July 30, 2010
SEC Settlement Trends
Posted by Lisa Fairfax

On Tuesday I moderated a program sponsored by the SEC Historical Society featuring presentations of the top papers from NERA Economic Consulting's Finance, Law and Securities Litigation Conference, which program can be accessed here.  All of the presenters discussed some really engaging and timely issues.  One presenter, Dr. Elaine Buckberg, spoke about SEC settlement trends.  In fact, NERA Economic Consulting has developed a proprietary database of settlements in SEC enforcement actions.  The database has some very interesting information, including a list of the top ten SEC settlements, with AIG leading the pack at $800 million.  (The list does not include Goldman, which likely would rank 3rd.) 

The database also confirms what we have all witnessed, that since SOX, the SEC "has imposed unprecedented penalties in its enforcement actions."  Indeed, one report notes that prior to SOX, the largest penalty imposed in an SEC action against a publicly traded company was $10 milliom; since that time, the SEC has imposed such a fine (or higher) against more than a hundred companies.  Importantly, that same report notes that while the SEC has had authority to impose significant fines since 1990, it used that authority "sparingly," with some of the reluctance stemming from concern about the impact of such fines on "already aggrieved shareholders."  However, corporate governance scandals and SOX changed all of that-- especially SOX's Fair Funds provision, which allows penalties to be funneled back to shareholders if disgorgement is obtained.  And in the case of AIG, the disgorgement represented $700 million of the total penalty.

To be sure, another report reveals that while the number of settlement actions increased for the first quarter of 2010, the settlement amounts were relatively modest--averaging about $4.7 million, as compared to $10.8 million in the 2009 fiscal year.  The report also reveals that "the proportion of company settlements that included a monetary payment was the third lowest in any quarter since the passage of SOX."  Depending on your view of settlements and civil penalties, this may be good or bad news.

However, whether or not you think the SEC's heightened activity in this area is a good or bad thing, this data is very interesting, especially as it relates to potential future trends.  Of course, it is not clear if the more recent numbers reflect a one-time dip or even, as the report wonders, a one-time "clearing out" of relatively minor cases.  Indeed, according to another report by NERA Economic Consulting, securities class actions have surged, with most of that surge stemming from credit-crisis related cases.  Hence, if SEC enforcement actions parallels these trends in class actions, then it could be that the first quarter numbers are just the calm before the storm. 

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