Evolutionary enforcement at the securities and exchange commission

University of Pittsburgh Law Review

Volumn 71, Issue 3, 2010, Pages 403-437

  Barnard, Jayne W ^a  

^a Department of Law ^*  (United States)

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EID: 77953258744     PISSN: 00419915     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (187)

1. See generally Joe Nocera, S.E.C. Chased Small Fry While Big Fish, Madoff, Swam Free, N.Y. TIMES, June 27, 2009, at B1.
2. CTR. FOR CAPITAL MARKETS COMPETITIVENESS, EXAMINING THE EFFICIENCY AND EFFECTIVENESS OF THE SECURITIES AND EXCHANGE COMMISSION 23 (Feb. 2009), available at http://www.uschamber.com/assets/ccmc/090211ccmc-sec-speed.pdf (last visited Feb. 16, 2010).
3. Jonathan G. Katz, former Secretary of the SEC, was commissioned by the Chamber of Commerce to conduct this report and make recommendations.
4. GAO, REPORT to CONGRESSIONAL REQUESTERS, SECURITIES and EXCHANGE COMMISSION: GREATER ATTENTION NEEDED to ENHANCE COMMUNICATION and UTILIZATION of RESOURCES in the DIVISION of ENFORCEMENT, 2009, 50, (March) [hereinafter INVESTIGATION OF FAILURE]. http://www.gao.gov/new.items/d09358.pdf.
5. U.S.SEC.& Exch.Comm'n Office of Investigations, Investigation of Failure of the Sec to Uncover Bernard Madoff's Ponzi Scheme-Public Version 29 (Aug. 31, 2009), http://sec.gov/news/studies/2009/oig-509.pdf [hereinafter INVESTIGATION OF FAILURE].
6. Id. at 24.
7. Id. at 34, 39, 41 and 310.
8. U.S. SEC. & EXCH. COMM'N OFFICE OF INSPECTOR GEN., OFFICE OF AUDITS, PROGRAM IMPROVEMENTS NEEDED WITHIN THE ENFORCEMENT DIVISION (Sept. 29, 2009), http://www.sec-oig.gov/Reports/AuditsInspections/2009/467.pdf.
9. See infra Part I and accompanying text.
10. Yin Wilczek, Khuzami Cites Move to Specialized Teams, Other Initiatives to Improve SEC Enforcement, 41 SEC. REG. & L. REP. (BNA) 849 (May 11, 2009).
11. Yin Wilczek, In Mid-Year Reviews, Lawyers Give Enforcement Division High Marks for Revamp, 41 SEC. REG. & L. REP. (BNA) 1362 (July 20, 2009).
12. John Herzfeld & Phyllis Diamond, Khuzami Unveils Broad Reorganization of Enforcement Div 'n, New Subpoena Powers, 41 SEC. REG. & L. REP. (BNA) 1473 (Aug. 20, 2009).
13. Kara Scannell, "Urgency" Drives SEC Crackdown, WALL ST. J., Aug. 11, 2009, at C1.
14. Yin Wilczek, Specialized Units Should Be in Place By Beginning of New Year, SEC Official Says, 41 SEC. REG. & L. REP. (BNA) 1777 (Sept 28, 2009) ("The shake-up is said to be "the most significant revamp of the division in the last 30 years.");
15. see infra Part I.
16. See infra Parts II-VII, respectively.
17. Press Release, U.S. Sec. and Exch. Comm'n, Enforcement Dir. Linda Chatman Thomsen to Leave SEC (Feb. 9,2009), http://www.sec.gov/news/press/2009/2009-22. htm.
18. See generally Madoff Investment Securities Fraud: Regulatory and Oversight Concerns and the Need for Reform: Hearing Before S. Comm. on Banking Housing and Urban Affairs, 111th Cong. (Jan. 27, 2009);
19. see generally Assessing the Madoff Ponzi Scheme and Regulatory Failures: Hearing Before the H. Financial Services Comm., Subcomm. on Capital Markets, Insurance, and Government-Sponsored Enterprises Hearing, 111th Cong. (Feb. 4, 2009).
20. See Otis Bilodeau, SEC's Cox Tightens Reins on Enforcement Division, BLOOMBERO.COM, Apr. 13,2007, http://www.bloomberg.com/apps/news?pid= 20601087&sid=aodWCvu220YE&refer=home.
21. Khuzami Will Lead SEC Enforcement Division, WALL ST. J., Feb. 20,2009, at C3;
22. Press Release, U.S. Securities and Exchange Commission, Robert Khuzami Named SEC Director of Enforcement (Feb. 19, 2009), htttp://www.sec.gov/news/ press/2009/2009-31.htm.
23. Kara Scannell Canellos to Run SEC in New York, WALL ST. J., June 3, 2009, at C3;
24. Press Release, U.S. Sec. and Exch. Comm'n, George S. Canellos Named as Regional Director of SEC Regional Office (June 2,2009), http://ww.sec.gov/news/ press/2009/2009-125.htm.
25. Kara Scannell, SEC Names Deputy Enforcement Director, WALL ST. J., July 2,2009, available at http://online.wsj.com/article-email/SB124656228827387801- 1MyQjAxMDI5NDE2MjUxNjIyWj.html;
26. Press Release, U.S. Sec. and Exch. Comm'n, Lorin L. Reisner to Join SEC Enforcement Division (July 2, 2009), http://www.sec.gov/news/press/2009/2009- 150.htm.
27. See generally Donald C. Langevoort, The SEC and the Madoff Scandal: Three Narratives in Search of a Story (Georgetown Univ. Law Ctr., Working Paper No. 1475433, 2009), available at http://scholarship.law.georgetown.edu/cgi/ viewcontenLcgi?aiticle=l118&context=fwps-papers (noting the inevitable limitations imposed on SEC enforcement staff and the beleaguered mindset that results).
28. Gibson, Dunn & Crutcher, LLP, The SEC in Transition: A Mid-Year Review of SEC Enforcement in2009, (July 9, 2009), http://www.gibsondunn.com/ Pubucations/SECEnforcement.aspx.
29. Joshua Gallu & Dawn Kopecki SEC May Send Staff to "Fraud College" to Detect Future Madoffs, BLOOMBERG.COM, Sept 3, 2009, http://www.bloomberg.com/apps/news?pid=20601087&sid=a06As7nsq.wo.
30. Zachary A. Goldfarb, SEC Upsets Some as It Tries to Sharpen Teeth: Several Moves Draw In- House Criticism, WASH. POST, July 15, 2009, at A13.
31. Robert Khuzami, Dir., U.S. Sec. & Exch. Comm'n, Remarks Before the New York City Bar: My First 100 Days as Director of Enforcement (Aug. 5, 2009), http://www.sec.gov/news/speech/2009/spch080509rk.html [hereinafter Khuzami, My First Hundred Days].
32. Id.
33. See INVESTIGATION OF FAILURE, supra note 4.
34. See Madoffinvestment Securities Fraud: Regulatory and Oversight Concerns and the Need for Reform: Hearing Before the S. Comm. on Banking, Housing and Urban Affairs, 111th Cong. (Sept 10, 2009) (Opening Statement of Senator Christopher J. Dodd, Chairman), available at http://banking,seiiate.gov/public/ index.cfm?FuseAction=Newsroom.press.raleases&content.record-id= a5f88d12-b340-0844-534a-166a8de98523.
35. Press Release, U.S. Sec. & Exch. Comm'n, SEC Publishes 2010-2015 Draft Strategic Plan for Public Comment (Oct 8, 2009), http://www.sec.gov/news/ press/2009/2009-216.htm.
36. Kara Scannell, SEC Plans Crime Fight With Teams of Specialists, WALL ST. J., Apr. 29, 2009, at C1.
37. Herzfeld & Diamond, supra note 11.
38. Khuzami, My First Hundred Days, supra note 25.
39. Khuzami, my First Hundred Days Id.
40. Khuzami, My First Hundred Days Id
41. Khuzami, My First Hundred Days Id.
42. See, e.g., MALCOLM SALTER, INNOVATION CORRUPTED: THE ORIGINS AND LEGACY OF ENRON'S COLLAPSE 125 (2008) ("Many employees were apparently well aware of Enron's dissimulations - some even joked about their pervasiveness. According to vice president Sherron Watkins, the giant green overlay on the lush tropical scene on the cover of Enron's 1997 annual report quickly became known internally as 'the fig leaf obscuring the company's financial status and performance.").
43. See Geoffrey Christopher Rapp, Beyond Protection: Invigorating Incentivesfor Sarbanes-Oxley Corporate and Securities Fraud Whistleblowers, 87 B.U. L. REV. 91, 95 (2007) (enumerating the disincentives typically faced by whistleblowers, including the possibility of destroying the company for which they work, fear of blacklisting from future employers, fear of social ostracism, and psychological burdens).
44. 15 U.S.C.§78u(l)(e) (2006).
45. One researcher reports that the SEC has paid only four bounties since 1989. He describes the SEC's program as "all but ignored and unused for its 20+ year history." Bruce Carton, New Opportunities for Bounty Hunters, COMPLIANCE WK., July 3,2009, http/www.complianceweek.com/blog/carton/2009/07/03/ new-opportunities-for-sec-bounty-hunters/.
46. When the possibility of SEC bounty authority first surfaced in Congress in 1988, the prospect caused considerable alarm within the Commission's enforcement staff: According to Lawrence Iason, Regional Administrator of the SEC's New York office, the bounty provision will create so much havoc, the agency should consider never using it: "The Commission should consider taking the position it will never enter into these arrangements." The New York chief said the SEC already receives tips from informants, some of them valuable and many of them worthless, but with the new legislation, people will be coming out of the woodwork with allegations. "Staff will be overburdened trying to sort out which leads to pursue, determining in successful cases who is entitled to the money, and defending its actions in court," he said. Barbara Franklin, Mutiny Over the Bounty? SEC Lukewarm on New Investigative Tool From Congress, N. Y. L.J., Nov. 17, 1988, at 5.
47. Joanna Chung, SEC Urged to Reward Whistleblowers, FIN. TIMES, July 1, 2009, available at http:/www.ft.com/cms/s/0/ffeb6ef4-6665-11de-a034- 00144feabdc0.html?nclick-check=1.
48. David R. Sands, Feds Might Offer Bounties for Market Miscreants, WASH. TIMES, Mar. 12,2009, at A01.
49. David R. Sands, Feds Might Offer Bounties for Market Miscreants, WASH. TIMES Id.
50. Interview with Pamela Bucy, Professor of Law, Univ. of Ala. Sch. of Law, Tuscaloosa, Ala., in Corp. Crime Rep. (May 20, 2002);
51. see also Pamela Bucy, Private Justice, 76 S. CAL. L. REV. 1, 55 (2002) ("Economic wrongdoing is difficult to detect and prove. Often, it is hidden within a large organization, buried in paper trails and electronic messages, concealed by false documentation, involves complex and intricate transactions, and has many participants, none of whom may know the full extent of the conduct or even, for some, that there are any improprieties. Reconstruction of the illegality requires sophisticated investigators and attorneys with significant investigative resources and legal skill.").
52. See IRS WHISTLEBLOWER ANNUAL REPORT 6 (2008), http.//www.irs.gov/pub/ whistleblower/whistleblower-annual-reportpdf
53. Major Fraud Act, 18 U.S.C. § 1031(a) (2006).
54. See supra note 40 and accompanying text.
55. 42 U.S.C. § 7413(f) (2006) (indicating payment of up to $10,000 for information leading to a conviction or imposition of a civil penalty).
56. 42 U.S.C. § 9609(d) (2006) (indicating payment of up to $10,000 for information leading to a conviction).
57. 19 U.S.C. § 1619 (2006) (authorizing payments of up to 25% of the fine or duties collected or 25% of the value of the confiscated property to any person who provides information that leads to collection of unpaid customs duties or any fine, penalty, or forfeiture of property).
58. D.E.A. AGENTS MANUAL § 6612.44A.2 (Mar. 24, 1999) (permitting payments for information or assistance leading to a criminal or civil forfeiture of illegal drugs, based on the value of the forfeited items)
59. United States Postal Service, Poster 296 - Notice of Reward (July 2006), http://www.usps.com/cpim/ftp/posters/pos296welcome.htm (offering rewards up to $ 100,000 for information about violations of the postal regulations).
60. Perhaps the best-known federal bounty program is the False Claims Act, which is regularly cited for its multi-million dollar bounties. See, e.g., Gardiner Harris, Pfizer to Pay $2.3 Billion to Settle Inquiry Over Marketing, N.Y. TIMES, Sept 3, 2009, at B4 (noting that a salesman who became a whistleblower under the False Claims Act received more than $50 million for his role in the case and that a total of $102 million in bounties was paid to informants).
61. See supra note 40 and accompanying text.
62. See ANDREW KIRTZMAN, BETRAYAL: THE LIFE AND LIES OF BERNIE MADOFF 85-86 (2009) (noting Markopolos' belief that his information might "make him a millionaire"). In his first meeting with the SEC, he said, "[i]f there is a reward for uncovering fraud, I certainly deserve to be compensated!.]" Id. at 101.
63. See infra note 69 and accompanying text.
64. 135 CONG. REC. S3314, S3319 (daily ed. Apr. 5, 1998) (statement of Sen. Dale Bumpers).
65. IRWIN ROSS, SHADY BUSINESS 139 (1992).
66. Elletta Sangrey Callahan & Terry Morehead Dworkin, Do Good and Get Rich: Financial Incentives for Whtstleblowing and the False Claims Act, 37 Vill. L. REV. 273, 318 (1992).
67. See HAL NIEDZVIECKI, THE PEEP DIARIES: How WE'RE LEARNING TO LOVE WATCHING OURSELVES AND OUR NEIGHBORS (2009).
68. The Sarbanes-Oxley Act whistleblower provisions are also aimed at this population, but have proven an inadequate incentive to induce whistleblowers to come forward. See Rapp, supra note 37, at 116.
69. 15 U.S.C. § 78u-l(e) (2006).
70. 15 U.S.C.§78u-l(e).
71. 15 U.S.C. § 78u-l(e).
72. See Letter from H. David Kotz, SEC Inspector Gen., to Congressman Paul E. Kanjorski (June 30, 2009), http.//kanjorski.house.gov/index.php?option=com- content&task=view&id=l571<emid=l.:Id.
73. Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat 183 (codified as amended in scattered sections of 12 U.S.C., 18 U.S.C, and 31 U.S.C.).
74. 12 U.S.C. § 1831k(b) (2006).
75. 12 U.S.C. § 1831k(c) (2006).
76. 12 U.S.C.§ 1831k(c).
77. 12 U.S.C. § 4205 (2006).
78. 12 U.S.C. § 4205.
79. 12 U.S.C. § 4225(c) (2006).
80. A particularly thoughtful proposal for a bounty program appears in Marsha J. Ferziger & Daniel G. Currell, Snitching for Dollars: The Economics and Public Policy of Federal Civil Bounty Programs, 1999 U. ILL. L. REV. 1141 (examining several federal programs and proposing a "model" bounty program that would include: (1) clarity about eligibility for a bounty; (2) certainty of payment rather than discretion on the part of the paying agency; (3) a "low, fixed-percentage bount[y] with no nominal cap," generally in the range of one to three percent of the penalty recovered; and (4) an assurance of anonymity).
81. For example, in Fiscal Year 2008, the Commission "returned more than $1 billion to harmed investors through Disgorgement and Fair Fund distributions.'' U.S. SEC. AND EXCH. COMM'N, 2008 PERFORMANCE AND ACCOUNTABILITY REPORT 28, available at http.//www.sec.gov/about/secpar/secpar2008.pdf. The Commission recently established an Office of Collections and Distributions to further pursue the collection of funds for the benefit of investors.
82. Stephen J. Crimmins, The SEC's Blueprint to Reinvigorate Enforcement, 41 SEC. REG. & L. REG. (BNA) 669, 670 (Apr. 13, 2009).
83. See generally Jayne W. Barnard, Allocution for Victims of Economic Crimes, 77 NOTRE DAME L. REV. 39, 41 (2001) (describing the kinds of harms that typically befall fraud victims).
84. In that proceeding, victims said things like "I am a victim because our government has failed me," "The SEC's incompetence has let this psychopath steal from me," and "[w]e have been devastated by the SEC's failure." Judge Denny Chin finally had to admonish the victims to focus on the task at hand, the sentencing of Madoff, and to stop trying to use the occasion to criticize the government Jayne W. Barnard, Notes from Madoff s Sentencing (June 29,2009) (unpublished, on file with author).
85. On the day of Madoffs sentencing, many victims skipped the proceeding in order to attend a rally outside the courthouse where they inveighed against the SEC. They wore T-shirts that read, "SEC FAILED US." Zachery Kouwe, Waiting to See Madoff, em Angry Crowd is Disappointed, N.Y. TIMES, June 30, 2009, at B1.
86. A group of Madoff s victims recently sued the SEC, alleging gross negligence in carrying out its enforcement responsibilities. Diana B. Henriques, Suit Claims S.E.C. Failed to Detect Madoff Scheme, N.Y. TIMES, Oct 15, 2009, at B11.
87. Reuters, Agencies Were Told of Stanford Fraud, Investors Say, N.Y. TIMES, Aug. 18, 2009, at B6.
88. See, e.g., SEC Case Against R. Allen Stanford (Mar. 12, 2009), http.//www.sec.gov/news/press/2009/2009-26-update.htm.
89. Some fraud victims now engage in self-help via the Internet Madoff victims, Stanford victims, and other victims' groups have created support sites and chat rooms to communicate with one another. See, e.g., Bernard Madoff Fraud Victims Support Group Website, http://bemardmadofrvictims.org (last visited Nov. 20, 2009). While access to web-based communication provides an alternative to the isolation experienced by previous generations of victims, a centralized repository of victim information would help avoid duplication of effort and forcing victims to reinvent the wheel.
90. The Crime Victims Rights Act of 2004 provides to "crime victims" the right to be present at public court proceedings involving the crime and the right to be "reasonably heard at any public proceeding in the district court involving release, plea, sentencing, or any parole proceeding." 18 U.S.C. §§ 3771(aX2)-(4) (2006). The statute also directs people in the Department of Justice to "make their best efforts to see that crime victims are notified of, and accorded, the rights described in subsection (a)." § 3771(cXl). However, "[n]othing in the CVRA requires the Government to seek approval from crime victims before negotiating or entering into a settlement agreement" In re W.R. Huff Asset Mgmt. Co., 409 F.3d 555, 564 (2d Cir. 2005). As a result of the CVRA, government-funded victim advocates are now very much a part of the federal prosecutorial system.
91. See supra note 81 and accompanying text.
92. See KENNETH R. FEINBERG, WHAT IS LIFE WORTH? THE UNPRECEDENTED EFFORT TO COMPENSATE THE VICTIMS OF 9/11, at 94 (2005) (recounting stories of claimants who refused to fill out the claim forms but wanted Feinberg to hear the stories of their lost loved ones).
93. In response to this critique, the SEC created a new Fellows program to build capacity in the Office of Risk Assessment Jesse Westbrook, SEC Offering Market Experts Salaries of More Than $200,000, BLOOMBERG.COM, Apr. 30, 2009, http.//www.bloomberg.com/apps/news?pid=20601087&sid= aH4eYn28mhrY&refer=home.
94. The Office ofRisk Assessment has since been reorganized and renamed. See SEC Creates New Division, Taps Law Professor as First Director, 41 SEC. REG. & L. REP. (BNA) 1723 (Sept 21, 2009).
95. See Tom McGinty & Kara Scannell, SEC Plays Keep-Up in High-Tech Race, WALL ST. J., Aug. 20, 2009, at C1 (noting that "by many accounts, the [SEC] is outmatched by the traders and market venues with technology that is remaking the trading world.").
96. There is, of course, a rich history of such projects. For example, states for nearly a century have maintained and analyzed data on the characteristics of imprisoned offenders, in order to make informed parole decisions. See BERNARD E. HARCOURT, AGAINST PREDICTION: PROFILING, PREDICTING, AND POLICING IN AN ACTUARIAL AGE 47-76 (2007) (detailing the history of these projects). Most of these projects have involved violent offenders.
97. See infra Part VA.
98. See infra Part V.B.
99. See Jayne W. Barnard, Corporate Therapeutics at the Securities and Exchange Commission, 2008 COLUM. Bus. L. REV. 793, 832 [hereinafter Barnard, Corporate Therapeutics] (noting that a sophisticated understanding of group dynamics is required to achieve meaningful organizational change).
100. There are many definitions of "learning organization." Generally, though, a learning organization is one that "facilitates the learning of its members and continuously transforms itself to more effectively achieve its goals, http.//en.wikipedia.orgwiki/Learning-organization (last visited Nov. 11, 2009).
101. See Julie Creswell et al., Fraud Parade: $8 Billion Case is Next in Line, N.Y. TIMES, Feb. 18, 2009, at A1 (describing the Texas Ponzi schemer who sought a knighthood in Antigua, lived in the spotlight of sports and charity events, and misrepresented the safety and security of high-yield certificates of deposit sold by his eponymous bank).
102. See Paul Tharp, Buffett Wannabe Tied to $2B Ponzi Scheme, N.Y. POST, Oct 2, 2008, at 61 (describing the Minneapolis Ponzi schemer who fancied himself a business genius, "hobnobbed with billionaires and movie stars[,]n and defrauded several major hedge funds of hundreds of millions of dollars).
103. see Leslie Wayne,The Mini-madoffs,N.Y.TlMES,Jan.28, 2009. atBl (describing the prominent Florida money manager who faked his suicide to avoid arrest after being charged with a $300 million investment fraud).
104. Stuart Pfeifer, Manager Tields Control of Firms, L.A. TIMES, Mar. 11, 2009, at B2 (detailing charges against a California man accused of diverting $17 million of investors' money to his personal use twenty-seven years after he had been convicted and sentenced to prison for grand theft).
105. Stuart Pfeifer, Alleged Scam Targeted Latinos, L.A. TIMES, Apr. 14, 2009, at B2 (describing an alleged scheme that netted $23 million).
106. Henry K. Lee, 2 Bay Area Men Sued by SEC-Investment Scam Targeted Koreans.S.F. CHRON., June 10, 2009, at C4 (describing an alleged scheme that netted $80 million).
107. See ERIN ARVEDLUND, Too GOOD TO BE TRUE: THE RISE AND FALL OF BERNE MADOFF 61 (2009) (describing Madoff s insistence on paperless desks, furniture placement at precise right angles, window blinds and computer screens all aligned at the same level, perfectly-hung picture frames, and the use of black - not blue - ink);
108. ANDREW KIRTZMAN, BETRAYAL: THE LIFE AND LIES OF BERNIE MADOFF 60, 117-18 (2009) (noting that, at home, Madoff insisted on perfectly-trimmed hedges; he also "was forever straightening rugs, drapes, objects on his tables." At the office, "he'd get down on his hands and knees in the reception area to straighten out the Persian rug leading to the elevator. A staffer once found him vacuuming his floor at 7:30 in the morning.").
109. See Bryan Burroughs, Pirate of the Caribbean, VANITY FAIR, June 3, 2009, at 76 (noting that Stanford lived in a mansion with a moat, gave "millions to hospitals, theaters, and museums," created the Stanford Cup for international cricket matches, and offered a S20 million prize for the winner).
110. See, e.g., Tom Gilroy, Ponzi Scheme Operator Who Targeted Family Members Pleads Guilty, 41 SEC. REO. & L. REP. (BNA) 1625 (Aug. 31, 2009) (noting that defendant who had operated a Ponzi scheme had lost some $5.2 million in clandestine poker games held regularly in a suite at a luxury Beverly Hills hotel);
111. Francis X. Donnelly, Billionaire Boys Club: Execs Accused in $53 Million Ponzi Scheme, THE DETROIT NEWS, July 29, 2009, at A1 (noting that alleged Ponzi schemers used some of their proceeds to pay gambling debts);
112. Martin Zimmerman, Irvine CEO Hit With Fraud Claims, LA. TIMES, Apr. 28, 2009, at B2 (noting allegations that alleged Ponzi schemer was a "high-stakes gambler" with ties to Taiwanese organized crime);
113. Charlie Gasparino, Accused Swindler Cosmo Owed Thousands to the Mob, CNBC.COM, Jan. 27, 2009, http.//www.cnbc.com/id/28878404 (noting that alleged Ponzi schemer had once owed tens of thousands of dollars in gambling debts to the Genovese crime family).
114. See, e.g., Tina Moore, Checks Out After $3S0 MV anishes, Fla. Cops Hunt Another Hedge Fund Scoundrel, N.Y. DAILY NEWS, Jan. 18, 2009, at 18 (noting that alleged Ponzi schemer Arthur Nadel had previously been disbarred for misusing escrow funds);
115. SEC v. YES Entertainment LLC, SEC Litigation Release 16786 (Oct 31,2000) (noting that Ponzi schemer had been disbarred for misappropriation of client funds);
116. Daniel J. Lehmann, Ex-Talent Agent Faces SEC Suit in Investing Scam, Cm. SUN-TIMES, Jan. 5, 1995, at 18 (noting that alleged Ponzi schemer was a disbarred lawyer).
117. See, e.g., Michael Beebe, Ponzi Suspect Piccoli Had Earlier Run-In, BUFFALO NEWS, Feb. 16, 2009, at Bl (noting that man charged with Ponzi scheme targeted at Catholics and Catholic priests [he has since pleaded guilty] had, in the 1970s, been accused of orchestrating a scheme in which he violated the usury laws in the sale of a home to an elderly woman).
118. See. e.g., SEC v. Global Asset Partners LLC, SEC Litigation Release 20220 (Aug. 1, 2009) (noting that defendant charged with orchestrating a $5 million Ponzi scheme diverted investor funds to a now-bankrupt Texas real estate project).
119. See, e.g., Chad Bray, SEC Charges Brooklyn Money Manager With Fraud, WALL ST. J., Sept 9, 2009, at A6 (noting that defendant charged with operating a $40 million Ponzi scheme used some of the investors' funds to finance his pornography business).
120. DAVID WEISBURD, ELIN WARING & ELLEN F. CHAYET, WHITE-COLLAR CRIME AND CRIMINAL CAREERS 25 tbl.1.1 (2001).
121. Id In this study, 99.4% of the securities law violators were white men.
122. Black, Bennett, and Ebbers are respectively serving six-and-a-half, sixteen, and twenty-five years in prison.
123. See generally' Jayne W. Barnard, Narcissism, Over-Optimism, Fear, Anger, and Depression: The Interior Lives of Corporate Leaders, 77 U. ClN. L. REV. 405 (2009) (tracing the characteristics of many failed CEOs, including Ken Lay, Bernie Ebbers, and Conrad Black). These characteristics, of course, are not limited to felonious CEOs. They may also characterize legendarily successful CEOs. See id. (describing Jack Welch).
124. Id. at 420-21.
125. See Alexei Barrionuevo, Enron Figures Tell How Results Were Manipulated, N.Y. TIMES, Feb. 28, 2006, at C3 (describing the testimony of Wesley H. ColwelL Enron's Chief Accounting Officer, that he sometimes "dipped into reserve accounts" in order to "beat analysts' estimates").
126. See Former CEO Indicted in WorldCom Scandal, SEATTLE TIMES, Mar. 3, 2004, at El (recounting the story of Scott Sullivan, WorldCom's CFO: "[I manipulated financial statements] in a misguided effort to preserve the company to allow it to withstand what I believed were temporary financial difficulties.").
127. See SEC v. Zandford, S35 U.S. 813 (2002) (tracing story of broker who stole from his disabled clients).
128. See Bloomerg news, Former Broker at Credit Suisse Found Guilty,N.Y.TIMES, Aug. 18,2009, at B2 (describing defendant's sales of products he falsely described as "backed by federally-guaranteed student loans and a safe alternative to bank deposits. The products were actually linked to auction-rate securities.").
129. See SEC v. C. Jones & Co., SEC Litigation Release 20940(Mar. 10, 2009) (noting that defendant posted "baseless projections and other financial information" without disclosing he was being compensated by the company and was, at the time of the posting, selling the company's stock).
130. See SEC v. Accord, SEC Litigation Release 21132 (July 15, 2009) (describing insider trading violations by a lawyer and an accountant, as well as in-laws and friends, who acquired shares of a company shortly before it issued an announcement that it was to be acquired).
131. See supra note 32 and accompanying text.
132. See infra note 158 and accompanying text.
133. When the sample size is sufficient, "preponderant evidence shows that statistical techniques of risk assessment are clearly superior to clinical assessments." BRIAN J. OSTROM ET AL., OFFENDER RISK ASSESSMENT IN VIRGINIA: A THREE STAGE EVALUATION 28 (2002), http.//www.vcsc.state.va.us/risk-off-rpt. pdf ("[S]tudies show that statistical methods outperform both mental health professionals and correctional caseworkers in predicting recidivism.").
134. Skeptics might also suggest that behavioral profiling, however scientifically-based, is just a modern version of the practice of phrenology.
135. See Posting of Tom Davenport to Harvard Business Review Blog, The Rise of Corporate Anthropology, http://blogs.harvardbusiness.Org/davenport/2007/l1/the- rise-of-corporate-anthropo.html (Nov. 28, 2007,9:01 EST). Corporate anthropologists use their observational and interviewing skills to study consumer behavior and workflow issues, examine corporate cultures, and help build communities within organizations. Id.
136. Vanessa M. Gezari, RoughTerrain, WASH. POST, Aug. 30,2009, (Magazine), at W16 (describing the use of embedded anthropologists and psychologists who are assisting front-line soldiers in Afghanistan).
137. See generally NEAL SHOVER & ANDY HOCHSTETLER, CHOOSING WHITE-COLLAR CRIME (2006).
138. Julian Roberts has recognized "there may be many reasons for [recidivism], including defiance, weak will, force of circumstances, or even physiological causes (the offender may have an addiction that is responsible for bis offending)."). JULIAN V. ROBERTS, PUNISHING PERSISTENT OFFENDERS : EXPLORING COMMUNITY AND OFFENDER PERSPECTIVES 62 (2008) [hereinafter ROBERTS, PUNISHING PERSISTENT OFFENDERS]. Youngjae Lee has offered a similar catalog of traits that may account for recidivism: [The possibilities include] cruelty, malice, abusiveness, arrogance (manifesting in the belief that rules of the society do not apply to them, callousness, dishonesty (if the crimes involve fraud), greed, hatred (if the crimes are motivated by hateful feelings), indifference (to human suffering), lack of discipline (if the crimes result from an inability to stick to a law-abiding path), weakness of will (if the crimes results from an inability to resist temptations), insensitivity, irresponsibility, or ruthlessness.
139. Youngjae Lee, Recidivism as Omission: A Relational Account, 87 TEX. L. REV. 571,586 (2009).
140. See generally Jayne W. Barnard, Securities Fraud, Recidivism and Deterrence, 113 PENN. ST. L. REV. 189 (2008) [hereinafter Barnard, Securities Fraud, Recidivism, Deterrence] (examining the careers of several recidivist securities fraud offenders).
141. See id
142. See supra note 101 and accompanying text
143. Barnard, Securities Fraud, Recidivism, Deterrence, supra note 122 (setting out numerous examples of multiple sequential injunctions).
144. In a study of offenders prosecuted criminally, "serial offenders [were] more than 500% more likely to recidivate⋯ than non-serial offenders [were]." Larry Laudan, Taking the Ratio of Differences Seriously: The Multiple Offenderandthe StandardofProof, or. Different Strokes for Serial Folks 5 (July 8, 2009), available at http://ssm.com/abstract=1431616.
145. Barnard, Securities Fraud, Recidivism, Deterrence, supra note 122.
146. Barnard, Securities Fraud, Recidivism, Deterrence Id.
147. See John Seabrook, Suffering Souls: The search for the roots of psychopathy. NEW YORKER, Nov. 10, 2008, at 64, 67 (describing psychopaths as "charming and intelligent." The "psychopath talks 'entertainingly,' [psychiatrist Hervey] Cleckley explain[s], and is 'brilliant and charming,' but nonetheless 'carries disaster lightly in each hand.'").
148. Three percent of the U.S. male population is said to suffer from some form of APD. Surely, the percentage of SEC defendants who have a history of scamming and conning is significantly higher than that.
149. See Barnard, Securities Fraud, Recidivism, Deterrence, supra note 122, at 224 (recommending the creation of a Securities Fraud Recidivism Task Force within the Enforcement Division).
150. This "no second chance" rule is further discussed in Part VI, infra.
151. See 2008 FEDERAL SENTENCING GUIDELINES MANUAL CHAPTER 4, http.//www.ussc.gov/2008guid/GL2008.pdf ("CMminal History and Criminal Livelihood").
152. See ROBERTS, PUNISHING PERSISTENT OFFENDERS, supra note 121, at 90-92 (summarizing seventeen theories of sentencing and the role that recidivist sentencing premiums or first-offender discounts plays in each).
153. See supra note 122 and accompanying text.
154. See Barnard, Corporate Therapeutics, supra note 89, at 816-20 (describing some of the dynamics of settlements with the SEC).
155. 15 U.S.C. § 78(u)(d)(5) (2006).
156. See Zachary A. Goldfarb, The SEC's New Enforcer: Former U.S. Prosecutor Charged With Adding Muscle, Restoring Agency's Image, WASH. POST, Apr. 7, 2009, at A16 (noting mat, in a recent speech SEC Commissioner Luis Aguilar had said "the agency needs Congress to give it new legal powers. "The commission needs authority to bring criminal charges where the Department of Justice has declined to do so,' he said.").
157. David Weisburd, Elin Waring & Nicole Leeper Piquero, Getting Beyond the Moral Drama of Crime: What We Learn From Studying White-Collar Criminal Careers, in CORPORATE AND WHITE-COLLAR CRIME (John Minkes & Leonard Minkes eds., 2008).
158. See generally Adam Benforado & Jon Hansen, The Great Attributional Divide: How Legal Policy Debates Are Shaped by Divergent Views of Human Nature, 57 EMORY L J. 311 (2008) (describing generally the "situationist" and "dispositionist" views of human behavior).
159. See Edward J. Imwinkelreid, Reshaping the "Grotesque " Doctrine of Character Evidence: The Reform Implications of the Most Recent Psychological Research, 36 Sw. U. L. REV. 741, 753-54 (2008).
160. WEISBURD, WARING & CHAYET, supra note 104.
161. A "crisis responder" is someone who responds to a personal or professional crisis by resorting to crime. Id. at 59. An "opportunity taker" commits a crime because a sudden or unusual opportunity arises that is too good to pass up.
162. Id. at 64.
163. An "opportunity seeker" spends considerable time imagining and engineering a role in fraudulent schemes. Id at 78.
164. A "chronic offender" is a person who has a demonstrated record of recidivism. See id. at 53, 74.
165. See supra Part IV.
166. Of course, other violators may also be referred for criminal prosecution, even though there is no evidence that they are or are likely to be chronic offenders. For example, high-profile mega-violators like Jeffrey Skilling and Bemie Ebbers were appropriately diverted to the criminal justice system. Ditto the colleagues who aided and abetted them.
167. There will, of course, be exceptions to the "no second chance" rule, where the evidence may not support a criminal conviction but can support a civil judgment. But those exceptions should be rare. Chronic offenders are dangerous predators and should be dealt with in the criminal justice system. The preference of some U.S. attorneys to reject these cases as "too small to prosecute" is bad public policy and should be addressed at a higher level within the Justice Department
168. First-tier penalties are available for defendants who violate any provision of the federal securities laws. 15 U.S.C. § 78u(d)(3)(B)(i) (2006). The maximum first-tier penalty for a natural person is the greater of $5,000 or the amount of his pecuniary gain from the violation. Second-tier penalties are available for defendants who violate any provision of the federal securities laws in a manner that involved fraud, deceit manipulation, or deliberate or reckless disregard of a regulatory requirement 15 U.S.C. § 78u((d)(3)(B)(ii) (2006). The maximum second-tier penalty for a natural person is the greater of $50,000 or the amount of his pecuniary gain from the fraud. Third-tier civil penalties are available for the same defendants as those who are eligible for a second- tier penalty, but third-tier penalties are imposed in cases of frauds that "directly or indirectly result. in substantial losses or create a significant risk of substantial losses to other persons." 15 U.S.C. § 78u(d)(3)(B)(iii) (2006). The maximum third-tier penalty for a natural person is the greater of $100,000 or the amount of his pecuniary gain from the fraud.
169. See Jayne W. Barnard, Rule 10b-5 and the "Unfitness " Question, 47 ARIZ. L. REV. 9, 54 (2005) (arguing that situational offenders should rarely be subject to an officer-or-director bar).
170. See supra note 146.
171. See PAUL MARCUS, THE ENTRAPMENT DEFENSE § 2.03B (2009).
172. See supra note 146.
173. See, e.g., SEC v. Bennett, SEC Litigation Release No. 20660 (July 30, 2008) (barring Phillip Bennett - now in jail for sixteen yean - from serving in the future as an officer or director of a public company).
174. See, e.g. In re Madoff, Exchange Act Release No. 60118 (June 16, 2009) (barring Bernie Madoff - now in jail for ISO years - from serving as an investment adviser).
175. See, e.g., SEC v. Bennett, supra note 151 (enjoining Phillip Bennett from future violations of the federal securities laws).
176. See Thomas Gorman, Restoring SEC Enforcement: Prosecutorial Discretion and Coordination, SEC Actions, Apr. 20, 2009, http://www.secactions.com/?p=1029 (citing examples of where "there was no apparent need for the SEC to step in and investigate" and noting that "there are instances when it may be more prudent for the Commission to step back and conserve its resources, letting another agency take the lead.")
177. See Khuzami, My First Hundred Days, supra note 25.
178. And, if there is value in pursuing such sanctions, then Congress could easily provide that anyone who is imprisoned for securities fraud is automatically enjoined and/or barred. There are many models for such a statutory provision.
179. See Jayne W. Barnard, The SEC's Suspension and Bar Powers in Perspective, 76 TUL. L. REV. 1253, 1269 n.84 (2002) (describing automatic bar statutes triggered by a criminal conviction).
180. See, e.g., SEC v. Dreier, SEC Litigation Release No. 20823 (Dec. 8, 2008) (announcing the filing of a civil action against lawyer accused of selling $113 million in bogus promissory notes). Dreier is now serving a twenty-year prison term. The SEC civil case is still pending.
181. SEC ANN. PERFORMANCE & ACCOUNTABILITY REP., 2008, http.//www.sec.gov/about/secpar/secpar2008.pdf#sec2, at 27.
182. SEC ANN. PERFORMANCE & ACCOUNTABILITY REP., 2008 Id.
183. Donald C. Langevoort, Managing the "Expectations Gap" in Investor Protection: The SEC and the Post-Enron Reform Agenda, 48 Vnx. L. REV. 1139, 1165 (2003).
184. Khuzami, My First Hundred Days, supra note 25.
185. See Barnard, Securities Fraud, Recidivism, Deterrence, supra note 122, at 225 (advocating for the creation of an online registry of Ponzi schemers, modeled on similar registries for sex offenders and physicians who have been disciplined for misconduct).
186. See Wikipedia, COPS (TV series), http://en.wildpedia.org/wiki/COPS-(TV- series).
187. See, e.g., SEC v. Tri-Energy, Inc., SEC Litigation Release No. 21000 (Apr. 15, 2009) (describing a Ponzi scheme that raised $50 million through solicitations aimed at people who thought they were contributing to humanitarian causes).