Risk & Compliance

Ex-SEC Attorney Raps WSJ Report on Enforcement Activity

Wall Street Journal article criticizing feds' level of enforcement this year is off-base, the attorney explains.
Jordan A. ThomasAugust 15, 2017
Ex-SEC Attorney Raps WSJ Report on Enforcement Activity

If the first half of the year was any indication, the Securities and Exchange Commission is on track to have another record year for enforcement activity in 2017. Looking at data compiled in our SEC Sanctions Database, which tracks a subset of enforcement actions that resulted in monetary sanctions exceeding $1 million, the agency shows no sign of easing its efforts to sanction bad actors.

Jordan A. Thomas

Jordan A. Thomas

The largest case thus far in 2017 was brought against Barclays, which agreed to pay $97 million in disgorgement and penalties for overcharging clients for mutual fund sales and advisory fees. Perhaps unsurprisingly, given where major financial firms are headquartered, cases were clustered regionally in the Northeast and West, with nearly half of all actions coming out of the Northeast. But actions coming from the South nearly doubled from last year and the Midwest saw a fivefold increase in the number of cases.

Also for the first half of 2017, more than 40% of cases we studied involved offering fraud. That’s almost double the number of offering fraud cases observed in the first halves of the last three years combined. Meanwhile, Foreign Corrupt Practices Act matters represented more than a quarter of the cases.

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Given that these preliminary numbers clearly point toward another strong year, it’s curious that the SEC and other agencies were criticized by some in a Wall Street Journal article for levying less in penalties in the first half of the year compared to 2016.

Analysis_Bug3Having spent more than 15 years in the enforcement division of the SEC, I know first-hand that it’s nearly impossible to draw conclusions about the Commission’s broad enforcement agenda by looking at monetary penalties assessed in a six-month vacuum.

As the Commodity Futures Trading Commission pointed out in Politico’s “Morning Money,” the aggregate amount of penalties in 2016 was skewed by major cases; more than half a dozen had total monetary sanctions over $100 million. Indeed, of the more than $1 billion levied by the agency in the first half of 2016, $415 million was attributable to a settlement with Merrill Lynch, an action driven by our whistleblower clients.

Most important, tying a decline in monetary sanctions to a new presidential administration, as the WSJ article does, makes little sense, statistically or otherwise. We see from the historical data in our sanctions database that for each of the last five years, more than half of the year’s enforcement actions were concluded in the second half of the year.

Moreover, SEC investigations aren’t a trip to the grocery store; they are exceedingly complex undertakings with a vast number of moving parts that take years to bring to successful conclusion. The enforcement matters resolved this year may have resulted from tips initially made to the Commission five years ago, or earlier. Keep in mind that the average life of an SEC investigation is two to four years.

We fully expect 2017 to be another strong year for the SEC. Just as importantly, whistleblowers with actionable intelligence will play a significant role in an aggressive and efficient enforcement paradigm. If we want to continue to arm the SEC and other regulators with the tools to take down the most insidious actors perpetuating the most complex schemes, we need to continue to protect whistleblowers. Merrill Lynch is just the beginning.

Jordan A. Thomas chairs the whistleblower representation practice at Labaton Sucharow. A principal architect of the SEC whistleblower program, Thomas launched the first national practice focused exclusively on whistleblowers reporting federal securities violations.