Monday, July 02, 2012

In Approving Settlement of SEC Enforcement Action, Federal Judge Urges Congress to Empower SEC to Recover More for Investors


In approving the settlement of an SEC enforcement action against two hedge fund managers, a federal judge (ED NY) urged Congress to consider broadening the SEC’s power to recover amounts more reflective of investor losses and  require any moneys recovered to be paid into Fair Funds for investors’ benefit. For now, however, the court had to accept the SEC’s enforcement authority as it currently stands. Regrettably, said the court, that authority leaves investors out in the cold. The two hedge fund managers that settled the action managed Bear Stearns hedge funds that allegedly lost approximately $1.6 billion. When, as here, the alleged losses far exceed the defendants' alleged profits, noted the court, the SEC's enforcement authority necessarily provides a paltry monetary remedy. SEC v. Cioffi, et al., ED NY, Case No. 08-CV-2457, June 18, 2012.

After a lengthy jury trial, the hedge fund managers were acquitted of all criminal charges.  The SEC then advised the court that it wished to press forward on its civil suit. The crux of the civil settlement is that the defendants, without admitting or denying the SEC’s allegations, agreed to the entry of consent judgments against them requiring disgorgement and the payment of monetary penalties. The hedge fund managers further  consented to administrative orders  barring  them  from participation in the  securities  industry for  three years and two  years.

The primary purpose of disgorgement orders is to deter violations of the securities laws by depriving violators of their ill-gotten gains, noted the court, with the compensation of victims a distinctly secondary goal. Congress’ authorization of civil monetary penalties was likewise intended to further the dual goals of punishment of the individual violator and deterrence of future violations. The focus on punishment and deterrence explains why disgorgement and civil monetary penalties are measured by the defendant's gains, explained the court, and not by the victim's losses. The court invited Congress to consider whether more should be done by the government to come to the aid of the victims of Wall Street predators.

The court said that Congress empowered the Commodities  Futures  Trading  Commission to  assess  actual  damages  caused  by  a violation  of  the commodities laws, and, in cases of willful and intentional violations, punitive damages equal to no more than two times the amount of such actual damages. Given the obvious parallels between commodities trading and securities trading, reasoned the court, Congress could easily grant the SEC the same authority.

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