TheCorporateCounsel.net

Despite grappling with many uncertainties right now, corporate teams may be breathing a little easier when it comes to the SEC Enforcement environment. That’s partly because people are predicting that the new leadership team will be focused more on individual accountability than on corporate penalties. This Reuters article details enforcement actions that presumptive SEC Chair Paul Atkins dissented from when he served as a Commissioner, which give some insight into what his priorities and approaches might be.

A shift in the enforcement environment doesn’t mean that compliance teams can fall asleep at the wheel, though. This Statement of the Commission Concerning Financial Penalties – which was unanimously approved back in 2006, when Paul Atkins was a Commissioner – lays out factors that, at that time, the Commission believed would warrant corporate penalties. Here’s Broc’s blog from way back when that happened. The two principal considerations were:

The presence or absence of a direct benefit to the corporation as a result of the violation. The fact that a corporation itself has received a direct and material benefit from the offense, for example through reduced expenses or increased revenues, weighs in support of the imposition of a corporate penalty. If the corporation is in any other way unjustly enriched, this similarly weighs in support of the imposition of a corporate penalty. Within this parameter, the strongest case for the imposition of a corporate penalty is one in which the shareholders of the corporation have received an improper benefit as a result of the violation; the weakest case is one in which the current shareholders of the corporation are the principal victims of the securities law violation.

The degree to which the penalty will recompense or further harm the injured shareholders. Because the protection of innocent investors is a principal objective of the securities laws, the imposition of a penalty on the corporation itself carries with it the risk that shareholders who are innocent of the violation will nonetheless bear the burden of the penalty. In some cases, however, the penalty itself may be used as a source of funds to recompense the injury suffered by victims of the securities law violations. The presence of an opportunity to use the penalty as a meaningful source of compensation to injured shareholders is a factor in support of its imposition. The likelihood a corporate penalty will unfairly injure investors, the corporation, or third parties weighs against its use as a sanction.

Additional factors included:

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.

7. Extent of cooperation with Commission and other law enforcement.

In a speech later that year, then-Commissioner Atkins noted:

It is worth noting that articulating the Commission’s approach to corporate penalties is one area where, thanks to Chairman Cox, we have made significant progress. Our January principles turn primarily on the existence or absence of a direct benefit to the corporation resulting from the violation and the degree to which the penalty will compensate or further harm shareholders. But, despite this guidance, do not think that large corporate penalties are a thing of the past. As I have said for quite a while, corporate penalties are appropriate in many circumstances, particularly where the company and its shareholders have broken the law and accrued a benefit from it. Consider, for example, the $700 million in disgorgement and penalty of $100 million that AIG agreed last month to pay.

He went on to discuss the undesired incentive-effect that large corporate penalties can have on the Enforcement Staff – along with ideas for rewarding Staff who pursue micro-cap cases and other less glamorous issues.

– Liz Dunshee