We have previously posted on the issue of CCO liability, a very sensitive subject, to say the least, for many readers of this blog. If this is a subject that interests you, then there was a very intriguing development this past week in this area that merits your attention.
It came in the form of a decision by SEC Administrative Law Judge Cameron Elliott. In its complaint, the SEC named Judy Wolf, a former compliance officer at Wells Fargo Advisors. She was not the Chief Compliance Officer; in fact, she was far from chief, something that, ultimately, was important to the result. The principal allegation is that she altered – slightly, through the addition of two sentences – a report she had created two years earlier concerning her review of trading in a particular stock to make it appear that her review was more robust than it actually was. The SEC also maintained that she lied during her intitial sworn investigative testimony when questioned about the alteration to the report. The sanctions sought against her included a cease-and-desist order, a second-tier civil penalty, and a permanent industry bar.
In his decision, Judge Elliott found that Wolf was, in fact, liable as alleged by the SEC. He made some very nasty sounding findings, including that she was not credible when she initially attempted to explain the alteration, that she acted with scienter, that her alteration of the report was “highly unreasonable and created an obvious danger of violating the books and records rule,” that she “does not recognize the wrongful nature of her misconduct,” and that she willfully caused and aided and abetted the books and records violations attributed to Wells Fargo. What is fascinating about the decision is not those findings, however, but, rather, the Judge’s determination not to impose sanctions on Wolf notwithstanding those harsh findings.
In support of his decision that Wolf did not merit the imposition of any sanctions, the judge identified several mitigating factors. First, he noted that her act of misconduct was isolated. Second, Wolf was already out of the securities industry and expressed no desire to return, so the Judge concluded there was little likelihood of any recurrence of the misconduct. Third, Wolf had no disciplinary history, despite having over 30 years of experience, nearly ten in compliance.
None of this sounds particularly unusual; in fact, many respondents are able to, and do, make these same assertions. So, what made the Judge take the unusual step of not imposing sanctions on Wolf when, historically, such arguments fall on deaf ears?
He cited a couple of specific reasons, and, more importantly, some conceptual ones. As for the specific reasons, Judge Elliott started by concluding that despite all the findings against Wolf, her “violation was not egregious and it caused no proven harm to investors or the marketplace.” While he conceded that her initial testimony was “misleading,” it did not cause the SEC to expend additional resources. Her alteration was “minimal,” and did not materially impact the SEC’s investigation. Again, any lawyer that practices in front of the SEC can tell you that arguments like this are made all the time, but with little impact. So, these cannot really explain the decision not to sanction Wolf.
That, in my view, came down to the conceptual reasons. First, the Judge concluded that because Wolf was “low-ranking, relatively low-paid, supervised no one, and worked in a cubicle,” sanctioning her would create the false impression to the securities industry that she was simply “a bad apple, a low status worker who unilaterally caused Wells Fargo to violate the law, and will see no need to examine their own practices and corporate cultures.” The Judge was of the view that “Wells Fargo clearly had deeper and more systemic problems than one bad apple.” Thus, sanctioning her would send the wrong signal to the world.
Second, and more important, was the Judge’s view, generally, of Compliance personnel:
In my experience, firms tend to compensate compliance personnel relatively poorly, especially compared to other associated persons possessing the supervisory securities licenses compliance personnel typically have, likely because their work does not generate profits directly. But because of their responsibilities, compliance personnel receive a great deal of attention in investigations, and every time a violation is detected there is, quite naturally, a tendency for investigators to inquire into the reasons that compliance did not detect the violation first, or prevent it from happening at all. The temptation to look to compliance for the “low hanging fruit,” however, should be resisted. There is a real risk that excessive focus on violations by compliance personnel will discourage competent persons from going into compliance, and thereby undermine the purpose of compliance programs in general.
In conclusion, Judge Elliott wrote: “I do not condone Wolf’s misconduct. Neither the Division nor the Commission as a whole should tolerate falsified records or knowingly false testimony, and the Division was quite right to at least investigate Wolf. But now that the evidence has been fully aired, it is clear that sanctioning Wolf in any fashion would be overkill.”
The unusual nature of this decision cannot be overstated. Arguments about mitigation that are made every day without success were found here to have import. Deliberate acts of record falsification, lies to investigators, pish posh, no sanction. Really rather amazing. I am hopeful that this case marks the start of a real analysis by securities regulators of the role that Compliance plays at broker-dealers, and a recognition that not every error committed, even when intentional, merits the attention that regulators now feel compelled to pay to Compliance personnel. Thank you, Judge Elliott, for this decision. Anyone want to bet if the Division will appeal?
UPDATE: 9/23/15: I hope no one took my bet! Turns out that the Division did not appeal after all, so the Initial Decision is now final. Imagine that!