January 15, 2013

SEC’s Top Cops Blast Columbia Law Professor Over ‘Inaccurate’ Enforcement Stats

Columbia professor Coffee’s claims are ‘distorted,’ Khuzami and Canellos say

The SEC enforcers say the paper is wrong to claim the agency frequently loses cases. (Photo: AP) The SEC enforcers say the paper is wrong to claim the agency frequently loses cases. (Photo: AP)

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The SEC’s two top enforcement cops, Robert Khuzami and George Canellos, are coming out against a recent article penned by Columbia Law professor John Coffee titled "SEC enforcement: What has gone wrong?," that they say makes various claims about the agency’s enforcement cases that are “inaccurate” and “distorted.”

Khuzami, who plans to soon leave his post as enforcement director, and Canellos, deputy director of the enforcement division, wrote Monday in the National Law Journal that Coffee proposes that the SEC outsource its biggest cases to private contingency-fee lawyers—a suggestion that Khuzami and Canellos says “ignores critical differences between the SEC’s goals as a regulator and those of a litigant seeking monetary damages.”

First, the two SEC lawyers argue that Coffee has “his facts wrong” when he states that “the penalties collected by the commission…are declining” and “the median value of SEC settlements with corporate defendants” in 2011 and 2012 “are well below the median corporate settlements a decade ago.” Far from declining, Khuzami and Canellos say, “the median value of SEC settlements is at or near record levels.”

Coffee’s suggestion to the contrary “seems to be based on a simple apples-to-oranges error in reading a chart,” the two say. “He inaccurately states that the median settlement with a corporate defendant dropped from ‘well over $50 million’ in 2003 through 2005 to $1.5 million in fiscal year 2011 and $800,000 during the first half of FY 2012.”

Coffee’s source—a study of SEC settlement trends published by the NERA Economic Consulting group—actually reveals just the opposite, Khuzami and Canellos say. “It states that the median corporate settlement in the period from 2003 to 2005 ranged from a low of approximately $600,000 to a high of approximately $1.3 million. Therefore, the $1.5 million median value obtained in 2011 was not only greater than the median in the 2003-2005 time frame from which Coffee cites a decline, but also was close to an all-time high. And the 2012 figures were well within the range for recent years.” Also, “given that the first three months of FY 2013 already have seen a $525 million penalty and two additional settlements well above $100 million each, the median may well continue to rise.”

Coffee is also wrong to suggest that the SEC “rarely sues” individuals, “settling instead with the entity only,” Khuzami and Canellos write. “The NERA study reveals that in the first half of FY 2012, the SEC was on pace to hold a larger number of individuals accountable than at any time since 2005, and the median value of settlements with individual defendants has been increasing steadily in recent years.”

Another inaccuracy: “Coffee’s suggestion that the SEC ‘frequently loses’ cases against individual defendants is dramatically at odds with the facts,” Khuzami and Canellos write. “During FY 2012, the Enforcement Division won its cases against 23 out of 24 defendants who went to trial. These include cases tried in both district and administrative courts and before both judges and juries. We count the case as a ‘win’ only if the SEC prevails on the most serious charge against the defendant. Most of the defendants were individuals (17 out of 24), including senior officers of public companies and investment professionals; and the cases against them include a broad range of complex fraud charges.”

These “unusually strong results,” the two say, “follow three consecutive fiscal years in which the SEC notched an enviable record in the courtroom, winning about 80% of its cases at trial.”

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