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. Personal Finance

    What it Takes to Get a Green Card

    Grounds for getting a green card include having family members in the U.S., being a certain type of refugee or specialized worker, or winning a lottery.
  2. Investing News

    ABC's Madoff Miniseries Explores His Charm, Smarm

    An ABC miniseries on Ponzi scheme king Bernie Madoff gets inside the head of a man who was, in fact, not too big to fail.
  3. Career Education & Resources

    Laws & Regulations To Know Before Changing the Name of Your Business

    Discover some of the most important steps you need to take after making a decision to change your legally established business name.
  4. Personal Finance

    Passport Procrastinators: This Year, Renew Early!

    Millions of passports issued nearly 10 years ago when the Western Hemisphere Travel Initiative became law are expiring. Expect backlogs; leave extra time.
  5. Economics

    Why Enron Collapsed

    Enron’s collapse is a classic example of greed gone wrong.
  6. Financial Advisor Technology

    Advisors: What to Know Before You Text

    Texting is becoming more popular between clients and financial professionals, but compliance can be tricky. Here's what to know before advisors text.
  7. Term

    Understanding Rule 144A

    Rule 144A is an SEC rule that changes the two-year holding period requirement on privately placed securities.
  8. Term

    What is the Series 66?

    The Series 66 exam is one of two tests required to register as both a securities agent and an investment advisor.
  9. Retirement

    Power of Attorney: When It's Critical to Get One

    "The sooner the better" is the usual answer.
  10. Markets

    Privateer Holdings Revolutionizes the Cannabis Industry

    Watch Privateer Holdings succeed by bringing more respectability to the legalized medical and recreational marijuana and industries.
  1. What is the Writ of Mandamus?

    A writ of mandamus is a court order issued by a judge at a petitioner’s request compelling someone to execute a duty he is ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center