Columbia Law Professor John Coffee Jr. has some advice for the Securities and Exchange Commission (SEC) – to deter corporate wrongdoing “stop issuing parking tickets for pennies and start hunting bigger game.”
In an article in the National Law Journal titled Is the SEC’s Bark Worse Than Its Bite?, Coffee crunches SEC settlement numbers over the past ten years and asks the question – are SEC settlements actually generating any meaningful deterrence?
“The quantitative evidence is disquieting,” Coffee concludes.
Coffee, using stats compiled by NERA Economic Consulting, looks at high-value cases – cases that gain national attention.
“To measure the penalties in these cases, NERA used the 90th percentile level of all SEC settlements with companies and found that this 90th percentile declined more than 50 percent in 2011 from $35.9 million to $16.4 million in company settlements,” Coffee writes. “Moreover, both these figures were well below the corresponding $80 million figure in 2003 or the $72.5 million figure in 2005. In short, companies engaged in major litigation with the SEC can expect that, on average, their cases will be resolved at a lesser settlement level than in the past.”
“According to NERA, the percentage of SEC settlements involving public-company misrepresentations declined in 2011 for the fourth consecutive year, falling to a new post-Sarbanes-Oxley low of 10.4 percent, down by more than half from the 2007 figure of 23.7 percent,” Coffee writes. “Sooner or later, reduced SEC scrutiny of public companies could invite a new Enron.”
“Understaffed and overworked, the SEC is forced to settle cases more leniently when it brings more cases,” Coffee writes. “The growing pressure of the caseload is probably the best explanation both for why the SEC settles cases relatively cheaply and why it feels compelled to persist with its ‘neither admit nor deny’ policy on settlements.”
Looking to the future, Coffee predicts that “the SEC will continue to obtain modest penalties in most cases, thereby economizing on its enforcement costs and arguably maximizing the annual aggregate revenues that it collects and can pass back to injured victims.”
Coffee says that while “such a policy may also help the SEC obtain a larger budget from Congress. . . the result is much like imposing a 1 percent tax on securities fraud – annoying to defendants, but never enough to cancel the expected gain.”