(The news featured below is a selection from the news covered in SEC Today.)

SEC's Enforcement Chief Discusses Implications of Aggressive Penalties

SEC enforcement chief Stephen Cutler said the SEC is in the midst of an evolution, if not a revolution, in thinking about the monetary penalties it imposes in virtually all significant settlements of enforcement actions. In prepared remarks delivered at the April 29 annual Ray Garrett Jr. Corporate and Securities Law Institute in Chicago, Cutler said the trend toward increased penalties raises the question of whether there is any limit and whether large penalties will become so routine that they no longer gain much attention.

Cutler explained that it is now typical for people to focus on the penalty amount whenever the SEC announces the settlement of an enforcement action. He reviewed a sampling of settlement amounts over the past year, including the $2.25 billion penalty against WorldCom, then the largest civil penalty in the SEC's history. It was only in 2002 that the $10 million penalty against Xerox was the largest civil penalty that had been imposed by the SEC in a financial fraud action. Cutler said the evolution in the SEC's penalty regime represents a change from only a decade ago when monetary penalties were seldom imposed.

In the current environment of corporate fraud and Wall Street scandals, Cutler said it would be tempting to conclude that no penalty could be large enough to deter such egregious conduct. However, the staff recognizes that all scandals are not equally bad and attempts to reflect the distinctions as fairly and consistently as possible in the sanctions it seeks. At the same time, he said the staff starts from the presumption that any serious violations of the securities laws should be penalized with a monetary sanction.

Cutler continued, however, that there may be cases in which the facts and circumstances would justify a departure from the penalty presumption. He outlined the core factors that are always considerations in the staff's analysis, starting with the type of violation committed. The staff considers whether the violation involved fraud and if so, the degree of scienter. Fraud is not the bright line for separating penalty cases from nonpenalty cases, he added, as the SEC also has imposed penalties for violations of the nonfraud provisions of the securities laws.

A second core factor the staff considers is the degree of harm caused by the violation, such as the loss to investors. If the violator is a regulated entity, the staff may look at the harm to public confidence and trust in the markets, according to Cutler. The third factor is the extent of the violator's cooperation. A significant cooperative effort may result in a moderate penalty, or even no penalty, Cutler emphasized. Among the other factors the staff may consider is whether the wrongdoer is a recidivist, whether it is a sophisticated party such as an officer, a director or lawyer, and the duration of the misconduct.

The SEC may take into account the size of an entity or the net worth of an individual in determining the size of the penalty recommendation. Cutler said that the SEC's more frequent use of penalties against entities is not a reflection of a lessened commitment to imposing significant penalties against individual wrongdoers. In Cutler's view, the recent increase in penalties is driven by the mutual goals of increased accountability and enhanced deterrence.

Cutler said the SEC takes care not to impose larger penalties merely because a defendant or a respondent might be willing to pay the amount to mitigate market reaction or competitive pressures. The SEC strives to set penalties that reflect the facts of each case, he said, while striving to achieve its goals of fairness, consistency, accountability, efficiency and deterrence.