SEC Enforcement Settlements to Hit Three-Year High

U.S. Securities and Exchange Commission enforcement action settlements were expected to hit a three-year high in 2008, according to a new study released by a New York economic consulting firm.

The study, by NERA Economic Consulting, projects that the SEC was on pace to reach 739 settlements by year-end, “continuing a dynamic period of SEC enforcement since the enactment of Sarbanes-Oxley (SOX) in 2002,” said NERA.

Settlements totaled 702 in 2007, and 663 in 2006.

Large Penalties

The post-SOX era also has witnessed the SEC's imposition of record monetary penalties on a range of defendants, according to the study. Before SOX, the largest penalty imposed in an enforcement action against a publicly traded company for financial fraud was a $10 million penalty against Xerox in April 2002. By contrast, according to NERA's research, since SOX, the SEC has imposed penalties of $10 million or more against 115 parties, including 14 that were penalized at least $100 million.

Other Findings

NERA, which has been analyzing trends in securities litigation for more than 15 years, reported other findings, including:

• The number of settlements with individuals was on the rise, projected to reach 568 for 2008. Company settlements, on the other hand, were declining, and were projected to total just 171 by year-end, which would be the lowest number in any full year since SOX.
• Fifty-six percent of SEC settlements with company defendants since SOX have included monetary penalties.
• In 2007, the median company settlement dropped to $0.7 million, less than half the 2006 high of $1.5 million.
• Forty-three percent of company payments have been in the form of disgorgement, and 57% in the form of civil penalties; for individuals, disgorgement penalties account for 88% of payments.
• Insider trading is the most frequent allegation in SEC settlements for individuals; NERA projected 92 settlements with individuals will have occured in 2008, compared with 52 in 2007.
• Misstatements and omissions are among the allegations most frequently brought by the SEC, and account for the majority of cases brought against publicly traded companies. These cases include allegations of false public statements or important omissions about the company's finances or business prospects, such as earnings misstatements and incorrect press releases.
• The number of settlements involving company misstatements rebounded strongly in 2007, after three years of declines: After reaching a high of $50 million in 2006, the median company settlement value fell to $26.5 million in 2007 and $12 million in the first three quarters of 2008.

Conclusion

In performing the study, NERA reviewed every SEC litigation release and administrative proceeding document published from July 31, 2002 through Sept. 30, 2008.

Marcia Coyle is a reporter for the National Law Journal, an Incisive Media sister publication of this newsletter.

U.S. Securities and Exchange Commission enforcement action settlements were expected to hit a three-year high in 2008, according to a new study released by a New York economic consulting firm.

The study, by NERA Economic Consulting, projects that the SEC was on pace to reach 739 settlements by year-end, “continuing a dynamic period of SEC enforcement since the enactment of Sarbanes-Oxley (SOX) in 2002,” said NERA.

Settlements totaled 702 in 2007, and 663 in 2006.

Large Penalties

The post-SOX era also has witnessed the SEC's imposition of record monetary penalties on a range of defendants, according to the study. Before SOX, the largest penalty imposed in an enforcement action against a publicly traded company for financial fraud was a $10 million penalty against Xerox in April 2002. By contrast, according to NERA's research, since SOX, the SEC has imposed penalties of $10 million or more against 115 parties, including 14 that were penalized at least $100 million.

Other Findings

NERA, which has been analyzing trends in securities litigation for more than 15 years, reported other findings, including:

• The number of settlements with individuals was on the rise, projected to reach 568 for 2008. Company settlements, on the other hand, were declining, and were projected to total just 171 by year-end, which would be the lowest number in any full year since SOX.
• Fifty-six percent of SEC settlements with company defendants since SOX have included monetary penalties.
• In 2007, the median company settlement dropped to $0.7 million, less than half the 2006 high of $1.5 million.
• Forty-three percent of company payments have been in the form of disgorgement, and 57% in the form of civil penalties; for individuals, disgorgement penalties account for 88% of payments.
• Insider trading is the most frequent allegation in SEC settlements for individuals; NERA projected 92 settlements with individuals will have occured in 2008, compared with 52 in 2007.
• Misstatements and omissions are among the allegations most frequently brought by the SEC, and account for the majority of cases brought against publicly traded companies. These cases include allegations of false public statements or important omissions about the company's finances or business prospects, such as earnings misstatements and incorrect press releases.
• The number of settlements involving company misstatements rebounded strongly in 2007, after three years of declines: After reaching a high of $50 million in 2006, the median company settlement value fell to $26.5 million in 2007 and $12 million in the first three quarters of 2008.

Conclusion

In performing the study, NERA reviewed every SEC litigation release and administrative proceeding document published from July 31, 2002 through Sept. 30, 2008.

Marcia Coyle is a reporter for the National Law Journal, an Incisive Media sister publication of this newsletter.