SEC Enforcement Heuristics: An Empirical Inquiry

This Article examines the overlap between SEC securities enforcement actions and private securities fraud class actions. We begin with an overview of data concerning all SEC enforcement actions from 1997 to 2002. We find that the volume of SEC enforcement proceedings is relatively modest. We next examine the scope of the recently enacted “Fair Fund” provision that authorizes the SEC to designate civil penalties it recovers from defendants to benefit defrauded private investors. We conclude that this provision offers only limited potential relief for private investors. We complete this Part of the Article with an analysis of the serious resource limitations faced by the SEC. The second portion of the Article contains an empirical analysis of the determinants of SEC enforcement actions and the overlap of private fraud suits and SEC enforcement proceedings. Using bivariate analysis, we find that (1) private suits with parallel SEC actions settle for significantly more than private suits without such proceedings; (2) SEC enforcement actions target significantly smaller companies than private actions alone; (3) private cases with parallel SEC actions take substantially less time to settle than other private cases; and (4) private cases with parallel SEC actions have significantly longer class periods than other private actions. Finally, we create a model for estimating Copyright © 2003 by James D. Cox and Randall S. Thomas. † Brainerd Currie Professor of Law, Duke University School of Law. †† John S. Beasley II Professor of Law and Business, Vanderbilt University Law School. ††† Department of Economics, Duke University. The authors are grateful for the comments received on earlier drafts by Professors Robert B. Thompson and Stephen Choi as well as the participants at the Duke-ILEP Agencies, Economic Justice and Private Initiatives Conference in Coronado, California. We are also thankful for the excellent research assistance of Ms. Gitanjali Lakhotia and Mr. Paul Y. Castle. COX.DOC 06/21/04 3:59 PM 738 DUKE LAW JOURNAL [Vol. 53:737 damages to compare settlement ratios in cases with parallel SEC actions to those in private actions. We find that one-fourth of all the private class action settlements occurring in suits that yield less than 10 percent of provable losses are settled for less than 2 percent of provable losses, but that there are no private actions with parallel SEC suits with such small settlements. In the final Part of the Article, we conduct a multivariate regression analysis of the determinants of when SEC enforcement actions are filed. We find that the most highly significant determinant of SEC actions is financial distress. Estimated losses do not appear to be a statistically significant factor in the SEC’s decision to file these suits. TABLE OF CONTENTS Introduction 738 I. Mechanisms to Fulfill the SEC’s Enforcement Mandate 746 II. SEC Recoveries on Behalf of Injured Investors 753 III. The SEC as the Heroic “David” 757 IV. Testing Suppositions and Suspicions Regarding Private Securities Class Action Suits 760 V. Empirical Analysis of the Public-Private Enforcement of the Securities Laws 763 Conclusion 777