In the fallout of the 2007-2008 financial crisis, the Securities and Exchange Commission has been attacked for the size of penalties paid by the industry in settlements with the regulator. Recently, a judge in the Eastern District of New York, Frederic Block, decried the statutory limitation of SEC penalties,1 and Professor John Coffee advocated a substantial increase in the amount of SEC penalties.2 Historically, SEC penalties are relatively recent, and for much of the 1990s posed issues for the SEC, because the potentially criminal nature of the remedy (under a since overruled Supreme Court case) gave rise to a possible double-jeopardy defense in parallel criminal proceedings. Now, with SEC penalties higher than everdespite the public clamor for even higher penaltiesa decision by the Supreme Court last term, Southern Union v. United States,3 again raises the specter for the SEC that when the SEC seeks penalties in “civil” actions, defendants might deserve the constitutional protections afforded criminal defendants.
SEC Penalties
The SEC was first able to seek penalties in cases not involving insider trading in 1990, with the enactment of the Securities Enforcement Remedies and Penny Stock Reform Act or the Remedies Act. Before that, the only monetary sanction available to the SEC in a case not involving insider trading was the equitable remedy of “disgorgement,”4 i.e., recovery of a defendant’s unlawful gains. Since 1990, penalties against companies in SEC settled actions have soared, beginning with the $10 million payment by Xerox in 2002. The trend for massive penalties accelerated in the first decade of the 21st century, with a slew of broker-dealers paying more than $1 billion to settle cases alleging conflicts of interest in their research, and mutual funds and advisers paying tens, or even hundreds, of millions to settle market-timing cases.
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