|August 28, 2012|
Previously published on August 2012
Last month Sens. Jack Reed (D-R.I.) and Charles Grassley (R-Iowa) introduced a bipartisan bill that would significantly enhance the penalties that the Securities and Exchange Commission can seek.
Among other measures, the Stronger Enforcement of Civil Penalties Act of 2012 would increase the cap for the most serious securities law violations to $1 million per violation for individuals and $10 million for companies. (The current cap is $150,000 per violation for individuals and $725,000 for entities.)
The bill also would allow the SEC to triple the monetary fines sought in both administrative and civil actions in certain cases where the penalties are tied to the defendant’s illegal profits. Currently, the law allows the SEC to calculate penalties equal to a defendant’s “gross amount of pecuniary gain” only in federal court actions.
The bill would give the SEC new authority to impose sanctions equal to investor losses in cases involving “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement” where the loss or risk of loss is significant. Finally, the bill would increase the stakes for repeat offenders.
SEC Chair Mary Schapiro sought the enhanced enforcement powers in a letter to Sen. Reed, Chairman of the Subcommittee on Securities, Insurance, and Investment. Schapiro’s November 28, 2011 letter was sent the same day that Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York rejected a proposed $285 million deal between the SEC and Citigroup Global Markets Inc. to settle alleged misrepresentations involving a collateralized debt obligation. Among other problems, Rakoff faulted the SEC for proposing only a $95 million fine for the firm, whereas it had imposed a $535 million penalty against Goldman Sachs & Co. in a similar case.
SEC Enforcement Director Robert Khuzami, responding to Judge Rakoff’s decision, noted that “securities law generally limits the disgorgement amount the SEC can recover to Citigroup’s ill-gotten gains, plus a penalty in an amount up to a defendant’s gain.”
With bipartisan support, it is likely that the bill will be enacted into law.