Should the SEC be a collection agency for defrauded investors?

Business Lawyer

Volumn 63, Issue 2, 2008, Pages 317-346

  Black, Barbara ^a,b  

^a Department of Law ^*

^b UNIVERSITY OF CINCINNATI   (United States)

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EID: 44049102990     PISSN: 00076899     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (325)

1. The SEC describes its mission as threefold: "[t]o protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation."
2. See U.S. Securities and Exchange Commission, About the SEC, What We Do, http://www.sec.gov/about/whatwedo.shtml (last visited Jan. 22, 2008);
3. U.S. SEC. & EXCH. COMM'N, 2004-2009 STRATEGIC PUN 4 (2004) [hereinafter "STRATEGIC PLAN"], available at http://www.sec.gov/about/ secstratplan0409.pdf.
4. The Strategic Plan also sets forth four agency-wide goals: to enforce compliance with federal securities laws, to sustain an effective and flexible regulatory environment, to encourage and promote informed investment decision making, and to maximize the use of SEC resources. Id. at 3.
5. The SEC's identification of its mission is consistent with that of international securities regulators. See INT'L ORG. OF SEC. COMM'NS (IOSCO), OBJECTIVES AND PRINCIPLES OF SECURITIES REGULATION (1998), http://www. riskinstitute.ch/144440.htm (identifying objectives as protecting investors, ensuring that markets are fair, efficient, and transparent, and reducing systemic risk) [hereinafter "IOSCO, OBJECTIVES & PRINCIPLES"].
6. The SEC protects investors in many ways in addition to enforcement. For example, the SEC regulates to improve the quality of markets, market participants, and corporate governance and to improve the quality of information available to investors. See STRATEGIC PLAN, supra note 1, at 3.
7. John D. Ellsworth, Disgorgement in Securities Fraud Actions Brought by the SEC, 1977 DUKE L.J. 641,644 n. 15 ("The Commission attempts to avoid being a collection agency for injured investors (quoting SEC Commissioner Richard B. Smith in 1968)). In the 1960s, Professor Louis Loss criticized the SEC for not seeking restitution as a remedy on behalf of small investors.
8. See id. at 644. After the enactment of the Sarbanes-Oxley Act of 2002 ("SOX"), the SEC continued to emphasize the subsidiary role of compensating investors.
9. See U.S. SEC. & EXCH. COMM'N, REPORT PURSUANT TO SECTION 308(C) OF THE SARBANES OXLEY ACT OF 2002 19-20 (2003) [hereinafter "SECTION 308(C) REPORT"], available at http://www.sec.gov/news/studies/sox308creport.pdf, Shortly after SOX was enacted, however, SEC Chairman Harvey L. Pitt described the agency's "principal goal of taking care of innocent investors and trying to make them whole when they have been defrauded."
10. See Harvey L. Pitt, Chairman, U.S. Sec. & Exch. Comm'n, Remarks Before the U.S. Department of Justice Corporate Fraud Conference (Sept. 26, 2002), www.sec.gov/news/speech/spch585.htm.
11. On the relationship between private and public securities law actions, see IOSCO, OBJECTIVES & PRINCIPLES, supra note 1 (standard 8.3) (stating that "[a]s a general matter, [a securities regulator's] enforcement powers should not compromise private rights of action. Private persons should be able to seek their own remedies."). Professor John Coffee, however, argues that private securities fraud class actions do a poor job of compensating investors and their principal function should be deterrence.
12. See generally John C. Coffee, Jr., Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation, 106 COLUM. L. REV. 1534 (2006).
13. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 308, 116 Stat. 745, 784
14. (codified at 15 U.S.C. § 7246 (Supp. V 2005)) [hereinafter "section 308"].
15. Id.
16. SECTION 308(C) REPORT, supra note 3, at 22 (emphasis added). The SEC, in its 2003 Annual Report, notes the SEC's efforts to increase sanctions and, whenever practical, return the recovered funds to investors.
17. See U.S. SEC. & EXCH. COMM'N, 2003 ANNUAL REPORT 24 (2003) [hereinafter "2003 REPORT"], available at http://www.sec.gov/about/annrep03.shtml. The SEC has reiterated this intention in subsequent annual reports.
18. See U.S. SEC. & EXCH. COMM'N, 2005 PERFORMANCE AND ACCOUNTABILITY REPORT 5 (2005) [hereinafter "2005 PAR"], available at http://www.sec.gov/ about/secpar2005.shtml;
19. U.S. SEC. & EXCH. COMM'N, 2006 PERFORMANCE AND ACCOUNTABILITY REPORT 6 (2006) [hereinafter "2006 PAR"], available at http://www.sec.gov/about/ secpar2006.shtml.
20. See infra Part II.B.3. The SEC has also used section 308 to create Fair Funds in enforcement actions involving market timing and other abuses in mutual funds.
21. See, e.g., In re Evergreen Inv. Mgmt. Co., Exchange Act Release No. 56462, at 14-15 (Sept. 19, 2007) ($28.5 million in disgorgement and $4 million in penalties), available at http://www.sec.gov/ litigation/admin/2007/34-56462.pdf. This Article does not discuss these actions, as these cases, similar to insider trading cases, generally involve identifiable gains to the wrongdoers and do not present the same issues as the financial fraud cases.
22. For example, SEC Chairman Christopher Cox stated: "[i]n 2006, we continued to order record monies to be returned to harmed investors... $50 million in McAfee; $50 million in Tyco; $55 million in Hartford; $153 million in Security Brokerage; $250 million in Bear Stearns; $270 million in Prudential; $350 million in Fannie Mae; and $800 million in AIG.... [D]uring my 80-week tenure with the Commission, we have distributed over a billion dollars to injured investors."
23. Christopher Cox, Chairman, U.S. Sec. & Exch. Comm'n, Opening Remarks to the Practicing Law Institute's SEC Speaks Series (Feb. 9, 2007), http://www.sec.gov/news/speech/spch020907cc.htm.
24. See infra notes 156-58 and accompanying text.
25. 128 S. Ct. 761, 773 (2008).
26. See, e.g., James D. Cox Sr Randall S. Thomas, SEC Enforcement Heuristics; An Empirical Inquiry, 53 DUKE L.J. 737, 742 (2003). Professor Cunningham views the goal more skeptically.
27. See Lawrence A. Cunningham, The Sarbanes-Oxley Yawn: Heavy Rhetoric, Light Reform (and It Just Might Work), 35 CONN. L. REV. 915, 971 n.263 (2003).
28. While other federal agencies have the power to collect damages for private parties who have been injured by the regulated party's misconduct, I have found no other statute that authorizes payment of civil penalties collected by an agency to victims. The Commodities Futures Trading Commission (the "CFTC"), for example, has statutory authority to require commodities brokers to make "restitution to customers of damages proximately caused by [statutory] violations" and to impose sanctions, including civil penalties. See 7 U.S.C. § 9 (2000);
29. Press Release, Commodities Futures Trading Comm'n, CFTC Administrative Law Judge Orders Civil Monetary Penalty of $1.77 Million, Revocation of Registration, Permanent Trading Ban, and Cease and Desist Order Against Michael F. Staryk of Florida (June 11, 1996), http://www.cftc.gov/opa/enf96/opastaryk-a. htm. The penalties are paid to the United States. 17 C.F.R. § 143.1 (2007).
30. See, e.g., infra notes 18, 23-25 and accompanying text.
31. Instead, the IOSCO recognizes in its standards that investors should have access to "a neutral mechanism" (courts or an alternative dispute resolution forum) to seek compensation for their injuries. See IOSCO, OBJECTIVES & PRINCIPLES, supra note 1 (standard 4.2.1).
32. See, e.g., SEC v. Gemstar-TV Guide Int'l, Inc., 401 F.3d 1031, 1037, 1047 (9th Cir.) (noting the deterrent effect of SEC enforcement actions),
33. cert. denied sub nom. Yuen v. SEC, 546 U.S. 933 (2005).
34. For earlier literature discussing the SEC's enforcement remedies, see generally George W Dent, Jr., Ancillary Relief in Federal Securities Law: A Study in Federal Remedies, 67 MINN. L. REV. 865 (1983);
35. Arnold S. Jacobs, Judicial and Administrative Remedies Available to the SEC for Breaches of Rule 10b-5, 53 ST. JOHN'S L. REV. 397 (1979);
36. Ellsworth, supra note 3;
37. James R. Farrand, Ancillary Remedies in SEC Civil Enforcement Suits, 89 HARV. L. REV. 1779 (1976);
38. Arthur F Matthews, Recent Trends in SEC Requested Ancillary Relief in SEC Level Injunction Actions, 31 BUS. LAW. 1323 (1976);
39. James C. Treadway, Jr., SEC Enforcement Techniques: Expanding and Exotic Forms of Ancillary Relief, 32 WASH. & LEE L. REV. 637 (1975).
40. Pub. L No. 101-429, 104 Stat. 931 (codified as amended in scattered sections of 15 U.S.C) [hereinafter "1990 Act"].
41. 446 F.2d 1301, 1307-08 (2d Cir.), cert. denied, 404 U.S. 1005 (1971).
42. 890 F.2d 1215, 1229-32 (D.C. Cir. 1989). The court found that the defendant had profited from its section 13(d) violation because it was able to buy another corporation's stock at prices lower than they would have been had its position in the corporation been disclosed.
43. Id. at 1231.
44. See SEC v. Cavanagh, 445 F.3d 105, 117 (2d Cir. 2006) (stating that the purpose of the disgorgement remedy is to take profits away from violators, not primarily to compensate investors).
45. See Rory C. Flynn, SEC Distribution Plans in Insider Trading Cases, 48 BUS. LAW. 107, 110 (1992). The U.S. Government Accountability Office (formerly the U.S. General Accounting Office) (the "GAO") found in 1994 that the SEC did not maintain aggregate information on the amount of disgorged funds collected from defendants and distributed to investors or to the U.S. Treasury.
46. See U.S. GOV'T ACCOUNTABILITY OFFICE, REPORT TO THE CHAIRMAN, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, COMMITTEE ON ENERGY AND COMMERCE, HOUSE OF REPRESENTATIVES, SECURITIES ENFORCEMENT: IMPROVEMENTS NEEDED IN SEC CONTROLS OVER DISGORGEMENT CASES 3 (Aug. 1994), available at http://archive.gao.gov/t2pbat2/152354.pdf.
47. 1990 Act, supra note 18, §§ 202(a), 203, 104 Stat. at 937-40 (codified at 15 U.S.C §§ 78u-2(e), 78u-3(e) (2000)).
48. See S. REP. NO. 101-337, at 8 (1990) [hereinafter "SENATE REPORT"].
49. 1990 Act, supra note 18, §§ 202(a), 203, 104 Stat. at 937-40
50. (codified at 15 U.S.C. §§ 78u-2(e), 78u-3(e) (2000)).
51. In Basic Inc. v. Levinson, 485 U.S. 224, 241-49 (1988), the U.S. Supreme Court adopted the "fraud-on-the-market" theory and established that secondary traders could sue an issuer without any showing of reliance and thus no semblance of privity with the issuer.
52. While Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342-46 (2005), and its requirement of loss causation established that simply overpaying for securities did not establish a Rule 10b-5 claim, the opinion does not detract from the central point that the focus is on the injury to secondary traders and there is no requirement of gain to the corporation.
53. For recent examples, see SEC v. Maxxon, Inc., 465 E3d 1174, 1177 (10th Cir. 2006) (holding that company founder and chief executive officer had to disgorge profits from sale of stock made after fraudulent press release),
54. cert. denied, 127 S. Ct. 2116 (2007);
55. SEC v. Johnson, 174 F App'x 111, 113 (3d Cir. 2006) (finding that corporate insider had to disgorge profits from trading after he fraudulently caused his company to file two false registration statements with the SEC).
56. See, e.g., SEC v. Gemstar-TV Guide Int'l, Inc., 401 F.3d 1031, 1037, 1047 (9th Cir.)
57. (requiring corporate insiders to disgorge bonuses), cert. denied sub nom. Yuen v. SEC, 546 U.S. 933 (2005).
58. See, e.g., SEC v. First Pac. Bancorp, 142 F.3d 1186, 1192-93 (9th Cir. 1998) (holding that where disgorgement resulted from violations of "mini-max" offering conditions, there was no need to distinguish between disgorgement and restitution),
59. cert. denied sub nom. Sands v. SEC, 525 U.S. 1121 (1999).
60. See, e.g., SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1112 (9th Cir. 2006) (appointing receiver and disgorging gains from Ponzi scheme);
61. SEC v. Rose Fund LLC, 156 F App'x 3, 4 (9th Cir. 2005) (finding that no jury trial was required on whether defendant had to disgorge profits).
62. See, e.g., First Pac. Bancorp, 142 F.3d at 1190;
63. SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1104 (2d Cir. 1972) (affirming district court's order requiring disgorgement of proceeds of offering).
64. See, e.g., SEC v. United Energy Partners, Inc., 88 F App'x 744, 745 (5th Cir.),
65. cert. denied sub nom. Quinn v. SEC, 543 U.S. 1034 (2004);
66. SEC v. Carrillo, 325 F.3d 1268, 1270 (11th Cir. 2003);
67. SEC v. Alliance Leasing Corp., 28 E App'x 648, 651 (9th Cir. 2002).
68. In contrast, the purpose of the CFTC's restitution remedy is to compensate the injured customers of the commodities broker, and the total amount of the compensation is limited by requirements of privity and reliance. See supra note 13.
69. Colin S. Diver, The Assessment and Mitigation of Civil Money Penalties by Federal Administrative Agencies, 79 COLUM. L. REV. 1435, 1436 (1979).
70. In contrast, the U.S. Department of Justice ("DOJ") has had the power to seek criminal penalties for securities violations since 1934; the maximum amount for a criminal corporate penalty is currently $25 million.
71. See 15 U.S.C. § 78ff (Supp. V 2005). As discussed at infra notes 97-137 and accompanying text, recent civil corporate penalties have substantially exceeded that amount.
72. Insider Trading Sanctions Act of 1984, Pub. L. No. 98-376, § 2, 98 Stat. 1264, 1264-65
73. (codified as amended at 15 U.S.C. § 78u (2000 & Supp. V 2005)).
74. Insider Trading and Securities Fraud Enforcement Act of 1988, Pub. L. No. 100-704, § 2, 102 Stat. 4677, 4677
75. (codified as amended at 15 U.S.C. § 78u-1 (2000 Sr Supp. V 2005)).
76. SENATE REPORT, supra note 24, at 1.
77. For background on the 1990 Act, see generally James Treadway, Looking for the Perfect Enforcement Remedy: Old Wine in New Bottles or: Have I Seen This Movie Before?, 48 WASH. & LEE L. REV. 859 (1991).
78. 1990 Act, supra note 18, § 202(a), 104 Stat. at 937-38
79. (codified as amended at 15 U.S.C.A. § 78u-2 (West 1998 Sr Supp. 2007)).
80. SENATE REPORT, supra note 24, at 1.
81. Id. at 10.
82. Id.
83. Id. at 11.
84. For an assessment of whether the SEC followed these guidelines in the early years after enactment of the 1990 Act, see Arthur B. Laby & W Hardy Callcott, Patterns of SEC Enforcement Under the 1990 Remedies Act: Civil Money Penalties, 58 ALB. L. REV. 5, 46, 48 (1994) (concluding that the SEC has not followed many of the congressional factors and also noting that the availability of penalties has dramatically changed the SEC's approach to enforcement).
85. See H. REP. NO. 101-616 (1990), at 18-19,
86. as reprinted in 1990 U.S.CC.A.N. 1379, 1384, 1385-86.
87. Diver, supra note 34, at 1456.
88. Id. Alternatively, the payment of a penalty can be seen as compensating the government for the costs it incurs in enforcing the law.
89. Id.
90. Id.
91. 1990 Act, supra note 18, § 201(2), 104 Stat. at 936 (codified as amended at 15 U.S.C. § 78u(d)(3) (2000 & Supp. V 2005)). In addition, the SEC has the power to seek penalties in administrative proceedings against regulated entities and securities industry professionals,
92. see 15 U.S.CA. § 78u-2(a) (West 1998 & Supp. 2007), except that, in some circumstances, it can seek a penalty in a cease and desist proceeding against anyone who was a cause of a violation of 15 U.S.C. section 78j-1 (Supp. V 2005) (audit requirements). There must be a finding that the penalty is in the public interest, taking into account a number of factors.
93. See 15 U.S.C. § 78u-2(c) (2000).
94. 1990 Act, supra note 18, § 201(2), 104 Stat. at 936
95. (codified as amended at 15 U.S.C. § 78u(d)(3)(B)(i) (2000 & Supp. V 2005)).
96. 1990 Act, supra note 18, § 201(2), 104 Stat. at 936 (codified as amended at 15 U.S.C. § 78u(d)(3)(B) (2000 & Supp. V 2005)). Penalties for violations other than insider trading are classified as Tier I, Tier II, and Tier III depending on the severity of the offense (with Tier III providing for the largest penalties): • Tier I: $5,000 for a natural person or $50,000 for any other person or the gross amount of pecuniary gain to such defendant as a result of the violation (whichever is greater). • Tier II: $50,000 for a natural person or $250,000 for any other person or the gross amount of pecuniary gain to the defendant as a result of the violation (whichever is greater) if the violation involved "fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement." • Tier III: $100,000 for a natural person or $500,000 for any other person or the gross amount of pecuniary gain to the defendant as a result of the violation (whichever is greater) if the violation "involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement" and it resulted in "substantial losses or created a significant risk of substantial losses to other persons."
97. Id. (The amounts are adjusted for inflation.)
98. See id.
99. SENATE REPORT, supra note 24, at 13. Professor Diver questioned penalty statutes that tied the amount of the penalty to the severity of the harm "since the harms involved are 'specific' harms that can be, and presumably are, compensated directly."
100. Diver, supra note 34, at 1468.
101. SENATE REPORT, supra note 24, at 17.
102. Id.
103. Id.
104. Id. The legislative history does not elaborate on the significance of shareholder turnover, but presumably the burden of corporate penalties should be borne by the shareholders at the time of the wrongdoing if they were the beneficiaries of the corporation's misconduct.
105. See, e.g., Clawson v. SEC, No. 03-73199, 2005 WL 2174637, at *2 (9th Cir. Sept. 8, 2005) (upholding administrative penalty on corporate insider as well within the SEC's discretion);
106. SEC v. Amazon Natural Treasures, Inc., 132 F App'x 701, 703 (9th Cir.) (holding that district court did not abuse its discretion in imposing third-tier penalty),
107. cert. denied sub nom. Sylver v. SEC, 546 U.S. 1076 (2005).
108. See, e.g., SEC v. Haligiannis, 470 F. Supp. 2d 373, 386 (S.D.N.Y. 2007) (stating that each of the quarterly statements sent to each of the investors is a materially false statement that technically constitutes a separate violation).
109. See also Ralph C Ferrara, Thomas A. Ferrigno Sr David S. Durland, Hardball! The SEC's New Arsenal of Enforcement Weapons, 47 BUS. LAW. 33, 44-46 (1991) (discussing the interpretive issues involving "violation").
110. See, e.g., Haligiannis, 470 F. Supp. 2d at 386 (ordering penalty in the approximate amount of the defendant's ill-gotten gains because of difficulty in calculating total number of violations). Laby and Callcott observe, however, that in cases involving financial reporting violations, the defendant's gain may be impossible to calculate.
111. Laby & Callcott, supra note 43, at 49.
112. See supra notes 26-28 and accompanying text.
113. Section 308, supra note 5. Two other provisions enhance the SEC's power to collect funds for investors. Section 1103 gives the SEC the power, during an investigation, to seek a temporary order requiring a company to escrow "extraordinary payments" to insiders. SOX § 1103, 15 U.S.C. § 78u-3(c)(3) (Supp. V 2005). Section 304 requires reimbursement to the company by insiders of any performance-based bonuses or profits from sales of the company's securities if the company is required to restate its financial statements. SOX § 304, 15 U.S.C § 7243 (Supp. V 2005).
114. SOX § 305(b), 15 U.S.C. § 78u(d)(5) (Supp. V 2005).
115. See SEC v. Cavanagh, 445 F.3d 105, 116-20 (2d Cir. 2006) (holding that district court has ancillary jurisdiction to enter a disgorgement order).
116. See Section 308, supra note 5.
117. The SEC is not required to create a disgorgement fund. See Official Comm. of Unsecured Creditors of Worldcom, Inc. v. SEC, 467 F.3d 73, 82 (2d Cir. 2006).
118. In instances where distribution would not be an efficient use of resources, the SEC has remitted both the disgorged amount and the penalty to the U.S. Treasury. SECTION 308(C) REPORT, supra note 3, at 14. However, one district court reviewed the SEC's decision not to establish a fund under its general equitable powers to ensure that a plan was "fair and reasonable" and declined to approve disbursement of funds to the U.S. Treasury without a better estimate of the expense and difficulty involved in compensating injured investors.
119. See SEC v. Hoberg, No. 03-04135 HRL, slip op. at 3 (N.D. Cal. Jan. 07, 2007) (on file with The Business Lawyer).
120. Section 308 also authorizes the SEC to accept and administer gifts for a disgorgement fund. SOX § 308(b), 15 U.S.C. § 7246(b) (Supp. V 2005). A church that received a $2.3 million donation from a man later charged in an investment scam gave that amount to a Fair Fund set up for victims of the fraud. Business Briefing, WASH. POST, Mar. 18, 2006, at D2.
121. H.R. 3763, 107th Cong. § 13 (2002),
122. reprinted In JOHN T. BOSTELMAN, THE SARBANES-OXLEY DESKBOOK app. J (2006) [hereinafter "DESKBOOK"].
123. Richard A. Oppel, Jr., Corporate Conduct: The Overview; Negotiators Agree on Broad Changes in Business Laws, N.Y. TIMES, July 25, 2002, at A1, available at http://select.nytimes.com/gst/abstract.html?res= F50A1FFB3B5C0C768EDDAE0894DA404482.
124. BOSTELMAN, DESKBOOK, supra note 66, at §2:6.3.
125. As of February 2008, although there was $440 million in the Fair Fund for Enron investors, distributions had not yet begun. See Enron Victim Trust, http://www.enronvictimtrust.com (last visited Feb. 1, 2008).
126. Throughout 2001, prior to public disclosure of Enron's financial problems, Enron chief executive officer Kenneth Lay reportedly sold substantial amounts of his Enron stock. In contrast, after public disclosure of Enron's problems in the latter part of 2001 and the company's collapse, Enron employees were prohibited from selling their Enron shares in their 401(k) plans because of a change in plan administrator. Enron employees participating in the plans reportedly had an average of 62% of their plan balances invested in Enron stock. See BOSTELMAN, DESKBOOK, supra note 66, at § 2:2.2.
127. As of December 31, 2000, Enron had nearly 13% of all its common shares outstanding under stock option plans that apparently had no restrictions on the subsequent resale of the shares. See JOHN C. COFFEE, JR., GATEKEEPERS: THE PROFESSIONS AND CORPORATE GOVERNANCE 24 (2006).
128. See SEC v. Fischbach Corp., 133 F.3d 170, 176 (2d Cir. 1997) (agreeing with SEC that amount disgorged by officers who looted a corporation should be paid to the U.S. Treasury and not to the corporation because the current owners purchased the corporation at a price reflecting the fraud).
129. SEC Director of Enforcement Stephen M. Cutler referred to this limitation as "technical." See It's Only Fair: Returning Money to Defrauded Investors: Hearing Before the Subcomm. on Capital Markets, Insurance, and Government Sponsored Enterprises of the H. Comm. on Financial Services, 108th Cong. 7 (2003) (statement of Stephen M. Cutler, SEC Director of Enforcement), available at http://www.sec.gov/news/testimony/022603tssmc. htm.
130. SECTION 308(C) REPORT, supra note 3, at 33. This former alternative was included in the Securities Fraud Deterrence and Investor Restitution Act of 2004, H.R. 475(1), 108th Cong. § 8(a) (2004), available at 2004 WL 934533, which Congress did not enact.
131. In addition, the SEC can bring administrative proceedings against broker dealers, associated persons, and regulated entities, See 15 U.S.C.A. § 78u-2 (West 1998 & Supp. 2007). The number of proceedings for each fiscal year is as follows (numbers in parentheses show civil injunction actions first, administrative proceedings second): FY03-636 (271,365); FY04-639 (264, 375); FY05-629 (335, 294); FY06-574 (218, 356); FY07-656 (262, 394). The numbers are from the SEC's Annual Reports, Performance and Accountability Reports ("PARs"), and Select SEC and Market Data for the applicable years,
132. See U.S. Securities and Exchange Commission, About the SEC, http://www.sec.gov/about.shtml (last visited Jan. 24, 2008).
133. Disgorgement amounts by fiscal year: $900 million (FY03); $1.9 billion (FY04); $1.6 billion (FY05); $2.3 billion (FY06); $1.093 billion (FY07). Penalties: $1.1 billion (FY03); $1.2 billion (FY04); $1.5 billion (FY05); $975 million (FY06); $507 million (FY07).
134. Id.
135. In each Annual Report or PAR, the SEC highlights certain cases as significant or key cases or major accomplishments. Although it does not set forth its criteria for selecting these cases, the SEC appears to include high-profile cases in terms of publicity and monetary relief. See id.
136. Enron and Xerox were identified in the 2003 Annual Report, 2003 REPORT, supra note 7, at 16;
137. Computer Associates and Lucent Technologies in the 2004 Performance and Accountability Report, U.S. SEC. St EXCH. COMM'N, 2004 PERFORMANCE AND ACCOUNTABILITY REPORT 6 (2004) [hereinafter "2004 PAR"], available at http://www.sec.gov/about/secpar.shtml;
138. Qwest Communications, Time Warner, and Adelphia in the 2005 PAR, supra note 7, at 7-8;
139. McAfee, AIG, Fannie Mae, and Tyco in the 2006 PAR, supra note 7, at 8-9;
140. and Mercury Interactive, ConAgra, and Cardinal Health in the 2007 Performance and Accountability Report, U.S. SEC. & EXCH. COMM'N, 2007 PERFORMANCE AND ACCOUNTABILITY REPORT 6 (2007) [hereinafter "2007 PAR"], available at http://www.sec.gov/about/secpar2007.shtml.
141. The self-regulatory organizations are principally the exchanges on which stock is traded.
142. See Deborah Solomon, For Wronged Investors, It's Payback Time - The SEC Begins Doling Out Funds from Settlement Pools, but the Wait Can Be Long, WALL ST. J., July 7, 2005, at D1 (reporting that the SEC pairs Fair Funds with related class action settlements whenever possible to save time and money).
143. See, e.g., SEC Charges J.P. Morgan Chase in Connection with Enron's Accounting Fraud, Litigation Release No. 18252 (July 28, 2003) (noting that the firm paid a total of $135 million in disgorgement, penalties, and interest in connection with Enron-related misconduct), available at http://www.sec.gov/litigation/litreleases/lr18252.htm;
144. In re Citigroup, Inc., Exchange Act Release No. 48230 (July 28, 2003) (announcing firm paid $52.750 million in disgorgement and $48.5 million as a penalty for Enron-related misconduct; firm paid $9.750 million in disgorgement and $9 million in penalty for Dynergy-related misconduct);
145. available at http://www.sec.gov/litigation/admin/34-48230.htm; SEC Charges Merrill Lynch, Four Merrill Lynch Executives with Aiding and Abetting Enron Accounting Fraud; Merrill Lynch Simultaneously Settles Charges for Permanent Anti-Fraud Injunction and Payment of $80 Million in Disgorgement, Penalties and Interest, Litigation Release No. 18038 (Mar. 17, 2003) (publicizing that firm paid $37.5 million in disgorgement, $5 million in interest, and $37.5 million as a penalty in connection with Enron-related misconduct), available at http://www.sec.gov/litigation/litreleases/lr18038.htm.
146. See, e.g., KPMG Pays $22 Million To Settle SEC Litigation Relating to Xerox Audits, Litigation Release No. 19191 (Apr. 19, 2005) (announcing that firm paid nearly $10 million in disgorgement, over $2.5 million in interest, and $10 million as a penalty in connection with Xerox audit), available at http://www.sec.gov/litigation/ litreleases/lr19191.htm. However, in the settlement paid by Deloitte St Touche in connection with its audits of Adelphia, none of the $50 million obtained in judicial and administrative proceedings was designated as disgorgement amounts.
147. See In re Deloitte Sr Touche LLP, Litigation Release, No. 19202 (Apr. 26, 2005) (stating that $25 million was paid as a penalty to settle a judicial proceeding and an additional $25 million was paid in a related administrative proceeding), available at http://www.sec.gov/ litigation/admin/34-51606.pdf.
148. Xerox executives paid $22 million in disgorgement, interest, and penalties. See KPMG Pays $22 Million To Settle SEC Litigation Relating to Xerox Audits, Litigation Release No. 19191 (Apr. 19, 2005), available at http://www.sec.gov/litigation/litreleases/lr19191.htm. The SEC brought civil actions against several Healthsouth Corp. executives for penalties, disgorgement, and interest.
149. See SEC Charges William T. Owens and Weston L. Smith in Connection with the Healthsouth Corp. Accounting Fraud; Commission Action Seeks Injunctions, Money Penalties, Officer and Director Bars, Litigation Release No. 18059 (Apr. 1, 2003), available at http://www.sec.gov/litigation/ litreleases/lrl8059. htm;
150. see also SEC v. Owens, Litigation Release No. 19743 (June 28, 2006) (noting the former CFO of Healthsouth Corp. paid approximately $16 million in disgorgement and interest but because of his financial condition no penalty was required), available at http://www.sec.gov/litigation/ litreleases/2006/-lr19743.htm;
151. SEC v. Kumar, Litigation Release No. 18891 (Sept. 22, 2004) (announcing that the SEC brought actions against Computer Associates insiders for disgorgement, interest, and penalties), available at http://www.sec.gov/ litigation/litreleases/lr18891.htm.
152. In the Kumar proceedings, the former Computer Associates chief executive officer did not have to make any payments in the civil action because of his obligation to make restitution payments of $798,600,000 in the criminal proceeding.
153. See Final Judgment Entered Against Defendant Sanjay Kumar, Litigation Release No. 20082 (Apr. 19, 2007), available at http://www.sec.gov/litigation/litreleases/2007/lr20082.htm.
154. See supra notes 26-32 and accompanying text.
155. See supra notes 64-65 and accompanying text.
156. See, e.g., SEC Charges Lucent Technologies Inc. and Ten Defendants for a $1.1 Billion Accounting Fraud; Lucent Will Pay a $25 Million Penalty; Three Individuals Also Settle Securities Fraud Charges, Litigation Release No. 18715 (May 17, 2004), available at http://www.sec.gov/litigation/litreleases/lr18715.htm.
157. In SEC v. McAfee, for example, the SEC alleged in the complaint stock sales by the corporation during the time of the fraud, but the settlement included only a $1 nominal disgorgement amount that allowed the SEC to put the $50 million penalty into a Fair Fund.
158. See Complaint at 20, SEC v. McAfee, Inc., No. 06-009 (PJH) (N.D. Cal. Jan. 4, 2006), available at http://www.sec.gov/litigation/ complaints/comp19520.pdf;
159. SEC Sues McAfee, Inc. for Accounting Fraud, McAfee Agrees To Settle and Pay a $50 Million Penalty, Litigation Release No. 19520 (Jan. 4, 2006), available at http://www.sec.gov/litigation/litreleases/lr19520.htm.
160. The settlements provide that the penalty amounts cannot be offset against any amounts paid in class action settlements. See, e.g., SEC Charges Time Warner with Fraud, Aiding and Abetting Fraud by Others, and Violating a Prior Cease-and-Desist Order; CFO, Controller, and Deputy Controller Charged with Causing Reporting Violations; Time Warner Agrees to $300 Million Penalty, Antifraud Injunction and Order To Comply with Cease-and-Desist Order; Will Restate Its Financial Results and Engage Independent Examiner; CFO, Controller and Deputy Controller Consent to Cease-and-Desist Order, Litigation Release No. 19147 (Mar. 21, 2005) [hereinafter "Time Warner Litigation Release"], available at http://www.sec.gov/litigation/litreleases/lr19147. htm. Pre-SOX case law allowed defendants that disgorged profits in an SEC enforcement action to offset that amount against damages in private litigation when the plaintiffs were seeking disgorgement of profits.
161. See Litton Indus. Inc. v. Lehman Bros. Kuhn Loeb Inc., 734 F. Supp. 1071, 1076 (S.D.N.Y. 1990) (stating that "once ill-gotten gains have been disgorged to the SEC, there remains no unjust enrichment and, therefore, no basis for further disgorgement in a private action"). Courts did not extend that offset to financial fraud actions, however, where the investors' theory of damages was based on the inflated value of their securities.
162. See In re Spear & Jackson Sec. Litig., 399 F. Supp. 2d 1350,1360 (S.D. Fla. 2005) (holding that disgorgement of profits to the SEC and plaintiffs' securities fraud damages are different remedies). One commentator argued that Fair Fund distributions should be taken into account in compensating investors in class actions;
163. see Kenneth M. Lehn, Commentary, Private Insecurities, WALL ST. J., Feb. 15, 2006, at A16, available at http://online.wsj. com/article/SB113996764865374191.html.
164. Stephen M. Cutler, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm'n, Speech by SEC Staff: 24th Annual Ray Garrett Jr. Corporate St Securities Law Institute (Apr. 29, 2004), http://www.sec.gov/news/speech/spch042904smc.htm [hereinafter "Cutler Speech"].
165. Id.
166. See Paul S. Atkins, Comm'r, U.S. Sec. St Exch, Comm'n, Remarks Before the U.S. Chamber Institute for Legal Reform (Feb. 16, 2006), http://www.sec.gov/news/speech/spch021606psa.htm [hereinafter "Atkins Remarks"].
167. See infra notes 97-105 and accompanying text.
168. See Cutler Speech, supra note 89.
169. See, e.g., Alix Nyberg Stuart, Penalty Box: The SEC Is Handing Out Bigger and Bigger Fines for Misdeeds. But Is This the Right Approach?, CFO MAG., Feb. 1, 2006, at 79, available at http://www.cfo.com/ article.cfm/5435460/c_5461573?f=singlepage;
170. see also Richard A. Spehr & Michelle J. Annunziata, The Remedies Act Turns Fifteen: What Is Its Relevance Today?, 1 N.Y.U. J. L. & Bus. 587, 611 (2005) (criticizing the SEC for failure to follow the penalty statute).
171. See infra Part III.
172. See Coffee, supra note 4, at 1556-62.
173. See also Richard A. Booth, The End of the Securities Fraud Class Action as We Know It, 4 BERKELEY BUS. L.J. 1, 3 (2007) (arguing that in diversified portfolios investors will be both winners and losers with respect to investing in corporate securities violators).
174. 273 F. Supp. 2d 431 (S.D.N.Y. 2003). The distribution plan was approved by the district court in Official Comm. of Unsecured Creditors of Worldcom, Inc. v. SEC, No. 02 Civ. 4963(JSR), 2004 WL 1621185 (S.D.N.Y. July 20, 2004),
175. aff'd, 467 F.3d 73 (2d Cir. 2006).
176. Worldcom, Inc., 273 F Supp. 2d at 431.
177. Id. at 434-35.
178. See id. at 431, 433-34.
179. Id. at 431, 434.
180. This was apparently a reference to the penalty statute, 15 U.S.C. § 78u(d)(3) (2000 & Supp. V 2005). See supra notes 50-52 and accompanying text.
181. Worldcom, Inc., 273 F. Supp. 2d at 434.
182. Id. at 431. In the same sentence, the court also referred to the balance sheet's overstatement by more than $75 billion,
183. see id., but that number does not appear to figure in the court's calculation of corporate gain.
184. See supra notes 51-52 and accompanying text.
185. Worldcom had sold debt instruments during the period of the fraud, but there was apparently no attempt to quantify the corporate gain in that sale resulting from the fraud. See SEC v. Worldcom, Inc., First Amended Complaint, Civ. No. 02-CV-4963 (JSR) (S.D.N.Y. Nov. 5, 2002), http://www.sec.gov/litigation/complaints/comp17829.htm.
186. See Official Comm. of Unsecured Creditors of Worldcom, Inc., 467 F.3d at 75.
187. See id. at 82;
188. see also SEC v. Wang, 944 F.2d 80, 85 (2d Cir. 1991) (finding that district court must only satisfy itself that SEC's disgorgement plan is "fair and reasonable").
189. Id. at 83
190. (quoting Wang, 944 F.2d at 88).
191. Id. at 84 (quoting the district court's opinion). The appellate court, in turn, reviews the district court's decision using an "abuse of discretion" standard.
192. See id.
193. See id. at 84-85.
194. For why bankruptcy priorities should be followed in Fair Fund cases, see generally Zack Christensen, Note, The Fair Funds for Investors Provision of Sarbanes-Oxley: Is It Unfair to the Creditors of a Bankrupt Debtor?, 2005 U. ILL. L. REV. 339.
195. The district court that approved the settlement, however, was cognizant of bankruptcy policy: "[w]hat the [SEC] may not do, at least in a case in which the company is in bankruptcy, is determine the size of the penalty primarily on the basis of how much shareholder loss will thereby be recompensed, for this would not only be adverse to the priorities established under the bankruptcy laws but also would run contrary to the primary purposes of S.E.C. fraud penalties themselves." Worldcom, Inc., 273 F. Supp. 2d at 434.
196. See Worldcom Victim Trust, http://www.worldcomvictimtrust.com (last visited Jan. 29, 2008).
197. Id.
198. Time Warner Litigation Release, supra note 88.
199. Id.
200. Id.
201. The inflation of the bottom line was substantially in excess of $300 million. Id. As part of the settlement, Time Warner agreed to reduce its reported online advertising revenues by approximately $500 million in addition to the $190 million already restated.
202. Id. The SEC presumably took into account the fact that Time Warner was a recidivist offender.
203. Time Warner agreed to pay $1 in disgorgement. SECv. Time Warner, Inc., No. 1:05CV00578(GK) (D.D.C. Mar. 21, 2005) (final judgment).
204. In settlement of the securities fraud class action, In re AOL Time Warner, Inc. Sec. & ERISA Litig., No. 02 Civ. 5575 (SKW) (S.D.N.Y. 2002), Time Warner agreed to ask the SEC to distribute the $300 million penalty along with the class settlement, and the SEC agreed to do so.
205. See AOL Time Warner Securities Litigation Settlement 19-20, http://www.aoltimewamersettlement.com/pdf/altw1stip.pdf (last visited Jan. 23, 2008). The relevant time period for the class of purchasers who received Fair Fund distributions was shorter than the damages period in the class action settlement, the ninety-day look-back cap on damages required by 15 U.S.C. section 78u-4(e)(l) (2000) and applied in the class action settlement was not applicable to the Fair Fund distributions, and those who opted out of the class action could file Fair Fund claims.
206. See AOL Time Warner Securities Litigation Settlement, http://www.aoltimewamersettlement.com/pdf/altw1stip.pdf (last visited Jan. 23, 2008). The fund also included $150 million from a DOJ settlement.
207. Id. at 19.
208. Distribution of the fund commenced on July 13, 2007. See AOL Time Warner Securities Litigation Settlement, July 16 Update, http://www. aoltimewarnersettlement.com (last visited Jan. 23, 2008).
209. SEC v. Am. Int'l Group, Inc., Litigation Release No. 19560 (Feb. 9, 2006) [hereinafter "AIG Litigation Release"], available at http://www.sec.gov/litigation/litreleases/lr19560.htm.
210. This was part of a global settlement with the New York Attorney General, the New York Superintendent of Insurance, and the DOJ. Id.
211. Id.
212. Id.
213. Id.
214. See supra notes 26-28 and accompanying text.
215. See infra notes 170-74 and accompanying text.
216. AIG Litigation Release, supra note 120. AIG was also a recidivist.
217. See Complaint at 2-3, SEC v. Am. Int'l Group, Inc., No. 06 Civ. 1000 (S.D.N.Y. Feb. 9, 2006) (providing details about two recently settled SEC actions with AIG that involved substantial penalties and disgorgement), available at http://www.sec.gov/litigation/complaints/comp19560.pdf.
218. Am. Int'l Group, Inc., Annual Report (Form 10-K), at 19 (Mar. 1, 2007), available at http://www.sec.gov/Archives/edgar/data/5272/ 000095012307003026/y27490e10vk.htm.
219. Am. Int'l Group, Inc., Quarterly Report (Form 10-Q), at 15 (Nov. 7, 2007), available at http://www.sec.gov/Archives/edgar/data/5272/ 000095012307015058/y38903e10vg.htm.
220. Fannie Mae To Pay $400 Million Penalty for Accounting Fraud, SEC and OFHEO Settle Action Against Fannie Mae, Litigation Release No. 19710 (May 23, 2006) [hereinafter "Fannie Mae Litigation Release"], available at http://www.sec.gov/litigation/litreleases/2006/lr19710.htm.
221. Id.
222. See supra notes 120-28 and accompanying text.
223. Complaint at 1-2, SEC v. Fed. Nat'l Mortgage Ass'n, No. 1:06CV00959 (RBW) (D.D.C. May 23, 2006), available at http://www.sec.gov/litigation/ complaints/2006/comp19710.pdf.
224. Fannie Mae Litigation Release, supra note 129.
225. Press Release, U.S. Sec. & Exch. Comm'n, SEC Announces Start of $357 Million Fair Fund Distribution Process in Fannie Mae Settlement (Apr. 30, 2007), http://www.sec.gov/news/press/2007/2007-81.htm [hereinafter "Fannie Mae Press Release"].
226. Id. Payments began in October 2007 and will amount to approximately 3.9% of eligible loss amounts.
227. See SEC Fannie Mae Settlement Fund, Recent Settlement Events, http://www.secfanniemaesettlement.com/events.html (last visited Feb. 28, 2007).
228. See infra note 190 and accompanying text.
229. Fannie Mae Press Release, supra note 134.
230. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737-38 (1975) (holding that only a purchaser or seller of securities can bring a private action under Rule 10b-5).
231. In Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., the U.S. Supreme Court established that reliance is an element in all private Rule 10b-5 actions. 128 S. Ct. 761, 769 (2008).
232. See 15 U.S.C. § 78u-4(b)(4) (2000). Loss causation became a substantial obstacle for private plaintiffs after Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342-46 (2005).
233. See Oscar Private Equity Invs. v. Allegiance Telecomm., Inc., 487 F.3d 261, 264 (5th Cir. 2007).
234. After the U.S. Supreme Court held in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 191 (1994), that there was no aiding and abetting liability under Rule 10b-5, Congress amended the Exchange Act to allow the SEC to bring aiding and abetting claims.
235. See Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, § 104, 109 Stat. 737, 757 (codified as amended at 15 U.S.C. § 78t (2000)).
236. No private action can be brought later than the earlier of two years after the discovery of the facts constituting the violation or five years after such violation. 28 U.S.C. § 1658(b) (2000 & Supp. V 2005). There is a five-year statute of limitations when the government seeks enforcement of any civil fine, penalty, or forfeiture. See 28 U.S.C. § 2462 (2000).
237. See also SEC v. Jones, 476 F. Supp. 2d 374, 381 (S.D.N.Y. 2007) (holding that the statute is applicable to "civil penalties and equitable relief that seek[] to punish" but not to equitable relief that "seeks to remedy a past wrong or protect the public from future harm").
238. See supra note 119.
239. See Atkins Remarks, supra note 91 (stating that "[the SEC does] not allow any of the funds from the SEC action[s] to be paid to private lawyers").
240. See supra note 111 and accompanying text.
241. See Ellsworth, supra note 3, at 650.
242. See In re Merrill Lynch & Co., Inc., 273 F. Supp. 2d 351, 358 (S.D.N.Y. 2003) (stating that "[t]he record clearly reveals that plaintiffs were among the high-risk speculators who, knowing full well or being properly chargeable with appreciation of the unjustifiable risks they were undertaking in the extremely volatile and highly untested stocks at issue, now hope to twist the federal securities laws into a scheme of cost-free speculators' insurance"), aff'd sub nom. Lentell v. Merrill Lynch & Co., Inc., 396 F.2d 151 (2d Cir.),
243. cert. denied, 546 U.S. 935 (2005).
244. See Hillary A. Sale, Judging Heuristics, 35 U.C. DAVIS L. REV. 903, 946 (2002) (noting that rhetoric of some judicial opinions suggests disdain for plaintiffs' attorneys).
245. See supra notes 53-56 and accompanying text.
246. The Worldcom distribution plan excluded "holders' claims." See SEC v. Worldcom, Inc., No. 02-CV-4963 (JSR), 2004 WL 1621185, at *1 (S.D.N.Y. July 20, 2004).
247. See SEC v. Worldcom, Inc., Civ. No. 02-CV-4963 (JSR) (S.D.N.Y. July 20,2004) (further order approving distribution plan), available at http://www.worldcomvictimtrust.com/Downloads/DistributionPlan.pdf.
248. 511 U.S. 164 (1994).
249. Id. at 189.
250. See supra note 141.
251. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761, 773 (2008).
252. An illustrative example: "The SEC's broad powers and lengthy record of pursuing wrongdoers and returning funds to investors further belie... the argument that the government is 'ill-equipped' to enforce the securities laws on a large scale.... The FAIR Funds provision's sponsor sought to compensate investors without incurring the high legal fees associated with private class-action litigation...." Brief for the Securities Industry and Financial Markets Association and the Futures Industry Association as Amici Curiae in Support of Respondents at 25-26, Stoneridge Inv Partners, LLC v. Scientific-Atlanta, Inc., No. 128 S. Ct. 761 (2008) (No. 06-43). Similar language is found in the Brief for the Securities Industry and Financial Markets Association (SIFMA) and the Chamber of Commerce of the United States of America (Chamber of Commerce) as Amici Curiae in Support of Petitioners at 11, Tellabs, Inc. v. Makor Issues Sr Rights, Ltd., 432 F.2d 588 (7th Cir. 2006), cert. granted, 75 U.S.L.W. 3349 (U.S.Jan. 5, 2007) (No. 06-484), and in the Brief of the Chamber of Commerce as Amicus Curiae in Support of Petitioner at 27, Merrill Lynch, Pierce, Fenner and Smith, Inc. v. Dabit, 547 U.S. 71 (2006).
253. See Carrie Johnson, Bush Weighs in Against Investors in Fraud Case, WASH. POST, June 13, 2007, at D1.
254. See Press Release, Sec. Indus. & Fin. Mkts. Ass'n, SIFMA Opposes Third-Party Class Action Lawsuits (June 13, 2007), http://www.sifma.org/ news/46297159.shtml.
255. 128 S. Ct. 761, 773 (2008).
256. Professor Coffee sets forth statistics comparing private and SEC actions and recoveries to demonstrate that "private enforcement seems to dwarf public enforcement." Coffee, supra note 4, at 1543.
257. Professors Cox and Thomas said, "[h]ere we have cause to find the obvious: the SEC cannot and does not prosecute all violations and the private suit picks up the slack." Cox & Thomas, supra note 12, at 779.
258. SECTION 308(C) REPORT, supra note 3, at 20.
259. See Cox & Thomas, supra note 12, at 757.
260. See COMMISSION ON THE REGULATION OF U.S. CAPITAL MARKETS IN THE 21ST CENTURY, REPORT AND RECOMMENDATIONS 88-90 (Mar. 2007) [hereinafter "CAPITAL MARKETS REPORT"], available at http://www.uschamber.com/NR/rdonlyres/ eozwwssfrqzdm3hd5siogqhp6h2ngxwdpr77qw2bo gptzvi5weu6mmi4plfq6xic7kjonfpg4q2bpks6ryog5wwh5sc/0703capmarkets_full.pdf. The Commission is an independent, bipartisan committee established by the U.S. Chamber of Commerce. Id. at 1.
261. For the other report, see COMMITTEE ON CAPITAL MARKETS REGULATION, INTERIM REPORT OF THE COMMITTEE ON CAPITAL MARKETS REGULATION 82 (Nov. 30, 2006) [hereinafter "INTERIM CAPITAL MARKETS REPORT"], available at http://www.capmktsreg.org/pdfs/11.30Committee_Interim_ReportREV2.pdf. Established by Secretary of the U.S. Treasury Henry M. Paulson, Jr., the Committee is an independent, bipartisan committee composed of twenty-two corporate and financial leaders.
262. See id. at vii.
263. INTERIM CAPITAL MARKETS REPORT, supra note 163, at 82.
264. Similarly, the Capital Markets Report expresses a need to avoid a potential "doubling" of the costs for each violation and to avoid the "duplicate investor compensation problem," CAPITAL MARKETS REPORT, supra note 163, at 88-89.
265. See also Lehn, supra note 88, at A16.
266. See supra notes 97-105 and accompanying text.
267. See, e.g., SEC v. Risman, 7 F. App'x 30, 31 (2d Cir. 2001) (holding that disgorgement payments made to victims cannot duplicate payments already made in criminal restitution proceedings).
268. See Atkins Remarks, supra note 91.
269. See also Jonathan Peterson, Corporate Fraud Fundon Track, OfficialsSay;$2.6BillionCollectedforInvestors, CHI. TRIB., Sept.28,2004,atC1 (quoting Rep. Oxleysaying,"[w]hen corporate executives make out like bandits, the money ought to go back to the investors, not to trial lawyers");
270. Rep. Richard Baker, The Election and Your 401 (k), NAT'L REV. ONLINE (Nov. 2, 2006), http://article.nationalreview.com/ ?q=YzBmZWRhZmRhOTUyYjUlZGUyMTNkNGU4MTkwZWUlYWI-#moret (contrasting SEC's collections under the Fair Fund provision with "runaway litigation" and criticizing Milberg Weiss);
271. Ted Frank, Opinion, 'Arbitrary and Unfair,' WALL ST. J., May 31, 2007, at A14 (the author, resident fellow at the American Enterprise Institute, says; "[o]ne can help investors without paying billions to the likes of Mr. Lerach").
272. See Coffee, supra note 4, at 1542-43.
273. As expressed by SEC Commissioner Cynthia A. Glassman, "I cannot justify imposing penalties indirectly on shareholders whose investments have already lost value as a result of the fraud. Our use of so-called Fair Funds.., leads to the anomalous result that we have shareholders paying corporate penalties that end up being returned to them through a Fair Fund - minus distribution expenses." See Cynthia A. Glassman, Comm'r, U.S. Sec. & Exch. Comm'n, Speech by SEC Commissioner: SEC in Transition: What We've Done and What's Ahead (June 15, 2005), http://www.sec.gov/news/speech/ spch061505cag.htm.
274. See also Stuart, supra note 94, at 81 (quoting former SEC Commissioner Joseph Grundfest that in some cases "these fines punish the victims twice," particularly if those responsible for the violations have been removed).
275. Press Release, U.S. Sec. & Exch. Comm'n, Statement of the Securities and Exchange Commission Concerning Financial Penalties (Jan. 4, 2006), http://www.sec.gov/news/press/2006-4.htm [hereinafter "SEC Financial Penalties Press Release"].
276. Id.
277. See id.
278. Id.
279. Id. In April 2007, Chairman Cox confirmed that, effective January 2007, SEC enforcement attorneys were required to get pre-approval from the Commission before initiating settlement negotiations that might result in a corporate penalty.
280. See Christopher Cox, Chairman, U.S. Sec. & Exch. Comm'n, Speech by SEC Chairman: Address to the Mutual Fund Directors Forum; Seventh Annual
281. Policy Conference (Apr. 13, 2007), http://www.sec.gov/news/speech/2007/ spch041207cc.htm [hereinafter "Cox Address"].
282. See supra note 44 and accompanying text.
283. See, e.g., AIG Litigation Release, supra note 120.
284. SEC Financial Penalties Press Release, supra note 170 (emphasis added).
285. See Cox Address, supra note 174.
286. Id.
287. Freddie Mac and Four Former Accounting Executives Settle SEC Enforcement Action in Connection with Multi-Billion Dollar Accounting Fraud, Litigation Release No. 20304 (Sept. 27, 2007), available at http://www.sec.gov/litigation/ litreleases/2007/lr20304.htm.
288. See supra notes 97-137 and accompanying text.
289. 2007 PAR, supra note 78, at 15, 18.
290. In 2007, the SEC settled, in addition to Freddie Mac, eight financial fraud cases that included corporate penalties. See MBIA To Pay $50 Million To Settle Securities Fraud Charges for Misuse of Reinsurance Contracts, Litigation Release No. 19982 (Jan. 29, 2007) ($50 million penalty; SEC stated that it elected not to apply SEC's new policy on corporate penalties because the settlement was negotiated before its release), available at http://www.sec.gov/litigation/litreleases/2007/lr19982.htm;
291. SEC Charges ConAgra Foods, Inc. in Financial Fraud and Accounting Case; ConAgra Agrees To Pay $45 Million Penalty To Settle Charges, Litigation Release No. 20206 (July 25, 2007), available at http://www.sec.gov/ litigation/litreleases/2007/lr20206.htm;
292. Nortel Network Pays $35 Million To Settle Financial Fraud Charges, Litigation Release No. 20333 (Oct. 15, 2007) ($35 million penalty; SEC acknowledged the company's "substantial remedial efforts and cooperation," which presumably reduced the penalty), available at http://www.sec.gov/litigation/litreleases/2007/lr20333.htm;
293. SEC Sues Cardinal Health, Inc. for Fraudulent Earnings and Management Revenue Scheme, Litigation Release No. 20212 (July 26, 2007) ($35 million penalty; SEC acknowledged the company's "cooperation," which presumably reduced the penalty), available at http://www.sec.gov/ litigation/litreleases/2007/lr20212. htm;
294. Reinsurer Settles Accounting Fraud Case Involving Sham Reinsurance Transaction, Litigation Release No. 19989 (Feb, 6, 2007) ($15 million penalty; SEC stated that it elected not to apply the new policy because the settlement was negotiated before its release), available at http://www.sec.gov/litigation/litreleases/2007/lr19989.htm;
295. SEC v. Nicor Inc., Litigation Release No. 20060 (Mar. 29, 2007) ($10 million penalty), available at http://www.sec.gov/litigation/ litreleases/2007Ar20060.htm;
296. SEC v. Tenet Healthcare Corp., Litigation Release No. 20067 (Apr. 2, 2007) ($10 million penalty), available at http://www.sec.gov/ litigation/litreleases/2007/lr20067.htm;
297. First BanCorp Settles Financial Fraud Charges with SEC and Agrees To Pay $8.5 Million Penalty, Litigation Release No. 20227 (Aug. 7, 2007) ($8.5 million penalty), available at http://www.sec.gov/ litigation/litreleases/2007/lr20227.htm.184.
298. See id.
299. See supra notes 1-4 and accompanying text.
300. See supra note 9 and accompanying text. Commissioner Cynthia Glassman, in contrast, thought Fair Fund distributions of corporate penalties were "form over substance."
301. See supra note 169.
302. For example, Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, said, "'[w]ith this distribution, the Commission will have distributed over $2 billion in Fair Fund monies since the 2002 passage of the Sarbanes-Oxley Act, demonstrating our continued resolve to return money to injured investors where appropriate.'" Press Release, U.S. Sec. & Exch. Comm'n, SEC Announces $316 Million Fair Fund Distribution to Investors Harmed by Fraud at Time Warner (July 9, 2007), http://www.sec.gov/news/press/ 2007/2007-131.htm;
303. see also Stephen M. Cutler, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm'n, Speech by SEC Staff: Remarks Before the District of Columbia Bar Association (Feb. 11, 2004), http://www.sec.gov/news/speech/spch021104smc. htm.
304. Although Commissioner Atkins has previously spoken approvingly of Fair Fund distributions, see supra note 91, more recently he gave a speech in which he expressed concern that the SEC "may become an extension of the plaintiffs' bar, with similar philosophy and tactics." Paul S. Atkins, Comm'r, U.S. Sec. Sr Exch. Comm'n, Speech by SEC Commissioner: The SEC's Role in Globalization of the Capital Markets (Oct. 16, 2007), http://www.sec.gov/news/ speech/2007/spch101607psa.htm.
305. Specifically, the SEC was to "identify areas where such proceedings may be utilized to efficiently, effectively, and fairly provide restitution for injured investors," section 308, supra note 5, as well as to review and analyze "other methods to more efficiently, effectively, and fairly provide restitution to injured investors, including methods to improve the collection rates for civil penalties and disgorgements," SOX § 308(c)(1)(B), 15 U.S.C. § 7246(c)(1)(B) (Supp. V 2005). The required report was also to "include a discussion of regulatory or legislative actions that are recommended or that may be necessary to address concerns identified in the study." SOX § 308(c)(2), 15 U.S.C. § 7246(c)(2) (Supp. V 2005).
306. See U.S. GEN. ACCOUNTING OFFICE, REPORT TO CONGRESSIONAL REQUESTERS, SEC ENFORCEMENT: MORE ACTIONS NEEDED TO IMPROVE OVERSIGHT OF DISGORGEMENT COLLECTIONS (GAO-02-771) (July 2002), available at http://www.gao.gov/new.items/d02771.pdf.
307. SECTION 308(C) REPORT, supra note 3, at 22-23.
308. Id. at 23-24.
309. It acknowledged the costs involved in creating and administering distribution plans, id. at 23-24, as well as the need to improve collection rates. Id.
310. STRATEGIC PLAN, supra note 1, at 4.
311. Id. at 3.
312. 467 F.3d 73, 83 (2d Cir. 2006).
313. Id.
314. MINORITY STAFF OF THE U.S. SENATE COMM. ON FINANCE AND THE U.S. SENATE COMM. ON THE JUDICIARY, 110TH CONG., THE FIRING OF AN SEC ATTORNEY AND THE INVESTIGATION OF PEQUOT CAPITAL MANAGEMENT 7 (Comm. Print 2007), available at http://www.finance.senate.gov/sitepages/leg/LEG%202007/36960.pdf.
315. Id.
316. Some indication that there is a problem is the fact that enforcement did not meet its 2007 performance measure for the number of first enforcement actions filed within two years of opening an investigation. The reasons given were that there was a higher percentage of complex cases involving issuer reporting and disclosure and significant resources were devoted to the distribution of Fair Funds. 2007 PAR, supra note 78, at 27.
317. 2006 PAR, supra note 7, at 11. "The Division of Enforcement aims to maintain an enforcement presence in each of the areas within its jurisdiction, while concentrating on particular problem areas."
318. Ralph C. Ferrara & Philip S. Khinda, SEC Enforcement Proceedings: Strategic Considerations for when the Agency Comes Calling, 51 ADMIN. L. REV. 1143, 1146 (1999).
319. 2006 PAR, supra note 7, at 6.
320. U.S. GEN. ACCOUNTING OFFICE, TESTIMONY BEFORE THE SUBCOMMITTEE ON OVERSIGHT OF GOVERNMENT MANAGEMENT, RESTRUCTURING AND THE DISTRICT OF COLUMBIA, COMMITTEE ON GOVERNMENTAL AFFAIRS, U.S. SENATE, HUMAN CAPITAL: MAJOR HUMAN CAPITAL CHALLENGES AT SEC AND KEY TRADE AGENCIES (GAO-02-662T) 6 (Apr. 23, 2002), available at http://www.gao.gov/new. items/d02662t.pdf.
321. Professors Cox and Thomas criticize the SEC for not pursuing more large market-capitalization defendants in the pre-Enron era. See Cox St Thomas, supra note 12, at 777-78. In their subsequent paper, they observe that, post-Enron, the SEC shifted its enforcement focus away from firms in financial distress to companies where investors may have suffered larger losses.
322. See James D. Cox & Randall S. Thomas, Public and Private Enforcement of the Securities Laws: Have Things Changed Since Enron?, 80 NOTRE DAME L. REV. 893, 906 (2005).
323. See generally Margaret V Sachs, Materiality and Social Change: The Case for Replacing "The Reasonable Investor" with "The Least Sophisticated Investor" in Inefficient Markets, 81 TUL. L. REV. 473 (2006).
324. Professor Coffee goes so far as to suggest that Rule 10b-5 should be "disimplied" with respect to the non-trading corporate defendants, See Coffee, supra note 4, at 1582-84.
325. A payment of a certain percentage of penalties to the U.S. Treasury to offset the decrease in government revenues would be a reasonable policy, although it is very likely politically unpalatable.