SEC chair says big fines key to attacking wrongdoing

WASHINGTON Thu Sep 26, 2013 3:08pm EDT

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011.

Credit: Reuters/Jonathan Ernst

WASHINGTON (Reuters) - The head of the Securities and Exchange Commission warned that her agency will aggressively use its powers to fine wrongdoers and is seeking other creative ways to hold companies and individuals accountable for their misdeeds.

"Meaningful monetary penalties - whether against companies or individuals - play a very important role in a strong enforcement program," SEC Chair Mary Jo White said in a speech in Chicago on Thursday.

"They make companies and the industry sit up and take notice of what our expectations are and how vigorously we will pursue wrongdoing," she said.

The comments mark White's second major enforcement policy shift since she took over the helm of the SEC in April.

White, a former federal prosecutor, has already sought to add teeth to SEC settlements by requiring defendants in certain cases to admit to wrongdoing, rather than settle without admitting or denying the charges.

White's public remarks on Thursday come as SEC staff and commissioners in recent weeks have reignited a long-standing debate about the merits of mega fines against publicly traded companies, according to several people familiar with the matter.

Critics have long held that sizeable fines against public companies unduly punish ordinary shareholders, while proponents argue they carry a strong deterrent effect.

The closed-door debate was evident in the SEC's settlement last week with JPMorgan Chase & Co over the "London Whale" trades.

In a non-public meeting the week before the settlement was announced, the SEC's newest commissioner, Michael Piwowar, a Republican, voiced concerns that the SEC was fining the company, as opposed to considering ways to levy penalties against top-level executives at the bank, according to people familiar with the situation.

The commissioners ultimately approved the settlement 2-1, with Piwowar voting against it, the sources said. Democratic Commissioners Kara Stein and Luis Aguilar, who has long pushed for tougher penalties against companies, voted in favor of it.

White and SEC Republican Commissioner Daniel Gallagher were not present for the vote because their former law firms represented the bank.

The debate came up again in the context of other enforcement cases later that day, some of the sources said.

LONG-STANDING DEBATE

Corporate penalties have long been considered controversial.

The SEC did not win authority from Congress to seek penalties until 1990, and even then, the agency was slow to embrace the practice.

It took more than 10 years for the agency to ramp up penalties, in the wake of the accounting scandals at Enron, Tyco and Worldcom, according to a 2010 article in the Securities Litigation Report.

But in 2006, then-SEC Chair Chris Cox shifted gears amid concerns about corporate penalties from some SEC officials.

The central question was: When is it appropriate to fine a publicly traded company, and what factors should be used to determine whether to levy one?

Cox created a corporate penalty pilot program that required enforcement staff to get approval from commissioners before seeking penalties.

He also released new guidelines on how the commission should consider when to levy penalties, such as the egregiousness of the conduct.

But the greatest weight was given to two factors: whether a fine would only harm already-injured shareholders and whether the company benefited from the alleged wrongdoing.

In recent years, the SEC has faced mounting pressure to punish both individuals and corporations for their roles in the 2007-2009 financial crisis.

When Mary Schapiro took over as SEC chair in 2009, she ended the pilot program that required pre-approval on penalties. However, she did not push to formally revise the penalty guidelines that Cox put in place, despite pressure from some outspoken critics at the SEC, including Aguilar.

Instead, people familiar with the agency's inner workings say the guidelines were not as strictly followed as they had been under Cox.

NEW ERA?

In her speech before the Council of Institutional Investors on Thursday, White said she felt the 2006 guidance under Cox, while "useful," is not "binding" for the agency.

"The bottom line for me is that corporate penalties will be considered in all appropriate cases," she said. "Whether, in fact, to seek a corporate penalty and the appropriate amount are decisions that must be based on a consideration of all the facts and circumstances."

Like her predecessor Schapiro, White on Thursday also said she staunchly supports legislation that has been proposed in the U.S. Senate that would bolster the SEC's penalty powers.

The bill, which has yet to gain traction, would let the SEC seek penalties based on either three times the ill-gotten gains or the investor losses- whichever is greater.

It would also let the SEC seek additional penalties against repeat offenders.

"These would be very powerful, additional tools," White said.

Besides penalties, White said the SEC should consider requiring the company at issue to adopt measures that would make the misconduct less likely to occur again.

At the same time, White stressed that it will be equally important to pursue cases against individuals as well.

In the case of JPMorgan's whale trades, for instance, the SEC's investigation is still continuing into whether certain high-level people at the bank should face charges, one of the people familiar with matter said.

"I have made it clear that the staff should look hard to see whether a case against individuals can be brought," White said.

"I want to be sure we are looking first at the individual conduct and working out to the entity, rather than starting with the entity as a whole and working in."

(Reporting by Sarah N. Lynch and Aruna Viswanatha; Editing by Karey Van Hall, Lisa Von Ahn, Leslie Adler and Richard Chang)

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