K&L Gates' Securities Enforcement Manual: A Guide To Navigating The Securites Enforcement Process

Monday, October 1, 2007 - 01:00

Editor: Mr. Missal, would you tell our readers something about your professional experience?

Missal: I started my career in the SEC's Division of Enforcement in 1983. One of my most noteworthy cases involved the prosecution of R. Foster Winans, the former Wall Street Journal reporter who wrote the "Heard on the Street" column. That case became one of the most important cases defining insider trading and went all the way to the United States Supreme Court.

I came to K&L Gates in 1987. The firm has always had a large number of alumni from the SEC. It was, and is, a terrific platform for a practice representing public companies and those in the financial services industry. I have been with the firm for the last 20 years, and my practice revolves around securities regulatory and enforcement matters, as well as internal investigations.

Editor: Speaking of your practice, how has it evolved over the course of your career?

Missal: My practice has evolved in large part in tandem with the growth of securities enforcement activity. When I started my practice, securities enforcement was a small part of what I did. However, with the various scandals, including the collapse of the junk bond market in the late 1980's, the meltdown of the fixed income market in the mid-1990's, the bursting of the Internet bubble in early 2000 and the recent corporate scandals, enforcement has become a very significant part of my practice, in addition to internal investigations.

In this connection, I represent a number of public and private companies and their officers and directors on a variety of regulatory and corporate governance matters. I regularly appear before the SEC, the Financial Industry Regulatory Authority, the Department of Justice, and a variety of state attorneys general and state securities regulators.

Editor: K&L Gates has just brought out the second edition of The Securities Enforcement Manual: Tactics and Strategies, of which you and Richard Phillips are editors. For starters, what is the origin of this project?

Missal: So much has changed in the enforcement area in the last ten years that we felt it was important to update our earlier edition. K&L Gates has an extremely large enforcement group and a great deal of experience in this area. We thought it was time to marshal this significant resource and update the original edition. At 720 pages, the second edition has been a very ambitious undertaking. Essentially, we rewrote the first edition and added several new chapters. We believe that all of the changes that have taken place in recent years justified what is really a new book.

Editor: What is the strategy here? What is the firm attempting to accomplish with the second edition?

Missal: The work is meant to show the bench strength and depth, and the extensive capabilities, of the firm's large enforcement practice. Instead of simply citing statutes and case law, it provides both practical and strategic guidance on how to handle an enforcement matter, both civilly and criminally. The underlying premise, of course, is that if enforcement matters are not handled properly, they can have disastrous consequences for both companies and individuals.

Editor: Not too long ago, a kind of knee-jerk reaction on the part of corporate counsel was to ignore the things that might fuel an enforcement issue. That can no longer be done.

Missal: I could not agree with you more. Ignoring the issue can only exacerbate the underlying problems. The stakes are getting higher. The SEC has made it quite clear that they are focusing on gatekeepers, including lawyers, auditors, senior management and board members, to ensure that things are done right. Ignoring an issue, thinking it will go away if no one takes it seriously, would be an extremely risky strategy today.

Editor: Who are the contributors to the second edition? Can you give us a summary of the experience and expertise they bring to this project?

Missal: Most of the members of our securities enforcement group and our white collar group contributed to this effort. The authors have over 300 collective years of experience. They have handled virtually every kind of matter and have seen most of the situations that could arise in these circumstances.

Accordingly, we are attempting to connect with in-house counsel, as well as lawyers in private practice, both those who have handled enforcement matters and those who may have some securities or corporate governance background but no specific securities enforcement experience.

Editor: You mentioned that the second edition really constitutes a complete rewrite of the first edition. What are the differences?

Missal: Each of the chapters in the first edition has been greatly expanded, and there are several new chapters which deal with matters which have become more important in recent years. The latter include internal investigations - an extremely important area at present - insurance coverage for regulatory matters and the FSA, which is the securities regulator in the UK.

The subtext here is that the corporate scandals of a few years ago and the resulting statutory and regulatory enactments that ensued, including Sarbanes-Oxley, have created a new environment for securities enforcement. One of the consequences is that at least some of the information appearing in the first edition, if not actually obsolete, is not directly responsive to the demands of this new environment. Corporate penalties have increased dramatically in the last ten years, for example, and penalties against individuals - officers, directors, lawyers and accountants - which were infrequently invoked, if invoked at all, are at the heart of the new regulatory framework.

Editor: Over the coming months, we hope to interview a number of the K&L Gates lawyers who wrote chapters for this edition. In the meantime, would you give us an overview of the edition's contents?

Missal: The chapter on SEC enforcement is the largest chapter in the book. It takes the reader through how an investigation is started, the document gathering and production process, how to best prepare witnesses for interviews, how to write an effective Wells statement and when and how to settle a case.

The chapter on self-regulatory organizations covers an area that is changing as we speak, given the merger between the regulatory units of the National Association of Securities Dealers and the New York Stock Exchange. It discusses the differences between handling an investigation before the SEC and an SRO, as well as how to handle most effectively an SRO investigation.

Elliot Spitzer has elevated the role of state attorneys general and state securities regulators, so we have expanded the chapter on state securities regulation. Today it is not uncommon for companies to be confronted with a multistate investigation. These multistate investigations are extremely difficult to handle, given the variety of ways in which pressure can be brought to bear on companies and individuals. In this connection, K&L Gates is one of a handful of firms with the experience and the resources to handle multistate investigations effectively. We have offices all across the country, and we have proximity to many state capitals. At any given time we are handling numerous securities investigations, internal investigations and regulatory inquiries at the state level, in addition to the extensive work we handle at the federal level. I should also point out that we have made a considerable effort to discuss, in this particular chapter, a variety of strategies on addressing both multistate and single state investigations.

Of late, there has been a tremendous increase in criminal prosecutions of the securities laws. We have an extremely large practice in this area, led by former United States Attorney General Dick Thornburgh. While the SEC can take away a person's assets and livelihood, a criminal prosecution can take away someone's freedom. The stakes are very high, and we have given a great deal of attention to this section of the book.

Editor: The corporate scandals resulted in the enactment of very significant statutory and regulatory structures in this area. In your view, will the pendulum swing back in time, or are these structures a permanent part of corporate America's structure going forward?

Missal: In the short run, I do not believe that the pendulum is going to swing back. Scandals of one kind or another seem to be uncovered with some frequency, and that means there is continuing pressure to maintain a strong regulatory focus. In my opinion, this enforcement focus is on the increase, and it is only going to get tougher for the gatekeepers. Thus, those who are supposed to be looking out for the interests of the shareholders, including lawyers, auditors - both internal and outside - senior management and, above all, the company's directors, are going to be subject to more, not less, scrutiny from the regulators as to whether they have met their responsibilities.

Editor: Members of the governing board are important gatekeepers. In your experience, is the increase in scrutiny of corporate directors having a negative effect on companies' abilities to recruit good directors for their boards?

Missal: I have not seen any comprehensive studies addressing that issue, but anecdotally I have heard of people who are more cautious in terms of considering whether to serve on a corporate board than they might have been in the past. Cutting the other way, the increase in scrutiny could have a positive impact in causing directors to take their responsibilities more seriously and having greater resources to do their jobs effectively. Given all of the recent publicity, everyone is aware of the serious issues that can arise from a casual attitude toward the fiduciary duties of board members.

Editor: Would you share with us your thoughts on what is on the horizon with respect to securities enforcement?

Missal: I think we are going to see an increase in the coordination between the various regulators. This is already underway and the increased coordination between federal and state civil and criminal regulators will make it that much more challenging and difficult to defend an enforcement investigation.

The stakes are extremely high. If an enforcement matter is not handled effectively, great damage - personal, reputational and financial - can be the result. I think The Securities Enforcement Manual will make it easier for both companies and individuals to navigate the difficult waters of the securities enforcement process.

Please email the interviewee at michael.missal@klgates.com with questions about this interview.