfavored difficult and complex cases and because newer officials were not made aware of concerns raised in past examinations. This was followed by Congressional hearings, a civil suit against certain SEC officials, and other Stanford-related investigations. More recently, the FWRO was investigated for alleged misconduct in connection with its insider trading action against Dallas Mavericks’ owner, Mark Cuban, but the SEC OIG concluded there was insufficient evidence to substantiate the claims. The bad press from these investigations is a tough act to follow, but Woodcock seems ready to tackle the assignment.

Woodcock is expected to bring a fresh perspective to the FWRO’s operations, and his arrival coincides with substantial organizational changes within the Division of Enforcement nationally. Over the past two years, the SEC’s Director of Enforcement, Robert Khuzami, has (1) created five new specialized, cross-office units that focus on asset management, market abuse, structured and new products, the Foreign Corrupt Practices Act, and municipal securities and public pensions; (2) authorized the SEC’s enforcement staff to use non-prosecution and deferred prosecution agreements with cooperating witnesses in exchange for their testimony; (3) flattened bureaucracy within the staff by eliminating branch chief positions; and (4) encouraged greater coordination with federal, state, and local law enforcement who are authorized to use undercover tactics such as wiretapping to build cases.

As Regional Director of the FWRO, Woodcock will be responsible for compliance examinations and enforcement activities in Texas, Oklahoma, and Arkansas, as well as enforcement activities in Kansas. The FWRO’s territorial jurisdiction is partly the result of historical anomaly. For example, during the 1940s, the FWRO had responsibility for western Louisiana, but the Atlanta Regional Office was responsible for eastern Louisiana because its director liked to visit New Orleans. Today, ironically, the Miami Regional Office has jurisdiction over the entire state of Louisiana. Indeed, the territorial jurisdiction of individual offices is less important for many types of cases since the national office in Washington, D.C. frequently gets involved in high-profile matters, and the cross-office units formed by Director Khuzami now handle specialized cases throughout the country.

In his new role, Woodcock will help set enforcement priorities for the FWRO. While he and other staff attorneys working in the office will undoubtedly be guided by the national priorities set in Washington, an informal poll of attorneys who practice before the FWRO suggests the following areas where a reinvigorated FWRO might focus:

- Insider trading cases. During the past 18 months the SEC staff has pursued numerous insider trading claims, particularly against hedge funds. In the past few years the FWRO has filed cases against hedge fund insiders and against numerous individuals trading in advance of M&A activity. Earlier this year, the SEC filed its first insider trading complaint against a hedge fund and its portfolio managers for receiving illegal tips from employees moonlighting as expert consultants. These trends are expected to continue.

- Foreign Corrupt Practices Act cases. While SEC enforcement involving FCPA violations declined in 2011 compared to prior years, it continues to be a hot area for enforcement. The FWRO has previously obtained substantial settlements from companies alleged to have bribed foreign officials or failed to comply with the FCPA’s record-keeping requirements. Since this region is home to energy companies and Fortune 500 companies with global operations, the FWRO will undoubtedly continue to pursue FCPA cases.

- Financial fraud cases. These types of enforcement actions typically involve allegations that companies understated expenses, overstated revenues, misappropriated corporate funds, and/or failed to disclose financial and operational difficulties. The Dodd-Frank Act includes provisions that arguably authorize the SEC to pursue securities violators globally when their conduct has a substantial effect within the United States. Thus, the SEC recently created a task force to investigate accounting fraud by non-U.S. companies whose shares trade in the United States, and it has filed or settled numerous actions against foreign issuers in 2011. While the FWRO has pursued fewer financial fraud actions in recent years, it remains an essential area for SEC enforcement.

- Executive compensation clawback cases. The SEC has filed several notable cases under § 304 of the Sarbanes-Oxley Act to obtain compensation and bonuses from senior corporate officers when their employers restate corporate financials. This is a new area for enforcement where the FWRO may become active.

- Whistleblower cases. The SEC adopted final regulations this summer governing whistleblower actions under the Dodd-Frank Act. Although the FWRO has handled whistleblower cases in the past, the new law provides financial incentives requiring the SEC to share 10-30% of any monetary sanction above $1 million with one or more whistleblowers if a successful enforcement action is based on the whistleblower’s allegations. The impact of the new law on future enforcement cases is uncertain, but with SEC monetary sanctions on the rise individually and collectively, there is a strong incentive for whistleblowing.

- Attorney misconduct cases. Director Khuzami highlighted attorney conduct in SEC investigations as an area of concern in a speech this summer and warned that attorneys might be subject to whistleblower complaints as well. Khuzami specifically cautioned defense attorneys against using overzealous tactics such as signaling witnesses during testimony, representing witnesses who have adverse interests or who all seem to testify to the same implausible explanation of events, and otherwise obstructing enforcement investigations.

Woodcock will be the eleventh director of the FWRO. The first director, Judge Oren Allred, was appointed in 1935 shortly after the federal securities laws were enacted. According to SEC legend, when the judge’s brother, Jimmy Allred, then Governor of Texas, called to offer him the job, the judge said “yes” for the SEC, but only if the office was in Fort Worth. The judge reportedly refused to move to Dallas. While Woodcock is unlikely to change the physical location of the office, he has the opportunity to change its public image and change its direction at a time when the SEC’s Enforcement Division appears intent on doing the same.

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