News

In Light of Citigroup Decision, SEC Chair Requests Authority to Impose Larger Financial Penalties

News Brief
November 29, 2011

By Cydney Posner

By now, you've certainly read or heard about the decision by Judge Rakoff to reject the SEC's proposed $285 million settlement with Citigroup on the basis that the proposed Consent Judgment was "neither fair, nor reasonable, nor adequate, nor in the public interest." The Judge also lambasted the SEC for its "long-standing policy - hallowed by history, but not by reason - of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations, [which] deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact." In addition to his disapproval of the modest penalty and inadequate negligence charge, Judge Rakoff also implicitly criticized the futility of imposing "the kind of injunctive relief that Citigroup (a recidivist) knew that the S.E.C. had not sought to enforce against any financial institution for at least the last 10 years." (See my article of 11/9/11.)

If you haven't yet caught up, here are some relevant articles:

Here are a couple of editorials on the topic:

And, after the 80+ page dissertations regularly dispensed by Delaware courts, Judge Rakoff's clear and direct 15-pager-- with big type – is kind of a luxury to read.

The Wall Street Journal reports that, in the wake of the Citigroup decision, SEC Chair Mary Schapiro has sent a letter to Senators Jack Reed (D., R.I.) and Mike Crapo (R., Idaho), suggesting that the SEC is hamstrung by current law from imposing adequate penalties for fraud and unable to adequately take into account the seriousness or impact of the misconduct.  As a result, the SEC is seeking legislation that would authorize higher limits on financial penalties. For civil cases, the WSJ reports that Schapiro is asking for authority to seek penalties equal to three times the pecuniary gain from a fraudulent transaction, in lieu of the current limit of the firm's net profits in the transaction. The letter explains that this change "would allow the commission to address situations where the actual pecuniary gain to the violator is relatively small compared to the nature or magnitude of the wrongdoing." In addition, she proposes to allow the SEC, in both civil cases and administrative proceedings, to calculate penalties based on the amount of investor losses incurred as a result of the misconduct and to impose penalties of up to $1 million per violation for individuals and $10 million for financial firms. (The current limits are $150,000 and $725,000, respectively.) Reportedly, Senator Reed is working on legislation to expand the SEC's authority, which could include enhancing the SEC's ability to sanction companies and individuals with a pattern of repeated violations.

(See this New York Times article, which discusses the recidivist behavior of many financial firms: "A New York Times analysis of enforcement actions during the last 15 years found at least 51 cases in which 19 Wall Street firms had broken antifraud laws they had agreed never to breach.")

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