SEC secures record $6.4 billion in application payments

Gurbir Grewal, director of the enforcement division at the Securities and Exchange Commission, said his mission is to restore public confidence in financial markets and the authorities that oversee them, which means hitting violators. with tougher penalties and force them to admit their wrongdoing. .

The headquarters of the United States Securities and Exchange Commission in Washington, DC

Al Drago/Bloomberg

The SEC this week released its enforcement report for fiscal year 2022 (which ended Sept. 30), saying that through settlements and won judgments, it secured a record $6.4 billion. in total payments, including $4.2 billion in penalties, also a record.

Speaking at a conference in Washington on Tuesday, Grewal pointed to the numbers as evidence his division is making progress in tackling some of the worst behavior among market participants.

“It’s so important right now given the volatility and uncertainty that we are experiencing in the financial markets and in the crypto market,” Grewal said.

Its division at the SEC, which determines which cases to pursue and negotiates settlements with companies and individuals accused of misconduct, carries more weight in public perceptions of corporate liability than any other part of the agency, and Grewal describes the mission in urgent terms. , saying it is crucial to tackle the perception that “we regulators somehow fail to hold bad actors accountable.”

The SEC only has civil authority, so Grewal’s attorneys aren’t throwing any wrongdoers in jail. But he sees the agency’s ability to impose monetary penalties on bad actors as one of its most important tools, arguing that those fines must be large enough that the companies affected take a real hit and that other companies are taking note.

“In terms of sanctions and remedies, simply put, they must be sufficient to punish and deter misconduct,” Grewal said. “If market participants believe that being fined by the SEC is just another expense to be factored into the cost of doing business, then penalties are neither an effective punishment nor a deterrent.”

Consider the breakdown of total payouts the SEC obtained through enforcement action in fiscal year 2022. Grewal examines the relationship between penalties and restitution — the ill-gotten gains that violators are ordered to repay — as having been historically unbalanced, with restitutions generally being numbered higher than penalties. According to his interpretation, this means that the incentive to break a law – the possibility of achieving these ill-gotten gains – is greater than the potential punishment – the sanctions that the commission assesses.

This year, the level of penalties imposed by the commission was nearly double the $2.2 billion in restitution payments. For the previous five fiscal years, reimbursement volumes were generally more than twice as high as penalties, according to Grewal.

“In other words, for every dollar in penalties issued, offenders received over $2 in ill-gotten gains,” he said. “Now, to me, that ratio is reversed, because it means at the macro level that the potential reward for getting away with violating securities laws was far greater than the potential downside of getting caught.”

Another consideration that potential rule breakers might weigh involves admissions of guilt. The SEC frequently includes boilerplate language in its regulations saying that the alleged bad actor agrees to the terms of the deal, including the monetary penalties involved, without admitting or denying guilt. Grewal wants to change that.

He cited 19 major recent deals the SEC has entered into, all of which included admissions of wrongdoing. Seventeen of them involved improper communications within some of the larger brokerages. The others involved allegations of cheating on the CPA exam at Ernst & Young and alleged fraud at Allianz that masked the risks associated with an options trading strategy.

“Admissions is an incredibly powerful measure of accountability, and you should expect us to continue to seek admissions in similar cases,” Grewal said.

He says the commission does not take admissions lightly and insists that parties admit wrongdoing when his team has a strong enough case for them to be confident they would win at trial. (The SEC won in 12 of the 15 cases it brought to court in fiscal year 2022.)

So for the accused, that means the choice could come down to accepting a settlement that includes an admission of guilt or a trial.

“We are intentional and thoughtful when we put admissions on the table,” he said. “In cases where we put admissions on the table, we will litigate those issues.”

Email [email protected]

Comments are closed.