WASHINGTON -- Flexing their muscles, Securities and Exchange Commission officials from around the nation told a group of lawyers here that while cooperation with regulators is essential, the bar has been raised in terms of penalties and no firm will avoid getting its medicine.
The nation's top securities regulator sent an unmistakable message to the $7.4 trillion mutual fund industry that cooperation, or lack thereof, will be taken into account when doling out penalties, but the sector's expectations should not be based on historical fines. Times and circumstances have changed.
"The kinds of sanctions we were happy with before, we're not happy with today," said Stephen Cutler, the SEC's director of enforcement, speaking to a room full of lawyers and regulators here at the Practicing Law Institute's "SEC Speaks" conference. "Without cooperation, the lives of your clients would be even worse," Cutler said, adding, "Don't destroy documents."
One of the jokes at the meeting was that Cutler's favorite movie is "Unforgiven" and that his New Year's resolution was not to lose weight, or to start exercising, but to increase the number of enforcement actions and to crack down on violators more sternly.
Recently, some in the legal profession and the fund industry have groaned that the nation's top securities regulator has given defendants and subjects of Commission investigations little leeway and less incentive to talk than before. After all, the settlements the SEC negotiated with both Alliance and MFS tallied well into the hundreds of millions of dollars, some of the largest settlements seen in the financial services industries. And at press time, there were reports that a pending settlement with Bank of America could even exceed Alliance's historic settlement.
Charged, Barred & Imprisoned
Executives are being charged and barred from the industry, and regulators are looking to prosecute and throw fund company leaders in prison. The recent case against two Columbia units even seeks to bar the firm from managing its own funds (see MME 3/8/04). Obviously, the stakes are much higher now.
But in order to send a strong message of deterrence, a significant penalty has to be levied in some instances, said Paul Berger, an associate director in the division of enforcement.
Further indication that the pressure is on the industry from regulators, the SEC announced last week more targeted "minisweeps" to identify and investigate areas of concern. Examples of some of the ongoing or recent sweeps include: payments by mutual funds for "shelf-space", use of soft dollars by index funds, valuation and pricing of bond funds, fair-value pricing and "practices of investment consultants," said Lori Richards, the Commission's head of compliance, in a statement.
Randall Lee, the regional director of the SEC's Pacific region office, said the penalties playing field has changed dramatically, even in the last year. Noting that developments in the fund industry "continue to astound" his staff, Lee said every district and regional office has participated in and has ongoing investigations into fund-related malfeasance.
Lee said the SEC has brought 16 enforcement actions, 12 against entities and nine against individuals, and that dozens of additional investigations are ongoing.
In accordance with new funding to the agency, increased staff has enabled the SEC to extend its reach. In addition to boasting about its impressive nine wins in 11 trial cases and its undefeated track record in 21 cases in the administrative ranks last year, the agency is poised to take that momentum into 2004 and keep the success rolling.
"I don't know if we're winning the war against corporate fraud [and] disclosure," said Linda Chatman Thomsen, a deputy director in the division of enforcement. "But in litigation, we're winning."
However, just because the SEC has its poker face on doesn't mean it is out to jack up the penalties. Deputy Litigation Counsel Peter Bresnan, who is based in the agency's Boston office, said "one shouldn't assume all of our future settlements will be in the same dollar range" as the ones settled so far, noting that harm to investors is an important consideration.
The Art of the Deal
During a workshop on enforcement, Alan M. Buie, an assistant district administrator out of the SEC's Fort Worth district office, said, "The subject of cooperation is very much on the minds of the staff." Buie noted that the agency is "assessing and weighing cooperation when making decisions," but that "the question of cooperation is much more an art than a science."
Cooperation, in and of itself, is not enough to get firms a free pass. There are many factors that go into weighing cooperativeness, such as self-reporting, diligence in handing over documents, and the preventative systems in place at the firm. Oh yes, and helping investigators find other misdeeds.
"If your client has info about other things of interest to us, we will definitely take that information into consideration," said Mark Schonfeld, associate director in the division of enforcement, based in the Northeast regional office.
However, companies that the SEC deems uncooperative could have harsh penalties levied against them, he said, pointing to an action against Houston-based Dynegy, an energy production, distribution and trading company, back in September 2002.
While the settlement was of a modest dollar amount compared to what we have seen so far in "Fundgate," the firm's difficult disposition played a major part in determining the punishment. "The $3 million penalty imposed directly against Dynegy in this case reflects the Commission's dissatisfaction with Dynegy's lack of full cooperation in the early stages of the Commission's investigation," said Cutler, at the time of the settlement. "Just as the Commission is prepared to reward companies that cooperate fully and completely with agency investigations, the Commission will also penalize those who do not. If companies wish to receive the maximum benefit from their cooperation, the cooperation must be complete and meaningful from the outset."
Proving that it is cracking the whip just a bit harder these days, the SEC announced last Wednesday it has settled an enforcement action against Banc of America Securities for taking too long when supplying the agency with requested documents, providing misinformation and engaging in delay tactics. The document requests were in relation to an investigation into trading of securities at the firm prior to its issuance of research pertaining to those stocks. Banc of America agreed to a $10 million civil penalty and a censure (see sidebar page 8).
"[This] action makes clear that we will not tolerate unreasonable delay in responding to our inquiries and will act aggressively to protect the integrity of the Commission's investigative processes," Cutler said in a statement.
For those firms that don't plan on settling or being overly accommodating, Thomas C. Newkirk, an associate director in the division of enforcement, welcomes the challenge. "Those that want to roll the dice, they're welcome to do so."
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