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Home > Securities Arbitration Blog > SEC Filed Record Number of Enforcement Actions in Fiscal Year 2011

SEC Filed Record Number of Enforcement Actions in Fiscal Year 2011

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Posted: November 14, 2011 @ 10:13 pm - Nicholas Guiliano
    The Securities and Exchange Commission, or SEC, announced last week that it filed a record 735 enforcement actions in the fiscal year that ended Sept. 30.

The enforcement actions often involved highly complex financial products and transactions. They also dealt with market practices, including those related to the 2007 to 2008 financial crisis, according to information released by the SEC. Insider trading also led to numerous actions.

In fact, more enforcement actions were instigated in fiscal year 2011 than ever before in a single year in SEC history. The FY 2011 actions resulted in orders for a total exceeding $2.8 billion in penalties and disgorgement.

The SEC increased the number of enforcement actions related to investment advisers and broker-dealers. The agency filed a total of 146 enforcement actions related to investment advisers and investment companies in FY 2011, a single-year record and a 30 percent increase over FY 2010.

Regarding broker-dealers, the SEC brought 112 enforcement actions against them, a 60 percent increase over FY 2010.

Two Charles Schwab-related entities were charged for making misleading statements to investors regarding a mutual fund heavily invested in mortgage-backed and other risky securities. Two executive were also charged in the action. The Schwab entities paid more than $118 million to settle the charges.

An action was brought against AXA Rosenberg Group LLC and its founder for concealing a significant error in the computer code of the quantitative investment model that they used to manage client assets, resulting in a $217 million payment from AXA to cover investor losses and a $25 million penalty.

In addition, Merrill Lynch was charged for misusing customer order information to place proprietary trades for the firm, as well as charging undisclosed trading fees to customers.

Fifteen separate actions related to the financial crisis were filed by the SEC in FY 2011. These cases named 17 individuals, including 16 chief executive officers (CEOs), chief financial officers (CFOs) and other senior corporate officers involving in wrongdoing.

The cases included an enforcement action against J.P. Morgan for misleading investors as to a collateralized debt obligation (CDO) as the housing market deteriorated, and actions against Wachovia Capital Markets for misconduct in the sale of two CDOs tied to the performance of residential mortgage-backed securities. An action against Stifel, Nicolaus & Co. and RBC Capital Markets involved the sale of unsuitable CDO investments to five Wisconsin school districts

Six executives at Brooke Corp., and three executives at mortgage lender IndyMac Bancorp were charged by the SEC with misleading investors about the worsening financial conditions at their companies.

In addition, Morgan Keegan & Co. paid $200 million this year to settle fraud charges brought in FY 2010 after the company allegedly placed false values on subprime mortgage securities.

Altogether, during the last two and a half years the SEC has filed 36 actions stemming from the financial crisis against 81 defendants. Nearly half of these defendants were senior corporate executives, CEOs and CFOs.

The cases resulted in roughly $1.97 billion ordered in disgorgement, penalties, and other monetary relief. As well as those noted above, cases related to the financial crisis included enforcement actions against Goldman Sachs and Citigroup, as well as against senior executives from mortgage lenders Countrywide Financial, New Century and American Home Mortgage. 

Insider trading cases also increased in FY 2011. The SEC filed 57 enforcement actions in the fiscal year, a roughly 8 percent increase over the previous fiscal year. Among those charged in the past fiscal year were Barai Capital Management, a New York hedge fund, and four hedge fund portfolio managers and analysts who illegally traded on confidential information obtained from employees of technology companies. The illegal trading led to gains of more than $30 million based on nonpublic information about such companies as AMD, Seagate Technology, Western Digital, Fairchild Semiconductor, and Marvell.

Other insider trading cases included actions against a former manager director of the NASDAQ, a former Major League Baseball player, and a chemist with the Food and Drug Administration.

The SEC also brought insider trading charges against a Goldman Sachs employee and his father for trading on confidential information learned as he worked on Goldman’s exchange-traded funds desk.

Also, a member of the board of Mariner Energy Inc., an oil and gas company, was charged for trading on confidential information about its impending takeover. The board member’s son was also charged

The enormous Galleon Management case also took place in FY 2011. The SEC obtained judgments in 18 actions arising out of its investigation Raj Rajaratnam, the founder and manager of the hedge fund. Rajaratnam was recently convicted of multiple counts of insider trading, and the SEC levied a record penalty of $92.8 million against him in its civil action for widespread insider trading. The SEC also assisted the U.S. Attorney’s Office for the Southern District of New York in its successful criminal prosecution of Rajaratnam.

In other enforcement matters, the SEC brought 89 actions in FY 2011 for financial fraud and disclosure violations. Examples of such cases include actions against Satyam Computer Services Ltd. for fraudulently overstating its financial results by more than $1 billion over five years. An action was also brought against affiliates of PricewaterhouseCoopers based in India for their audit failures related to Satyam.

A major supplier of body armor to the U.S. military as well as law enforcement agencies, DHB Industries Inc. was charged with massive accounting fraud, and separate fraud charges were brought against the company’s former outside directors and audit committee for facilitating the fraud.

A special initiative of the SEC called the Cross-Border Working Group, also brought many important actions in FY 2011. The SEC describes this group as a proactive risk-based initiative focusing on U.S. companies with substantial foreign operations.

Actions brought by the Cross-Border Working Group include the first-ever stop order for post-effective registration statements due to the resignation of a company’s independent auditor, and a subpoena and enforcement action against Shanghai-based accounting firm Deloitte Touche Tohmatsu CPA Ltd. for its failure to produce documents related to possible fraud by its client, Longtop Financial Technologies Ltd.

In addition, SEC actions also led to the suspension of trading in the securities of several companies because of concerns about the accuracy and completeness of their publicly filed information.

Other enforcement actions involved the protection of vulnerable investors like the elderly. For example, the SEC charged three high-level executives of the Akron, Ohio- based Fair Finance Co. with orchestrating a $230 million fraud scheme targeting thousands of investors, many of them elderly. The SEC also charged Imperia Invest IBC, an Internet-based investment company, for running a scam targeting members of the deaf community.

The SEC said in its release that further data on FY 2011 enforcement will be available as part of the agency’s Performance and Accountability Report, to be published later.

A reorganization of the SEC’s Enforcement Division in 2009 and 2010 was cited in the SEC’s release as one reason for the increase in enforcement actions. The most significant since the division was established in the early 1970s, the reorganization greatly strengthened the enforcement capacity, flattened the management structure, and revamped the way the division handles tips and complaints.

The new formal tip program encourages cooperation from individuals and companies in SEC investigations. It also created national specialized units in five priority areas involving complex and high-risk areas, among other things. The new program was designed to speed up the prosecution of wrongdoers.

Robert Khuzami, director of the SEC’s Division of Enforcement, also credited the staff’s overall willingness to consider new tools and approaches to stopping and deterring fraud and misconduct. 


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