Although the SEC's efforts to directly regulate hedge funds have been thus far unsuccessful, its enforcement program against hedge funds and their investment advisers remains aggressive. Hedge funds are some of the most active traders on Wall Street and represent a large measure of market volume. Although a settled case, Matter of Sandell Asset Management Corp. is still a reminder to market participants that the SEC can, and will, enforce conduct stemming from violations of seemingly technical trading rules (i.e. short sale rules), as "non-scienter based" fraud under Section 17(a)(2) of the Securities Act. In this Expert Commentary, Joseph D. Edmondson, Jr., an SEC enforcement defense practitioner and partner with Foley & Lardner, LLP, provides an analysis of the Sandell case.

 

Mr. Edmonson writes: “Sandell is a settled case, which means that the respondents (S[andell] A[sset] M[anagement (SAM)] the investment adviser; Thomas Sandell, its founder, sole owner and CEO; Patrick Burke, a managing director reporting to Mr. Sandell; and Richard Ecklord, SAM’s head trader) consented to the entry of an Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings and Imposing Remedial Sanctions and a Cease and Desist Order (the ‘Order’), without admitting or denying the findings contained in the Order. There are many reasons why respondents choose to settle a case with the SEC. As one court noted with respect to a similar settlement with the IRS: an ‘offer [of settlement] may be motivated by desire for peace rather than from any concession of weakness of position .’ Hudspeth v. Commissioner of Internal Revenue Service, 914 F.2d 1207, 1213-14 (9th Cir. 1990) (citing Fed.R.Evid. Advisory Committee Note).

 

“Interpretation of settled SEC cases is usually difficult, and the Sandell case is not unusual in that respect. An SEC settlement is not an adjudication of liability. In addition, settled cases often do not recite all the relevant facts. While settling respondents usually lobby hard to ensure that exculpatory facts are recited in a settled order, the language of the order is controlled by the SEC. As such, the value of analyzing a case like Sandell lies in understanding the positions taken by the staff of the SEC’s Division of Enforcement, rather than as a dispositive application of law to fact. Indeed, settled cases are of little precedential value, except perhaps as a benchmark for negotiating future settlements.

 

While Sandell represents a major step in the SEC’s announced program of enforcing the federal securities laws applicable to hedge funds, one can also look at the case as confirmation of certain practices in SEC enforcement cases.” [footnote omitted]