In the wake of the Madoff debacle, the Securities and Exchange Commission came under fire from many quarters for what was perceived as its lack of mettle. America's chief securities regulator has set about rectifying that impression, filing 735 enforcement actions in the 2011 fiscal year ended September 30, an all-time record for the agency. The tab for penalties and disgorgement ran to over $2.8 billion. A wide ranging reorganization of the Enforcement Division under Robert Khuzami, which streamlined management and revised the manner in which tips and complaints were handled, was behind its greatly increased effectiveness.
SEE: The SEC: A Brief History Of Regulation
As an agency of law enforcement, the Enforcement Division of the SEC can recommend investigation of potential securities law violations, recommend bringing civil (the filing of an injunction or cease-and-desist order where disgorgement of profits and fines may be imposed) and administrative (case adjudicated by an administrative law judge who issues findings of fact and recommended sanctions that the agency may accept or reverse) actions, prosecuting such cases and working with global law enforcement agencies to bring criminal cases as applicable.
The Division avails itself of numerous resources to investigate potential violations including, to wit: media reports, complaints, tips, analysis of trading patterns and collaboration with other self-regulatory organizations such as the Internal Revenue Services (IRS) and the Financial Industry Regulatory Authority (FINRA). Violations may include, but are not limited to activities such as insider trading, misappropriation of client funds, misrepresentation and market manipulation.
Areas of Focus
While the trend of enforcement has moved toward insider trading cases, other types of actions were brought as well:
Wrongdoing related to the 2007-2009 Financial Crisis
Examples here include cases against Wachovia and JP Morgan regarding misrepresentation of the condition of the residential real estate market in the sale of mortgage backed securities (MBS) and Morgan Keegan for false valuation of subprime mortgage securities. Cases are broken down by the following categories:
- Concealed from investors risks, terms, and improper pricing in CDOs and other complex structured products.
- Made misleading disclosures to investors about mortgage-related risks and exposure.
- Concealed the extent of risky mortgage-related and other investments in mutual funds and other financial products.
Investment Advisors And Broker/Dealers
Actions brought against broker/dealers saw a 60% increase over fiscal 2010. Actions against investment advisors and investment companies witnessed a 30% increase over fiscal 2010. Enforcement actions here totaled 146.
This area has been a focus for the agency. Fifty-seven enforcement actions were filed, 8% above the previous year. 2011 was the year in which the hedge fund Galleon Management was brought down, which saw the conviction of Raj Rajaratnam on multiple insider trading counts.
Other cases include a Goldman Sachs employee and his father for trading on material information acquired while working on the exchange-traded fund desk, and Barai Capital Management, a New York hedge fund where several portfolio managers and analysts traded on material non-public information that they received from technology companies, earning over $30 million in this manner.
SEE: Defining Illegal Insider Trading
The Foreign Corrupt Practices Act
The act is another area of focus for the SEC that created a dedicated unit to enhance its enforcement efforts. The act prohibits U.S. company personnel from bribing foreign officials for business, governmental or otherwise. A sampling of cases from the agency's website follows:
Diageo - SEC charged one of the world's largest producers of premium alcoholic beverages for making $2.7 million in improper payments to government officials in India, Thailand, and South Korea to obtain lucrative sales and tax benefits. Diageo agreed to pay more than $16 million to settle the case. (Sept. 27, 2011)
Johnson & Johnson - SEC charged the New Brunswick, N.J.-based pharmaceutical company for bribing public doctors in several European countries to win contracts for their products and paying kickbacks to Iraq to illegally obtain business. J&J agreed to pay $70 million to settle cases brought by the SEC and criminal authorities. (April 8, 2011)
International Business Machines Corp. - SEC charged IBM for providing improper cash payments, gifts and travel and entertainment to government officials in China and South Korea in order to secure the sale of IBM products. IBM agreed to pay $10 million to settle the SEC's charges. (May 18, 2011)
SEE: The Biggest Bribe Cases In Business History
The Bottom Line
The agency's work is never done. Through June 28, 2012, and with three months left in the 2012 fiscal year, penalties, disgorgement and other monetary relief came to about $2 billion. Individuals will continue to be creative in attempting to find means to outwit the lawmen who have to be more vigilant still. Greed never sleeps.