Perspectives on Strengthening Enforcement

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Wednesday April 2, 2014 at 9:02 am
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Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the Annual Forum of the Australian Securities and Investments Commission (ASIC), available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Greg [Tanzer, ASIC Commissioner] suggested that I talk about my perspectives on international cooperation in the enforcement context, as well as what we at the SEC are doing to try to make our own enforcement program even more robust and responsive to the issues presented by interconnected and fast moving markets. I am happy to do that. But, before I do, I would like to share a couple of thoughts on the topic of your first session—“Enforcement—does the punishment fit the crime?”

Much of my professional background has been in enforcement and strong enforcement was one of my primary focuses when I became Chair of the SEC almost a year ago and it remains so. Vigorous enforcement of the securities laws in the United States, in Australia and around the world is obviously a critical component of our investor protection mission.

In order for our SEC enforcement program—or any enforcement program—to be effective, the punishment must not only fit the crime, but the actions we bring must also send a strong message of deterrence to other would-be wrongdoers. This is much easier said than done and very hard to measure, but this much is certain—our sanctions must have teeth and we must send a strong public message about our cases. The more serious the misconduct, the more aggressive we should be in seeking monetary penalties, industry bars, court injunctions and other remedies available to us.

Among the challenges we face at the SEC is that, as a civil law enforcement agency, we do not have the authority to arrest and jail wrongdoers. Those tools were part of my arsenal as a prosecutor and we used them to very good ends in securities fraud cases. It has not been atypical in recent years in the United States to see CEOs convicted of securities fraud to be sentenced to 20-plus years in prison. That sends an undeniable message of deterrence. Very often, the civil cases we bring at the SEC also involve egregious frauds that deserve severe sanctions. But we do not have the power to jail at the SEC and our civil penalty authority is not as strong as I would like it to be.

For that reason, I have supported statutory changes to increase the SEC’s maximum civil penalties—specifically, legislation to increase our penalty authority, including to permit the penalty calculation to be based on total investor loss, which in many cases can be much higher than the current statutory maximums or the amount of defendants’ ill-gotten gains. Our current maximum penalties per violation are $160,000 for an individual and $775,000 for companies. [1] In some cases, we can alternatively seek the amount of gross pecuniary gain defendants realize from their wrongdoing. While that number in very significant cases can be quite high, it still frequently falls far short of the amount of investor losses.

To broaden our own enforcement reach, we also leverage our efforts by working in parallel with criminal authorities, like our United States Department of Justice, who do have the power to jail wrongdoers and to obtain higher monetary penalties. We also focus on the use of our own very powerful non-monetary sanctions, such as our authority to bar wrongdoers from the securities industry or from serving as an officer or director of a public company for a period of years, or even permanently. We also have the authority to seek to bar a lawyer or accountant from practicing before the SEC. These very important remedies are not designed to punish, but to protect the public from future harm. They nevertheless have real bite and make the industry sit up and take notice.

So, our philosophy is to use all of the tools in our enforcement arsenal, and make sure our sanctions have teeth so that the punishment comes as close as our authority allows to fit the crime. And when our sanctions are not enough to fit the crime, we work with our prosecution counterparts to leverage the punishments for the most serious white collar fraudsters. We then strive to publicly send the strong messages of deterrence that flow from our cases—through the media, the bully pulpit and in industry and educational conferences where the SEC staff are speakers.

Turning now to the topics that Greg suggested I cover, let me begin on the international front. One of the most important tools in our enforcement arsenal is strong cooperation with our counterparts around the world, which is absolutely critical in today’s global markets.

International Cooperation in Enforcement

Let me begin by going back to 2002 when the International Organization of Securities Commissions, IOSCO, recognized that international activity in the securities and derivatives markets was on the rise and that proper policing of that activity required greater international cooperation among regulatory agencies. To address this challenge, IOSCO created the Multilateral Memorandum of Understanding, the MMOU, which enables regulators around the world to help each other investigate securities fraud and other misconduct in investigations with cross-border elements.

I am glad to say that, in 2002, ASIC and the SEC immediately recognized the importance of the MMOU and were among the first to sign it. Today, there are more than a hundred signatories.

Why is this non-binding “understanding” among more than one hundred countries so important to enforcing our respective securities laws?

As we know all too well, fraud and other misconduct does not stop at borders. The Enforcement Division at the SEC frequently conducts investigations in which witnesses, conduct and potential evidence of wrongdoing are located in jurisdictions outside the United States, but where the investors harmed and the markets impacted are primarily in the United States. So do regulators in all jurisdictions.

Let me give you one quick example. Last fall, we brought a case against a number of defendants, located both in the United States and abroad, charging that they operated a worldwide pyramid scheme and defrauded hundreds of investors in the United States, Canada, Taiwan and other countries in Asia. We charged that the defendants operated the scheme through entities based in Canada, the British Virgin Islands and Hong Kong, and falsely promised exponential, risk-free returns to investors in a venture that purportedly sold Internet-based children’s educational courses, when, in fact, there were no sales.

In investigating the case, we received tremendous assistance under the MMOU from our counterparts in Canada, Hong Kong and Malaysia. We were not only able to obtain evidence necessary to bring the case, but also were able to freeze more than $20 million dollars of investors’ funds from accounts overseas. Without that degree of international cooperation, we could not have brought such a strong enforcement action, and perhaps none at all. [2]

I am sure examples like this resonate with the enforcement staffs at ASIC and other regulatory agencies around the world. Obviously, just having the MMOU available to use is critical, but so is using it as effectively as we can. The SEC, ASIC and many other signatories use the MMOU thousands of times every year. In the SEC’s last fiscal year, for example, we made more than 700 requests for assistance to our fellow regulators, and ourselves responded to more than 500 requests for assistance, the majority of which were made pursuant to the IOSCO MMOU.

The cooperation and assistance that we receive from our counterparts around the world has ranged from advice on international service of process and cross-border discovery practices, to production of bank and brokerage records, internet service provider information, and other critical evidence of wrongdoing.

Last year alone, we were helped by our international partners in bringing important cases against individuals and corporate entities charging a broad range of wrongdoing, including financial reporting and accounting fraud, [3] bribery offenses under our Foreign Corrupt Practices Act, [4] and other misconduct like “pump and dump” market manipulations [5] and Ponzi schemes. [6] International cooperation has also helped us deregister the securities of many companies that failed to comply with our financial reporting and disclosure requirements, including 50 in our last fiscal year alone. [7]

I hope and believe that the assistance we provide to our counterparts around the world pursuant to the MMOU has been every bit as valuable and has contributed to the prosecution of many important cases. When you stop and think about it, more than 100 regulatory agencies around the world have joined forces under the umbrella of the MMOU to help each other in investigations. It is a remarkable model of international cooperation that has dramatically increased investor protection and the safety of our markets. But there is always more that needs to be done.

In today’s world, borders do not contain wrongdoers who defraud investors and manipulate the markets. They will continue to try to arbitrage differences in national regulations to carry out their schemes. They will continue to use banks in multiple jurisdictions to simultaneously target investors in many different countries while using the complexity of their international structure and their geographic distance from their victims and the investigating regulator to keep their identities hidden and their conduct effectively immunized from enforcement.

Technology, for all of its benefits, has made it easier for the fraudsters too. Illicit schemes can be executed from anywhere in the world as long as there is an internet connection. Wrongdoers will continue to use electronic banking, e-trading, sophisticated web portals, and other advanced technologies to exploit all of our markets and prey on all of our investors.

In order to continue to police our global markets effectively, we need to be nimble, to constantly change and adapt, and to use every tool we have as effectively as we can. The IOSCO MMOU is no exception. We must ensure that what may have been international norms and best practices in 2002, do not remain static. We need to make sure that the MMOU enables each of us to get all of the evidence we need, when we need it, in order to investigate and prosecute cross-border offenses to the fullest extent of our laws.

I am glad that IOSCO is considering an enhanced MMOU to broaden the types of information that can be obtained and to streamline the process. [8] I hope to see a stronger new agreement that will expand our investigative reach on the international front.

As has been a positive historic pattern, ASIC and the SEC are ahead of this curve and have already stepped up our level of cooperation. A number of years ago, the SEC and ASIC entered into a new, bilateral arrangement, which went beyond the current IOSCO MMOU.

Under the SEC-ASIC arrangements, for example, we can obtain not only bank, brokerage and beneficial ownership records, but also are able to seek audit work papers, internet service provider records, travel histories, credit card and phone records, and more. As any experienced investigator knows, these types of documents can provide invaluable evidence of wrongdoing. And the arrangements we have together also provide for compelled testimony, which is critically important in any investigation but not mandatory under the current IOSCO MMOU.

We need to continue to raise the bar in international cooperation, through a strong MMOU and strong bilateral arrangements like the one between the SEC and ASIC. We need to ensure that borders do not serve as barriers that prevent us from obtaining the assistance we need for the strongest enforcement programs possible. The investors, who place their trust in us, expect and deserve no less.

The SEC’s Enforcement Program

Now let me turn to a few of the initiatives that we have recently implemented in the SEC’s enforcement program.

Comprehensive and relentless enforcement of our securities laws is a cornerstone of investor protection. It is, and always should be, of the highest priority at the SEC. We have a talented and dedicated staff in our Enforcement Division and they do outstanding work. In our last fiscal year, our Enforcement Division, which includes slightly more than 1,200 lawyers, accountants, analysts and other professionals, brought almost 700 cases and obtained orders for penalties and disgorgements of ill-gotten gains totaling $3.4 billion.

The cases spanned the entire breadth of our securities industry. They included, for example, offenses that contributed to the financial crisis, insider trading, offering frauds, bribery offenses, and offenses by “gatekeepers,” who play a critical role and bear special responsibilities in safeguarding the interests of our investors, including lawyers, accountants and board members.

One of my immediate priorities when I became Chair last year was to look for ways to make our enforcement program even more robust. The strength of our Enforcement Division is understood by our markets, but I want our team to send an even stronger message of deterrence, which is ultimately the most effective enforcement strategy.

Admissions

One of the first things we did was to modify the SEC’s long standing protocol of permitting most defendants to settle cases without admitting or denying liability or the facts that would establish their liability. In Australia, I know that when ASIC agrees to settle a civil regulatory action, it, like the SEC, has the discretion to require admissions by the defendant as a condition of the settlement but is not required to do so.

For many years, the SEC and nearly all other civil law enforcement agencies in the United States, have very effectively made use of what is called a no admit/no deny settlement protocol. It allows us to achieve more and quicker settlements. When we settle enforcement cases without requiring an admission of wrongdoing, we nevertheless most often get the very same penalties through the settlement as we would if we brought the matter to court and won. This, in turn, speeds up the disgorgement of the defendants’ ill-gotten gains, the collection of penalties, and the faster return of funds to wronged investors. No admit/no deny settlements also avoid the delay and uncertainty inherent in civil trials in the United States, and permits us to use our finite resources more efficiently.

But, as a result of my many years as United States Attorney, when I prosecuted terrorist organizations, organized crime, securities fraud and many others kinds of criminal cases, I understand how powerful a public admission of what defendants did and how they broke the law can be to our system of justice. So, after studying the issue and consulting with my fellow Commissioners, I decided to require admissions to settle those cases in which we saw a greater need for public accountability—for wrongdoers to publicly admit what they did. These types of cases involve particularly egregious conduct, a large number of harmed investors, significant risk to investors or the markets, obstruction of our investigations, or where the defendant presents a particular future threat to investors or the markets.

We have since settled a number of cases using this new protocol. We have required, for example, a hedge fund manager to admit to misuse of more than one hundred million dollars of fund assets to pay personal taxes, [9] and required a global financial institution to admit to massive control failures that resulted in material financial misstatements. [10]

Admissions in these types of cases, coupled with the significant sanctions that came along with them, not only provide a greater degree of public accountability, but also boost investors’ confidence in our enforcement program and our markets, and should serve as a strong deterrent to all who are tempted to follow in the defendants’ footsteps.

Gatekeepers

We have also sought to enlarge our enforcement footprint with a renewed focus on “gatekeepers.” We use that term to describe the attorneys, accountants, auditors, fund directors and other board members and professionals who play a critical role in the securities industry and share the responsibility with regulators to protect investors. When they fail to perform their duties and responsibilities, the risk of investor harm from fraud, control failures and other misconduct goes up significantly.

We have brought a number of cases against gatekeepers, including charging fund directors with failing to exercise their fiduciary duty to ensure proper valuation of assets [11] and charging auditors with failing to act on red flags in financial statements. [12] In one of our initiatives in this area, which we call “Operation Broken Gate,” we brought a number of actions against auditors alleging that they failed to carry out their duties and responsibilities consistent with their professional obligations and, as a result, put investors at risk due to the possibility of undetected fraud or other financial misstatements. [13]

We will continue our focus on pursuing these cases to ensure that gatekeepers understand their special duties and responsibilities, and that they will be held accountable if they do not safeguard the interests of investors as they are obligated by law to do.

Prosecuting Smaller Violations

Over the past year, the SEC has brought a number of very significant actions that were widely reported in the media. And the deterrence message from the severe penalties imposed in those cases hopefully comes through loud and clear. But, at the same time, we have not lost sight of the smaller compliance related violations because prosecution of those offenses can also have an importance deterrent effect.

When I was the United States Attorney, I understood that when small or what some would consider relatively minor crimes are not addressed, or worse, tolerated in a community, it fosters an attitude that allows more serious crimes to occur. We have taken the same approach at the SEC. We are trying to prevent smaller securities violations from becoming more serious ones, and trying to stop individuals who are prepared to commit minor violations from moving on to bigger ones. We are pursuing these smaller infractions through streamlined investigations and often bring a number of cases at the same time to strengthen our impact.

This past year, for example, we brought actions against nearly two dozen firms charging them with violating an anti-manipulation rule that prohibits firms from improperly participating in public offerings of stocks soon after selling short those same stocks. In that case, we obtained disgorgement of the defendants’ profits, which ranged from as low as $4,000 to more than $2.5 million. We also imposed penalties beginning at $65,000 for the smallest violations, and up to a quarter of a million dollars for the largest violations. [14]

Obviously, we will continue to aggressively prosecute the big and more complex violations, but we want every investor—from large, sophisticated institutional ones to small retail ones investing to educate their children and fund their retirement—to know that our enforcement program is like the police officer who protects the entire neighborhood. While enforcement is only one tool we have as regulators to influence behavior, we want every would-be wrongdoer to know that no institution is too big to be held accountable and no violation is too small to ignore.

Conclusion

We must all be—in fact and appearance—strong enforcers of all of our securities laws. If we are not, the punishment will not begin to match the wrongdoing in our global markets. It is up to each of us to do everything we can to be sure that the punishment does indeed fit the crime of financial fraud. And we need to help each other in every way possible to achieve strong global enforcement. The “real people”—the investors in our capital markets—deserve no less.

Endnotes:

[1] See 17 CFR Part 201; effective March 2013 (http://www.sec.gov/rules/final/2013/33-9387.pdf); 17 CFR. § 201.1005; 17 CFR Part 201, Subpt. E, Tbl. V.
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[2] See Press Release No. 2013-223, SEC Halts $20 Million Pyramid Scheme Targeting Asian-American Community (Oct. 17, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539880547.
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[3] See Press Release No. 2013-187, JPMorgan Chase Agrees to Pay $200 Million and Admits Wrongdoing to Settle SEC Charges (Sep. 19, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539819965.
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[4] See Press Release No. 2013-94, SEC Charges Total S.A. for Illegal Payments to Iranian Official (May 29, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171575006.
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[5] See Litigation Release No. 2013-228924, SEC Charges Detroit Area Man and His Company with Conducting a Pump and Dump Scheme (Dec. 10, 2013), available at http://www.sec.gov/litigation/litreleases/2013/lr22892.htm.
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[6] See Litigation Release No. 2013-22832, SEC Obtains Asset Freeze and Other Emergency Relief in Ponzi Scheme Targeting Investors in Japan (Oct. 3, 2013), available at http://www.sec.gov/litigation/litreleases/2013/lr22832.htm.
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[7] See Press Release No. 2013-115, SEC Charges China-Based Company and CEO in Latest Cross-Border Working Group Case (Jun. 20, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171605909.
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[8] http://www.iosco.org/library/resolutions/pdf/IOSCORES50.pdf.
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[9] See Press Release No. 2013-159, Philip Falcone and Harbinger Capital Agree to Settlement (Aug. 19, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539780222.
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[10] See Press Release No. 2013-187, JPMorgan Chase Agrees to Pay $200 Million and Admits Wrongdoing to Settle SEC Charges (Sep. 19, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539819965.
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[11] See Press Release No. 2013-111, Former Mutual Fund Directors Agree to Settle Claims That They failed to Properly Oversee Asset Valuation (Jun. 13, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171574878.
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[12] See Press Release No. 2013-238, SEC Charges New York-Based Audit Firm and Four Accountants for Failures in Audits of China-Based Companies (Nov. 7, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540289271; Press Release No. 2013-205, SEC Charges New Jersey-Based Accounting Firm and Founding Partner for Failed Audits of China-Based Company (Sep. 30, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539849819.
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[13] See Press Release 2013-207, SEC Charges Three Auditors in Continuing Crackdown on Violations or Failures By Gatekeepers (Sep. 30, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539850572.
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[14] See Press Release No. 2013-182, SEC Charges 23 Firms With Short Selling Violations in Crackdown on Potential Manipulation in Advance of Stock Offerings (Sep. 17, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539804376.
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  1. Thank you Mrs White for your paper which help us to do prevention and make strong compliance actions.

    Great for real people to know that they are the center of interest.
    Gatekeepers involved, small companies concerned, and fraud prevention at the top of CEO desk : we share these values of transparency and responsability to develop in a safer global economy.

    Marc D. HEITZ

    Comment by Marc D. HEITZ — April 19, 2014 @ 8:47 am

 

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