According to media reports (here and here, for example), SEC Chairman Mary Schapiro, in a letter dated November 28, 2011 to Senators Jack Reed and Larry Crapo, has requested a series of statutory changes which would allow the Commission to impose stricter financial penalties for certain securities law violations, as well as greater penalties for recidivists.
The request apparently was submitted hours after Judge Jed Rakoff rejected the SEC's proposed settlement with Citigroup Global Markets for $285 million (previously discussed here). One of the reasons cited by Judge Rakoff for refusing to approve the settlement was that it only imposed "a very modest penalty," pointing out that "[i]f the allegations of the Complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business."
In a statement issued that afternoon (discussed here), SEC Director of Enforcement Robert Khuzami accused the Court of overlooking "the fact that securities law generally limits the disgorgement amount the SEC can recover to Citigroup's ill-gotten gains, plus a penalty in an amount up to a defendant's gain," asserting that the limitations was the "reason that [the SEC] sought to recover close to $300 million," and not a larger amount. Judge Rakoff was also troubled by the fact that Citigroup was a "recidivist" and the penalty being imposed was "pocket change."
In addition to arguing this point in the Citigroup Global Markets case, the Commission is seeking to address that issue in Congress. According to Jim Hamilton's World of Securities Regulation blog, "[t]he SEC seeks five specific statutory enhancements to its enforcement authority that collectively would allow the Commission to impose appropriate monetary penalties for serious violations and authorize greater penalties for recidivists." Mr. Hamilton describes the five requested changes to include:
• an increase to $1 million for individuals and $10 million for entities for each violation;
• a change to the method of calculating gain by the defendant to allow for greater penalties;
• allowing the calculation of penalties to be based on investor losses caused by the violations;
• an increase in penalties for recidivists; and
• a civil penalty for violations of court injunctions or industry bars.
While the SEC's proposed changes will not result in a change to the Citigroup Global Markets ruling, if such legislation is enacted, it could have an impact on similar cases in the future.