Trends In SEC Enforcement Actions: Focus On Individuals, Insider Trading

The SEC is on pace to settle a record number of enforcement actions, according to a new report released by NERA Economic Consulting (here). This trend is being driven by a marked rise in the number of actions against individuals, primarily in insider trading and Ponzi scheme cases. The largest settlement by the agency to date, according to the report, is, ironically, the one it cannot complete. That is the $285 million deal with Citigroup Capital Markets that Judge Rakoff declined to enter in a decision which is now pending before the Second Circuit.

NERA is projecting that at the current pace the SEC will settle 758 cases by year end. Presently the Commission has concluded 379 settlements. That total represents 93 resolved cases with corporations and 286 with individuals. If the current pace continues the total settlements will be the most since 2005 when the Commission resolved 824 cases.

The largest increase in settlement activity is in insider trading cases. In 2011 the Commission settled 63 insider trading cases. Based on current trends, NERA projects that the agency will settle 120 in fiscal 2012. Settlements in Ponzi scheme cases had the next largest increase with a projected 76 settlement compared to 55 in 2011. While these two groups of cases represent the largest year over year increases, neither category had the most settlements. Rather, the resolution of cases involving public company misstatements will have the most with a projected 142 settled actions compares to 139 the prior year. Insider trading cases rank second in the number of settlements.

Contrary to the trend with individuals, an analysis of settlements with corporations projects that they are about the same or declining in all categories except Ponzi schemes. Settlements in cases involving public company misstatements are projected to be essentially flat with 11 in 2011 and 12 in 2012. However, settlements in categories for financial firm misstatements, illegal securities offering and FCPA violations are all projected to fall compared to 2011 with, respectively, a projected 48 compared to 61 in the first category, a projected 14 compared to 23 in the second and a projected 12 compared to 17 in the last category.

Overall trends in the dollars paid as part of a resolution of an SEC enforcement action track those reflected in the case statistics. In settlements with individuals, which are projected to increase by 20% , the median value will increase in 2012 to $190,000, exceeding the prior year. Interesting, while average settlement values are projected to increase for three of the five categories used by NERA, the value drops significantly in cases involving Ponzi schemes. At the same time that value is expected to increrase significantly in insider trading cases. That number may be influenced in part by the large settlement with Galleon Management LLC which is currently the second largest in 2012 at $92.1 million and the emphasis on cases in this area.

In contrast, the median settlement value for cases involving corporations is projected to decline from $1.5 million for 2011 to about $0.8 million for 2012. Yet in FCPA cases the value is projected to increase although the number of settled cases is projected to drop. That trend appears to be consistent with the notion that the costs of resolving an FCPA case continue to increase, a point well illustrated by an analysis of the current top ten largest settlements.

When analyzing the NERA statistics two points are important. First, the number of settled cases includes actions like the Citigroup case which is still not actually settled and others such as Pentagon Capital Management, a market timing late trading case listed in the report as the sixth largest settlement, which actually was litigated to judgment and is on appeal. Second, the dollar values represent the total amount of disgorgement, prejudgment interest and civil penalties rather than just the penalties. The numbers are not adjusted for outliers such as the Galleon insider trading settlement noted above.

For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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