SEC Chairman Seeks Higher Fines to Deter Violators

The Chairman of the Securities and Exchange Commission (“SEC”), Mary Schapiro, recently sent a letter to Senators Jack Reed (D-RI) and Mike Crapo (R-ID), ranking members of the Senate banking committee’s subcommittee on securities, requesting an increase in the SEC’s authority to obtain monetary penalties from offenders.  Specifically, Ms. Schapiro asked for the following changes:

• Increase the per-violation cap applicable to the most serious violations, from $150,000 per violation for individuals and $725,000 per violation for entities, to $1 million per violation for individuals and $10 million per violation for entities;
• Amend the maximum penalty for the most serious violations from an amount equal to the “gross amount of pecuniary gain” to instead authorize penalties equal to three times the “gross amount of pecuniary gain” to the defendant;
• Make a calculation method based on “gross amount of pecuniary gain” available in administrative proceedings for all violations;
• Authorize a calculation method based on the amount of “investor losses” incurred as a result of the defendant’s violation that would be available in both civil and administrative actions;
• Authorize the SEC to seek a penalty enhancement equal to three times the otherwise applicable penalty cap if the defendant has been convicted of a securities or SEC fraud within the past five years; and
• Authorize the SEC to seek a civil penalty if an individual or entity has violated an existing federal court injunction or a bar obtained or imposed by the SEC.

Ms. Schapiro argues that, taken together, “the statutory changes proposed above would substantially enhance the effectiveness of the Commission’s enforcement program by addressing exiting limitations” and help to impose an “appropriate deterrent effect” which is currently “limited in many circumstances.”

The Wall Street Journal reports, however, that the proposal faces an uphill climb.  The Journal reports that many Republicans in the House of Representatives have “expressed reluctance about giving the SEC more resources without structural changes at the agency.”  Moreover, Sen. Charles Grassley (R-IA) told the Journal that “even if the penalties were increased, the same old regimen of quick settlements with no admission of wrongdoing still might not deter illegal behavior.”  Sen. Grassley went on, “Maybe fewer settlements and more trials and holding individuals accountable rather than the firms at large might help.”

Sen. Grassley’s comments are part of a common theme heard from many in the financial industry.  However, while there is no doubt that the greatest deterrent for many of these financial crimes would be jail time for individuals and the embarrassment of a public trial for corporations, that needn’t be an argument against increasing the SEC’s ability to impose appropriate fines.  David J. Marshall of the whistleblower law firm Katz, Marshall & Banks, who represents whistleblowers before the SEC, said that “while it is true that the greatest deterrent may be a more rigorous approach to settlements on the part of the SEC, there is simply no reason that the SEC shouldn’t have all the tools it needs to hold offenders accountable.”  Larger fines and penalties could also mean larger awards for SEC whistleblowers, who are entitled to awards ranging from ten to thirty percent of the amount the SEC recovers from companies that violate securities laws.