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Panel Discusses Evolution of SEC Enforcement Remedies

The SEC Historical Society yesterday hosted a panel discussion on enforcement remedies featuring current SEC enforcement director Linda Thomsen, former enforcement director William McLucas, Mary Schapiro from the NASD, and Ralph Ferrara with LeBoeuf Lamb Greene & MacRae LLP. The discussion was moderated by Theodore Levine with Wachtell Lipton Rosen & Katz.

McLucas reviewed the evolution of enforcement remedies available to the SEC. He noted that, for the majority of the SEC's existence, civil injunctive relief was the only relief. These "obey the law" injunctions were an effective remedy, he said. In 1984, the SEC for the first time gained the authority to levy statutory penalties for insider trading. This too was extraordinarily effective, according to McLucas. At that time, insider trading was viewed as the worst conduct in the marketplace.

McLucas said that the savings and loan scandals colored Richard Breeden's view, given the weak authority of the banking regulators. He put together a record to support the expansion of the SEC's authority to provide for additional penalties, which resulted in the 1990 Remedies Act. McLucas noted that the Act was passed without much controversy or objection and it changed the landscape. The penalties authority has evolved gradually with this new arsenal, but McLucas said the most stunning development is that penalty powers are now being used in a way that was not imagined. The world changed dramatically after Enron and financial penalties are now the preferred vehicle of punishment.

Ferrara pointed out that today, every agency is out for a scalp so companies might as well fight the charges. Thomsen said that all of the remedies have multiple purposes, and they always have. There is a punishment element, a protection mechanism and a prevention element which includes deterrence. Punishment is part of being preventive, she said, which includes being forward-looking.

Schapiro said she was shocked when she came to the SEC in 1988 to discover that it had no civil penalties. She came from the CFTC, a much smaller agency, which always had civil penalties. "To go forth and sin no more" is not an adequate response, in her view. The SEC's remedies have to have more sting.

McLucas said there has to be a barometer of fairness in using the penalty authority. What seems to drive regulators is a competition over who gets there first, who gets the biggest chunk, he said. He agreed that a law enforcement agency could not be run today without this authority, but feels that how the penalty amount gets set is sometimes affected by things other than the right number.

Levine asked whether every violation warrants a penalty. There appears to be a penalty attached to every case, he said. Thomsen replied that penalties are not imposed in every case. She said the controversial issue is penalties against companies, but in her review of hundreds of cases involving financial fraud and financial reporting, only about 20 involved penalties against companies.

Thomsen also pointed to the Fair Funds provisions of the Sarbanes-Oxley Act that now permit the penalties to go back to the shareholders. The SEC has to consider whether the shareholders were victimized in the fraud or whether they benefitted when choosing to impose a penalty against a company, she said. Ferrara said the legislative history suggested that civil penalties should be used sparingly, but the Fair Funds provision has a bias toward civil penalties since there is no distribution of disgorged funds.

Levine noted that about 90% of the SEC's cases are settled. Ferrara said that if a company chooses to litigate and loses, the penalty goes up, even if it puts forth a good faith honest defense. You shouldn't have to pay a premium for defending a company, he said. Thomsen acknowledged that the SEC wants to reward people who step up to the plate and settle a matter. The SEC has a range of penalties that it may impose based on how people respond to the enforcement action.

McLucas said that the way lawyers practice in this environment has changed dramatically given that the defense of a client can be turned around and be seen as not being cooperative. A lot of attorneys are worried that their zealous advocacy can be turned against their client, he said.

The panelists also discussed the use of officer and director bars. Thomsen said the SEC's decision to impose a bar rests on the simple proposition that an officer or director who engaged in fraud ought not to be put in the same position again. As to whether individuals rather than enterprises should be held accountable for violations, Thomsen said the commissioners are unanimous in the view that individuals should be held accountable for terrible conduct. The more egregious the violation, the more likely the staff is to look for the individual involved, she said.