In June 2012, when Eastern District of New York Judge Frederic Block considered the SEC’s proposed settlement of its enforcement action against former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin, he “reluctantly” approved the deal, bemoaning the fact that he was “constrained” to accept the deal and lamenting the limited power that Congress had given the SEC to recoup investor losses. In that case, the two individuals paid civil penalties totaling about $1 million, after being indicted for defrauding investors of over $1.6 billion. In his June 18, 2012 opinion (here), Judge Block expressly invited Congress to reconsider the penalties that the SEC is authorized to seek.


This recent development in the case involving the two Bear Stearns hedge fund managers follows a November 2011 request from SEC Chairman Mary Shapiro that Congress increase the penalties that the SEC is authorized to seek and allow the agency to seek penalties based on the scope of investor losses. In addition, according to a July 23, 2012 Reuters article (here), in a December 2011 speech, President Obama also called for legislation to make “penalties count.”


In response to these developments and requests, on July 23, 2012, Democratic Rhode Island Senator Jack Reed and Republican Senator Charles Grassley introduced a bill titled The Stronger Enforcement of Civil Penalties Act of 2012 to increase the SEC’s civil monetary penalties authority and to directly link the size of those penalties to the scope of the harm and investor losses. The Senators’ joint July 23, 2012 press release about the Bill can be found here.


The Bill proposes to update the maximum money penalties the SEC can obtain from both individuals and from entities, and further provides that the penalties may be obtained both in enforcement actions filed in federal court and in the agency’s own administrative actions (currently the SEC must file a civil enforcement action in order to seek penalties).


Under the laws currently in place, the largest amount that the SEC can seek from individual violators is $150,000 per offense and the largest amount the SEC can seek from entities is $750,000 per offense.


The increased penalties proposed by the new Bill are scaled to the seriousness of the offense. For the most serious offenses (specified as the third tier violations involving fraud, deceit or manipulation) the per violation penalty for individuals may not exceed the greater of $1 million; three times the gross pecuniary gain; or the losses incurred by victims that result from the violation. The maximum per violation penalty the SEC can seek from entities is limited to the greater of $10 million; three times the gross pecuniary gain; or the losses incurred by victims.


For less serious violations, the maximum amount the SEC may seek is correspondingly lower. For individuals, the per violation penalty may not exceed the greater of $100,000 or the gross pecuniary gain as a result of the violation. The equivalent per violation limit for entities is the greater of $500,00o or the amount of the pecuniary gain. The maximum per violation penalty amount for violations not involving fraud or deceit is the greater of $10,000 for individuals or the amount of the pecuniary gain, and for entities, the greater of $100,000 of the amount of the pecuniary gain.


The proposed Bill also provides that for repeat offenders, the maximum penalty amount is three time the applicable cap.


Though the Bill was just introduced, given its bipartisan support and the fact that it was introduced at the request of the agency Chairman and in response to concerns noted in the courts, the Bill seems relatively likely to pass. If passed, it will be signed into law, given the President’s support. The practical implication seems to be not just that the SEC will seek higher penalties, but will seek penalties more often, given the proposed new authority to seek penalties in administrative actions. There is nothing specifically about the Bill that directly suggests that this legislation will cause the agency to increase the number of enforcement and administrative actions overall, but with greater firepower at its disposal, the SEC may become more active, and perhaps even more aggressive.


The increased penalties would not directly change D&O insurers loss cost exposure, since the increased penalties would not typically be covered by insurance. But if the SEC becomes more aggressive in seeking penalties, and in particular becomes more aggressive in seeking penalties against individuals, it could result in an increase in defense expenses, as companies and individuals, keen to avoid the increased penalties for which no insurance is available, extend the fight to defend themselves.


At a minimum, if this legislation passes, we could see a significant increase in penalty amounts. If nothing else the increased penalties could dramatically increase the consequences for both companies and individuals that are targeted by the SEC for securities law violations. Whether or not this actually results in a deterrence of misconduct, it certainly dramatically ramps up the consequences.


The Credit Rating Agencies and Their Involvement in the Credit Crisis: Among the many issues arising in the wake of the credit crisis is the question of the extent of the rating agencies’ involvement in the many of the securities at the heart of the financial meltdown and the extent of the rating agencies’ responsibility for many of the credit crisis events.



In a July 19, 2012 article on Thomson Reuters News and Insight entitled “The Credit Rating Agencies: Power, Responsibility and Accountability” (here) by Robert Piliero of the Butzel Long law firm takes an interesting and detailed look at the involvement and complicity of the rating agencies in many of the events central to the credit crisis. Piliero definitely takes a particular point of view – that is, that the rating agencies ought to be answerable and held liable for many actions taken leading up to the crisis. With appropriate allowances for that point of view, the article provides and interest overview of the issues surrounding the rating agencies potential liability. The author also includes an overview of the case law to date in connection with efforts to hold the rating agencies liable.


Today’s Entry for Cease and Desist Request of the Day: Jack Daniels is famous for its alcoholic beverages. It turns out that its lawyers are as smooth as its liquor. In what has to be one of the most polite cease and desist requests ever, its lawyer sent a letter to an author whose book cover was designed to mimic Jack Daniels’ famous bottle label. Take a look at a comparison of the book cover and the liquor bottle label, and also read excerpts the liquor company’s remarkably courteous letter, here


Midwest PLUS Chapter Event on the JOBS Act: On Friday August 3, 2012, the PLUS Midwest Chapter will be hosting an educational event and cocktail reception at the Market Bar on West Randolph Street in Chicago. The panel discussion is entitled “An Overview of the Jumpstart Our Business Startups (JOBS) Act.” Leading the discussion will be my good friend Perry Granof of the Granof International Group, along with Machua Millet of Marsh. The panel, which is scheduled to run from 5:30 pm to 6:00 pm, will be followed by a cocktail reception. Admission is complementary but you do need to register in advance. You can find further information about the event including how to register here.