Risk & Compliance

The SEC in 2008: A Very Good Year?

A terrific one, the commission says, tallying a fiscal-year record in insider-trading cases, and the second-highest number of enforcement cases ove...
Stephen Taub and Roy HarrisOctober 22, 2008

It was a great year for Securities and Exchange Commission enforcement, according to the SEC. In a fiscal-year-end summary, it notes, for example, that it brought the highest number ever of insider trading cases.

And altogether, it took the second-highest number of enforcement actions in agency history.

“The SEC’s role in policing the markets and protecting investors has never been more critical,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement. “The dedicated enforcement staff has been working around the clock to investigate and punish wrongdoing.”

The celebration of these records and near-records, however, comes during a time of widespread charges of what critics call lax policing by the regulator. They question its performance before the powderkeg of subprime mortgage lending, amid loose standards within major financial institutions, exploded into the worst global financial crisis since the Great Depression. Just a month ago, Republican presidential candidate John McCain promoted the replacement of SEC Chairman Christopher Cox, while many legislators have supported folding the SEC and other agencies into one larger, more encompassing financial regulator.

But this day, at least, was one for the SEC proudly to recount the 671 enforcement actions it took during the most recent fiscal year. And it made special note of how insider trading cases jumped more than 25 percent over the previous year.

Among those trading cases, the SEC seemed to prize most highly the charges against former Dow Jones board member David Li, and three other Hong Kong residents, in a $24-million insider-trading enforcement action, along with the charging of the former chairman and CEO of a division of Enron Corp. with illegally selling hundreds of thousands of shares of Enron stock based on nonpublic information.

Market manipulation cases surged more than 45 percent. They included charges against a Wall Street short seller for spreading false rumors, and charging 10 insiders or promoters of publicly traded companies who made stock sales in exchange for illegal kickbacks.

Among the major fraud cases, the SEC sued two Bear Stearns hedge fund managers for fraudulently misleading investors about the financial state of the firm’s two largest hedge funds. The regulator also charged five former employees of the City of San Diego for failing to disclose to the investing public buying the city’s municipal bonds that there were funding problems with its pension and retiree health care obligations and those liabilities had placed the city in serious financial jeopardy.

Illegal stock-option backdating was also a big focus of the agency in 2008. The SEC charged eight public companies and 27 executives with providing false information to investors based on improper accounting for backdated stock option grants.

The SEC said that another growth area involved cases against U.S. companies that use corporate funds to bribe foreign officials, an activity precluded by the Foreign Corrupt Practices Act. In 2008, the SEC filed 15 FCPA cases. Since January 2006, the SEC has brought 38 FCPA enforcement actions — more than were brought in all prior years combined since FCPA became law in 1977.