SEC Settlement: Agency Self-Interest or Public Interest
Fordham Journal of Corporate & Financial Law
Danne? L. Johnson
Copyright c 2007 by the authors. Fordham Journal of Corporate & Financial Law is produced
by The Berkeley Electronic Press (bepress). http://ir.lawnet.fordham.edu/jcfl
Danné L. Johnson∗
The Securities and Exchange Commission (“SEC”) has a soul of its
own. The SEC has many human characteristics including the need for
security, freedom, power, expansion, and expression.1 As with people
dedicated to serving others, the SEC faces the Herculean task of
ignoring its own self-interest in favor of those acts that might be in the
best interest of the public that the SEC was organized to protect. The
SEC is not succeeding in this task.
The primary mission of the SEC is to protect investors and maintain
the integrity of the securities markets.2 The SEC carries out this mission
∗ Assistant Professor of Law, Oklahoma City University School of Law; formerly
Branch Chief, Senior Counsel, and Staff Attorney, Division of Enforcement, Northeast
Regional Office, United States Securities and Exchange Commission (1994-2000). The
author wishes to thank: former Oklahoma City University School of Law student Sylvia
L. Thomas for research assistance; OCU for support during the writing process;
Professor Lee Peoples; the library staff; her colleague Professor Norwood Beveridge;
Anahaita N. Kotval, Managing Director and Deputy General Counsel, RBS Greenwich
Capital; Ellen M. Leigh, Managing Director, Mariner Investment Group; Anna
Majewicz Wilson, Esq.; and Professor Lisa H. Nicholson, Louis D. Brandeis School of
1. Maslow’s hierarchy of needs is often depicted as a pyramid consisting of five
levels: the four lower levels are grouped together as deficiency needs, and the top level
is termed being needs. While our deficiency needs must be met, our being needs are
continually shaping our behavior. The basic concept is that the higher needs in this
hierarchy only come into focus once all the needs lower in the pyramid are satisfied.
Growth forces create upward movement in the hierarchy, whereas regressive forces
push proponent needs further down the hierarchy. ABRAHAM H. MASLOW, MOTIVATION
AND PERSONALITY (Abraham H. Maslow ed., HarperCollins Publishers 1987) (1954).
2. See Securities and Exchange Act of 1934, 15 U.S.C. § 78b (1994) (stating that
one purpose of securities law is “to insure the maintenance of fair and honest markets”);
through investigations of possible violations of the federal securities
laws.3 Once the SEC concludes that such violations have occurred, the
SEC faces a decision of either litigating or settling with the alleged
If the SEC considers the public’s best interest5 when making the
choice between trial or settlement, it engages in an unguided exercise.6
Settlement, the option requiring the least SEC effort in terms of
resources and risk, has been the SEC’s preferred method of case
resolution for many years.7 Unfortunately, the SEC fails to demonstrate
its consideration, if any, for the public interest when approaching the
decision to litigate or settle. It is not coincidental that alleged violators
also prefer settlement as an alternative to litigation.8
This article explores the SEC’s self-interest in settlement as it
diverges from the public interest that it is charged with protecting. It
will query whether there are some instances where the agency’s
selfSecurities and Exchange Commission Home Page, http://www.sec.gov (last visited
Mar. 25, 2006).
3. See Securities and Exchange Act of 1934, 15 U.S.C. § 78d (1994); SEC v.
Howatt, 525 F.2d 226, 229 (1st Cir. 1975) (stating SEC has power of “original inquiry”
and “[i]t may ‘in its discretion, make such investigations as it deems necessary to
determine whether any person has violated or is about to violate (the securities laws)”
(quoting United States v. Morton Salt, 338 U.S. 632 (1950))).
4. See Securities and Exchange Act of 1934 at 15 U.S.C. § 78u(a) (1994).
5. Public interest should be couched in terms of the SEC’s benefits as well as
societal benefits. The SEC benefits from settlement by avoiding litigation risk and
potential harm to its reputation while collecting fines and interpreting the federal
securities laws in an uncontested forum. The public interest in SEC settlement is
broader than the SEC’s interests. The public interest should include, not only concern
for the SEC as an institution and the collection of fines, rather the public interest should
include a societal interest in the benefits of adjudication, transparency, and corporate
6. See Securities and Exchange Act of 1934 at § 78u(d) (1994).
7. The vast majority of cases settle. See U.S. Securities and Exchange
Commission, Administrative Proceedings, available at www.sec.gov/litigation/admin.
shtml (last visited Feb. 6, 2006) (listing orders and notices that concern settlement of
administrative proceedings); Susan S. Muck et al., Recent Trends in Securities
Litigation: Perspectives from Plaintiffs and Regulators (Fenwick & West LLP, Feb. 14,
2005), available at www.fenwick.com/docstore/publications/litigation/SecLit_Alert_
8. Kenneth B. Winer & Marc B. Dorfman, What Corporate Counsel Should Know
About SEC Enforcement, 16 CORP. COUNS. WKLY., No. 33, 264 (Aug. 22, 2001),
available at www.abanet.org/buslaw/corporateresponsibility/clearinghouse/02spring/
interest conflicts with public interest. Consider this hypothetical: Linda
and Martin, a retired couple, are investors who have suffered great
economic losses in the stock market. Their attorney believes that these
losses are a result of Linda and Martin’s reliance on Jack Grubman’s
analyst reports. The lawyer discovers and informs his clients that on
, the SEC filed civil actions to redress violations of the
Securities Act of 1933, NASD Conduct Rules, and NYSE Rules against
ten separate investment banks and two former research analysts,
including Grubman, for issuing allegedly conflicting advice.9
The Commission’s complaint alleges that during 1999-2001,
Grubman was a Managing Director and research analyst at SSB,
covering the telecommunications sector.10 The complaint alleges that,
during the relevant period, Grubman publicly issued research reports on
two telecommunications companies that were fraudulent because the
reports contained misstatements and omissions of material facts about
the companies covered, contained recommendations that were contrary
to Grubman’s actual views and those of an analyst who reported to him,
overlooked or minimized the risk of investing in these companies, and
predicted substantial growth in the companies’ revenues and earnings
without a reasonable basis.11 The complaint further alleges any or all of
the following: that Grubman issued research reports on six
telecommunications companies that were not based on principles of fair
dealing and good faith; did not provide a sound basis for evaluating facts
about these companies’ business prospects; contained exaggerated or
unwarranted claims about these companies; and contained opinions for
which there was no reasonable basis.12 The complaint also alleges that
Grubman issued a research report that upgraded his rating on a
telecommunications company and did not disclose that his objectivity
had been compromised.13
The SEC sought a permanent injunction against Grubman,
enjoining him from aiding and abetting violations of certain provisions
of the federal securities laws, NASD Conduct Rules, and NYSE Rules;
an accounting and disgorgement of all proceeds Grubman had obtained
9. SEC v. Bear, Stearns & Co., 2003 S.D.N.Y. Civ. 2937, available at
http://www.sec.gov/rules /other/order-enron082503.pdf (last visited Mar. 6, 2006).
as a result of his illegal conduct, plus prejudgment interest thereon, and
civil money penalties.14
On June 19, 2003, just two months after the SEC filed its
complaint, Linda’s and Martin’s lawyer attempts to intervene in the
Grubman civil suit on behalf of “over 12,000” allegedly aggrieved
investors.15 The District Court does not allow the intervention, citing
delay and the assumption that the SEC would be pursuing the public
Months of negotiations among the SEC, the defendants, and various
state attorneys generals culminated in the filing of twelve proposed
15. SEC v. Bear, Stearns & Co., 2003 S.D.N.Y. Civ. 2937, at 5, available at
http://www.sec.gov/rules/other/order-enron082503.pdf (last visited Mar. 6, 2006).
16. Id. The SEC’s policy is to oppose intervention in accordance with § 21(g) of
the Exchange Act which forbids, absent Commission consent, the consolidation or
coordination of any Commission enforcement action with actions brought by others:
Notwithstanding the provisions of § 1407(a) of Title 28, United States Code, or any
provision of law, no action for equitable relief instituted by the Commission pursuant
to the securities laws shall be consolidated or coordinated with other actions not
brought by the Commission, even though such other actions may involve common
questions of fact, unless such consolidation is consented to by the Commission.
Securities and Exchange Act, 15 U.S.C. § 21(g) (1994). Courts have broadly applied
§ 21(g) of the Exchange Act to preclude participation of third parties in Commission
enforcement cases. See Aaron v. SEC, 446 U.S. 680, 717 n.9 (1980) (Blackmun, J.,
concurring); Parklane Hosiery Co. Inc. v. Shore, 439 U.S. 322, 332 n.17 (1979); SEC v.
Sprecher, 81 F.3d 1147
(D.C. Cir. 1996)
; SEC v. Better Life Club of Am., Inc. 995 F.
Supp. 167, 180 (D.D.C. 1998); SEC v. Qualified Pensions, Inc., 1998 U.S. Dist. LEXIS
942, at *14 (D.D.C. 1998); SEC v. McCaskey, 56 F. Supp. 2d 323, 325 (S.D.N.Y.
1999); SEC v. Wozniak, 1994 U.S. App. LEXIS 24310 (7th Cir. 1994); SEC v.
Thrasher, 1995 WL 456402, at *4 (S.D.N.Y. 1995); SEC v. Bradt, 1995 WL 215220, at
*1 (S.D. Fla. 1995); SEC v. Randy, 1995 WL 616788, at *3 (N.D. III. 1995); SEC v.
Egan, 821 F. Supp. 1274, 1276 (N.D. III. 1993); SEC v. Electronic Warehouse, Inc.,
689 F. Supp. 53, 56 (D. Conn. 1988), aff’d sub nom. SEC v. Calvo, 891 F.2d 457, 458
(2d Cir. 1989), and cert. denied, 496 U.S. 942 (1990); SEC v. Lorin, 1991 WL 155767,
at *1 (S.D.N.Y. 1991); SEC v. Downe, 1994 U.S. Dist. LEXIS 2292, at *7 (S.D.N.Y.
1994); SEC v. Keating, 1992 U.S. Dist. LEXIS 14630, at *10 (C.D. Cal. 1992); SEC v.
Am. Free Enter. Inst., 580 F. Supp. 270, 271 (D. Ariz. 1984); SEC v. Hansen, 1984 WL
2413, at *1, Fed. Sec. L. Rep. (CCH) ¶ 91, 426 at 98, 111 (S.D.N.Y. 1984); SEC v.
Allison, 1981 WL 1667, Fed. Sec. L. Rep. (CCH) ¶ 98, 263 at 91, 702 (N.D. Cal. 1981).
There are some instances where courts have allowed intervention under circumstances
where the intervener does not seek to expand the scope of the Commission’s inquiry.
But see SEC v. Credit Bancorp., Ltd., 194 F.R.D. 457, 465-66 (S.D.N.Y 2000); SEC v.
Hollinger lnt’l., Inc., 2004 WL 422729, at *2
(N.D. III. 2004)
; SEC v. Heartland Group,
Inc., 2003 WL 1089366, at *2 (N.D. III. 2003).
consent judgments in the Southern District of New York.17 The
proposed consent judgments provide for both injunctive and monetary
relief, and contemplate that defendant investment banks will create
distribution funds to be administered pursuant to plans devised by an
administrator and approved by the SEC and the District Court, and an
Investor Education Fund, to be administered by a separate Administrator
pursuant to a plan to be approved in the same manner.18
On October 31, 2003, a final judgment in the civil suit is entered by
consent against Grubman and others.19 Grubman is permanently
enjoined from aiding and abetting future violations of the federal
securities laws, NASD Conduct Rules, and NYSE Rules.20 Grubman
agrees to pay $15,000,000 in penalties and disgorgement.21 In addition,
on October 31, Grubman, in an SEC administrative proceeding, consents
to being barred from associating with any broker, dealer, or investment
adviser.22 Grubman settles these matters without admitting or denying
the SEC’s allegations. 23
This example demonstrates the conflict among the SEC’s preferred
method of resolution, settlement, and the public interest. The Grubman
settlement focused solely on the SEC’s interests by providing for the
disgorgement of large amounts from the alleged wrongdoer, penalizing
the firms, and barring the individuals from the industry, insuring that
they would not be in a position to repeat such behavior. This is
seemingly harsh punishment, and perhaps this is the full relief that the
SEC would expect at trial without the risk and expense of litigation.
This article explores whether the SEC, a government actor representing
the public interest, has an obligation to consider factors, such as public
interest and the orderly development of the law, beyond how the agency
will fare at trial in terms of outcome and recovery. The results of SEC
litigation are broader than the simple impact on the SEC. Litigation
creates precedents, and is a superior method of enforcement labeling.
After SEC settlement in our case above, Linda and Martin have
several options: they can file an arbitration as provided for in their
brokerage agreement, they can attempt to sue Grubman and his firm in
district court, and they can attempt to recover from the settlement fund.
Linda and Martin’s lawyer files an arbitration24 against Grubman
on their behalf. They lose the arbitration, however, and are unable to
recover because they face the difficulty of proving causation and of
conducting discovery against a large international corporation.
Furthermore, Linda and Martin are unable to access the SEC records
gathered during the investigation, and because of the SEC settlement
there are no public records and no adjudicated facts available to aid
Linda and Martin’s case. The public, in the form of injured investors,
does not benefit from the SEC’s work as these investors attempt to
recover for injury.
Since October 2003, numerous individual investors unsuccessfully
have attempted to recover damages for relying on various Grubman
reports.25 Almost two years later, on October 6, 2005, the first
arbitration victory was recorded for a couple represented by the same
firm that attempted to intervene in June 2003.26
Is it possible that litigating the Grubman matter would have been in
the public’s interest? Adjudication of this matter would have served the
public’s interest by creating precedent, establishing res judicata, and
providing enforcement transparency. The SEC should not ignore these
public benefits during settlement negotiations.
By settling the majority of its cases, the SEC may be placing its
own interest above the interest of the investing public which it is
charged with serving. Instead of making a public interest determination
on the manner and terms of resolution, the SEC and the courts assume
that decisions serving the best interest of the SEC are also in the best
interest of the public. A distinction between the SEC’s interest and the
public’s interest is appropriate and necessary.
In approaching the question of whether SEC settlements favor
selfinterest over public interest, Part I of this article examines SEC
24. “The parties to the arbitrator’s decisions are bound by it.” A DICTIONARY OF
MODERN LEGAL USAGE 73 (2d ed. 1995).
25. See Investors Win $2.41M in WorldCom Case, ASSOC. PRESS, Oct. 6, 2005,
available at http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2005/10/06/financial/f09
investigations that seek to highlight cases the SEC believes to have merit
but that result in settlement. Part II of this article analyzes the SEC’s
settlement process. Part III explores public interest as it relates to
settlement and discusses SEC settlement in the context of public policy.
Part IV discusses the public interest in SEC settlements. Part V explores
factors that impede the SEC from considering the public interest in
reaching the decision to settle. Part VI of this article proposes possible
solutions which can incorporate public interest into SEC settlements.
I. SEC INVESTIGATIONS ARE DETAIL-ORIENTED, WEEDING OUT THE
There are numerous articles discussing the details of SEC
investigations27 and enforcement procedures.28 However, few address
the external and internal pressures to settle with the enforcement staff
and the effect of such settlements on the development of law and the
Congress founded the SEC after the market crash of 1929.29 Prior
to the crash, approximately 20 million large and small shareholders took
advantage of post-war prosperity and set out to make their fortunes in
the stock market.30 An estimated $50 billion in new securities was
offered during this period, yet half became worthless.31 After the
shocking blow the Crash dealt to investors, Congress concluded that to
improve the economy, investors would need confidence in the markets.32
Congress held hearings to uncover the problems and possible solutions
related to the Crash. These hearings resulted in the passage of the
Securities Act of 1933 and the Securities Exchange Act of 1934, and in
the establishment of the SEC in 1934.33
The SEC is a quasi-judicial federal law enforcement agency. Its
mission is to administer and enforce the federal securities laws, to
protect investors, and to maintain fair, honest, and efficient markets.34
Pursuant to the federal securities laws the SEC carries out this mission
nationwide through the work of its staff.35 Headquartered in
Washington, D.C., the SEC is led by five Commissioners who are
appointed by the President and confirmed by Congress. At the end of
the 2004 fiscal year, the SEC consisted of four Divisions, 21 Offices,
and a staff of more than 4,000.36 The most prominent and largest
division is the Division of Enforcement (“Division”),37 which pursues
possible violations of the federal securities laws through non-public
investigations. The primary goals of the Division are to (1) deter
conduct violative of the federal securities laws, (2) protect investors and
shareholders from the potential recidivism of securities law violators,
and (3) influence and improve standards of conduct and business
practices of market participants.38 The SEC’s enforcement priorities
may shift because of changes in its budget, the Commissioners, and the
financial and business environment.39 The Division’s powers are broad,
and are in some ways similar to the broad investigatory powers of a
Federal Grand Jury.40
As of 2003, the Division comprised approximately 935 attorneys,
accountants, inspectors, and investigators (the “Staff”)41 located in 11
regional and district offices throughout the country.42 Each year, the
SEC seeks approval from Congress for increased funding.43 The
Division receives a significant portion of the SEC budget.44
Simultaneously, the SEC has devoted more time to increasing its work
with other regulatory agencies, such as the Department of Justice, state
and local authorities, and self-regulatory organizations, to further
enforce the federal securities laws.45 A basic assumption of this article
is that a strong enforcement program is beneficial to the securities
markets and the investing public.
A. The Investigation Process46
Congress provided the SEC with broad statutory authority to carry
out its mission through investigations and prosecution of violations.47
The authority and the tools available for the SEC to carry out these
investigations and prosecutions have increased over time.48 When the
SEC receives inquiries from the media or other sources about the
existence or details of an investigation, the SEC routinely indicates that
it can neither confirm nor deny the existence of an investigation.49 All
phases of an SEC investigation are non-public.50
The Division learns of possible violations of the federal securities
laws from a number of sources, including, but not limited to, the
Commission’s inspection staff,51 self-regulatory organizations, other
securities industry sources that contact the Division, and referrals from
other SEC divisions and offices or other state and federal governmental
agencies.52 Some of the most fertile sources of potential violations
come from the numerous outside contacts that the Division receives,
either via e-mail,53 telephone, or letter, with the deliverers of this
information being good Samaritans, disappointed and defrauded
investors,54 corporate employees, or disgruntled spouses. In addition to
these channels, the Staff actively looks for signs of potential violations
in the local and national media, and on the Internet.55
The Commission has established procedures for conducting
50. See 17 C.F.R. § 240.0-4 (2005) (stating that nondisclosure of information
obtained in examinations and investigations). Information or documents obtained by
officers or employees of the Commission in any examination or investigation pursuant
to § 17(a) shall, unless made a matter of public record, be deemed confidential. 15
U.S.C. §§ 21(a), 78(q), 78(u)(a) (1982).
51. The SEC requires registered broker-dealers, investment companies, investment
advisers, municipal securities dealers, national securities exchanges, and transfer agents
to maintain certain books and records, and to make these available to the SEC
inspection staff upon request. See Exchange Act §§ 15B, 15C, 17, 17A , Rules 17a-1,
3, 4; Advisers Act § 204 and Rule 204-2;Investment Company Act § 31, Rules 31a-1,
3. See 12 U.S.C. §§ 31, 31(a)(1), 31(a)(3) (1982); 15 U.S.C §§ 15(B), 15(C), 17, 17(A),
17a-1, 204, 204-2 (1982).
52. INVESTOR’S ADVOCATE, supra note 29.
53. The SEC website allows any person to file a complaint or report a potential
violation by filing an online form at http://www.sec.gov/complaint.shtml, or e-mailing
the enforcement department at . In 2005, the SEC received
76,221 complaints and opened 71,737 matters due to investor complaints. 2005
PERFORMANCE AND ACCOUNTABILITY REPORT, supra note 37, at 45.
54. See Sec. & Exch. Comm’n, Budget Estimate Fiscal 1998 at II-1 (1997) and
others. In 1999, the SEC received a record 72,173 complaints and inquiries, up 41
percent from 1998. U.S. SEC. & EXCH. COMM’N, ANNUAL REPORT 1999, at 20,
available at http://www.sec.gov/about/annrep99.shtml. In 2000, the SEC received
82,709 complaints up 15 percent from 1999, the year the SEC launched its online
investor complaint form. U.S. SEC. & EXCH. COMM’N, 2000 ANNUAL REPORT, available
at http://www.sec.gov/about/annrep.shtml [hereinafter SEC 2000 ANNUAL REPORT].
55. See Written Statement of Richard H. Walker, Concerning Securities Fraud on
the Internet (Mar. 23, 1999), available at http://www.sec.gov/news/testimony/
investigations.56 To determine whether there are violations of the
federal securities laws, generally the first step the Staff takes is initiating
a preliminary inquiry.57
1. Matters Under Inquiry
To initiate or open a preliminary first assures, with the help of a
proprietary computer system, that no other office has an open
investigation regarding the matter.58 During the Matter Under Inquiry
(“MUI”) phase of an investigation inquiry, the Staff attempts to collect
information about the matter informally. Regulated entities, including
brokers, dealers, investment companies, and investment advisors, are
required to cooperate in SEC investigations.59 The Staff might review
regulatory filings, trading records, and media reports to explore
allegations of violations. This phase of the inquiry is short-lived. At the
conclusion of a small number of staff hours, the Staff must either
convert the MUI to an investigation or close the inquiry.60 If, during
this phase of the inquiry, the Staff concludes that further investigation is
necessary to determine whether there has been a violation of the federal
securities laws, the Staff converts the MUI into an investigation.61 The
staff attorney assigned to the investigation may make this conversion
only with the approval of a supervisor, normally the Branch Chief.62
The SEC can conduct an investigation on a formal or informal
basis. Investigations, once initiated, can take anywhere from a few
months to a few years to complete.63 There have been several somewhat
successful attempts to shorten investigation time.64 The initial phase of
a formal or informal investigation is a fact-finding inquiry that
determines whether there are any violations of the federal securities
a. Informal Investigations
During the initial phase of an informal investigation, the Staff will
request that individuals and corporate entities provide information or
documents—information that can enable the Staff to determine the facts
of a particular case.66 The Staff develops the facts to the fullest extent
possible through methods of fact finding, such as taking witness
testimony,67 examining brokerage records, and reviewing trading data.68
If the Staff obtains all of the relevant information on a voluntary basis,
the Staff may not need to seek a Formal Order of Investigation,
Table of Securities and Exchange Commission Investigations (1995-2004):
Year 1999 2000 2001 2002 2003 2004
Pending as of 10/01/FY-1 1839 1966 2240 2401 2302 2929
Opened in Fiscal Year 520 558 570 479 910
TOTAL 2359 2524 2810 2880 3212
Closed in Fiscal Year 393 284 409 578 283
discussed below. In rare instances where all related parties cooperate, a
case can fully develop at this stage. Those informal investigations that
show promise of leading to the discovery of violations of the federal
securities laws are often converted to formal investigations.
b. Formal Investigations
The Staff must request, in writing, a Formal Order of Investigation
(“Formal Order”) from the Commission.69 The Commission may
consider the following factors when deciding whether to grant the
Formal Order: either the need to compel documents or testimony,70 or
the need for the financial records of bank customers, or both.71 Once the
Commission issues a Formal Order,72 the Division’s staff may compel
by subpoena witnesses to testify,73 and produce books, records, and
other relevant documents.74 The Formal Order provides general
information about the investigation, and designates staff members as
Officers of the Commission for the purpose of the investigation.75
These Officers are able to administer oaths during administrative
testimony taken during the investigation. The staff may issue a
subpoena anywhere in the United States, and may compel witnesses to
appear at any designated place for testimony.76
Responding to a subpoena from the SEC can be costly and time
consuming.77 However, the response to a subpoena from the SEC
should be within the period contemplated in the subpoena unless
B. Conclusions of a Formal or Informal Investigation78
1. A Matter Can Be Closed without Enforcement Action
The Staff closes a number of investigations each year with no
enforcement action.79 A typical reason for closing an investigation is
that the staff has failed to uncover evidence of a violation of the federal
securities laws.80 The process and length of time required to close an
investigation depends on the status of the investigation. While an
informal investigation can be closed by a staff member with little
review, closing a Formal Order investigation is not always easy, and can
take anywhere from a few weeks to a few months. The staff attorney
recommending to the Division that the Formal Order investigation be
closed normally presents the recommendation to the Commission in a
memo, usually including therein a summary of facts, issues, and legal
analysis.81 Several levels of supervision must review and approve the
memo.82 After an investigation is closed, the Staff has the discretion to
notify certain parties of the closing.83
76. See, e.g., 15 U.S.C. § 77s(c) (2002); Phillips, supra note 46, at 56.
77. Winer, supra note 8.
78. In 2000, the Commission’s criminal referrals yielded sixty-four indictments and
sixty-two convictions. Winer, supra note 8.
79. MARSHALL, supra note 58.
81. The scarcity of resources is rarely a sufficient reason to close a case.
82. See Appendix A, infra.
83. 17 C.F.R. § 202.5(d) (1991). In instances where the Staff has concluded its
investigation of a particular matter and has determined that it will not recommend the
commencement of an enforcement proceeding against a person, the Staff, in its
discretion, may advise the party that its formal investigation has been terminated. Such
advice if given must in no way be construed as indicating that the party has been
exonerated or that no action may ultimately result from the Staff’s investigation of the
2. The Staff Can Seek Authority to Institute or
File an Enforcement Action84
Upon the completion of a thorough investigation by the Staff, if the
Staff concludes that it has the evidence to prove a violation of the
federal securities law, the case has merit,85 and that it is likely to be won
in a contested proceeding, the Staff will prepare to make a
recommendation to the Commission seeking approval to institute an
enforcement action86 either in Federal District Court or as an
As is the case when to closing a formal investigation without an
enforcement action, the first step is to draft a memo describing the case,
the Division’s findings during the investigation, an analysis of the
applicable law, a recommendation regarding sanctions, and a
recommendation to proceed in Federal District Court or before an
administrative law judge.88 The staff considers the seriousness of the
alleged offense, whether the violation was technical in nature, and the
type of sanction or relief that the Staff is seeking, when deciding
between a civil action and an administrative proceeding.89 Several
particular matter. Id.
84. Commission authorization to issue a formal order, to file or institute an
enforcement action, or to accept an Offer of Settlement can be obtained in a number of
ways. The first of these is by way of a Regular Calendar Meeting in which the
Commissioners discuss and vote whether or not to issue a formal order, etc. This is
particularly useful when considering important issues or complex fact patterns (rarely
used for a Formal Order Memo). “Seriatim Consideration” is when the
recommendation of the Staff is moved from Commissioner to Commissioner for their
vote on the issue (is used for routine cases and those previously authorized for
settlement). “Duty Officer Consideration” is when one Commissioner votes on a
routine matter which requires expedited consideration, such as on going fraud, the other
Commissioners vote seriatim to affirm the action of the Duty Officer (this is used in
emergency situations). See 17 C.F.R. §§ 200.41-.42. (1995).
85. Weak cases, and those that lack merit, are weeded out early in the investigatory
process. Marshall, supra note 58.
86. The SEC has civil enforcement authority; however the Commission works
closely with criminal authorities when the matter is egregious. Assistance provided by
the Commission can be in the form of technical assistance to taking on the form of
temporarily lending staff members to that authority. MARSHALL, supra note 58, at 114.
87. Administrative Proceedings (“APs”) are heard by Administrative Law Judges
(“ALJs”) employed by the Commission. See MARSHALL, supra note 58, at 115.
88. Winer, supra note 8.
89. Depending on the sanctions that the Staff is seeking, the Staff seeks approval to
institute both an administrative proceeding as well as a civil action. MARSHALL, supra
layers of supervision review and revise the recommending memo to the
a. The Wells Process
Prior to submitting the memo recommending enforcement action to
the Commission, the Staff contacts the potential defendant(s) or
respondent(s) and offers each one an opportunity to present a statement
to the Commission stating their interests and position.91 This contact is
known as a “Wells call.” During this communication, the enforcement
staff usually describes the general nature of the violations that will be
subject to the enforcement action, if it is approved by the Commission.
The staff usually sends a detailed letter after the Wells call.92
Sometimes the counsel for defendant(s) or respondent(s) requests a
Wells meeting to better understand the allegations of the Staff and to
draft a more effective response. A response to the Wells call is
generally known as a Wells Submission (“Wells”).93 A Wells
submission may be discoverable and admissible in subsequent litigation
even though it may contain an offer of settlement.94 Effective responses
are no longer than twenty-five pages.95 In drafting a Wells submission,
counsel attempts to detail and therefore persuade the enforcement staff
and the Commission to consider facts that may have not come to light
during the investigation, mitigating circumstances, and deficiencies in
the Staff’s case, all which may decrease culpability or penalties.96 Wells
submissions rarely raise new facts or dispute the application of the law,
and counsel sometimes attaches a settlement offer to the submission.
note 58, at 114-15.
90. See Appendix A, infra.
91. Securities Act Release No. 5310 (Sept. 27, 1972); 17 C.F.R. § 202.5(c) (1991).
92. Winer, supra note 8; See David R. Chase & Neal Wilson, When the SEC
Comes Knocking: What to do when faced with an ‘enforcement investigation, BUS. L.
(ABA Section of Business Law, May/June 2000)
, available at
94. See In re Initial Pub. Offering Sec. Litig., 2004 WL 60290
95. On rare occasion, a “Wells Submission” has been done by video. See Order
Approving Proposed Rule Change and Amendment No. 1 Relating to Regulatory
Jurisdiction; Proceedings, Securities Act Release No. 34-40,568, 63 Fed. Reg.
57,34001 (Approved Oct. 27, 1998).
96. Winer, supra note 8.
Upon receipt of the Wells submission, if any, the Staff drafts a
response for the Commissioners’ consideration and presents both to the
Commission. In many instances, the Staff is also in a position to
recommend the acceptance or rejection of an offer of settlement
presented by the defendant(s) or respondent(s). After considering the
Staff’s memorandum, the Wells submission, and any settlement offers,
the Commission decides at a formal meeting whether to bring an action,
what type of action to bring, the persons or entities to be named as
defendant(s) or respondent(s), what violations to charge, and what relief
to seek.97 The Commission approves most of the Staff’s
recommendations. Recently, the number of matters that the SEC is able
to handle has increased,98 as have the amounts of disgorgement and
b. Commission Authorization to File a Civil Action in Federal
If the Commission approves the recommendation of the Staff to file
a civil action, the Staff drafts and files a complaint with a U.S. District
Court. Usually, the Commission allows the Staff to issue a press
release.99 Typically, the complaints filed by the Commission are very
detailed, describing the alleged misconduct, identifying the particular
provisions of the federal securities laws violated, and indicating the
appropriate sanctions or remedial action. These sanctions usually
include an injunction prohibiting future violations of the federal
securities laws.100 The Commission can seek and obtain through court
order undertakings,101 such as audits,102 accounting,103 or special
supervisory arrangements.104 Additionally, the SEC often seeks civil
monetary penalties105 and disgorgement.106 The courts may also bar or
suspend an individual from serving as a corporate officer or director.107
The civil proceeding is like any other case in any U.S. District
Court; briefs, interrogatories, depositions, documentary discovery, and
motion practice all culminate in a civil trial. The SEC’s trial counsel in
the regional offices, or trial attorneys from Headquarters usually handle
trials.108 But, there are instances when staff attorneys assist in the
presentation of their case at trial.109
c. Commission Authorization to Institute an Administrative
If the Commission approves the Staff’s recommendation to institute
an Administrative Proceedings (“AP”), the Secretary of the Commission
signs an Order Instituting Proceedings (“Order”) and sends it to the
parties.110 Typically, the Order filed by the Commission describes the
equal bargaining position, how does the SEC extract unprecedented
settlements from these parties?176
Notwithstanding the mutual advantages, SEC settlements are not
agreements between equals. We must evaluate hidden power and the
power of coercion to understand the bargaining ability of each side.
Unfortunately, these types of power are not obvious, particularly if
unused. Unspoken coercive power and other hidden powers held by
each side influence SEC settlements with large and powerful financial
institutions. Unspoken yet strong factors that might play a role in
defining the power relationship between the SEC and large financial
institutions are: (1) large financial institutions and the law firms that
represent them heavily employ former SEC staff, (2) the compliance and
176. Between early 2004 and fall 2004, the SEC imposed fifteen penalties over $50
million, including may of the highest penalties ever obtained in SEC enforcement
actions. Stephen M. Cutler, Speech; The Themes of Sarbanes-Oxley as Reflected in the
Commission’s Enforcement Program (Sept. 20, 2004), available at
http://www.sec.gov/news/speech/spch092004smc.htm. See SEC v. WorldCom, Inc.,
273 F. Supp. 2d 431 (S.D.N.Y. 2003) (imposing a $2.25 billion penalty, satisfied
postbankruptcy at $750 million); In re Merrill Lynch & Co., Litigation Release No. 18038,
79 SEC Docket 2533 (Mar.
), available at http://sec.gov/litigation/
litreleases/lr18038.htm; In re Citigroup, Inc., Exchange Act Release No. 48230, 80 SEC
Docket 2116 (July
), available at http://sec.gov/litigation/admin/34-48230.htm;
SEC Charges J.P. Morgan Chase In Connection With Enron’s Accounting Fraud,
Litigation Release No. 18252, 80 SEC Docket 2286 (July
), available at http://
sec.gov/litigation/litreleases /lr18252.htm (stating that SEC imposed a total of $197.5
million in civil penalties, and substantial disgorgement, against Merrill Lynch,
Citigroup, JPMorgan Chase, and CIBC); see, e.g., In re Invesco Funds Group, Inc.,
Investment Company Act of 1940 Release No. 26629, 83 SEC Docket 2872 (Oct. 8,
2004) (imposing a $110 million penalty), available at http://www.sec.gov/litigation
/admin/34-50506.htm; In re Alliance Capital Management, L.P., Investment Advisers
Act of 1940 Release No. 2205A, 81 SEC Docket 3401 (Jan. 15, 2004) (imposing $100
million penalty), available at http://www.sec.gov/litigation/admin/ia-2205a.htm; In re
Massachusetts Financial Services Co., Investment Advisers Act of 1940 Release No.
2213, 82 SEC Docket 341 (Feb. 5, 2004) (imposing $50 million penalty), available at
http:// www.sec.gov/litigation/admin/ia-2213.htm; In re Pilgrim Baxter & Associates,
Investment Advisers Act of 1940 Release No. 2251, 83 SEC Docket 363 (June 21,
2004) (imposing $50 million penalty), available at http://www.sec.gov/litigation
/admin/ia-2251.htm; In re Putnam Investment Management, LLC, Investment Advisers
Act of 1940 Release No. 2226, 82 SEC Docket 2225 (Apr. 8, 2004) (imposing $50
million penalty), available at http://www.sec.gov/litigation/admin/ia-2226.htm; In re
Janus Capital Management LLC, Investment Advisers Act of 1940 Release No. 2277,
83 SEC Docket 1766 (Aug. 18, 2004) (imposing $50 million penalty), available at
legal areas of large financial institutions and the firms that represent
them are normally staffed by former SEC staff, (3) the financial
institutions in avoiding litigation also avoid suits by the investing public;
and (4) the SEC is self-interested.
The trend toward increased settlement from large corporations and
financial institutions would seem to indicate that the SEC has more
power than respondent(s) or defendant(s) in these cases. But, first we
must address the coercive power and hidden factors that contribute to
the imbalance of power. An analysis of the motivation below does seem
to indicate that the respondent(s) or defendant(s) have more to lose than
to gain in litigation. Maybe the threat of future collateral estoppel forces
large corporations and financial institutions to engage in SEC settlement.
C. Public Policy Favors Settlements When the Parties Are Motivated to
Avoid the Time, Cost, Emotional Toll, and Risk of Trial
In Traditional Settlement Environments, the parties are equally
motivated by certain considerations, including, but not limited to, the
avoidance of the time, cost, emotional toll, and risk of litigation. These
considerations exact a cost of the parties who resort to litigation. These
costs are immeasurable, and the impact on the courts is significant.
The societal and individual benefits of settlement emerging from
the Traditional Settlement Environment, instead of litigation, are
impossible to quantify. Most negotiators engage in a cost benefit
analysis. They weigh the financial costs of litigation versus the
economic value of settlement. Generally, the expense, risk, and delay
that frequently attend formal adjudication explain, at least in part, a
party’s preference for, and the rising incidence of, settlement.177
Settlement should promise a speedy resolution and enhanced party
Party motivation toward SEC settlement varies greatly from the
motivations leading toward settlement in the Traditional Settlement
Environment. The motivations in SEC settlement are less noble than the
general aversion of cost, emotional toll, and the risk of trial. Agency
self-interest and the opposing side’s desire to avoid collateral estoppel
are the primary factors encouraging SEC settlement.
1. Potential Motivations Toward Settlement for the Defendants’ or Respondent(s)
Fear of reputation and economic harm, and the collateral estoppel
effect of a trial, motivate potential defendant(s) or respondent(s) in an
SEC settlement.179 Defendant(s) or respondent(s) might feel internal or
external pressures to settle quickly. The business and investing
communities perceive institutions and individuals who choose to defend
against the SEC’s allegations as bad actors. The opposite is true for
those who settle SEC enforcement actions.
Defendant(s) or respondent(s) must concern themselves with two
possible negative outcomes associated with contested SEC matters,
reputational and economic harm and the significant risk of collateral
estoppel, both of which could attach if the defendant(s) or respondent(s)
loses the SEC enforcement matter.
a. Avoidance of Reputational and Economic Harm
The first type of harm associated with an SEC enforcement matter,
reputational and economic harm, can be devastating if not managed by
the defendant(s) or respondent(s) properly. Even though SEC
investigations are nonpublic, leaks do occur.180 These leaks are often
more damaging to a corporate image or individual reputation than any
sanction that might be imposed in a contested proceeding. Public
awareness of an SEC investigation requires corporate crisis management
and communication.181 Engaging in a contested proceeding with the
SEC, however, can increase harm to an individual or corporation for any
number of reasons including, but not limited to, the expense of
179. The coercive motivation often is felt by small and mid-sized enterprises or
individuals. This motivation is omitted from this discussion. See Part III.B.1.
180. See Phillips, supra note 46; see also 17 C.F.R. § 202.5(a) (1996). It is
believed that most leaks are the result of testimony witnesses’ discussions and are rarely
attributed to the Staff. The staff policy is neither to confirm nor deny the existence of
defense,182 prolonged negative media attention,183 and the redirection of
corporate efforts and resources from daily management to defending
against the enforcement proceeding.
The harm associated with a contested proceeding can be minimized
through a simultaneous filing of the complaint or order and a
settlement.184 Settling with the SEC allows the defendant(s) or
respondent(s) to resume normal business as soon as possible and to
manage the negative publicity at one time, as opposed to confronting
waves of negative publicity at the time of filing, through the trial, and at
the resolution of the matter. Another public relations reason to settle an
enforcement matter is the possibility that the SEC staff will allow the
settling defendant(s) or respondent(s) to review and comment upon the
Public sentiment related to corporate reputation impacts consumer
trends as well as the share price.186 Harm to a company’s reputation can
quickly morph into long-term economic harm for a corporation or an
individual. In 2000, when Microsoft was found to have exploited its
monopoly powers and ordered to break up, its share price fell sharply.187
Microsoft’s recovery of market capitalization is still in progress, six
years later, even though the charges were settled and the breakup was
avoided.188 In 2002, when investors discovered that the SEC and the
U.S. Attorney were investigating Computer Associates International, its
share price fell by half within days.189 Computer Associates’ share price
has just begun to reach levels comparable to the 2002 prices. In 2002,
Merrill Lynch suffered a $20 billion loss of market capitalization.190
The loss is attributable to three corporate scandals: (1) the analyst
scandal, (2) the company’s ties to Enron, and (3) the company’s
connection to Martha Stewart.191 In 2003, Martha Stewart Omnimedia,
Inc. lost 16% in market capitalization on reports of possible criminal and
civil charges against Martha Stewart in connection with selling her
ImClone stock.192 During the investigation, Martha Stewart
Omnimedia, Inc. lost half of its value.
There is a value attached to corporate reputations because public
sentiment, more so than corporate fundamentals, move the securities
markets. The reputational and economic harm which attend an SEC
enforcement matter can not be underestimated. The avoidance of
market share loss is a possible motivation for respondent(s) and
defendant(s) to settle quickly SEC matters.
b. Avoidance of Collateral Estoppel193
Of the two possible types of harm, the second associated with an
SEC enforcement matter, possible exposure to collateral estoppel, is
most feared by large corporations. Plaintiffs can use collateral estoppel,
also known as issue preclusion, to prevent an unsuccessful defendant in
an SEC enforcement matter from re-litigating certain issues decided
against that defendant in the first case.
Issue preclusion bars from litigation issues that were litigated and
determined. These particular issues will be barred from relitigation
between the actual parties as well as all other litigants.194 Issue
preclusion is applicable when (1) an issue of fact or law is (2) litigated
and determined by (3) a valid and final judgment and (4) the
determination essential to the judgment.195 Issue preclusion contributes
to judicial efficiency and enhances consistency because the doctrine
precludes relitigation of issues already decided in an earlier suit and
avoids the possibility of inconsistent outcomes. In the past, only the
same parties in a subsequent suit could use issue preclusion. However,
193. Collateral estoppel is also known as issue preclusion. See BLACK’S LAW
DICTIONARY 179 (6th ed. 1991).
194. See Parklane Hosiery Co. v. Shore, 439 U.S. 322 (1979); RESTATEMENT
(SECOND) OF JUDGMENTS § 29 (1982).
195. See Gargallo v. Merrill Lynch, 918 F.2d 658, 664 (6th Cir. 1990) (stating that
this requirement cannot be met through settlement).
in 1942, the mutuality rule in the application of issue preclusion was
abandoned in most jurisdictions196 and nonmutual collateral estoppel
began its rise.
Nonmutual collateral estoppel conserves judicial time and resources
while enhancing fairness.197 Plaintiffs who are unhappy with verdicts
may no longer press their case until potential defendants run out.198 In
addition, defendants who have lost are precluded from ignoring the
decided issues in a prior case.199
Offensive nonmutual collateral estoppel is the tool that private
litigants would use after a successful SEC enforcement action.
Assuming that (1) an issue of fact or law was (2) litigated and
determined by (3) a valid and final judgment and (4) the determination
was essential to the judgment, the determination would be conclusive in
a subsequent action brought by aggrieved investors. The Supreme Court
has suggested that subsequent plaintiffs should not be able to use issue
preclusion “in cases where a plaintiff could easily have joined in the
earlier action . . . .”200 Private plaintiffs may seek to join SEC
enforcement actions; however, the SEC as a policy opposes such
joinder.201 The investors in the subsequent action would be able to use
offensive nonmutual collateral estoppel against the same defendant in
the SEC enforcement action to establish the recurring issues without
relitigation. This ability would increase the power of the securities
plaintiff’s bar tenfold.
The Supreme Court has granted courts broad discretion in applying
offensive nonmutual collateral estoppel.202 There are three significant
factors to consider when examining the validity of collateral estoppel:
(1) whether the defendant had a full and fair opportunity to litigate the
issue in the first proceeding, (2) whether the court was fair in its
determination in the first proceeding, and (3) whether there have been
changes in the law since the first proceeding. SEC settlements void the
public’s opportunity to use offensive nonmutual collateral estoppel
because settlements are not actually litigated.
The motivation of defendant(s) or respondent(s) for SEC settlement
has little to do with whether the conduct in question is right or wrong.
The motivation is purely economic: the avoidance of future litigation
with perhaps numerous private litigants, relying on collateral estoppel,
and the speedy reestablishment of business as normal. The interest of
the defendant(s) or respondent(s) in settlement as a form of resolution in
lieu of litigation is the avoidance of collateral estoppel. The desire to
avoid this negative outcome is so great that the rules of law articulated
in the settlements releases are more closely akin to a one-sided
dissertation of the facts and law than it is a true advancement of
principled reasoning through the use of precedents.203 Very few
negatives can be found for the settling defendant(s) or respondent(s)
beyond the terms of settlement that can include a variant of sanctions
that arguably would be no different from those imposed in a litigated
In settling matters, the Commission has responded to the
defendant(s) or respondent(s) collateral estoppel fear by inserting
language into settlement documents that favor the defendant(s) or
permissive intervention and intervention of right, noting that “though this is not a case
where a governmental entity is suing as parens patriae . . . the fact that the suit is being
defended by the combined legal forces of the United States and the State of New York”
supports the conclusion that the “interests of [the proposed interveners] are adequately
represented”) (internal citations omitted). See also supra note 16 and accompanying
202. Parklane Hosiery Co., 439 U.S. at 322.
203. Report of the Task Force on SEC Settlements, 47 Bus. L. 1083, 1041 (May
respondent(s).204 The largest beneficiary of an SEC settlement is/are the
potential defendant(s) or respondent(s).
2. The SEC’s Motivation for Settlement
The SEC’s enforcement program seeks to promote the public
interest by protecting investors and preserving the integrity and
efficiency of the securities markets.205 The SEC does not consider the
various public interests into the decision to settle any particular matter.
Unfortunately, the SEC’s interest in settlement has more to do with the
agency self-interest concerns of internal cost savings and risk aversion,
as opposed to the motivations favored by public policy in the Traditional
Settlement Environment—the speed of reaching a mutually negotiated
conclusion, or the impact on or benefit to the public.
Any consideration of the legitimacy of SEC settlement as the
primary method of enforcement case resolution should explore the
SEC’s motives. Numerous factors encourage SEC settlement. Several
of these factors could be termed legitimate, while other factors could be
viewed as illegitimate as they relate to public policy or public interest.206
204. Id. (explaining that the Division hopes to avoid taking a stance on the
collateral estoppel effects of its proceedings and settlements; the Order Making
Findings, and Imposing Sanctions will also contain what has become known as the
collateral estoppel language).
205. SEC ANNUAL REPORT 2003, supra note 41, at 1.
206. Congress has charged the Commission with protecting the investing public.
See, e.g., 15 U.S.C. § 78j(b) (referring to “rules and regulations . . . the Commission
may prescribe . . . for the protection of investors”). See Pierce v. SEC, 239 F.2d 160,
163 (9th Cir. 1956) (“The Commission is given the duty to protect the public. What
will protect the public must involve, of necessity, an exercise of discretionary
determination.”). In theory, the SEC has experience determining what is in the public
interest and representing this interest. The SEC, in its Memorandum of Law in
Opposition to Motion to Intervene in SEC v. NJ Affordable Homes Corp. and Wayne
Puff, 2005 WL 3523260 (D.N.J. 2005), indicates that the Commission is responsible for
litigating in the public interest. See also Jack Benjamin Grubman, SEC Motion and
Order, SEC v. Bear, Stearns & Co., 2003 S.D.N.Y. Civ. 2937, available at
http://www.sec.gov/rules/other/order-enron082503.pdf (last visited Mar. 6, 2006)
(denying plaintiff the right to intervene in an SEC enforcement matter on the basis that
the SEC represents the public interest.). The agency is required to make public interest
determinations is a number of different situations. See Rules of Practice for the
Securities and Exchange Commission 200(c): Initiation of Proceedings (regarding the
time and place of the hearing shall be fixed with due regard for the public interest);
The prevalence of such settlements indicates that in settlement the SEC
follows formalistic norms as opposed to evaluating the public interest.
The SEC’s status as a government actor representing the public interest
is an idyllic description. The SEC represents its “self-interest” and
settlement is pragmatic. Pragmatism, however, does not determine if
these routine settlements comport with public policy or serve the public
interest. SEC settlement benefits the agency. The conservation of
resources, risk avoidance, expansion of jurisdiction, and impact on legal
norms play a prominent role in the decision to settle.
A definition of agency self-interest must be developed to examine
whether the SEC makes settlement decisions based on its own
selfinterest considerations instead of public interest considerations. The
agency is a collection of people, some interested in any or all of the
following: justice; victory; reputation; and political gain. Agency
selfinterest is most visible when agency actions and decisions attempt to
place the articulated goals and priorities of the agency over all other
Rules of Practice for the Securities and Exchange Commission 193: Applications by
barred individuals for consent to associate, preliminary note (stating that the
Commission will consider the nature of the findings that resulted in the bar when
making its determination as to whether the proposed association is consistent with the
public interest); Rules of Practice for the Securities and Exchange Commission 192
Rulemaking: Issuance, Amendment and Repeal of Rules of General Application (stating
that except where the Commission finds that notice is contrary to the public interest);
Rules of Practice for the Securities and Exchange Commission 102(e)(3)(i):
Appearance and Practice Before the Commission (“The Commission, with due regard
to the public interest . . . .”). When imposing certain sanctions, the SEC is required to
consider public interest and must make a showing that the imposition of certain
sanctions is in the public interest. Maletta, supra note 132 (listing sanctions that
include a revocation of registration as a broker or dealer or adviser, bar of a person from
association with such an entity, suspension from an association with a regulated entity,
limitation on activities and censure). The question of the appropriate remedy is an issue
for administrative competence. See Butz v. Glover Livestock Commission Co., 411
U.S. 182, 185 (1973) (quoting American Power & Light Co. v. S.E.C., 329 U.S. 90, 112
(1946) (internal quotation marks omitted); Phelps Dodge Corp. v. N.L.R.B., 313 U.S.
177, 194 (1941) (“The relations of remedy to policy is peculiarly a matter for
administrative competence . . . .”). As a result, and traditionally the Commission’s
interpretation of the public interest and the resulting sanctions must be affirmed unless
“unwarranted in law or . . . without justification in fact.” Rizek v. SEC, 215 F.3d 157,
160 (1st Cir. 2000) (quoting American Power & Light, 329 U.S. 90, 112-13 (1946)).
207. The articulated goals can come from Agency leaders, Agency priorities
(Internet cases), Congress (e.g., Sarbanes-Oxley), or the President.
a. Conservation of Resources
The SEC caseload is enormous, and SEC settlement plays a role
similar to mediation or other forms of court mandated attempts at
alternative dispute resolution. The SEC settles most of its enforcement
cases. Settlement conserves resources which would be expended during
the adjudication of a contested proceeding.
Each year, the SEC requests and receives additional Congressional
funding for staff salaries, hiring, training, and equipment.208 During
fiscal year 2002, Congress increased the Commission’s initial
appropriation of $437.9 million to $514 million.209 The Commission
also received a supplemental appropriation of $30.6 million to hire 125
new attorneys and accountants and to address technology needs.210
Congress enacted the fiscal year 2003 appropriation, in late February
2003, resulting in an operating budget of $711.7 million. For fiscal year
2004, the SEC received authority to spend $811.5 million.211 Fifty-three
percent of that funding went to the Division of Enforcement.212 The
SEC requested appropriation of $888.1 million for fiscal year 2006.213
Over the last several years, Congressional funding has increased to meet
the needs of the SEC.214 Arguably, these positive changes215 make the
agency’s lack or conservation of resources a less compelling argument
to justify wholesale settlement.
b. Avoid Litigation Risk and Possible Reputational Harm
The Commission’s interest and posture in settlement is often
attributed to the design of the investigatory process, which encourages
thorough investigations. The quality and quantity of staff hours,
documents reviewed, and witness testimony result in a confident and
knowledgeable enforcement staff. The staff can present a persuasive
case leading to a positive outcome for the Commission. However, the
threat of reputational and programmatic harm that can result from a
litigation loss is a significant motivator toward settlement.
In examining the impact of possible litigation risk and reputational
harm to the agency, we should assume that the agency and staff are
motivated to stop harm to investors, and that the Staff only seeks
approval from the Commission to proceed when faced with winnable
cases. We must also assume that the Staff does not bring cases for the
purpose of coercing settlements.
Assuming that the SEC brings winnable cases and the
Commission’s goal is to protect investors and serve the public interest
then the SEC should experience great success in contested matters. A
review of SEC cases suggests that the SEC fairs better in terms of
positive outcomes in settlement and in contested administrative
proceedings than it does in civil litigation. Litigation risks the
uncertainty of a result (since the SEC could and does lose) that can be
avoided by settlement.216 The effects of losing a contested proceeding,
particularly a novel case, are far reaching.
A recent survey of SEC cases points to anecdotal evidence that the
SEC is most successful when it is pursuing its core areas of
enforcement, such as standard account fraud cases and insider trading
cases.217 The SEC does not fare as well in areas beyond its “core
216. Report of the Task Force on SEC Settlements, 47 BUS. L. 1083, 1093 n.28
(May 1992). See, e.g., Dirks v. SEC, 463 U.S. 646, 662 (1983) (reversing SEC censure,
applying a “personal benefit” analysis to determine tipper/tippee liability); Aaron v.
SEC, 446 U.S. 680 (1980) (ruling against the SEC on the issue of scienter in Rule 10b-5
cases); SEC v. Peters, No. 88-1720-K (D. Kan. 1990) (finding the defendant not guilty
on charges of insider trading).
217. Hitting Home Runs and Missing? Examining How the SEC Has Fared in recent
District Court Litigation, ALI-ABA, at 711, 714 (July 20, 2006) [hereinafter Hitting
competency,” including, but not limited to, market timing and primary
and aiding and abetting liability for market timing, secondary actor
liability, scienter required for lying to auditors, insider trading,218 and
viatical settlements. The survey suggests that the SEC’s mixed results
when it has sought to expand the reach of its enforcement practice might
explain its lack of aggression in these novel areas of law.219
c. The SEC Strategically Increases Its Power Through Settlement
The SEC’s popular support and bargaining strength are enhanced
through settlement activity. The SEC and Congress are often pressured
by popular sentiment to act in response to market factors and scandals.
For example, market timing rules, The Sarbanes-Oxley Act, and the
creation of the PCOAB are areas of regulation that were a reaction to
popular scandal. The SEC and Congress’ swift response to popular
scandal increases popular sentiment.
An examination of the parties’ motives for settlement reveals that
settlement is a win-win proposition for the SEC and the defendant(s) or
respondent(s). Unfortunately, the SEC pays little attention to the public
interest in SEC settlements process.220 There is no guidance, which
suggests that the SEC or the courts make a public interest determination
when conducting and entering settlement negotiations. SEC settlement
may very well be appropriate in a host of cases and for a variety of
reasons. However, the SEC and the judiciary should recognize a public
interest in SEC settlements.
IV. THE PUBLIC INTEREST IN SEC SETTLEMENTS SHOULD BE DEFINED
Examining the public interest in SEC resolution requires that the
public interest be described, if not defined. Defining the public interest
in any one area is often difficult. The public interest in the financial
markets and in investor protection is referenced in several works. Public
218. These crimes are noted as part of the SEC’s core competency. However, the
SEC has attempted to prosecute an individual who would not normally be subject to
liability, a barber who was given insider information. S.E.C. v. Maxwell, 341 F. Supp.
2d 941 (S.D. Ohio 2004).
219. See Hitting Homeruns, supra note 217, at 714.
220. Dor, supra note 177 (stating that the impositions of some sanctions require that
the SEC make a public interest determination).
response to current events in the financial markets can be an indicator of
public interest. Negative public reaction followed by legislation in the
areas of corporate ethics and accounting practices is an indicator of the
public interest in corporate responsibility and in market transparency.
A. Transparency and Corporate Responsibility
SEC settlement fails as a branding tool in the area of enforcement
because it fails to distinguish bad actors from those who have made
technical errors or minor violations of the federal securities laws.
There have been several recent articles about the wave of corporate
executives who refuse to acknowledge wrongdoing and publicly accept
responsibility for their activities. A rash of high profile corporate
scandals serves to highlight the necessity and public interest in corporate
responsibility. Consider Rigas of Adelphia Communications Corp., Inc.,
Credit Suisse First Boston’s Frank Quattrone, Martha Stewart and
ImClone’s Samuel Waksal, WorldCom’s Bernard Ebbers, former CEO,
Scott Sullivan, former CFO, Tyco’s L. Dennis Kozlowski and former
CEO, Kenneth Lay of Enron.
If we examine these financial scandals, in spite of convictions,
settlements, and trials the defendant(s) are not remorseful. There has
been no acceptance of responsibility or acknowledgement of guilt. In
2005, Marsh & McLennan, charged with insurance bid rigging by the
New York Attorney General’s office, was stuck in settlement
negotiations, not by the additional $150 million that the NYAG’s office
was requiring for settlement, but by a required statement of contrition.221
In October 2005, the CEO of Citibank apologized to Japanese regulators
in person for his company’s action, violations by Citibank’s private
banking group in Japan. SEC settlements are done on a “without
admitting or denying” basis. This in some way allows respondent(s) or
defendant(s) to maintain the appearance of innocence while paying a
fine to avoid litigation. A method of labeling wrong doers in the
settlement process would allow the public to make an informed decision
about which companies and individuals transact business with. The
swift Congressional and public response to the Enron and WorldCom
scandals is an indicator of public interest in corporate responsibility.
221. See Geyelin, supra note 123.
B. There Is a Public Interest in Adjudication
Adjudication yields the following societal benefits: (1) the creation
of recognized rules or precedents; and (2) the creation of the possibility
of collateral estoppel. In addition to these tangible benefits of
adjudication, some societal satisfaction can be derived from the
adjudication process being a focus of the popular media. The result of
wide media coverage can spur or enhance the public dialogue about
financial fraud, investor relations, and corporate misdeeds.
1. Creation of Precedents Is in the Public Interest
The creation of precedents through adjudication is in the public
interest. Adjudication creates precedents. When an unbiased arbiter
analyzes the law and applies it to facts of a particular case, the same
conclusion and the same analysis can be expected in future cases having
the same facts. The creation of precedents avoids the necessity of
revisiting the application and interpretation of every law. Precedent is a
method of using the past in order to assist in current interpretation and
decision-making. It allows people to have a reasonable expectation of
the legal solutions that apply in a given situation. Additionally,
precedents have the important role of guiding future behavior and in
imposing certainty in disputed areas of law.
Precedents encourage certain efficiencies in the American dispute
resolution system. The ability to reflect, utilize, and be bound by earlier
cases can lead to the avoidance of litigation and might increase the
frequency of private resolution. In addition, market participants aware
of the precedents can adjust their behavior in recognition of a developed
body of law in order to avoid conflict.
The certainty of law, transparency, and increased judicial efficiency
and consistency are byproducts of the adjudication process that are in
the public interest. Settlement avoids the creation of precedents, leaving
behind a limited body of law with which to establish legal principles to
be followed when similar or identical facts arise. Settlements should not
produce precedents binding on non-parties.222 However, as discussed
earlier223 courts as well as the SEC treat SEC settlements as precedents.
Coleman & Silver, Justice in Settlements, 4 SOC. PHIL. & POL. 102, 114-19
See supra, discussion at Part III.A.
The pervasive use of SEC settlements runs counter to the public interest
in the creation of precedents.
2. Collateral Estoppel224 (a By-Product of Adjudication)
is in the Public Interest
The Supreme Court in Parklane Hosiery225 approved the use of
collateral estoppel by strangers to an SEC proceeding against a defeated
defendant, who had an opportunity fairly and fully to litigate the
Commission action. The plaintiff using collateral estoppel could prevent
the defendant from defending the action on certain grounds and
relitigating certain facts on a private suit. Private plaintiff’s use of
collateral estoppel would strengthen their ability to prevail against major
financial institutions involved in complicated frauds. Non-parties would
be able to seek recovery associated with the SEC’s cases. Collateral
estoppel could obligate the individual or corporation to public investors
who without collateral estoppel were unable to pursue their rights.226 As
a result of collateral estoppel, private parties could adopt a wait and see
posture with respect to defendant(s) in SEC matters.227 It is generally
accepted that federal courts may give collateral estoppel effects to
findings in an administrative proceeding.228
It is not clear that the risks to the agency in terms of reputation,
loss, and expense outweigh the benefit to the public of finality and
collateral estoppel. The balancing needed to make this sort of
determination is neglected in the settlement context. The resources of
the agency, its ability to make law, the removal of litigation risk, and the
ability to obtain significant sanctions in settlement are the primary
considerations as the agency approaches settlement. Little regard is
224. See supra, discussion at Part III.C.1.b.
225. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 322 (1979).
226. Id. (regarding investors that could not have joined the SEC case).
227. See Parklane Hosiery Co., 439 U.S. at 322 (dissent, J. Rehnquist).
228. United States v. Utah Constr. & Mining Co., 384 U.S. 394, 421-22 (1966)
(determining that findings of Board of Contract Appeals in proceeding on claim within
its jurisdiction are final and conclusive with respect to a claim which is based on the
same facts, but which is not within the Board’s jurisdiction and is harmonious with
general principles of collateral estoppel). A statement that res judicata principles do not
apply to administrative proceedings is too broad, and when an agency is acting in
judicial capacity and resolves disputed issues of fact properly before it which parties
have had adequate opportunity to litigate, courts may apply res judicata to enforce
given to the public’s interest in the adjudicatory process and its societal
V. THERE ARE PRACTICAL SOLUTIONS TO OVERCOMING THE COLLECTIVE
ACTION PROBLEM INHERENT IN THE RECOGNITION OF THE PUBLIC
INTEREST IN SEC RESOLUTION
It might be impossible for the SEC, comprised of the staff and the
Commissioners, to consider investor protection the public interest.
Divergent interests imply that the staff will be an imperfect advocate for
the “public interest.”229 The Commissions and the Staff look to past
settlements to determine reasonableness, impact on the public investors,
deterrence, and punishment when confronted with the settlement
decision. The Commission does not examine the public interest factors
in this determination. There are, however, possible solutions to the
incorporation of public interest considerations into SEC settlements.
A. Saying “Sorry”
We must assume that some settlements reached by the SEC in
which the defendant or respondent is not required to admit or deny the
allegations of wrongdoing are appropriate in certain limited
circumstances. This proposition should not be true for most settlements.
SEC settlements of novel and routine230 cases should be more
strictly scrutinized by the courts, administrative law judges, and the
public. The resources of the Commission would provide an acceptable
justification for the settlement of routine cases, pose little litigation risk
and will be settled on a “neither admitting or denying basis.”231
Settlement of routine cases without admissions of guilt harms public
interest while benefiting the defendant(s) or respondent(s) through the
avoidance of collateral estoppel. Cases in which the Staff predicts
229. Sanford I. Weisburst, Judicial Review of Settlements and Consent Decrees:
An Economic Analysis, 28 J. LEGIS. 55, 93 (1999).
230. For our purposes, routine cases are those cases in an area of the law which is
well settled and similar to those cases which contain principles previously tested
231. SEC settlements, with rare exception, contain the following language: “Without
admitting or denying the findings herein, except that Respondent has admitted the
Commission’s jurisdiction over it and over the subject matters set forth herein,
Respondent has consented to the entry of this Order.” See generally SEC Releases.
minimal litigation risk should only be settled with an admission of guilt,
responsibility, or statement of contrition from the respondent(s) or
In the equity markets, investors likely view the integrity and
competence of management as material to investment
decisionmaking.232 This comment made by William McLucas is no less true
today. Certainly, integrity and corporate management are important to
investors. In recognition of this public interest, the SEC should require
this precise information when settling. The information should be in the
form of some statement of contrition or the acceptance of responsibility
from respondent(s) and defendant(s) settling SEC enforcement
proceedings. However, the settlement of routine cases could include
some admission of guilt or a statement of contrition. The settlement of
routine cases including an admission of guilt or other statement of
responsibility could satisfy the Agency’s self-interest as well as the
232. William R. McLucas, Common Sense, Flexibility, and Enforcement of the
Federal Securities Laws, 51 BUS. L. 1221, 1229 (1996) (citing Roeder v. Alpha
Industries Inc., 814 F.2d 22, 25 (1st Cir. 1987)) (holding undisclosed bribe as material
because information could cause a reasonable investor to question competency of
management); United States v. Fields, 592 F.2d 638, 649-50 (2d Cir. 1978), cert. denied
442 U.S. 917 (1979) (finding kickbacks received by corporate officers could be
material); In re Franchard Corp., Securities Act Release No. 4710, [1964-66 Transfer
Binder] Fed. Sec. L. Rep. (CCH) ¶ 77,113 (1964) (stating that self-dealing reflects on
quality of management, which is “of cardinal importance in any business”); John M.
Fedders, Law Enforcement Against Those Who Fail to Disclose Illegal Behavior,
BANKING & BUS. L. (Nov. 19, 1982).
233. Id. Critics will suggest that the proposal is impracticable for several reasons:
court systems are overburdened with costly and time-consuming litigation, SEC
resources cannot support additional litigation, settlements are related to court efficiency,
and public policy generally supports settlements. There is no easy solution to the
burden on the federal court system; however, public interest in adjudication should not
give way to an overburdened system. As for cost savings unlike private settlements
where each party bears the burden of cost in an SEC litigation the defendant or
respondent bears its costs and the public bears the cost of the SEC prosecution. While it
is true that, public policy favors settlement and settlement is viewed as an efficiency in
our system. However, the adjudication of novel cases would increase court efficiency
through the creation of precedent. As for Commission and staff resources, funding for
the Staff has been increasing steadily; it would seem that funds could be utilized to
support an enforcement philosophy, which could include litigation in novel areas.
B. Exempt Novel Cases from Settlement
An alternative to settling novel case is to issue 21(a) reports. In the
past, these reports have been used to illuminate the need for legislation
while others have served to advise the public with respect to the
obligations imposed by the federal securities laws.234 In a number of
instances, the publication of these reports has accompanied the
institution of enforcement actions by the Commission.235
When the Staff brings novel cases, or cases attempting to clarify the
law, the Commission engages in the creation of precedent. The
Commission or the Staff can outline allegations or findings that led to
the enforcement action and the sanctions appropriate for such behavior.
These settlements are released publicly and are reviewed by those in the
industry for indicia from the Commission as to its current enforcement
policies and practices. Potential defendant(s) and respondent(s) take
cues from these sources and conform their conduct as not to duplicate
the prohibited behavior. In theory, this conforming behavior is not
However, in the area of novel cases a different standard should
apply. Settlements in novel cases help to shape industry behavior, serve
as precedent for the commission and the industry, and essentially create
rules outside of the formal rulemaking process. Restrictions on
settlements will benefit the SEC and the public.
An argument against stricter policing of settlements of novel
matters is that the ability to settle while clarifying the law will inhibit the
SEC’s ability to be nimble and respond to new areas of fraudulent
tactics. With adjudication, Rulemaking, or Legislation, the SEC has
been able to prosecute Insider Trading236, initiated the foreign payments
234. Issuances of Reports and Investigations of Statements, Exchange Act Release
No. 34-15664, 17 SEC Docket 18 (Mar. 21, 1979).
236. See United States v. O’Hagan, 521 U.S. 642 (1997). The SEC and Congress
have refused to define the term “Insider Trading.” This has allowed the Staff to
advance insider trading from the traditional formulation, where a classic corporate
insider uses information for personal gain in violation of a duty owed to shareholders of
the company, to the misappropriation theory where a corporate outsider working on a
transaction who trades based on information obtained in the work environment while
owing no duty to any market participant or shareholder that can be found liable for
program237, prosecuted parking frauds,238 and municipal securities pay
to play schemes.239 However, the rulemaking process is efficient and
within the control of the Commission. It should be used to address
novel cases and new interpretations of the laws.
C. Judiciary’s Role as an Oversight Body
The role of the Judge in evaluating the protection of the public
interest should be increased as a check on the settlements of the Agency
in response to self-interest, and the public’s inability to join suits and
represent its own interest. The judiciary should explore this showing of
the SEC and it should balance the self-interest of the agency and its
employees against the public interest. The purpose of the court in
making these inquiries is to determine whether the decree adequately
protects the public interest.240
D. Lessons from Other Areas of Law Which Allow for the
Incorporation of Public Interest.
Family law and antitrust law are two areas of the law where the
incorporation of interests beyond the parties is necessary.
1. Family Law
Child custody jurisprudence can shed light on SEC settlement
jurisprudence. Child custody jurisprudence goes through a decision
237. See id. When the Commission uncovered that corporations were making
payments to foreign parties in the normal course of business and failing to disclose such
payment the SEC injunctive action against several corporation for falsifying books and
records to conceal these payments.
238. McLucas, supra note 232, at 1229. There were no specific rules that address
the common practice of Parking in the 1980s. However, the SEC viewed parking as
compromising the public’s perception of fairness, honesty, and integrity in the securities
239. Id. at 1229. Bribery, quid pro quo arrangements, political contributions, or
other gratuities that affect the selection of underwriters and financial advisers, go to the
heart of the municipal market’s integrity. These practices may have serious implications
for the overall health of public finance. The broad provisions of the anti-fraud rules
have provided the SEC with a vehicle with which it can address abuses in the municipal
securities market and protect investors, without a need for additional legislation.
240. See United States v. Ketchikan Pulp Co., 430 F. Supp. 83, 86 (D. Ala. 1977).
making process that evaluates several spheres of concern in advance of
reaching a conclusion. These spheres of influence include the
following: the wishes of the child, a party often unable to express his or
her wishes; the wishes of each parent; the best interest of the child; and
the interaction and interrelationship of the child with his parent or
parents, his siblings, and any other person who may significantly affect
the child’s best interest. The judge “acts as parens patriae to do what is
best for the interest of the child. He is to put himself in the position of a
wise, affectionate, and careful parent . . . and make provision for the
Beyond child custody matters there are other matters where courts
need to consider the interest of minors or incompetents. Sometimes a
court might appoint a guardian ad litem. A guardian ad litem is a person
appointed by the court only to take legal action on behalf of a minor or
an adult not able to handle his/her own affairs. Duties may include
filing a lawsuit for an injured child, defending a lawsuit or filing a claim
against an estate. The attorney who is appointed guardian ad litem
provides independent advice to the Court (as compared to the attorneys
advocating for one side or the other in the action) to bring balance to the
decision-making process. The guardian ad litem may conduct interviews
and investigations, make reports to the court and participate in court
hearings or mediation sessions.
The public, similar to a child or an incompetent person, has
problems expressing its interests in SEC settlements. There are practical
barriers,242 and collective actions problems which prevent the public
from representing its interest in SEC settlements. The SEC and the
courts that approve settlements should go through a process whereby the
public interest is evaluated along with the desires of the parties. The
utilization of the guardian ad litem for the public interest is a possible
solution. The creation of a commission to represent the public interest
in government settlements would be a step toward the incorporation of
the public interest.
See Finlay v. Finlay, 148 NE 624, 626 (1925).
The SEC has a policy of not allowing third parties to intervene. See supra note
2. Antitrust Arena
Antitrust is another area of law which can be instructive about the
incorporation of the public interest in settlement. The Tunney Act243
requires court approval of settlement.
The Tunney Act requires that proposed settlements be filed with the
district court where the case is pending and that settlement be published
in the Federal Register. The filing and publication requirement notify
the public and any interested parties of the impending settlement and
any responses made by the government shall be filed with the district
court and published in the Federal Register. The Tunney Act allows
public comment about the settlement in advance of the finalization.
The Tunney Act requires that the district court make a
determination that the settlement is in the public interest. Factors to be
used in the determination are outlined in the Tunney Act. In the antitrust
are the Tunney Act requires an opportunity for public input and assigns
an evaluative role to the judiciary. The prosecutor is not the only body
responsible for determining whether the public interest is served. The
adoption of rules requiring publication of settlement and allowing public
comment in advance of finalization would be a step toward the
incorporation of the public interest.
The SEC will continue to ignore the role of the public interest in
settlement negotiations unless legislative steps to incorporate the public
interest are taken. Borrowing from other areas of the law will be helpful
in developing methods to incorporate the public interest. As a matter of
public policy, it would be prudent to appoint a guardian ad litem for the
public interest instead of allowing the SEC to address its own
selfinterest instead of the public interest.
The Tunney Act, 15 U.S.C. § 16(b)-(d) (1994).
ORGANIZATIONAL STRUCTURE OF THE SEC
(2-3 per ADOA)
Staff Attorney and Sr.
Counsel (5-7 per branch)
17. See SEC v. Bear, Stearns & Co., 2003 S.D.N.Y. Civ . 2937 , available at http://www.sec.gov/litigation/litreleases/consent18111b.htm (last visited Mar. 6 , 2006 ).
18. Id .
19. Id .
20. Id .
21. Id .
22. Id .
23. In re Jack Benjamin Grubman, Securities Exchange Act of 1934 , Release No. 48725 (Oct. 31 , 2003 ); Investment Advisers Act of 1940 , Release No. 2189 , Administrative Proceedings , File No. 3 - 11323 (Oct. 31 , 2003 ).
27. See Barbara Brooke Manning, SEC Investigations and Enforcement Actions, ALI-ABA COURSE OF STUDY (June 25, 2005 ); William R. McLucas , Contact with Corporate Officers and Employees in SEC Investigations, 9 No. 3 INSIGHTS 2 (Mar . 1995 ) ; Mark S. Klock, A Comparative Analysis of Recent Accords Which Facilitate Transnational SEC Investigations of Insider Trading, 11 MD . J. INT'L L . & TRADE 243 , 245 ( 1987 ).
28. See Colleen P. Mahoney et al., Current Developments in SEC Enforcement , 1517 PLI/Corp. 1073 ( Nov . 2005 ); Colleen P. Mahoney et al., Current Developments in SEC Enforcement after Sarbanes-Oxley, ALI-ABA COURSE OF STUDY (Aug . 26 - 28 , 2004 ); David G. Tucker, SEC Enforcement Actions Against Municipalities Blaming the Professionals No Longer Works, 35 URB . LAW. 717 ( 2003 ).
29. U.S. SEC. & EXCH. COMM'N , THE INVESTOR'S ADVOCATE: HOW THE SEC PROTECTS INVESTORS , MAINTAINS MARKET INTEGRITY, AND FACILITATES CAPITAL FORMATION , available at http://www.sec.gov/about/whatwedo. shtml (last visited Mar. 6 , 2006 ) [hereinafter INVESTOR'S ADVOCATE] .
30. Id .
31. Id .
32. Id .
33. Id .
34. Government Performance and Results Act of 1993 (the “GPRA”) 31 U .S.C.S. § 1115 , 39 U.S.C.S. § 2801 ( 1993 ) [hereinafter GRPA] .
35. Securities Act of 1933 , 48 Stat. 74 ( May 27, 1933 ), 15 U.S.C. § 77a ( 1933 ) [hereinafter Securities Act]; Securities Exchange Act of 1934 15 U .S.C. § 78a (June 6, 1934 ) [hereinafter Exchange Act]; Investment Advisers Act of 1940 , 15 U.S.C. § 80b-1 through 15 U.S.C. § 80b- 21 ( 1940 ) [hereinafter Advisors Act]; Investment Company Act of 1940 , 15 U.S.C. § 80a-1 through 15 U.S.C. § 80a- 52 ( 1940 ) [hereinafter Inv . Company Act]; Public Utility Holding Company Act of 1935 , 15 U.S.C. §§ 79 - 79z - 6 ( 1935 ) [hereinafter PUHCA] .
36. GPRA, supra note 34.
37. U.S. SEC. & EXCH. COMM'N , 2005 PERFORMANCE AND ACCOUNTABILITY REPORT , available at http://www.sec.gov/about/secpar/secpar2005.pdf [hereinafter 2005 PERFORMANCE AND ACCOUNTABILITY REPORT].
38. The Commission has stated its goals even more pointedly . In fiscal 1990 , its enforcement program was characterized by “record-breaking efforts to ensure that defendant(s) who violated the law suffered the most serious possible financial and professional consequences within the current limits of the federal securities laws . ” SEC, Budget Estimate Fiscal Year 1992 , at II - 3 ( Feb . 4, 1991 ). Committee on Federal Regulation of Securities, Report of the Task Force on SEC Settlements , 47 BUS.
56. See 17 C.F.R. § 202 .5 ( 1991 ); 17 C.F.R. §§ 203 . 1 -.8 ( 1991 ).
57. See 17 C.F.R. § 202 .5( a ) ( 1996 ).
58. In some instance, the Staff will precede the opening of a MUI with an informal inquiry in which the Staff checks facts and attempts to piece together preliminary information such as the corporate names and information about a particular security, or Central Registration Depository records . This process is usually very short . RICHARD D. MARSHALL, OVERVIEW OF SEC ENFORCEMENT INVESTIGATIONS , 111 ( Glasser Legal Works , 2002 ).
59. See Exchange Act § 15 .
60. MARSHALL, supra note 58.
61. Id .; see Sec. & Exch. Comm'n , Fiscal 2006 : Congressional Budget RequestIn Brief , available at http://www.sec. gov/about/secfy06budgetreq.pdf (last visited Feb . 12 , 2007 ) (states that many MUIs are closed ).
62. See Appendix A , infra, for Organizational Structure.
69. See supra note 56.
70. 17 C.F.R. § 200 . 30 - 6 (c); Manning, supra note 27, at 436.
71. See Right to Financial Privacy Act of 1978 , 12 U.S.C. 3401. The Right to Financial Privacy Act limits the ability of the government to obtain customer account records from financial institutions . Phillips, supra note 46 , at 119.
72. Formal Orders of Investigation issued over the last five years has ranged from a low of 254 in 2003 to a high of 345 in 2000 . SEC ANNUAL REPORT 2003 , supra note 41, at 124; SEC 2000 ANNUAL REPORT , supra note 54, at Table 3: Investigations of Possible Violations of the Acts Administered by the Commission .
73. The process of taking witness testimony is dictated in part by an SEC guide . This guide ensures that the Enforcement staff is consistent in its method and procedure. It also addresses privacy issues, the various other concerns that witnesses and their counsel might have, including, but not limited to, objections and privileges. This is one example of the Commission's interest in enforcement uniformity. The SEC has also developed formalized procedures for other function including making enforcement recommendations to the Commission, method of settlements, and in some specific phrasing. This guidance is written and ensures consistency and uniformity in the documents produced by the Division of Enforcement and the Commission . See Phillips, supra note 46 , at 56.
74. See supra note 66.
75. Copies of the Formal Order may be obtained through a controlled process outlined in Rule 7(a) of the Commission's Rules Relating to Investigations. This process helps to ensure the confidential nature of Commission investigations . 17 C.F.R . § 202 . 7(a). 177. Laurie Kratky Dor, Secrecy by Consent:The Use and Limits of Confidentiality in the Pursuit of Settlement, 74 NOTRE DAME L . REV. 283 , 290 ( 1999 ); Samuel R. Gross & Kent D. Syverud , Don't Try : Civil Jury Verdicts in a System Geared to Settlement, 44 UCLA L . REV. 1 , 3 - 5 ( 1996 ) (explaining the American legal system's preference for settlement with structural reasons such as “scarcity of judges and abundance of lawyers, adversarial fact-finding, and trial by jury” ). 178 . Id .
182. Id . The expense of defending a SEC Enforcement matter can be crippling because the SEC can choose to devote substantial Staff hours and other resources to a case that the Staff or Commission deems important. The cost is even greater when you consider the expenses incurred during the investigation process .
183. Id . Prolonged negative publicity of this sort can have an adverse impact on share price, employee morale, business planning, and sales .
184. Id .
185. Id .
186. Id .
187. Id .
188. Michael Bobelian , Companies Accused of Wrongdoing Often Settle Quickly, BROWARD DAILY BUS . REV. 7 (Dec. 8 , 2004 ).
189. Id .
190. Ronald J. Alsop , Corporate Reputation: Anything but Superficial, 25 J. OF BUS. STRATEGY 21 ( 2004 ), 2004 WLNR 15864092 at *1.
196. See Bernhard v. Bank of America Nat'l Trust & Savings Ass'n, 122 P.2d 892 (Cal . 1942 ).
197. RESTATMENT (SECOND) OF JUDGMENTS § 27 ( 1982 ).
198. See Blonder-Tongue Lab., Inc. v. Univ. of Ill. Found., 402 U.S. 313 ( 1971 ) (stating that defensive non-mutual estoppel is present in suit number one when the plaintiff loses on a certain issue; in suit number two against defendant two, plaintiff is precluded from arguing the recurring issue lost in suit one).
199. See id. (stating that offensive non-mutual estoppel: in suit one defendant loses on a certain issue; in suit number two against plaintiff number two can use collateral estoppel against the same defendant from suit number one to establish the recurring issue in suit number one without re-litigation) .
200. Parklane Hosiery Co. v. Shore, 439 U.S. 322 , 331 ( 1979 ).
201. See In re Jack Benjamin Grubman, Securities Exchange Act of 1934 , Release No. 48725/Oct. 31 , 2003 ; Investment Advisers Act of 1940 , Release No. 2189/Oct. 31 , 2003 , Administrative Proceedings , File No. 3 - 11323 ; Jack Benjamin Grubman, SEC Consent of Defendant Jack Benjamin Grubman, SEC v . Bear, Stearns & Co., 2003 S.D.N.Y. Civ . 2937 , available at http://www.sec.gov/litigation/litreleases/ consent18111b.htm (last visited Mar. 6 , 2006 ) (citing SEC v. Canadian Javelin Ltd ., 64 F .R.D. 648 , 651 (S.D.N .Y. 1974 )) (denying intervention of right and noting that “Congress has entrusted the SEC with the responsibility for protecting the public interest”); accord Natural Res . Def. Counsel, Inc. v. New York State Dep' t of Env't Conservation , 834 F.2d 60 , 62 ( 2d Cir . 1987 ) (affirming district court's denial of both 208. See generally ANNUAL REPORTS of the SEC . & EXCH. COMM'N , available at http://www.sec.gov/about/annrep. shtml (last visited Mar. 6 , 2006 ).
209. See SEC. & EXCH. COMM'N, GOVERNMENT PERFORMANCE AND RESULTS ACT2004 ANNUAL PERFORMANCE PLAN; 2002 ANNUAL PERFORMANCE REPORT (Mar . 2003 ) at 11, available at http://www.sec.gov/about/gpra2004_ 2002 . pdf (last visited July 4, 2007 ).
210. Id .
211. SEC . & EXCH. COMM'N , ANNUAL REPORT 2004 , at 14, available at http://www.sec.gov/about/ secpar/ secpar04.pdf [hereinafter SEC ANNUAL REPORT 2004 ].
212. SEC . & EXCH. COMM'N , Fiscal 2006 : Congressional Budget Request , In Brief, http://www.sec. gov/about/secfy06budgetreq.pdf (last visited Mar. 6 , 2006 ).
213. Id .
214. Staff salaries, hiring, training, and equipment have each increased in the last several years . In fiscal year 2002 , 7,300 training sessions were attended . In fiscal year 2003 , 4,803 training sessions were attended . Between 2002 and 2004, the SEC saw its highest hiring increase of 1,000 new employees . SEC ANNUAL REPORT 2003, supra note 41; SEC ANNUAL REPORT 2004 , supra note 211.
215. The salary, staffing, training, and other improvements at the agency level may help to explain the increased number of cases . See Maletta, supra note 132.