Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, December 7, 2011

Does the SEC Need the Power to Impose Stiffer Fines?

President Obama, in a speech yesterday in Osawatomie, Kansas, called on Congress to increase the penalties for fraud, saying that:

Too often, we’ve seen Wall Street firms violating major anti-fraud laws because the penalties are too weak and there’s no price for being a repeat offender. No more. I’ll be calling for legislation that makes those penalties count so that firms don’t see punishment for breaking the law as just the price of doing business.

While the President did not specifically refer to securities fraud, he appears to be echoing the recent request SEC Chair Schapiro made in a letter to Representative Jack Reed, Chair of the House Subcommittee on Securities, Insurance and Investment. (I could not find the letter on the SEC website, but the Scribd site has a copy of what appears to be the letter.)  Ms. Schaprio wants changes to the law to "increase the statutory limits on civil monetary penalties, more closely link the size of monetary penalties to the scope of harm to investors and associated investor losses, and substantially raise the financial stakes for securities law recidivists."

While, as a general principle I'm all in favor of hitting securities law violators (especially Wall St. firms) with hefty fines, I remain skeptical that the SEC has been hindered in its enforcement efforts by reason of constraints of its power to impose penalties. The statute generally sets forth two alternative methods for calculating the maximum amount of penalties.  The first method permits a "per violation" calculation, the amount of which increases by tier according to the seriousness of the violation.  The second method permits imposition of a penalty equal to "the gross amount of pecuniary gain" to the defendant "as a result of the violation."   While the appellate courts that have reviewed penalties do not provide much guidance as to the amount of penalties, they confirm the discretionary nature of the remedy.   It is true that in the instances of secondary market fraud, the monetary gain to the defendant may be small (thus ruling out the second method of calculation); however, there is a considerable degree of interpretation about what constitutes a "violation," particularly in the typical financial fraud situation where many defendants have made numerous misstatements that allegedly violate a number of different statutory provisions.  

I worry that the SEC may be crying "wolf" on this occasion.

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