SEC steps up enforcement efforts - penalties include monetary settlements, but the total impact is yet to be seen
Under heightened scrutiny, but with its staff empowered by reforms mandated by new chairman Mary Schapiro, the SEC reached 182 new settlements in the first quarter of 2009. This exceeds both the 123 settlements in the previous quarter and the 157 settlements in the first quarter of 2008. The five largest settlements in the first quarter of 2009 are shown in part two of the chart on the following page, Settlement stats.
The largest settlement was the $200 million that UBS agreed to disgorge in connection with allegations that it operated as an unregistered broker/dealer in the US. According to the SEC, this allowed certain US investors to evade taxes by maintaining undisclosed accounts in foreign countries. The SEC further alleged that UBS client advisers received training on how to avoid detection of their domestic broker/dealer activities by US authorities. In a parallel criminal investigation, UBS entered into a deferred prosecution agreement with the Department of Justice under which it agreed to disgorge $180 million and to make $400 million in tax-related payments.
Halliburton and one of its subsidiaries, KBR, agreed to disgorge $177 million to settle charges that KBR bribed Nigerian government officials over a 10-year period in order to obtain construction contracts. KBR also agreed to pay a $402 million fine to settle parallel criminal charges brought by the DoJ. The combined $579 million paid to settle the civil and criminal Foreign Corrupt Practices Act (FCPA) charges represents the largest ever combined FCPA settlement with a US company. This marks the second straight quarter that the SEC has settled an FCPA case for over $100 million. In Q4 2008 the agency settled with Siemens for $350 million, alleging that the company had paid $1.4 billion in bribes to various foreign officials.
E*Trade Capital Markets agreed to pay $34 million to settle SEC charges that it engaged in unlawful proprietary trading on the Chicago Stock Exchange. The SEC alleged that instead of matching customer orders, E*Trade filled customer orders through trades in the firm’s proprietary account. The SEC settled similar charges against 13 other specialist defendants in the first quarter, for a total of $36 million.
Monetary payments were a component of 66 percent of company settlements and 61 percent of settlements with individuals in the first quarter of 2009. Settlement values increased for companies whose settlements included a monetary payment (see Company settlement values). The mean settlement amount was $12.6 million in the first quarter, up from the 2008 average of $8.4 million. The median company settlement amount – the settlement with an equal number of values above and below it – was $1.7 million, up from $1.3 million in 2008. The mean settlement amount for individuals was $0.7 million in the first quarter, a decline from the 2008 mean of $1.1 million. The median settlement amount for individuals was $100,000, as it has been in every year since 2003.
Schapiro announced many new policies in Q1 2009 that have implications for SEC enforcement actions. For example, she has ended the ‘penalty pilot’ program initiated by former chairman Christopher Cox in 2007. Under this program, SEC staff were required to obtain pre-approved settlement ranges from the SEC prior to beginning negotiations with publicly traded companies. The press speculated that this program was intended to reduce settlement amounts. Indeed, when she announced that she would bring the penalty pilot program to an end, Schapiro stated: ‘In speaking to our enforcement staff, I’ve been told that [the penalty pilot program] introduced significant delays into the process of bringing a corporate penalty case; discouraged staff from arguing for a penalty in a case that might deserve a penalty; and sometimes resulted in reductions in the size of penalties imposed.’
Schapiro also announced that she would put new procedures in place to provide for more rapid approval of subpoena power for SEC staff. As explained in NERA’s November 2008 report, ‘SEC settlements: A new era post-Sox’, the first stage of an SEC investigation is typically an informal investigation, in which SEC staff do not have subpoena power but rely on the cooperation of witnesses. Based on their findings in the informal investigation, the staff may request a formal order of investigation from the SEC, which grants subpoena power to designated staff members on the case. Schapiro noted that ‘many formal orders of investigation are made subject to full review at a meeting of all five commissioners, necessitating that they be placed on the calendar sometimes weeks in advance. In investigations that require use of subpoena power … every additional day of delay can be costly.’
In recent testimony before the Senate Banking, Housing and Urban Affairs Committee, Schapiro stated her intention to request that the SEC be granted authority to compensate whistleblowers for providing ‘well-documented evidence of fraudulent activity.’ Such authority would represent an extension of the SEC’s existing authority to offer rewards to sources in insider trading cases.
Also in the first quarter, senators Richard Shelby and Charles Schumer introduced legislation that would
add 100 new SEC Division of Enforcement employees, while President Obama’s fiscal year 2010 budget request for the SEC would represent a 13 percent increase over the agency’s 2008 budget.
While the first quarter of 2009 has brought changes to the SEC, it remains to be seen what the effects will be on SEC settlements, and how long it will take for these effects to be felt.
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