Big Firms Fare Better in SEC Enforcement Actions

So says a study conducted by Berkeley Law School professor, Stavros Gadinis.  The article appears in The Business Lawyer, published in the May 2012 issue  (Volume 67, Number 3)  by the American Bar Association. The study covers SEC enforcement actions against investment banks and brokerage houses during a period just before the 2007-2008 economic crisis (the dataset covers 2005, 2006, and the first four months of 2007); and the data suggests that defendants in smaller firms fared far worse in SEC enforcement actions.  According to Professor Gadinis, there are three dimensions to the data.

The first is that when the SEC action involved big firm misconduct, the preferred choice was corporate responsibility as opposed to individual liability.  In short, this sounds,  in part, like some of the criticism heaped on the Bush and Obama Justice Department for failing to bring criminal cases against some individual senior officers in the banking industry responsible for the financial debacle.  Often in these SEC actions, neither the individual who actually participated in the violative conduct nor high-level supervisors were subject to additional sanctions.

Even though both legal venues are open to them, a second factor involves the SEC’s more likely decision to bring adminstrative proceedings against big firms instead of court proceedings.  Hence, the study found that financial professionals subjected to court proceedings resulted in stiffer sanctions, including higher penalties and even bans from the securities industry.

Concomitantly, with administrative proceedings, a third factor arises.  For the same violation and comparable levels of harm to investors, the study found that big firms and their employees were less likely to be banned from the securities industry, even after controlling for violation type and harm to investors.

Skepticism over the legal and public policy implications of not holding individuals liable for violations noted in the Gadinis article (and as we discussed in our January 2, 2012 post) has been raised some courts like Judge Jed Rakoff’s criticism and rejection of the SEC’s settlements with Citi Bank and Bank of America.

To be fair, the article makes clear that “[w]hile… [these theories] seek to explain the SEC’s enforcement strategy… they do not purport to represent an exhaustive list of potential explanations of the [SEC’s] motives.”  Instead, the data raises and addresses major issues about the future implications of the SEC’s activities in recent years.

Author: Dexter Johnson

The author is a an attorney who for the past 14 years has concentrated his practice in representing, successfully, investment advisers, broker-dealers, corporations and individuals who are subject to SEC, FINRA, State or other regulations and who may be the subject of regulatory examination, review or investigation. He formerly worked at the SEC. His regulatory and litigation experience has encompassed virtually every type of securities issue in the industry. He has also negotiated favorable outcomes in many of these matters for his clients.