Part I: SEC Enforcement Trends and Priorities, 2008

Last year the SEC Enforcement Division brought a record number of cases:

• 1776 investigations;
• 262 civil actions; and
• 394 administrative proceedings.

In these cases the Division obtained $520,000,000 in disgorgement and penalties.

The statistics suggest that the Division was also very successful. These statistics suggest a very successful program. They represent an increase of about 10% over the previous year. This reverses a trend over prior years where the number of cases handled by the division had been declining. The success of the program seems confirmed by the fact that about 92% of these cases either settled or ended in default.

There are signs, however, that the Enforcement program was not as successful as these statistics suggest. For example, the amount of disgorgement and penalties obtained in 2007 was down by 50% over the prior year. While that may result from the fact that there were no huge Enron or similar cases, the decrease has caused enough concern in Congress to spark an investigation.

Another disturbing sign is the results in some court cases. For example:

SEC v., Inc., Civil Action No. 3:05 cv 1747 (D. Conn. Mar. 21 2007). This case was brought so late that the SEC could not seek a penalty because the statute of limitations had expired. Later, the case was dismissed for want of prosecution. The case ended when the defendants agreed to what can only be called a face-saving settlement for the SEC and in which defendants avoid further litigation by avoiding an SEC appeal.

• In each litigated PIPE/hedge fund case where the SEC claimed insider trading and the sale of unregistered securities, the court dismissed the Section 5, sale of unregistered securities claims. In two of the cases the courts criticized the legal theory on which the Section 5 claims were based. These cases will be discussed in detail in a later installment of this series.

SEC v. Jones, No. 07 Civ 7044 (S.D. N.Y. Feb. 26, 2007). The court refused to award a penalty sought by the SEC because the statute of limitations had passed. The court also refused to issue the standard SEC injunction, finding that the case was so old that it would only be punitive and not equitable and was thus also time barred.

SEC v. Todd, Civil Action 03 CV 2230 (S.D. Ca. May 30, 2007). Post trial defense motions were largely granted where the court concluded that the SEC misrepresented key evidence regarding whether the defendant had signed a claimed false filing. Despite an SEC representation that the defendant had singed the filing which the court had relied on in denying earlier defense motions, in fact the defendant not signed the filing and there was no evidence he had anything to do with it.

While every law enforcement agency loses cases, these are particularly disturbing. Bringing stale cases, relying on unsupported securities law theory and misrepresenting facts to the court is inexcusable for any litigant. This is particularly true for an agency charged with administering the federal securities laws and policing the nation’s securities markets. These cases suggest that Enforcement program is troubled.

Next: Enforcement policies