The Business Lawyer - February 2008, Volume 63, Issue 2 ARTICLES "Should the SEC Be a Collection Agency for Defrauded Investors?" Barbara Black, 63(2): 317-346 (February 2008) One of the important functions of the U.S. Securities and Exchange Commission ("the SEC") is enforcing the securities laws and punishing violators. Collecting damages for defrauded investors was not, historically, an important part of the agency's mission; rather, that was the function of private securities fraud class actions. Section 308 (the "Fair Fund provision") of the Sarbanes-Oxley Act of 2002 gives the SEC a more prominent role in compensating investors and allows the agency, in some circumstances, to distribute civil penalties to defrauded investors. The SEC has established Fair Funds in a number of high-profile cases and has taken pride in the large amounts of money it has obtained for investors. Meanwhile, section 308 has become an instrument in the business community's campaign against private securities fraud class actions. This Article reviews the background of the SEC's disgorgement and penalty powers, the history and language of section 308, and SEC enforcement actions against corporations in financial fraud cases and then looks at the business community's reaction to section 308 and recent SEC enforcement actions. The Article concludes that the SEC's increased emphasis on section 308 could lead to a weakening of its effectiveness as an enforcement agency and further erode support for private securities litigation—an unfortunate outcome for investors. "Disgorgement: Punitive Demands and Remedial Offers" Elaine Buckberg and Frederick C. Dunbar, 63(2): 347-382 (February 2008) U.S. Securities and Exchange Commission ("SEC") enforcement actions against corporate executives accused of securities fraud have become more visible since the Sarbanes-Oxley of 2002 set new standards to ensure that executives are held individually responsible for corporate fraud. Although long available to the SEC, the disgorgement remedy gained greater prominence because of the Sarbanes-Oxley Act requirement that the chief executive officer and chief financial officer of any company restating its financials due to material non-compliance disgorge incentive or equity-based compensation and profits from sales of stock following the false reporting. The SEC may also seek disgorgement from other executives and of other benefits, including any increment to pension or other retirement plans. Traditionally, class actions were the primary means by which shareholders sued officers and directors for securities claims. But the deterrent value of such lawsuits is arguably compromised because these cases almost alwayssettle—and the employer and its directors' and officers' liability carrier usually fund the full settlement. Computing accurately the benefits to the executive from the fraud requires an analysis of causation similar to that performed by the U.S. Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo. In the case of an executive benefiting from inflated shares, the approach to measuring the inflation per share at the time of the purchase and sale is the same one as would be used in a shareholder class action. If the wrongdoing included fraudulent accounting leading to higher executive pay, then a similar causation standard applies—namely, how did the defendant's compensation change as a direct result of the fraudulent financials. For some types of accounting violations, such as recognition of revenue in the wrong year, the gains in executive compensation in the year the revenue was recognized are offset, at least to some extent, by the loss in compensation in the year the revenue should have been recognized. The principles of proximate cause and offsetting in disgorgement are grounded in both economics and securities fraud case law. "Summary of Mendes Hershman Student Writing Contest Prize Essay: Conflicts of Interest in Derivative Litigation Involving Closely Held Corporations: An All or Nothing Approach to the Requirement of 'Independent' Corporate Counsel" Bobby Riccio, 63(2): 383-384 (February 2008) REPORTS "Model Real Estate Development Operating Agreement with Commentary" Joint Task Force of Committee on LLCs, Partnerships and Unincorporated Entities and Committee on Taxation, ABA Section of Business Law, 63(2): 385-510 (February 2008) "Changes in the Model Business Corporation Act—Proposed "Force the Vote" Amendments to Chapters 8, 9, 10, 11, 12 and 14" Committee on Corporate Laws, ABA Section on Business Law, 63(2): 511-524 (February 2008) "Changes in the Model Business Corporation Act—Proposed Amendment to Section 6.24" Committee on Corporate Laws, ABA Section of Business Law, 63(2): 525-530 (February 2008)
