Securities Law Prof Blog

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

Thursday, June 11, 2009

SEC v. Bear Stearns & Co.

I am pleased to introduce Professor Jill Gross (Pace) as an occasional guest blogger.  Today Jill analyzes SEC v Bear Stearns & Co. (S.D.N.Y. June 10, 2009), the final installment in the Global Research Analyst Settlement:

Yesterday, in the SEC enforcement action that resulted in the well-known $1.4 billion Global Research Analyst Settlement of 2003, United States District Judge William H. Pauley III of the Southern District of New York issued an opinion addressing the “quandary” of what to do with the “undisbursable,” residual settlement funds.  In the underlying action, the SEC alleged that research analysts employed by numerous investment banks failed to disclose conflicts of interest in their research reports.  The consent judgments originally provided for, among other things, monetary payments by the named investment banks of $460 million for independent investment research, $528.5 million in disgorgement and penalties to the states, $432.75 million in federal disgorgement and penalties, and $85 million for investor education programs. 

However, as the opinion notes, the SEC provided no detailed plan for the distribution of the federal disgorgement monies as restitution to aggrieved investors, instead leaving it to the district court to work out.  Judge Pauley heavily criticized the SEC and the settling investment banks for their lack of specificity and forethought as to the “destiny of the disgorgement and penalties,” which led them to submit a proposed Distribution Plan.  Following the approval of the plan, Judge Pauley appointed a Distribution Fund Administrator, who embarked on five-year effort to identify and locate potential claimants for the monies.  Judge Pauley then details the torturous history of the Fund Administrator’s efforts and difficulties in locating claimants for the $432.75 million.  In the end, $75 million still remained undistributed.

After skewering the SEC for its misstep in agreeing to monetary settlements with no mathematical or formulaic connection to identifiable investor losses, Judge Pauley addresses and rejects various third party requests (including a consortium of investor justice law school clinics) for a cy pres distribution of the residual funds.  Notably, Judge Pauley expressly declines to authorize payment to FINRA because of the “disappointing performance” of FINRA’s Investor Education Foundation in awarding grants for investor education programs, and the SEC’s failure to properly oversee the Foundation.  He asks: “When will the SEC exercise its responsibility to ensure that these substantial sums are expended to educate the investing public?”  With no other entity available as worthy to him, Judge Pauley orders that the residual funds be transferred to the United States Department of Treasury “to be used by the Government for its operations.  Pragmatism, simplicity and the need for finality also counsel this denouement.”  Judge Pauley cynically concludes his lengthy opinion with this observation:

In the final analysis, this Court does not question the SEC’s interest in bringing to an end improper conduct.  Nor does it question the SEC’s interest in recompensing investor victims and deterring future violations.  However, whether the SEC has the institutional resolve and commits adequate resources to reach these goals is an open question. (emphasis added)

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