SEC Reports Record Number of Enforcement Actions

The Securities and Exchange Commission (SEC) filed a record 735 enforcement actions in the fiscal year that ended Sept. 30, with 146 of these actions taken against investment advisers. 

The Commission reports that this represents a 30% increase over 2010. The record number of enforcement actions is a result of the enforcement division undergoing its most “significant reorganization” in 2009 and 2010 since being established in the early 1970s, the SEC said.  

The reorganization efforts included management restructuring, a new way to handle tips and complaints, swifter prosecution of wrongdoers through a formal program that encourages cooperation from individuals and companies involved in investigations, and the creation of specialized units in five priority areas involving complex and higher risk areas of potential securities laws violations, according to the SEC. 

“We continue to build an unmatched record of holding wrongdoers accountable and returning money to harmed investors,” said SEC Chairman Mary L. Schapiro.

The agency filed a total of 146 enforcement actions related to investment advisers and investment companies, a single-year record and 30% increase over FY 2010. The SEC also brought 112 enforcement actions related to broker/dealers, a 60% increase over last year.

Among those charged in SEC investment adviser and broker/dealer actions were Charles Schwab entities and executives for making misleading statements to investors regarding a mutual fund heavily invested in mortgage-backed and other risky securities; AXA Rosenberg Group LLC and its founder for concealing a significant error in the computer code of the quantitative investment model that they used to manage client assets; and Merrill Lynch for misusing customer order information to place proprietary trades for the firm and for charging customers undisclosed trading fees. The Schwab entities paid more than $118 million to settle the SEC’s charges, while AXA Rosenberg paid $217 million to cover investor losses and a $25 million penalty. 


Financial Crisis Cases  

Among the cases filed by the SEC in FY 2011 were 15 separate actions naming 17 individuals, including CEOs, CFOs and other senior corporate officers, involving wrongdoing related to the financial crisis. These cases included enforcement actions involving collateralized debt obligations (CDOs) against J.P. Morgan for misleading investors in a CDO as the housing market began to plummet, Wachovia Capital Markets for misconduct in the sale of two CDOs tied to the performance of residential mortgage-backed securities, and two firms (Stifel, Nicolaus & Co. and RBC Capital Markets) involved in the sale of unsuitable CDO investments to five Wisconsin school districts.  

During the last 2½ years, the agency has filed 36 separate actions in its financial crisis-related cases against 81 defendants – nearly half of whom were CEOs, CFOs and senior corporate executives, resulting in approximately $1.97 billion in disgorgement, penalties, and other monetary relief obtained. In addition to the cases described above, this includes enforcement actions against Goldman Sachs and Citigroup, as well as senior executives from Countrywide Financial, New Century and American Home Mortgage. 

Insider Trading Cases 

Insider trading cases also are on the upswing with 57 actions filed in FY 2011 by the SEC, a nearly eight percent increase over last year’s total. Among those charged in SEC insider trading cases in the past fiscal year were various hedge funds managers and traders involved in a $30 million expert networking trading scheme, a former NASDAQ Managing Director, a former Major League Baseball player, and an FDA chemist.  

In FY 2011, the SEC obtained judgments in 18 actions arising out of its investigation of hedge fund manager Raj Rajaratnam, the founder of Galleon Management, who was recently convicted of multiple counts of insider trading (see “Goldman Sachs Director Surrenders in Insider Trading Case”).  

Additional data on the SEC’s FY 2011 enforcement results will be available as part of the agency’s Performance and Accountability Report that will be published at a later date.