Source: https://www.yalelawjournal.org/comment/sec-monetary-penalties-speak-very-loudly-but-what-do-they-say-a-critical-analysis-of-the-secs-new-enforcement-approach
Timestamp: 2019-04-18 12:17:26+00:00

Document:
The dramatic increase in monetary sanctions with minimal changes in the location to which the money goes raises certain questions: Does the new strategy improve the SEC’s efforts to police the securities markets and protect investors? What are the strategy’s larger implications for corporations and their shareholders? I address these issues and argue that the net consequence of the SEC’s new approach is negative. My focus is on corporate violators, both because they have incurred the steepest fines and because they implicate the unique concerns that arise when third parties (that is, shareholders) foot the bill. This Comment is organized as follows: Part I explains where the sums that the SEC collects go. Part II examines the effectiveness of fines on corporations and the implications for deterrence when shareholders pay for management misdeeds. Part III highlights additional concerns stemming from the SEC’s self-interest in setting its enforcement agenda, while Part IV argues that this dynamic is particularly troubling in light of the SEC’s near-total discretion, absent effective judicial scrutiny. Part V concludes.
I. where does the money go?
The SEC has loudly championed its ability to collect billions of dollars from securities law violators every year, but it has not been as clear in identifying where all of this money goes. The answer to that question, which I addressed by sifting through SEC Annual Reports and the Office of Inspector General (OIG) Semi-Annual Reports, is threefold: (1) Fair Funds; (2) the new Investor Protection Fund; and (3) the Treasury General Fund. But how much is distributed to each, and who decides, are more complicated questions.
Fair Funds are relatively new; § 308 of SOX14 granted the agency authority to compensate harmed investors with Fair Funds composed of both penalty funds and disgorgements. Before 2002, the vast majority of funds collected by the SEC were directed to the General Fund.15 Although disgorgements were available to compensate harmed investors, the SEC made limited use of the remedy. Only after SOX was passed did investor compensation become an explicit goal of the agency.16 SOX gave the SEC total discretion to direct that funds be distributed to harmed investors; neither corporations nor their shareholders can object to the creation of such a fund.17 Although the text of § 308 does not explicitly encourage the SEC to elevate investor compensation as an agency priority, and the available legislative history focuses on the use of disgorgements as a tool to penalize wrongdoers rather than to benefit their victims, the SEC nonetheless interpreted the provision as requiring a shift in agency policy. In its 2003 Annual Report, the agency listed “[w]herever practical, continue to seek to return recovered funds to defrauded investors” as one of its “main objectives” going into 2004.18 Moreover, the agency’s 2006 Statement Concerning Financial Penalties—intended to clarify the SEC’s decision-making process in seeking monetary penalties—explicitly included “[t]he degree to which the penalty will recompense or further harm the injured shareholders” as one of its two principal considerations in assessing a financial penalty against a corporation.19 Deterring future misconduct, historically the SEC’s foremost priority, was demoted to an “additional” concern.
By the time that fund was closed in 2009, almost $80 million of the originally earmarked $432.5 million was remitted to the U.S. Treasury rather than to the investors for whom it was intended.34 These administrative hassles, compounded by the resulting bad publicity, may have dampened the agency’s enthusiasm for creating new funds.
Although disgorgements and penalties cannot be used directly for SEC expenses, it is a point of pride within the agency that it is a net contributor to the Federal Government’s budget and any appropriations from Congress are “fully offset.”51 To be sure, the SEC would be a net contributor even without violator fines: securities transactions fees alone fully offset the SEC’s total FY2013 budget request.52 Up to $50 million in additional registrant filing fees are deposited in the SEC’s Reserve Fund, created under 15 U.S.C. § 78d(i) to be used “as the Commission determines is necessary”; the remainder of those fees also go to the General Fund.53 Even if these additional funds are not factored into actual SEC expenses, though, they are considered to be part of the SEC’s total budget, which has steadily increased as a result.
II. do fines do any good?
Depending on how punishments are structured, even a massive fine may not directly affect executive compensation; instead, the sum is effectively split among shareholders. To borrow a phrase from an eminent securities law professor, this system is “akin to punishing the victims of burglary for their failure to take greater precautions.”61 Although executives may be deterred by other means—including the possibility of being fired by the corporation for the original misconduct or of being assessed a fine individually by the SEC—they are not personally liable for fines assessed against the corporation.
Although the circularity problem is particularly troubling when shareholders do not share in any of the initial benefits of misconduct (for example, accounting fraud), the concern is not limited to these violations. Circularity is exacerbated by a temporal disconnect: if the company has sufficient liquidity, then shareholders enriched by the initial misconduct have likely already sold their stock. Remaining shareholders are then doubly penalized: by the penalty itself and the “reputational penalties” that companies suffer after SEC actions, which can be higher than the fines themselves.62 Enforcement actions also can divert management’s attention, leading to further lost revenue. This timing issue has distributive consequences; it benefits investors who sell rapidly (for example, hedge funds) and penalizes those who hold for longer periods (for example, retail investors).63 This is not to suggest that corporate fines are never appropriate. For example, requiring a corporation to disgorge the profits gained from a price-fixing scheme appropriately requires the beneficiary of the violation to pay, and this may deter similar future misconduct. However, these considerations suggest the importance of paying careful attention to the particular factors involved before any fine is assessed.
Deterring future misconduct is not merely a positive side effect of enforcement; according to Congress, it is one of the primary reasons we have the securities law regime we do.
III. whom does the sec target?
Inability to deter misconduct is one problem with corporate monetary penalties, but it is not the only one. At least two additional, related issues prompt consideration: the way in which the SEC prioritizes enforcement, and the lack of meaningful checks on the agency. This Part addresses the former; the following Part discusses the latter.
IV. are there any meaningful checks on sec enforcement?
Even before the settlement or litigation phase of an enforcement action, the SEC’s policy of penalizing non-cooperation further skews the outcome in the SEC’s favor. It is surely sound public policy to encourage defendants to cooperate with investigations—some analysis even suggests that optimal enforcement requires some degree of self-reporting and compliance92—but the SEC has been accused of exerting undue pressure on defendants to divest themselves of appropriate legal protections, including the attorney-client privilege.93 One study found that cooperation increased over time, particularly after the 1990 Remedies Act, and even more so after 2000.94 Between 1978 and 1989, only 3.1% of enforcement actions cite company cooperation, compared to 63.4% in 2010.95 Furthermore, researchers found that larger firms are more likely to cooperate than smaller firms; the average market capitalization of cooperators is $13.1 billion compared to $4.0 billion for non-cooperators.96 In addition to the deep pockets hypothesis discussed above and the likelihood that large public companies will settle rather than litigate, the increased likelihood of cooperation on the part of large public companies provides yet another reason for the SEC to target them. The SEC can investigate with the company’s help and then garner headlines by assessing hefty monetary penalties that firms see as merely a “cost of doing business,”97 all with only minimal checks to ensure that the agency is penalizing the appropriate actors or targeting the most egregious violations.
By every available metric—litigated cases won, billions of dollars assessed, number of headlines generated—the SEC’s enforcement division has been remarkably successful in the past few years. Whether these efforts have been effective in protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation is not as clear. The SEC’s use of monetary sanctions has grown rapidly, without much critical consideration given to the effects of the new focus on the alleged violators themselves or the market as a whole.
There are multiple reasons to be concerned. Particularly for public corporations, the source of the largest sums garnered and circularity and temporal problems may prevent optimal deterrence. The absence of deterrence is particularly concerning given that the SEC’s budget grows in tandem with the growth in monetary penalties. The SEC’s near-total discretion over its enforcement strategy raises an additional issue: if the SEC targets those with the deepest pockets or those most likely to garner publicity, then other equally or more culpable violators might be able to operate with impunity. Insofar as those violators will not otherwise be sanctioned by private investors, the SEC’s approach is suboptimal. Yet without any checks, including judicial review, it is difficult to discern whether the SEC’s approach is the right one in any individual case, let alone systematically.
This historical background suggests that there are viable alternatives to the current strategy. The SEC need not always impose monetary sanctions against corporations, and when it does so, it can tie the amount to the gains generated by wrongdoing. The SEC can also refocus its monetary penalties on individuals within corporations, potentially strengthening the deterrent effect of these penalties. Long before the SEC had the authority to pursue monetary sanctions, it availed itself of other regulatory tools, including censures, deregistrations, and cease-and-desist orders. All of these tools are still available—and are still used by the SEC—but they do not raise the concerns regarding self-interest or agency aggrandizement articulated above. Given the clear costs of centering its enforcement program around large-dollar sanctions and absent clear benefits of that strategy over alternatives, the SEC would be best served by refocusing its enforcement agenda accordingly.
Because the SEC’s current incentives likely preclude the agency itself from desiring such a change, other actors may need to intervene. Congress could clarify the goals toward which the enforcement program should be oriented. The courts could likewise meaningfully assess SEC actions and settlements, rather than “rubber-stamping” the cases that the agency brings. The result might just be a more robust and fair market that protects investors and deters potential violators better than the current system.
Sarbanes-Oxley Act of 2002 § 308, 15 U.S.C. § 7246 (2012).
SEC Rule 1100: Creation of Fair Fund, 17 C.F.R. § 201.1100 (2005).
SEC Annual Report 2003, supra note 11, at 24.
SEC v. Bear, Stearns & Co., 626 F. Supp. 2d 402, 403-404 (S.D.N.Y. 2009).
Securities Exchange Act of 1934 § 21F(g), 15 U.S.C. § 78u-6(g)(2)(2012).
Securities Exchange Act of 1934 § 4D(e); 15 U.S.C. § 78d-4(e) (2012).
Id. at 16. The total includes $650,206.56 earned in investments in FY2013.
15 U.S.C. § 78u-6(g)(3)(A)(i) (2012).
See infra Figure 5 and underlying data.
The Budget for Fiscal Year 2014: Other Independent Agencies, supra note 54, at 1313.
Coffee, supra note 61, at 1560.
S. Rep. No. 101-337, at 17 (1990).
H.R. Rep. No. 101-616, at 13 (1990).
William A. Niskanen, Jr., Bureaucracy and Representative Government 38 (1971).
Sturc et al., supra note 81, at 15-2 to -3.
Files et al., Monetary Benefit, supra note 94, at 16.
Atkins & Bondi, supra note 88, at 383.
Pub. L. No. 101-429, 104 Stat. 931 (codified in scattered sections of 15 U.S.C.).
See supra note 19and accompanying text.
Statement of the Securities and Exchange Commission Concerning Financial Penalties, supra note 19.
White was sworn in on April 10, 2013. SEC Biography: Chair Mary Jo White, Sec. & Exchange Commission, http://www.sec.gov/about/commissioner/white.htm [http://perma.cc/W6SU-S8TR].
Mary Jo White, Chair, Sec. & Exch. Comm’n, Remarks at the Council of Institutional Investors Fall Conference in Chicago, IL: Deploying the Full Enforcement Arsenal (Sept. 26, 2013), http://www.sec.gov/News/Speech/Detail/Speech/1370539841202 [http://perma.cc/NC83-6BAQ].
Jean Eaglesham, SEC Ramps Up Fine Amounts to Deter Misconduct, Wall St. J., Oct. 1, 2013, http://online.wsj.com/news/articles/SB10001424052702303918804579109554149460532 [http://perma.cc/9MPE-Z7NC].
All data were collected from SEC Annual Reports and analyzed by the author. Penalties assessed are not necessarily identical to penalties collected, as the SEC may take ability to pay into account in collections (for example, if the debtor has no assets, the SEC may not collect or may reduce the amount owed proportionally).
SEC Annual Report 2002, Sec. & Exchange Commission 5 (2002), http://www.sec.gov/pdf/annrep02/ar02full.pdf [http://perma.cc/7J5X-59XS].
Paul S. Atkins, Comm’r, Sec. & Exch. Comm’n, Remarks Before the U.S. Chamber Institute for Legal Reform (Feb. 16, 2006), http://www.sec.gov/news/speech/spch021606psa.htm [http://perma.cc/G2PJ-CEAL]. Note that these figures represent the maximum level of penalties, not median payments.
Jason Hegland & Michael Klausner, SEC Practice in Targeting and Penalizing Individual Defendants, Harv L. Sch. F. on Corp. Governance & Fin. Reg. (Sept. 3, 2013, 9:23 AM), http://blogs.law.harvard.edu/corpgov/2013/09/03/sec-practice-in-targeting-and-penalizing-individual-defendants [http://perma.cc/9F27-MTSL]. Note that these figures relate to a specific subset of SEC cases: those involving nationally listed firms for violation of disclosure-related rules (e.g., fraud, books and records, and internal control rules).
For example, Commissioner Richard B. Smith made clear in 1968 that “the Commission attempts to avoid being a collection agency for injured investors.” Richard B. Smith, Comm’r, U.S. Sec. & Exch. Comm’n, Remarks at Program of Continuing Education of the Bar of the State of California: The Interest of the Securities and Exchange Commission in Private Civil Actions Under the Securities Acts 14 (Jan. 12, 1968), http://www.sec.gov/news/speech/1968/011268smith.pdf [http://perma.cc/E7UC-DH93].
For example, a report by the Government Accountability Office (GAO) noted that “SEC staff demonstrated support for the provision [§ 308] by promoting an aggressive approach in seeking, where appropriate, disgorgement orders in cases where CMPs [civil monetary penalties] are also being sought. For example, attorneys have obtained disgorgement for as little as $1 in settlements in order to obtain authorization from the SEC Commission to create a Fair Fund.” U.S. Gov’t Accountability Office, GAO-05-670, SEC and CFTC Penalties: Continued Progress Made in Collection Efforts, but Greater SEC Management Attention is Needed 11 (2005), http://www.gao.gov/assets/250/247566.pdf [http://perma.cc/ZW63-3BMS]. The SEC’s 2003 Annual Report was also the agency’s first to elevate investor compensation to a “main objective.” SEC Annual Report 2003, Sec. & Exchange Commission 24 (2003), http://www.sec.gov/pdf/annrep03/ar03full.pdf [http://perma.cc/7M89-DBVK].
SEC fiscal years run through September of the respective calendar years. Totals refer to orders obtained in SEC judicial and administrative proceedings requiring securities violators to pay penalties or to disgorge illegal profits. All data were collected from corresponding SEC annual reports, located at Annual Reports, Sec. & Exchange Commission, http://www.sec.gov/about/annrep.shtml [http://perma.cc/SR57-HQ49] and Reports, Sec. & Exchange Commission, http://www.sec.gov/about/secreports.shtml [http://perma.cc/U6EG-46CR].
See Verity Winship, Fair Funds and the SEC’s Compensation of Injured Investors, 60 Fla. L. Rev. 1103, 1113 & n.42, 1117-18 (2012).
SEC Rule 1106: Right to Challenge, 17 CF.R. § 201.1106 (2005). However, the SEC is required to publish notice of the proposed plan of disgorgement or Fair Fund plan for comment by non-parties under 17 C.F.R. § 201.1103.
The other principal consideration was “[t]he presence or absence of a direct benefit to the corporation as a result of the violation.” Press Release, Sec. & Exch. Comm’n, Statement of the Securities and Exchange Commission Concerning Financial Penalties (Jan. 4, 2006), http://www.sec.gov/news/press/2006-4.htm [http://perma.cc/V2YB-6KC7].
See infra Figure 2. All data were collected from a list that the SEC makes publicly available. Distributions in Commission Administrative Proceedings: Notices and Orders Pertaining to Disgorgement and Fair Funds, Sec. & Exchange Commission,http://www.sec.gov/litigation/fairfundlist.htm [http://perma.cc/AB8A-3WCL]. Data include corporate violators only. There may be additional funds created from corporate violators that are not included on the SEC’s publicized list. See Urska Velikonja, Public Compensation for Private Harm: Evidence from the SEC’s Fair Fund Distribution, 67 Stan. L. Rev. (forthcoming 2015) (on file with author). However, Velikonja’s larger dataset displays the same pattern over time. Id. at 26.
See infra Figure 3. The $200 million paid by JPMorgan increased the average significantly; the two other Funds created in 2013 together totaled less than $5 million.Id.(data on file with author).
See infra Figure 2 and underlying data (on file with author). Among terminated funds, an average of $8 million remained, although one outlier accounted for 84% of the total undistributed funds. The calculations for outstanding funds are on file with the author.
See, e.g., U.S. Gov’t Accountability Office, GAO-10-448R, Securities and Exchange Commission: Information on Fair Fund Collections and Distributions 3 (2010), http://www.gao.gov/assets/100/96667.pdf [http://perma.cc/LSB4-MDKE] (describing steps the SEC has taken to measure and improve its performance in Fair Funds management).
Barbara Black, Should the SEC Be a Collection Agency for Defrauded Investors?, 63 Bus. Law 317, 335 (2008).
Order Approving Transfer of Remaining Distribution Funds to the U.S. Treasury, Exchange Act Release No. 64,553, 101 SEC Docket 781, at 5-6 (May 26, 2011), http://www.sec.gov/litigation/admin/2011/34-64553.pdf [http://perma.cc/8Q7P-3DM3].
Press Release, Sec. & Exch. Comm’n, Ten of Nation’s Top Investment Firms Settle Enforcement Actions Involving Conflicts of Interest Between Research and Investment Banking (Apr. 28, 2003), http://www.sec.gov/news/press/2003-54.htm [http://perma.cc/V5SJ-SBTW].
All data were collected from Distributions in Commission Administrative Proceedings: Notices and Orders Pertaining to Disgorgement and Fair Funds, Sec. & Exchange Commission, http://www.sec.gov/litigation/fairfundlist.htm [http://perma.cc/W9P5-AGQ6]. Data include corporate violators only, and exclude Fair Funds composed of disgorgements and/or penalties paid by individual violators, including where entities were co-respondents but were not ordered to disgorge profits or pay penalties. There may be additional Fair Funds not advertised on the SEC’s website, although that would contradict the agency’s purpose in distributing the money. The SEC’s case against JPMorgan Chase & Co. increased the average fund in 2013 significantly; the $200 million in penalties dwarfed the two other funds created, which together totaled less than $5 million. Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order, Exchange Act Release No. 70,458, 107 SEC Docket 4, at 19 (Sept. 19, 2013), http://www.sec.gov/litigation/admin/2013/34-70458.pdf [http://perma.cc/JV64-HVRE].
Distributions in Commission Administrative Proceedings, supra note 29. Some of the cases are no longer available on the SEC website and are on file with the author.
Id.; see also supra note 23 and accompanying text (discussing time delays). The numbers in brackets represent the number of funds that have reached each milestone.
SEC v. Bear, Stearns & Co., 626 F. Supp.2d at 420 (directing the SEC to transfer monies remaining in the Funds to the Treasury Department);Velikonja, supra note 20, at 30, 60.
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 922, 124 Stat. 1376, 1841-49 (2010).
2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program, Sec. & Exchange Commission 1 (2013), http://www.sec.gov/about/offices/owb/annual-report-2013.pdf [http://perma.cc/FKR6-3CZN].
Id. at 8. Per the 2013 Annual Report, these figures include only those who included the required whistleblower declaration. Id. at 8 n.10. Only seven weeks of whistleblower data was available for 2011, id. at 8 n.11, during which time there were 334 complaints, id. at 8.
2012 Annual Report on the Dodd-Frank Whistleblower Program, Sec. & Exchange Commission 8 (2012),http://www.sec.gov/about/offices/owb/annual-report-2012.pdf [http://perma.cc/L543-G74S].
Office of Inspector Gen., Semiannual Report to Congress, Sec. & Exchange Commission 124 (2011), http://www.sec.gov/about/offices/oig/reports/reppubs/2011/sar_fall_2011_final_508.pdf [http://perma.cc/ZU23-QYR3]. There were problems with OHR’s program, however. See Office of Inspector Gen., Audit of SEC’s Employee Recognition Program and Recruitment, Relocation, and Retention Incentives, Sec & Exchange Commission 25 (2011), http://www.sec.gov/oig/reportspubs/492.pdf [http://perma.cc/V7W9-99YR]. In fact, some of the initial suggestions made to the Employee Suggestion Program in 2011 were actually leftovers from the previous program. Semiannual Report to Congress, supra, at 20-21.
Office of Inspector Gen., Semiannual Report to Congress, supra note 44, at 124; Office of Inspector Gen., Semiannual Report to Congress, Sec. & Exchange Commission 27-30 (2013), http://www.sec.gov/about/offices/oig/reports/reppubs/2013/oig_fall2013.pdf [http://perma.cc/XYD2-Q7HA].
Office of Inspector Gen., Semiannual Report to Congress, Sec. & Exchange Commission 29 (2013), http://www.sec.gov/about/offices/oig/reports/reppubs/2013/oig_fall2013.pdf [http://perma.cc/PAV6-W6DY]; Semiannual Report to Congress, supra note 44, at 20.
All data were collected from the SEC Office of the Whistleblower annual reports. See 2013 Annual Report, supra note 38, at 1, 15-16; Annual Report on the Dodd-Frank Whistleblower Program: Fiscal Year 2012, Sec. & Exchange Commission 10 (2012), http://www.sec.gov/about/offices/owb/annual-report-2012.pdf [http://perma.cc/ZS2X-YQTR]; Annual Report on the Dodd-Frank Whistleblower Program: Fiscal Year 2011, Sec. & Exchange Commission 5, 9 (2011), http://www.sec.gov/about/offices/owb/whistleblower-annual-report-2011.pdf [http://perma.cc/B4XH-5F62].
All data were collected from SEC Annual Reports. See infra Figure 6 and underlying data (on file with author).
All data were collected from the SEC’s corresponding annual reports. See Fiscal Year 2013 Agency Financial Report, Sec. & Exchange Commission 34 tbl.1.2 (2013), http://www.sec.gov/about/secpar/secafr2013.pdf [http://perma.cc/6VS9-QMUU]; Fiscal Year 2012 Agency Financial Report, Sec. & Exchange Commission 32 tbl.1.2 (2012), http://www.sec.gov/about/secpar/secafr2012.pdf [http://perma.cc/D5QL-S98D]; FY 2011 Performance and Accountability Report, Sec. & Exchange Commission 32 tbl.1.2 (2011), http://www.sec.gov/about/secpar/secpar2011.pdf [http://perma.cc/FKP5-N7R6]; FY 2010 Performance and Accountability Report, Sec. & Exchange Commission 82, 101 n.13 (2010), http://www.sec.gov/about/secpar/secpar2010.pdf [http://perma.cc/88BD-L9ZR]; Putting Investors First: 2009 Performance and Accountability Report, Sec. & Exchange Commission 64, 82 n.12 (2009), http://www.sec.gov/about/secpar/secpar2009.pdf [http://perma.cc/XSF4-SUTG]; 2008 Performance and Accountability Report, Sec. & Exchange Commission 59, 75 n.12 (2008), http://www.sec.gov/about/secpar/secpar2008.pdf [http://perma.cc/RZR7-PEXB]; 2007 Performance and Accountability Report, Sec. & Exchange Commission 14 tbl.1.3 (2007), http://www.sec.gov/about/secpar/secpar2007.pdf [http://perma.cc/Y3L4-UHDB]; 2006 Performance and Accountability Report, Sec. & Exchange Commission 33 exh. 1.8, 60-61, 77 n.6, 78 n.7 (2006), http://www.sec.gov/about/secpar/secpar2006.pdf [http://perma.cc/QD73-F2Z6]; 2005 Performance and Accountability Report, Sec. & Exchange Commission 30 exh. 1.8 (2005), http://www.sec.gov/about/secpar/secpar2005.pdf [http://perma.cc/ZS9-2KLD].
In Brief FY 2013 Congressional Justification, Sec. & Exchange Commission 2 (Feb. 2012), http://www.sec.gov/about/secfy13congbudgjust.pdf [http://perma.cc/K5JZ-QXXW].
See FY 2014 Congressional Budget Justification, Sec. & Exchange Commission 18 n.1 (2014), http://www.sec.gov/about/reports/secfy14congbudgjust.pdf [http://perma.cc/MS8R2LSM] (describing this statutory provision).
Those funds were generated by: Civilian Property Realignment Board ($120 million), District of Columbia ($1 million), Federal Communications Commission ($251 million), Federal Maritime Commission ($1 million), Nuclear Regulatory Commission ($1 million), and Vietnam Education Foundation ($5 million, although the entirety of that amount is contributed by other federal governmental agencies, USDA, and USAID). Negative subsidies from loans made by the Export-Import Bank of the United States are excluded. The Budget for Fiscal Year 2014: Other Independent Agencies, Off. Mgmt. & Budget (2014), http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/oia.pdf [http://perma.cc/79L4-RJQS].
David Burton, Lack of Resources Is Not the Reason for SEC Tardiness, Heritage Found.: The Daily Signal (Dec. 10, 2013), http://dailysignal.com/2013/12/10/lack-resources-reason-sec-tardiness [http://perma.cc/8ZUJ-9R3Y].
Fiscal Year 2015 Budget of the U.S. Government, Off. Mgmt. & Budget 170 tbl.S-5, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2015/assets/budget.pdf [http://perma.cc/F4B3-AT3J]. “Discretionary” is a technical term for government spending on programs other than Social Security, Medicare, Medicaid, and other mandatory programs.
See, e.g., Todd L. Cherry, Financial Penalties as an Alternative Criminal Sanction: Evidence from Panel Data, 29 Atlantic Econ. J. 450, 450 (2001). See generally A. Mitchell Polinsky & Steven Shavell, The Economic Theory of Public Enforcement of Law, 38 J. Econ. Literature 45 (2000).
The agency problem, or moral hazard, arises from the mismatch in incentives between shareholders and corporate managers. See generally Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976).
Deborah Solomon, As Corporate Fines Grow, SEC Debates How Much Good They Do, Wall St. J., Nov. 12, 2004, http://online.wsj.com/news/articles/SB110021198122471832 [http://perma.cc/W8EK-HMW2].
John C. Coffee, Jr., Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation, 106 Colum. L. Rev. 1534, 1562 (2006).
See generally Jonathan M. Karpoff et al., The Cost to Firms of Cooking the Books, 43 J. Fin. & Quantitative Analysis 581 (2008) (arguing that reputation losses impose the largest penalties for financial misrepresentations). Karpoff’s study was limited to accounting fraud. However, Engelen and van Essen demonstrate that companies suffer reputational penalties from a wide range of misconduct, at least so long as the misconduct directly involves related parties. See generally Peter-Jan Engelen & Marc van Essen, Reputational Penalties in Financial Markets: An Ethical Mechanism?, in Responsible Investment in Times of Turmoil, at 55 (Wim Vandekerckhove et al. eds., 2011).
SEC v. Bank of Am. Corp., Nos. 09 Civ. 6829(JSR), 10 Civ. 0215(JSR), 2010 WL 624581, at *5 (S.D.N.Y. Feb. 22, 2010) (Rakoff, J.).
There is some evidence that some types of enforcement actions may result in reputational penalties for management, including reducing compensation or firing individuals. See generally Anup Agrawal & Tommy Cooper, Corporate Governance Consequences of Accounting Scandals: Evidence from Top Management, CFO and Auditor Turnover (Oct. 2007) (unpublished manuscript), http://ssrn.com/abstract=970355 [http://perma.cc/S5YM-6FSS]. But see Jonathan Macey, The Death of Corporate Reputation (2013). Macey argues that reputational penalties are no longer sufficient to discipline management because even those who are criminally indicted, like Michael Milken, emerge with their reputations largely intact. Id. at 111-13. It is also important to keep in mind that executives may suffer reputational penalties from the discovery of the underlying misconduct, separate and apart from specific regulatory penalties.
James D. Cox et al., Public and Private Enforcement of the Securities Laws: Have Things Changed Since Enron?, 80 Notre Dame L. Rev. 893 (2005).
This incentive is generated partially because of the failure of the Private Securities Litigation Reform Act. See Michael A. Perino, Did the Private Securities Litigation Reform Act Work?, 2003 U. Ill. L. Rev. 913, 972-73.
Stephen J. Choi et al., Scandal Enforcement at the SEC: The Arc of the Option Backdating Investigations, 15 Am. L. & Econ. Rev. 542, 542-44 (2013).
See id. at 576. The study looked at stock price reactions to SEC announcements of investigations, follow-on private litigation, criminal prosecutions, the outcome of the SEC’s investigation, and the magnitude of the accounting error as proxies for the quality of an investigation, all of which declined over the period. Id.
For example, companies targeted for backdating were smaller than those accused of other accounting fraud, and later investigations were less likely to generate monetary penalties. Id. at 565, 570-73.
See The Budget-Maximizing Bureaucrat: Appraisals and Evidence 4-6 (André Blais & Stéphane Dion eds., 1991).
Macey, supra note 67, at 14; see also David Lucca et al., Staff Report No. 678: The Revolving Door and Worker Flows in Banking Regulation, Fed. Res. Bank N.Y. (June 2014), http://www.newyorkfed.org/research/staff_reports/sr678.pdf[http://perma.cc/4795-4W3W].
Agency interpretations of their own regulations receive deference unless they are not “reasonable.” Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 845 (1984) (citing United States v. Shimer, 367 U.S. 374, 382-83 (1961)).
William N. Eskridge, Jr. & Lauren E. Baer, The Supreme Court’s Deference Continuum, An Empirical Analysis (Chevronto Hamdan), 96 Geo. L.J. 1083, 1144 (2008); see also Steven Croley, The Scope of Chevron 2-3 (July 2001) (unpublished manuscript), http://www.americanbar.org/content/dam/aba/migrated/adminlaw/apa/chevronscopejuly.doc [http://perma.cc/U3KU-XBGY] (“The Supreme Court has made it clear that Chevron deference is not to be confined to interpretations occasioned by agency rulemaking, however, but extends also to agency interpretations made in connection with a formal adjudication, including enforcement actions.”).
Andrew Tangel & Jim Puzzanghera, SEC’s Mary Jo White Wants Companies to Fess Up, L.A. Times, Jan. 1, 2014, http://articles.latimes.com/2014/jan/01/business/la-fi-sec-white-20140102 [http://perma.cc/UB23-NGS9].
See John H. Sturc et al., SEC Investigations and Enforcement Actions, in Securities Litigation: A Practitioner’s Guide 15-30 (Jonathan Dickey ed., 2011).
See infra Figure 7. The SEC did not provide the 2013 breakdown between civil actions and administrative proceedings, contrary to previous practice.
See, e.g., 2013 Mid-Year Securities Enforcement Update, Gibson Dunn 3 (July 15, 2013), http://www.gibsondunn.com/publications/Documents/2013-Mid-Year-Securities-Enforcement-Update.pdf [http://perma.cc/S8YB-P9HV].
Each bar represents the percentage of civil actions minus the percentage of administrative proceedings. For example, in 2002, 53.1% of cases were brought as civil actions and 46.9% as administrative proceedings, resulting in a 6.2% difference in favor of civil actions.
Linda Greenhouse, Justices Unanimously Overturn Conviction of Arthur Andersen, N.Y. Times, May 31, 2005, http://www.nytimes.com/2005/05/31/business/31wire-andersen.html [http://perma.cc/33BY-4KUE].
Admitting guilt in a settlement could expose defendants to “collateral estoppel”: “This means that a defendant could, as a result of the admission in the SEC settlement, be precluded from challenging liability in the private civil litigation.” Examining the Settlement Practices of U.S. Financial Regulators: Hearing Before the H. Comm. on Fin. Servs., 112th Cong. 79 (2013) (statement of Robert Khuzami, Director, Div. of Enforcement, U.S. Sec. & Exch. Comm’n).
Paul S. Atkins & Bradley J. Bondi, Evaluating the Mission: A Critical Review of the History and Evolution of the SEC Enforcement Program, 13 Fordham J. Corp. & Fin. L. 367, 394 (2008) (emphasis omitted). The legal travail surrounding the SEC’s settlement with Citigroup is also a case in point. The Second Circuit Court of Appeals overturned Judge Rakoff’s rejection of the settlement deal with Citigroup on the grounds that “it is not within the district court’s purview to demand ‘cold, hard, solid facts, established either by admissions or by trials’ . . . as to the truth of the allegations in the complaint as a condition for approving a consent decree.” SEC v. Citigroup Global Mkts., Inc., 752 F.3d 285, 295 (2014) (quoting SEC v. Citigroup Global Mkts. Inc.,827 F. Supp. 2d 328, 335 (S.D.N.Y. 2011)).
See Macey, supra note 67, at 92 (quoting Peter J. Henning, Behind Rakoff’s Rejection of Citigroup Settlement, N.Y. Times: DealBook, (Nov. 28, 2011, 5:14 PM), http://dealbook.nytimes.com/2011/11/28/behind-judge-rakoffs-rejection-of-s-e-c-citigroup-settlement [http://perma.cc/Q62M-D526]).
See, e.g., id. at 272-73; see also Jed S. Rakoff, The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?, N.Y. Rev. Books, Jan. 9, 2014, http://www.nybooks.com/articles/archives/2014/jan/09/financial-crisis-why-no-executive-prosecutions [http://perma.cc/RE29-SWMM] (discussing the reasons for the recent lack of prosecutions against high-level executives).
Rebecca Files et al., Does It Pay for Firms to Cooperate with Regulators? 7-8 (July 7, 2014) (unpublished manuscript) (citing Jennifer Arlen, Stumbling into Crime: Stochastic Process Models of Accounting Fraud, in Research Handbook on the Economics of Criminal Law 44 (Alon Harel & Keith N. Hylton eds., 2012)), http://ssrn.com/abstract=2026282 [http://perma.cc/VHW2-3GR8].
The Seaboard Report apparently generated a widespread perception that companies must waive attorney-client privilege to be seen as sufficiently cooperating (the so-called “culture of waiver”), which proved controversial for the SEC and DOJ. See, e.g., Sturc et al., supra note 81, at 15-22 to -24.
Rebecca Files et al., The Monetary Benefit of Cooperation in Regulatory Enforcement Actions for Financial Misrepresentation 16 (Oct. 2012) (unpublished manuscript) (on file with author) [hereinafter Files et al., Monetary Benefit]. For a more recent version of the study, see Files et al., supra note 92.
Macey, supra note 67, at 23; see also id. at 215-16 (concluding that “SEC regulators seek to enhance the power of their organization . . . [and] advance their own careers,” and that “regulation has entirely lost its value as a signal of weak reputation”).
See Insider Trading Sanctions Act of 1984, Pub. L. No. 98-376, § 2, 98 Stat. 1264, 1264 (codified as amended at 15 U.S.C. § 72u-1(a)(1) (2012)).
S. Rep. No. 101-337, at 17 (1990) (quoted in Statement of the Securities and Exchange Commission Concerning Financial Penalties, supra note 19).
* I am grateful to Professor Roberta Romano for inspiring the topic, and for her helpful comments on the finished product. I would also like to thank Professor Yair Listokin for his insights and advice throughout the drafting process, the Law & Economics Working Group participants for their suggestions, and the editors and staff of the Yale Law Journal for all of their input. Finally, thank you to Angela, for encouraging me to continue digging and at least feigning interest in every new discovery.

References: § 308
 § 308
 § 78
 § 308
 § 7246
 § 201
 v. 
 § 21
 § 78
 § 4
 § 78
 § 78
 § 201
 § 201
 v. 
 § 922
 v. 
 v. 
 v. 
 v. 
 v. 
 § 2
 § 72