Preliminary SEC Enforcement Statistics Raise More Questions Than They Answer
The SEC announced a portion of its fiscal year Enforcement statistics for last year showing that the Division brought the second highest number of cases ever. During the same period it returned more than $1 billion to harmed investors through Fair Funds. The press release is a preview of the Commission’s Performance and Accountability Report which will be issued next month. While the statistics suggest that the Enforcement program, which is key to the agency fulfilling its statutory mission, is vibrant and operating at a very high level, questions remain concerning its vitality.
Last year, the SEC brought 671 enforcement actions. In contrast, in 2007 there were 636 enforcement actions filed. 2007 was the first time in years the number increased. In 2006 the total had dropped by about 9% compared to the prior year.
Insider trading, market manipulation and FCPA cases were key areas of focus for the Division based on the preliminary statistics released yesterday. Compared to the prior year, the number of insider trading cases increased 25% while the number of market manipulation cases was up 45%. In addition, 15 FCPA cases were brought. While perhaps not a large number standing alone, over the last few years there should be little doubt that the FCPA is a key area of emphasis for both the SEC Enforcement Division and the Department of Justice. Indeed, since January 2006 the SEC has brought 38 FCPA enforcement actions which is more than in all prior years combined since the enactment of the Act in 1977.
Two groups of cases cited in the release may suggest the immediate future direction of the Enforcement program. One group is the 50 on-going investigations related to the subprime crisis. The other is the settlements in the auction rate securities market.
At first glance, the statistics released by the Commission are impressive – more cases, lots of money recovered, complex investigations and news making settlements. There are, however, questions. While the number of enforcement cases increased last year, many of those actions were defaults based on claims that an issuer failed to file its periodic reports. While these cases may be important, they obviously lack the substance of an insider trading case or a financial fraud action.
Likewise, the amount of money distributed under Fair Funds appears impressive. The release does not, however, mention the amount of disgorgement and fines obtained through enforcement actions. In 2007 that amount decreased by 50% compared to 2006. While such statistics are hardly dispositive of the health of the enforcement program, they did raise questions in Congress earlier this year. Chairman Cox was apparently so concerned about those questions that he responded by claiming record amounts at the date of his congressional testimony. Unfortunately his claim was “puffed” as discussed in the May 2, 2008 post.
Similarly, the number of subprime inquiries appears impressive. Mr. Sirri, Director of Trading and Markets, indicated in his recent testimony (discussed on Oct. 16, 2008), however, that the Division of Enforcement is encountering significant difficulties with these inquiries.
Finally, the ARS settlements also appear impressive. At the same time, those settlements appear to have been driven in large measure by the New York Attorney General and his counterparts in other states, not the SEC. The tentative settlements also raise significant questions about their merit. Typically, the settlements are structured so that consumers and other small investors are made whole. While that is an admirable result, small investors in probability only account for only a fraction of the traders in those markets. Institutional investors who conduct the bulk of trading in that market are largely left to fend for themselves. For those investors, the settlements give only the vague and undefined prospect that the settling institution will use its “best efforts” to provide liquidity in the already declared dead ARS market.
Overall, the statistics in the SEC release are interesting. Any analysis of the state and health of the Enforcement Division will have to await the final report, however. For now, the partial statistics released raise more questions about the state of Enforcement than they answer.