Bipartisan bill gives SEC room to seek larger securities fines
A bipartisan bill introduced in the Senate would give the Securities and Exchange Commission the ability to tie securities laws penalties directly to investor losses.
Sens. Jack Reed, D-R.I., and Chuck Grassly, R-Iowa, submitted the Stronger Enforcement of Civil Penalties Act Monday. Existing law caps penalties to $150,000 per violation for individuals and $725,000 for entire institutions.
The SEC can tie penalties to what the firm profited from the fraud, but only if the case reaches federal court. The underfunded agency more often settles cases administratively.
The bill would cap for violations based on their seriousness. For the worst offenses, individuals could be fined up to $1 million. Firms could be penalized $10 million per violation. The SEC can triple the penalty in cases where it ties the fine to what the institution profited from the fraud. The agency would also be able to triple the fine for those convicted of a previous securities law violation in the past five years.
In previous legislative hearings, federal regulators warned against any requirement to get an admission of guilt from violators. SEC Chairwoman Mary Schapiro wrote to the Senate asking for an expansion of penalty limits instead.
"If a fine is just decimal dust for a Wall Street firm, that's not a deterrent," Grassley said in a statement. "It's just the cost of doing business."
U.S. District Court Judge Jed Rakoff struck down a settlement between Citigroup (C) and the SEC over a $1 billion collateralized debt obligation tied to mortgages the bank allegedly knew were riskier than advertised.
Investors lost an estimated $700 million in the deal, while Citi profited $160 million. The settlement would return $285 million to the investors, which Rakoff said at the time wasn't enough. The case reached trial in July.
Two former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin settled with the SEC in February for a combined $1 million. They were indicted for wire, securities fraud charges for misrepresenting the health of their funds and their exposure to the subprime mortgage market. Investors lost an estimated $1.6 billion from the funds.
"If they look at the bottom line and see they can break the law, get caught, pay a nominal fine, and still profit, the cycle of misconduct will continue," Reed said in a statement.