Evaluating the Mission: A Critical Review of the History and Evolution of the SEC Enforcement Program
Fordham Journal of Corporate & Financial Law
Paul S. Atkins
Bradley J. Bondiy
By Paul S. Atkins and Bradley J. Bondi∗
∗ Paul S. Atkins is a commissioner of the United States Securities and Exchange
Commission and is a member of the New York and Florida Bars. Bradley J. Bondi
serves as counsel to Commissioner Atkins and is a member of the District of Columbia,
New York, and Florida Bars. The views expressed herein reflect the views of the
authors and do not necessarily reflect those of the SEC or other Commissioners. The
authors wish to extend their thanks and appreciation for the advice and significant
contributions of Kechi Anyadike, Jan Bauer, Brenden P. Carroll, W. Blair Hopkin,
Hester M. Peirce, Mark T. Uyeda, and numerous others. All blame for any errors or
omissions, however, resides solely with the authors.
The United States Securities and Exchange Commission (the
“SEC” or “Commission”) is nearing its seventy-fifth anniversary, a
milestone that will be marked by reflection on the past and
contemplation of the future.1 During this time of introspection, the
Commission should take the opportunity to examine the manner in
which it has reacted to the growth and changes in its regulatory authority
and in the capital markets. One constant throughout its history has been
the SEC’s need to balance competing interests. The SEC’s stated
mission reflects this tension. Today, that mission is composed of three
objectives: “to protect investors; maintain fair, orderly, and efficient
markets; and facilitate capital formation.”2
Historically, the SEC’s mission has focused on investor protection.
As the SEC and its regulatory powers have grown in response to the
ever more complex and international financial services markets, the
seemingly straightforward mission of investor protection has become
more intricate and multidimensional, prompting questions such as,
“Who are the investors that should be protected?” and “How should they
be protected?” After all, investors range in sophistication, size, activity,
goals, needs, and other attributes. They include traditional individual
and institutional investors in the securities markets, traders, and foreign
entities seeking to invest in the United States.3 Choices that the SEC
makes in its rulemaking and other activities can favor or disfavor one
group of investors over another. A rule beneficial for one investor may
be detrimental to another, depending on an investor’s investment
strategy or changing circumstances. Indeed, because investors
ultimately pay for inefficiencies arising from regulatory mandates
1. The SEC was created on July 2, 1934 during a period of heated debate over the
country’s economic turmoil. That day was literally heated: 93 degrees Fahrenheit, to be
exact. The Federal Trade Commission met in an unairconditioned, temporary building
in Washington, D.C., located on the present site of the Federal Reserve Building, to
vote the SEC into existence pursuant to the Securities Exchange Act of 1934. Frank V.
Fowlkes, Agency Report/Congress Prods SEC To Get Firmer Grip on Nation’s
Securities Industry, NATIONAL JOURNAL, Feb. 20, 1971, at 385.
2. U.S. SEC. & EXCH. COMM’N, 2006 PERFORMANCE AND ACCOUNTABILITY
REPORT 5, available at http://www.sec.gov/about/secpar/secpar2006.pdf [hereinafter
3. One group of foreign investors, sovereign wealth funds, has received much
attention by the press in recent years. Sovereign wealth funds are estimated currently at
$2.5 trillion and expected to grow to $10 to 15 trillion by 2015. Robert M. Kimmitt,
Public Footprints in Private Markets, FOREIGN AFFAIRS, Jan./Feb. 2008, at 1-2,
available at http://www.foreignaffairs.org/20080101faessay87109/robert-m-kimmitt/pu
through direct or indirect costs, diminished returns, and reduced choice,
the rules must be made with careful analysis and deliberation. Congress
acknowledged this potential harm in 1996 when it revised the SEC’s
statutory mandate to expressly require the SEC “to consider or
determine whether an action is necessary or appropriate in the public
interest” and to “consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
This multidimensional aspect of investor protection applies not only
to rulemaking, but also to enforcement matters. Each enforcement
matter involves in some degree a balancing of competing interests, some
at a pragmatic, case-specific level and others at a higher policy level.
For example, in distributing money recovered in an enforcement action
against a bankrupt company, the SEC conceivably could decline a
distribution to all investors and instead choose a distribution that favors
one class of investor over another, such as common stockholders over
senior debtholders, which by virtue of their preferred position may have
had greater recovery per dollar invested than did common stockholders,
but still fell short of their desired recovery. In its overall enforcement
program, the SEC’s decisions about resource allocation, charges to be
brought, and relief to be sought may enhance the protection of one group
of investors at the potential cost of another. Advancing a novel legal
theory may protect the group of investors in a particular case, but have
unintended detrimental consequences to investors as a whole.5
The enforcement decisions of the SEC must be guided by the
multidimensional nature of the SEC’s mission of protecting investors;
maintaining fair, orderly, and efficient markets; and facilitating capital
formation. The difficult choices of balancing conflicting interests must
be guided by the transcendent principles of predictability, fairness, and
transparency, culminating in the rule of law. These principles are the
defining characteristics of the U.S. markets.
In order to assess the SEC’s application of these principles to its
enforcement decisions, this Article investigates the shifting focus of the
SEC’s enforcement program from its inception to the present day. The
Article explores the development and usage of the SEC’s statutory
enforcement powers in the context of due process and fairness. Finally,
the Article calls for the Commission to appoint an independent advisory
committee to conduct a detailed review and evaluation of the policies
and procedures of the enforcement program in light of the changes in the
SEC’s statutory authority over the course of the last three decades.
THE ORGANIZATION OF THE SEC
The SEC is governed by five commissioners, all of whom are
appointed by the President with the advice and consent of the Senate.6
One of the commissioners is designated as chairman by an executive
order of the President.7 To ensure bipartisanship, Congress specified
that only three of the five commissioners can belong to the same
The SEC is organized into four primary operating divisions and
nineteen “offices,” or special service units, each of which is
headquartered in Washington, D.C. The SEC’s staff, numbering
approximately 3500, is located in Washington, D.C. and throughout its
eleven regional offices.9 The SEC’s largest division—and the focus of
6. Securities Exchange Act of 1934 § 4, 15 U.S.C. §
7. See Reorganization Plan No. 10 of 1950, 15 Fed. Reg. 3175 (1950), reprinted
in 5 U.S.C. 901 et seq. (2006), and in 64 Stat. 1265 (1950); see also 2006 REPORT,
supra note 2, at 7. This power of the President to designate (or remove) the chairman
by executive order does not apply to similar agencies. For example, the chairmen of the
Board of Governors of the Federal Reserve and the Commodity Futures Trading
Commission are separately nominated and confirmed to their positions as chairmen,
although they have separate terms as governor or commissioner, respectively. See 12
U.S.C. § 242 (2008) and 7 U.S.C. § 2(a)(2)(B) (2008).
8. Securities Exchange Act of 1934 § 4. The first five commissioners were
Democrats Joseph P. Kennedy, James M. Landis and Ferdinand Pecora, and
Republicans George C. Mathews and Robert E. Healy. The commissioners elected
Joseph P. Kennedy to serve as the first chairman. See Fowlkes, supra note 1, at 385.
9. See U.S. SEC. & EXCH. COMM’N, 2007 PERFORMANCE AND ACCOUNTABILITY
REPORT 2, available at http://www.sec.gov/about/secpar/secpar2007.pdf [hereinafter
2007 REPORT]. The SEC has grown tremendously since its inception. In 1942, the SEC
had a staff of 1700 employees. In order to make room for wartime agencies, the SEC
was forced to relocate to Philadelphia in 1942. By the time it returned to Washington in
1948, the staff had decreased to 1150. By 1955, there were only 666 employees.
Fowlkes, supra note 1, at 383.
this Article—is the Division of Enforcement, which has more than 1100
employees, and has grown by more than 40% in the past fifteen years.10
THE SEC’S AUTHORITY UNDER THE FEDERAL SECURITIES LAWS
Today, the SEC is charged with administering the Securities Act of
1933,11 the Securities Exchange Act of 1934,12 the Trust Indenture Act
of 1939,13 the Investment Company Act of 1940,14 the Investment
Advisers Act of 1940,15 and certain provisions of the Sarbanes-Oxley
Act,16 some of which fall outside of the earlier securities laws.17
The Commission is vested with statutory authority to conduct any
investigation it deems necessary to determine whether a person has
violated federal securities laws and the rules and regulations
promulgated thereunder.18 As part of this investigative authority, the
Commissioners—and any officer to whom the Commissioners’ authority
is delegated—have the power to “administer oaths and affirmations,
subpena [sic] witnesses, compel their attendance, take evidence, and
require the production of any books, papers, correspondence,
memoranda, or other records which the Commission deems relevant or
material to the inquiry.”19 The Commission has delegated these tasks to
the Director of the Division of Enforcement, who undertakes them
pursuant to formal orders that the Commission grants in individual
matters.20 If the Commission concludes that a securities law has been
violated, the Commission may bring an action in federal court or in an
administrative proceeding against the purported violators.
THE ESTABLISHMENT OF THE ENFORCEMENT DIVISION
Among its various other roles, the SEC acts to enforce the federal
securities laws,21 and it has built a strong reputation for professionalism
and effectiveness in its enforcement program. At the time the
Commission was established in 1934, the Commission’s “Legal
Division” was responsible for conducting investigations pertaining to
federal securities law violations.22 Within the first two years, the
Commission assigned that duty to its regional offices.23 For the next
four decades, the regional offices were primarily responsible for
conducting investigations and bringing enforcement actions while the
Commission’s Trading and Markets Division “played a largely
supervisory and coordinating role supporting the regions and referring
criminal cases to the Justice Department for prosecution.”24 By 1944,
after only a decade of existence, the SEC had gathered information
“concerning an aggregate of 44,399 persons against whom Federal or
State action had been taken with regard to securities violations” and had
obtained permanent injunctions against 1,057 firms and individuals.25
The second decade of the SEC’s existence was marked by World
War II and its aftermath. During the war, the SEC’s headquarters
moved temporarily to Philadelphia to make room for wartime operations
in Washington, D.C.26 When the SEC finally returned to Washington in
1948, it occupied temporary buildings that were erected during the
war.27 Despite the inconveniences caused by the war and post-war
budget cuts, the SEC continued to bring a constant number of
enforcement actions during this time.28
Beginning in the late 1950s and continuing through the 1960s, the
enforcement program underwent a remarkable transformation, and the
enforcement resources in the SEC’s Washington, D.C. headquarters
increased. With the added resources, the headquarters began to bring
more actions for violations of the securities laws. During the entire
decade of the 1950s, the home office brought a total of approximately
fifty cases. Yet during the 1960s, that number escalated substantially –
the home office brought approximately forty cases per year.29
The 1960s witnessed landmark decisions in the field of securities
law in cases brought by the SEC, such as SEC v. Texas Gulf Sulfur Co.30
and SEC v. VTR, Inc.31 In Texas Gulf Sulfur, the Second Circuit adopted
the SEC’s application of Rule 10b-5 to insider trading cases by requiring
insiders in possession of material, nonpublic information either to
abstain from trading on such information or to disclose such information
at 13 (quoting TENTH ANNUAL REPORT OF THE SECURITIES AND EXCHANGE
COMMISSION, at 3).
25. Id. at 13 (citing TENTH ANNUAL REPORT OF THE SECURITIES AND EXCHANGE
COMMISSION, at 2-3).
26. Id. at 14.
29. See JOEL SELIGMAN, THE TRANSFORMATION OF WALL STREET: A HISTORY OF
THE SECURITIES AND EXCHANGE COMMISSION AND MODERN CORPORATE FINANCE
36061, 363 (3d ed. 2003). The impetus for the transformation was the enforcement staff’s
massive investigation into fraudulent practices by the American Stock Exchange. See
HAWKE, supra note 22, at 2-3.
30. See SEC v. Tex. Gulf Sulfur Co., 401 F. 2d 833 (2d Cir. 1968), cert. denied,
394 U.S. 976 (1969).
31. See SEC v. VTR, Inc., 410 F. Supp. 1309 (D.D.C. 1975).
before trading.32 In VTR, the SEC persuaded a federal district court to
approve as a remedy for the securities law violation the appointment of
independent directors and to order restitution.33 The VTR decision
marked the beginning of a long series of civil cases obtaining ancillary
relief in addition to an injunction against further misconduct.34
The growth in the number of actions being brought by the SEC
sparked discussions, led by Chairman William J. Casey, about
“concentrat[ing] resources by focusing all enforcement and investigative
activity in one division.”
35 In August 1972
, the Commission
reorganized the operating structure of its divisions by combining the
enforcement programs of the divisions of Trading and Markets,
Corporation Finance, and Investment Management into a newly created,
stand-alone division.36 The new “Division of Enforcement” would
oversee all enforcement actions brought by the SEC.37
THE WELLS COMMISSION AND ITS RECOMMENDATIONS
On January 27, 1972, in a speech to the New York State Bar
Association underscoring the importance of cooperation and
collaboration between the Commission and the securities bar, Chairman
Casey announced the creation of an advisory committee38 to “review
and evaluate the Commission’s enforcement policies and practices and
to make such recommendations as they deemed appropriate.”39
Chairman Casey called upon the private securities bar to contribute to
improving the enforcement program by developing procedural
safeguards to protect against abuses of the rights of prospective
defendants.40 Stressing the value of input from the private sector,
Chairman Casey explained:
[I] consider it essential for the Commission to redouble its efforts to
keep in touch with the best thinking on investor protection at the
private bar, in the accounting profession, and in the financial
community generally. As one step — and I hope that it will prove a
significant step — toward that end, I have created a special
committee of three highly experienced practicing lawyers who will
at my request examine the SEC’s enforcement policy and practices,
engage in frequent dialogue with the members of the Commission
and with our staff, seek and sift the suggestions of the bar and make
recommendations to the Commission for worthwhile improvements
to our time-honored ways.41
Although the official name of the committee was the “Advisory
Committee on Enforcement Policies and Practices,” it is better known as
the “Wells Committee” after its chairman, John A. Wells, a prominent
lawyer and partner at the New York law firm of Royall, Koegel &
Wells.42 The Wells Committee also included former SEC chairmen
Ralph H. Demmler and Manual F. Cohen, both of whom had taken an
active interest in the workings of the enforcement program.43 Howard
G. Kristol, who served as special counsel to Chairman Casey, acted as a
liaison to, and unofficial member of, the Wells Committee.44
The Wells Committee’s stated mandate45 was: first, “to advise on
how the SEC’s enforcement objectives and strategies may be made still
more effective;”46 second, to assess the due process implications of the
enforcement practices;47 third, to evaluate the enforcement policies and
procedures;48 fourth, “to make recommendations on the appropriate
blend of regulation, publicity and formal enforcement action and on
methods of furthering voluntary compliance;”49 and fifth, “to make
recommendations on criteria for the selection and disposition of
enforcement actions and on the adequacy of . . . sanctions imposed in
The Wells Committee was composed of three of the brightest minds
of the securities bar, but the Committee did not conduct extensive,
independent research and analysis. Instead, the Committee solicited
comments from persons outside the Commission who were affected by
the SEC’s enforcement activities to “determine whether fairness could
be more certainly assured, consistent with the need for effective
enforcement.”51 The Wells Committee started its work in January 1972
and published a detailed report with forty-three recommendations for the
Commission in June of the same year—an impressive achievement by
any measure.52 The report represented a candid and honest assessment
of the enforcement program and reflected the substantial input the
Committee received from the private bar.
The Wells Committee Recommendations
The most significant recommendations, from the perspective of a
person defending against an SEC enforcement proceeding, are numbers
16, 17 and 20 of the report:53
16. Except where the nature of the case precludes, a prospective
defendant or respondent should be notified of the substance of the
staff’s charges and probable recommendations in advance of the
submission of the staff memorandum to the Commission
recommending the commencement of an enforcement action and be
accorded an opportunity to submit a written statement to the staff
which would be forwarded to the Commission together with the staff
17. The procedures whereby a prospective defendant or respondent is
permitted to present to the Commission his side of the case prior to
authorization of an enforcement action should be reflected in a rule
or published release.
20. The Commission should adopt procedures permitting discussions
of settlement between the staff and the prospective defendant or
respondent prior to the authorization of a proceeding.54
These three recommendations became the impetus for what is now
known as the “Wells Submission.”
Providing prospective defendants with notice of potential charges
and allowing them to respond, as reflected in Recommendations 16 and
17, was not a novel concept within the walls of the SEC. Even prior to
the report of the Wells Committee, the SEC, under Chairman Hamer
Budge, had afforded prospective defendants an opportunity to be heard
by the Commission. A September 1, 1970, internal directive of the
Commission55 required the Enforcement staff to include within its
53. Harvey L. Pitt et al., SEC Enforcement Process, Internationalization of the
Securities Markets – Business Trends and Regulatory Policy, C489 ALI-ABA 109, 238
54. WELLS COMMITTEE ADVISORY REPORT, supra note 39, at iv-v.
55. See Fowlkes, supra note 1 (describing the positions of the commissioners). It
should be noted that this directive was supported by commissioners of both political
memoranda recommending action by the Commission “any arguments
or contentions as to either the facts or the law . . . which have [been]
advanced by the prospective respondents and which countervail those
made by the staff . . . .”56 The purpose of the procedure was “to afford
the Commission an opportunity to consider the position of the
prospective defendant or respondent on any contested matters prior to
authorization of a proceeding.”57
The Wells Committee observed that “[a]s a practical matter, only
experienced practitioners who are aware of the opportunity to present
their client’s side of the case have made use of [such] procedures.”58
The Committee felt that the process of providing notice to prospective
defendants and allowing them to respond to the allegations before the
Commission formally charged them was critical to protecting their rights
and ensuring overall fairness.59 The Committee recommended that the
Commission codify the procedure through formal rulemaking.60
Unlike Recommendations 16 and 17, Recommendation 20 of the
Wells Committee—to allow the staff to engage in preliminary settlement
negotiations with a prospective defendant before the Commission
authorized a proceeding61—was a significant departure from
thenexisting procedure. The 1970 internal directive required the staff to seek
approval from the Commission to bring an action or proceeding prior to
discussing its settlement.62 Under the 1970 internal directive, the
Enforcement staff could allow a defendant or respondent to present
proposals and arguments prior to Commission authorization, so long as
that person initiated the discussions.63 The staff, however, was
precluded from negotiating settlement terms or disclosing to the
defendant or respondent the “recommendation it intend[ed] to make to
the Commission.”64 This process, which itself represented a departure
from prior procedure for negotiating settlements, grew out of a concern
56. This 1970 directive was made public solely as a result of pretrial discovery in
SEC v. National Student Marketing Corporation. See SEC v. Nat’l Student Mktg.
Corp., 68 F.R.D. 157, 166 appx. A (D.D.C. 1975) [hereinafter 1970 Internal Directive].
57. WELLS COMMITTEE ADVISORY REPORT, supra note 39, at 31.
58. Id. at 31-32.
60. Id. at 32.
61. WELLS COMMITTEE ADVISORY REPORT, supra note 39, at iv-v.
62. 1970 Internal Directive, supra note 56, at 165.
63. See id. The staff was permitted to discuss the facts and nature of the alleged
by the Commission that “its discretionary authority regarding the
institution of proceedings [would be] substantially impaired.”65
According to Commissioner A. Sydney Herlong, the 1970 internal
directive was designed to prevent the staff from “bludgeoning”
companies into consent settlements by using the threat of public
proceedings that might never be approved.66 Commissioner Herlong,
who was one of two Democrats on the Commission, explained:
The staff sometimes is overly zealous and they sometimes want
quick settlements to clear up their files. Sometimes they would beat
people over the head for a consent decree. We had reports from
some people who weren’t pleased with the treatment.67
Responding to comment letters, the Wells Committee
recommended that the Commission withdraw this mandate and return to
the prior procedure of allowing staff leeway to negotiate settlements
with prospective defendants prior to having the authority to commence
an action or proceeding.68 The Wells Committee believed that “frank
discussions between the staff and opposing counsel concerning the
staff’s conclusions and probable recommendation to the Commission
would encourage settlements.”69 To address concerns with abuse, the
Committee proposed that the Director of Enforcement or a regional
administrator be responsible for supervising settlement negotiations and
that the proposed defendant or respondent be shown the evidence that
the staff has assembled in support of its case.70 As the Wells Committee
observed, “When the staff refuses to disclose its evidence or the theory
of its case to the respondent’s attorney before the hearing, the attorney,
65. WELLS COMMITTEE ADVISORY REPORT, supra note 39, at 35. Philip A.
Loomis, then general counsel of the SEC, explained that the Commission abandoned
the practice of considering settlements negotiated without prior Commission
authorization because the Commissioners felt hindered by a pre-decided result. See
Fowlkes, supra note 1, at 381. Commissioner Richard B. Smith “offered essentially the
same reason, saying that he missed the opportunity to hear industry’s side of a case and
that it struck him as bad administrative procedure.” Id.
66. Fowlkes, supra note 1, at 381.
68. WELLS COMMITTEE ADVISORY REPORT, supra note 39, at 35.
70. Id. at 35-36.
not knowing what his client faces, may be unable or reluctant to
recommend a settlement.”71
The Wells Committee recommendation of a return to the pre-1970
procedure of allowing staff to negotiate settlements prior to Commission
approval was met with favor by many members of the securities bar. In
a May 23, 1972 letter to the Wells Committee concerning the proposed
change, Arthur F. Mathews, a former SEC enforcement lawyer, wrote:
[T]he changed enforcement policy has, although unintended, worked
to the severe detriment of many defendants and prospective
defendants who wish to achieve an acceptable consent settlement in
lieu of litigation and who are not concerned that the Staff might
“bludgeon” them. Rather, such persons usually are concerned with
the continuing blasts of adverse publicity showering upon them, first
by public institution of charges by the Commission, and later upon
the conduct of a hearing or the announcement of the terms and
conditions of a settlement subsequently negotiated. Such continuous
publicity may be extremely unfair, particularly where serious
allegations publicized upon institution of an action, are dropped
subsequently by Staff and the Commission in accepting a consent
settlement of the action.72
The notable aspect of this debate is that both sides were concerned
with fairness and due process. Those in support of requiring
Commission approval prior to settlement were concerned with the
uneven negotiating position of the Commission’s staff and the
prospective defendant. Those in support of allowing informal settlement
procedures prior to Commission approval believed that fairness would
be advanced by limiting the time under which a prospective defendant
could be exposed to adverse publicity. The ultimate conclusion of the
Commission, however, emphasized the due process concerns of
71. Id. at 37. Today, there are no specific guidelines concerning the amount and
type of information that staff must share with a prospective defendant, so practices vary
among the staff and across the regional offices.
72. Letter from Arthur F. Mathews of Wilmer, Cutler & Pickering, to the Advisory
Committee on Enforcement Policies and Practices 30 (May 23, 1972). Stanley Sporkin,
then an associate director, agreed, stating that “it saved everybody a lot of bother and
was welcomed by many of the people we regulate because it gave them a means of
settling quickly.” Fowlkes, supra note 1, at 381.
The Commission’s Response to the Wells Recommendations
The recommendations of the Wells Committee were met with
mixed responses within the agency. Although the private securities bar
generally applauded the recommendations from the Wells Committee,
the SEC staff disagreed with many of them, and the commissioners were
reluctant to adopt formal rules.73 With respect to Recommendations 16
and 17, the Commission “agree[d] that the objective [was] sound,” but
“concluded that it would not be in the public interest to adopt formal
rules for that purpose.”74 The Commission apparently felt hamstrung by
the mandatory-sounding nature of the phrase “except where the nature of
the case precludes.” The Commission believed that the formal adoption
of the proposals “could seriously limit the scope and timeliness” of
enforcement actions and inject issues “irrelevant to the merits.”75 As a
result, the Commission indicated that, where “practical and appropriate,”
it would allow, on an informal basis, prospective defendants to provide
written submissions before a charging decision was reached by the
Although it did not immediately embrace Recommendations 16 and
17, the Commission eventually adopted the substance of these
recommendations in procedural rules in November 1972, formulating
today’s Wells submission process. The process as adopted provided a
proposed defendant or respondent with the opportunity to respond to
charges.77 The Commission notified the public of the opportunity for
prospective defendants or respondents to “submit a written statement to
the Commission setting forth their interests and positions in regard to the
subject matter of the investigation.”78 SEC procedural rules directed the
staff, in its discretion, to advise prospective defendants or respondents
“of the general nature of its investigation, including the indicated
violations as they pertain to them, and the amount of time that may be
available for preparing and submitting a statement prior to the
presentation of a staff recommendation to the Commission for the
commencement of an administrative or injunctive proceeding.”79 The
Commission, however, explained that a prospective defendant’s
opportunity to submit a response was not absolute, and the Commission
expressly reserved the right to take any action while awaiting a
submission by a proposed defendant or respondent.80
The Commission rejected Recommendation 20 of the Wells
Committee, which would have permitted settlement discussions prior to
authorization from the Commission to commence an action or
proceeding.81 Apparently, the Commission continued to harbor
concerns that its discretionary authority regarding the institution of
proceedings would be substantially impaired.82 Irving Pollack, then
director of the Division of Enforcement, explained the reason for
rejecting the recommendation as two-fold: first, it would be difficult for
the Commission to reject a settlement already reached between staff and
a prospective defendant; second, there was concern that settlement
discussions prior to Commission approval would give the staff the
leverage to threaten prospective defendants into submission.83
Therefore, the procedure described in the 1970 internal directive of
requiring the staff to seek Commission approval to bring an action prior
to negotiating settlement of it remained in effect.
In 1979, the Commission, under Chairman Harold Williams,84
formally adopted in the SEC procedural rules the requirement that the
enforcement staff must have Commission authorization before engaging
in settlement discussions.85 The Commission reasoned that its
involvement in settlement discussions was critical to ensuring a fair
process and to protecting the rights of defendants.86
Although the Commission did not adopt all of the forty-three
specific recommendations, the most obvious legacy of the Wells
Committee was the adoption of the “Wells Process,” a process whereby
prospective defendants or respondents are afforded an opportunity to
submit a writing—essentially a brief—to the Commission and its staff
after the staff’s investigation is completed, but before the staff has made
a recommendation to the Commission. Under this procedure, a
prospective defendant or respondent enjoys due process—a hallmark of
our Anglo-American judicial system.
THE EVOLUTION OF THE ENFORCEMENT PROGRAM AND ITS PHILOSOPHY
Prior to 1990, the SEC’s statutory purpose for enforcing the
securities laws was to provide remedial relief for aggrieved investors
and to deter future violations.87 The enforcement program began by
serving primarily a remedial purpose, through the Commission’s
injunctive powers and the disgorgement remedies that the Commission
fashioned.88 In the decades following the Wells Committee, the
Commission’s enforcement actions began to shift from remedial to
punitive in nature. This shift of emphasis arose from the new powers
that Congress gave the SEC, such as the authority to impose officer and
director bars, penalties against individuals and registered entities, and
censures in administrative actions.
In 1984, the SEC staff, in response to a congressional request,
prepared a review of the adequacy of enforcement sanctions and
remedies.89 The resulting report stated that “[t]he federal securities laws
are presently viewed by the courts as remedial rather than punitive” and
Education: New York State Society of Certified Public Accountants 3-6 (Nov. 16,
87. See, e.g., Memorandum from John S.R. Shad, Chairman, U.S. Sec. & Exch.
Comm’n, to Rep. Timothy E. Wirth, Chairman, Subcomm. Telecomms., Consumer
Prot., & Fin. of the H. Energy and Commerce Comm. 350 (Feb. 22, 1984) [hereinafter
Memorandum to Chairman Wirth].
88. See, e.g., SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1104 (2d Cir. 1972)
(“The deterrent effect of an SEC enforcement action would be greatly undermined if
securities law violators were not required to disgorge illegal profits.”); SEC v.
Commonwealth Chem. Sec., Inc., 574 F.2d 90, 102 (2d Cir. 1978) (“[T]he primary
purpose of disgorgement is not to compensate investors. . . . [I]t is a method of forcing a
defendant to give up the amount by which he was unjustly enriched.”).
89. See Memorandum to Chairman Wirth, supra note 87 (transmitting “Results of
the Review of the Adequacy of Enforcement Remedies and Sanctions”).
that the SEC’s non-monetary remedies were “effective in most cases” in
providing that remedial relief.90 The staff reported that, aside from the
area of insider trading, which Congress was addressing at the time,91
“the Commission has been unable to identify a serious need for
additional remedies to deter a specific type of conduct.”92
The report asserted that “the advantages of seeking additional civil
penalties appear to be marginal” and “must be balanced against a
number of potentially serious disadvantages.”93 Chief among those
identified disadvantages was the concern that giving the SEC the
authority to seek or impose civil monetary penalties for violations of the
federal securities laws would “change the character of the enforcement
program from remedial to punitive, [and] might lead the judiciary to be
less receptive to the SEC’s injunctive actions.”94 Traditionally, the
Commission relied on the Department of Justice to exercise these
remedies through its criminal authority.95
By the late 1980s, these philosophical views substantially changed.
In a memorandum in support of the Securities Enforcement Act of 1989,
the Commission stated that “variable-penalty provisions are appropriate
to penalize and deter the broad range of conduct for which these
penalties will be assessed.”96 The Commission conceded that moving to
remedies that were more punitive in nature could result in one of two
things: increased difficulty in obtaining settlements as a result of
defendants’ unwillingness to settle cases involving large civil penalties,
thereby potentially harming aggrieved investors, or a greater likelihood
of settlement by defendants hoping to avoid much larger civil monetary
penalties after litigation.97 The Commission’s asserted need in 1990 to
penalize a broad range of conduct was a significant departure from its
representation to Congress only six years earlier that its existing
remedies were effective.98
In 1990, former Director of Enforcement Gary Lynch, who had
recently left the SEC, testified before the Senate Subcommittee on
Securities. Although he testified in favor of providing additional penalty
powers to the Commission, he cautioned:
I think it is important for the Commission to maintain its historical
focus on achieving remedial relief, rather than taking punitive action
in every case, and that the Commission should still continue to judge
the effectiveness of the Commission’s enforcement program based
on what it actually accomplishes, as opposed to what the dollar
amount is that is ordered in a particular case.99
Congress provided the SEC with enhanced enforcement remedies,
including expanded remedial powers and new penalty authority. These
powers were included in the Insider Trading Sanctions Act of 1984,100
the Insider Trading and Securities Fraud Enforcement Act of 1988,101
and the Securities and Enforcement Remedies and Penny Stock Reform
Act of 1990.102
As a result of these laws, the SEC gained three significant new sets
of powers: (1) the ability to seek civil monetary penalties against
persons and entities that may have violated federal securities laws; (2)
the authority to bar directors and officers of public companies from
serving in those capacities if they violated federal antifraud provisions;
and (3) the authority to issue administrative cease-and-desist orders,
temporary restraining orders, and orders for disgorgement of ill-gotten
profits to violators of federal securities laws. These significant powers
and laws enabling them are discussed in more detail below.
during the conference process.161 Accordingly, the Senate Banking
Committee report does not discuss this provision.
Prior to Section 308(a), the Commission was permitted to remit
amounts obtained in actions as disgorgement to injured investors, but
was required to remit any penalties it received to the U.S. Treasury.
Section 308(a) provided flexibility to the Commission to distribute both
disgorgement and penalties through a Fair Fund, but the penalties cannot
be dispersed absent disgorgement of ill-gotten gains.162 Congress,
joined by the Justice Department, wanted to avoid having penalties
become a substitute for disgorgement. Disgorgement is the forfeiture of
the ill-gotten gains received by the defendant; it is not inherently a
mechanism to recompense aggrieved investors. By making
disgorgement a prerequisite for adding penalties to the Fair Fund,
Congress focused on depriving the defendant of its ill-gotten gains, not
necessarily punishing wrongdoers.163 Congress also may have been
concerned with a possible windfall to investors if the defendant did not
receive any ill-gotten gain from the wrongdoing.
Congress also required the SEC to study ways to improve the Fair
Funds process. Section 308(c) of Sarbanes-Oxley instructed the SEC to
review and analyze enforcement actions over the course of the five years
prior to enactment “to identify areas where such proceedings may be
utilized to efficiently, effectively, and fairly provide restitution for
injured investors . . . including methods to improve the collection rates
for civil penalties and disgorgements.”164 Section 308(c) instructed the
SEC to provide a report to Congress within 180 days of the enactment of
the Act that included “a discussion of regulatory or legislative actions”
that the SEC recommended or “that may be necessary to address
concerns identified in the study.”165
In response to Section 308(c), the Commission submitted a report to
Congress on January 23, 2003.166 In its report, the Commission
described the limitations of the requirement in Section 308(a) for the
SEC to obtain disgorgement before adding the penalty amount to the
Currently, the Fair Fund provision permits the Commission to add
penalty money to distribution funds in limited circumstances. If a
defendant is ordered only to pay a penalty, then that defendant’s
penalty amount cannot be added to the disgorgement fund.
Moreover, if no defendants in a case are ordered to pay
disgorgement, then no penalties may be distributed to injured
investors. Some issuer financial fraud and reporting cases do not
result in any disgorgement orders because no defendant received a
tangible profit causally connected to the fraud.167
To alleviate these restrictions, the Commission recommended that
Congress amend Section 308 to permit the penalties to be added to the
Fair Funds even when no disgorgement is obtained. The Commission’s
By amending the Fair Fund provision to allow defendants’ penalties
to be distributed to investors irrespective of whether the defendant
has been ordered to disgorge money, Congress could allow more
monies to be returned to harmed investors.168
164. Sarbanes-Oxley Act § 308(c).
166. See U.S. SEC. & EXCH. COMM’N, REPORT PURSUANT TO SECTION 308(C) OF THE
SARBANES OXLEY ACT OF 2002, available at http://www.sec.gov/news/studies/sox308c
167. Id. at 34.
168. Id.; see also Cutler Testimony, supra note 162.
[I]t would be beneficial if the Commission could distribute penalties collected from
these defendants (as well as from defendants who are paying disgorgement) to harmed
investors in that case . . . . We recommend making technical amendments to the Fair
Fund provision to permit the Commission to use penalty moneys for distribution funds
in these additional circumstances.
In response to the Commission’s request, Chairman Richard Baker
of the Subcommittee on Capital Markets, Insurance, and
GovernmentSponsored Enterprises of the House Financial Services Committee
introduced legislation in 2003 and 2006 to permit any penalty monies
obtaining by the Commission to be added to a Fair Fund for the benefit
of victims of the securities law violation.169 Neither bill passed
Proponents of corporate penalties argue that the Fair Funds
provision of the Section 308 of the Sarbanes-Oxley Act alleviates the
earlier concerns raised by the Commission in 1989 and Congress in
1990 about harm to shareholders, because any penalties collected are
distributed to shareholders. This argument is premised on flawed,
circular reasoning. When the Commission obtains penalties from a
corporation, there is always one group of shareholders that must pay.
The Commission is taking from one group of shareholders to
recompense another.171 Whatever its characterization, ultimately the
costs of making this circular distribution are borne by shareholders.
There is no doubt that Section 308 was rooted in good intentions of
attempting to help defrauded shareholders. Unfortunately, it has
injected an element of uncertainty because penalties are inherently
subjective, while disgorgement is rooted in the notion of illicit gain,
which generally is quantifiable. In many instances, the SEC has
avoided—some argue circumvented—the requirements of Section 308
by assessing a “nominal” disgorgement amount of $1 in order to obtain
the “hook” to justify seeking a large corporate penalty to put into a Fair
Fund for distribution.172 As a result, the Fair Fund provision, which was
designed to protect shareholders, has been used as a justification for
obtaining large corporate penalties, which may harm shareholders.
Therein lies the paradox: Fair Funds used to compensate injured
shareholders are often funded largely through corporate penalties, which
are paid by the corporation’s current shareholders and result in
additional adverse consequences for the company through depletion of
AN ERA OF INCREASING PENALTIES AGAINST SHAREHOLDERS
The size of the penalties imposed by the Commission has increased
markedly in recent years.173 For example, in 2002, the SEC obtained its
first $10 million penalty against a public corporation in its settlement
with Xerox Corporation.174 Since then, the Commission has levied
many civil penalties in that amount or larger. In 2003, the Commission
obtained twenty penalties in that range or greater, while in 2004, it
sing recent settlements such as Symbol Technologies ($1 disgorgement; $37,000,000
civil penalty), i2 Technologies ($1 disgorgement; $10,000,000 civil penalty), Royal
Dutch Petroleum ($1 disgorgement; $120,000,000 civil penalty), Bristol-Myers Squibb
Co. ($1 disgorgement; $150,000,000 civil penalty), and Qwest ($1 disgorgement;
$250,000,000 civil penalty)). Disgorgement is a remedy that, if available, is supposed
to be exhausted before the SEC seeks a penalty. Therefore, only in the rarest of
circumstances should the SEC seek a penalty that accomplishes the goal of stripping
away an ill-gotten benefit. Unfortunately, that has not been the case in many SEC
penalty actions. Many of those actions have blurred the distinction between “benefit”
173. Not only have civil monetary penalties increased, the number of officer and
director bars has also increased drastically over the last several years as has the
involvement of criminal authorities, such as the Department of Justice, in securities law
violations. In 2004, 170 director and officer bars were entered—more than three times
as many as entered in 2001—and the DOJ brought criminal proceedings against 302
entities and individuals in SEC related matters. U.S. CHAMBER OF COMMERCE, REPORT
ON THE CURRENT ENFORCEMENT PROGRAM OF THE SECURITIES AND EXCHANGE
COMMISSION 25 (2006), available at http://www.uschamber.com/NR/rdonlyres/eodmud
174. Xerox Corp., Litigation Release No. 17465, 77 SEC Docket 971, 2002 WL
535379 (Apr. 11, 2002); see U.S. SEC. & EXCH. COMM’N, 2004 ANNUAL PERFORMANCE
PLAN AND 2002 ANNUAL PERFORMANCE REPORT (2003), available at
obtained forty such penalties.175 The total amount of issuer penalties in
2003 and 2004 was greater than the total amount of all penalties
imposed by the SEC for the prior fifteen years combined. From 2003
through 2007, approximately $13.8 billion in disgorgement and civil
penalties were ordered to be paid to the SEC, courts, or other appointed
An essential consideration in deciding the appropriateness of any
corporate penalty is determining who has profited from the illegal
conduct. Sometimes, shareholders have benefited, as in cases of price
fixing or bribery of foreign officials; without the bribe, the corporation
would not have received a benefit. Regulated entities, such as
brokerdealers or registered investment advisors, might increase profits or
revenues, which in turn benefit shareholders, by failing to comply with
regulatory requirements.177 In the rare instances where disgorgement
may be difficult to calculate, corporate penalties may be appropriate to
reverse the ill-gotten benefit.
On the other hand, there are situations where the shareholders did
not benefit from the securities law violation. In a typical financial fraud
case, management misrepresented the corporation’s financial
performance to the owners of the corporation. In the typical case, the
shareholders have suffered from management’s deception and received
no ill-gotten gain. When the fraud becomes public, often the market
reacts by depressing the value of the stock. In addition, an investigation
and ensuing litigation distracts management from the business, drains
corporate resources, and harms the corporation’s reputation. A penalty
would add further to shareholder injury.
In the majority of SEC corporate penalty cases, the corporation has
also been sued for the same transgressions in civil class action suits
seeking restitution for allegedly harmed shareholders. Settlement
proceeds from such private actions should be recognized by the
Commission as an offset when determining whether to penalize a
corporation in a financial fraud case. Indeed, by statute, the
Commission must consider such restitution in its own administrative
proceedings when a penalty is under consideration.
175. See U.S. SEC. & EXCH. COMM’N, 2004 ANNUAL PERFORMANCE REPORT (2005),
available at http://www.sec.gov/about/secpar/secpar04.pdf; U.S. SEC. & EXCH.
COMM’N, ANNUAL REPORT 2003 (2004), available at http://www.sec.gov/pdf/annrep03/
176. 2007 REPORT, supra note 9, at 26.
177. Penalty figures in this Article do not include regulated entities.
Another essential consideration in seeking and imposing a penalty
is the effectiveness of the sanction. There is an inherent conflict of
interest between management and shareholders of a corporation. If
senior managers are faced with the threat of enforcement actions against
them or their former colleagues, the senior managers might be motivated
by their self-interest to settle the action against the corporation for a
large corporate penalty. The penalty obtained in settlement with the
corporation may satisfy the SEC’s desire to garner public awareness
(and thus enhance the “deterrent” effect), causing the SEC to forgo
seeking large penalties against individual managers. This willingness to
forgo seeking penalties against individuals increases when the evidence
against the individuals is relatively weak (indicating a greater risk of
losing at trial), or when the individuals have negligible assets or name
recognition (diminished publicity and deterrence value).
Other potential conflicts of interest exist between management and
shareholders that may interfere with the effectiveness of the sanction.
New senior managers, who may have started after the departure of
former employees tainted by the fraud, may feel compelled to settle the
matter to minimize negative publicity from their being associated with
the fraud. In addition, corporate boards, while exercising business
judgment, may approve a settlement to avoid the costs and other
negative effects of prolonged litigation with the SEC.
As both a philosophical and practical matter, the effectiveness of a
corporate penalty as a means for deterrence is questionable.
Corporations do not act; individuals do. Senior managers who commit
fraud undoubtedly do so with the knowledge that their actions, if
exposed, will cause reputational and economic harm to their corporation,
such as a depressed stock price, loss of customers and business partners,
shareholder litigation, and legal and investigative costs. Often, what
motivates the wrongdoer to commit the fraud is the potential personal
pecuniary gain of increased stock price, personal advancement within
the corporation, or masking the negative effects of strategic or tactical
management decisions on the performance of the company. If
wrongdoers have little concern for their company and shareholders when
they commit the fraud, it is doubtful that the behavior of potential
wrongdoers will be altered by the threat of a corporate penalty on the
company and shareholders that they are seeking to victimize. Are
would-be fraudsters more likely to be deterred by headlines trumpeting a
multimillion dollar corporate fine, or by hearing that a senior executive
was fired, lost his savings, became barred from serving as an officer or a
director, suffered irreparable harm to his reputation, and perhaps faces
Each of these considerations continues to be important when the
Commission evaluates whether to seek a penalty against a corporation.
In providing the SEC with the power to seek penalties against
corporations, Congress recognized the need for the SEC to have the
authority in limited and rare circumstances, and it trusted the SEC with
the discretion to use that authority in accordance with the SEC’s mission
of protecting investors. In order to provide some transparency to the
process, the Commission has issued guidance to the public concerning
what factors the Commission considers and what prospective defendants
may do to avoid a penalty or reduce the amount.
THE 2006 STATEMENT OF THE SECURITIES AND EXCHANGE COMMISSION
CONCERNING FINANCIAL PENALTIES
Under a new chairman, the Commission on January
released a statement concerning the factors that the SEC would evaluate
in assessing a monetary penalty.178 In formulating the penalty statement,
the Commission returned to first principles: it discussed the 1989 and
1990 Commission and Congressional statements regarding penalties and
attempted to set up a hierarchy of balancing considerations to guide
future deliberations. It stated unequivocally that penalties against
corporations can harm shareholders, a point that previously had been in
dispute within the Commission.
The Commission explained that the two most significant factors
are: (1) the presence or absence of a direct benefit to the corporation as a
result of the violation, and (2) the degree to which the penalty will
recompense or further harm shareholders.179 The first key factor
focused on unjust enrichment to the corporation, and thus to the
shareholders. Any improper benefit would have to be balanced against
the losses incurred by the shareholders as a result of the fraud.
The second key factor balances the possibility that the penalty will
“recompense” investors with the injury that the penalty would do to
them. In this factor, the Commission, unfortunately, was rather
imprecise with its terms. In every case, current stockholders pay for the
penalty. The purpose of this language was to cover the cases in which
other classes of investors may have been harmed for the benefit of the
stockholders—for example, fraudulently enhanced financial statements
may have resulted in lower coupon interest rates or yields to
bondholders, to the benefit of the corporation and its common
The Commission also announced secondary factors for
consideration. Those factors are: (1) “The need to deter the particular
type of offense;” (2) “The extent of the injury to innocent parties;” (3)
“Whether complicity in the violation is widespread throughout the
corporation;” (4) “The level of intent on the part of the perpetrators;” (5)
“The degree of difficulty in detecting the particular type of offense;” (6)
“Presence or lack of remedial steps by the corporation;” and (7) “Extent
of cooperation with Commission and other law enforcement.”180
The penalty statement has served as a reminder of the fact that
corporate penalties harm shareholders. Nevertheless, it has had some
unintended consequences. In particular, the last factor—the extent of
cooperation with the Commission and law enforcement—has been used
along with other Commission guidance as a means to credit prospective
defendants, particularly corporations, for waiving their attorney-client
privilege and work-product protections.181
THE SEABOARD REPORT
The SEC’s explicit willingness to credit cooperation, even if it
involves the waiver of the attorney-client privilege and work-product
protection, predates the 2006 Statement on Penalties and the
181. The New York Stock Exchange lists waiver of the attorney-client privilege as a
factor in evaluating whether a Member has exhibited “extraordinary cooperation.” See
New York Stock Exchange, Information Memorandum No. 05-65 to All Members,
Member Organizations and Chief Operating Officers 5 (Sept. 14, 2005). Members of
the New York Stock Exchange are required as a condition for listing to cooperate and
produce documents upon request by the Exchange, but that required cooperation does
not include a mandatory requirement to produce attorney-client privileged information.
FINRA (formerly NASD) Rule 8210 requires members and persons associated with
members to produce non-privileged documents and provide testimony upon request by
FINRA. See FINRA Rule 8210, available at http://finra.complinet.com. As a general
matter, the SEC does not impose any similar mandatory requirements to cooperate in its
Oxley Act. On October 23, 2001, the Commission released an
investigative report pursuant to section 21(a) of the Exchange Act,
addressing the relationship of cooperation and agency enforcement
decisions.182 That report, called the “Seaboard Report” based on the
name of the defendant at issue, marked the first time that the
Commission announced the factors that it would evaluate in measuring
cooperation and assessing whether to bring an enforcement action.
The Commission intended this report to encourage companies to
cooperate with the SEC in investigations. In that respect, the report was
a major improvement in the transparency of the SEC in its enforcement
investigations. Lacking a public manual of policies and procedures, the
SEC in effect encouraged an informal body of knowledge to develop
among long-time SEC enforcement practitioners as to what was
expected of potential defendants in dealing with the Commission.183
The Seaboard report was a long-overdue attempt to open up the process.
Among other issues, the Seaboard Report discussed disclosures to
staff of confidential information protected by the attorney-client
privilege or work-product doctrine. In a footnote, the Seaboard Report
The Commission recognizes that these privileges, protections and
exemptions serve important social interests. In this regard, the
Commission does not view a company’s waiver of a privilege as an
end in itself, but only as a means (where necessary) to provide
relevant and sometimes critical information to the Commission
Waiver is not itself listed as one of the Seaboard criteria for
determining whether, and how much, to credit self-policing,
selfreporting, remediation, and cooperation. Nonetheless, the Enforcement
Division and the Commission in the ensuing years often have
misinterpreted the Seaboard Report as a basis for rewarding companies
for waiving privilege. As a practical matter, rewarding companies for
182. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange
Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency
Enforcement Decisions, Exchange Act Release No. 44,969 (Oct. 23, 2001), available at
183. The Wells Committee had the same concern with inexperienced practitioners
being unaware of a prospective defendant’s ability to provide written submissions that
raised factual and legal defenses. See supra, text accompanying note 58.
184. Id. at n.3.
cooperating by waiving privilege has the same effect as punishing them
for not waiving privilege—both effectively strip the attorney-client
privilege, which is a fundamental component of our legal system.185
Another problem with a permissive approach to waiver is that
waiver becomes mandatory in practice. Faced with concerns over their
fiduciary duties and the expense and risk of litigation to the corporation,
a corporation’s board of directors may feel compelled to take full
advantage of any cooperation credit available to it by waiving the
attorney-client privilege and work-product protection. Indeed,
shareholders likely would be unable to establish that the board of
directors breached its fiduciary duty by waiving the corporation’s
privilege in exchange for cooperation credit if the corporation faced the
threat of a large penalty.186
185. See, e.g., The Thompson Memorandum’s Effect on the Right to Counsel in
Corporate Investigations: Hearing Before the S. Comm. on the Judiciary (2006)
(statement of Edwin Meese III, former Att’y Gen. of the United States and Chairman,
Ctr. for Legal and Judicial Studies, Heritage Foundation), available at
[E]xperience has shown that the [Thompson] Memorandum has resulted in the
dilution of essential rights encompassed by the attorney-client relationship. . . . [T]he
Thompson Memorandum itself pressures companies to fulfill its nine factors,
including by waiving their attorney-client privilege and cutting off their employees’
attorney fees. Even if no prosecutor ever mentions either factor to a company, the
fact that the Thompson Memorandum requires federal prosecutors to take all nine of
its factors into consideration when deciding whether to indict a business organization
necessarily places great pressure on the company to take these two steps.
Id. For a discussion of the Thompson Memorandum and other Justice Department
memoranda regarding waiver of attorney-client privilege and work-product protection,
see infra note 187.
186. Just as with any individual, corporations must not obstruct government
investigations and must comply with duly issued subpoenas and court orders.
Individuals and corporations, however, owe no duty to abandon all potential defenses
and privileges in the face of government investigations. In fact, under state law, the
directors of a corporation owe fiduciary duties to their shareholders. See, e.g., Smith v.
Van Gorkom, 488 A.2d 858 (Del. 1985) (discussing the duties of directors). Under
most state laws, including Delaware General Corporate Law, the board of directors of a
corporation owes to its shareholders a duty of care and loyalty. See id. In some
instances, cooperating with the SEC or another regulator may be contrary to the
fiduciary duties of the directors because cooperation may lead to the corporation’s
being susceptible to meritless governmental actions and frivolous shareholder litigation.
In those circumstances, it may be appropriate for the board of directors, in fully
evaluating the situation and exercising business judgment, to decline to waive their
attorney-client privilege with respect to a government investigation.
The idea of crediting the waiving of the attorney-client privilege or
work-product protection originated with the Department of Justice. Two
years prior to the Seaboard Report, the DOJ published the first
memorandum—of what would ultimately be several memoranda—
illuminating on the meaning of cooperation and the general principles
that the Department of Justice follows when investigating business
organizations.187 These DOJ memoranda stated explicitly that a
corporation’s willingness to waive the attorney-client privilege and
work-product protection should be considered in determining whether a
corporation has cooperated adequately with the government. Given the
number of parallel investigations by the DOJ and SEC, the policies of
one agency affect the conduct of the other’s investigations and limit the
possible range of choices available to a defendant.188
187. The first memorandum was sent by Deputy Attorney General Eric Holder to all
Department Component Heads and U.S. Attorneys on June 16, 1999 (the “Holder
Memorandum”). The Holder Memorandum focused on the prosecution of corporate
criminal activity and included a document called “Federal Prosecution of
Corporations,” which outlined factors and considerations to be taken into account when
charging corporations. Memorandum from Eric Holder, Deputy Att’y Gen., to Heads of
Department Components and United States Attorneys (June 16, 1999) (on file with the
Department of Justice). The second memorandum, which was a response to the
substantial controversy that arose over the Holder Memorandum, was sent by Deputy
Attorney General Larry Thompson in January 2003 and included much of the same text
from the Holder memo, with some changes to reflect findings of the Corporate Fraud
Task Force. Memorandum from Larry D. Thompson, Deputy Att’y Gen., to Heads of
Department Components and United States Attorneys (Jan. 20, 2003), available at
http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm. Mounting criticism regarding
lack of policies and procedures in this regard led acting Deputy Attorney General
Robert McCallum in 2005 to amend the U.S. Attorney’s manual to require that U.S.
Attorneys establish a written waiver review process for their respective districts. See
Memorandum from Robert D. McCallum, Jr., Acting Deputy Att’y Gen., to Heads of
Department Components and United States Attorneys (Oct. 21, 2005), available at
Finally, the Justice Department, under the direction of Deputy Attorney General Paul J.
McNulty, released a memorandum that attempted to draw distinctions on categories of
privileged material. See Memorandum from Paul J. McNulty, Deputy Attorney General,
to Heads of Department Components and United States Attorneys (Dec.
available at http://www.usdoj.gov/dag/speeches/2006/mcnulty_memo.pdf. The
McNulty memorandum still gives entities credit for turning over attorney-client
privileged material and attorney work product.
188. The implications extend to individuals as well. DOJ allows prosecutors to
consider a company’s willingness to punish employees who assert their constitutional
rights and whether the company entered into joint-defense or information-sharing
agreements with employees. This policy could cause an employee to face the difficult
choice of losing his job or cooperating in an internal investigation without counsel and
without constitutional protections. See, e.g., Proposed Amendment of Commentary on
The practices of the SEC and DOJ to credit cooperation for waiving
the attorney-client privilege or work-product protection have met with
significant criticism. On February 5, 2007, the American Bar
Association (“ABA”) submitted to the SEC a proposed “Revised
Commission Statement on the Relationship of Cooperation to Agency
Enforcement Decisions,” which seeks to have the SEC revise the
Seaboard Report with respect to the waiver of the attorney-client
privilege and work-product protection.189 The proposal amends the
section of the Seaboard Report describing the factors by which
cooperation may be measured to read: “provided, however, that a
company shall not be required to take any of the foregoing actions to the
extent that it would result in a waiver of the attorney-client privilege or
work product doctrine.”190 The proposal also seeks to remove the
ambiguous footnote 3 of the Seaboard Report that describes waiver as “a
means (where necessary) to provide relevant and sometimes critical
information to the Commission staff.” The proposal adds a new
paragraph and related footnote describing the importance of
attorneyclient privilege and work-product protection and the adverse
consequences when staff seeks the waiver.191 The new paragraph states
Commission staff shall not take any action or assert any position that
directly or indirectly demands, requests or encourages a company or
its attorneys to waive its attorney-client privilege or the protections
of the work product doctrine. Also, in assessing a company’s
cooperation, Commission staff shall not draw any inference from the
company’s preservation of its attorney-client privilege and the
protections of the work product doctrine. At the same time, the
voluntary decision by a company to waive the attorney-client
Section 8c2.5 of the Federal Sentencing Guidelines Regarding Waiver of
AttorneyClient Privilege and Work Product Doctrine Before the United States Sentencing
Commission (2006) (statement of Kent Wicker, Nat’l Ass’n of Criminal Def. Lawyers).
This compelled waiver of the attorney-client privilege forced my client to give up the
protection at the heart of our criminal justice system: The privilege under the Fifth
Amendment against self-incrimination. It is not enough to say he could have just
given up his job and retained his Fifth Amendment rights. This is a real person, with a
real family to support.
189. Letter from Karen J. Mathis, President, American Bar Ass’n, to Christopher
Cox, Chairman, U.S. Sec. & Exch. Comm’n (Feb. 5, 2007), available at http://www.aba
190. Id. at 2.
191. Id. at 2-3.
privilege and/or the work product doctrine shall not be considered
when assessing whether the company provided effective cooperation.
The Commission may consider, however, in assessing whether a
company has provided effective cooperation, the degree to which the
company has provided factual information to the Commission staff
in a manner, to be worked out by the company and the Commission
staff, that preserves the protections of the attorney-client privilege
and work product doctrine to the extent possible.192
Similar criticisms by other groups have been, and continue to be,
levied against using the Seaboard Report to encourage waiver of the
attorney-client privilege or work-product protection.193
As the SEC and other Federal agencies press to have the
attorneyclient privilege waived as they undertake investigations, the entire
privilege is gradually weakened. As knowledge of its weakening
spreads, corporate employees may become less candid and forthcoming,
corporate internal investigations will be less trustworthy, and
shareholders and government investigators will be frustrated in their
efforts to prevent misdeeds. Given those outcomes, revisiting Seaboard
and the SEC’s approach to the attorney-client privilege and
workproduct protection is long overdue.
A CALL FOR A NEW ADVISORY COMMITTEE
The SEC Enforcement Division is viewed with pride by
Commissioners, staff, alumni, and many outsiders. The Division has a
long history of stellar achievements and dedicated attorneys,
accountants, and other staff. Thirty-six years after its creation, the
Division is larger, stronger, and more visible than any member of the
Wells Committee could have imagined. Thus, it makes sense that the
192. Id. at 3. The proposal recognizes that there are limited, specific exceptions
where the staff, after obtaining advance approval from the Director of Enforcement or
his/her designee, may seek privileged or work-product materials. Those exceptions
arise when the company asserts the advice of counsel defense or the SEC staff
establishes the elements for the crime/fraud exception. Id.
193. See, e.g., McLucas, Shapiro & Song, The Decline of the Attorney-Client
Privilege in the Corporate Setting, 96 J. CRIM. L. & CRIMINOLOGY 621 (2006); Posting
of Thomas O. Gorman, The Rolling Stones Test: SEC And DOJ Cooperation Standards,
SEC Actions Blog, http://www.secactions.com/?p=190 (May 22, 2007, 01:07 EST)
(“Conversely no cooperation credit should be given for what the government says it
does not usually need –privileged material and waivers.”).
Commission should consider whether it is time to convene a Wells-like
committee to “bring to date” the best thinking on enforcement practices.
The new advisory committee’s mission would be to conduct an
independent review of the Commission’s enforcement program from
multiple, diverse perspectives, and to recommend to the Commission, if
warranted, any needed changes. We propose that the new advisory
committee adopt the same mandate as that of the Wells Committee in
1972. The tasks assigned to the Wells Committee are as important today
as they were in 1972. If the same mandate is adopted, the new advisory
committee would be charged with virtually the same tasks as the original
Wells Committee, only slightly adapted to developments in the last three
(1) reviewing and evaluating the Commission’s
enforcement policies and practices in light of its
statutory responsibilities and mission to protect
investors; to maintain fair, orderly, and efficient markets;
and to facilitate capital formation;
(2) advising how the SEC’s enforcement objectives and
strategies may be made more effective;
(3) examining the Commission’s enforcement practices
and procedures from the point of view of due process,194
respect for the prospective defendants’ attorney-client
privilege and work-product protection,195 the relationship
of enforcement action to notice of legal requirements,
the attribution of responsibility for violations, and the
194. The Committee should consider the Commission’s current procedure regarding
authorization of cases implicating potential corporate penalties, under which the
Commission authorizes the staff to negotiate a settlement, before the staff engages in
any settlement discussions with the prospective defendant. At issue is whether the
Commission, at the time of authorization of negotiations, should also authorize the staff
to litigate if the settlement negotiations prove unfruitful, or whether the staff should
return to the Commission to seek litigation authorization. The issues hearken back to
those that animated the debate around the original Wells Committee Recommendation
20, namely whether authorizing staff to litigate before commencing settlement
negotiations skews the negotiations through the implicit threat to litigate if no
settlement is reached. See supra notes 61-72 and accompanying text.
195. Included in this task would be the need to re-evaluate the 2006 Statement
Regarding Penalties and the 2001 Seaboard Report, particularly with respect to the
expectation of waiver of attorney-client privilege and work-product protection as a
determinant of cooperation.
protection of reputation and rights of privacy of those
with whom the Commission interacts;196
(4) making recommendations on the appropriate blend of
regulation, publicity, and formal enforcement action and
on methods of furthering voluntary compliance with
(5) making recommendations on criteria for the selection
and disposition of enforcement actions, in particular,
providing timely notice to parties of the closing of an
(6) advising on the appropriate uses of penalties against
corporations in light of the SEC’s mission of protecting
Among the many issues that would fall under this broad mandate
would be the implementation of mechanisms to provide more efficacy,
predictability and transparency to the enforcement program. The overall
philosophy and management of the enforcement program should be
examined to determine how best it can fulfill the SEC’s mission, in light
of resources and statutory authority.
Predictability and transparency provide for a fair process that
respects the rights of all parties involved and ensures adherence to the
rule of law.197 Of course, the Commission’s discretion should not be
eliminated in favor of rote application of a mathematical formula for
calculating penalties. Discretion plays an important role in forgoing
certain theories of liability or not bringing an action at all. For example,
a company and its shareholders may have been punished enough through
196. Beyond the scope of this Article is the ancillary issue of disclosure by issuers of
the various stages of an SEC investigation. Although in large part a
facts-andcircumstances determination as to materiality, guidance would be helpful to issuers and
197. With the increasing emphasis on a more punitive enforcement approach, are
sufficient safeguards in place to protect the rights of prospective individual defendants?
At the time of the Wells Committee, the SEC lacked the power to seek punitive
damages against individuals, so the potential costs to the individual defendant were not
as pronounced as they are today. Individual defendants are faced with high costs of
defending an SEC action and severe consequences if they lose. These consequences at
times can be tantamount to criminal sanctions, including large monetary payments and
loss of livelihood. Often, the only option is a pro-se defense. Will a Commission one
day decide that it should establish a system to provide representation to individual
defendants who cannot afford to hire private counsel?
other avenues or the securities law violation may have been merely an
honest mistake. Indeed, the Wells Committee’s Recommendation 14
discussed this type of discretion:
The Commission should give due consideration in cases which
appear to involve honest mistake or good faith efforts at compliance
to exercising its discretion against bringing a formal enforcement
proceeding notwithstanding the appearance of a violation.198
The ability of the Enforcement Division to recommend to the
Commission that no action be taken in a particular matter should be
encouraged and institutionalized. This will require, among other things,
a re-evaluation of the incentives for bringing actions and obtaining large
penalties (such as through promotions, awards, and public recognition).
Statistics, such as the number of cases brought and the penalties
recovered, should play only a minimal role in assessing individual
performance. Instead, an evaluation system should focus on rewarding
high quality efforts and professionalism regardless of the outcome of
particular actions. A decision to forgo bringing an enforcement action
should not be treated automatically as a loss, but it should be evaluated
qualitatively alongside other enforcement decisions.
In some instances, exercising discretion may not be appropriate.
There should not be institutional encouragement for using discretion to
formulate theories of liability that overstep the boundaries of existing
law. Law making is reserved for legislative process in Congress and the
SEC rulemaking process under the strict requirements of the
Administrative Procedure Act; it is not a function of the Enforcement
Another aspect that could be considered by the advisory committee
is the implementation of a written and uniform “full-disclosure” policy
for enforcement matters.199 In criminal procedure, this is often referred
to as an “open jacket” policy. Operating under such a policy, the
enforcement staff would show defense counsel the evidence it has
against the prospective defendant, which is the essence of due process.
Some practicing lawyers have criticized the SEC Enforcement Division
for failing to explain to defendants the allegations of wrongdoing and
failing to share critical incriminating—and most importantly,
198. WELLS COMMITTEE ADVISORY REPORT, supra note 39, at iv.
199. The Wells Committee proposed the institutionalization of a similar policy. See
supra note 71 and accompanying text. Currently, there is not a uniform practice among
the various units in the Enforcement Division.
exculpatory—evidence that the SEC has gathered.200 Because no such
policy is in place today, arguments in Wells Submissions often are based
on defense counsel’s best guess as to the conduct that enforcement staff
has identified as violating federal securities laws. The sharing of
information would promote the goal of fact-finding, which is paramount
to due process and to the administration of justice.
With the advent of additional remedies in the SEC’s arsenal in the
decades after the Wells Committee and a shift in approach towards a
more punitive focus, the idea of a full-disclosure policy is even more
important than it was when the Wells Committee made its
recommendations. The SEC staff should inform fully individuals and
companies about the allegations and the evidence at the time of a Wells
call or, at the very latest, before entering into settlement discussions.
Corporate boards, in particular, must be sufficiently informed so that
they can apprise their shareholders and exercise good business judgment
in determining whether to settle a matter with the SEC.
Another aspect of the enforcement program that the new advisory
committee should consider is the process for closing investigations. In a
report to Congress by the General Accountability Office (“GAO”), the
GAO harshly criticized the Enforcement Division for not closing
investigations promptly and observed that the Division had a
“potentially large backlog of investigations that are not likely to result in
enforcement actions and for which closing packages have not been
completed.”201 As a result, the GAO concluded that “the subjects of
many aged and inactive investigations may continue to suffer adverse
consequences until closing actions are completed.”202
Enforcement Division officials told the GAO that their attorneys
may believe that pursuing potential securities violations is a higher
200. See, e.g., Kevin J. Harnishch & Natasha Colton, When the SEC Comes
Knocking, 15 A.B.A. SEC. BUS. L. 1 (2005), available at http://www.abanet.org/buslaw/
201. U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-07-830, SEC: ADDITIONAL
ACTIONS NEEDED TO ENSURE PLANNED IMPROVEMENTS ADDRESS LIMITATIONS IN
ENFORCEMENT DIVISION OPERATIONS 22 (2007), available at
http://www.gao.gov/new.items/d07830.pdf. For example, according to the GAO
Report, one SEC regional office reported that as of March 2007 about 35% of its open
investigations were “more than 2 years old, had not resulted in an enforcement action,
and were no longer being actively pursued.” Id. at 21. In response, the Enforcement
Division has undertaken to review the backlog and streamline the closing process. Id. at
priority than closing investigations.203 Officials also cited a scarcity of
time, administrative support, and incentives to comply with established
procedures for closing investigations.204 Although the GAO recognized
that resolving the potentially large backlog of investigations would
impose resource challenges for Enforcement Division,205 the GAO
recommended that the SEC chairman direct the Enforcement Division to
“consider developing expedited procedures for closing
When the Commission or its staff determines that an investigation
should be closed or action is not warranted, the agency promptly should
send a closing letter.207 Closing letters should be sent not only to those
who have made a Wells Submission, but also to any significant
nonparty that has provided documents, information, or testimony to the
SEC. Similarly, if the enforcement staff views a person only as a
witness or source of information in an investigation, staff should make
that clear to the person.
In its proposed mandate to examine enforcement practices and
procedures from the point of view of due process, the new advisory
committee should consider ways to improve the cherished Wells
process. One way in which the Wells process should be bolstered is
through a mechanism to allow a proposed defendant to appear before the
Commission to oppose a proposed enforcement proceeding. Although it
would likely be both unnecessary and unmanageable to allow such an
“oral Wells submission” in every situation, it may be beneficial to both
the Commission and proposed defendants for the Commission to have a
discretionary avenue to hear from proposed defendants prior to taking
action. Matters that might be appropriate for this procedure would
include complex factual cases, such as those necessitating expert
witnesses, disputes concerning the level of cooperation, or cases in
which character assessment and credibility is particularly important.208
206. Id. at 7.
207. The Wells Committee in Recommendation 8 proposed that the “Commission
adopt in the usual case the practice of notifying an investigatee against whom no further
action is contemplated that the staff has concluded its investigation . . . .” and will not
recommend an enforcement action. WELLS COMMITTEE ADVISORY REPORT, supra note
39, at 20.
208. For example, at both the Federal Trade Commission and the Federal
Communications Commission, in-person presentations to commissioners and staff of
A review of the enforcement process would not be complete
without a review of the costs to parties responding to an investigation.
Responding to an SEC investigation is costly, particularly in the age of
e-mails and electronic data. The SEC must ensure that its investigations
and enforcement actions do not impose unnecessary costs. Overly broad
subpoenas or document or interview requests add to a responding
entity’s costs, and not every responding entity becomes a defendant.
Innocent parties pay the price of overly broad requests. Notices to
preserve—and subsequent requests to produce—electronic data,
including e-mails, voicemails, and server back-up tapes are particularly
burdensome and costly to a company. While it is undoubtedly critical
for the SEC to have certain electronic data to conduct an investigation
and litigate a matter, preservation notices and requests for production are
often generic and extend well beyond the boundaries of the existing
investigation. It is difficult to justify imposing unnecessary costs on a
company, particularly when the investigation may last many years and
result in no action taken.
The new advisory committee should recommend ways to minimize
costs through the formulation of detailed procedures to address
preservation notices and production requests for electronic data. In
recommending the procedures, the advisory committee should take into
account the burden and expense of preserving certain kinds of records,
such as electronic voicemail, and producing data stored in long-term
media such as back-up tapes. Preservation notices should be reasonably
related to the matters under investigation, and prospective preservation
of information should be invoked only if misconduct is suspected or
ongoing.209 The use of generic preservation notices, covering data that
the company might not otherwise preserve in the normal course of its
operations, should be prohibited.
Production requests should be narrowly tailored and should first
seek information that is readily accessible. Requests should not demand
the production of data stored on back-up tapes unless unavailable
through other sources. As a measure to guard against overbroad
requests, the advisory committee should consider ways to incorporate in
enforcement procedures pre-approval of document requests by a senior
member of the Enforcement Division.
evidence and advocacy positions in advance of potential enforcement actions are
209. Subjects of investigation already have other legal obligations to preserve
documents. See, e.g., 18 U.S.C. § 15
The advisory committee also should explore the establishment of an
ombudsman to review and evaluate complaints about the enforcement
process and behavior of the Enforcement staff. An ombudsman would
provide an avenue for persons to convey their grievances to the
Commission without fear of reprisal. People should be able to make
these complaints anonymously through a hotline.210
The new advisory committee should examine the usage, effects,
amount, and appropriateness of issuer penalties in financial fraud cases.
The committee should consider whether these issuer penalties are
consistent with the SEC’s mission of investor protection; maintaining
fair, orderly, and efficient markets; and facilitating capital formation.
For example, do penalties protect investors? Do they harm or benefit
shareholders? Is the circularity of Fair Fund penalty distributions
consistent with ensuring fair, orderly, and efficient capital markets? Is
capital formation impeded by the threat of large, unpredictable issuer
The advisory committee also should evaluate the moral hazards
associated with issuer penalties. One moral hazard is the possibility that
managers of companies might agree to a large corporate penalty in order
to avoid or soften actions against culpable individuals.211 Are
individuals deterred from wrongdoing if they expect that shareholders
will pay the penalties for the misconduct?
The SEC also faces it own moral hazards when contemplating the
assessment of issuer penalties. Does the prospect of large issuer
penalties and the inevitable press coverage cause the SEC to misallocate
210. The SEC’s Office of Compliance Inspections and Examinations already has
such a hotline. See U.S. Sec. & Exch. Comm’n, Office of Compliance Inspections &
Examinations, Examination Hotline, http://www.sec.gov/about/offices/ocie/ocie_hotlin
e.shtml (last visited May 9, 2008).
211. See generally Donald C. Langevoort, On Leaving Corporate Executives
“Naked, Homeless and Without Wheels”: Corporate Fraud, Equitable Remedies, and
the Debate over Entity versus Individual Liability, 42 WAKE FOREST L. REV. 627
(2007). As Professor Langevoort explains:
The corporate sanction avoids the need to attribute fault to any particular individual
under circumstances where there is likely mutual finger pointing about who is to
blame. For all these reasons, company sanctions are the path of least resistance; the
SEC can claim its victory and move its resources to new matters that deserve
attention. There is probably a publicity-related reason as well: sanctions against
companies can be large enough to grab headlines, which is less likely to occur with
respect to individual sanctions, even in the aggregate.
Id. at 654.
resources to build these cases to the detriment of other types of
The Commission’s 2006 penalty statement was a significant first
step in setting forth a principled foundation for examination of many of
these concerns.212 In applying the penalty statement, the Commission
has encountered areas not addressed by the statement, such as the
determination of the amount of penalty and the appropriateness of
imposing penalties on new shareholders.213 Taking the Commission’s
experience into consideration, the new advisory committee should
reexamine these issues with the input of economists, legal scholars, and
These and any additional recommendations from the advisory
committee that ultimately are approved by the Commission should be set
forth in a publicly available Enforcement Manual. In 2007, the minority
members of the Senate Finance Committee recommended that the SEC
create such a manual, which would be similar to the U.S. Attorney
Manual, “to address situations or issues likely to recur.”214 The public
accessibility of the manual would ensure transparency and uniform
application. The manual itself, and any later changes to it, should be
reviewed and approved by the Commission. Deviations from the
manual, while necessary in some instances, should be discouraged. The
manual will serve as the governing guidelines for the Enforcement staff
at headquarters and in the regional offices. An Enforcement Manual that
reflects the recommendations of an advisory committee, as adopted by
the Commission, could serve as a useful framework for the
Commission’s enforcement program in the years to come.
The SEC’s enforcement program serves a critical function in
ensuring proper compliance with the U.S. securities laws. Throughout
12. See 2006
Penalty Statement, supra note 178.
213. Many of these same concerns were raised by the Commission during the
legislative debate over the Remedies Act of 1990. See, e.g., SEC Memorandum in
Support of Remedies Act, supra note 96.
214. See Staff of S. Fin. Comm., 110th Cong., Report on the Firing of an SEC
Attorney and the Investigation of Pequot Capital Management 7 (Comm. Print 2007),
available at http://finance.senate.gov/sitepages/leg/LEG%202007/Leg%201
4. Securities Exchange Act of 1934 § 3 ( f ), 15 U.S.C. § 78c(f) ( 2006 ).
5. See, e.g., Stoneridge Inv. Partners , LLC v. Scientific-Atlanta, Inc ., - U.S. -, 128 S. Ct . 761 ( 2008 ).
10. The Enforcement Division is currently the largest of the divisions and offices of the SEC, with more than 1100 personnel . See Christopher Cox, Chairman, Opening Remarks to the Practising Law Institute's SEC Speaks Series (Feb. 9 , 2007 ), available at http://www.sec.gov/news/speech/2007/spch020907cc.htm. According to information provided by the SEC to Congress, the total number of employees in the Enforcement Division at the end of fiscal year 2008 is expected to be 1124-up from 781 in 1992 .
11. Securities Act of 1933 , 15 U.S.C. §§ 77a - 77aa ( 2006 ).
12. Securities Exchange Act of 1934 , 15 U.S.C. §§ 78a - 78nn ( 2006 ) ; see generally Securities and Exchange Act of 1934 , http://www.sec.gov/about/laws. shtml#secexact19 34 (last visited May 8 , 2008 ) (discussing some of the many powers granted by the 1934 Act, including regulating corporate reporting, proxy solicitations and tender offers).
13. Trust Indenture Act of 1939 , 15 U.S.C. §§ 77aaa - 77bbbb ( 2006 ) (focusing on debt securities such as bonds, debentures, and notes that are offered for public sale ).
14. Investment Company Act of 1940 , 15 U.S.C. §§ 80a-1 to a- 64 ( 2006 ) (regulating the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public ).
15. Investment Advisers Act of 1940 , 15 U.S.C. §§ 80b-1 to b- 21 ( 2006 ) (regulating investment advisors).
16. Sarbanes-Oxley Act of 2002 , Pub. L. No. 107 - 204 , 116 Stat. 745 ( 2002 ) (codified in scattered sections of 11, 15 , 18 , 28 and 29 U.S.C.) (mandating a number of reforms to enhance corporate responsibility and financial disclosures and to combat corporate and accounting fraud). The Sarbanes-Oxley Act also created the Public Company Accounting Oversight Board to oversee the activities of the auditing profession ..
17. On February 8 , 2006 , the repeal of the Public Utility Holding Company Act of 1935 took effect, relieving the SEC of what once arguably was its primary focus. The Act provided for the regulation of multi-state utilities by the SEC . Public Utility Holding Company Act of 1935 , 15 U.S.C. § 79 (repealed 2006 ).
18. See e.g., Securities Act §§ 8(e) , 20 (a); Securities Exchange Act § 21(a); Investment Company Act § 42(a); Investment Advisers Act § 209(a ).
19. Securities Exchange Act § 21 (b). Congress has granted similar authority in other provisions of the federal securities laws . See Investment Company Act § 42 (b); Investment Advisers Act § 209 (b).
20. 17 C.F.R. § 200 . 30 -4 (a)(1) ( 2008 ).
21. 2007 REPORT, supra note 9 , at 2.
22. DANIEL M. HAWKE , A BRIEF HISTORY OF THE SEC'S ENFORCEMENT PROGRAM 1934 -1981, at 2 (SEC Historical Society 2002 ), available at http://www.sechistorical.or g/collection/oralHistories/roundtables/enforcement/enforcementHistory.pdf.
23. Id . A copy of the 1939 organization chart of the SEC is available at http://www.sechistorical.org/collection/papers/1930/1939_SEC_OrgChart.pdf.
24. Id . During the SEC's first decade, the Justice Department had a 95% conviction rate from the indictments that it brought based on referrals from the SEC . Id.
32. See Tex . Gulf Sulfur , 401 F. 2d at 848 -52.
33. See VTR , Inc., 410 F. Supp . 1309 .
34. SELIGMAN, supra note 29, at 362.
35. U.S. SEC. & EXCH. COMM'N, THIRTY-EIGHTH ANNUAL REPORT OF THE SECURITIES AND EXCHANGE COMMISSION xxvii ( 1972 ), available at http://www.sec.gov/about/annual_report/1972.pdf. It has been suggested that this reorganization was initially resisted on the belief that enforcement responsibility should not be separated from the divisions of the Commission that deal with substantive regulation. The belief was that as the regulators developed new principles of regulation, if enforcement became too separate from such development, it might reflect the uncertainties of the rules and the appropriate nature of regulation . Symposium, Securities Law Enforcement Priorities, 17 SETON HALL LEGIS. J. 7 , 9 ( 1993 ) (statement by Leonard M. Leiman ).
36. HAWKE, supra note 22, at 3. In 1971, there were 40 lawyers in the enforcement group of the Division of Trading and Markets . Fowlkes, supra note 1, at 380. The Commission, on November 14 , 2007 , restored the name of the “Division of Market Regulation” to the “Division of Trading and Markets .” See Press Release, U.S. Sec . & Exch . Comm'n, SEC Renames Division of Market Regulation as Division of Trading and Markets (Nov . 14, 2007 ), available at http://www.sec.gov/news/press/2007/2007- 229 .htm. The Commission changed the name of the “Division of Corporate Regulation” to the “Division of Investment Management” in 1972. See Interview by Richard Rowe with Allan Mostoff (Oct . 30 , 2002 ), available at http://www.sechistorical.org/collection/oralHistories/interviews/mostoff/mostoff100202 Transcript.pdf.
37. HAWKE, supra note 22, at 3.
38. William J. Casey , Chairman, U.S. Sec . & Exch. Comm'n , Address to the New York Bar Association (Jan. 27, 1972 ), available at http://www.sec.gov/news/speech/19 72/012772casey.pdf [hereinafter Casey Speech].
39. U.S. SEC. & EXCH. COMM'N, REPORT OF THE ADVISORY COMMITTEE ON ENFORCEMENT POLICIES AND PRACTICES (June 1, 1972 ), reprinted in ARTHUR F. MATHEWS ET AL., ENFORCEMENT AND LITIGATION UNDER THE FEDERAL SECURITIES LAWS 1973 , at 275 (Practicing Law Institute 1973 ) [hereinafter WELLS COMMITTEE ADVISORY REPORT]; Memorandum from John A . Wells et al., Chairman , SEC Advisory Committee on Enforcement Policy and Practices (Mar. 2 , 1972 ), available at http://www.sechistorical.org/collection/papers/1970/1972_0302_Casey.pdf [hereinafter Wells Memo].
40. Casey Speech, supra note 38 , at 4-5.
41. Id .
73. See Pitt et al., supra note 53 , at 63.
74. Procedures Relating to the Commencement of Enforcement Proceedings and Termination of Staff Investigation, Securities Act Release No. 5310 , [ 1972 -1973 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 79 ,010, at 82 , 183 - 86 (Sept. 22, 1972 ) (emphasis added) [hereinafter SEC Release No . 5310 ].
75. Id . at 2.
76. Stephen A. Glasser, SEC Adopts Rules Changes in Areas of Enforcement , N.Y.L.J. , Sept . 29 , 1972 .
77. See 37 Fed. Reg. 23 , 829 ( Nov . 9, 1972 ) (codified at 17 C.F.R. § 202 .5( c )).
78. 17 C.F.R. § 202 .5( c ) ( 2006 ).
79. Id .
80. See SEC Release No. 5310 , supra note 74, at 2.
81. WELLS COMMITTEE ADVISORY REPORT, supra note 39 , at 34.
82. Id . at 35.
83. Glasser , supra note 76.
84. Harold M. Williams-Biography , http://skadden.com/index.cfm? contentID=45 &bioID=848 (last visited May 8 , 2008 ). During his tenure, Chairman Williams increased the Office of the General Counsel from approximately a dozen attorneys to more than forty attorneys as an alternative source of advice to the Commission on issues such as enforcement matters .
85. See 17 C.F.R. § 202 .5( f ) ( 2006 ).
86. John M. Fedders , Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm'n , Remarks to the 1981 SEC Accounting Conference Foundation for Accounting
90. Id .
91. Congress was considering proposed legislation that eventually became the Insider Trading Sanctions Act of 1984. See Insider Trading Sanctions Act of 1984, Pub . L. No. 98 - 376 , § 1 , 98 Stat . 1264 ( codified as amended in scattered sections of 15 U .S.C.).
92. Memorandum to Chairman Wirth, supra note 87 , at 350.
93. Id .
94. Id .
95. Id .
96. U.S. Sec. & Exch . Comm'n, Memorandum of the Securities and Exchange Commission in Support of the Securities Law Enforcement Remedies Act of 1989, reprinted in H .R. No. 975 , 101st Cong., at 7 (emphasis added) [hereinafter SEC Memorandum in Support of Remedies Act] .
97. Memorandum to Chairman Wirth, supra note 87 , at 350-51.
98. Id . at 350.
99. The Securities Enforcement Remedies Act of 1989: Hearing Before the Sec . Subcomm. of the S. Banking, Hous., & Urban Affairs Comm. (Feb. 1 , 1990 ) (statement of Gary G . Lynch, Fmr. Dir., Div. of Enforcement, U.S. Sec. & Exch . Comm'n).
100. Insider Trading Sanctions Act of 1984 , Pub. L. No. 98 - 376 , § 1 , 98 Stat . 1264 ( codified as amended in scattered sections of 15 U .S.C.).
101. Insider Trading and Securities Fraud Enforcement Act of 1988, Pub . L. No. 100 - 704 , § 1 , 102 Stat . 4677 ( codified as amended in scattered sections of 15 U .S.C.).
102. Securities Enforcement Remedies and Penny Stock Reform Act of 1990, Pub . L. No. 101 - 429 , 104 Stat. 931 ( 1990 ).
161. See Press Release, Baker Proposes New Federal Investor Restitution Fund (July 17 , 2002 ), available at http://web.archive.org/web/20031108035021/www.baker.hous e.gov/News/fair_fund. htm [hereinafter Baker I].
162. See Sarbanes-Oxley Act § 308 ( a). Within the first six months of having the authority, the Commission sought federal court approval of Fair Fund distributions on at least 12 occasions . Stephen Cutler, Dir. of Enforcement, U.S. Sec. & Exch . Comm'n, Testimony Concerning Returning Funds to Defrauded Investors Before the H . Subcomm. on Capital Mkts., Ins . , & Gov't Sponsored Enters. , Comm. on Fin. Servs . 10 ( Feb . 26, 2003 ) available at http://www.sec.gov/news/testimony/022603tssmc.htm [hereinafter Cutler Testimony].
163. See Press Release, Baker Statement to Open House-Senate Conference on Corporate Reform (July 19 , 2002 ), available at http://web.archive.org/web/2003090603 5258/www.baker.house.gov/News/conf_corprfm.htm.
How is it possible for anyone to sit idly by while watching a corporate official move into his $20 million mansion, with hundreds of millions of dollars in retirement benefits, having generated this lifestyle by manipulating the books and defrauding shareholders? With the adoption of the FAIR plan, we will make this much less likely to occur and offer the hope to investors for a small reduction in their loss . Id.; see also Baker I, supra note 161.
169. See Fair Fund Improvement Act , H.R. 5956 , 109th Cong. ( 2006 ) ; Securities Fraud Deterrence and Investor Restitution Act of 2004, H .R. 2179 , 108th Cong. ( 2004 ); Dissenting Views to Accompany H.R. 2179, H.R. REP . No. 108 - 475 (Apr. 27, 2004 ); see also Press Release, Baker, Oxley Introduce Bill To Strengthen SEC Powers Against Securities Fraud , Return Funds To Defrauded Investors (May 21, 2003 ), available at http://web.archive.org/web/20030602 192406/www.baker.house.gov/News/fair_bill.htm.
170. The bills did not advance in Congress because of the general unwillingness to re-open the Sarbanes-Oxley Act of 2002 .
171. The Fair Fund distribution thus creates a circular situation: the Commission penalizes a corporation to put the money into a fund to reimburse the shareholders who were themselves just indirectly penalized .
172. See , e.g., Bruce Carton , When a Dollar (of Disgorgement) Is Worth Millions, SEC. CLASS ACTION SERV., (Institutional S'holder Servs .), Dec. 3 , 2004 , available at http://scas.issproxy.com/Newsletter/issscasDecember2004.html #POVEditorial (discus178 . Press Release, U.S. Sec . & Exch . Comm'n, Statement of the Securities and Exchange Commission Concerning Financial Penalties (Jan. 4 , 2006 ), available at http://www.sec.gov/news/press/2006-4.htm [hereinafter 2006 Penalty Statement].
179. Id .