Rise in SEC Enforcement Expected to Continue This Year

By Pamela J. Bethel

The U.S. Securities and Exchange Commission’s Enforcement Division announced on Nov. 9 that it filed an all-time high 735 actions and collected $2.8 billion in penalties in fiscal year 2011.

These included, the SEC said, 15 separate actions involving wrongdoing related to the financial crisis. Seventeen individuals were named in such cases, including 16 CEOs, CFOs and other senior corporate officers.

In addition, the SEC said, insider trading cases were also on the upswing — with 57 actions filed in FY 2011, a nearly eight percent increase over last year’s total. Particularly notable among them were the 18 judgments that the SEC obtained in cases growing from its investigation of hedge fund manager Raj Rajaratnam, who was recently convicted of multiple counts of insider trading.

We would expect that this number will continue to rise in fiscal year 2012. One of the main reasons for this prediction is the fact that the SEC’s new whistleblower program, mandated under the Dodd-Frank law, went into effect on August 12, 2011.

The whistleblower program requires the SEC to pay whistleblowers anywhere between 10 percent and 30 percent of the money recovered in a case that they helped create, as long as the total government take is $1 million or more. A whistleblower can, of course, be an employee of the company that committed the securities law violation, but the reach of the program is probably broader than that.

Congress apparently found that the best incentive to induce people to go to law enforcement with new and useful information is cold cash.

The SEC has shown a willingness to go after both large companies and small, and this is a very good time for companies to ramp up their compliance programs.

The whistleblower program does not require that a whistleblower first report the alleged wrongdoing through internal corporate channels. A financial services firm would be well advised, therefore, to encourage reporting through those channels, by creating its own incentives. It’s a lot better to know that there is a problem and to try to solve it than to hear about the problem from the SEC, which has received a whistleblower’s complaint.

Scroll to top