Fraud & The Law

SEC speaks on corporate penalties for federal securities violations


By Juliana Morehead, J.D., CFE

On Jan. 4, 2006, the Securities and Exchange Commission (SEC) released its opinion regarding imposition of civil penalties on publicly traded corporations that engage in federal securities fraud. Traditionally, the SEC hasn't imposed civil penalties exceeding $10 million because of its concern that such large penalties would harm victim investors. However, given the massive securities fraud scandals commencing with Enron and WorldCom, the SEC was forced to reconsider its deterrence means. For example, on July 7, 2003, the SEC obtained a $2.25 billion civil penalty judgment against the former telecommunications giant, WorldCom.

Short history lessonIn 1990, the SEC was given the authority to seek civil penalties in federal securities violations under the Securities Enforcement Remedies and Penny Stock Reform Act. Thereafter, with the enactment of the Sarbanes-Oxley Act of 2002, the SEC became authorized to add civil penalty assets to disgorgement funds established for victim investors (also known as the Fair Funds for Investors provision, Section 308).The SEC holds steadfast to its principle that [C]orporate penalties are an essential part of an aggressive and comprehensive program to enforce the federal securities laws, and that availability of a corporate penalty, as one of the range of remedies, contributes to the Commission's ability to achieve an appropriate level of deterrence through its decision in a particular case.1 

This principle, in conjunction with the SEC's deviance from traditional penalty impositions, required public explanation as to when the SEC will seek financial penalties of publicly traded corporations in violation federal securities laws.

In a unanimous agreement setting forth the guidelines for imposing corporate financial penalties, the SEC presented two primary considerations for determining when it will seek such remedies:

  1. the presence or absence of a direct benefit to the corporation resulting from the violation; and
  2. the degree to which the penalty will recompense or further harm the shareholders.2 

Additionally, the Commission listed the following factors to take into account when making penalty determinations:

  • the need to deter the particular offense;
  • the extent of the injury to innocent parties;
  • whether complicity in the violation is widespread through out the corporation;
  • the level of intent on the part of the perpetrators;
  • the degree of difficulty in detecting the particular type of offense;
  • the presence or lack of remedial steps by the corporation; and
  • the extent of cooperation with the SEC and other law enforcement.

 

 

 


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