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Prepared by:

Thomas O. Gorman,
Dorsey and Whitney LLP
1801 K St. N.W.
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Gorman.tom@Dorsey.com

 
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    SEC Enforcement Statistics: A Work in Progress?

    The SEC released Enforcement Division statistics for government Fiscal Year 2013 along with a table and chart listing the number of actions filed each year as well as the amount of disgorgement and penalties ordered. The SEC Press Release states also states that in the last fiscal year the program obtained a record $3.4 billion in “monetary sanctions against wrong doers.” That amount is 22% higher than fiscal 2011 when the agency brought a record number of enforcement actions.

    The Release also highlights select actions as well as “forward looking initiatives.” Actions highlighted include:

    Market structure and exchanges: This group of actions includes the proceeding against NASDAQ which resulted a $10 million penalty, the largest against an exchange; and the action against the CBOE which is the first in which a penalty was assessed against an exchange for violations relating to regulatory oversight.

    Gatekeepers: These cases included the administrative proceeding against five PRC based affiliates of accounting firms and cases against trustees and directors for not complying with their obligations.

    Insider trading: Here the Commission highlighted the pending proceeding for failure to supervise against Steven Cohen in a yet to be resolved action.

    Financial Crisis Enforcement Actions: The agency highlighted the fact that it has brought actions against 169 individuals and entities tied to the financial crisis. In those cases 70 CEOs, CFOs or other senior executives were charged.

    Going to trial: The Release strikes a positive note, discussing the deployment of resources. It notes the successful actions against former Goldman Sachs employee Fabrice Tourre and the decision in the OptionsXpress proceeding.

    Whistleblower Tips: Here the agency highlighted the 3,238 tips received and the more than $14 million paid.

    Under the heading of “Forward-Looking Initiatives” the SEC identified four items: 1) The new Financial Reporting and Audit Task Force along with the related Microcap Task Force; 2) The consolidated short selling charges; 3) A claimed “strong pipeline” of 908 new investigations, up 13% from the prior year along with 574 formal orders, up 20% compared to the prior year; and 4) Improved technology.

    Despite the glowing comments in the Release a closer examination of last year raises questions.

    First, it is clear that by any measure the number of enforcement actions filed declined. In the last fiscal year the Release states that 686 cases were filed. This is the lowest total since 2010.

    At the same time, the number of enforcement actions actually brought is difficult to assess since the tables furnished include delinquent filings actions and tag along proceedings barring professions from either the securities business or from appearing before the agency as a professional based on the results secured in a related enforcement action.

    The table furnished by the Commission does specify the number of delinquent filing cases from 2006 forward. When those cases are excluded in the last fiscal year the SEC brought 554 enforcement actions. That is the lowest number since 2006 when 483 actions were filed if delinquent filing cases are excluded.

    Second, the amount of penalties ordered in Commission cases last year was $1.16 billion, the largest amount since fiscal 2005. The reason for the increase is not clear from the Release which records $3.4 billion in “penalties,” a number that includes penalties and disgorgement.

    Third, the claims about whistleblower tips require more detail. According to the Report from the Office of the Whistleblower, the number of tips received in fiscal 2013 was 3,238, a modest increase from the 3,001 in FY 2012. In the last fiscal year “more than $14 million” was paid to whistleblowers as the Release notes. The Report states, however, that a $14 million award — the largest to date — went to one claimant. There is no specification in the Report of other awards last year.

    Finally, there is not doubt that the “SEC continued to “aggressively deploy litigation resources” as noted in the Release. Yet a key part of the new “get tough,” omnipresent strategy of the SEC is to go to trial. But going to trial is only effective if you win. In view of the recent losses in major cases such as Cuban, Stoker and Primary Reserve Fund, and the declining number of actions being brought, it appears that the omnipresent strategy is at best a work in progress.

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