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.