The SEC Takes Off Its Gloves, Sort Of

The SEC received scathing criticism for its failure to follow the scent of massive fraud leading to Bernard Madoff. In the aftermath, Mary Schapiro announced on February 6 that the SEC would unleash the Commission’s enforcement staff to more aggressively pursue instances of financial fraud.

Using the SEC Defendant Search page on Securities Mosaic, we decided to investigate whether the SEC has truly taken off the gloves. We examined enforcement data from February 9 (the Monday following this SEC press conference) to August 9, a six-month window. We compared this data to the same period in 2008. Here is what we learned.

Total Defendant Records: The SEC announced actions against 229 individuals and businesses in this six-month period 2008 and against 257 individuals and businesses in the same period in 2009, an increase of 12.3 percent.

Total Financial Penalties: $2.998 billion in 2008 and $3.00 billion in 2009, a statistically meaningless increase.

So looking at the big picture, it would seem things have not changed much with regard to SEC enforcement. But appearances can be deceiving. Let’s drill down a bit further.

Individual Records and Penalties:
The SEC announced actions against 181 individuals in the 2008 period and 175 individuals in 2009, a decrease of 3.3 percent. Penalties for individuals dropped a remarkable 36.7 percent in the 2009 period, from $2.752 billion in 2008 to $1.739 billion in 2009.

Where does the rest of the money come from? Broker-Dealers, Hedge Funds, Investment Advisers, and Commercial Companies!

The SEC has initiated enforcement actions against 82 of these entities in 2009, while actions totaled only 45 in the same period in 2008, which is an increase of 82 percent. Financial penalties increased from $234 million to $1.248 billion, a whopping increase of 433 percent.

The most notable emphasis has been on increased actions against Broker-Dealers (from 11 to 34) and Investment Advisers (from 9 to 16).

As noted securities experts Tom Gorman and Lynn Turner have emphasized, however, the consequences of these actions probably need to directly target individuals to result in meaningful reductions in wrongdoing. Our analysis indicates that, for the most part, individuals at these companies have been spared significant penalties.