Tuesday, July 24, 2012

Responding to Request from SEC Chair Schapiro, Senate Legislation Would Raise SEC Limits on Securities Fines, Tie Penalties to Scope of Harm and Crack Down on Recidivists

Senators Jack Reed (D-RI) and Charles Grassley (R-IA) have introduced bipartisan legislation strengthening the SEC’s ability to crack down on securities laws violations. The Stronger Enforcement of Civil Penalties Act (SEC Penalties Act) of 2012 would increase the statutory limits on civil monetary penalties, directly link the size of these penalties to the scope of harm and associated investor losses, and substantially raise the financial stakes for repeat offenders of the securities laws.

The legislation responds, in part, to an earlier letter sent to Senator Reed, and Securities Subcommittee Ranking Member Larry Crapo (R-ID), by SEC Chair Mary Schapiro requesting statutory changes substantially enhancing the effectiveness of the SEC’s enforcement program by addressing existing limitations. In the letter, Chairman Schapiro sought five specific statutory enhancements to Commission enforcement authority that collectively would allow the SEC to impose appropriate monetary penalties for serious violations and authorize greater penalties for recidivists.

Under existing law, the SEC can only penalize individual violators a maximum of $150,000 per offense and institutions $725,000.  In some cases, the SEC may calculate penalties to equal the gross amount of ill-gotten gain, but only if the matter goes to federal court, not when the SEC handles a case administratively.  The SEC Penalties Act increases the per violation cap applicable to the most serious securities laws violations to $1 million per violation for individuals, and $10 million per violation for entities.

In cases where the penalty is tied to the amount of money gained by the bad action, the SEC would be able to triple the penalty.  The legislation would also triple the penalty cap for recidivists who have been convicted of securities fraud or subject to SEC administrative relief within the past five years.  The agency would be able to assess these types of penalties in-house, and not just in federal court.

Specifically, the measure would modernize and update the maximum money penalties that may be obtained from individuals and entities charged with securities law violations in administrative and civil actions. The maximum penalty for an individual charged with the most serious violations, such as third tier violations involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement that resulted in substantial losses to victims or substantial pecuniary gain to the violator, could not exceed, for each violation, the greater of $1 million, three times the gross pecuniary gain, or the losses incurred by victims as a result of the violation.  The maximum amount that could be obtained from entities charged with the most serious violations could not exceed, for each violation, the greater of $10 million, three times the gross pecuniary gain, or the losses incurred by victims as a result of the violation.

The maximum penalties for individuals and entities charged with other violations would be revised by the legislation so that the maximum penalty for an individual charged with less serious violations involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement could not exceed, for each violation, $100,000 or the gross pecuniary gain as a result of the violation.  The maximum penalty that could be obtained from entities charged with these violations could not exceed, for each violation, $500,000 or the gross pecuniary gain as a result of the violation.

The maximum penalty for an individual charged with violations not involving fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement could not exceed, for each violation, $10,000 or the gross pecuniary gain as a result of the violation.  The maximum penalty that could be obtained from entities charged with these violations could not exceed, for each violation, $100,000 or the gross pecuniary gain as a result of the violation.

The Act would also deal with the p
enalties for recidivists. Thus, the maximum amount of the penalty for repeated misconduct must be three times the applicable cap when the person or entity within the five years preceding the act or omission is criminally convicted of securities fraud or is subject to a judgment or order concerning securities fraud.

In addition, the measure would provide authority to seek civil penalties for violations of previously imposed injunctions or bars obtained or entered under the securities laws.  It also provides that each violation of an injunction or order must be considered a separate offense.  In the event of an ongoing failure to comply with an injunction or order, each day of the continued failure to comply with the injunction or order will be considered a separate offense.

Senator Reed, the Chair of the Subcommittee on Securities, said that tougher antifraud laws are needed to protect taxpayers and investors. With a number of financial firms, he noted, if they look at the bottom line and see they can break the law, get caught, pay a nominal fine, and still profit, the cycle of misconduct will continue. Noting that the law needs to change to ensure the punishment fits the crime, Senator Reed emphasized that the legislation would give the SEC more tools to demand meaningful accountability from Wall Street and enhance the Commission’s ability to protect investors and crack down on fraud.

The SEC is responsible for overseeing approximately 35,000 entities, as well as the Financial Industry Regulatory Authority (FINRA), which itself oversees 4,500 brokers; the Public Company Accounting Oversight Board (PCAOB), which oversees auditors of public companies; and the Municipal Securities Rulemaking Board (MSRB), which regulates municipal securities firms and municipal advisors.

Last year, the SEC successfully brought 735 enforcement actions which resulted in the transfer of $2.8 billion in penalties and returned funds to harmed investors. However, the Senators noted that in a recent case between the SEC and two former Bear Stearns hedge fund managers who were indicted on charges of wire and securities fraud for misrepresenting the health of their funds that cost investors $1.6 billion, the SEC was forced to settle for civil penalties of $800,000 and $250,000, respectively. 


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