The SEC’s current “broken windows” approach to securities enforcement has brought on increasingly aggressive resolution tactics. At first blush, trial or settle at the SEC’s forced rates may appear to be the only options. But there are other options—ones worth considering if the SEC’s settlement offer is extreme enough to push a client past the point of being trial-averse.
I believe the SEC should strive to be that kind of cop—to be the agency that covers the entire neighborhood and pursues every level of violation. An agency that also makes you feel like we are everywhere.
—SEC Chair Mary Jo White, Remarks at the Securities Enforcement Forum (Oct. 9, 2013)
Over the past few years, the United States Securities and Exchange Commission (SEC) has upped the enforcement ante on multiple fronts. Prosecution tactics have become more aggressive with the SEC increasingly adopting a Department of Justice–style approach, a trial-ready posture, and forcing trial through bet-the-house settlement demands. These demands can include crushing penalty and disgorgement amounts—even for non-fraud violations—and industry bans that are trending upward in duration, at least as a minimum “ask” to resolve matters.
By the numbers, in 2014 the SEC filed a record 755 enforcement actions and went after defendants both large and small for violations both limited and broad. Investigations were on the uptick, with 955 opened in 2014, increasing from 908 in 2013. And there is no sign of let up, with the commission increasing its staffing levels to enhance its efforts. At the center of this investigatory hubbub is the controversial enforcement strategy known as “broken windows.” The theory goes that allowing successful law breaking—even minor infractions—to go unpunished causes a breakdown in respect for laws. SEC Chair Mary Jo White announced the SEC’s adoption of this strategy in late 2013, and the SEC has made the most of its new remit, conducting a series of industry sweeps to root out scores of low-level, even non-fraud, securities law violators. These sweeps have caught multiple defendants up in the SEC’s civil action nets and have been a notable source of settlement figures and press releases. Increasingly aggressive resolution tactics accompany the SEC’s new investigatory approaches. Targeting non-scienter violations and making use of oftentimes high-penalty payment demands, the SEC’s approach might be described as take-no-prisoners as well as broken windows.
Consider the following scenario: Your client is charged with securities law violations in parallel criminal and civil actions. The criminal case settles with an admission to a low-level “broken window” internal controls violation. Seeking the civil-penalty equivalent to wrap up the case, you offer a similar settlement to the SEC. The SEC responds to this settlement offer with its best-case-scenario penalty, pointing to the fact that in a civil action, it enjoys broader discovery and more lenient proof burdens. Your client wants to fight, and will go to trial if necessary, but would rather preserve resources, yet sees nothing to gain by settling if settlement will bring no better resolution than rolling the trial dice. The SEC, by contrast, has a comparatively unlimited trial budget and related resources once it pulls the trigger on filing an action. In this environment, what is defense counsel to do? At first blush, trial or settle at the SEC’s forced rates may appear to be the only options. But there are other options—ones worth considering if the SEC’s settlement offer is extreme enough to push a client past the point of being trial-averse.