Securities Law Prof Blog

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

Monday, January 14, 2013

SEC Enforcement Directors Respond to Professor Coffee's Criticisms: Who's Got the Facts Straight?

Professor John Coffee (Columbia) recently wrote a column, SEC enforcement: What has gone wrong?, in which he asserts that:

A disturbingly persistent pattern has emerged in U.S. Securities and Exchange Commission enforcement cases that involves three key elements: (1) The commission rarely sues individual defendants at large financial institutions, settling instead with the entity only; (2) when it does sue individual defendants, it frequently loses; and (3) the penalties collected by the commission from corporate defendants are declining and, in any event, are modest in proportion to the profits obtained.

In the view of Professor Coffee, the SEC simply does not have the resources to investigate cases as deeply as the private bar (both defense and private plaintiffs' bar) can.  He suggests that the SEC retain private counsel on a contingent-fee basis to litigate large cases that the agency cannot adequately staff.

Robert Khuzami, the exiting Director of the SEC's Enforcement Division, and Deputy Director George Canellos, have now responded.  In Unfair claims, untenable solution, they assert that Coffee has his facts wrong on all three assertions.  (1) he inaccurately stated that the median SEC settlement dropped in amount; (2) he is wrong to suggest that the SEC rarely sues individuals; and (3) his suggestion that the SEC frequently loses cases against individual defendants is "dramatically at odds with the facts."  Not surprisingly, then, the SEC lawyers disagree with Coffee's proposed solution.

[Coffee] proposes that for big litigation matters the SEC engage private lawyers compensated based on a percentage of the monies they collect. However, that solution assumes that the SEC's general goal is to sue as many deep-pocketed parties, and collect as much in penalties, as possible. But, as enforcer of the nation's securities laws, the SEC's goal is aggressively to uphold the law and serve the interests of justice. That means evaluating each case fairly, suing only those whom the evidence shows violated the law, assessing relative culpability of different participants, and assessing a penalty that is appropriate for the particular violation — which could be anything from a serious fraud to an unintentional violation of a more technical requirement.

Moreover, assessing penalties is by no means the only objective of the SEC. In cases against individuals, other forms of relief can be of great importance, such as banning a violator from the securities industry or from serving as an officer or director of a public company. Similarly, in cases against companies, the SEC frequently seeks to achieve meaningful corporate reform, such as effecting changes in management, improving the company's culture of compliance and enhancing the company's policies and procedures.

 Khuzami and Canellos close by referring to "the existing limits on the SEC's authority" and suggest that recently proposed legislation to expand the SEC's power to assess penalties could address Coffee's concerns about the inadequacy of penalties.

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