[ by Howard Haykin ]

In an effort to give its enforcement cases more bite, the SEC is considering aligning punishment more closely with the wrongdoing at issue.  One area in particular is how the Agency can more effectively deter repeat offenders.

Of all the criticisms leveled at the SEC, perhaps the most stinging one is the Commission's failure to penalize or punish wrongdoers for breaking securities laws a second and third time around.  All SEC settlements include a broad ban on wrongdoers from breaking securities law again.  Yet, when a large firm, say, repeatedly allows criminal elements to launder money to through its facilities, sanctions rarely take into consideration such prior violations.

How Customized Injunctions Can be More Effective.   Critics of the SEC complain that typical broad prohibitions are ineffective and not well enforced.  However, customized injunctions, such as barring an individual from being a company officer or director, could be a more precise tool that is more readily enforceable.  In the past year, SEC lawyers have slowly started seeking injunctions that bar defendants from specific types of conduct, even if that conduct is itself legal.

The new push comes as former top federal prosecutor Mary Jo White, the SEC Chairman nominee, advances through the confirmation process.  She has talked about instituting a "bold and unrelenting" enforcement program to the agency. 

One positive factor acting in the Commission's favor is the passage of time.  For the past 5 years, the attention of securities regulators has been largely consumed by financial crisis cases.  As the number of such cases decline, regulators will be focusing on cases involving modern day issues, such as market structure and high frequency trading.  This will enable them to explore using tools they haven't had much use of in the past.

e.g. -  in September, the SEC settled an older case against a salesman who allegedly hosted misleading investing classes.  In settling the case, the SEC convinced a federal court to bar the defendant from receiving compensation for developing, presenting, or marketing investment classes.

e.g. -  in May, when the SEC filed its corruption case against former Detroit mayor Kwame Kilpatrick and other top city officials, it sought to bar them from participating in any decisions involving investments in securities by public pensions.  Kilpatrick was convicted on Monday on 2 dozen federal charges of corruption and bribery, while the SEC's case remains pending.

Application to Cases Against Larger Institutions.   Former SEC lawyers said the model could potentially apply to cases against larger institutions - such as a company that misstated earnings could face an injunction barring them from ever misstating earnings in the future - a scarier prospect than a generic ban on violating the securities laws.  Yet, it's unclear how successful the SEC will be in pursuing such bans - particularly when faced with a strong defense team. 

Daniel Nathan, now in private practice at Morrison & Foerster, asks "What is the limiting principle?"  He answers by saying:  "For a conduct-based injunction, when do you do it, and when not?  It's very hard to draw the line."  And, when it comes to insider trading cases, Mr. Nathan says it would be difficult to tailor a punishment that would bar an individual from trading, or bar a tipper from speaking to certain individuals.

Temporary Enforcement Chief George Canellos, however, likened the strategy to harassment cases, where courts not only impose bars on future harassment, but also limit the ability for the defendant to even approach a victim - with the courts "draw[ing] a bright and easily enforceable line,..."  This eliminates the possibility of future debate in court about whether approaching or talking to the victim constitutes harassment.
 

For further details, go to:   [ Reuters, 3/12/13 ].