More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
Federal Judge Jed S. Rakoff assessed a record fine of $98.2 million against hedge fund billionaire Raj Rajaratnam of Galleon Group, the largest penalty against a person ever levied in a Securities and Exchange Commission insider trading case.
Altogether, Rajaratnam will be on the hook for $156.6 million, which includes fines and forfeitures assessed at his sentencing in the criminal case brought against him, The New York Times reported on Wednesday.
Robert S. Khuzami, the SEC’s head of enforcement, said of the decision: “The penalty imposed today reflects the historic proportions of Raj Rajaratnam’s illegal conduct and its impact on the integrity of our markets.”
However, the judge was not satisfied, and rejected Rajaratnam’s attorneys’ argument that civil penalties were unwarranted in view of the criminal ones.
“This misapprehends both the nature of this parallel proceeding and the purposes of civil penalties,” Rakoff said in his order. “SEC civil penalties, most especially in a case involving such lucrative misconduct as insider trading, are designed, most importantly, to make such unlawful trading a money-losing proposition not just for this defendant, but for all who would consider it.”
Rakoff’s discontent stems from his dissatisfaction with the SEC’s practice of allowing settlements as a means of enforcement, rather than bringing cases to trial—and rather than bringing contempt charges against companies that violate previous agreements.
In addition to presiding over Rajaratnam’s case, Rakoff is also overseeing the SEC case against Citigroup over the sale of mortgage securities, and he has indicated that he may not sign off on the $285 million settlement reached by the two parties. Instead, he has said he will issue a written opinion later.
In a hearing on the Citigroup case on Wednesday, The Times reported Rakoff asking, “Doesn’t the S.E.C. have an interest in what the truth is?” in reference to the SEC practice of not compelling a defendant to admit wrongdoing when arriving at a settlement.
While SEC lawyer Matthew T. Martens replied that the government believed the public knew the truth about Citigroup because the lawsuit detailed the SEC’s accusations, Rakoff disagreed, saying, “Last time I checked, correct me if I’m wrong, anyone can make an allegation. The mere fact that you say it’s so does not make it so unless it’s proved.”
The question arose days after a Monday New York Times article that questioned the rate of recidivism among banks and financial firms that have repeatedly been the target of investigations and settlements with no admission of wrongdoing—and which have proceeded to violate the same rules they had already promised not to break.
Rakoff’s criticism also came just as Mary Schapiro, chairman of the SEC, touted the commission’s stepped-up enforcement efforts. In the fiscal year ended Sept. 30, the commission filed 735 actions, a new record. Of those, 146 were against investment advisors, which represents a 30% increase over 2010. The record number of enforcement actions, the SEC said, are a result of the enforcement division undergoing its most “significant” reorganization in 2009 and 2010 since being established in the early 1970s.