Jury Trials in Missouri Securities Division Administrative Enforcement Actions

 The Enforcement Section of the Missouri Secretary of State Securities Division (the “Enforcement Section”) brought 35 administrative enforcement actions between 2020 and 2021 pursuant to Section 409.6-604, RSMo.,[1] which assessed $7.5 million in civil penalties.[2] Some of these administrative actions alleged securities fraud in violations of Section 409.5-501(1), Section 509.5-501(2), and Section 509.501(3). The administrative procedures allow the Missouri Secretary of State appointed Commissioner of Securities (the “Commissioner”) to issue an interim order finding that the respondent has committed securities fraud, which order becomes final unless the respondent requests a hearing. The administrative procedures also authorize the Commissioner to conduct the hearing, in effect serving as both the prosecution and the judge, which may be why only 5 hearings were requested in these 35 enforcement actions.[3]

Section 409.6-603 also authorizes the Missouri Securities Division to file civil actions to enforce alleged securities fraud violations to be tried by a neutral judge in the Circuit Court of Cole County, Missouri. But the Division does not.[4] And why would it when the Commissioner whose job it is to enforce the Missouri securities laws also gets to determine whether those laws have been violated?

But administrative enforcement proceedings for alleged securities fraud cases are not the only play here in Missouri. The case can certainly be made that the Missouri Constitution, art. I, section 22(a) applies to securities fraud enforcement claims, which states: “the right of trial by jury as heretofore enjoyed shall remain inviolate; …”[5] “Quite simply, the words of the provision are intended to guarantee a right, not restrict a right. The choice of words, particularly the use of the words ‘remain inviolate,’ is a more emphatic statement of the right than the simply stated guarantee written some 30 years earlier as the 7th Amendment of the United States Constitution that ‘…the right of trial by jury shall be preserved…’” State ex rel. Diehl v. O’Malley, 95 S.W. 3rd 82, 84 (Mo. Ct. App. 2002). 

Credit the U.S. Court of Appeals for the Fifth Circuit for first coming up with this idea in the context of securities fraud administrative enforcement actions in Jarkesy v. Securities and Exchange Commission, 34 F. 4^th 446 (5^th Cir. 2022), which ruled on May 18, 2022, in a 2-1 decision, that the U.S. Securities and Exchange Commission (“SEC”) may no longer use its own administrative proceedings framework to enforce SEC securities fraud cases. Instead, the SEC must bring such actions in federal district courts where respondents may exercise their rights to civil jury pursuant to the 7^th Amendment. The same principle applies to Missouri’s administrative proceedings framework to enforce Missouri securities fraud cases, even though there is also gratuitous language in Diehl and Goodrum v. Asplundh Tree Expert Co., 824 S.W. 2d 6, 11 (Mo. banc 1992), which appears to state otherwise. We disagree.  The key is that the rights the Enforcement Section seeks to vindicate in securities fraud administrative enforcement actions are analogous to fraud causes of action at common law brought at the time of Missouri’s 1820 Constitution. 

Cosgrove Law Group has experience dealing with these questions. If you are served with a securities fraud administrative enforcement action by Missouri Securities Division and would like to speak with one of our licensed attorneys, call 314-563-2490.   

Author: Brian St. James

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[1] All statutory references are to the 2020 Revised Statutes of the State of Missouri. 

[2] Committee Meeting Materials, “Administrative Practice Before the Missouri Commissioner of Securities,” 2022 MoBar Fall Conference, Office of the Missouri Secretary of State Securities Division. 

[3] Id.

[4] Id.

[5] Article, I, Section 22(a), the Missouri Constitution.

FINRA Orders Worden to Pay $1.2 Million in Restitution to Customers Whose Accounts Were Excessively Traded

FINRA announced last week that it sanctioned Worden Capital Management LLC (WCM) more than $1.5 million, including approximately $1.2 million in restitution to customers whose accounts were excessively traded by the firm’s representatives, and a $350,000 fine for supervisory and other violations. WCM must also retain an independent consultant to conduct a comprehensive review of the relevant portions of the firm’s supervisory systems and procedures.

FINRA found that from January 2015 to October 2019, WCM and the firm’s owner and CEO, Jamie Worden, failed to establish and enforce a supervisory system reasonably designed to achieve compliance with FINRA’s rules relating to excessive trading. As a result, WCM’s registered representatives made unsuitable recommendations and excessively traded customers’ accounts, causing customers to incur more than $1.2 million in commissions..

Jessica Hopper, Head of FINRA’s Department of Enforcement, said, “FINRA has an unwavering commitment to protect investors from excessive and unsuitable trading. Firms must ensure they establish systems and procedures reasonably designed to supervise representatives’ recommendations to their customers, and firms’ supervisory personnel must have in place the necessary tools and training to address red flags.”

FINRA also found that WCM and Worden interfered with customers’ requests to transfer their accounts to another member firm. Finally, as a result of supervisory failures, WCM failed to timely file amendments to registered representatives’ Form U4s and Form U5s to disclose the filing or resolution of customer arbitrations[1]. 

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[1] Michelle, Ong. (2020, December 31). FINRA Orders Worden Capital Management LLC to Pay More than $1.2 Million in Restitution to Customers Whose Accounts Were Excessively Traded. Retrieved January 05, 2021, from https://www.finra.org/media-center/newsreleases/2020/finra-orders-worden-capital-management-llc-pay-more-12-million

 

Missouri Securities Division Brings Action for Unregistered Investment Advice

Missouri’s Commissioner of Securities recently issued an Order to Cease and Desist against a California resident that was allegedly collecting fees to provide advice regarding stock selections. According to the order, Yifel Lu (“Lu”), “…for compensation, provided unregistered investment advice to individuals throughout the United States. Lu touted personal success in the United States stock market in an internet chat room. When asked for Lu’s advice, Lu instructed individuals to contact him on a separate phone/computer application. Once alternative contact was established, Lu proceeded to require clients to pay a fee of at least $300 for his advice. When the fee was agreed upon, Lu instructed clients to deposit funds electrically into a PayPal account.”  

Moreover, a Missouri Resident initially met Lu in a public chatroom on Moonbbs “where Lu, using the username “kyoraiden123,” touted his personal success in the United States stock market and advertised stock-selection advice. Lu promised multiple stock tips with the potential for high profit.”

The Enforcement Section is seeking disgorgement of the $300 fees and over $75,00 in civil penalties. Food for thought.

NASAA Releases Its 2016 Enforcement Report

The North American Securities Administrators Association (NASAA) recently released its Enforcement Report for 2016, an annual publication providing a general overview of the activities of the state securities agencies responsible for the protection of investors who purchase investment advice or securities. Admittedly, the information undercounts many statistics due to differences in fiscal year reporting and a lack of response or underreporting for each survey question posed. However, trends in the 52 U.S. jurisdictions are still apparent in the report.[i]

For the first time since NASAA began tracking enforcement statistics, more registered than unregistered individuals and firms were subject to respondent status.[ii] During 2015, state securities regulators conducted 5,000 investigations and brought 2,000 enforcement actions against 2,700 respondents, which often involved more than one individual or company.[iii]

Sanctions imposed upon those who were found in violation of securities law ranged from incarceration to monetary relief and bans on trading. The year witnessed a combined 849 years of imprisonment, 410 years of probation, and 23 years of deferred prosecution, as well as $538m paid in restitution and $238m in fines/penalties.[iv] In addition to criminal and monetary repercussions, revocation and disbarment from the industry occurred for more than 250 individuals, while another 475 licenses/registrations were denied, suspended or conditioned.[v]   

The five most common violations prompting these actions were, in order of frequency: Ponzi Schemes, Real Estate Investment Program Fraud, Oil & Gas Investment Program Fraud, Internet Fraud, and Affinity Fraud.[vi]

The NASAA report found that Ponzi scheme victims were often targeted through the internet or for identifiable attributes, such as race or religion. The report also found that vulnerable seniors were disproportionately victims; jurisdictions that reported on seniors found one-third of all investigations related to their victimization.[vii]

Prison terms have become more common for those conducting such schemes, such as Derek Nelson, found guilty of selling about $37m in promissory notes for property purchases that never took place. As a consequence, Mr. Nelson received 19 years in prison.[viii]

Real estate and oil and gas investment fraud was also a major concern for reporting NASAA members. Some states, such as Colorado, have sought judicial remedy and have secured investor protection by winning the right to have oil and gas interests subject to securities law.[ix]

The report clearly states that all fraud has been made easier to accomplish due to the internet, where only basic computer skills allow an individual from anywhere in the world to “enter” the homes of investors. Scott Campbell was sentenced to 20 years in prison for conducting a Ponzi scheme over the internet from Florida. Alabama garnered 18 convictions in an international bank scheme conducted through Craigslist.[x] Affinity frauds, in which an individual purports to be a member of a certain group, are much easier to accomplish given the anonymity of the internet.

The industry’s heightened attention to elder abuse has not shielded those responsible for supervision or oversight. Wells Fargo Advisors, LLC and Fulcrum Securities, LLC were ordered to pay $470,000 to investors for their failure to oversee Christopher Cunningham of Virginia, who defrauded elderly clients in a Ponzi scheme. For his part, Cunningham was disbarred and sentenced to 57 months in federal prison.[xi]

Attorneys are not immune to abusing their positions in order to perpetrate fraud. According to the report, Michael Kwasnik, an estate planning attorney, used his position of trust to perpetrate a $10m Ponzi scheme against elderly victims in New Jersey. The Court found that he had taken advantage of the attorney-client trust. Earlier in the year, Kwasnik also pled guilty to securities fraud in Delaware, utilizing the client trust account of his law firm to commingle monies from both frauds. Though Mr. Kwasnik received no jail time, he was ordered to repay millions in lost monies, amongst other judgments.[xii]

What may be the single worst case of elder victimization presented in NASAA’s annual report was perpetrated by Sean Meadows, owner of a financial planning and asset management firm, Meadows Financial Group LLC (MFG). Meadows perpetrated a $13m Ponzi scheme against 100 individuals, some disabled, poor, or terminally ill. He took the life savings of most, luring them into draining their retirement accounts. Many lost their homes, ability to care for their families, and even pay for cancer treatments.[xiii]

Meadows convinced his victims to pull money out of tax-deferred accounts to invest with MFG, promising these transactions would be tax-free rollovers. He then convinced these same individuals to allow him to do their taxes, in order to cover up the scheme. He either filed fraudulent tax returns or filed nothing at all. As a result, in addition to losing retirement savings, many incurred significant tax liabilities. For his crimes, Meadows received 25 years in prison.[xiv]

As the NASAA report makes clear, positive steps are being taken by its members to address the fraudulent and criminal activities of some individuals and firms. Laura Posner, NASAA Enforcement Section Chair, believes enhanced regulatory scrutiny is responsible for the increase in action documented by the report.[xv] However, it is still necessary to be on alert for promises that seem too good to be true. If you feel you may have fallen victim, please seek consultation from an attorney immediately.   

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[i] North American Securities Administrators Association (2016) NASAA 2016 Enforcement Report (Based on 2015 Data) [Electronic Format]. Retrieved from: http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2016/09/2016-Enforcement-Report-Based-on-2015-Data_online.pdf. (pp. 11)

[ii] Ibid. pp. 5

[iii] Ibid. pp. 2

[iv] Ibid. pp. 3

[v] Ibid. pp. 4

[vi] Ibid. pp. 4

[vii] Ibid. pp. 5

[viii] Ibid. pp. 6-7

[ix] Ibid. pp. 4-5

[x] Ibid. pp. 7

[xi] Ibid. pp. 7

[xii] Ibid. pp. 9

[xiii] Ibid. pp. 9-10

[xiv]Ibid. pp.  9-10

[xv] NASAA Releases Annual Enforcement Report (9.13.2006) [Electronic Format]. Retrieved from: http:nasaa.org/40256/nasaa-releases-annual-enforcement-report-2

Illinois Securities Department Requests Hearing against Springfield Investment Adviser Rep for Alleged Fraud

On January 17, 2014, the Illinois Securities Department filed a Notice of Hearing against investment adviser representative, David Matthew Lisnek.  As of November 13, 2013, the Department suspended Lisnek’s registration and further prohibited him from offering or selling any securities or otherwise engaging in the business of rendering investment advice in the State of Illinois. Lisnek was registered as an LPL salesperson and an investment adviser representative since September 23, 2004 but was terminated from LPL when the State of Illinois suspended Lisnek’s registration.  Lisnek has also been charged with one count of Financial Exploitation of the Elderly – a class 1 felony.    

 

The Notice alleges that Lisnek engaged in fraud involving at least three clients who are either elderly or nearing retirement.  The alleged loss is $270,918 in client funds.  The Notice also alleges that Lisnek held himself out as “an expert in investments and retirement planning and authored multiple books and articles advising the public, including advice on how to avoid getting defrauded by your financial adviser…”  The purported fraud committed by Lisnek is detailed as follows.    

Lisnek allegedly approached an 84 year old client (“PC’) with an investment opportunity to provide funds to another customer of Lisnek’s (so that the customer could renovate her home) in exchange for the customer’s REIT stocks.  LPL specifically prohibits a rep’s involvement with any cross transactions between clients.   Despite LPL’s policy, between June and September of 2013, Lisnek instructed PC to write him eleven checks totaling $65,000.  Lisnek either deposited the checks into a personal account or cashed them rather than purchasing REIT stock on behalf of PC.  The Notice alleges that Linsek used the $65,000 for his own benefit.  After further investigation, it was discovered that in 2011, Lisnek advised the client to purchase other REIT stock at over 2.5 times its actual value.    

The second client in which Lisnek is purported to have defrauded is a 54 year old client (“RJ”).  Around 2010 and 2011 Lisnek advised RJ to purchase real property for $272,500 if he allowed Lisnek and his family to reside there.  Lisnek promised to purchase the residence from RJ a year and a day later for $321,550.  In the interim, Lisnek agreed to pay RJ $2,000 in monthly rent.  Lisnek apparently advised RJ to withdraw the funds to purchase the property from an annuity Lisnek sold him the year prior.  RJ incurred approximately $17,418.29 in surrender charges from the early withdrawal.  To date, Lisnek has never made any of the monthly rent payments or purchased the property from RJ as agreed. 

In December 2010, Lisnek also advised RJ to invest in Lisnek’s own publishing company whose only purported asset was the copyrights to a book written by Lisnek.  RJ invested $50,000 in the publishing company pursuant to the terms of a buy-sell agreement which Lisnek never abided by.  It was later discovered that the publishing company was not a legal entity and Lisnek’s book had no registered copyright.

Around 2010-2011, Lisnek approached RJ with an opportunity to loan $40,000 to another client of Lisnek’s.  The Notice states the client, who is referred to as AB, was 69 years old.  Around January 31, 2011, Lisnek drafted a Promissory Note between RJ and AB whereby RJ agreed to provide AB with a loan of $40,000 and that AB would repay RJ the principal plus $5,000 by May 31, 2011.  Lisnek advised AB to write the $45,000 check to Lisnek and that he would deposit the check into RJ’s account.  However, Lisnek only deposited $30,000 in RJ’s account and deposited the remaining $15,000 into Lisnek’s personal account.

From 2012 through 2013, Lisnek also convinced AB to write him nine checks totaling $80,000.  Lisnek purportedly gave AB two checks totaling $115,000 in payment for the loans but instructed her not to cash the checks.

The lesson to investors here, which may seem obvious to some, is never write a personal check to your financial advisor under any circumstance.  Entering into investment “opportunities” that involve your advisor is also extremely questionable and we recommend avoiding those types of transactions.      

Lisnek’s hearing is currently set for February 19, 2014 so stay tuned for updates relating to this matter. 

The SEC’s Compliance Outreach Program for Investment Companies and Investment Advisers

The SEC recently announced that it will be hosting a national compliance outreach seminar for investment companies and investment advisers.  The seminar will be held on January 30, 2014 at SEC headquarters in Washington D.C.  The SEC’s Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and the Asset Management Unit of the Division of Enforcement will co-sponsor the event.

The following topics will be covered in the seminar:

-          Program Priorities in 2014 with presentations from OCIE, Division of Investment Management, Division of Enforcement (Asset Management Unit), Joint or Coordinated Initiatives and Large Firm Engagements;
-          Private Fund Advisers with an emphasis on presence exam observations, JOBS Act, private fund initiatives/guidance, and private equity issues; 
-          Registered Investment Companies with an emphasis on 15c process/observations, alternative mutual funds, exchange traded products, and distribution in guise;
-          Valuation Issues specifically focusing on basic legal framework, valuation techniques and practices, difficult-to-value investments, and the role of persons other than the investment adviser (e.g., Board, Pricing Services); and
-          The Role of the CCO including presentations on SEC staff observations, CCO presence, access, and empowerment, and recent enforcement actions.  

“The compliance outreach program is an important part of the Commission’s initiative to share information about observed risks to assist firms in assessing and enhancing their compliance and control programs,” said OCIE Director Andrew Bowden.  “Past compliance outreach program events have been well attended and well received, and we look forward to a candid exchange of ideas with participants at our upcoming event.”

Click here for more information about registration.     

This announcement came just a few days before the SEC issued enforcement results for its fiscal year 2013, which ended in September.  The agency’s 686 enforcement actions in fiscal year 2013 resulted in a record $3.4 billion in monetary sanctions ordered against wrongdoers. Disgorgement and penalties resulting from those actions are 10 percent higher than fiscal year 2012 and 22 percent higher than fiscal year 2011, when the SEC filed the most actions in agency history.

If you need representation in an enforcement proceeding or need compliance consulting, contact the attorneys at Cosgrove Law Group, LLC.  

Furthermore, David Cosgrove, the managing-member of Cosgrove Law Group, LLC and former securities industry regulator, has recently established the Investment Adviser Rep. Syndicate.  This is a group dedicated to the interests of investment adviser representatives through the provision of educational and training opportunities.  In addition to these opportunities, the Syndicate, in general, is intended to address the specific interests and concerns of the representatives, rather than the representatives’ RIA or broker-dealer.

The Syndicate currently intends to hold its first annual conference in Saint Louis in the summer of 2014.  Stay tuned for the launching of the website that will include information on how to become a member, for additional announcements, and blog entries.  We are eager to be a part of the first national organization dedicated solely to the professional interests of investment adviser representatives.   

FINRA Tags St. Louis Bond Underwriter for Improper Sports Ticket Gifting

FINRA recently accepted the offer of settlement of a St. Louis member firm. The uncontested offer of settlement was submitted approximately 9 months after FINRA's Department of Enforcement filed its Complaint. Enforcement accused the firm of improperly gifting tickets to various sporting events to employees of municipal securities issuers. The firm gifted over $2,000 tickets valued at almost $200,000 in a two-year period.

In concluding that the firm violated MSRB Rule G-27, FINRA emphasized three salient factors: 1) the firm did not host the recipients of the tickets at the events, 2) the firm gifted tickets only to those issuers who were clients, and 3) the bigger issuers received more and better tickets. MSRB Rule G-20 has an exemption for occasional gifts of tickets that requires the member firm to host the event. As a result, the St. Louis firm was censured and fined $200,000. Food for Thought! Go to the game!

FINRA’s 2012 Year in Review

FINRA just released its 2012 Year in Review Report.  In its opening remarks, FINRA’s Chairman and CEO, Richard Ketchum, stated, “FINRA fulfilled its role as the first line of defense for investors through a comprehensive and aggressive enforcement program, supported by a realigned and more risk-based examination program and the provision, for the first time, of cross-market surveillance programs that more effectively detected electronic manipulative trading. Protecting investors and helping to ensure the integrity of the nation’s financial markets is at the heart of what we do every day.

Regulatory

FINRA noted that one of its regulatory highlights was the success of its referral program in which the Office of Fraud Detection and Market Intelligence (“OFDMI”) shares regulatory intelligence with the SEC and other law enforcement agencies. Its intelligence stems from OFDMI’s fraud and insider trading surveillance of nearly all U.S. equities markets.  In 2012, FINRA referred a total of 692 matters to the SEC and other law enforcement agencies, of which 347 involved insider trading and 260 involved fraud. 

Disciplinary and Enforcement

In addition to its referrals program, FINRA brought 1,541 disciplinary actions against registered firms and individuals, levied fines in excess of $68 million, and ordered $34 million in restitution to harmed investors.  FINRA expelled a total of 30 firms from the securities industry, barred 294 individuals, and suspended 549 brokers from associating with FINRA-regulated firms. 

Some of the complex products involved in 2012 disciplinary and enforcement actions were non-traded REITs, exchange-traded funds (ETFs), and structured products.  Other enforcement actions involved research analyst conflicts, mispricing, and improper reimbursement fees to lobbying groups. 

Another critical aspect of FINRA is its examinations of member firms and associated persons.  In 2012, FINRA initiated 1,846 routine examinations, over 800 branch office examinations, and 5,100 examinations resulting from customer complaints, terminations for cause, and other regulatory tips.  FINRA’s exam procedures were made more efficient due to advances in technology which has provided FINRA with a modernized framework that allows it to identify and prioritize areas of risk exposure at firms. 

Investor Protection

Of grave importance to investors was FINRA’s new suitability rule that was implemented July 9, 2012.  The rule requires broker-dealers and/or their associated persons “to have a ‘reasonable basis’ to believe a recommended investment is suitable for the customer, based on information obtained through ‘reasonable diligence’ to understand a customer’s investment profile.”  For more investor information on FINRA’s suitability rule, click here.

FINRA also proposed an investor-protection initiative in 2012 that attempts to address conflicts of interest relating to recruitment compensation practices of member firms offering incentives to recruit registered representatives.  Currently these compensation arrangements are not disclosed to the representative’s customers when they are asked to transfer their accounts to a representative’s new firm.  The rule would require the member firm to provide certain disclosures before a customer makes the final determination to transfer an account to the new firm.  The view the text of the proposed rule, click here.

In September 2012, FINRA obtained approval to file proposed rules that would require firms to include a reference and a link to BrokerCheck on their websites to make it easier for investors to obtain information on firms and brokers. FINRA also increased the user friendliness of BrokerCheck by including a zip code search and a combined search function that provides for easier access to the SEC’s Investment Adviser Public Disclosure (IAPD) database. 

In November 2012, FINRA Dispute Resolution released data which reflects the outcomes of cases heard under its all-public panel program that was implemented in February 2011 which allows investors the option of a panel comprised of all public arbitrators versus a panel made up of one arbitrator with securities industry experience (nonpublic arbitrator) and two public arbitrators. The all-public panel option represents an investor-friendly change to the program, designed to ensure a fair playing field for all parties. To date, the data indicates that in cases decided by three public arbitrators, customers were awarded damages 51 percent of the time, whereas in cases decided by a panel including one nonpublic arbitrator and two public arbitrators, investors were awarded damages 32 percent of the time.  For the full data report, click here.

Notably, FINRA and the FINRA Investor Education Foundation have continued to enhance its outreach strategies and investor education by distributing educational brochures, holding live events, and creating an Outsmarting Investment Fraud curriculum.  The Foundation also put  more focus into providing services for military families through their military financial readiness project. 

Crowdfunding

A hot new topic in 2012 was “crowdfunding” since new provisions relating to crowdfunding were introduced in the April, 2012 JOBS Act.  To ensure that the capital-raising objectives of the JOBS Act can be advanced while simultaneously protecting investors, FINRA has requested and solicited comments on specific rules it should adopt for registered funding portals that become FINRA members.  In addition, FINRA has also asked for comments on the application of its existing rules to broker-dealers engaging in crowdfunding activities. 

If you’re a FINRA member firm, associated person, or an investor involved in a potential FINRA-related claim, contact the experienced attorneys at Cosgrove Law Group, LLC for assistance. 

Has the SEC Stepped Up to the Plate on Fraud Enforcement Actions?

The Securities and Exchange Commission’s (“SEC”) mission is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”  The SEC believes that its “investor protection mission is more compelling than ever” since more first-time investors have turned to the market to invest in their future.  Therefore, it goes without saying that the SEC’s enforcement authority is crucial in maintaining investor protection.  But, has the SEC stepped up to the plate considering the negative impact the 2008 financial crisis has had on investors?

The 2008 financial crisis had devastating effects on our economy which caused massive job losses and a growing number of American families at risk of foreclosure and poverty.  However, some companies made substantial profits from the financial collapse and many top executives received considerable bonuses (some from government bailout money) after millions of families’ investments dwindled or even disappeared. 
Most recently, the SEC filed civil fraud charges in Texas against former Chief Executive Anthony Nocella and former Chief Financial Officer J. Russell McCann of Franklin Bank Corp. for concealing the deterioration of the bank’s finances during the mortgage crisis.  Specifically, the SEC alleged that in 2007, Nocella and Man used aggressive loan modification programs to hide the bank’s non-performing loans and artificially boost profits.  See SEC Complaint. 

Despite having charged over 100 people and firms with fraud tied to the financial crisis, critics of the SEC believe the agency hasn’t buckled down hard enough.  Yet SEC enforcement chief, Robert Khuzami, believe these numbers show the agencies effectiveness in “tackling financial-crisis wrong-doing.”  Of the 74 cases filed against individuals, 55 are chief executives, finance chiefs or other top officers.  Khuzami believes this “sends a strong deterrent message.”  

Many of the SEC critics note that about 24 of the people charged by the SEC have avoided trial by reaching “weak” settlements.  Senator Grassley from Iowa stated, “The lack of accountability from Wall Street encourages recidivism.” 

For instance, Angelo Mozilo, Chief Executive of Countrywide Financial Corp., agreed to a settlement of $67.5 million ($22.5 million penalty and $45 million disgorgement), while denying any wrongdoing.  These sanctions are supposed to compensate investors for their losses.   However, the repayment of illegal profits is tax-deductible and can be covered by some corporate insurance policies.  In Mozilo’s case, nearly half of the $45 million payment came from Countrywide's current owner, Bank of America Corp.  It can be difficult for the SEC to challenge indemnification rights in employment contracts or insurance policies.

According to The Wall Street Journal, in the 24 crisis-related cases where the SEC reached a settlement with an individual, the median sanction was $203,751.  These same defendants paid a combined $80.7 million in penalties.  Most of those penalties came from executives at collapsed mortgage lenders such Countrywide, American Home Mortgage Investment Corp. and New Century Financial Corp.; yet, their investors sustained losses of about $31 billion based on the three companies' peak stock-market value before the financial crisis began.  These penalties arguably pale in comparison to investor losses. 
Even some federal judges have criticized the large gaps between investor losses and the penalty.  For example, U.S. District Judge Frederic Block in New York, said $1.05 million in penalties paid by two former Bear Stearns Cos. hedge-fund managers, Ralph Cioffi and Matthew Tannin, in a proposed settlement of civil-fraud charges against them was “chump change” compared with the $1.8 billion lost by investors. The judge has not yet approved the proposed settlement.

While to some, the above penalties may seem like an inadequate punishment for the charges, Cioffi and Tannin have agreed to a temporary ban from the securities industry.  Khuzami believes the SEC’s power to expel people from the securities industry or from serving as directors of public companies is “probably one of the most powerful sanctions [it has].” 

Furthermore, when reaching settlements, the SEC has to weigh the likelihood of losing to a jury, along with the amount the agency can show was a direct result of the wrongdoing.  In some cases, it can be hard to say with certainty how much of investor losses were caused by fraud or illegal conduct, or if any fraud or illegal conduct actually took place.  Usually, defendants argue the financial losses were due to a failure to predict the meltdown, rather than any fraud on their part.  The answer is not always clear cut and pushing for stricter penalties across the board may not be appropriate for each case. 

Nevertheless, we can only hope that Americans’ trust in our banking and financial systems can once again be restored.