Chapter 13 - § 13.3 • PENALTIES FOR VIOLATIONS
| Jurisdiction | Colorado |
§ 13.3.1—Penalties Under SERPSRA
Since the 1980s, Congress has been increasing the authority of the SEC to investigate and punish violations of the securities laws. These Congressional actions include the Insider Trading Sanctions Act of 1984 (ITSA), the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA), SERPSRA, the Private Securities Litigation Reform Act (PSLRA), and the Sarbanes-Oxley Act of 2002. SERPSRA established "tiers" of penalties, depending on the nature of the violation:145
1) The first tier, available for any violation, permits a fine up to $5,000 for a natural person and $50,000 for any other person.
2) The second tier permits a fine up to $50,000 for a natural person and $250,000 for any other person. Second-tier penalties can be imposed if the violation involved fraud, deceit, manipulation, or reckless disregard of statutory requirements.
3) The third tier permits a fine up to $100,000 for a natural person and $500,000 for any other person. Third-tier penalties can be imposed if the violation involved fraud, deceit, manipulation, or willful disregard of statutory requirements and the violation resulted in, directly or indirectly, substantial losses (or created a risk of substantial losses), or in substantial pecuniary gain to the violator.
In each case, the fines can be increased to the amount of the malefactor's gain. The SEC must, however, have a basis for imposing appropriate penalties. In Rockies Fund Inc. v. SEC,146 the D.C. Circuit found that the record did not support the imposition of third-tier penalties where the SEC filed to establish proof as to how the directors' conduct resulted in or created a significant risk of substantial loss to others.
SERPSRA is an extremely broad statute that provides great flexibility to the SEC in enforcing its provisions and punishing wrongdoers. In SEC v. Sterns,147 the Central District of California issued permanent injunctions against defendants who had allegedly distributed shares of unregistered stock. Sterns was fined the maximum of $100,000 multiplied by the 29 investors who purchased after the date of SERPSRA.148
The staff has also filed actions for violations of the cold call rule,149 illegal market manipulation,150 failure to register as a broker-dealer,151 misappropriation of client funds, books and records violations, and failure to file a Schedule 13D. In SEC v. Embry,152 a New York investment adviser agreed to disgorge $1 million that he allegedly defrauded from his investment advisory clients through improper personal securities transactions.
In SEC v. JT Wallenbrock & Assocs.,153 the defendants settled an SEC enforcement action by consenting to a permanent injunction against future violations. The injunction order authorized the district court to determine the amount of disgorgement, interest, and civil penalties. The district court imposed disgorgement against two of the defendants, seeking repayment of $139.4 million. The defendants appealed, arguing that the disgorgement should be reduced by $36.6 million, the amount of their business and operating expenses. As described by the court, "In short, the defendants here seek an offset for entirely illegitimate expenses incurred to perpetuate an entirely fraudulent operation."154 The Ninth Circuit denied their appeal, holding, "Neither the deterrent purpose of disgorgement nor the goal of depriving a wrongdoer of unjust enrichment would be served were we to allow these defendants—who defrauded investors of $253.2 million—to 'escape disgorgement by asserting that expenses associated with this fraud were legitimate.'"155
The SEC has instituted numerous cease and desist proceedings administratively under SERPSRA:
• On May 6, 1992, the SEC instituted proceedings against the State Bank of Pakistan (the "Bank") for violating the registration requirements of the 1933 Act. This resulted from advertisements in U.S. newspapers by the Bank for the offer and sale of bearer bonds by the Islamic Republic of Pakistan. The SEC alleged that these advertisements constituted a prospectus, and the Bank consented to a cease and desist order.156
• On March 31, 1992, Caterpillar, Inc. consented to a cease and desist order deriving from allegations made by the SEC that Caterpillar did not adequately disclose in its MD&A the importance of poor operations of its Brazilian subsidiary.157
Other cease and desist orders have been entered in cases involving the filing of false and misleading registration statements, false financial disclosures, books and records violations, failure to file Forms 3 and 4, and fraud in connection with a kickback scheme between an investment adviser, an investment company, and a broker-dealer.
The SEC has also instituted numerous proceedings under 1933 Act § 20(e) to prohibit persons from serving as officers or directors of any issuer subject to the reporting requirements of the 1934 Act. In SEC v. BFMF Corp.,158 the principal of a corporation engaged in the sale of unregistered securities was barred from acting as an officer or director of a public company.
Bars have also been sought in cases involving financial fraud, fraud in connection with the offer and sale of securities, and books and records violations.
• In SEC v. Posner,159 the Supreme Court refused to review the Second Circuit's decision affirming an officer/director bar imposed against Victor Posner and his son as a result of misdealings in securities. They were also ordered to disgorge $4 million in profits....
• The SEC must meet certain standards in assessing bars against officers and directors. In SEC v. Patel,160 the appellate court reversed the district court's imposition of a permanent bar on a
To continue reading
Request your trial