Legal Developments in Securities Law

SEC Seeks to Raise Potential Civil Penalties

Earlier this week, the SEC’s chairperson, Mary Schapiro, sent a letter to Senators Jack Reed and Mike Crapo urging that Congress change the current rules on how the SEC can fine individuals and companies and to plead for greater maximum civil penalties.

Currently, the SEC can impose up to $150,000 per violation as a civil penalty against an individual, but the SEC has requested that the potential fine be increased to up to $1 million.  For an entity, the civil penalty can be up to $750,000 under current rules, but Chairman Schapiro would like that potential penalty to go up to $10 million.

Other changes proposed included the ability to calculate the fine as three times the disgorgement figure, which represents the profits that were made by the accused.  Currently, another method by which the SEC calculates a civil penalty is a fine that is equal to the disgorgement figure.  Further, the Chairman proposed basing the fine on the amount of investor losses, rather than being based on the disgorgement figure, which could be significantly lower.  Finally, the Chairman also asked that penalties be increased for repeat offenders.  The SEC’s ability to recover from defendants may provide a deterrent to future securities violations, but by the same token, defendants would still be able to demonstrate their financial inability to pay a civil penalty.

It seems apparent that the Chairman’s suggested increases would increase the penalties for entities, more so than for individuals.  While the proposed maximum civil penalty for individuals is five times the current maximum, the proposed maximum fine for entities is ten times greater than the current maximum.  Given the recent issues with the Citigroup settlement that were raised by Judge Rakoff and the anti-Wall Street sentiment that has developed across the country, it is not surprising that the SEC would react in this way.  To truly deter financial entities from committing securities violations in the future, arguably, any potential punishment would have to outweigh the potential gain to the entity, if the entity operates purely on a profit-seeking basis.  That sentiment certainly seemed to be echoed by Judge Rakoff last month.

Chairman Schapiro’s staff is in the process of preparing draft legislation for legislators to consider.  In the meantime, this letter from Chairman Schapiro is likely just another step to demonstrate the SEC’s willingness to aggressively pursue potential securities law violations, and more changes from the agency are likely in the future.


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