When the Securities and Exchange Commission (SEC) enforces a civil action against a corporation or an individual found guilty of violating SEC regulations, there's a good chance that some sort of fine will be imposed. The money from these fines goes back to investors who have been victims of securities law violations.
- The Securities and Exchange Commission (SEC) is America's regulator for the securities industry and markets.
- The SEC is responsible for establishing and enforcing various rules and regulations.
- Securities violations can include insider trading, accounting fraud, and securities fraud.
- Penalties and disgorgements from SEC actions go to the U.S. Treasury, to the SEC, and to victims' & whistleblowers' funds.
- In 2021, the SEC collected $1.4 billion in penalties and $2.4 billion in disgorgements (the return of ill-gotten gains).
What Is the SEC?
The Securities and Exchange Commission is an independent regulatory agency created by the federal government through the U.S. Securities Act of 1933 and the Securities and Exchange Act of 1934. It was formed largely in response to the 1929 stock market crash and Great Depression that ensured.
The SEC serves to establish and enforce regulations concerning securities markets, issuers, and brokers, as well as to protect investors and provide the public with transparency in the financial markets.
With wide-ranging powers over the securities industry and markets, the SEC can impose fines of its own for transgressions, as well as bring civil or criminal actions in conjunction with other federal agencies.
SEC Penalty Enforcement
Monetary penalties levied by the SEC fall into two categories: civil money penalties and disgorgements. Civil penalties are usually fines paid by defendants found liable for damages to the state. In the past, civil money penalties went to the U.S. Department of the Treasury, which was apparently negatively affected by the wrongdoing of the party found liable. A civil money penalty is meant to be punitive, and its value is left to the discretion of the courts, within statutory limits.
The second type of penalty is called a disgorgement. This penalty is a remedial civil action meant to restore the funds that were received through illegal or unethical business transactions with interest to those affected by the illegal activities.
With the passing of the Sarbanes-Oxley Act in 2002, the courts gave the SEC the ability to distribute disgorgement money (plus interest judged owing on it) and civil money penalties received to the victims of securities law violations through the Fair Funds for Investors provision.
The SEC's Division of Enforcement was created in August 1972 to consolidate enforcement activities that previously had been handled by the various operating divisions at the Commission's headquarters in Washington. The Commission's enforcement staff conducts investigations into possible violations of the federal securities laws, and prosecutes the Commission's civil suits in the federal courts as well as its administrative proceedings.
SEC Penalty Examples
The SEC Has made an example out of individuals and companies for breaking securities laws. Insider trading is a common charge that brings in widely-publicized penalties. For instance, when Martha Stewart sold ImClone (Nasdaq: IMCL) stock on non-public material information given to her by her broker, she was ordered to disgorge $45,673, the amount that Stewart would have lost had she not made the insider trade.
Jeffrey Skilling, Enron's infamous CFO, was also charged with insider trading in 2006 (among several other scandals). Raj Rajaratnam, the head of the influential hedge fund Galleon, was found to be a rampant insider trader. He was charged by the SEC and sent to prison for 11 years in 2011. Another well-known hedge fund manager, Steven A. Cohen of SAC Capital, was accused of insider trading by the SEC in 2013, resulting in nearly $2 billion in fines and a two-year ban from managing outside money.
Insider trading isn't the only offense. In 2022, crypto company BlockFi was charged by the SEC for illegally offering unregistered securities to the public. This resulted in a $100 million fine. In 2021, investment bank J.P. Morgan Chase settled with the SEC, paying a $200 million charge for widespread improper record-keeping.
In 2020, Chinese-based coffee roasting company Luckin Coffee agreed to pay the SEC $180 million in fines related to fraudulent accounting. Also in 2020, General Electric (GE) was fined $200 million by the SEC for reportedly misleading investors and failing to disclose necessary information.
In 2021, the SEC filed 697 enforcement actions. In 2021, the SEC also obtained judgments and orders for nearly $2.4 billion in disgorgement and more than $1.4 billion in penalties, as well as awarding a total of $564 million to 108 whistleblowers.
What Does the SEC Do With Money It Collects From Fines?
This will depend on the nature of the penalty. If investors or others were harmed financially due to a transgression, the penalties collected will be used to recover those losses and make those investors whole. Until the passage of the Sarbanes-Oxley Act of 2002, all penalties the SEC obtained were paid to the United States Treasury.
Section 308 of the Sarbanes-Oxley Act, the so-called "Fair Funds provision,” permits the SEC to request that certain penalties be added to any disgorgement fund established as part of an SEC enforcement action to return money to shareholders, investors, whistleblowers, or other victims of the defendant’s securities law violations.
What Kinds of Acts Constitute Securities Law Violations?
Securities violations generally fall into one of three categories. Those involving the use of material non-public information (e.g., insider trading); accounting irregularities; and securities fraud, which broadly includes theft, fraud, or other illegal or unethical activity carried out involving securities or asset markets in order to profit at the expense of others. This may also include manipulating securities prices or making false or misleading statements about securities issues.
What Are the Penalties for Securities Violations?
Securities law violations are technically federal Class C felonies, which may be punishable by up to twenty years in prison, three years of supervised release, and $5 million in fines. However, the SEC often uses a three-tier system based on the severity of the crime and its intent.
The first tier authorizes the SEC to seek up to $5,000 in an action against an individual, and up to $50,000 from a corporation. The second tier increases the amounts of the penalties to $50,000 for an individual and $250,000 for a corporation. The third tier is $100,000 and $500,000. In addition to penalties, the SEC will seek disgorgement, or the return of ill-gotten gains.
Where Do Bank Fines Go?
U.S. Banks are not usually regulated by the SEC (except for their securities divisions). Instead, they are overseen by the Federal Reserve and the Federal Office of the Comptroller, as well as state-level banking regulators. Banks also must conform to certain regulations issued by the FDIC. Federal fines levied against banks end up at the U.S. Treasury, the Federal Reserve, the Department of Justice (some to victims' funds), and state bank regulatory authorities.