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

Investigations Primer
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.

Insider Trading
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.

Related Articles
  1. Professionals

    4 Must Watch Films and Documentaries for Accountants

    Learn how these must-watch movies for accountants teach about the importance of ethics in a world driven by greed and financial power.
  2. Financial Advisors

    SEC Audit? How Financial Advisors Can Be Ready

    Your firm may never be audited by the SEC, but you need to be prepared nonetheless. Follow these tips to make sure you're in compliance and organized.
  3. Investing Basics

    What are the fiduciary responsibilities of board members?

    Find out what fiduciary duties a board of directors owes to the company and its shareholders, including the duties of care, good faith and loyalty.
  4. Investing Basics

    4 Iconic Financial Companies That No Longer Exist

    Learn how poor management, frauds, scandals or mergers wiped out some of the most recognizable brands in the finance industry in the United States.
  5. Active Trading

    What Is A Pyramid Scheme?

    The FTC announced it had opened an official investigation of Herbalife, which has been accused of running a pyramid scheme. But what exactly does that mean?
  6. Investing News

    What Affirmative Action Means for Businesses

    A look at what Affirmative Action means for your business.
  7. Investing

    Protect Your Creations--Register Your Trademark

    Federally registering your brand name or logo offers the broadest protection against potential trademark infringement.
  8. Investing Basics

    How Financial Statements Are Manipulated

    Financial statement manipulation is an ongoing problem, and investors who buy stocks or bonds should be aware of its signs and implications.
  9. Economics

    3 Notorious American White Collar Criminals

    Learn about the crimes and punishments of some of the most infamous convicted white-collar crooks.
  10. Investing Basics

    How To Handle A Serious Dispute With Your Broker

    Find out what to do if you have a dispute with your broker.
  1. Are UTMA accounts escheatable?

    Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>
  2. What is the SEC's escheatment process?

    The U.S. Securities and Exchange Commission (SEC) does not have its own escheatment process. Rather, the SEC notes that the ... Read Full Answer >>
  3. Can the IRS audit you after a refund?

    The U.S. Internal Revenue Service (IRS) can audit tax returns even after it has issued a tax refund to a taxpayer. According ... Read Full Answer >>
  4. How does escheatment impact a company?

    In recent years, state governments have become increasingly aggressive in enforcing escheatment laws. As a result, many businesses ... Read Full Answer >>
  5. What happens if property is wrongfully escheated?

    If your financial accounts, such as bank, investment or savings accounts, are declared dormant and the managing financial ... Read Full Answer >>
  6. How do financial advisors help you avoid escheatment?

    Financial advisors can help you avoid the escheatment of your financial assets by regularly reviewing all of your accounts, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center