SEC testing customized punishments

WASHINGTON Tue Mar 12, 2013 4:09pm IST

A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011.

Credit: Reuters/Jonathan Ernst

WASHINGTON (Reuters) - The Securities and Exchange Commission is experimenting with punishments that more closely fit the wrongdoing at issue in a bid to give its enforcement cases more bite.

Criticized for its traditional practice of a broad ban on wrongdoers breaking securities law again, the SEC is testing injunctions that specifically bar certain behavior, such as giving advice to pension funds or profiting from presenting investment seminars.

Critics of the SEC's typical broad prohibitions say they are ineffective and not well enforced. Customized injunctions could also be a more precise tool than the blunt instrument of barring an individual from being a company officer or director.

"We want to use all of the tools available to us to specifically discourage repeat misconduct and go beyond the injunctions we traditionally obtain," George Canellos, the SEC's acting enforcement director, told Reuters in an interview.

In the past year SEC lawyers have slowly started seeking injunctions that bar defendants from specific types of conduct, even if that conduct is itself legal.

They are relying on authority derived from the 2002 Sarbanes-Oxley investor protection law that makes explicit courts' authority to follow through on the SEC's recommended injunctions.

"We are actively exploring ways to invoke that authority more creatively toward the goal of creating remedies tailored to the misconduct at issue," he said.

The new push comes as former top federal prosecutor Mary Jo White is poised to take over the agency. She is expected to win confirmation from the Senate and plans to tell lawmakers on Tuesday that she will bring a "bold and unrelenting" enforcement program to the agency.

Canellos previously worked under White as a federal prosecutor in the U.S. Attorney's office in Manhattan, and could stay on at the SEC in a senior enforcement role.


As securities regulators turn their attention away from the financial crisis cases that have absorbed their attention for the past five years, and look to cases around market structure issues and high frequency trading, they are exploring tools they haven't used much in the past.

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

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

Former SEC lawyers said the model could potentially apply to cases against larger institutions. A company that misstated earnings, for example, could face an injunction barring them from ever misstating earnings in the future, a scarier prospect than a generic ban on violating the securities laws.

But lawyers also said such a prospect would be fought hard by the defense bar, and it is unclear how aggressively the SEC would pursue such bans.

"What is the limiting principle?" said Daniel Nathan, a former SEC lawyer now in private practice at Morrison & Foerster. "For a conduct-based injunction, when do you do it, and when not? It's very hard to draw the line."

For an insider trading case, for example, Nathan said, it would be difficult to tailor a punishment that would bar an individual from trading, or bar a tipper from speaking to certain individuals.

Canellos likened the strategy to harassment cases, where courts not only impose bars on future harassment, but also limit the ability for the defendant to even approach a victim.

Courts "draw a bright and easily enforceable line, ordering the accused ... not to get within 100 feet of the victim. This way, there's no future debate in court about whether approaching or talking to the victim constitutes harassment," he said.

The SEC pursued a similar remedy in its case against a former executive of Colonial Bank, which failed in 2009 as a result of a major fraud scheme.

In that case, the SEC barred the executive, former vice president Catherine Kissick, from not only serving as an officer or director of a public company, but also explicitly banned her from serving in any senior position at a mortgage firm or financial institution.

(Reporting by Aruna Viswanatha; Editing by Karey Van Hall and Tim Dobbyn)

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Comments (2)
QuietThinker wrote:
Teeth? More like deciding which wrist to slap. How about something that might actually deter criminal behavior?

Mar 12, 2013 6:37pm IST  --  Report as abuse
CMEBARK wrote:
Unless and until some people start facing criminal charges, these wrongdoers simply see all this as simply a cost of doing business. Of course, this would require DOJ to file a case and prosecute instead of holding press conferences with a bunch of pretty boys standing on stage telling us how wonderful they are.

Mar 12, 2013 6:37pm IST  --  Report as abuse
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