SEC Analysis: Enforcement Data Shows SEC Ramping It Up

By Mark Fickes

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Recently, the Securities and Exchange Commission (SEC) announced its enforcement statistics,1 and they are definitely revealing. The biggest point that jumps out are the numbers--the SEC filed a record-breaking 735 enforcement actions for the fiscal year ended September 30, 2011, obtaining $2.8 billion in civil penalties and disgorgement for the year.

The cases spanned a wide spectrum of conduct, but the most notable actions are tied to the global financial crisis. Fifteen separate actions naming 17 defendants, including 16 CEOs, CFOs and senior management, were focused on the economic collapse. Among the more high-profile cases was the action against J.P. Morgan for misleading investors in connection with collateralized debt obligations (CDOs) as the housing market began to collapse, and an action against Wachovia Capital Markets for its conduct related to the sale of CDOs tied to the performance of mortgage-backed securities.

The biggest recovery related to the financial crisis was a $200 million settlement from Morgan Keegan and Co. on charges that it falsely valued subprime mortgage securities.

Of course the mortgage meltdown shared the stage with another big securities story this year--the SEC emphasis on insider trading. For the third consecutive year, there was an increase in insider trading cases with 57 actions filed. One case in particular grabbed the spotlight: The SEC obtaining judgments in 18 actions related to its investigation of Raj Rajaratnam, the founder of Galleon Management. The SEC obtained a record-breaking insider trading penalty of $92.8 million against Rajaratnam, who was convicted and sentenced to 11 years, the longest prison term on an insider trading case.

While making fewer headlines, the SEC also continued to focus on the investment management industry. The agency brought 146 enforcement actions related to investment advisers and investment companies, representing an almost 30% increase over the prior fiscal year. That increase follows on the heels of a 47% increase in the number of the SEC brought against investment advisers in fiscal year 2010 as compared to 2009. One noteworthy case involved AXA Rosenberg Group LLP which paid $217 million to address investor losses and a $25 million civil penalty for concealing an error in the computer code of its quantitative investment model. The SEC has promised to continue its focus on the investment management industry.

The SEC has also maintained its focus on the Foreign Corrupt Practices Act (FCPA). As part of the agency's restructuring, the SEC created a specialty unit to address FCPA violations. For the first time this year, the SEC also separately reported FCPA cases indicating it filed 20 actions. After years of flying under the radar, the FCPA is now receiving serious attention from federal regulators and prosecutors.

The overall numbers only hint at what may come. The Dodd-Frank Act is being implemented and the SEC's whistleblower office is now up and running. It is very likely that in the coming year, we will see a more active SEC, breaking even more enforcement records.

Mark Fickes is a partner at BraunHagey and Borden LLP and a former Senior Trial Counsel at the Securities and Exchange Commission. Mr. Fickes was lead trial counsel on the largest financial fraud case ever brought by the SEC's San Francisco office. Contact: Fickes@braunhagey.com.

End Notes

1 See "SEC Division of Enforcement Releases Its Enforcement Data for 2011", in the SEC/SRO Update in the January 2012 issue of Wall Street Lawyer, (vol. 16, iss. 1) copyright West Services, Inc., a division of Thomson Reuters.